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Archive for March 17th, 2009

Ten Comments on the Current Market Melange

Tuesday, March 17th, 2009

1) I like PartnerRe — they invest in their people; they limit their risks; they keep their balance sheet strong.  So it was with pleasure when I saw they had bought back the majority of some of their their junior debt at 50+ cents on the dollar.  Good move.

2) The short-term performance model for financial stocks recommends insurance brokers and reinsurers here. No surprise, because both of them face little risk on the asset side of the balance sheet.  For insurance brokers, short–term performance favors BRO, AOC, and EHTH.  For reinsurers, short-term performance favors VR, RNR, GLRE, and AWH.  Personally, I would consider BRO and AWH. Very soundly run firms.

3) There are troubles with life insurers as noted in this WSJ piece.  Personal notes: I applied to be chief investment officer of Shenandoah Life in 2003.  They told me they needed to get more out of their asset portfolio.  I gave them some free consulting — I told them that their portfolio was fine, but that they had too many lines of business, and their expenses were too high.

Penn Treaty (spit, spit) — I know some of the management there; they were dealt a bad hand.  I fault the state insurance department of Pennsylvania for not taking them over four years ago, and allowing a reserve credit for a reinsurance treaty that did not pass risk.

As for Conseco and Genworth, it is just another demonstration of how long term care insurance is not an underwritable liability.  There is too much freedom for policyholders to influence benefits paid.

Then there are the equity-sensitive insurers, like Hartford, Lincoln National, and Phoenix.  They will have a very high beta versus the market, because they are on the cusp.  Sad place to be.

4)  Why are we trying to reassure China regarding their purchases of US Government debt?  As a government, they made efforts to push their exports on the US, and had to take back US debt, because it seemed to be the best store of value, or at least, the most liquid.  Personally, I do not see any reason to kowtow.  They are not our problem; we are their problem.  Let China figure out that they have been playing ina rigged casino.  They still don’t have many places to park spare funds.

5) I have a little more sympathy for Ben Bernanke after he appeared on 60 Minutes.  That doesn’t mean that I think he is right, but to see an honest man trapped in a situation where his gifted intellect is stunted because he has bought into a flawed paradigm is painful.  Worse is that he will drag us along with him.  That said, I find it laughable that the recession will end in 2009.  That’s just political talk to make us comfortable.

6) When the dollar and gold move together, it is a sign that the rest of the world is in worse shape than the US.  Frightening, huh?

7) As I have commented long before this, state and municipal pensions are in deep trouble, or worse the states and municipalities are in trouble.  It may add up to a lot of funds.  Also, they may have made a number of bad investments.

There were many years where some of the states rested on their laurels and did not put a cent into the pension coffers.  The surging market took care of their funding, wrong as that was to assume.  Now they are paying the price for their political indolence.

8 ) The flub.  Whoops, the FHLB. What, they invested in dodgy mortgage securities?  They are supposed to support the mortgage markets regardless.  Big surprise that they get whacked in this environment.

9) I am no big fan of fair value, but I detest those that want to modify FAS 157. The problems are due to bad investment decisions, not bad accounting rules.  Even with held-to-maturity accounting, there is loss recognition.  Investors are not dumb.  To the extent that losses are not recognized in the accounting, suspicion grows.

Accounting does not affect cash flows, and as such does not affect the valuation of firms.  Most major accounting studies reflect this truth.

10) Can you pass the CEO test?  Personally, I found this article to be edifying.  It describes what an effective/good CEO is.

Full Disclosure: Long PRE HIG


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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