18 April 2008 – The Aleph Blog

Why I like TIPS

Posted on 18 April 2008 by David Merkel

I have received a little criticism regarding my liking for TIPS.? Much of it falls along the lines of James Grant’s criticisms of the securities, given that the government controls the definition of inflation, it can discriminate against TIPS holders.

Inflation as it pertains to TIPS has been running at a rate of 4% year-over-year.? I think that level will rise from here.? For those that are not constrained to fixed income investing, you can speculate in a variety of commodities and similar investments.? Have fun.? But for those that have to invest in fixed income, TIPS should be attractive, given the low rates on nominal Treasury Notes.

I? realize this involves speculation on future inflation and interest rates, but the margin of safety versus a 2-2.5% yield in short Treasury Notes makes TIPS compelling to me.

It’s That Season, Again

Posted on 18 April 2008 by David Merkel

I don’t celebrate Easter or Passover, though it is intriguing how far apart the two days are this year.? The season that I am talking about is annual reports and proxies.? This is just a friendly reminder to say that voting your proxies is something that helps keep capitalism legitimate.? Granted, I think that board elections should always be contested, and that access to the proxy should be available to anyone with more than 1% of outstanding shares, but my view is that both amateur and professional investors should take the time to evaluate proxies, vote accordingly for their interests, and not blindly side with management.

I vote down:

All directors at firms that have lost money for me.? (And the auditor!)
Most options and supplemental pay plans.? Pay people cash, not contingent stock that dilutes me.? And, most of the officers earn enough already.? If you don’t do your job because you love it, you’re not the right person for the job.
Shareholder proposals limiting executive pay, environmental issues, and other liberal folderol.

I vote up:

Proposals for greater shareholder democracy.
Plans to de-classify boards, and eliminate poison pills.
Proposals to split the Chairman and CEO positions.

If we’re going to be capitalists, let’s exercise our responsibilities, and have our companies act fairly and ethically.?? When we do that, it helps give capitalism a good name, and maximizesw the benefits in the long run to shareholders.

The Source of Most Economic Prediction Errors at Present

Posted on 18 April 2008 by David Merkel

This should be regarded as a small “opinion piece” of mine.? My big gripe with economic predictions over the past five years, is that forecasters use the old closed economy simplifications that worked when the US was a unique capitalist economy, and international trade flows did not affect the total picture much.

Today, I don’t try to analyze the US economy as a whole.? I look at its sectors and try to analyze them in a global context.? Even if the domestic US economy is in a funk, it is possible for sectors that serve other countries that are growing to do well.

So, I don’t make much of those who assume a recession will restrain inflation.? Perhaps a global recession will do so, but a US recession will not.? We need to look more closely at how the US is devaluing its currency versus other countries, and that might give us better clues regarding future inflation.

It is much richer to look at the sectors of the US economy, and look at them separately.? They have varying exposure to the US and Global economies.? That difference is critical now for investment decisions.

Not Concerned About Reinsurance Group of America

Posted on 18 April 200818 April 2008 by David Merkel

So Reinsurance Group of America missed estimates. Big deal; they’ve had good-to-excellent earnings for the last ten quarters; they have a bad quarter now and then when the “law of small numbers” catches up with them. Look at 2Q05 and 4Q01 for examples. The law of small numbers means that every now and then, you get a random gaggle of deaths with high face amounts, and the quarter is bad. This is often a good buying opportunity, because Wall Street, which only understands that the earnings missed, without understanding the underlying model, assumes that the miss will persist into the future. That has not been true of RGA.

I have met the CEO and CFO of RGA, and I think they know what they are doing, more than all of the other companies that do life reinsurance. They are the quality name in the space, including their more complex European competitors.

The stock price is currently way above my lower rebalance point, but I would be a buyer on weakness if I did not have a position. This is one of those stocks that you tuck away for 5-7 years, and you find that it doubles. The current oligopolistic nature of life reinsurance may shorten that timespan.

Full disclosure: long RGA