Ah yes, surely Florida's governement can allocate risk far better than private actors...
Governor freezes insurance rates, bars companies from canceling policies
By Michael Peltier
Wednesday, January 31, 2007
TALLAHASSEE — Gov. Charlie Crist on Tuesday froze Florida property insurance
rates and prohibited companies from canceling policies as the state prepares
for another hurricane season and new laws take effect.
One week after state lawmakers signed off on a sweeping package of property
insurance reforms, Crist said the remedies need a chance to work and he
feared insurers may attempt to drop customers and raise premiums that don’t
reflect recent changes that backers say would reduce their risk.
“It’s fundamental that we make sure no policies are canceled and we make
sure that no rate increases are slipped under the door before this law
becomes effective,” said Crist, who bristled that his parents’ policy was
canceled last week.
The emergency rule, which remains in effect for 90 days, took the industry
and other Florida Cabinet members by surprise. The order will not affect
companies that recently have had rates approved by the Office of Insurance
Regulation.
Other companies such as Nationwide, which had requested a 71 percent
increase last year, will not be allowed to institute rate hikes until after
the 90-day period. Private insurers say the freeze, however temporary, may
directly affect their bottom lines.
“We think the rule will have a drastic negative impact on some of our
members,” said Guy Marvin, president of the Florida Insurance Council, an
industry group that represents the majority of private property insurers
still writing business in Florida.
Last week, Crist signed into law a bevy of fixes aimed at resuscitating the
state’s property insurance market that has been plagued by skyrocketing
rates and the exodus of private carriers.
The new laws more than double the size of the Florida state hurricane
catastrophe fund by putting policyholders on the hook for as much as $36
billion in hurricane losses that would be paid by assessing holders of
property, automobile, commercial and other lines of insurance.
full: http://tinyurl.com/2v24ho
______________
Money $marts: Insurance fix puts everyone at risk
By Gerry Kramer
Friday, February 2, 2007
The concept of insurance is thousands of years old, first practiced by
Chinese traders in the 3rd millennia BCE. Its central elements are therefore
well understood. Risks are assessed in accordance with the likelihood of an
event happening. Premiums are charged to accumulate enough capital to pay
off claims while leaving enough for the insurance company to profit, pay
shareholders a return and retain capital for the future.
Extraordinary claims due to unanticipated events can put you out of
business. Insurance is therefore not an eleemosynary (charitable) endeavor
unless, of course, the government is involved.
Blaming “greedy” insurance companies for higher property insurance premiums
is pure political voter appeasement oration and irrational economics. Since
1990, insurance companies have paid out some $10 billion more in claims in
Florida than they received in premiums. Perhaps this is because of the
unprecedented (i.e. unpredicted) number of hurricanes hitting Florida’s
shores (duh!). If an event has a high degree of certainty to occur (e.g.
more hurricanes), insuring against it is very costly. That’s why sky divers
are basically uninsurable. Would you sell a life insurance policy to someone
on death row?
The reform bill forces insurance companies to lower their rates while
simultaneously Florida expands its role through Citizens Property Insurance
Corp. as “the insurer of last resort” to about 40 percent of the homes in
the state. Moreover, property owners are allowed to choose higher
deductibles, forego wind damage and home content coverage and spread out
premium payments. All these choices give the artificial appearance of lower
premiums, but do not mitigate risk.
The short term fix (“reform”) for property insurance in Florida is thus a
ticking financial fiasco time bomb. If a major hurricane (or two) hits
Florida again, underinsured property owners will face billions in losses and
the State of Florida will have to speedily come up with more billions to
bail out Citizens. Inland homeowners would have to pay higher premiums for
years.
In addition, potentially every Florida resident could have to chip in
(higher taxes) to cover the losses. Of course, all this is moot if there are
no hurricanes. But that’s what we’re betting on, isn’t it?
Saturday, February 03, 2007
Thursday, February 01, 2007
China
The Recapitulator spoke about the China problem in December. One must recall that central planning has been thoroughly discredited both in theory (predominantly by the great F.A. Hayek) and in practice (the U.S.S.R., Vietnam, and eventually Cuba).
The recent IPOs of Chinese banks illustrates this. The government cleaned up both sides of the balance sheet (by moving Non Performing Loans, or NPLs, to asset management companies, and by simply handing 45 Billion in reserves to the banks in order to shore up the asset side of the ledger). The problem is there was no structural reform accompanying these actions, and so the NPL problem will rear its head again like the Hydra of myth.
As for asset prices:
Chinese shares tumble 5% on fears bubble will burst
The Shanghai index's drop, its biggest since June, is led by blue chips as
concern grows over high stock valuations.
