Search Results for “insurers” – Page 10

Sorted Weekly Tweets

Posted on 8 February 2014 by David Merkel

?Note: this is the 100th weekly edition of sorted weekly tweets.

Market Impact

Standing Out from the Crowd: Measuring Crowding in Quantitative Strategies http://t.co/MRjZ8d8GGL Overinvestment in strategy precedes losses Feb 08, 2014
Does Fair Value Accounting Contribute to Market Price Volatility? An Experimental Approach http://t.co/YQqQPrwMwr Short answer: no $$ $XLF Feb 08, 2014
The Deeper Causes of the Financial Crisis: Mortgages Alone Cannot Explain It http://t.co/0P7fMrQWKn But they were the leading cause $$ $XLF Feb 08, 2014
Contagion Rejected as Biggest Bond Buyers Double Down on Junk http://t.co/5wm1k4Ghlw Makes me think the correction will b another crisis $$ Feb 08, 2014
Hedge Funds Preparing for $1T Property Bill http://t.co/RRQN992uat Key Q: Will they limit their risks prior to the next commercl RE bust? $$ Feb 08, 2014
Apollo Credit Twice Size of LBOs Shows Private-Equity Shift http://t.co/J69eh3TPTn Not a good sign, nonstandard lenders r fragile $$ $APO Feb 07, 2014
Five Pointers on Floating-Rate Funds http://t.co/sV6JtizBlN Don’t chase performance, rates may not rise, nor yields, adds credit risk $$ Feb 05, 2014
Inverse VIX Fund Gets Record Cash on Calm Market Bet http://t.co/YSHGpON0DE Be careful to not hold it long $$ $VXX http://t.co/qGCycKbPsX Feb 05, 2014
World’s cheapest stock markets: Where are shares cheap? http://t.co/3Uvq1HZfSF Gives u a rough idea as 2 where values may b found $$ $SPY Feb 04, 2014
Gundlach Shows Why Betting Against Treasuries Is a Fool?s Game http://t.co/R0s4wQLcbu Interesting that he is in long Tsys $$ FD: + $TLT Feb 03, 2014
Monday?s Selloff, by the Numbers http://t.co/LseNtCUEXz That’s 2 large >2% down days in less than 2 weeks $$ $SPY Feb 03, 2014

Companies & Industries

Big Pizza Chains Use Web to Slice Out Bigger Market Share http://t.co/C6xQeSWmlr Easier 4 large chains 2 implement online ordering $$ $PZZA Feb 08, 2014
SodaStream?s New Mainstream Rivals: Coke and Green Mountain http://t.co/zOkwpBpOiK All the more reason 4 $PEP 2 buy $SODA $$ Feb 07, 2014
Why Discount Airlines Draw Fewer Complaints (Hint: It’s Not Better Service) http://t.co/a8rzqrf0DU Friendlier attitudes r better service $$ Feb 07, 2014
Satyajit Das: The Truth About Bank Earnings http://t.co/9FzkPbbyIm Bank earnings r lower quality; getting harder to increase them $$ $XLF Feb 05, 2014
Experts testify on true cost of Target breach http://t.co/FGVRFBvc6K Magnetic stripes will go away, & chips &/or PINs will appear $$ $TGT Feb 05, 2014
Apple Quietly Builds New Networks http://t.co/bncx84P4RW $AAPL certainly has spare $$ to throw at it, enhancing service quality $NFLX $GOOG Feb 04, 2014
H-P Finds Accounting Errors at Autonomy Unit http://t.co/9cQFBamwpI We knew it was a dumb deal at the time, now $HPQ shows just how dumb $$ Feb 04, 2014
Prophet of No Profit: How Jeff Bezos won the faith of Wall Street. http://t.co/eaZmKgfnir Moats, operating leverage, pricing power $$ $AMZN Feb 01, 2014
Ask Buffett what he would be willing 2pay 4 $AMZN — after all, it has significant moats. I think he would put it in the “too hard” pile $$ Feb 01, 2014

Rest of the World

China, the Death Star of Emerging Markets http://t.co/zFmo0RkXva @williampesek points at financial bubble in China; what will make it pop $$ Feb 08, 2014
Scandal Tests Chinese President’s Standing With Military http://t.co/cHGvLtROFE Corruption is a major issue 4 China, between Party & Army $$ Feb 08, 2014
Saudi Twitter Debate as Citizens Criticize Government http://t.co/quwkxpkHDX Social media allows criticism tht would not b done in public $$ Feb 05, 2014
China Savers? Penchant for Property Magnifies Bust Danger http://t.co/yrfDYQK5KH Anytime a single investment strategy dominates -> worry $$ Feb 05, 2014
Pimco?s Bill Gross Says He Avoids China ?Mystery Meat? http://t.co/My6P5x1jE0 Great phrase as we do not know much about indebted China $$ Feb 05, 2014
Sao Paulo Biggest Water-Supply System May Run Dry Within 45 Days http://t.co/fEcioInfjX Many water systems r near their limits globally $$ Feb 05, 2014
Emerging Stocks Drop to 5-Month Low Led by China as Ruble Gains http://t.co/aWgDSdVBUt Not all emerging mkts r equal, some financed wrong $$ Feb 04, 2014
Japan Sees Worst Developed-Stock Rout as Nikkei 225 Drops http://t.co/UQDhX1a3XL Current mkt reveals weak underlying fundamentals $$ $FXY Feb 04, 2014
Dad Can?t Buy Daughter Shoes as Argentine Currency Falls http://t.co/WTnUn1Okf0 ?Do you know how I feel buying my daughter used shoes?? $$ Feb 04, 2014
Argentina Scrambles To Raise $10B, Avoid Reserve Collapse; BONARs Bidless http://t.co/Xx4t0dFqCk Only hold hard assets in Silverland $$ Feb 04, 2014
EM rout? Or Intervention Sunday? http://t.co/d54Qjj4X2S Difficult to tell what Developed Mkt policymakers will do, they r strapped @ home $$ Feb 04, 2014
Argentina Bust Lures Investors After 200 Years of Defaults http://t.co/YoWjotidcp Invest in the hard stuff, land does not depreciate $$ $IRS Feb 04, 2014
Emerging-Market Rout Seen Enduring on Low Real Rates http://t.co/RTxP6GjMVw Funding structures of some emerging markets fall, $$ goes 2 $TLT Feb 04, 2014
Canadian Oil Rises as California Ships in Record Amount by Rail http://t.co/CKvu4BEqJl Retweet after me: Pipelines r cleaner & safer $$ Feb 04, 2014
Analysis: Emerging markets outlook not rosy, but valuations tempt http://t.co/hADIRvUK5g This may b a time 2nibble, not a time 2gulp $$ $EEM Feb 04, 2014

US Politics & Policy

AOL is leading the way to make 401(k)s worse for everyone http://t.co/AnlQ1Ud6Ds Meh; new employers will compensate workers that lose $$ Feb 08, 2014
‘Six Californias’ plan difficult but doable, assessment shows http://t.co/nuw3S6rLVl Ideas like this come & go in a fragmented California $$ Feb 08, 2014
No, CBO did not say Obamacare will kill 2M jobs http://t.co/RHsSai7rwv Rather, will discourage 2M from working full-time; big deal $$ Feb 08, 2014
Ex-NSA Chief Details Snowden’s Hiring at Agency, Booz Allen http://t.co/EWRuqlViXW Snowden set back US intelligence by 20+ yrs. Good. $$ Feb 06, 2014
The Tyranny and Lethargy of the Times Editorial Page http://t.co/hbW20h6Vjn Inside baseball, picture sums up story http://t.co/USlMTh4Bm0 $$ Feb 05, 2014
Puerto Rico Has Credit Rating Cut One Step 2Junk by S&P http://t.co/4Av3ftwL8q also http://t.co/QkwCnXQdcy Well-deserved, default coming $$ Feb 05, 2014
Going on 30, Living With Mom and Dad http://t.co/Wo4YB74mKo Part is being slow 2 marry, then education, poor career choices, motivation $$ Feb 04, 2014
Crop Insurers Win as Congress is Poised to Pass Farm Law http://t.co/rFNrEDhYkZ If we can’t reduce ag subsidies when ag is healthy… $$ Feb 04, 2014
Obamacare Wonks Flunk Data Analysis http://t.co/Ss2Tc3q2e9 You can show lots of savings if u show your winners & hide your losers $$ $SPY Feb 04, 2014
CBO: Obamacare Will Lead To 2M Fewer Workers In Labor Force By 2017 http://t.co/OsCrQOUORb Unintended consequences; fix this, break that $$ Feb 04, 2014
Fed Presidents Say Stock Decline Unlikely to Derail QE Taper http://t.co/pdoloENc9L In the short-run true, but if the decline persists… $$ Feb 05, 2014
Investment Manager Explains Why 99.5% Of Americans Can Never Win http://t.co/MqngZy7zZW Tax code is cockeyed, wealthy can avoid taxation $$ Feb 04, 2014
How Feds? Double Standard Enables Bad Bankers http://t.co/AGok7eeqdU Simple: little bankers get prosecuted; big banks get fined $$ $BNK $XLF Feb 04, 2014
Early Drive for Hillary Clinton Unsettles Democrats http://t.co/Hb3lJnpnr6 Some Worry It Will Siphon $$ from Candidates in Midterm Elections Feb 04, 2014
You Can Thank or Blame Richard Stanger for Writing 401(k) http://t.co/wX38lGA4m4 Many important laws r accidental; killed DB pensions $$ Feb 04, 2014
ISM Miss Is Ugly All Around http://t.co/Px97nGSccl I’ve been arguing that the economy is weaker than it looks 4 a while; here’s a clue $$ Feb 04, 2014
US Banks Ease Loan Standards in Fed Survey as Demand Rises http://t.co/etkDJPLLhN Can inflation b far behind if this persists? $$ $TLT $TIP Feb 04, 2014
California Dries Up as Brown Pushes $15B Tunnel http://t.co/r4boO9Tzzo If u don’t allocate water economically, becomes a political fight $$ Feb 04, 2014

