stock market

Sociological Explanation for Rising Markets?

        The huge increase in PE ratios (double what is reasonable and traditional) along with the huge increase in debt to GDP ratio (also doubled) over the past 20 years requires an explanation. Of course, central bank policies encouraging growth of the money supply (part of which is connected to declining interest rates) were the main reason. Another reason may be a sociological one that in the past several decades there has been a tendency for high earning, degreed, credentialed professionals to get married to each other, whereas many decades ago there was a greater degree of married couples in a situation, where the spouse, usually the wife, had a non-professional, moderate income career. The benefit of

2017-10-24T09:58:35-07:00 October 24th, 2017|mayflowercapital blog|Comments Off on Sociological Explanation for Rising Markets?

Cash On The Sidelines: Does It Justify High PE Ratios?

Fundamental analysis may look at PE ratios to define bubbles. But what should one do if the money supply has been drastically increased thus providing more funds for investors to engage in a bidding war to buy stocks? Does that mean that PE ratio guidelines should be expanded to accommodate the increased supply of money? Some fundamentalist advisors refer to the phrase “cash on the sidelines” as a false concept that can’t happen.  They assume that there is a finite amount of cash available to be traded between investors for shares of stock held by other investors and that on the aggregate that no new cash can appear on the sidelines and then be deployed into buying stocks. This would

2017-08-14T14:01:11-07:00 August 14th, 2017|mayflowercapital blog|Comments Off on Cash On The Sidelines: Does It Justify High PE Ratios?

Tax Law Changes May Hurt Stocks

$1.3 Trillion annual interest expense deduction may be removed by Congress which would result in extra tax of $150 Billion a year for corporations. The tax would reduce corporate profits after-tax by 9% for the average corporation. Today corporate profit margins are at record highs, in part, because of more aggressive use of legal offshore subsidiaries that reduce taxes. The proposed new tax would reduce profits after tax by 9% which would act to cool off the overpriced stock market bubble. Stocks are (in theory) fundamentally valued based on long term after-tax profits, so a 9% decrease in profits implies a reason for stocks to go down. The bigger multinational companies often use borrowed money to avoid repatriating offshore profits.

2017-06-26T12:38:55-07:00 June 26th, 2017|mayflowercapital blog|Comments Off on Tax Law Changes May Hurt Stocks

Lower Interest Rates Don’t Justify High Stock Prices

Formerly bearish advisor Jeremy Grantham made a huge change and is no longer bearish. He did an interview recently and said the old Ben Graham Value investing is not applicable, that we really are in a new era of lower discount rates that justify high stock prices. I disagree. Bullish advisors promote the theory that risk has steadily declined over centuries thus the cost of capital discount rate has declined thus justifying higher stock prices. (If so it would have made a huge stair step decline in past decade). Bearish advisors feel the growth rate of global GDP since 2007 top is very poor except for China which is probably a bubble with “misinterpreted” growth rates. There is a huge

2017-04-27T12:46:33-07:00 April 27th, 2017|mayflowercapital blog|Comments Off on Lower Interest Rates Don’t Justify High Stock Prices

Building a Bullish Case

The best case for stock bulls is to say that since stocks are mostly owned by the upper 10% of society and these people’s earned income have gone way up, compared to blue collar workers, due to ever-increasing complexity of various professions such as engineering, medicine, the practice of law, CPA practice, etc. then stock prices are a reflection of these professional’s ability to earn and save rather than GDP or the average person’s earnings. The earnings of professionals went up far faster than workers because a talented professional today can be far more productive than 50 years ago; by contrast, an uneducated blue collar worker’s productivity didn’t go up that much. Assuming a finite amount of stock and a

2017-04-06T13:46:56-07:00 April 6th, 2017|mayflowercapital blog|Comments Off on Building a Bullish Case

Are Low Rates Justification For High Stock Prices?