From the Associated Press
February 1, 2007
SHANGHAI — That loud hiss you hear is the sound of some air escaping from
China's stock markets.
For months an equity bubble had been growing in China, led by a rush of
investment after authorities instituted reforms aimed at controlling price
manipulation and other abuses that had made investors shy away from Chinese
shares.
On Wednesday, Chinese shares tumbled nearly 5% in their biggest one-day loss
in eight months amid mounting worries that the bubble was about to pop.
Analysts said the decline, led by blue chips, probably signaled a respite
after weeks of continued record highs.
The Shanghai composite index fell 4.9% to 2,786.33, its biggest one-day
decline since a 5.3% tumble June 7, 2006. The smaller Shenzhen composite
index slid 5.8% to 655.53.
"Many traders felt a push to cash out, for even blue chips, such as banks,
are trading at high valuations," said Hao Guomei, an analyst at Huatai
Securities Co.
Wednesday's decline followed warnings from the Shanghai Stock Exchange and
other regulators over rising risks from the market's recent bull run.
Before Wednesday's tumble, the Shanghai index, which tracks China's biggest
companies, was up 9.5% for the year after soaring 134% last year. Trading
volumes have been at record highs amid growing volatility.
China's markets languished for years before reviving last summer after
shareholder reforms and other measures helped bring price manipulation and
other market abuses under control. Market sentiment has been further boosted
by rebounding corporate earnings and an economy that has been growing at a
rate of more than 10% a year.
The recent IPOs of Chinese banks illustrates this. The government cleaned up both sides of the balance sheet (by moving Non Performing Loans, or NPLs, to asset management companies, and by simply handing 45 Billion in reserves to the banks in order to shore up the asset side of the ledger). The problem is there was no structural reform accompanying these actions, and so the NPL problem will rear its head again like the Hydra of myth.
As for asset prices:
Chinese shares tumble 5% on fears bubble will burst
The Shanghai index's drop, its biggest since June, is led by blue chips as
concern grows over high stock valuations.
From the Associated Press
February 1, 2007
SHANGHAI — That loud hiss you hear is the sound of some air escaping from
China's stock markets.
For months an equity bubble had been growing in China, led by a rush of
investment after authorities instituted reforms aimed at controlling price
manipulation and other abuses that had made investors shy away from Chinese
shares.
On Wednesday, Chinese shares tumbled nearly 5% in their biggest one-day loss
in eight months amid mounting worries that the bubble was about to pop.
Analysts said the decline, led by blue chips, probably signaled a respite
after weeks of continued record highs.
The Shanghai composite index fell 4.9% to 2,786.33, its biggest one-day
decline since a 5.3% tumble June 7, 2006. The smaller Shenzhen composite
index slid 5.8% to 655.53.
"Many traders felt a push to cash out, for even blue chips, such as banks,
are trading at high valuations," said Hao Guomei, an analyst at Huatai
Securities Co.
Wednesday's decline followed warnings from the Shanghai Stock Exchange and
other regulators over rising risks from the market's recent bull run.
Before Wednesday's tumble, the Shanghai index, which tracks China's biggest
companies, was up 9.5% for the year after soaring 134% last year. Trading
volumes have been at record highs amid growing volatility.
China's markets languished for years before reviving last summer after
shareholder reforms and other measures helped bring price manipulation and
other market abuses under control. Market sentiment has been further boosted
by rebounding corporate earnings and an economy that has been growing at a
rate of more than 10% a year.
Tuesday, January 30, 2007
Amaranth's death throws
The following description of Amaranth's dire situation will be no surprise to readers of the Recapitulator:
The final agonies of Amaranth, described by dozens of people close to
the roller-coaster negotiations about its fate, began on Friday, Sept.
15. Bleeding cash and facing a Monday demand for money it didn't have,
Amaranth scrambled through an intense weekend to find someone who
would take over losing energy investments for a price.
See a timeline of key events in the history of hedge funds.It did
negotiate a rescue plan, requiring it to pay nearly $2 billion to
Goldman Sachs Group to take toxic trades off its hands. Strapped for
cash, Amaranth aimed to get the money to do the deal by using cash
collateral on deposit with its middleman for natural-gas trades, J.P.
Morgan Chase & Co.
But on Monday morning, just after Amaranth had told its investors a
rescue was close, J.P. Morgan said it wouldn't release the collateral.
The firm was effectively responsible for making sure parties to
Amaranth's trades got paid, and it said the rescue plan didn't free it
of this risk, according to people familiar with its stance. J.P.