Other

Financial Blogging: How to Write Powerful Posts That Attract Clients http://t.co/fxmxkLJKbS My longer review: http://t.co/lOqexXT7RO $$ Feb 08, 2014
Why I Did Not Go To Jail http://t.co/4EtyFFyTyg @bhorowitz good read on the importance of proper company, legal, & incentives structure $$ Feb 08, 2014
Daniel Suarez Sees Into the Future http://t.co/kkLkxcmvnv ‘Influx’ may propel sci-fi writer in2 void left by Tom Clancy &Michael Crichton $$ Feb 08, 2014
Why Melted Cheese Does the Trick http://t.co/ZACj1EaWKB Creaminess enhances the textures and flavors of other foods $$ $KFT $DF Feb 06, 2014
Deadly New Bird Flu Strain Spawned by Virus Behind H5N1 http://t.co/b0fLG89fkg This is overblown. People die from the flu each year $$ $SPY Feb 05, 2014
Young Bankers Seek ?Good Yield? With Their Own Nonprofits http://t.co/gJZVwJ5lse Wealthy & powerful like 2b thought benefactors $$ Lk 22:25 Feb 04, 2014
How the Seattle Seahawks solved Peyton Manning http://t.co/0P0kiHnddI Even if u r not into football, interesting 4 understanding strategy $$ Feb 04, 2014
Super Bowl Safety Is Blow for Broncos and Las Vegas Sportsbooks http://t.co/2vXpm4IRbl The odds r interesting to read 4 unusual bets $$ $SPY Feb 04, 2014
Microsoft Adds Momentum to ?Open Science? |http://t.co/Ar6WCDKNug Understand that scientists r not neutral observers; they have 2 publish $$ Feb 04, 2014
Carney leaving CNBC for WSJ?s ?Heard on the Street? |http://t.co/dRNtplkOQB @carney gets a significant promotion! Congrats! $$ $SPY $TLT $GE Feb 01, 2014

Other Economics

Free Checking Is Disappearing Perk http://t.co/pZwsA0u3sl Smaller banks often offer better deals than big banks on checking $$ $XLF $SPY Feb 08, 2014
More Men in Prime Working Ages Don’t Have Jobs http://t.co/YmAjNcQrc5 1 of the qualitative factors that show how punk the economy is $$ $SPY Feb 08, 2014
An International Gold Standard Beats The Rule Of The Governing Elite http://t.co/GoTHUVusXK Old, makes point gold standard was better $$ Feb 05, 2014

Wrong

Wrong: High unemployment putting the ECB in isolation http://t.co/wlBQOP7JqM Loose monetary policy doesn’t lower L-T unemployment $$ #global Feb 08, 2014
Wrong: America The Startup http://t.co/C0Rax7KPJP Worth a read, but the writer does not really understand the Pilgrims or the Puritans $$ Feb 04, 2014

Retweets, Replies, & Comments

@HistoryInPix Cemented the creation of the graphical user interface, buggy in prior versions, aside from pricey Macintosh ghetto Feb 06, 2014
‘ @catofwallstreet the credit cards will have chips, not us- already have these in Europe. Also, consider amillenialism or postmillenialism. Feb 05, 2014
RT @PUMPSandDUMPS: This fan says it all http://t.co/MryfT9l04a #pennystocks Feb 05, 2014
Ice falling, branches too, west of Baltimore — kind of pretty $$ #weather Feb 05, 2014
@DavidSchawel The difference between dollar-weighted & Time-weighted returns is crucial but few get that. Good tweet on $DBLTX $$ Feb 05, 2014
RT @DavidSchawel: Retail psychology: chasing performance, then puking the bottom & missing the bounce-DBLTX Fund assets vs adjusted NAV htt? Feb 05, 2014
RT @cate_long: Cheers! “@carney: Thanks everyone! Very excited to be joining the @wsjheard team! Some details here http://t.co/sjLSyTMIEH Feb 01, 2014
@dpinsen not all, but a majority Feb 01, 2014

An Expensive Kind of Insurance

Posted on 6 February 20146 February 2014 by David Merkel

Strategy One: “Consistent Losses, with Occasional Big Gains when the Market is Stressed”

Strategy Two: “Consistent Gains, with Total Wipe-out Risk When Market is Highly Stressed”

How do these two strategies sound to you?? Not too appealing?? I would agree with that.? The second of those strategies was featured in an article at Bloomberg.com recently — Inverse VIX Fund Gets Record Cash on Calm Market Bet.? And though the initial graph confused me, because it was the graph for the exchange traded note VXX, which benefits when the VIX spikes, the article was mostly about the inverse VIX?exchange traded note XIV.

Why would someone pursue the second strategy?? Most of the time, it makes money, and since January 2011 we haven’t a horrendous market event like the one from August 2008 through February 2009, it makes money.

I would encourage you to look at the decline in the second half of 2011, where it fell 75% when the VIX briefly burped up to around 50.? But given the amazing comeback as volatility abated, the lesson that some investors drew was this: “Volatility Spike? Time to buy XIV!”? And that explains the article linked above.

You might remember a recent book review of mine — Rule Based Investing.? In that review, I made the point that those that sell insurance on financial contracts tend to win, but it is a volatile game with the possibility of total loss.? To give another example from the recent financial crisis: most of the financial and mortgage insurers in existence prior to 2007 are gone.? Let me put it simply: though financial risks can be insured, the risks are so volatile that they should not be insured.? You are just one colossal failure away from death, and that colossal failure will tend to come when everyone is certain that it can’t come.

But what of the first strategy?? How has it done?

Wow!? Look at the returns over the last few weeks!? Rather, look at a strategy that consistently loses money because it rolls futures contracts for the VIX where the futures curve is upward-sloping almost all the time, leading to buy high, sell low.

Does it pay off in a crisis?? Yes.? Can you use it tactically?? Yes.? Can you hold it and make money?? No.

Back to the second strategy.? People are putting money into XIV because they “know” that implied volatility always mean-reverts, and so they will make easy money after a volatility spike.? But what if they arrive too early, and volatility spikes far higher than expected?? Worse yet, what if Credit Suisse goes belly-up in the volatility?? After all, it is an exchange-traded note where owners of XIV are lending money to Credit Suisse.

Back to Basics

Do I play in these markets?? No.

Do I understand them?? Mostly, but I can’t claim to be the best at this.

What if I try both strategies at the same time?? You will lose.? You are short fees and trading frictions.

What if I short both strategies at the same time?? Uncertain. It comes down to whether you can hold the shorts over the long term without getting “bought in” or panic when one side of the trade runs the wrong way.

Recently, someone pinged me to speak to CFA Institute, Baltimore, where he wanted to talk about “not all correlations of risky assets go to one in a crisis” and pointed to volatility investing as the way to improve asset allocation.? Sigh.? I’m inclined to say that “you can’t teach a Sneech.”

I favor simplicity in investing, and think that many exchange traded products will harm investors on average because the investors do not understand the underlying economics of what they own, while Wall Street uses them as a cheap way to hedge their risk exposures.

There may be some value to speculators in using “investments” like strategy one for a few days at a time.? But holding for any long time is poison.? Worse, if you are accidentally right, and the world comes to an end — this is an exchange-traded note, and the bank you lent to will be broke.? That will also kill strategy two.

So, my advice to you is this: avoid either side of this trade.? Stick with simple investments that do not invest in futures or options.? Complexity is the enemy of the average investor.? I can understand these investments and they don’t work for me.? You should avoid them too.

PS — before I close, let me mention:

A Google search that I did: “why does vxx always go down“
And the article: VXX: Where Wealth Goes to Die

Good article in both places.

On Position Sizing in Equity Long-Short Hedge Funds

Posted on 28 January 2014 by David Merkel

This article is prompted by the following article by John Hempton of Bronte Capital.? This is not meant as a criticism of him; I have nothing but respect for him.? The article triggered memories of my own experiences with position sizing at a hedge fund.

The hedge fund I once worked for had great expertise with financial companies, and I worked for them in the boom years of the 2000s.? Our leader was bearish on depositary financials, a view that would eventually be right.? Of course “eventually right” is another way to say “wrong in the short run.”

Let me describe the problem from another angle.? When I was a corporate bond manager, I would mentally set three levels with the bonds that I held.

Spread necessary for an ordinary-sized position.
Spread necessary for a big position.
Spread necessary for a maximum position.

These spreads I would adjust for premium vs discount, optionality, and a bunch of other things.? The point is that I would always have a schedule for where I would be willing to buy more, or lighten up (sell some).? I often dealt in some of the least liquid corporate bonds, and I was patient, and even willing to break rules by holding more than 20% of a given issue.? My analysts almost always did good work, and I trusted them.

When markets are illiquid, they “trade by appointment.”? If you have a balance sheet behind you that is not worried about liquidity, you can do interesting things by buying assets that most ordinary managers won’t touch, because the issue is too small.

I came to the hedge fund after I managed corporate bonds.? In one sense, I had managed a far more complex long-only portfolio.? But being able to short creates complexities of its own.

