Search Results for “insurers” – Page 11

Sorted Weekly Tweets

Posted on 21 December 201322 December 2013 by David Merkel

Monetary Policy

The theory of money entanglement (Part 1) http://t.co/zfCM2rPxBx The effects of monetary policy vary w/finl institutions need for credit $$ Dec 20, 2013
Repo market as a form of free banking http://t.co/4m3PSuFViG? @isakaminska describes a hybrid credit system where central banks r weak $$ Dec 20, 2013
Why Do So Many People Hate QE? http://t.co/ZpcQhSrSpH Basic reason is fairness. Y can the Fed create credit out of thin air, & we can’t? $$ Dec 19, 2013
Visualizing the Fed | The Big Picture http://t.co/J7K15MIDdZ @ritholtz shares a cool interactive graphic on the Fed’s Balance Sheet $$ $TLT Dec 19, 2013
‘Was The Fed A Good Idea?’ How Cato Cleans Keynesian Clock http://t.co/qaalFGBvML Economies grow faster when currency stores real value $$ Dec 17, 2013

?? TIPS Wipeout Signals Fed Losing Fight Against Disinflation http://t.co/3GeeSDpZAv Implied inflation rising across TIPS curve $$ $TIP $TLT Dec 17, 2013

FOMC & Data

Fed Seen Tapering QE in $10B Steps in Next Seven Meetings http://t.co/gvmopTBufm Y do economists assume that things follow a simple path? $$ Dec 20, 2013
Fascinating Bernanke can call Fiscal policy restrictive when deficit huge & shrinking a little, doesn’t apply same logic 2 LSAP shrinking $$ Dec 18, 2013
FOMC Central Tendency for Fed funds rate 2013-6 &long-run 0.25%, 0.34%, 1.06%, 2.18%, 3.88% Change 0.00%, -0.06%, -0.19%, -0.09%, -0.04% $$ Dec 18, 2013
FOMC Central Tendency for Fed Tightening — January 2016, 25 months away vs 27 last September, one month further out $$ Dec 18, 2013
FOMC Central Tendency for PCE Inflation 2013-6 & long-run 0.99%,1.52%, 1.79%, 1.87%, 2.00% Change -0.21%, -0.01%, -0.10%, 0.00%, 0.00% $$ Dec 18, 2013
FOMC Central Tendency for Unemployment 2013-6 & long-run 7.05%, 6.45%, 5.91%, 5.53%, 5.54% Change -0.11%, -0.13%, -0.12%, -0.10%, 0.04% $$ Dec 18, 2013
FOMC Central Tendency for real GDP 2013-6 & long-run 2.27%, 2.91%, 3.09%, 2.83%, 2.25% Change 0.14%, 0.00%, -0.07%, -0.05%, -0.09% $$ Dec 18, 2013
Someone ask Ben Bernanke if they would issue fed funds at longer terms/tenors Dec 18, 2013
@AlephBlog wrong again, David — decrease of $10B, $5B each of Treasuries and MBS Dec 18, 2013
@AlephBlog sorry — $5b/month change Dec 18, 2013
RT @NickTimiraos: MBS issuance has plunged since Sept, so a $5 billion taper of MBS doesn’t mean the Fed will decrease its *share* of MBS p? Dec 18, 2013
Statement Regarding Purchases of Treasury Securities &Agency Mortgage-Backed Securities http://t.co/97DNRGXJFQ Pares MBS buys by $10B/mo $$ Dec 18, 2013
An Opiate for Underachievement: Bernanke Says Fed in ?Finest Hours? Stood Up to Pressure http://t.co/soQDjBHZea Rather, they caved & hid $$ Dec 17, 2013
The One Thing Bernanke Must Not Do Tomorrow http://t.co/AvDcElOHTY Saying & not doing loses credibility 4the Fed. Don’t say wut u wont do $$ Dec 17, 2013

Companies & Industries

The Buffett difference, derivatives edition http://t.co/5VUI7WxOUB Soft collateral reqs, tolerated earnings vol, bot in size w/variety $$ Dec 20, 2013
Target Data Breach Has Become a Card Data Fire Sale http://t.co/jUxgOpv7SP B especially wary here because it can b used as a debit card $$ Dec 20, 2013
Buffett’s massive wind-power order shows wind energy becoming cheaper http://t.co/0lOSGp3NQi Wind power becomes economical, end subsidies $$ Dec 20, 2013
Facebook Is Selling Stock For Some Reason http://t.co/x9LsnLUMNb $FB makes it easier 4 index buyers to get shares as it enters the S&P500 $$ Dec 19, 2013
Facebook, Zuckerberg to Sell Stock Worth Nearly $4 Billion http://t.co/B4joZJZYR9 Note $FB compny selling shares; not usually a good sign $$ Dec 19, 2013
Regional Shippers Pose New Threat to UPS, FedEx http://t.co/RNUpcBrL3Y And USPS too. Regionals can get it there the next day $$ $FDX $UPS Dec 19, 2013
AT&T Sells Wireline Assets To Frontier Communications http://t.co/or1n1lWqbD Interesting 2c $T sell off rural wireline customers 2 $FTR $$ Dec 18, 2013
Gold Town Turns to Dust as Metal Decline Shutters Mines http://t.co/unN2Mi97A3 Life at high-cost mines is very cyclical. Boom-bust $$ $GLD Dec 18, 2013
Dodge CVT Animation http://t.co/cfEWG0Y9jQ Cool 82-second video of how a continuously variable transmission works $$ $GM $F $TM $HMC Dec 18, 2013
How Good Old Car Engines Got So Efficient http://t.co/hM5ZmjdXpK Most progress w/energy has come by using hydrocarbons more efficiently $$ Dec 18, 2013
Delta Battles Tiny Upstart Airport http://t.co/HbalfXKYc3 B careful of small airports near big cities, u don’t want 2create the next $LUV $$ Dec 18, 2013
Poor Americans Lead Movement to Abandon Landlines http://t.co/MmUfqiljPa Landlines r dying; I’m thinking of getting rid of mine $$ $SPY $VZ Dec 18, 2013
Pizzerias Try to Apply Chipotle Formula http://t.co/afyCN5xi2u Creating Fast, Custom & Inexpensive 4 pizza; many r trying, who will win? $$ Dec 18, 2013
Campbell Seen as Next Buffett Target Post-Heinz http://t.co/zryODDWpRs Likely wishful thinking; soup shrinking; PE high, no growth $$ $CPB Dec 17, 2013
Wind Power Rivals Coal With $1B Order From Buffett http://t.co/WXJfEAHmrn Wind power gets competitive on price; can we end the subsidies? $$ Dec 17, 2013
Google Just Bought a Mechinized Cheetah and Other Military Robots http://t.co/5ZO3XXzcNF 1st internet search now robotic world domination $$ Dec 17, 2013
Google, Facebook Push to Control Web’s Pipes http://t.co/nmDzeospON Content companies want more control over their delivery over the web $$ Dec 17, 2013

Market Impact

Three things long/short hedge funds cannot do (well) http://t.co/zyiE65FcAZ Manage risk, Short stocks on a systematic basis &stop trading $$ Dec 20, 2013
Investors should abandon long-term commodity bets http://t.co/5rGgYXj5fy End of supercycle, no income, correlated w/equity returns $$ $GLD Dec 20, 2013
DJIA Rises to Inflation-Adjusted Record High http://t.co/nseI2H9eF4 Closes at 16,221. Guess I have 2 eat my words: http://t.co/A6kJoniqG5 $$ Dec 20, 2013
The FOMC- SCR Factors- Bullish SP500? http://t.co/pI3A04XM71 The TINA effect: TINA stands 4 There Is No Alternative.(to Stock investing) $$ Dec 19, 2013
Investor Hunger 4US Corporate Bonds Signals Confidence http://t.co/PsCIMa25A9 Retweet after me:Credit spreads r free $$, credit spreads r… Dec 17, 2013
Want to invest like Buffett? Here?s how http://t.co/3CIqNByFVU Focus on cheap, high-quality stocks w/moats, lever using ins float $$ $BRK-B Dec 17, 2013
Corn Plummeting Spurs Talk of ?80s US Farmland Bust http://t.co/QoO5lVTXSx Will b interesting 2c how many recent buyers get inverted $$ $SPY Dec 17, 2013

Financial Sector

US Credit Markets: US Lite Covenant: Freshness without Protection ? http://t.co/F2HguklHFM Credit protections getting worse 4 bank debt $$ Dec 20, 2013
OCC believes banks might be gambling again http://t.co/lMG9YG24dj The OCC is seeing looser underwriting, reminds them of 2007 $$ #toosevere Dec 20, 2013
Man Who Said No to Soros Builds BlueCrest Into Empire http://t.co/UNksM1mSvl Borrowed $750M to hire 25 equity mgrs 4 his hedge funds $$ $SPY Dec 20, 2013
Secret Currency Traders? Club Devised Biggest Market?s Rates http://t.co/dtBfuqR48w There is no human system that cannot b gamed $$ $SPY Dec 19, 2013
New Mortgages to Get Pricier Next Year http://t.co/oNfGLJeZCC About time F&F raised fees; dodgy mtges have much higher loss rates $$ $FNMA Dec 18, 2013
Volcker Rule Shows Its Wide Reach http://t.co/MOZMjUFoj8 Securitized assets, when they default, most frequently default w/zero recovery $$ Dec 17, 2013
First Volcker Victim? Zions Dumping Its Hedge Funds http://t.co/Kj8uYfltTn $ZION cleans up the trash w/now-sufficient capital $$ Dec 17, 2013

