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HomeIs My Insurance Insured?
Posted by Larry Doyle on March 12th, 2009 6:30 PM |
The world of insurance occupies almost every corner of our lives. Life, home, auto, disability, long term care, personal articles. Rather than addressing what is insured, an easier question may be to ask what isn’t insured.
Given the intricate web of products and accompanying risks, we clearly are not currently dealing with your grandfathers’ insurance companies.
All that said, insurance is a relatively simple business. A policy is underwritten, premiums are collected and invested, and on and on we go. In fact, with major policies incorporating outsized risks, insurers can “lay off” risk with reinsurers, such as Munich Reinsurance, Swiss Reinsurance, and General Reinsurance. One would think this should be a steady and stable, if not quiet, industry. It would be such if companies did not reach for outsized returns through ever greater risks, primarily in the products in which they invested. While The Quiet Company, Northwestern Mutual invests primarily in high quality corporate bonds, entities like AIG trafficked in esoteric CDS. Hartford Financial Services played in the lower credit sectors of the commercial mortgage space, sub-prime mortgages, and junk bonds. (more…)
Is the Market Oversold? UPDATE
Posted by Larry Doyle on March 12th, 2009 2:28 PM |
A few weeks ago, I wrote a piece on whether the market was oversold. Allow me to re-introduce a few topics . . .
The market valuation of any asset is determined by three factors:
1. Fundamentals: measures items such as cash flow analysis, cost-benefit analysis, earnings before interest, taxes and depreciation (EBITDA)
2. Technicals: measured by regression of price movements to determine overbought and oversold conditions
3. Psychology: measured by unscientific surveys of market participants
I have never seen such divergent views on expected future earnings which directly impacts any reasonable fundamental analysis. (more…)
FROM THE ARCHIVES: How Bernie “Madoff” with $50 Billion
Posted by Larry Doyle on March 12th, 2009 10:44 AM |
Bernie Madoff pleaded guilty to his Ponzi scheme today. I thought it would be timely to post my piece from December 14, 2008:
The neighborhood of Far Rockaway in Queens, NY epitomizes the essence of middle income urban life. To say that the kids from this neighborhood develop “street smarts” at a very early age is a huge understatement.
Hustlers of every strain, predominantly positive in nature, grow up early in Rockaway. The movie, “Flamingo Kid,” starring Matt Dillon is set in Rockaway Beach. From the beaches in Rockaway one could see the Twin Towers off in the distance. Dreams of fortunes and fame earned on Wall St. drove many with real ambition. Bernie Madoff was one of those boys filled with ambition. However, while ambition can be an amazingly powerful force, if left unchecked it can be fatal.
When the tide is high and the surf is pounding in Rockaway, the kids frolic and never want to come out of the water. However, when the tide goes out, the ocean can leave a few gems. Often times, though, the waves leave a mix of driftwood and waste and a very unpleasant, if not putrid, odor.
Bernie Madoff
In similar fashion, in 2008 the tide on Wall St. has gone out. While there will be some gems amidst the rubble, it is also mostly a mix of driftwood and waste left upon the shore. Just as at times large fish are trapped and die as the tide recedes, this past Thursday, the unchecked ambition from one of Rockaway’s boys finally caught up with him and in so doing left the biggest “carcass” in the person of Bernard Madoff on the shore for all to observe.
How is it that this “fish” which appeared to be the marvel that created wonderment in the form of outsized financial returns for so many for so long was actually a shark that enveloped and ultimately devoured his followers? Let’s enter the world of this “shark.”
How Do We Track Housing?
Posted by Larry Doyle on March 12th, 2009 7:07 AM |
At the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again. All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents.
There are two indexes that have developed over the last few years and are enormously respected by market participants. One index, the S&P/Case-Shiller Home Price Indexes, is released on a monthly basis. This index tracks a variety of regions in the country but not every region. Still, all things considered, this index is widely watched as a reliable indicator of health in housing. The index is typically released toward the end of each month. The most recently released report was on February 24th, A Look at Case-Shiller Numbers, by Metro Area. In this report, all indications are that housing has yet to see any support. (more…)
Where Can I Put My Money?
Posted by Larry Doyle on March 11th, 2009 5:06 PM |
With stock markets down 15-20% on the year and 50% over the last 14 months, everybody in the market is asking the same question, “where can I put my money?” While many asset managers are touting the equity markets as a great buy at these levels, cooler and calmer heads are stating that the economy and markets are likely to have a slow recovery. The question screams where to put one’s money to earn more than the pittance offered in bank checking and savings accounts.
I read a very informative piece in today’s WSJ, Locking In Returns You Like. First off, this piece is very user friendly. It provides a wealth of information and links to websites which will provide good market insight.
Over and above referencing some quality products (GNMAs, TIPS, municipals), it also broaches the topic of laddering which I believe is a very valuable technique in building a bond portfolio.
Additionally, the article highlights FPA New Income Fund which is managed by one of our Economic All-Stars Bob Rodriguez. (I have no professional relationship with anybody on this site!!)
I think you will find this article a very valuable resource and I would recommend putting it in the “save” column for future reference. As you review the products highlighted and topics broached, please do not hesitate to ask anything you may not fully understand.
LD
Libor Creeping Higher
Posted by Larry Doyle on March 11th, 2009 5:45 AM |
For those involved in the markets, very often the first rate one checks in the morning is Libor (London Interbank Offered Rate). For those not directly involved in the markets, perhaps tomorrow morning or Thursday you may start your day by asking your partner, “where’s Libor?” In all seriousness, the 1 month and 3 month Libor rates may very well be the most closely watched indicators of market health in the world.
As Libor is the rate at which banks can borrow from each other in the London market, the rate is an indication as to the availability of dollars and the confidence banks have in each other’s credit. Traditionally, Libor tracked the Federal Funds rate (the rate at which banks borrow from the Federal Reserve) very closely. However, on the heels of the failure of Lehman Bros. last September, the confidence banks and investors had in each other plummeted. The relationship between the Fed Funds rate and 3 month Libor blew out. The 3 month Libor rate went as high as 4.7% from just outside 1%. Recall that at that period there was concern about money market funds “breaking the buck” amongst a whole set of other issues. (more…)
Turn That Screw a Little Tighter
Posted by Larry Doyle on March 10th, 2009 6:30 PM |
The screwing that Americans have taken on the development and marketing of the scam known as Auction Rate Preferred Securities (ARPS) continues. I have written at length on how the regulatory body, FINRA, actually owned $650 million in these 
securities at calendar year end 2006. I have persistently questioned how a regulatory body could possibly own a security which was knowingly mismarketed. Was FINRA negligent, complicit, or both? Did FINRA liquidate its position prior to the market imploding on all other owners? While many institutional owners of ARPS have been made whole, many retail clients are still left holding the bag.
Well, the screw that is ARPS just got turned another notch tighter. It turns out that the issuers of ARPS (municipalities, hospitals, colleges and universities, et al) are contractually obligated to pay an ongoing underwriting fee to the Wall Street banks despite the fact that these regularly scheduled auctions no longer occur. (more…)