I can’t tell you how many times at meetings at the hedge fund we had tough discussion on position sizing, more frequently on short positions. We were perpetually long quality, short market capitalization, long insurers, short banks, and long value.? Great idea, if too early. This would be an extreme example:

Boss: “This short position is killing us, it is up 50% from where we shorted it, and now we have a 6% short position, what do we do?”

Others answered in front of me, essentially suggesting no change.? He asked me personally and I said:

David: “If you had no position, and you were approaching this company today, what would you do?”

Boss: “I would short the maximum — 4%.”

David: “Then buy in 2%.”

Boss: “But that locks in the loss.”

David: “Do you want to risk locking in a bigger loss?”

The boss once said to me that I was the only one on his team that was natively a portfolio manager rather than an analyst.? (That said, I remained an analyst, while an analyst was made an assistant portfolio manager.? I think it would have been too difficult to have the insurance guy to manage the portfolio of what was a banking shop.? That said, as a corporate bond manager, I managed the financials, which were mostly banks.)

Setting position sizes on shorts is always harder than longs.? When your thesis goes wrong on a short, your risk increases, as the position size gets larger.? When it goes wrong on a long position your risk decreases, as the position size gets smaller.

As I have often said, being short is not the opposite of being long, it is the opposite of being leveraged long.? When you are short, or leveraged long, you do not fully control your trade.? The margin desk can take you out of your trade if the equity in the account gets small enough.? They are ruthless in doing so, because the margin desks at brokerages do not want to take losses.

That makes it all the more important to set a schedule of sizes on short positions.? The first question should be: at what price would I put my maximum position on?? That would help in sizing introductory and normal positions.? They would be far smaller than what most hedge funds do.

Again, the same exercise is easier in a long-only format, but the protocol is the same.? Establish introductory, normal and maximum position sizes, and hold to them.? Also put into effect the idea that analysts must give greater scrutiny to large positions.

All That Said

This is a reason I am not a fan of most hedge funds.? I believe in the funds of my former employer and those of Mr. Hempton.? But the difficulties of dealing with bad decisions with a weak balance sheet kills a lot of hedge funds.? Long only — it might survive.? But when you go long and short with leverage, the risk arises of total loss.

So don’t think you are a “cool kid” because you invest in hedge funds.? Long only does better over the long haul, because it is less risky, and compounds value.

Systemic Risk Stems from Asset-Liability Mismatches

Posted on 23 January 2014 by David Merkel

What happens when a crisis hits?? There are demands for cash payment, and the payments can’t be made because the entities have short liabilities requiring immediate payment, and long illiquid assets that no longer can be sold for a price consistent with average market conditions.? When there are many firms for which this is true, and they rely on each other’s solvency, that creates a systemic crisis.

Whether through:

Owning long assets, and financing short, or
Using the repo market to hold long assets, thus disguising it for accounting purposes as short assets
Taking deposits, and investing long,

it creates an imbalance.? It is almost always more profitable in the short-run to finance short and lend long.? But when there is a demand for cash, such institutions are on the ropes and might not survive.? Less than half of the major American investment banks existing in 2007 were alive in 2009 to today.

But what if you were clever as a financial institution, and had liability structures that were long, or distributed the risk of what you were doing back to clients.? You would always have adequate liquidity, and would not be in danger of default for systemic reasons.

Thus, I think the Financial Stability Oversight Commission [FSOC] is nuts to regulate insurers such as MetLife, Prudential, AIG and Berkshire Hathaway.? They do not face the risk of a run on the bank.? Look at the history of insurers: those that failed due to a run on the bank were those that:

Issued guaranteed investment contracts that would be immediately payable on ratings downgrade.
Issued P&C reinsurance contracts that would be immediately payable on ratings downgrade.

Aside from that, there were badly run companies that failed but no systemic risk.? There was also AIG, which faced a call on cash from its derivatives counterparty, but not the insurance entity.

As for investment managers, they have no systemic risk.? It does not matter if Blackrock, Pimco, Fidelity and Vanguard would all fail.? Mutual fund holders would find their funds transferred to solvent entities, and any losses? they might receive are the ordinary losses they could receive if the management? firms were still solvent.

Someone lend the FSOC a brain.? Big size does not equal systemic risk.? Systemic risk stems from a call on liquidity at financial firms that borrow short and lend long for their own accounts.? That does not include asset managers and insurers, no matter how big they are.

What this says to me is that financial reform in DC is brain-dead.? (Surprised?? Nothing new.)? They have fixated on the idea that big is bad, when the real problem is asset-liability mismatches, amplified by size and connectedness.? Big banks are a problem.? Big insurers and asset management firms are not.

Sorted Weekly Tweets

Posted on 21 January 2014 by David Merkel

Rest of the World

Crunch Escalates as Money Funds Rival Shadow Banks http://t.co/JVU1w5ipZc Money funds in China suck liquidity away from wealth mgmt prods $$ Jan 20, 2014
Spain?s Worst Year for Work Leaves Rajoy Counting Cost http://t.co/KlaAGab4kY Private debts r not economically neutral. Large -> unstable $$ Jan 20, 2014
Richest Scandinavian Nation Extends Its Junk Boom http://t.co/ZVwwxEAdIa Norwegian financial institutions have hunger for yield in kronor $$ Jan 20, 2014
Bird Flu Kills Health Worker, Stokes Transmission Concern http://t.co/FVcxVhaH4L Would not b concerned, seems difficult to transmit virus $$ Jan 20, 2014
Rise of ‘Common Man’ in India Threatens Stability of Government Coalition http://t.co/vke6lnqM3s Things get squishy if no majority win $$ Jan 20, 2014
German Economic Growth Fails to Gain Impetus http://t.co/g9EQLN5HNg Depends on on the strength of those that import German goods $$ $SPY Jan 20, 2014
French First Lady Leaves Hospital http://t.co/hnnrYJwE2q At least *one* person cared about the behavior of Francois Hollande $$ #sad Jan 20, 2014
Solar Beats Gas Unlocking Middle East?s Heavy Oil, Report Says http://t.co/dmyDla2t7R Fascinating, using cheap solar energy 2 produce oil $$ Jan 20, 2014
Hot Demand for Emerging-Market Bonds http://t.co/LLZPDt4iyT This is puzzling , I don’t get how emerging markets r well financed $$ Jan 19, 2014
China encroaching on U.S. military dominance in Pacific, says top admiral http://t.co/h152VrhcEg So we can’t be global cop, good thing $$ Jan 19, 2014
Mobius Placing Biggest Wagers on Nigeria for Frontier Rally http://t.co/dsxt8Fft6e It is difficult to make $$ when there is a quiet war Jan 19, 2014
BENGHAZI WAS PREVENTABLE: Hillary Clinton cited for major security lapses http://t.co/5oCpBVlbdK Hillary will have a lot to answer for $$ Jan 19, 2014
Saudi King Sees Egypt Too Big to Fail Under Friendly General http://t.co/oIHo5fae5s Saudi Arabia gets pragmatic, supports Egyptian Army $$ Jan 19, 2014
The West Is Losing Ukraine http://t.co/GWCNb322Ss Ukraine is losing the West, as its leader strips freedoms, & fights protesters $$ $SPY Jan 19, 2014
Hollande?s Tryst and the End of Marriage http://t.co/EUGztMAKnq Secretly, even the French care about the stability of their leaders $$ $FXE Jan 19, 2014
Baltic Homes That Singed Scandinavia Banks Heating Up: Mortgages http://t.co/3KHcPllcKZ Beware large increases in indebtedness $$ $TLT $SPY Jan 19, 2014
China’s Indie Rockers Get Boost From Online Music Platforms http://t.co/MSbdnGFzRI Note the prominence of our friend Michael Pettis $$ $FXI Jan 19, 2014
Venezuela Post-Ch?vez: Hustlers’ Paradise http://t.co/ROstARpBkc Thugs run govt. Some people get cheap goods, while others get shortages $$ Jan 19, 2014

