Comments on: Where to Invest, When Interest Rates are so Low

By: Lurker

Lurker — Tue, 30 Mar 2010 21:20:10 +0000

If I were confined to trading U.S. sectors, I would be long insurers from a momentum perspective, using the KIE. keithpiccirillo Says: “Insurance stocks have yet to catch up to other sectors.” Lurker says: what are you looking at???? KIE has outperformed SPY by a HUUUGGE margin, up 115% in the last year.

If I were forced to select individual insurers from a momentum perspective, they would likely be members of the KIE that David most likely wouldn’t like, players like AFL, GNW, etc.

If forced to look at fundies for insurer selection, I might start my screening with guys like KINS, VR, RNR, MRH, PRE, OB, HCII, MCY, NYM, FSR, AFL, AWH, PGR, WSH, and ESGR.

If purely rolling dice:

I am of the (totally unfounded, BTW) position that HIG is positioning for either a divestment or being acquired, with their recent capital raise to pay off Treasury as a necessary precursor. Personally I think their mixed business model sucks and that they’re a good comm. carrier with so-so personal lines departments and a wannabe mutual fund outfit attached, but somebody might want the “life” business enough to pay for it, and somebody might want the AARP distribution enough to pay for it.

I am intrigued by many of the smaller Florida-based P&C HO guys. This is a game where you need to understand their strategy and the intricacies of reinsurance pricing, but those guys, some of them are priced like options on their company’s survival. Yeah, I occasionally buy Lotto tickets …

By: David Merkel

David Merkel — Mon, 29 Mar 2010 21:13:25 +0000

I own ALL, SAFT, CB and PRE — love insurance here.

By: keithpiccirillo

keithpiccirillo — Sun, 28 Mar 2010 16:24:51 +0000

How about a company like TRV? Insurance stocks have yet to catch up to other sectors.
Trading at $55, just above book value of $50.

By: dlr

dlr — Sun, 21 Mar 2010 21:36:10 +0000

I was talking to a Fidelity advisor and he told me that California doesn’t have the ability to default on it’s debts – it’s written into the constitution, that all revenue flow must go first to schools, and second to debt obligations. Interesting if true.

By: dlr

dlr — Sun, 21 Mar 2010 21:32:59 +0000

I’m concerned about the Canadian dollar and the Australian dollar. If the world economy tanks some more oil is going to drop in price again, and that will have a negative impact on both the Canadian dollar and the Australian dollar. And I think we have lots and lots of downside risk that could hurt oil prices— Europe shooting itself in the foot (even more), the US going into a double dip (which I think is inevitable) or as a reaction to China tightening. In fact, I think Australia’s economy is so intertwined with China’s that it is really a China play.

By: Russ

Russ — Fri, 19 Mar 2010 11:55:38 +0000

David,
Thanks for suggesting your readers hold MMFs. In my view, the zero interest rate environment is tempting many individuals to chase yield. That never ends well.

By: David Merkel

David Merkel — Thu, 18 Mar 2010 18:11:13 +0000

Profit margins do look abnormally high; I will have to revisit my thesis. Not sure that accounting shenanigans in aggregate are higher than normal at corporations now.

As for FXA and FXC, confirmed:one buying these takes JPM credit risk.

By: maynardGkeynes

maynardGkeynes — Thu, 18 Mar 2010 13:31:18 +0000

@David: The FED model is fine. What I was trying to say is that earnings today are routinely fudged, which is something you can’t do with bond yields, which are stated on the coupon. I seem to recall that even Jeremy Siegel applied something like a 15% fudge factor to reported corporate earnings in his debates with Shiller. I think that’s optimistic — look at GE, the bluest of blue chips, whose main product turned out not to be toasters and TVs, but thoroughly manufactured earnings by means of tricks with GE Capital. Nowadays, when dividends yields are so low across the market, the real world yield from equities is less certain than ever. Maybe not total fiction, but not reliable either

By: Bob_in_MA

Bob_in_MA — Thu, 18 Mar 2010 13:10:31 +0000

David,

I don’t think you are measuring valuation in your previous post, in the sense of what value do the equities represent. I think it’s measuring something like what valuations would be if today’s earnings and today’s cost of capital were made permanent.

In 2007, your model told us that IF the credit bubble could be sustained:
“What P/E ratio would the current BBB bond yield (6.74%) support? I am surprised to say that it would support a P/E in the high 30s; 39.8 for the simple model, and 35.2 for the “slightly superior” one. With the current trailing P/E at 18.1, that would indicate that on an unadjusted basis, the market could be twice as high as it is presently.”

No offense, but any valuation model that would arrive at that conclusion can safely be tossed aside. For the record, CAPE and the Q ratio were both well into over-valued territory.

And while your model said stocks were a screaming buy in 2007, it had you out of the market in 1983-84. A time when the market was seriously undervalued by every other measure.

By: IF

IF — Thu, 18 Mar 2010 05:20:57 +0000

I’ve noticed (and this is currently commented on with regards to the GS/Greece story), that US investors have a really hard time to get access to foreign bonds, equities to a lesser degree. It seems to foreigners have to voluntarily register under the 1933 laws to be able to be sold in the US, but of course many of them don’t care and hence are not available.

Contrast this with a brokerage account in Germany (or I think most of Europe), where bonds are on the exchange (vs. over the counter) and foreign equities and bonds are available from around the globe. Ultra low liquidity (maybe like US munis), but available to the patient investor.