PPACA / Obamacare

Obamacare Initiates Self-Destruction Sequence http://t.co/VkbqqPzMYb @asymmeticinfo asks what will Obama do next year on indiv mandate? $$ Dec 20, 2013
Obama Lifts Health Mandate for Those With Canceled Plans http://t.co/aCYJLzaOZz Must b nice 2b able 2alter laws by presidential fiat $$ Dec 20, 2013
More Obamacare Delays. Surprised? http://t.co/keWUsmLvay @asymmetricinfo thinks the law will survive b/c insurers benefit in long-run $$ Dec 19, 2013
A Medicaid Bet in Wisconsin http://t.co/Ejgbmbd61B Scott Walker Says He Wants to Protect the Poorest; Critics Assail 4Not Taking US Funds $$ Dec 19, 2013
National Lampoon’s ObamaCare Vacation http://t.co/Vzp636uMCW Interesting to hear how poorly Maryland is doing w/its healthcare website $$ Dec 19, 2013
Half of Uninsured Say Health Law Is Bad Idea http://t.co/BEWOeZg1gK When those that u r trying 2 benefit don’t like it, u know it is bad $$ Dec 18, 2013
Is Obamacare Really an Improvement on the Status Quo? http://t.co/Zc1umGhp1l More people lose insurance than gain it; status quo better $$ Dec 18, 2013
Insurers Fight Hospitals’ Paying Premiums for Poor http://t.co/WnuoAo481T Hospitals pay to get sick people insured, so they can make $$ $SPY Dec 17, 2013
Errors Continue 2Plague Government Health Site http://t.co/5j6OZRqkqZ Flaws Include Missing Customers & Erring Eligibility Determinations $$ Dec 14, 2013

Rest of the World

Putin Bets $15B to Capture Junk-Rated Ukraine Vassal http://t.co/vjxhVcT8gv Rebuilding the USSR is tough work for a tough man to do $$ Dec 19, 2013
South Sudan Rebels Take Key Town of Bor http://t.co/MMQumSSIHZ It’s in the center of the country, kind of a crossroads 4 commerce/travel $$ Dec 19, 2013
Vatican Hires Global Firms to Modernize Communications, Accounting http://t.co/1CRwzMDbs8 Humility arrives at the Vatican, expertise 2 $$ Dec 19, 2013
Russian Amnesty Includes Greenpeace as Well as Pussy Riot http://t.co/b8FNVgaQx6 Is Russia getting soft? 😉 Courting international favor $$ Dec 18, 2013
Mom Can?t Visit Daughter as Airlines Shun Venezuela Cash http://t.co/1uds13LW3t Such is life 4those under currency controls; freedom goes $$ Dec 18, 2013
North America to Drown in Oil as Mexico Ends Monopoly http://t.co/5bV35xIc7o Oil is no good to Mexico if can’t get it out of ground $$ #tech Dec 18, 2013
South Sudan Puts Down ‘Attempted Coup’ http://t.co/19KfhoRdVJ A young nation, very experienced in corruption; attempted coup unsurprising $$ Dec 17, 2013

China

China s Stealth Tightening? http://t.co/tuW7JvVhFI A new squeeze hits the China Interbank market & the authorities aren’t doing much $$ $FXI Dec 20, 2013
Why Are the Chinese Scared of American Corn?? http://t.co/lEGbWgh2r4 Probably some Party bigwig who sells domestic corn complaining $$ Dec 19, 2013
Can China Teach North Korea to Grow Up? http://t.co/J6Ba2jpzVz If N Koreans had as much freedom as the Chinese do, Kim would b overthrown $$ Dec 17, 2013
China’s Cities Chop Down Hills for Industrial Land http://t.co/KTpYOwgXNK Wonder what the secondary effect will b from this terraforming? $$ Dec 17, 2013

US Politics & Policy

The Trouble With Populism? It Isn?t That Popular http://t.co/RXSmHLDWTu All sorts of extreme positions, mine included, r never popular $$ Dec 19, 2013
Republicans Block Symbolic Step to Extend Tax Breaks http://t.co/mxUZ31R7GZ Rationality. Maybe temporary tax breaks will b temporary? $$ Dec 19, 2013
Obama?s own panel rips NSA spying on phone calls of Americans http://t.co/QYx1lJXLfc The consensus is that the NSA has gone too far $$ Dec 19, 2013
John Podesta eats crow: ?I apologize to Speaker Boehner? http://t.co/XyCLBNrjWs Don’t blame Podesta, he just drank his own Kool-aid $$ 😉 Dec 19, 2013
At 61 She Lives in Basement While 87-Year-Old Dad Travels http://t.co/KTF0YCOpWx Each generation does successively less well on average $$ Dec 18, 2013
That’s the nature of all of the fixed payment plans devised by the “Greatest Generation.” They borrowed from children & grandchildren $$ Dec 18, 2013
Top Democrats reject court ruling over NSA spying on Americans http://t.co/wnNGQmJwys Interesting 2c varying opinions in both parties $$ Dec 18, 2013
Unmasking the Mortgage Interest Deduction: Who Benefits and by How Much? http://t.co/4PzAbpa7rs Benefits the well-off; end & balance bdgt $$ Dec 18, 2013
Hidden Danger in Public Pension Funds http://t.co/lBgACsI12P Low Funded status, high amounts in risky assets, bonds offer little yield $$ Dec 18, 2013
Disarming Surveillance http://t.co/70nAEtNTJA The opposite danger is that by snooping on others intensively they grow to resent the US $$ Dec 17, 2013
NSA Phone Spying ‘Almost Certainly’ Unconstitutional, Judge Says http://t.co/cnqxDbGXrW Probably won’t b upheld, good 2try overturning $$ Dec 17, 2013
The truth about the NSA’s bogus malware apocalypse http://t.co/nJ3hMCrcwq Most mass attacks r hard 2pull off w/any significant force $$ $TLT Dec 17, 2013
In Bankrupt Detroit, the Bills Are Piling Up http://t.co/eJrX6tgIgO One tough part of a muni b/k – who gets paid & what r reasonable fees $$ Dec 17, 2013
Accidental Tax Break Saves Wealthiest Americans $100B http://t.co/RU6y8vCNZc ?I?ve done a lot4 Democratic contributors,? he sez w/a smile $$ Dec 17, 2013
Look How Easy It Is 2 Game Estate Taxes http://t.co/u3YGvZ491l Y the estate tax needs 2b replaced & income taxes disallow income deferral $$ Dec 17, 2013

US Economics

GDP Grows 4.1% in Third Quarter, Biggest Gain Since 2011 http://t.co/tUCz0bQViw Guess I have to eat more of my words, US looks good 4 now $$ Dec 20, 2013
Boomers as Retail Clerks Shows Y Greenspan Saw Low Growth Era http://t.co/phoiELeks2 Long good article how aging populace changes economy $$ Dec 19, 2013

Other

Finished the #GoogleCrossword http://t.co/VtaoYkaQdt Haven’t done a crossword in years $GOOG #fun Dec 21, 2013
Why Successful CEOs Get Fired http://t.co/KehYfcljKv Founding CEOs get fired when tasks get larger than them, &the board loses confidence $$ Dec 19, 2013
Doctors Eye Cancer Risk in Uterine Procedure http://t.co/CD5OKwWs2I Grinding up fibroid in the uterus may increase the risk of cancer $$ Dec 18, 2013
Top Products in Two Decades of Tech Reviews http://t.co/GQjGsMR1Xz Walter Mossberg’s last column @ WSJ; a joy 2 read, will still b on web $$ Dec 18, 2013
Youthful Migrants Lured by Perks to Shrinking US Areas http://t.co/jxFNa41ftZ Promising idea to create urban jobs in rural areas $$ #winwin Dec 18, 2013
How Dogs Might Protect Kids Against Asthma: Gut Bacteria http://t.co/HaWa0goqdn Fascinating that dogs may aid kids w/immunity to asthma $$ Dec 17, 2013
Multivitamins Found to Have Little Benefit http://t.co/5o8jUZGkYc The controversy will continue; nothing this profitable ever dies $$ $SPY Dec 17, 2013
Vonn Rivals Schuss From Slope to Boardroom for Funding http://t.co/GaJHLVAyob Olympians r little corporations seeking sponsors, donations $$ Dec 17, 2013
Stocks That Still Have Perks http://t.co/k93IaeQlgl From discounts on cars&computers 2cruise bounty, here’s where 2find shareholder perks $$ Dec 14, 2013
The Tsarnaevs and the Boston Bombing http://t.co/Pz8MxYQXEf A decade ago, WSJ reporter happened to befriend the Tsarnaevs- an inside view $$ Dec 14, 2013
Mike Tyson Explores Kierkegaard http://t.co/n2mrAx1KuW Philosophy is a dead end; no truth to their views of existence, knowledge &ethics $$ Dec 14, 2013

Wrong

Wrong: Bernanke: More Financial Reform May Be Needed http://t.co/gxitPtPQxb Dumb

comment from a guy who doesn’t understand how banks work $$ Dec 19, 2013

What Bible is Pope Francis reading? http://t.co/EvnvIDNZlo Jesus never questioned property rights in his teaching, w/charity voluntary $$ Dec 19, 2013
How Pope Francis Misunderstands the Free Market http://t.co/Ksmn5DzS0O Simpler than that; he is unstudied, engages in wishful thinking $$ Dec 18, 2013
Wrong: Technology Adoption Discrepancy Btw Individuals & Institutions http://t.co/YkLJscgP7S Tries 2 connect falling ROA & Social Media $$ Dec 14, 2013

Comments

“Artificially forcing down Treasury yields via QE has 4 major bad effects?” ? David_Merkel http://t.co/z9nLhQSknr $$ $TLT $IEF $SHY Dec 19, 2013
Commented on StockTwits: but the company is selling; it needs cash more than shares — good companies typically s… http://t.co/AkpvtYiijw Dec 19, 2013
Commented on The Economist | Daily chart: Doomsdays http://t.co/21NoGGuzuD Dec 18, 2013
“I analyzed TRUP CDOs 4a bank in 2008 and 2009 — built a special model that could dig into the?” ? David_Merkel http://t.co/tRm5NtJ0mk $$ Dec 17, 2013
Commented on StockTwits: ‘ @MMula534 A lot. Most of the best investors r lifelong learners, & they c patterns whe… http://t.co/5pQzWca6Nm Dec 17, 2013

Give Them a Small Bank

Posted on 20 December 2013 by David Merkel

It takes a thief to catch a thief. ?Thus I have a modest proposal for bank regulation. ?This could be applied more broadly to other forms of financial regulation also.