US Politics & Policy

Stop Obamacare?s Outrageous Bailouts http://t.co/uHYJvyRcM7 Once losses exceed 8% of premiums, taxpayers pay for 75% of excess losses $$ Jan 20, 2014
Questionable: Robert Gates?s Dishonorable Act http://t.co/bIEGf7o57k There r too many bad secrets in DC that we ought to know about $$ $SPY Jan 20, 2014
Which Fed Guidance Should We Believe? http://t.co/yqjOZX5AX6 As FOMC uses more & more words 2explain what they r doing we understand less $$ Jan 20, 2014
When Low Unemployment Is Bad News http://t.co/QLiWV8ocV5 Labor force participation rate continues 2 fall as punk economy creates few jobs $$ Jan 20, 2014
NSA Data Have No Impact on Terrorism: Report http://t.co/ug8GtnLjqz NSA is not worth the privacy risk, nor what we pay to employ them $$ Jan 20, 2014
Ari Fleischer: How to Fight Income Inequality: Get Married http://t.co/zz6lbDWiku Poverty rate falls 4 those who can make a marriage work $$ Jan 20, 2014
Obama’s Constitutional Education http://t.co/bH4jfr1rro & http://t.co/hdzNe1Blo4 Should consider unilateral actions modifying PPACA also $$ Jan 20, 2014
How the crash of safe assets fueled the financial crisis http://t.co/4Vlfxp7PUj When “safe” assets r found to have credit risk -> bust $$ Jan 20, 2014
Congress split over NSA’s domestic spying program, could just let laws expire http://t.co/mCD2pIbSl1 Divisive: left & right vs center $$ Jan 20, 2014
Young enrollees of Obamacare fall well short of goal http://t.co/VokUg0XFP6 When premiums rise as a result, people will b unhappy $$ $SPY Jan 20, 2014
Spy court judge slams proposed privacy advocate http://t.co/vkz4SyY5li We need someone arguing against spying on average people $$ $SPY $TLT Jan 19, 2014
What?s Net Neutrality? What Happened to Net Neutrality Yesterday? What Happens Next? A Q&A for the Rest of Us. http://t.co/xQACJvW8UC Read Jan 19, 2014
Volcker Rule Fix Will Aid Large and Small Banks http://t.co/nGv1TXtLT5 This is a lousy rule that allows banks to bury Trup CDO losses $$ Jan 19, 2014
Hillary Clinton’s political hit list of top betrayers includes Kerry, Kennedy http://t.co/33RFv63nKz This reminds me of the Nixon enemies $$ Jan 19, 2014
Judge Disallows Plan by Detroit to Pay Off Banks http://t.co/XQ6f1E2EZM Detroit should aim for the bast long-run outcome $$ $MUB $SPY $TLT Jan 19, 2014
Is Your Abortion My Free Speech?? http://t.co/kUA2XLRPB9 This is where constitutions fall apart, b/c they are limited documents $$ Jan 19, 2014
Reid Gives Landrieu VIP Treatment to Tip Election Odds http://t.co/UhQFIcPVt9 Democrats desperate to retain power, aid marginal members $$ Jan 19, 2014
Where Are the U.S.?s Millionaires? http://t.co/c8fXDEPD5S Alas, but Maryland sucks the blood of America, & creates millionaires $$ $SPY $TLT Jan 19, 2014
I Spent Two Hours Talking With the NSA’s Bigwigs. Here’s What Has Them Mad http://t.co/UrXexYR07k They hate Snowden’s guts $$ $thatsimple Jan 19, 2014
How the NSA Almost Killed the Internet | Threat Level http://t.co/1SLDuNq93O Sowing distrust in major internet utilities on privacy $$ $GOOG Jan 19, 2014
To enforce net neutrality, the FCC has to decide that Verizon is a common carrier http://t.co/WRb6VestAF Simple idea, simple solution $$ $VZ Jan 19, 2014
Student Loans, the Next Big Threat to the US Economy? http://t.co/5hXsK5SIFn Rule of Thumb: avoid lending in area w/greatest debt growth $$ Jan 19, 2014
ISS Open to Activists Paying Bonuses to Directors http://t.co/R1nNEkokg4 Carl Icahn wins a small victory; broader implications unclear $$ Jan 19, 2014
?Wolf of Wall Street? Offspring Never Quite Die http://t.co/oXkGDZQ1Ml It’s a revolving door & FINRA doesn’t provide real access 2 data $$ Jan 19, 2014

Market Impact

Investor Animal Spirits Spread to Companies Worldwide http://t.co/e8pKcudzhR No such thing as animal spirits, only pursuing opportunity $$ Jan 20, 2014
JPMorgan Says BVG Owes $200 Million Over ?Unfortunate? CDS http://t.co/coJQm6dpD5 What’s worse is trifling yield prompting BVG’s greed $$ Jan 20, 2014
Hedge Funds Raise Gold Wagers as Goldman Sees Drop http://t.co/7dc9dGCUCA Hedge funds 2short-term could b forced sellers on weakness $$ $GLD Jan 20, 2014
Even money market funds in a crisis would have a hard time delivering a >2% loss, which would b borne by investors, & not systemic $$ Jan 20, 2014
How You Can Survive a New Era in the Bond Market http://t.co/BvSkibWANR Too many people banging the drum 4 higher interest rates $$ $IEF Jan 20, 2014
From the prior tweet, Central Bankers have drawn wrong conclusion: You can fix a bust by issuing lots of credit. $$ Jan 20, 2014
The correct answer is that you can avoid a bust by not running loose monetary policy as in the ’20s & ’00s. We still have pain to come $$ Jan 20, 2014
Where Have All the Star Fund Managers Gone? http://t.co/qwbpDyDlkU Focus on low fees, long track record, low assets & not index-like $$ $SPY Jan 20, 2014
Reinsurers face ratings cuts, S&P warns http://t.co/70dK590OCG Too much surplus chasing reinsurance biz; I’ve been lightening the boat $$ Jan 20, 2014
Interest rates don’t matter? Federal Reserve paper says so http://t.co/guAPSQ05II Sad but true, monetary policy is weaker than most think $$ Jan 19, 2014
Professor Puts Ideas in Practice as Reverse-Mortgage CEO http://t.co/T3Kt0cNQtc As w/most complex financial agreements, this will fail $$ Jan 19, 2014
Metals, Currency Rigging Is Worse Than Libor, Bafin Says http://t.co/KjDNrRVR7m Impossible 2 create benchmarks free of human gaming $$ $SPY Jan 19, 2014
Nobody Likes Bonds!: by @ritholtz http://t.co/FuYachZ58I But *I* like bonds, particularly short corporates, loans, & $TLT FD: + $TLT $$ Jan 18, 2014

Other

Comet-Chasing Spacecraft Sends First Signal in 31 Months http://t.co/mZB62QnIYm Satellite to hitch ride on Churyumov-Gerasimenko comet $$ Jan 20, 2014
The ‘Sharing Economy’ and Its Enemies http://t.co/Qnc4YyZrOh How Airbnb steps on the toes of hoteliers, regulators & the tax man $$ $SPY Jan 20, 2014
Device Thefts Fueling Rise In Larcenies http://t.co/ohZZt8q2Qh NYC larcenies fall if you exclude theft of Apple-branded devices $$ $AAPL Jan 20, 2014
The Right Way to Go After Big Clients http://t.co/J6hoSbcHVX Can waste a lot of time & find margins squeezed in the end $$ Jan 20, 2014
What Secrets Your Phone Is Sharing About You http://t.co/u7wv29tyMG Many hack your phone datato get insights into how you shop $$ $SPY $TLT Jan 19, 2014
Moms in ?Survival Mode? as US Trails World on Benefits http://t.co/uSPuVZztqV We can argue over any benefit, but what when US is broke $$ Jan 19, 2014
Tennis Quant?s System Doubles Money Without Knowing Players http://t.co/sAS5Xug7DN Small markets r often inefficient, allow 4 small wins $$ Jan 19, 2014
Miners Chopping $10B Search Bodes Next Price Boom http://t.co/6X7H0KAivX Miners cut exploration budgets, should lead to higher prices $$ Jan 19, 2014
How the Target Hackers Did It http://t.co/Z8Jc5WuBQQ Scraped RAM in POS machines grabbing all manner of data on card users $$ $TGT $SPY $TLT Jan 19, 2014
Another Bad Year for Religious Freedom http://t.co/3C3C5lrjCo Religion by its nature tends to invite constraint as it is a threat 2 govts $$ Jan 19, 2014
If Google Is a Guy, DuckDuckGo Is a Ghost http://t.co/rk9o0I3Uwx Want privacy for your searches? Consider DuckDuckGo $$ Jan 19, 2014
http://t.co/uPsFzsm1Tn How an intelligent lady managed to wrongfoot & destroy a website engaged in “revenge porn.” $$ Jan 19, 2014

Wrong

Likely Wrong: A New Asset-Allocation Strategy for Investing in Retirement http://t.co/eDqaDxhFuH Stocks r risky over intermediate periods $$ Jan 20, 2014
Wrong: Bonds Captivate $16T of Pensions http://t.co/NEpJSjCD7p Bonds have 2 go somewhere & defined benefit pensions have long liabilities $$ Jan 20, 2014
Wrong: Bailout Risk, Far Beyond the Banks http://t.co/iv5eT6lhea! Asset mgmt companies can go bust, & they pose no systemic risk $$ Jan 20, 2014
Wrong: Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the US http://t.co/CPMUggr3CA $$ $TLT Jan 20, 2014
Wrong: Ten quotes on the question of financial bubbles http://t.co/MNwr543Vsf No one focuses on the effect of borrowing money in bubbles $$ Jan 19, 2014
Wrong: Wealthy CEO Is Deeply Concerned About Budget Deficits http://t.co/gTGUwSF3hS Biased article doesn’t factor in entitlements $$ $TLT Jan 19, 2014

Replies, Retweets, and Comments

@DavidBCollum Look here: http://t.co/VaqQESCdCu Value Line has a chart that goes back to the 20s though… Jan 17, 2014
RT @cate_long: Please add http://t.co/QHQiCxYopc RT @researchpuzzler: a guide to finding data on the cheap from @AlephBlog http://t.co/mb? Jan 15, 2014
RT @Pawelmorski: Great spot @toby_n : DB’s Slok quantifies how difficult the Fed finds explaining itself. http://t.co/1quahXrnJD Jan 14, 2014

E-mails on Insurance

Posted on 17 January 2014 by David Merkel

Here we go.? E-mail #1:

You truly have one of the great blogs out there!

I was wondering, have you ever had to evaluate a company that had set up a captive insurance company to self insure? How did you get comfortable with it?

As an example, ZCL composites on the TSXV. I looked at them awhile back and disqualified it as I could not get comfortable with the environmental liability. They manufacture fuel storage tanks, so insurance is a large component of their cost of doing business.

If they did have a reputable outside insurer, you could at least count on the insurer for doing some audit work in their manufacturing and installation processes. But they have set up a captive, and self insure.?