Discounting cash flows to estimate stock values far into the future should incorporate a factor for the risk of an error of the estimates, which may increase geometrically every 15 or so years. This means that even if interest rates are low the discount rate can be higher, the further out in the future one goes, because of an increase in risk premium. This means that the present era of the next 10 or 15 years is much more important to establishing the Discounted Cash Flow of an investment because the distant future has to be discounted so heavily that its returns regardless of outcome have less weight. Thus if interest rates remain very low for 10 to 15 years

2017-04-05T15:18:40-07:00 April 5th, 2017|mayflowercapital blog|Comments Off on Are Low Rates Justification For High Stock Prices?

Are Modern Stock Markets Safe Enough To Justify High Prices?

   The Great Depression was worse than the crash of 1981 or 2008 because there were no stabilizing institutions or programs like Social Security, welfare, FDIC, SEC, TARP, QE, etc. so the all-in impact meant that people in distress were in deeper trouble compared to victims of modern day crashes. However, there was one bright, risk reducing spot in the 1930’s: dividends were very high, around 6%. The big yields acted to lower duration of stocks and thus reduce risk. Also in those days people were used to the idea they had to be responsible and take care of themselves. So prudent investors would have parked cash in the least risky banks and in Treasuries before the crash; prudent people

2017-04-03T14:27:34-07:00 April 3rd, 2017|mayflowercapital blog|Comments Off on Are Modern Stock Markets Safe Enough To Justify High Prices?

Dow Hits 20,000 Yet Barely Beats Bonds

The Dow hit 20,000 today. It doubled since March, 1999, almost 18 years ago. That’s an annual compounded appreciation of 3.8%, plus the dividend. Since the dividend of roughly 2% a year roughly offsets inflation, then the inflation adjusted total return was basically the 3.8% price appreciation. From 1998 to 2007 bond yields were often higher than this. The Long Government bond index total return was 2.8213 times it starting value since March, 1999, which is an annual return of 5.93%. The Dow had a total return of 3.0845 times its starting value since March, 1999, making a 6.52% annualized rate of total return (which is both dividends and appreciation). The Dow beat bonds by 0.7% a year. Traditionally the

2017-01-25T10:17:05-08:00 January 25th, 2017|mayflowercapital blog|Comments Off on Dow Hits 20,000 Yet Barely Beats Bonds

Inflation Risk For Bonds Outweighed By Crash Risk For Economy

In 2017 inflation may increase because of a bottoming of oil prices. The economic climate of fiscal stimulation and deficit spending along with import restrictions may also raise prices. This will hurt bonds. However, the strategic global picture is that EM countries, the EU, and Japan all have serious unresolved structural problems resulting in too much output and inadequate demand and too much debt. The global economy has bottomed out almost eight years ago. Typically recessions occur every seven to nine years so 2017 ought to be time for a recession. Perhaps Trump will accidentally touch off a deflationary global trade war, which will reduce demand and push the already weak foreign economies into recession. The U.S. exports a lot

2016-12-19T13:09:21-08:00 December 19th, 2016|mayflowercapital blog|Comments Off on Inflation Risk For Bonds Outweighed By Crash Risk For Economy

Corporate Tax Cuts Effect On The Economy

If corporate taxes are cut from 35% to 15% that will help stimulate the economy. However many giant companies have fully utilized offshore tax havens for their subsidiaries which will now be outlawed. For those companies their effective tax rate will actually go up. This will reduce net income for the aggregate of publicly traded companies since many small caps that don’t operate offshore are so small that they are miniscule compared to the Fortune 100 or Dow 30 companies. Thus the cuts could actually make large cap stocks slightly less attractive. The stimulus will come from the benefits that companies that are not publicly traded and that are “C” corporations (meaning they are not a flow-through entity) get from

2016-12-08T12:30:16-08:00 December 8th, 2016|mayflowercapital blog|Comments Off on Corporate Tax Cuts Effect On The Economy