Why not require that all regulators spend time managing banks before they are appointed to be regulators? ?I think this would be very instructive to those who would become regulators, because they would see how issues at banks appear from the other side.

I am not suggesting that potential regulators “go native” and become sympathetic to banks. ?Working inside a financial institution can do the very opposite, and inform a regulator on what to be careful about. ?I want regulators to have the smarts that an insider perspective gives.

Think of me for a moment. ?I am not a fan of the insurance industry; I also don’t hate it, but I know it well. ?I know where the warts are. ?If I were a regulator, I would be feared by the industry, because there is almost nothing that I don’t know about insurance in broad. ?(I.e., I am not trying to brag, but I think that I am competent in analyzing insurers.)

My point is that we want intelligent regulators that cannot be bamboozled. ?That only comes with significant industry experience.

But industry experience isn’t enough. ?You want people who are intelligent critics, who can look at the industry and say that certain practices are wrong from a solvency or market conduct standpoint.

And thus I say, “Give them a small bank.” ?Let the Federal Government set up a bunch of small banks for prospective regulators to help manage for a few years. ?Being part of a senior management team would cue them into a wide number of problems as they try to make money in a competitive market. ?Let them interact with their regulators as well.

I write this because when I read what most broad bank regulators at the highest levels say, I think, “All you can do is suggest things should be tighter, but you have no good reasoning for what or why. ?Would that you understood the industry you are regulating.”

In general, it is a bad idea to have academic economists in regulatory positions, because they do not understand what they are doing, but merely follow their ideology. ?Far better to have practitioners that are skeptics be regulators, because they really know what is going on, and will not spare the industry over abuses.

As a dear friend of mine once said, “To truly loathe the public schools, you have to be one of the teachers.” ?In the same way, I say make the regulators work for the banks before they regulate them, so that they can properly loathe them.

Sorted Weekly Tweets

Posted on 14 December 2013 by David Merkel

Rest of the World

US Drone Strike Hits Wedding Convoy in Yemen, Killing 13 http://t.co/6h2vhYPuw6 More bad PR 4 drone strikes, wonder how this will end… $$ Dec 13, 2013
2.5-mile plunge into the world’s deepest gold mine in South Africa http://t.co/DQZA8Fkl9B &check out this graphic http://t.co/CvWrJlfbRu $$ Dec 13, 2013
A Journey Into the World’s Deepest Gold Mine http://t.co/mpb4pP658d The technology & the survivors @ the deepest gold mine in the world $$ Dec 13, 2013
How I Unintentionally Forced Pirate Bay From Its Latest Haven http://t.co/N3LReXRSJV Ascension Island boots Pirate Bay which runs to Peru $$ Dec 13, 2013
Irish Charm W/Germans Leads Nation Out of Bailout Wilderness http://t.co/4F0I3rGJz7 Fascinating piece on how Ireland survived austerity $$ Dec 13, 2013
SNB Gauges Bubble Risks as Euro Crisis Danger Recedes http://t.co/83gteiPvCZ Favoring exporters leads Sweden monetary policy to overheat $$ Dec 12, 2013
Merkel Embraces Coal as Rookie Lawmaker Makes Mark on Policy http://t.co/Qotu8cFsRm Fascinating how environmental policy isn’t considered $$ Dec 12, 2013
The Unstoppable Postal-Service Retreat Starts in Canada http://t.co/PSMW6FBLfy Is the future 4 USPS the elimination of local mailboxes? $$ Dec 12, 2013
Rat-Infested South Africa Schools Foil Mandela Education Dream http://t.co/TvJjENGqHG Graft & corruption eat up school $$ #culture $SPY $TLT Dec 12, 2013
Are we seeing the emergence of ‘dictator’ Xi? http://t.co/QsUU5184Xl His #2 is sidelined, & there is no obvious close helper. $$ Dec 12, 2013

Lobotomies

World War II Veterans’ Families Recall Lobotomy’s Scars http://t.co/SkutVXuhFH LONG article on how families coped after lobotomies $$ Dec 13, 2013
Neurologist Walter Freeman?s Lobotomy Legacy http://t.co/ilb2M1RO3c Ice-pick lobotomies r a horrifying legacy damaging minds of veterans $$ Dec 13, 2013
Lobotomy For WWII Veterans: Psychiatric Care by US Government http://t.co/rc5cLaxK80 LONG sad tale of lobotomies to cure mental illness $$ Dec 12, 2013

Volcker Rule

Banks, Lawyers Struggling to Evaluate Final Volcker Rule http://t.co/A77HZqrdc7 Complex laws & regulations almost never work $$ #fail $XLF Dec 13, 2013
Banks, Lawyers Struggling to Evaluate Final Volcker Rule http://t.co/gwWXCwgItX Complexity is friend of large banks; can hide their acts $$ Dec 12, 2013
Wall Street Exhales as Volcker Rule Seen Sparing Market-Making http://t.co/NcTrJUPymK It doesn’t do much though it separates functions $$ Dec 12, 2013
4 articles on the Volcker Rule: http://t.co/Ej2IMblb0m & http://t.co/rGYkIUBUNn & http://t.co/GU0A2jNcwp & http://t.co/VcRJdwzQxa $$ $TLT Dec 12, 2013

US Politics & Policy

Health Insurers Told to Ease Coverage Rules http://t.co/wpJOj8tWQw Exchanges r getting many more old than young http://t.co/b9YFdT5dPQ $$ Dec 13, 2013
Will Copper Pots Destroy Lake Superior? http://t.co/GqFmD4jPY6 Perhaps the tailings can be used 4 roadbed, or other types of construction $$ Dec 13, 2013
All-out war breaks out in GOP over budget pact http://t.co/vAZLPhm9D4 Will b interest 2c if House Dems pass the deal w/a subset of GOP $$ Dec 12, 2013
Obama Needs to Fire Some People http://t.co/AvOrlQgnxq Similarity of Obama & Reagan; they tend to stand behind their people, til it hurts $$ Dec 12, 2013
Republican-Tea Party Tiff Means 41% Don?t Like Candidates http://t.co/dw8UNAE9NF Divisions in the GOP weaken their political prospects $$ Dec 12, 2013
Republicans Get the Better End of the Budget Deal http://t.co/klP9uHuJGC @asymmetricinfo gives us a different take, but will GOP do it? $$ Dec 12, 2013
The Potholes Stay Where They Are http://t.co/ZZI56aYXmt VERY long article on the recovery of the US auto industry-what has changed $$ $GM $F Dec 12, 2013
Soothing Words on ‘Too Big to Fail,’ but With Little Meaning http://t.co/0h8COkjGIF! Short of breaking up big banks, no way to end TBTF $$ Dec 12, 2013
Ryan Lizza: Why Won?t Obama Rein in the N.S.A.? http://t.co/m8pc9jTgCu Long article on Obama’s hypocrisy on surveillance of US citizens $$ Dec 12, 2013
House, Senate Negotiators Announce Budget Deal http://t.co/9tQZ01iZGg The sequester would be better, at least that makes real cuts $$ $TLT Dec 12, 2013

Central Banking

The Fed Doesn’t Really Trust the Banks Either http://t.co/cNEyz5i6rw Structural rigidities in $$ mkts make Fed policy less effective $$ $TLT Dec 13, 2013
Hoenig Says Volcker May Spur Efforts to Split Biggest Banks http://t.co/f7AfDZY6yy Ending interstate branching would b more effective $$ Dec 13, 2013
A Fed Dissident on Policy and Transparency http://t.co/i3oQh6bjFS Plosser makes a courageous stand to protect the Fed from its excesses $$ Dec 12, 2013
Nicolas Copernicus Was Far More Than A Scientific Icon http://t.co/jX01ZEjEY7 Wrote “On the Minting of Money.” A hard money guy 4 his era $$ Dec 12, 2013
Stanford Economist Piazzesi Influences Fed Forecasts http://t.co/CgAAhituSv Now her theories affect policy w/every forward rate wiggle $$ Dec 12, 2013
Why do ivory tower academics get into policy positions, in this case assuming that forward rates forecast future economic activity? $$ Dec 12, 2013

Financial Sector

Six Investment Errors You Are Making Right Now http://t.co/vke2UmoRlS @ritholtz shows us errors that he has made that we r all prone 2 $$ Dec 13, 2013
Philadelphia Meets Manhattan at 10 Rittenhouse Square http://t.co/hOz6EXeiPb Worked w/Carl Dranoff once; bright guy, very creative $$ Dec 13, 2013
Five Accounting Red Flags the SEC is Watching http://t.co/wHktREd5Ci Revenue recognition & cost deferral r bigger issues; wasting time $$ Dec 13, 2013
Lawrence McCarthy, Who Saw Swaps Danger at Lehman, Dies at 49 http://t.co/PanZkbNbmH Bright guy; he will b missed $$ Dec 12, 2013
Wells Fargo Plans Ethics Review Amid Bank Scrutiny http://t.co/kgOfuKfoRn Give $WFC its due, they r trying to get ahead of their problems $$ Dec 12, 2013
Why Is Everybody Sitting on Huge Piles of Cash? http://t.co/N11xOheIHz Waiting 4 new IPOs absorb excess cash $$ HT: @ritholtz $SPY $TLT Dec 12, 2013
As stocks hit record highs, so do profit warnings http://t.co/PHLL8LiPMs Market rally is multiple expansion, pay more $$ 4 same stocks $SPY Dec 12, 2013