So, how would you calculate whether they have enough reserves?

I threw the company in the too difficult pile and moved on, but it has irked me as I like them.

Good toss into the too difficult pile.? Environmental liabilities are difficult even for actuaries inside the insurance companies? to analyze.? Those of us outside have no chance.? I cannot validate reserves from outside, and particularly not on long-tail lines.? I will not invest in any insurer that has a large part of its underwriting in asbestos/environmental — it is too risky.

That aside, using a captive is a negative sign.? No one uses a captive, except to weaken reserving, taxation, or other rules.

Next e-mail:

David,

I stumbled across Gainsco, Inc. (OTCPK:GANS), a very small nonstandard auto insurer (you may be familiar). It’s trading around 0.6x book value, seems to be well capitalized, and has had OK growth barring FY2012. It also has a pretty impressive 12.5% dividend yield.

I guess my questions are:

1) Would you expect this trade at such a discount to book because: its nonstandard insurance, it’s on the pink sheets (not regularly filing with the SEC), it’s too small, or some combination or other reason?

2) given that its nonstandard, I assume it’s riskier? What’s the best way to determine whether the company is adequately reserved/capitalized? 24.5% equity / assets seems pretty conservative, but I suppose if they’re not adequately reserved that could be meaningless.

Thanks so much, look forward to hearing from you.

I have run across Gainsco in the past, when they were bigger, and I avoided them.? Subprime insurers tend to lose money on underwriting over time.? There is a kind of cycle where a few make money for a few years, and then competition surges, and more money is lost than was previously made.? From the time I started as a buyside analyst of insurance stocks in 2003, until now, no subprime insurer has made money for a buy-and-hold investor.

Aside from that, Gainsco has gone dark.? You can see financials at their website, but do you trust them?? Aside from nonsponsored ADRs no good companies trade on the pink sheets.

Margin of safety — this does not meet my safety requirements.

Final E-mail:

Hi David,

I really enjoy your blog.? Have seen the recent news surrounding AmTrust Financial (AFSI) and short sellers?? I’d like to hear the thoughts of an actuary on the company and specifically the items that GeoInvesting points to.? To me, their financial structure appears extremely (perhaps, unnecessarily) complicated.?

Yes, and they fail my test of having conservative reserves.? They have had to strengthen reserves on prior year’s business for the past three years.? That is a bad sign, and would keep me away.? I think GeoInvesting is correct here, but this is not an endorsement of them generally.

It is very rare that an insurer should be valued near 2x book value.? Though I am rarely so bold, this one strikes me as a short sale, if you can get the borrow with confidence.

Sorted Weekly Tweets

Posted on 11 January 2014 by David Merkel

Rest of the World

Iraq Is New Schism for Saudis in Strained Alliance With West http://t.co/WiNnlXIhzI This piles on top of Iran & Syria; Sunni-Shi’a divide $$ Jan 11, 2014
Hollande Deplores Magazine Splash of Affair With Actress http://t.co/xVSPTk9f3r Many enjoy scandals, even if they say nothing is wrong $$ Jan 11, 2014
Surprise drop in euro zone inflation shows deflation risk http://t.co/BE8iIa4ENn Economic conditions are so weak, should we b surprised $$ Jan 09, 2014
Area Evacuated After Fiery Derailment in Canada http://t.co/fYOHtW5ZOy Pipelines are environmentally safer; send the memo to Obama $$ $XLE Jan 09, 2014
South Sudan Peace Talks Falter http://t.co/OVw1hj1fuM Africa is essentially tribal, which does not mix well w/democracy, most of the time $$ Jan 09, 2014
Good News and Bad News About Global Inequality http://t.co/t01kegmAL3 Many non-economic indicators show inequality is declining $$ Jan 09, 2014
Rich Danes Face Benefit Cuts as Universal Welfare Abandoned http://t.co/6k9Y0HJukb Non-universal entitlements tend2get viewed as welfare $$ Jan 08, 2014
Bond Tab for Biggest Economies Seen at $7.43T in ?14 http://t.co/Zq3VTSJAKi The debts will roll over, the only question is the yield $$ $TLT Jan 06, 2014
Euro Jobless Scourge Seen Defying Leaders? Growth Pledge http://t.co/32L7Hx2qsQ 12%+ unemployment &little improvement, makes US look good $$ Jan 06, 2014
Dirtiest Coal?s Rebirth in Europe Flattens Medieval Towns http://t.co/w6KWbpzzLr Trading nuclear power for lignite seems a bad trade $$ Jan 06, 2014
Shadow Banking Risks Exposed by Local Debt Audit http://t.co/KzlEW24cbH The problem is that it is tough to count all the opaque debts $$ Jan 06, 2014
China?s Runaway Train Is Running Out of Track http://t.co/IAHF6JCUta! The Chinese debt bubble nears its demise, what will Chinese govt do $$ Jan 06, 2014
South Sudan Peace Talks Start as Army Pushes Back Rebel Assault http://t.co/aqwnwYxEhX Hard to have peace talks while pushing back rebels $$ Jan 05, 2014

Companies & Industries

Who Wins, Who Loses if the U.S. Starts Exporting Oil? http://t.co/vN2BTl7kwE Missed the effect on the commodity petrochemical industry $$ Jan 11, 2014
Dish Seeks to End $2.2B Bid for LightSquared Asset http://t.co/VjxnNgBsTV Ergen wants to end the deal b/c LightSquared missed milestones $$ Jan 11, 2014
Target Data Breach Much Worse Than First Thought http://t.co/GnaR3VwHeu 70M customers had home & email addresses & phone #s stolen $TGT $$ Jan 11, 2014
Intel Has Its Eyes Fixed on Networking http://t.co/AGlmAad3rY Intel thinks they have 4 openings 4 networks to aid the telecom companies $$ Jan 11, 2014
Lenovo Dominated Worst-Ever World PC Market in 2013 http://t.co/GhmqSwuIGf Lenovo has the lead in a big but shrinking business $$ $HPQ $SPT Jan 11, 2014
IBM Doubles Down on Watson http://t.co/op7SD7gIiS Watson is a genius, but it takes lots of effort to make the four areas of strength work $$ Jan 11, 2014
Wells Fargo Creates SWAT Team to Keep Loans In-House http://t.co/xxyrsqJcr6 Putting loans on the balance sheet? How quaint. $$ FD: + $WFC Jan 09, 2014
Americans Are Eating More Velveeta, and Now There’s Not Enough http://t.co/1fqq5dxvgC As a cook, contemplating this makes me queasy $$ $KFT Jan 08, 2014
How Companies Face Up to Human Trafficking Risk http://t.co/qE4zzQ8bve Very difficult to get all slave labor out of int’l supply chains $$ Jan 08, 2014
Why business schools charge so much and pay their teachers so little http://t.co/dBepTcQ2ba They’re amoral bastards w/a profit motive $$ Jan 11, 2014
Bank of America ramps up credit card loans http://t.co/UXRDzeM4Xp If the big banks r starting to open the lending spigots — inflation? $$ Jan 08, 2014

US Politics & Policy

Taxes Have Congress Avoiding Roads Bill as Money Runs Low http://t.co/x2UDQbheq7 Let the states prioritize their road construction/repair $$ Jan 11, 2014
What Liberals Don?t Get About Single Payer http://t.co/MaQQZQh2kM Insurers a small part of costs, Drugs, Medical equipment & Doctors big $$ Jan 11, 2014
Christie and the IRS http://t.co/dWHZskMLHU Contrast the Governor’s contrition with Obama’s lack thereof; tho if Christie lied he is dead $$ Jan 11, 2014
HARP: How the Mortgage Program Has Panned Out http://t.co/ZDN94uFdsg It does leave the taxpayer w/a contingent liability 4 defaults $$ Jan 11, 2014
Puerto Ricans Flock North Away From Battered Economy http://t.co/LhchTMo3Q0 Self-reinforcing cycle as better off Puerto Ricans come to US $$ Jan 11, 2014
How the War on Poverty Was Lost http://t.co/uujlzrRkDp Goal was give fellow citizens a fair chance to develop their own capacities $$ #fail Jan 11, 2014
Chris Christie Is Not a Bully. These Guys Were http://t.co/pxYg6RBYCs John Adams, RFK, LBJ, Andrew Jackson, Nixon hurt political enemies $$ Jan 11, 2014
Millionaires’ Club: For First Time, Most Lawmakers are Worth $1 Million-Plus http://t.co/PMBoM3NyJA A million ain’t worth what it used 2b $$ Jan 11, 2014
Clickable Consent at Risk in Internet Privacy Lawsuits http://t.co/KFghV2XJ4s How much do u give away accepting information use policy? $$ Jan 09, 2014
Poverty level under Obama breaks 50-year record http://t.co/87feDKj7SN Be sure & give Congress, Bureaucracy & the Federal Reserve blame 2 $$ Jan 09, 2014
How Not to Regulate http://t.co/isrkmSd0l4 Good regulations r holistic & ignore special pleading from politically connected entities $$ $SPY Jan 08, 2014
Congress Makes NASA Finish Useless $350 Million Structure http://t.co/QlvScdhRab If we can’t make easy cuts, hard cuts will never b made $$ Jan 08, 2014
Cull the Stupid Tax Breaks http://t.co/j2UWBPZkwe Mostly we need to eliminate tax breaks that are not generally available to all business $$ Jan 06, 2014
Study Shows Fracking Is Bad for Babies http://t.co/i8KWfQpO5t Studies shouldn’t be released until peer review complete; statistics abuse $$ Jan 05, 2014
Darrell Issa’s Mischievous Postal Reform Bill http://t.co/YtisT8Yjey Eliminates Saturday delivery to restore COLAs for military retirees $$ Jan 05, 2014