Morgan's refusal killed the plan. Amaranth's situation went from dire
to desperate.
Two days later, J.P. Morgan itself agreed to take over most Amaranth
energy positions. With a partner, it cut a deal that turned out to be
lucrative for J.P. Morgan -- earning it an estimated $725 million --
but more painful for its longtime client, Amaranth.
Ruthlessly squeezing a client, and taking the positions over at the most opportune time. The Recapitulator respects the negotiation and business skill involved here, but also marvels at how far away the clients of Amaranth were from this whole process. Where did those wonderful profits come from??
The final agonies of Amaranth, described by dozens of people close to
the roller-coaster negotiations about its fate, began on Friday, Sept.
15. Bleeding cash and facing a Monday demand for money it didn't have,
Amaranth scrambled through an intense weekend to find someone who
would take over losing energy investments for a price.
See a timeline of key events in the history of hedge funds.It did
negotiate a rescue plan, requiring it to pay nearly $2 billion to
Goldman Sachs Group to take toxic trades off its hands. Strapped for
cash, Amaranth aimed to get the money to do the deal by using cash
collateral on deposit with its middleman for natural-gas trades, J.P.
Morgan Chase & Co.
But on Monday morning, just after Amaranth had told its investors a
rescue was close, J.P. Morgan said it wouldn't release the collateral.
The firm was effectively responsible for making sure parties to
Amaranth's trades got paid, and it said the rescue plan didn't free it
of this risk, according to people familiar with its stance. J.P.
Morgan's refusal killed the plan. Amaranth's situation went from dire
to desperate.
Two days later, J.P. Morgan itself agreed to take over most Amaranth
energy positions. With a partner, it cut a deal that turned out to be
lucrative for J.P. Morgan -- earning it an estimated $725 million --
but more painful for its longtime client, Amaranth.
Ruthlessly squeezing a client, and taking the positions over at the most opportune time. The Recapitulator respects the negotiation and business skill involved here, but also marvels at how far away the clients of Amaranth were from this whole process. Where did those wonderful profits come from??
Sunday, January 28, 2007
Funds of Funds
The online version of the Wall Street Journal has written about Fund of Funds and their business model (being more of an asset gatherer as opposed to competent risk managers.)
The Recapitulator, not working in that industry, does not know the relative merits of this argument, but he can opine on the, to quote Mr. Gross of PIMCO, "Alpha Beta anemia problem".
A friend of mine outlined a good list for determining whether or not to invest something. I somewhat disagree with using the Sharpe ratio, with all of its weaknesses (for instance, one still has the problem of determining the appropriate "benchmark", and hopefully now my readers will indentify my disdain for "Beta" used as a proxy for "Risk")
In any case, here are the points he made:
"1. Did the study actually make money on an absolute basis? Why invest
in something which lost money but did relatively better than the market?
2. Did the study outperform the market on a risk adjusted basis? This is
equivalent to asking whether the Sharpe ratio of the study was better
than the market. If it did not this means that someone could have bought
the market portfolio with appropriate leverage or deleverage and either:
a) Outperformed your study with equal risk (despite the leverage)
b) Matched the return of the study but with less risk
3. If the study involves selecting either good days or good stocks out
of a given sample did the study outperform the overall average of the
sample? In other words if the sample has a built in bias did the study
outperform that bias?
4. The study should be statistically significant by all of the foregoing
metrics."
This is an excellent way to begin wether or not one should invest in Fund of Funds products. If diversity is a goal, one should be very careful how one describes the "market" to compute ex-ante or ex-post risk adjusted returns. Fund of Funds allows access to many different types of assets, and taking advantage of (historical) negative correlation has beneficial effects on a portfolio.
In other words, it is as it has always been. Caveat emptor. One must know what one is buying, and therefore an investor with Fund of Funds should have independent personell assess the relative expertise of the Fund of Funds shop.
The Recapitulator, not working in that industry, does not know the relative merits of this argument, but he can opine on the, to quote Mr. Gross of PIMCO, "Alpha Beta anemia problem".
A friend of mine outlined a good list for determining whether or not to invest something. I somewhat disagree with using the Sharpe ratio, with all of its weaknesses (for instance, one still has the problem of determining the appropriate "benchmark", and hopefully now my readers will indentify my disdain for "Beta" used as a proxy for "Risk")
In any case, here are the points he made:
"1. Did the study actually make money on an absolute basis? Why invest
in something which lost money but did relatively better than the market?