Companies

What Yahoo Didn?t Want Investors to Know http://t.co/Ec25tEMoor $YHOO relies on $MSFT 4 25% of its revenue in 2012 & 31% in 3Q2013 $$ $SPY Dec 12, 2013
BNSF CEO Rose shifts role, renewing Buffett succession talk http://t.co/0mHnRYYVAy Would b a good candidate2run industrial side of $BRK-B $$ Dec 12, 2013
Inside the Breakup of the Pritzker Empire http://t.co/5XcnNWHnZk How Tom Pritzker detangled the family business, giving freedom to heirs $$ Dec 12, 2013

Other

How to Hike the Entire Appalachian Trail, and What You’ll Get Out of It http://t.co/fP8yHH7rTQ Retired photojournalist makes way on trail $$ Dec 13, 2013
Secular stagnation and the bastardisation of Keynes http://t.co/r2JiJ5z885 Rising debt levels led GDP to overshoot & now revert down $$ Dec 12, 2013
How Isaac Newton Went Broke Chasing A Stock Bubble http://t.co/gIQcjyBpRv HT: @tomkeene | Ride a painted pony, let the spinnin wheel spin $$ Dec 12, 2013
Why Do Forecasters Keep Forecasting? http://t.co/2t4Az5ZiyI Predictors exist so that we have someone to blame other than ourselves. $$ $TLT Dec 12, 2013

Wrong, etc.

Overstated: The Texasization of America http://t.co/cj67aQcR1e Texas may b the fastest growing state, but not all states go4 lower taxes $$ Dec 12, 2013
Wrong:White House Works2Attract Younger Health-Plan Users http://t.co/rtrWhv4UIe Most people signing up r either poor or sick; won’t work $$ Dec 12, 2013
I.e., w/interest rates on investment grade debt so low, most of these defined benefit pension plans r still dramatically underfunded. $$ Dec 12, 2013
Wrong: Pension Funds Make the Most of Stocks’ Surge http://t.co/6FjCE7boAQ Unless u can defease your liability, u don’t have enuf assets $$ Dec 12, 2013
Wrong: Federal Reserve Eyes New Tool for Setting Interest Rates http://t.co/T2jWOrhFk8 This is wishful thinking; math is same as IOER/FF $$ Dec 12, 2013
Ridiculous: Was Mandela Right to Sell Out Black South Africans? http://t.co/qOcPQR3BkU South Africa has done better than rest of Africa $$ Dec 10, 2013

Comments

Commented on StockTwits: I was a critic of W also. Good comment. http://t.co/2HtDhk1n2n Dec 12, 2013
Commented on StockTwits: That is not a skill of mine http://t.co/sXvuMKF95h Dec 09, 2013

When to Worry — An Asset-Liability Management Perspective on Financial Macroeconomics

Posted on 13 December 2013 by David Merkel

At the end of the day, the world is net flat.? Every asset is owned 100%; every liability is someone else’s asset.

If everything is 100% owned, why are there ever crises?? Financial companies owning illiquid assets financed by short, liquid liabilities.? Liquidity crises are credit crises; a company going through a liquidity crisis did not do sufficient stress testing to realize that they were weakly financed.

Crises are never accidents, aside from things like Hurricane Katrina and Superstorm Sandy.? And guess what?? How many insurers failed from those two events?? None.

Crises happen because things are inverted.? Under ordinary circumstances, prudence dictates that long-term assets be financed by equity or long-term debt.? Before a crisis, long-term assets are owned with short-term debt, and wealthy guys like Buffett and Klarman hold cash and shun long-term assets.? That’s inverted.? Those that should not be bearing risk are bearing risk, and those the could bear risk aren’t.? Why?? Because the prices on risk assets are high, and smart investors lighten the boat as the envious buy into momentum at the end of a doomed rally.? Ben Graham’s weighing machine takes over from the voting machine.

So what are reasons to worry?? Here are a dozen, not in any order:

The combined balance sheets of investment banks grow, and the complexity of their assets rises.
The repo market grows, as less liquid assets are financed by very liquid liabilities.
Poor-to-middle class people begin taking risk by buying homes, or speculating in stocks.? These people have weak liability structures, because they live paycheck to paycheck.
Mortgage finance moves to ARMs or even more exotic loans.
Downpayments on homes get low.
Rich hold more cash while the poor and middle-class borrow.? The rich can take losses — they have long time horizons.? When they play defense, it is a time to be concerned.
In a given sector there has been a large increase in debt, and there are concerns over ability to repay.
Shadow banking has increased dramatically.
Financial commercial paper issuance has increased dramatically.
People rely on certain large financial firms to not default, even if they have taken on too much credit risk relative to their capital.? (Think of Fannie and Freddie.)
Increased financial complexity makes everything opaque.? Bad things happen in the dark.
The credit cycle gets long in the tooth, and credit spreads/yields tighten to levels that are far too low for the risk taken on.

Now, I leave aside pure macroeconomic concerns like the possibility that the Fed might face a greater problem with stagflation than it did in the ’70s.? When long illiquid assets are financed by short liabilities, all sorts of bad things can happen.? Keep your eyes open.? Hey, aren’t Buffett and Klarman letting cash levels rise?

Sorted Weekly Tweets

Posted on 7 December 2013 by David Merkel

Rest of the World

Ghana Farms Miss Out on Oil-Fueled Middle Class Food Demand http://t.co/IwEsoXVy20 Middle classes introduce changes into societies $$ $SPY Dec 07, 2013
Are the Baltic Dry Index Telling Us to Expect a Stronger Economic Activity? http://t.co/aqnFaUuGkg Could be, but only in exports $$ Dec 07, 2013
Yuan Passes Euro as 2nd-Most Used Trade-Finance Currency http://t.co/yeNQzNYLWD If China’s banks were exposed 2 market, would b impressed $$ Dec 07, 2013
Big Oil to Get Brazil-Like Terms in Plan to End Mexico Monopoly http://t.co/SWqSEyVnU0 Maybe Mexico can gain the technical help it needs $$ Dec 07, 2013
Panasonic in Deal Talks With Auto Parts Makers for Expansion http://t.co/vjECK9hnD5 Desperation drives the company 2 seek more markets $$ Dec 07, 2013
Pirates Wielding Grenades Spur Japan to Ease Samurai-Era Gun Ban http://t.co/jsOtaI0J7c Force must b opposed by force; no other way $$ $SPY Dec 07, 2013
Rich Kazakhs Revive Polygamy as Women Seek Poverty Escape http://t.co/vTn2h9eSZx Young Kazakh women would rather b second wives than poor $$ Dec 07, 2013
Iran Wants US Companies to Develop Oil Fields http://t.co/E1NUUEo5t4 The Great Satan is quite useful under the right conditions $$ $SPY $TLT Dec 07, 2013
China Cinda Attracts $65B in Orders for Up to $2.5B IPO http://t.co/6i5nvsWhSD Those are bubbly conditions; 2 much $$ 2 put 2 work $SPY $TLT Dec 07, 2013
Wrong: OECD Warns Riksbank Against Obsessing Over Record Debt http://t.co/fYu3CcY31M OECD should learn excessive debt harms $$ $TLT $SPY Dec 07, 2013
Banks in Safest Euro Nation See Credit Drought as Finns Save http://t.co/HZ6IDctQzk Many want to save; few want to borrow. Rational $$ Dec 07, 2013
Spain Credit Falls to ?05 Shadow After Price Collapse http://t.co/y9VUnLcszp Even that is too much credit. Wait 4 hard money buyers $$ Dec 06, 2013
China Bans Financial Companies From Bitcoin Transactions http://t.co/i8yhbAcKAW Wealthy Chinese want to get value out of China $$ $SPY $TLT Dec 06, 2013
“Wealthy Chinese could use it to funnel flight capital out of China” ? David_Merkel http://t.co/XRD6rOfsGg How Bitcoin functions in China $$ Dec 02, 2013
China?s Largest Bitcoin Exchange Seeks Recognition for Currency http://t.co/hNtBu9e2MU Communist Party will eventually ban Bitcoin $$ $SPY Dec 02, 2013

PPACA/Obamacare

Obamacare’s New Goal: Stay Alive Until 2015 http://t.co/tJpT20oW6K The idea is 2 survive until 2015, so the law can’t b destroyed in 2017 $$ Dec 07, 2013
How Much More Will Smokers Pay for Obamacare? http://t.co/Rd3eWeVynR Answer: not much more & no, it will have little effect on quitting $$ Dec 04, 2013
Obamacare Website Repair Goals Reached, Administration Says http://t.co/PfJ5tgLrSu Big Problem: the insurers are not getting the data $$ Dec 03, 2013
Deep Inside The Hot Mess Called Obamacare: It’s Time For Honesty http://t.co/uY6P8JnakO Sophomoric, doing a dumb thing, calling it wise $$ Dec 01, 2013
Obamacare Payment System to Insurers Changed in Setback http://t.co/0d26PCyQh6 Complex law, difficult to change w/o affecting other parts $$ Nov 30, 2013
Inside the Company That Bungled Obamacare http://t.co/EbcR6VQ3rs B wary of companies that grow 2 fast w/shaky revenue recognition $$ $GIB Nov 30, 2013

