stock market

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

Fiscal Stimulus To Be Too Weak To Help Stocks

Trump’s policies are starting to increasingly look like conventional fiscal stimulus: tax cuts, and infrastructure projects. Is his administration really going to be different from others who advocate stimulus to help the job market? When the government seeks to stimulate to help the economy they use tools like Quantitative Easing (money printing) or deep interest rate cuts both done by the Federal Reserve, or fiscal stimulus such as tax cuts, or make-work infrastructure projects. All of these tools depend on the government manipulating the economy and very importantly manipulating the opinion of business managers and consumers in hope of inducing them to borrow more and to spend more. This manipulation is thwarted by insightful business managers and some consumers on

2016-11-29T11:45:51-08:00 November 29th, 2016|mayflowercapital blog|Comments Off on Fiscal Stimulus To Be Too Weak To Help Stocks

Sharpe Ratio For Labor Income: A Warning For Investors

The statistic that the average inflation-adjusted wage didn’t increase since 1989 doesn’t dive deeply enough into this topic. When analyzing cash flows for investments one should review the Sharpe ratio showing the excess return divided by the standard deviation (as a proxy for risk). If there is too much risk required to get a certain type of return then the investment isn’t worth doing since on a risk-adjusted basis some of the time the payback might be inadequate in proportion to what one expected to get. It helps to think of a person’s career like an investment in a stock. The risk to workers in the past 30 years is that their jobs changed from a stable full time job

2017-01-10T23:32:50-08:00 November 25th, 2016|mayflowercapital blog|Comments Off on Sharpe Ratio For Labor Income: A Warning For Investors

Stocks Continues To Be Overpriced Regardless of Election

Stock expert Jeremy Grantham of GMO said on 11-7-16 the current high priced stock market isn’t a true bubble because its exuberance is not as frothy as in 2000; it needs to go higher to be a true bubble, he claims. My response is that using the 2000 bubble as a benchmark is not correct because that was an extreme outlier. Using 1966 top as a secular top might be a better example. The market didn’t really crash hard until 1973, although adjusting for inflation it went down a lot before 1973. Regarding GMO’s claim that stocks didn’t go up enough to be over-exuberant, I think if one assumes there was no government intervention in the 2008 crash then the

2016-11-23T13:08:30-08:00 November 23rd, 2016|mayflowercapital blog|Comments Off on Stocks Continues To Be Overpriced Regardless of Election