US Economics

Is Jobless Rate Really Falling? http://t.co/pF2yH72N2B I find it dubious that falling labor participation rate is due to natural reasons $$ Jan 11, 2014
Payrolls Rise Less Than Forecast; US Jobless Rate at 6.7% http://t.co/ux3LHxbobh We need to have a different H/L #, U-3 is 2 unreliable $$ Jan 11, 2014
Highlights From the December Jobs Report http://t.co/3ZGjwho4Pv The December civilian labor force participation rate was a low 62.8% $$ $TLT Jan 11, 2014
Best Year Since 2007, Even Better 2014 http://t.co/CKxqxhYHbd Still haven’t made it back to 2000-2007 levels, projects better 2014 $$ Jan 06, 2014
What Do You Call 12,000 Economists Trudging Through Snow? http://t.co/xX7zlqcMne Not enough snow 😉 $$ Jan 05, 2014
Arthur Laffer Interview http://t.co/pKFx0aTPFV Difficult 2 deal w/a paradigm shift; inflation not realistic during deleveraging $$ Jan 04, 2014

Market Impact

When Does A Bubble Spell Trouble? http://t.co/pq9hFV9ywz Many transformative technologies get overvalued b4 producing real cash returns $$ Jan 11, 2014
Looking for Alternatives to Bonds http://t.co/2n1ehNPQgu Until negative part of the credit cycle bites it works; keep one eye on the exit $$ Jan 11, 2014
Skagen Says Ignore Wall Street, Bet on Emerging Markets http://t.co/pYIwqoL7kD Alternative POV, but emerging mkts do bad amid $$ tightening Jan 11, 2014
10 Reasons the Gold Bugs Lost Their Shirts http://t.co/MroSlPib0A @ritholtz writes a great piece on investing in an mistitled article $$ Jan 09, 2014
Older Americans Shun Retirement at 65 for Risky Startups http://t.co/cvhiw8zRZC I’ve run into these in PE, the desperation can be felt $$ Jan 08, 2014
Bull Market Has Years Left for Shaoul on S&P 500 Values http://t.co/pOWNFznDSG Argument is that breadth leads to long market rallies $$ Jan 06, 2014
Wall Street’s Reading List http://t.co/jvhIzbPtLC Great list, but add in Michael Pettis’ The Great Rebalancing http://t.co/C4jKcrUNHV $$ Jan 06, 2014

Other

Marriage Makes You Rich and Stupid http://t.co/9mIBOTCz44 Another factor here is that the productivity of stay-at-home spouse isn’t taxed $$ Jan 11, 2014
The Open-Office Trap http://t.co/nnjZnr8ycb Open offices promote distraction, which reduces productivity; it takes courage to resist it $$ Jan 11, 2014
To Stop Procrastinating, Look to Science of Mood Repair http://t.co/Ruw3YnrcvW Just get started, avoid a pity party, look to the future $$ Jan 09, 2014
Website helps students find freelance gigs, avoid unpaid internships http://t.co/NYbdKlHHJs Interesting stuff, sent it to my college kids $$ Jan 08, 2014
Payout May Come for an ABA Team That Is Long Gone http://t.co/qs8Fb6yl8v Half Billion comes 37 years later 2 owners of marginal ABA team $$ Jan 08, 2014
Frigid Air Threatens Coldest US Weather in Two Decades http://t.co/7xtE649g4l Things are extra cold in the Northern Hemisphere on average $$ Jan 06, 2014
Noah?s Ark Risks Collapse Without Bond Buyers by February http://t.co/0eBaSP8x1I It would be sad to see Noah’s Ark underwater 😉 $$ Jan 05, 2014
The Scandal Bowl: Tar Heels Football, Academic Fraud, and Implicit Racism http://t.co/J2CERTqxYa Phony classes &grades 4 football players $$ Jan 05, 2014

Information Security

Security Experts Pull Out of RSA Conference in NSA Protest http://t.co/Cyk8yREEVU & they should, y support those who compromise security? $$ Jan 11, 2014
Is the NSA spying on Congress? http://t.co/FIeYlyIVUV Not long, worth a read; NSA responses to Sanders and Grayson indicate yes. $$ Jan 04, 2014

Wrong

Wrong: Federal Probe Targets Banks Over Bonds http://t.co/ODCDpENNQo Vacuous, the bond market requires that you research what u buy $$ $AGG Jan 09, 2014
Wrong: Why great CEOs ignore their stock price http://t.co/MrxV9cKI6N Great CEOs use their stock price to guide buybacks & acquisitions $$ Jan 09, 2014
Wrong: Is China Losing Hong Kong? http://t.co/ZOtl520jK9 I don’t think the Party cares much over whether those in Hong Kong are happy $$ Jan 06, 2014

Comments, Replies & Retweets

RT @MacFarlaneNews: EPIC FAILURE- U.S. Navy accidentally sends reporter its strategy memo for dodging his FOIA request cc: @gregorykorte ht? Jan 08, 2014
RT @OracleofWallSt: @MatthewPhillips Myth: companies investing more cash in buybacks and not reinvesting. This chart debunks this view. htt? Jan 08, 2014
@hblodget @MatthewPhillips How much of the cash is collateral for derivatives, and other lending agreements? Different world today. Jan 08, 2014
@Mr_Berman Brainy, and cool-looking for his era. We all age. 🙂 Jan 07, 2014
I review more books than the above personalities. I nominate The Great Rebalancing by Michael Pettis…. http://t.co/4zknuYQS16 Jan 06, 2014
Bitcoin, like a promoted penny stock, is easily manipulated, because there is little intrinsic value http://t.co/5qyxzDVU68 Jan 06, 2014
The big question is when deleveraging stops, and individuals and banks start borrowing… http://t.co/ZQLyY5kc4L Jan 04, 2014

Sorted Weekly Tweets

Posted on 4 January 2014 by David Merkel

Rest of the World

Aberdeen Buys Thailand?s Stocks Amid Worst First-Day Drop http://t.co/3W6F8v7APS Thailand is worth a look, the Army tends to stabilize $$ Jan 04, 2014
Rousseff Buoyed by Rising Poor as Brazil Rating Drop Looms http://t.co/u28ILaBsSe Y I sold all Brazil investments when Dilma was elected $$ Jan 04, 2014
Who Needs Bitcoin? Venezuela Has Its ‘Sucre’ http://t.co/mO29dvSb5Q Trade Bolivars @ official rate 4 Sucre 2 Dollars 2 black mkt Bolivars $$ Jan 04, 2014
JPMorgan Halts Latvia Dollar Deals After Probes, Group Says http://t.co/hrsCfHXxG1 Latvian banks do $$ laundering w/sloppy investment banks Jan 03, 2014
Cheaper Hanoi Pork Shows Crops Ease World Food Cost http://t.co/Lh7AJ0W4jX Bumper grain harvests in the US & India lower world food costs $$ Jan 02, 2014
Chinese Banks Eye Global Bond Market http://t.co/NWMZPwzggu B leery of Chinese bank subordinated debt convertible into equity in failure $$ Jan 01, 2014
Explaining Hybrid Securities to Chinese Investors http://t.co/PlNYC6iZ55 Think the Chinese will regret this financial innovation in time $$ Jan 01, 2014
Unusual Emerging-Market Bond Bet Pays Off http://t.co/9RDw5iKLnl W/lots of liquidity, this was a year 4 the trash 2 fly: Argentina/Greece $$ Jan 01, 2014
Israel’s Christian Awakening http://t.co/KnXrPhf9lp Arab Christians find common ground w/Israeli State vs Arab Muslims to defend Israel $$ Jan 01, 2014
Bank Borrowing From ECB Jumps http://t.co/LkOcZ9kn4c Every bank likes 2 look liquid at year end 4 the snapshot of its balance sheet $$ Jan 01, 2014
The unintended consequences of Abenomics http://t.co/iZkiKE1vWD @soberlook shows us how the poor & elderly r hurt by Abenomics $$ Jan 01, 2014
Repeated Liquidity Crunches Beg a Question: Where’d the Money Go? http://t.co/el0ITutTxc Provides liquidity 2 WMP Ponzi schemes of banks $$ Jan 01, 2014
The Rise and Fall of a Local Official Obsessed with GDP Growth http://t.co/rDltv3HwiV Statistics stretched2make things look better $$ Jan 01, 2014
Argentina?s socioeconomic statistics: Still lying after all these years http://t.co/UUCPLhqOY2 Official statistics r fudged 2help govt $$ Jan 01, 2014
Miss Japan Ikumi Yoshimatsu joins battle against mafia in the media http://t.co/riMMv8TSMd Can one beauty take on the Yakuza? She can try $$ Jan 01, 2014
It’s Official: Pope Has Not Abolished Sin, Says Vatican http://t.co/WBrqw5HJEn That may be, but he certainly downplays its importance $$ Jan 01, 2014
Turkey first of Fed Taper victims as political crisis scares investors http://t.co/wQssI4hIeO monetary policy tightening reveals weakness $$ Jan 01, 2014