Pensions

Change Illinois’ pension benefits to match the Social Security system http://t.co/LuA3nkw50C The bill passed will harm Illinois long-run $$ Dec 07, 2013
The Best and Worst Run States in America: A Survey of All 50 ? http://t.co/Kq5ElC567u You might be surprised by the rankings $$ $SPY $TLT Dec 07, 2013
Pension Threats in Illinois, Detroit Rattle Government Workers http://t.co/t2rqvoK3cl If the local government can’t pay, it won’t $$ Dec 07, 2013
Pension Threats in Illinois, Detroit Rattle Government Workers http://t.co/Hd0Wr0TL0b Blame Union strategy of extracting pension gains $$ Dec 06, 2013
Illinois Passes Pension Overhaul http://t.co/8svwzeiTuK Fake overhaul that leaves Illinois taxpayers worse off, will go to court & die $$ Dec 05, 2013
Detroit Retirees Got Extra Interest After Guaranteed 7.9% http://t.co/WmvpH4PHWI What Detroit did w/”excess” pension earnings was evil $$ Dec 03, 2013
Illinois Legislative Leaders Try to Sell Pension Agreement http://t.co/vU1O1qKSO6 Dreamland vs Hard Choices. So far Dreamland is winning $$ Nov 30, 2013

US Politics & Policy

Gun Patents Set 35-Year Record as Limits on Sales Fail http://t.co/lZKuBqkheu When GOP has Presidency sales will fall $$ Dec 07, 2013
What You Don?t Know About Mortgages http://t.co/dmKPgFMAqL! Mortgage documents don’t reflect the full cost of getting the mortgage $$ $TLT Dec 07, 2013
Obama war chiefs widen drone death zones http://t.co/E47ZKFgBex If we want to make the US odious to the rest of the world, use drones $$ Dec 07, 2013
Paul Krugman Consigns To Hell An Economic Slump Of His Own Devise http://t.co/qgrKFSBG8W We have 2 turn the lights off near Krugman $$ Dec 07, 2013
The Fed Must Inflate http://t.co/nBKutizEDw I think this is the most likely conclusion, but not certain $$ Dec 07, 2013
Is the Fed increasingly monetizing government debt? http://t.co/1I3twSCfaY Yes, Fed is monetizing government debt, get ready 4 inflation $$ Dec 07, 2013
Angry Self-Insured Voters Dim Democratic Takeover Plans http://t.co/MMjVZi16LU Many feel robbed by the loss of choice in healthcare $$ $SPY Dec 06, 2013
Henninger: Obama’s Red-Line Presidency http://t.co/tOjc5UV88s What doe the US stand for? What will we defend? Who r our allies? Confusing $$ Dec 06, 2013
“You can’t regulate what you don’t understand. The SEC looked in on it several times, with more?” ? David_Merkel http://t.co/g9jqwD0En1 $$ Dec 03, 2013
Uninsured-Driver Dilemma http://t.co/DSBWcNLyMk Have Assurant track non-payment at the insurers, & inform the MVAs of lapsation $$ $AIZ Dec 03, 2013
Magic Johnson, Tom Hanks Join Obama on Cash-Grabbing Trip http://t.co/z2AOd9C8yC Cash works in the short run, voters decide the long run $$ Dec 03, 2013

Financial Sector

Why FDIC is Running Out of Time for Resolution Planning http://t.co/5PTdNU6LPb As w/all complex laws, things move slowly, no surprise. $$ Dec 07, 2013
Why Capital Is Key Battleground in GSE Reform Debate http://t.co/21pFcfRhfU Appropriate capital 4 new system:a political &technical issue $$ Dec 07, 2013
Penny Pricing for US Stocks Said to Get Scrutinized http://t.co/grStNTieJR I don’t think this is a big problem, helps small investors $$ Dec 07, 2013
Examiners-in-Residence Should Be Pulled Out of Megabanks: OCC Report http://t.co/QGyvc9RkDz Familiarity breeds acquiescence, not contempt $$ Dec 07, 2013
Buyers Give Up Their Names to Seal Merger Deals http://t.co/zmAgQ2J5Zo Who cares what a bank is named, so long as you have control? $$ $FXF Dec 07, 2013
Volcker Rule to Force Banks to Comply With Five Regimes http://t.co/7H0s7dhCnm Recipe 4 disaster. When many r responsible, no one is $$ Dec 07, 2013
Slate Writer Is Dead Wrong to Root Against Community Banks http://t.co/TAL566KB0n Getting banks is tough 4 neophytes like Matty Yglesias $$ Dec 06, 2013
Private equity firms brace for ?mafia? style scrutiny http://t.co/dRaXIvfztv This looks a lot more difficult than the article indicates $$ Dec 03, 2013
Fed Eyes Financial System’s Weak Link http://t.co/ShsZIBcWT4 Solution is simple; bifurcate repo acctg 4 statutory cash flow testing $$ $XLF Dec 03, 2013
Creating a Black Swan http://t.co/wMnfc81Ai0 Attempts 2 explain how negative black swan events get created in financial markets $$ $SPY $TLT Nov 30, 2013
The Black Swan http://t.co/IBQL7AG4XJ A good piece that explains positive & negative “Black Swan” events, & how 2 thus position for them $$ Nov 30, 2013

Companies & Industries

Crude Oil Refiners Are In A Sweet Spot | Commodities http://t.co/HjtUJOe0gZ Because crude oil can’t b exported, refiners benefit $$ $SPY Dec 07, 2013
Retailers Are in a Deflated Holiday Mood http://t.co/Rd7JLXlRj8 One reason why I rarely invest in retailers, aside from grocery $$ $SPY $TLT Dec 07, 2013
Heavy Inventories Threaten to Squeeze Clothing Stores http://t.co/t542Zlltcf That said, clothing is dirt cheap, so why worry much? $$ $SPY Dec 07, 2013
Hidden U-Haul Billionaire Emerges With Storage Empire http://t.co/YRE2pc6Tf4 Fascinating tale of how brothers rescued the family business $$ Dec 06, 2013
UnitedHealth Projects 2014 Results Below Analysts’ Estimates http://t.co/c9fGK1QUzp Health Insurers take one for Obama’s errors $$ #FTL Dec 03, 2013
Olin Corporation Common Stock up 9% today http://t.co/HwlrL4TD9z Something is happening w/OLN today. Anyone know what? FD: + $OLN $$ $SPY Dec 02, 2013
Microsoft, Yahoo Upgrades Shows Snowden Won, Obama Failed http://t.co/sqzBmoIY8n Encryption keys double, squaring time needed to crack $$ Nov 30, 2013
Fair-Weather Friends or Raining on Your Parade http://t.co/uVksfLp84u Good snarky post. Time to lighten up on property-centric reinsurers $$ Nov 30, 2013

Market Dynamics

Gen Re?s Gilbert Says Fed Sets Up Stocks for a Decline http://t.co/o28udyUMGC The Fed will learn the limits of its power in a few years $$ Dec 07, 2013
The Blessing of a Declining Stock Price http://t.co/Ta2eE12QW7 This is how I do it; I buy companies that have moved against me $$ $SPY $TLT Dec 07, 2013
The Stock Market Is ‘Shrinking,’ Despite Record-High Indexes http://t.co/cj6YcrhBYL Interesting argument of stock scarcity pushing prices $$ Dec 07, 2013
Buffett’s Alpha http://t.co/D3UrTxePlp Finally a paper from academics that gives Buffett the credit he deserves. Efficient markets? No. $$ Dec 07, 2013
Gross to Run Pimco Unconstrained as Dialynas Takes Leave http://t.co/rgLxxVp3Xj Unconstrained is no guarantee of good performance $$ $TLT Dec 06, 2013
?Quant? hedge funds: Computer says no http://t.co/ZCXplVsnnA Runs in cycles as more or less focus on anomalies in investing $$ $SPY $TLT Dec 01, 2013
Don?t Ignore Doctor Copper http://t.co/JYw6XNcR5z Copper is indicating a punk economy $$ $SPY $TLT Dec 01, 2013
Howard Marks: Too Cute for His own Good? http://t.co/BWZ2bDD0xP Unfair. Marks says that the opportunity set is small, get it? $$ $SPY $TLT Dec 01, 2013

Other

Fixing What’s Wrong With Economics 101 http://t.co/BR8Lt8Z19H We need 2 scrap neoclassical economics, and move economics away from math $$ Dec 07, 2013
Madoff Behaved Like a Lunatic Over Fund Probe, Jury Told http://t.co/CUfV17a9tA Seems like Madoff employees kept their heads down $$ Dec 07, 2013
CS50, a computer science course, breaks stereotypes and fills halls at Harvard http://t.co/wnc2WYQbpo Making IT relevant across cultures $$ Dec 01, 2013
Caveat Emptor: Lovers of Latin Try to Sell a Dead Tongue http://t.co/d5YuHQQZtd Looks like wishful thinking 2me. Esperanto, anyone? $$ Nov 30, 2013
Why Taylor Swift Is the Reigning Queen of Pop http://t.co/sTEJPtyp66 Swift’s popularity secret? My take:she appears more humble than most $$ Nov 30, 2013
Build a Better Turkey Sandwich http://t.co/mM42sClsuL Thanksgiving keeps on giving in six inspired takes on the leftover-turkey sandwich $$ Nov 30, 2013

Why I Resist Trends

Posted on 28 November 2013 by David Merkel

Portfolio Rule Seven says:

Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.

Rarely is a stock a better idea after it has risen 20%, thus, sell some off in case of mean reversion.? When a stock falls 20%, it is usually a better idea, but to make sure, a review should be done to make sure that nothing has been missed.? Since instituting this rule, I have only had two bad failures over the last 13 years.? One was a painful loss on a mortgage REIT, Deerfield Triarc, and the other was Scottish Re.

But still I resist trends.? Human opinion is fickle, and most of the time, there is overreaction.? As a guard, on the downside, I review new purchases to make sure I am not catching a falling knife.

