Thursday, December 6, 2007

In the news today

A couple of notable items relevant to the insurance industry:

  • President Bush is expected to unveil the terms of a 5-year rate freeze for homeowners with mortgages that they can afford now, but wouldn't be able to once their rate resets. My gut says that this is probably good for financial service stocks in the short run, but that in the long run, the implications on the broader mortgage market are unclear and possibly not good. Are we doing away with the entire concept of charging high interest to poor credit risks? Are we giving up on the idea that the lending industry has been stung badly enough that it now knows better than to give low-rate 100% financing to people who won't prove their income? Stay tuned...
  • Fitch predicts a modest drop in profits for life carriers, and also lower profits for P&C carriers in 2008. I'm inclined to agree with this, because the interest rate situation is unfavorable for carriers right now, and most life carriers have squeezed as much cost as they could out of their organizations already - that is, without replacing that old batch admin system they love to hate, which takes time, money and hard work.
  • Bill Gross (bond guru and manager of PIMCO Total Return) sees the federal funds target rate dropping from 4.5% to 3%, starting with a quarter-point cut next week, to avoid a "near-recessionary economy". Now, full disclosure here; I owned PIMCO Total Return for many years, only selling due to a 401(K) rollover, and I owned it because I consider Bill Gross to be a LOT smarter than me. I have to disagree with him on this one, though. Things have been tough for bonds lately, of course, because rates had been going up; but a "near-recessionary economy"? Forgive me, but I just don't think we're closing in on that just yet. However, if he's right about the Fed, that's not good news for life carriers.
H/T Walt Podgurski.

Monday, December 3, 2007

The Complexity of the Global Economy

The weak US dollar has been in the news lately. The dollar's value has dropped significantly enough against other currencies that newspapers are starting to do human interest stories about how tough it is for expatriates to live on a US-dollar salary these days.

Considered in a vacuum, the US dollar's weakness can be touted as a sign of US economic weakness, which will surely bring about a global economic catastrophe. However, currencies do not exist in a vacuum.

When it first became apparent that the markets were truly global, it seemed like a threat to me. Something was always bad SOMEPLACE, right? And if Hong Kong crashed one night, it would take Tokyo with it, and the Dow would follow the next day. But after a few years, it is apparent to me that market movement still goes back to plain, old investor emotion; are we a herd, following the others right off the cliff during the selloff, or are we a pack, waiting in the brush to pounce and split up the carcass? The difference is that now, it's easier for other predators from far away to share in the spoils.

I think that weak-dollar policy has helped the trade deficit, and that the markets will correct for it. As dollar-denominated investments lose value, many overseas will continue to sell... but there's always someone waiting in the weeds to take a bite.

So what does this mean for US insurers? I think it means more and more foreign investment in US financial services companies in the short-term, as investor overreaction to subprime issues allows long-term investors to snap up shares of good companies at garage-sale prices. Over the long term, it's harder to say, although I'm optimistic that there is enough foreign cash out there to avert a potential stock market crisis over the next ten years... but more about that later.