US Politics & Policy

MIT Economist Seeks Facts in Health-Care Policy Debate http://t.co/yY96lxT5dJ Amy Finkelstein worth watching as she measures healthcare $$ Jan 04, 2014
Someone Please Help New York Times With Econ 101 http://t.co/yABRFhpHve I’m sorry @cabaum1 , but there is no hope 4 the NYT, e.g. Krugman $$ Jan 04, 2014
America Burning – The Yarnell Hill Fire Tragedy and the Nation’s Wildfire Crisis http://t.co/lE5bjUwbba Volunteer firefighters risk lives $$ Jan 03, 2014
Bakken Crude More Dangerous to Ship Than Other Oil http://t.co/v7w5NdaTDu Lighter hydrocarbons tend to b more flammable, need 2 test them $$ Jan 02, 2014
If 2013 Was Hard on Obamacare, Just Wait for 2014 http://t.co/VSkDtqznNR An actuarially unsound program will get worse over time $$ #watch Jan 01, 2014
Obamacare Enrollments Hit 1.1M W/December Surge http://t.co/cbZ2tjDZmD B interesting 2c how well the policy is liked as taxes/prems go up $$ Jan 01, 2014
Americans on Wrong Side of Pay Gap Run Out of Means to Cope http://t.co/ymB8hshL8L Labor is not scarce & QE inflates necessities & stocks $$ Jan 01, 2014
TRICKY DICK: Only Nixon less popular than President Obama in Year 5 http://t.co/ingFHQhzjt B interesting 2c if it affects 2014 elections $$ Jan 01, 2014
Portfolio Hedging Is Alive and Well Under Volcker http://t.co/72w48Apm4A The “London Whale trade” & things like it r legal w/Volcker Rule $$ Jan 01, 2014
Buffett’s year-end bet: Pipelines http://t.co/B4bjfvCNjN Fits in nicely w/Lubrizol & $BRK-B other chemical assets | FD: + $BRK-B & $PSX $$ Dec 31, 2013
Icahn to FT: Why Shouldn?t My Board Picks Share in Profits? http://t.co/exjNK6Mbk3 Company Sale not always S/H best interests in long run $$ Dec 31, 2013
North Dakota Train Fire Adds Fuel to Keystone XL Debate http://t.co/H60WTHlrB8 Pipelines r more reliable than trains on average $$ $SPY $TLT Dec 31, 2013
SEC pushes US insurers for details on ‘captives’ http://t.co/Q0Wiw3otmK Isn’t primarily a GAAP issue, so the SEC is on the wrong track $$ Dec 31, 2013
Acquisitions Continue to Support AJG http://t.co/Pb6iGPuMkb Zacks goofs again. Validus $VR isn’t an insurance broker, but a P&C reinsurer $$ Dec 31, 2013

Companies & Industries

Can’t Get Tenure? Then Get a Real Job by @asymmetricinfo http://t.co/E5mZEqxexH Professors are in ovversupply, look outside of academia $$ Jan 04, 2014
Yet Another Housing Cover Story From Barron’s http://t.co/2hv4FhM5Ft @ritholtz takes under on 5% growth in housing prices 4 next 3 yrs $$ +1 Jan 04, 2014
How Wall Street got snowed on weather derivatives http://t.co/3jDAqJ7dCi Weather is different everywhere; bespoke market can’t get volume $$ Jan 04, 2014
Cox to Buy Back Stake in AutoTrader http://t.co/R7EAcHANiM Who knew that AutoTrader was worth ~$7B; web middlemen can b worth a lot $$ $PCLN Jan 04, 2014
Berkshire Seen Failing Buffett 5-Year Test for First Time http://t.co/HUNer4hK0Y Had 2 happen sometime, amazing it went on4so long $$ $BRK-B Jan 02, 2014
Buffett?s Media General Deal Makes a Lot More Financial Sense Now http://t.co/YhI7BhxeFl Buffett has aready made what he put in in equity $$ Jan 02, 2014
The first 3D printed organ — a liver — is expected in 2014 http://t.co/jdOdK4MMwH If we can create native organs, impact will be huge $$ Jan 02, 2014
Stop Pouting About Tech’s Next Big Thing, It’s Here http://t.co/muEZd8l0lB We still haven’t maxed out utility of smartphones & tablets $$ Jan 02, 2014
Hertz Runs Over Activist Shareholders http://t.co/pTPzixT7Lc A strong poison pill; I’m surprised the price of Hertz went up on the news $$ Jan 02, 2014
Health: Scientists Look to Improve Cost and Time of Drug Trials http://t.co/xI21QAj5Ln Sounds promising, but will lose double blind rigor $$ Jan 01, 2014
Bitcoin Is a High-Tech Dinosaur Soon to Be Extinct http://t.co/OgVFDpcxmZ Bitcoin will die, but it is not right 4 governments 2monopolize $$ Jan 01, 2014
Home Prices Back at Peaks in Some Areas http://t.co/Z8WVCyff5i Most of it depends on how well the underlying local economies r doing $$ Jan 01, 2014

Market Impact

Why ‘Wildly Overvalued’ Stocks May Keep Rising http://t.co/wT6vprAEAl @ritholtz Low short rates, steep yield curve good 4 PE multiples $$ Jan 02, 2014
Pension Funding Levels Surged in 2013 http://t.co/zOSFbl18vY If a Defined Benefit plan is not fully funded now, likely it never will be $$ Jan 02, 2014
Finra to Crack Down on Brokers With High Number of Complaints http://t.co/mCzrlW71Jv If FINRA is prioritizing now, y didn’t they do it b4 $$ Jan 02, 2014
Amid Record Rally, Stock Picker Keeps Focus on the Basics http://t.co/pIO25JTQOa Sam Eisenstadt, a Pioneer at Value Line, Remains Bullish $$ Jan 01, 2014
Private Equity Enjoys a Record Year http://t.co/eRdqannfjW Firms That Buy & Sell Companies Are Set to Return >$120B to Investors for 2013 $$ Jan 01, 2014
Paulson Gets $490 Million as ?Mooch? Rotates to Equities http://t.co/btjTtZ0gIR Not sure y an action of Scarmucci’s firm gets such play $$ Jan 01, 2014
Persistence is a Killer http://t.co/U8HtQzBBje @reformedbroker points out how hard it is 2 keep outperforming; as AUM rises harder still $$ Jan 01, 2014
Stocks $3.7T Year Beats Bonds Most Ever on Funds http://t.co/2DHvPluCO8 What a year; I’m glad I limit my ability2b bearish w/my portfolio $$ Jan 01, 2014
S&P 500 Price to Book Value http://t.co/YGJJ7aDpjz Worth a look- P/B is around 2.7 at present up from 1.8 at the beginning of 2009 $$ $SPY Jan 01, 2014
Guess which hedge funds beat the roaring S&P 500? http://t.co/9286hLNy40 Robbins, Paulson, Loeb, Peltz, Tepper, Pucillo $$ $SPY Dec 31, 2013

Other

Green Bay Cold Threatens to Outfreeze NFL Ice Bowl Record http://t.co/aEZ7QK3JEA Cheeseheads will watch&freeze as 49ers go to their knees $$ Jan 04, 2014
Plosser: May Need to Employ Aggressive Tightening Campaign http://t.co/hIdwcS1ijH Fed doesn’t know what will happen & can’t control it $$ Jan 04, 2014
Auburn-Alabama: Inside the Greatest Play of All http://t.co/NK5tiEQTV4 Interesting details on the strategies employed by the two coaches $$ Jan 04, 2014
Business Buzzwords Generator http://t.co/e8E1MBN1ph Generate random buzzword phrases for cheap fun $$ Jan 02, 2014
Which Buzzwords Would U Ban? http://t.co/TswImvO8mc Going Forward, Low-Hanging Fruit, Disrupt, Epic, Incentivize, Game Change, Reach Out $$ Jan 02, 2014
Apple, Jacob Appelbaum and the National Security Agency http://t.co/vJrTmaKlHm Scary article & video of NSA projects by a security expert $$ Jan 02, 2014
Scott Yancey – FREE Live Real Estate Income Event http://t.co/85hnNPy2PP For losers only; learn how to attempt flipping property & lose $$ Jan 01, 2014
The Ride-Sharing, Handbag-Borrowing Productivity Revival http://t.co/E7orfPRiAW The internet allows people 2 share capital goods easily $$ Jan 01, 2014
Say Goodbye to the Same Old Steakhouse http://t.co/5A6cjn4E4L That most hidebound of dining institutions is long overdue for an update $$ Jan 01, 2014
2014 Resolution: This Year, I Will Blog http://t.co/UuaIej3QIw Easy 2 say, hard 2do. Tonight, Aleph Blog will give pointers on how 2do it $$ Jan 01, 2014
2013 Year in Review by David Collum http://t.co/PF4HnO2aWA “Austerity is not a policy; it is a consequence of bad policy” Bad year 4 him $$ Dec 31, 2013

Wolf of Wall Street

How the “Wolf of Wall Street” Is Still Screwing His Real-Life Victims http://t.co/ziYCK3MAoY 20% restitution made to victims. Not enough $$ Jan 01, 2014
An Open Letter to the Makers of The Wolf of Wall Street, and the Wolf Himself http://t.co/8PnIZp2Azy Daughter of a scammer critcizes film $$ Jan 01, 2014
Daughter of the Boiler Room http://t.co/7ajMRjN2mv What would it b like2b daughter of Jordan Belfort’s associate? Lots of $$ -> lots of debt Jan 01, 2014
My ?Wolf of Wall Street? Review http://t.co/sFFcCqeGte @reformedbroker validates much of the tale from his own early experiences $$ Jan 01, 2014