Much of it comes down to time horizons — my average holding period is three years.? If the asset has enough of a margin of safety, the management team will take action to fix the problems.? That is why I analyze management, their use of cash, and margin of safety.? A stock may seem like a lottery ticket in the short run, but in the long run it is a share in a business, so understanding that business better than most is an edge.? How big that edge is, is open to question, but it is an edge.

Another reason I resist trends is that industry pricing cycles tend to reverse every three years or so, offering opportunities to firms that possess a margin of safety in industries that are not in terminal decline, like most newspapers, bricks-and-mortar bookstores, record stores, video rental stores, etc.? (The internet changes almost everything.)

The second last reason why I resist trends is practical — experience.? Most of my best purchases have suffered some form of setback while holding them — were they bad stocks?? No, time and chance happen to all, but a good management team can bounce back.? It offers me an opportunity to add to my position.? I made a great deal of money buying fundamentally strong insurers and other companies during the crisis, sometimes with double weights.

The last reason is an odd one — the tax code.? Short-term gains are disfavored, and also cannot be used for charitable giving.

So why not take a longer view?? I can tell you what you would need to do:

Focus on margin of safety (debt, competitive boundaries, etc.)
Analyze how management uses free cash (acquisitions, dividends, capital investments, buybacks)
Analyze industry pricing trends, at least implicitly.
Look at the accounting to see if it is likely to be fair (there are a few tests)
Look for cheap valuations, which may have ugly charts.? People have to be at least a little scared.

That takes effort.? I am by no means the best at it, but I do reasonably well.? I avoid large losses without having any sort of automatic “sell trigger.”? Most of my initial losses bounce back, to a high degree.

With that, I wish you well.? Have a great Thanksgiving!

Two Good Questions

Posted on 27 November 2013 by David Merkel

My last post, On Investment Ideas, Redux, received two good questions.? Here they are, with my answers:

When using your quantitative factors, do your normally compare an investment idea relative to its sector, industry, or a custom comp group? I have dabbled in quantitative factor models in the past, and normally I start with an index, group by sector, and then compare each company relative to its sector (I use valuation metrics, liquidity, technical factors such as relative strength and price relative to moving averages, earnings volatility, earnings estimates revisions, balance sheet metrics, beta, and a proprietary risk/reward metric). How do you go about making the data relevant?

I try to look at what is overplayed and underplayed among factors and industries, and adjust my weightings accordingly.? I look for companies that add to economic value relative to price? I look for companies that may benefit from an industry turnaround or a corporate turnaround.? I look for pricing power, and how that is changing.

My industry and factor models are not integrated.? I use industries as a screen, but I look for value via valuations and factors.? Consult my eight rules for more on this.

I make the data relevant by letting my scoring model highlight promising ideas, and then killing those that are qualitatively bad ideas.

The second question:

Do you think the insurance company meme, while historically profitable, has now been over-exposed by yourself, AIG, Berkshire, etc?

Seems like the barriers to entry throughout the financial industry have collapsed (dis-intermediation by whatever name), and the trade looks pretty crowded. Every industrial concern has a financial arm as widely reported.

I have noticed a lot of de-mutualization of insurance companies, a lot of M&A / consolidation activity, and obviously asset management (new competitors) has grown all over the place. The financial sector (as a percent of the S&P) is back near all time highs.

Is the insurance meme now a crowded trade?

There have been others talking about this idea long before me, notably Tom Gaynor of Markel, a few of the CEOs in Bermuda, Eddy Elfenbein, etc.? There are significant barriers to entry on this trade:

Insurance is not a fast growth industry.? As such, many investors ignore it.
Insurance is not sexy.? Few buy insurance companies as a result.
Insurance is the most complex industry from an accounting standpoint, if you exclude investment banks.? Few follow it in detail.
Insurance profits are volatile in the short-run, but consistent in the long-run, for conservatively run insurers.? People get scared out of insurance stocks from the volatility.

Demutualization is a plus for the publicly traded insurance industry, because it makes the more industry more economic.? That said, there are few large mutuals likely to demutualize anytime soon.? They know that they have got it good.? Good pay. Little oversight.? Why change a good thing?

I would look at it this way.? Since capital easily flows into insurers, be skeptical when insurers with short liabilities have price-to-book over 1.5x.? For life insurers, and those with long liabilities, get skeptical when the price-to-book is over 2.0x.

We’re not there yet, but we are getting closer.? My exposure to the insurance industry is still significant, but well below my peak, where buying discounted insurance shares was easy money, and with far less risk than buying banks.? Banks were the better choice in this scenario, but insurers would have made it through uglier scenarios.? Less leverage and credit risk.

I have not always been a fan of insurance stocks.? In the 90s, I never owned them, because many took too much risk in investing.? Today, those bad old days are gone, and underwriting is designed to make a profit, on average.? And in an environment where many stock valuations are stretched, the valuations of insurers are reasonable.? The only question is whether capital levels are so high that competition on premium levels will be brutal.

My view is this: it will be difficult for the general public, and even institutional investors to warm up to insurance stocks to the degree that they make relative valuations unreasonable.? But if they do, I will be gone.? Somebody give me a spank on the seat if we get another era like the mid-2000s where insurers trade well above their book value, some above 2.0x, and I don’t sell.

I failed to sell as much as I should in 2007.? This time, I will be more measured.? As for now, my overweight on insurers is still a reasonable and likely profitable trade.? But as valuations go up, I will lighten the boat.

Classic: Talking to Management, Part 5: Understanding Major Shifts

Posted on 24 November 2013 by David Merkel

The following was published at RealMoney on April 20th, 2007:

The Changing Business Environment

What do you think is the most important change happening in the competitive environment at present?

This query can highlight emerging issues and demonstrate how the company is adjusting to the changes. Again, you need to compare the answers of various managers against each other; an odd answer could either be ahead of the pack or out of touch. If you think the answer makes sense, it can open up new questions that further enhance your understanding of the industry and the role that the company you are interviewing plays in it.

After Hurricane Katrina and other storms in 2005, ratings agencies toughened up their risk models, and catastrophe modeling companies increased their frequency and severity estimates. This created an even greater squeeze in the 2006 property reinsurance markets than what the losses of capital alone would have caused, as happened to the 2005 property reinsurance market from losses suffered in 2004. New entrants in the reinsuring property risk space found that they could write only half of the premium that their more seasoned competitors from the class of 2001 could. Further, property-centric writers found the capital required went up more for them than for their more diversified competitors.

There was less effective capital in property reinsurance at the end of 2005 than at the end of 2004, even though surplus levels were higher on net. Those who recognized the change in the rules of the game caught the rally in the stock prices as the price for reinsurance went up more rapidly than most expected for the 2006 renewal season.

What laws, regulations, or pseudo-regulations (such as debt ratings criteria) would you most like to see changed?

This is another attempt to understand what most constrains the growth of the enterprise (see Part 1 for a different angle on the question). The answer should be something that is reasonably probable, or else the management is just dreaming.

For an investment bank like Goldman Sachs (GS), an answer could be, “We want the ratings agencies to agree with our view of our risk management models, so that we can get a ratings upgrade and lower our funding costs.”

For a steel company in the early 2000s, the answer could have been, “The government needs to enforce the antidumping duties better.”

A media or branded goods company today might say, “Better efforts by the government to reduce piracy both here and abroad.”

For companies under cost pressure, such as General Motors (GM) and Ford (F), the answer could be, “A better labor agreement that includes changes in the union rules, so that we can improve productivity.”

What technological changes are most driving your business now?

Technology often benefits its users more than its creators. Prior to computers, it took a lot more people to run banks and insurance companies. Now financial companies are a lot more efficient and hire fewer people than they used to as a result of the change. You as the analyst want to know about the next technological change that will lower costs or create new products in order to forecast increases in growth of profitability.

There are other technological changes, but the biggest one recently in business terms is the Internet. The creation of the Internet has changed the way people search for information. World Book Encyclopedia was owned by Berkshire Hathaway (BRK.A), which thought it had a pretty good franchise until Microsoft (MSFT) and others came out with their own cheaper encyclopedias on a CD-ROM. Now even these are getting competed away by Wikipedia.

Who else is being harmed by the Internet? Newspapers are under threat from all sides. Classified ads have been marginalized by eBay (EBAY), Craigslist, Monster (MNST), etc. Regular advertising has been siphoned off by Google (GOOG), Yahoo! (YHOO) and others.

What cultural changes are most driving your business now?

Cultural changes affect demand for products. As more and more women entered the workforce, demand increased for prepared foods and dining out options. Demand decreased for Tupperware parties and things sold door-to-door.

Cultural changes can also lower the costs of an operation. Outsourcing has lowered costs and improved time coverage for call centers, computer programming and many other service functions. The willingness of nations to embrace the cultural change of capitalism creates new markets that previously did not exist.

One more example, again from insurance: Insurance became a growth product when extended family ties weakened and nuclear families became the standard. Now as nuclear families break down and are replaced by a greater proportion of singles without children, some insurance markets are weakening (life) and others are strengthening (annuities, personal lines, individual heath and disability).

What regulatory changes are most driving your business now?

Before you talk to management, you should know the answer to this one. But what matters here is that you know that they know, too, and more importantly, are building that into the plans for the business.

To get you started, consider the possible impacts of some changes on a few industries. For a pharmaceutical company such as Merck (MRK) or Pfizer (PFE), this could be a change in the way that drugs get approved. It might be a larger political change, such as the recent election of the Democrats, which is expected to produce a change in Medicare reimbursement rates.

Increases in environmental regulation can affect the profits of extraction businesses significantly, whether agriculture, mining, silviculture, energy exploration and production and more. If it becomes easier to unionize, that can affect wage rates and productivity even more as work rules bite into effectiveness and flexibility of work; both of these can lower profits in labor-intensive businesses.

Now, these are pretty obvious examples, and most examples here will be obvious, because most regulation is done openly. The answers that a management gives can be a test as to whether they themselves know what is going on.

Sometimes the answers get a little more subtle. In personal lines insurance, it took analysts a long time to catch up with the safety trends that were bringing down the frequency and severity of losses, particularly graduated licensing for young drivers. Internally, the companies had figured it out long before they told the analyst community. The analysts who asked why severity and frequency of loss were so good and got an answer that allowed them to “connect the dots” to the regulatory change realized that there was a secular, not cyclical, change going on. Thus they were able to make money buying personal auto insurers, because the trend was likely to extend to more states.

Mergers and Acquisitions

Without naming names, what types of business alliances do you think could be most valuable in the future?

This helps flesh out competitive strategy. Managements will be reluctant to part with details, but usually are willing to explain their approach to supplier agreements, joint ventures and so on.

The answer to this question can also highlight the “missing pieces” for the current business, and how the management team is trying to source them. It can also shine a light on new products and services that management is considering.

Is it cheaper at present to grow organically or through acquisitions?

The right answer is almost always organic growth. Acquirers usually overpay, particularly in acquiring scale. Intelligent acquisitions are usually small and often private firms, where the sale is negotiated and not an auction. The goal is to gain new core competencies or markets that can grow profits in concert with the capital and other resources that the company can add to their new acquisition.

If a company answers “through acquisitions,” there had better be a reason it has an advantage in acquiring companies that its competitors don’t, which is rare. If it’s the only public company rolling up a sector (again rare), there should be some logic as to what discipline the company exercises in not overpaying for acquisitions.

In the early phase of a roll-up, prices are typically reasonable for the small firms being purchased. As the roll-up proceeds, the acquisitions that are easy, logical and cheap get done first. In later phases, if there is a mania, the hard, illogical and more expensive acquisitions get done.

It’s rare to have a roll-up in which some party doesn’t start overpaying badly at the end. Sometimes that signals the end of the roll-up phase, with a decline in the share price of the overpayer, destroying the value of the currency that it is using to acquire small entities; namely, its stock price.

How important is scale when you consider acquisitions?

Again, acquirers usually overpay for scale. The right answer is usually that it is not important, unless it is a commodity business and the acquirer is the low-cost competitor, and will wrench expenses out of the target company to make the target as efficient as the acquirer.

Summary

The difference between my approach and the approach of most analysts is that I think about the business and its strategy rather than the next quarter or year’s earnings. My methods probably won’t help you make money in the short run but will help you make money in the long run as you identify intelligent management teams that understand how to compete for the long term, rather than those that can manage only next quarter’s GAAP earnings.

Two additional side benefits to doing it my way: First, the management teams will like talking with you. I can’t tell you how many times managers have said they appreciated my businesslike approach to analyzing their companies. Second, it will translate back into an improved understanding of the business you presently work in, as you think about strategic issues there.

Sorted Weekly Tweets

Posted on 23 November 2013 by David Merkel

Market Impact

Banks Consider New Corporate-Bond Trading Network http://t.co/UxLaTmuIgK Maybe volume will pick up w/increased liquidity &reduced spreads $$ Nov 23, 2013
White House snubs Fannie-Freddie plan http://t.co/aq94voAcwa Agree w/Obama here; we need to discourage mortgage debt, delever economy $$ Nov 21, 2013
PIK Bond Offerings Surge http://t.co/xv5m3I4HND Always a bad sign when borrowers can choose not to pay cash to lenders; market is frothy $$ Nov 21, 2013
Americans Recover Home Equity at Record Pace http://t.co/nDDUZvCUYm I wouldn’t b so optimistic; there r2 many investors relative 2 owners $$ Nov 21, 2013
J.P. Morgan Is Haunted by a 2006 Decision on Mortgages http://t.co/niHE3SfMon How underwriting was compromised at $JPM leading2bad mtges $$ Nov 21, 2013
Morgan Stanley Wins as Lynch Pays Up http://t.co/cz0C1GVwpO Remember margin of safety. Great past track record, won’t likely work forever $$ Nov 20, 2013
Why Banks Are Still Wary of Credit Risk Retention Plan http://t.co/bySXEramn4 Maybe do opposite: ban banks from owning securitized assets $$ Nov 20, 2013
Bank, Credit Union Defend Payday Products as Crackdown Looms http://t.co/fqvP7Mkh1J Cheaper version of what exists outside banking $$ Nov 20, 2013
Why Bankers and Regulators See Very Different Future for Giant Banks http://t.co/iTms0Tmpso Hand banking regulation back to the states $$ Nov 20, 2013
Student Loan Market Headed for Crisis, CFPB Warns http://t.co/LQSE1xvC26 Always avoid the debt class that has grown rapidly; losses loom $$ Nov 20, 2013
Buying Low Thwarted by Narrowest Stock Valuation Gap Ever http://t.co/98JOxoyrLK I’m not finding many cheap stocks out there. $$ Nov 19, 2013
Why No Bankers Go to Jail http://t.co/w39LW6RqNm Theory 5: Easier for the government to discipline corporations than prosecute felonies $$ Nov 18, 2013
Inherited Money To Manage? Overcoming Emotion Is Key To Big Returns http://t.co/jYMnOkzokl This is essential to ALL money management $$ Nov 18, 2013

Central Banking

Fed Looks for Other Ways to Aid Economy http://t.co/LhJLzOuY5M You’ve done quite enough thank you. Go 2 the corner & play w/the fed funds $$ Nov 21, 2013
A Limited Central Bank http://t.co/HZfLQIFzMc John Mauldin republishes the notable speech by Charles Plosser at the Cato Institute $$ $SPY Nov 21, 2013
QE:Euthanasia of the economy? http://t.co/Ci8rLiL3E2 Japan & the US r examples; QE can’t revive an overindebted economy. Recession needed $$ Nov 20, 2013
Onions Bring Tears to RBI?s Rajan as Prices Surge http://t.co/8z8TSVBRzv The humble onion can make even a central banker cry $$ #agflation Nov 20, 2013
Junk Glistens Under ?Bernankecare? as Worst Stocks Win http://t.co/JlpofPq5zT Fed encourages the foolish to take more risk at a bad time $$ Nov 20, 2013
Fed Ponders How to Temper Tapering Without Rate Increase http://t.co/fAbD1DeHeU The Fed wants the best of all worlds and at no cost $$ Nov 20, 2013
It?s Fed Versus Moody?s for ?Most Wrong? Crown http://t.co/iGh71xNPXh Fed by a mile here; regulators should disallow unseasoned assets $$ Nov 18, 2013

Bubbles

This Market Is Going Higher, Warns Jeremy Grantham http://t.co/lgb2aLPXM7 Momentum will carry it up until valuations can’t b sustained $$ Nov 20, 2013
Krugman and Summers Want to Keep Finance Fun http://t.co/jvA6oMXhRo Their policies promote bubbles and crises rather than stability $$ Nov 20, 2013
Is the Only Choice Bubbles or Recession? http://t.co/5M3jsGAoqC Recessions r needed to eliminate unproductive lending; they r necessary $$ Nov 20, 2013
Risk of a Stock Market Melt-Up? http://t.co/HnaAXGTs06 ?Federal Reserve Ultra-Dovishness, Technicals, the Economy and the TINA effect… $$ Nov 18, 2013

China

Pimco Sees $3.7T Reason for Adding Yuan http://t.co/inqCbSDwNw FX reserves grew $166B in 3rd quarter 2a record; no rebalancing yet $$ $SPY Nov 23, 2013
China hard landing is likely: Andy Xie http://t.co/3NXbyF1V7y China today is like Japan in the late 1980s, an economy w/2many dead assets $$ Nov 21, 2013
Chinese Skeptics Deepen Biggest A-Share Discount in 3 Yrs http://t.co/xD4jdyx8TE Invest your $$ in Chinese stocks & watch it get Shanghaied Nov 20, 2013
Credit-Driven China Glut Threatens Surge Into Bank Crisis http://t.co/wo2aM3kDCV Forced industrialization leads to bad debts & depression $$ Nov 20, 2013
Gold No Slam-Dunk Sell in China as Aunties Buy Bullion http://t.co/33nzTfyRBF Chinese know that gold cannot be printed, so they own it $$ Nov 20, 2013
Chinese Steer Billions Abroad in Quest for Safety http://t.co/omkkxrVVYh Wealthy Chinese do not trust their government & so plan escape $$ Nov 20, 2013

Rest of the World

Iran Is Playing Obama, Says Savvy Saudi Prince http://t.co/CL71dNTKAE Fascinating political calculus here, Saudi Arabia vs Iran $$ Nov 23, 2013
Very Well Aged: Archaeologists Say Ancient Wine Cellar Found http://t.co/AT0r1KaUCO 3700 yrs old found in what is now Israel $$ Nov 23, 2013
Aluminum Fees in Japan Seen Near Record in First Quarter on Abe http://t.co/I77hxT99AJ Amazing how much Aluminum held off mkt 4 lending $$ Nov 23, 2013
Mobius Can?t Buy Enough Vietnam Equities on Foreign Limits http://t.co/zMflUVKGxY They have bad loan problems too, like everyone else $$ Nov 21, 2013
Pirates Looting Cargoes With AK-47s Threaten African Oil http://t.co/dNEwEvS0HZ Energy companies should pay military 4 services $$ Nov 21, 2013
Hollande?s Tax Rebels Underscore Mounting Opposition http://t.co/9IsTUauelM What u get for letting the govt get 2 big $$ $SPY $FXE Nov 20, 2013
Swiss Rage Against CEO Pay Provokes Vote on Salary Limits http://t.co/DiFHNPhFTv Interesting 2c if it passes & what happens if it does $$ Nov 20, 2013
Watch Greece ? it may be the next Weimar Germany http://t.co/YwKaCyY5nN Cradle of democracy becomes its graveyard? Golden Dawn & murder $$ Nov 20, 2013
What Castro Knew About Lee Harvey Oswald http://t.co/6LP6YQZs77 Argues Cuba did not plan the assassination, but encouraged Oswald 2do it $$ Nov 18, 2013