Wrong

Wrong: The Pope Is Right: Inequality Is Unjust http://t.co/0ZelLyi3V6 God is Sovereign & gives different people differing abilities $$ Jan 04, 2014
Wrong: Homebuyers Missing Housing Rebound Depend on Yellen http://t.co/uNmbAFB3S5 Too optimistic; Fed no longer controls long rates $$ $TLT Jan 03, 2014
Wrong: In Search of the Perfect Portfolio http://t.co/dOil5koE8p A fool’s errand. Environments change & no simple universal method $$ Jan 01, 2014

Comments, Replies & Retweets

@groditi For you, I think it would be worth $50+ to review what someone who used 2do it at Credit Suisse thinks. Get the company to pay $$ Jan 03, 2014
Commented on StockTwits: First time I have heard of Perceptron, thanks for introducing me to it. No, I don’t know… http://t.co/d2EtHTLFFi Jan 03, 2014
Commented on StockTwits: Also be aware that distributions from $AMLP have been somewhat irregular in the past:… http://t.co/Utul6cspT6 Jan 01, 2014
Commented on StockTwits: Just be aware that you have a concentrated position in an income vehicle. If interest ra… http://t.co/RDgBeiecyq Jan 01, 2014
Commented on StockTwits: What proportion of your investable assets is held in it? http://t.co/x6MUov551z Jan 01, 2014
@maoxian @randomroger But I’m glad you like it. I got the idea from @historysquared but realized it could be better 4 readers if I sorted Dec 31, 2013
@maoxian @randomroger I use “Allmytweets” http://t.co/xiSnKRldBe & since I do it weekly, search the word “sorted” to find where I left off Dec 31, 2013
@dpinsen @PortfolioArmor Go for it! Dec 28, 2013

On Understanding and Valuing Financial Companies

Posted on 2 January 2014 by David Merkel

I have readers all over the world.? Here is an example:

Hi Dave

I am a 25 year old from Pretoria, South Africa. I have been reading your blog for around 2 years and I thoroughly enjoy it (especially the book reviews). I might not agree with a few things you say, but it is rare that I don’t learn something while reading your work. I love how your personality shines through in your writing…a personality based on God.

I have had this fascination with finance and investing since I ran into a popular finance magazine here in South Africa around 2008 while stile in university. Since then I have been reading everything I could on business, investing and finance. I am also about to start training with a large wealth management firm in south africa to be 1 of their financial advisors. Training I am wholeheartedly looking forward to.

In all my reading, there is something I still struggle to wrap my head around, and that’s how to value Financial companies. You are undoubtedly the most informed person on financial company investing nd financials that I read. Hence my email: I was wondering if you could suggest a few readings for me to tuck into (preferably books) as I have found most of the things I have read only scratch the surface. Reading with maths that is not too elaborate.

I hope I am not asking too much.? Thank you in advance for any suggestions you might have, and I hope you keep up the good work on your blog.

Financial companies are difficult for several reasons:

1) The cash flow statement has almost no meaning.

2) It is very hard to know how much capital is needed to keep things going.? That data gets disclosed to the regulators, and not directly to stockholders.

3) It is difficult to know the riskiness of the assets that a financial company holds.

4) With complex financials, it is difficult to tell what the “run on the bank” risk is.

I will be reviewing a book on banks this month, but I have run into few books in my life analyzing financials.? It is a real hole in the investment literature.

Financial companies are valued off of their net worth, and their expected path of earnings.? Earnings retained, rather than paid out in dividends, or used to buy back stock, adds to net worth, and is new capital that can be used for growth.

The capital of financial companies can be divided in two: that which is required by the regulators for solvency purposes, and that which is free for deployment into new business.? With banks, look at the call reports to analyze the capital needs of subsidiaries.? With insurers, get the statutory reports.

To the extent you can, analyze the quality of assets owned.? Also analyze when liabilities may require cash, particularly if assets are financed by repurchase agreements.

Now over the last seven years, I have written a lot on financials, particularly insurers.? Here are the articles at my blog that would deserve attention:

A Summary of my Writings on Analyzing Insurance Stocks

A compendium of the best articles written prior to mid-2010.

Then there was the Flavors of Insurance Series.? In 12 parts, it went through the entire insurance space, explaining what make each area different.

Thinking about the Insurance Industry

Describes the changes that have happened since the financial crisis.? Bad financial models have been destroyed.

On Life Insurance and Life Reinsurance

Explains how life insurance is saturated but reinsurance is not.

On Complexity in Financials, and Insurers Specifically

Explains why complex financials are usually a bad investment.

Investing In P&C Insurers

Once you understand the model, many are simple companies, and easy to invest in.

Evaluating Regulated Financials

An attempt to explain to college students why financials are different from other companies.

On Insurance Investing

This seven-part series explained a wide number of factors in analyzing insurance stock investing.

Penny Wise, Pound Foolish

On some of the pathologies inside badly-run insurance firms.

Two Insurance Questions

On reserving and valuation questions.

On the Designation of Systemically Important Financial Institutions

Why Insurers, no matter how large, should not be considered a threat to systemic risk.? (Please ignore AIG — no other insurer was a major party in derivatives.)? Also see: On Risk-Based Liquidity, and Financial Regulation

On Captive Insurers

Explains some of the nuances of statutory reserving/capital, and why some insurers want to fuddle it.

Classic: Financials are Different

A piece from 2006 at RealMoney, describing how financials are different from industrial stocks.

That should give you a start.? There aren’t many books dealing with the intricacies of financial companies, and of what few there are they are written by the big four auditors, or the rating agencies, for their own purposes.? I don’t own any of them.

But what I have written, from that you can benefit.

Classic: Financials are Different

Posted on 21 December 201322 December 2013 by David Merkel

The following was published at RealMoney in March 2006:

When you are a corporate bond manager, one of the lessons that you learn early is that financial companies (or, financials) are different from industrials or utilities.? Why?? First, the novice manager wants to buy a lot of financials, because they yield more at equivalent ratings.? Second, you have a staff of analysts, and you realize that only a few of them can do financials, whereas almost all of them can do industrials or utilities.? Again, why?? Here are a number of related reasons:

Tangible assets play only a small role in a financial company.? What constrains the growth of an industrial company?? The fixed assets (plant and equipment) limit the technical amount of product that can be delivered in a year.? With services, workers? Finally, demand is the ultimate limiting factor, but this affects financial, industrial, and services businesses alike.? With a financial company, sometimes the limits are akin to a service business (?If only we had more trained sales reps!?), but more often, capital limits growth.
The cash flow statement plays a big role with industrials and utilities, but almost no role with financials.? One of the great values of the cash flow statement is the ability to attempt to derive estimates of free cash flow.? Free cash flow is the amount of cash that the business generates in a year that could be removed, and the business is as capable of functioning as it was at the start of the fiscal year.? Deducting maintenance capital expenditure from EBITDA often approximates free cash flow.? Cash flow statements for financials cannot in general be used to derive estimates of free cash flow because when new business is written, it requires capital to be set aside against the risks.? Capital is released as business matures.? In order to derive a free cash flow number for a financial company, operating earnings would have to be adjusted by the change in required capital.
Sadly, the change in required capital is not disclosed anywhere in a typical 10K.? Depending on the market environment, even the concept of required capital can change, depending on what entity most closely controls the amount of operating and financial leverage that a financial institution can take on.? Sometimes the federal or state regulators provide the most constraint; this is particularly true for institutions that interact closely with the public, i.e., depositary institutions, life and personal lines insurers.? For entities that raise their capital in the debt markets, or do business that requires a strong claims paying ability rating, the ratings agencies could be the tightest constraint.? Finally, and this is rare, the probability of blowing up the company could be the tightest constraint, which implies loose regulatory structures.? Again, this is rare; many companies do estimates of the economic capital required for business, but usually regulatory or rating agency capital is tighter.
Financial institutions are generally more highly regulated than non-financial institutions.? There are several reasons for this: the government does not want the public exposed to financial risk, systemic risk, guarantee funds are typically implicitly backstopped by the government (think FDIC, FSLIC, state insurance guaranty funds, etc.), and defaults are costly in ways that defaults of non-financials are not.? The last point deserves amplification; in a credit-based economy, confidence in the financial sector is critical to the continued growth and health of the economy.? Confidence can not be allowed to fail.? Also, since many financial institutions pursue similar strategies, or invest in one another, the failure of one institution makes the regulators touchy about everyone else.
Rapid growth is typically a negative; financial businesses are mature, and there is a trade-off between three business factors: price, quantity and quality.? In normal situations, a financial institution can get only two out of three.? In bad times, it would be only one out of three.
Because of the different regulatory regimes, financial institutions tend to form holding companies that own the businesses operating in various jurisdictions.? Typically, borrowing occurs at the holding company; the regulators frown at borrowing at the operating companies, unless the borrowers are clearly subordinate to the public served by the operating company.? This makes the common stock more volatile.? In a crisis, the regulators only want to assure the safety of the operating company; they don?t care if the holding company goes bust, and the common goes to zero.? They just want to make sure that the guaranty funds don?t take a hit, and that confidence is maintained among consumers.

All of these factors together lead to the following conclusion: financials are more complex than other types of companies, and are not correctly analyzed in the same way as non-financials.? Earnings quality is hard to discern, and growth is not always a positive thing.? Bankruptcies are rare, but when they happen, recoveries are poor for common stockholders and holding company debtholders.? Finally, management conservatism and competence are paramount, given the less certain nature of accrual accounting at financial companies, and the inability to calculate free cash flow with any precision.

In part 2 of this two-part series, I will give my approach to analyzing a sector of the insurance space in order to demonstrate some of these ideas.