Politics & Policy

Probe of How U.S. Agency’s Medicare Move Reached Investors Hits Wall http://t.co/xf4wtpCmJh Congress shields itself from insider trading $$ Nov 21, 2013
Illegal NYC Homes Thrive as De Blasio Tackles Housing http://t.co/HIUBfVrYha Legalize alternative apartments in NYC; end rent control $$ Nov 21, 2013
Details of Private Mars Mission Given to House Science Panel http://t.co/jeHELiDu5w Space era begins when private industry does it alone $$ Nov 20, 2013
Blame Rich, Overeducated Elites as Our Society Frays http://t.co/aZFut5gXCA Long. Argues that elites can control if they r united $$ #maybe Nov 20, 2013
US Military Eyes Cut to Pay, Benefits http://t.co/nly87Jv2gq Military is thinking much farther ahead than the politicians they serve $$ Nov 18, 2013

PPACA

Obamacare Bailout Sought as Effort Planned to Bypass Site http://t.co/3Y1A7XP6Kj PPACA looks like a wrecking ball for what was good $$ Nov 21, 2013
ObamaCare Forced Mom Into Medicaid http://t.co/R1mamdO3ND If it is important 2 preserve your Mother’s dignity, y aren’t u paying 4 it? $$ Nov 21, 2013
Obamacare Consultants Warned of Health Website Failure http://t.co/0YtdOoiNDP Wasn’t a surprise; officials knew in advance & ignored it $$ Nov 20, 2013
A Conservative Cure for Obamacare http://t.co/dUGtfc286y A challenge in 2017: fix PPACA or destroy it? Nothing big will change till then $$ Nov 18, 2013

Economics

Mainstream economics is in denial: the world has changed http://t.co/8Jt15186vs Correct, but the solution is more free markets, not less $$ Nov 21, 2013
It was not the free market that failed. It was the regulated market that refused to do what it promised; regulators acted pro-cyclically $$ Nov 21, 2013
Economics students need to be taught more than neoclassical theory http://t.co/NEKYqcCAG0 Reasonable; let students hear other paradigms $$ Nov 21, 2013

Other

Worried About That 787 You Ordered? Hire a Factory Babysitter http://t.co/nshpBN6n4d Makes sense to do this when u r paying so much $$ Nov 21, 2013
A Second Life for Old Permian Oil Field in Texas http://t.co/DrEOxmz7Jo Fascinating to see multiple levels of hydrocarbons, it goes deep $$ Nov 21, 2013
US Growth comes Mostly from Inventories http://t.co/ENaaqgtHKH Helps explain why the economy feels worse than the published numbers $$ Nov 20, 2013
Brookfield?s Looking-Glass World Foundation http://t.co/C4tpqbAKx9 $BAM $BIP $BPO $BRP $INF $BEP $BOXC $BPY Be wary of opaque disclosures $$ Nov 19, 2013
A Sub-$1,000 3D Printer for Metal http://t.co/tSDpP1JriA Not quite, you have to have your own kiln in order to process the clay/metal $$ Nov 18, 2013

Wrong

Wrong: Orthodox economists have failed their own market test http://t.co/X4pJpjNyia Krugman & Baker did not predict the crisis $$ Nov 21, 2013
Wrong: The college savings plan that beat the hedge funds http://t.co/AYXMUa84ge anyone can promise a high fixed return, few can fund it $$ Nov 21, 2013
Wrong: Robert Shiller: is economics a science? http://t.co/QrGJb2hMiJ See Robert Shiller incapably defend bankrupt neoclassical economics $$ Nov 21, 2013
Wrong: Has the Dollar Really Lost 97% of Its Value? http://t.co/7F70Kximt0 It has.lost as a store of value, u should not b forced 2invest $$ Nov 20, 2013

Retweets, Replies & Comments

“Part of the solution is to define taxable income right, so that taxation cannot be deferred.” ? David Merkel http://t.co/QhIBrsytRk $$ $SPY Nov 21, 2013
“I don’t have an opinion on the Kennedy assassination. I do believe that old men like Castro like to?” ? David Merkel http://t.co/UrsN3m1N8D Nov 21, 2013
“I lose. You lose. He, she & it loses. We lose. You all lose. They lose.” ? David Merkel http://t.co/WX6QxWHlfR $$ Yellen confirmed. Nov 21, 2013
“Rating agencies are only capable of dealing with financial instruments that have gone through a?” ? David Merkel http://t.co/Zbx1A5leXm $$ Nov 18, 2013
“Few banks bought insurers, and few insurers bought banks. By the time the meltdown hit, Citi had?” David Merkel http://t.co/sfhWR9NnSf $$ Nov 18, 2013
“Would be better if the male saved up gold to give to the woman in trust. It would help protect?” ? David Merkel http://t.co/vPsYiOWg1c $$ Nov 18, 2013
“You can never eliminate all risk. Never, but let’s do our best.” ? David Merkel http://t.co/v5oMKRvCuj $$ Article: http://t.co/yFf1SIFq2w? Nov 18, 2013

Classic: Talking to Management, Part 3: The Competition

Posted on 13 November 2013 by David Merkel

This was originally published on RealMoney on April 17, 2007:

The Competition

What are you seeing that you think most of your competitors aren’t seeing? Or: What resource is valuable to your business that you think your competitors neglect?

This question is an open invitation to a management team to reach into its “brag bag” and pull out a few of its best differential competences for display. The answer had better be an impressive one, and it had better make sense as a critical aspect of the business. Good answers can include changes in products, demand, pricing and resources; they must reflect some critical aspect of business that will make a difference in future profitability.

Consider two examples from the insurance industry, both of which are future in nature:

I posed this question to the CEOs of several Bermuda reinsurers, and the answer was: “We don’t think that the profitability of casualty business is as profitable as the reserving of some of our competitors would indicate.” That might have been a bit of trash talk; perhaps it was a word to the wise. I favor the latter interpretation.

Then there was a CEO who suggested that many specialty casualty insurers he competed against had underinvested in claims control. That’s fine in the bull phase of the cycle, but it can spell trouble in the bear phase, when cash flow might go negative and skilled claims adjusters are hard to find.

If you could switch places with any of your competitors, who would it be and why? Alternatively, if you think you are the best positioned, who is next best, in your opinion?

This question usually won’t get an answer in large forums. It’s best saved for more intimate gatherings, because to the wider investing public, most companies portray themselves as the best. Also, in diversified corporations, it’s useful to ask this question of divisional heads rather than the CEO. They have a closer feel for the competition they face on a day-to-day basis.

When answered, this query can yield new research vistas. Who knows company quality better than an industry insider? The response can bring out the unique reasons a competitor is succeeding — and, potentially, what this company’s current management team is doing to challenge the competitor.

Note: The opposite question, “Which companies are not run properly?” will not get answered, except perhaps in one-on-one meetings. Few managements will publicly trash-talk the competition. The few that will do so deserve a red flag for hubris.

As an example, I had an interesting experience while at a financial conference. I was at a breakout meeting where J. Hyatt Brown, of Brown & Brown, was taking questions. Of the insurance brokers, Brown & Brown is no doubt the best managed, and Hyatt Brown has strong opinions and is almost never at a loss for an answer. When my turn to ask a question came up, I said, “OK, you’re the best-run company in your space. Who is No. 2?”

Hyatt Brown looked reflective, paused for 20 seconds and answered that it is was tough to say, but he thought that Hub International (HBG) was No. 2. And now Hub has gone private in a much better deal than Goldman Sachs’ (GS) buy of USI Holdings (USIH), from a quality standpoint. To my chagrin, I didn’t buy Hub off of Hyatt Brown’s comments. I missed a cool 59% in 10 months, but you can’t kiss them all.

What would your competitors have to do in order to reverse-engineer your competitive position? Or, why do you suppose other companies don’t adopt your methods?

This question gets at what management views as its critical differences for business success. The answer had better be a good one; it should be something important, and hard to duplicate. As Warren Buffett might put it, we are trying to determine the size and depth of the “moat” that exists around the business franchise.

If the answer doesn’t deliver an idea that is weighty and makes sense from a competitive standpoint, you can assume that the business doesn’t have a lot of franchise value and doesn’t deserve a premium multiple.

Valero Energy (VLO) is the leading oil refiner in the U.S. It also has the leading position in refining both heavy (high-density) and sour (high-sulfur) crudes, which cost less, leading to higher profit margins. It would cost a lot of money for a competitor to create or purchase the same capacity, assuming it could get all of the regulatory permits to do so.

On a competitive basis, who has the most to lose in the present environment?

Some executives won’t name names, but they might be able to point out what characteristics the worst-positioned competitors don’t have. In commodity businesses, the executive could point at those with bad cost structures. In businesses where value comes from customization, the executive could say, “To be a real player, you can’t just sell product, you must be able to assess the needs of the client, advise him, sell the product, install it and provide continuing service, leading to ancillary product sales.”

As commodity prices move down, the recent acquirers and developers of high-cost capacity fare the worst. With life insurance today, scale is becoming more and more of an advantage. Smaller players without a clear niche focus are likely to be the losers; that’s one reason I don’t get tempted to buy most of the smaller life insurance companies that trade below book value. Given their fixed expenses and lack of profitability, they deserve to trade at a discount to book.

Full Disclosure: long VLO