2. Did the study outperform the market on a risk adjusted basis? This is
equivalent to asking whether the Sharpe ratio of the study was better
than the market. If it did not this means that someone could have bought
the market portfolio with appropriate leverage or deleverage and either:
a) Outperformed your study with equal risk (despite the leverage)
b) Matched the return of the study but with less risk
3. If the study involves selecting either good days or good stocks out
of a given sample did the study outperform the overall average of the
sample? In other words if the sample has a built in bias did the study
outperform that bias?
4. The study should be statistically significant by all of the foregoing
metrics."
This is an excellent way to begin wether or not one should invest in Fund of Funds products. If diversity is a goal, one should be very careful how one describes the "market" to compute ex-ante or ex-post risk adjusted returns. Fund of Funds allows access to many different types of assets, and taking advantage of (historical) negative correlation has beneficial effects on a portfolio.
In other words, it is as it has always been. Caveat emptor. One must know what one is buying, and therefore an investor with Fund of Funds should have independent personell assess the relative expertise of the Fund of Funds shop.
Thursday, January 18, 2007
Oil
The recent decline in oil appears to be a change of regime for the Saudis. Previously, they have pegged the price and let quantity float.
Now, geopolitical events (and their desire to gain market share amongst increasing supply at higher price levels) have given them an opportunity to be the primary provider to the west.
The Recapitulator thinks it is no coincidence that major policy changes are afoot in Iraq given the precipitous decline in oil.
Peak oil theory was always silly. $150.00 oil? $200.00 oil? Given the amounts of oil (and oil equivalent from coal and other resources) that come on line with each point of increase in the price, this theory was always a marketing ploy driven by those who were long oil. Where are those people now? For those who followed the marketing ploy, it is yet another example of the psychological bias of investors to over-weight confirming theories that are congruent with their investment positions.
Now, geopolitical events (and their desire to gain market share amongst increasing supply at higher price levels) have given them an opportunity to be the primary provider to the west.
The Recapitulator thinks it is no coincidence that major policy changes are afoot in Iraq given the precipitous decline in oil.
Peak oil theory was always silly. $150.00 oil? $200.00 oil? Given the amounts of oil (and oil equivalent from coal and other resources) that come on line with each point of increase in the price, this theory was always a marketing ploy driven by those who were long oil. Where are those people now? For those who followed the marketing ploy, it is yet another example of the psychological bias of investors to over-weight confirming theories that are congruent with their investment positions.
Thursday, January 11, 2007
All is quiet on the Western Front...
The novel by Erich Maria Remarque serves as a good title for today's column...this is a fairly mystical post today.
Risk spreads continue to compress. The dollar demonstrates its wonderful reslience in the face of a surprise interest rate rise by the Bank of England (which heretofore has been extremely transparent...inflation targeting means no surprises, right?). The Recapitulator is bullish on the dollar...and the recent announcement that China will purchase U.S. financial assets comes as no surprise on this view.
The Recapitulator is not a permabull, permabear or any subspecies therein. There is a time for all seasons (there, I have now exhausted my quota of silly analogies to describe an economic system).
We have already stated volatility will spike...we have seen some of that happen already, but the probabilities are clustering around February.
Venezuela, Russia, Somalia, Iraq, etc. All problems, and the relative calm on the political front, a situation that will not continue.
Risk spreads continue to compress. The dollar demonstrates its wonderful reslience in the face of a surprise interest rate rise by the Bank of England (which heretofore has been extremely transparent...inflation targeting means no surprises, right?). The Recapitulator is bullish on the dollar...and the recent announcement that China will purchase U.S. financial assets comes as no surprise on this view.
The Recapitulator is not a permabull, permabear or any subspecies therein. There is a time for all seasons (there, I have now exhausted my quota of silly analogies to describe an economic system).
We have already stated volatility will spike...we have seen some of that happen already, but the probabilities are clustering around February.
Venezuela, Russia, Somalia, Iraq, etc. All problems, and the relative calm on the political front, a situation that will not continue.
Monday, January 01, 2007
Silly article of the month
http://www.thetrumpet.com/index.php?page=article&id=2819
"The foremost reason is that when nations choose to eliminate their smaller coinage or degrade the metal content in their coins, it is commonly a tell-tale sign of the currency’s devaluation. To discontinue production or shift metal content would be a blatant admission of the loss of purchasing power of the dollar, and it is beneficial to hide this so as not to damage the dollar’s reputation, even if it means losing millions in minting costs.
Currently, the dollar’s position as the world’s reserve currency is very precarious. Several central banks around the world, including Russia’s, Sweden’s and Qatar’s, have announced they are reducing dollar holdings. Most recently, even China has indicated that it will reduce its dollar holdings.
The fact that pennies and nickels are now worth more for their metal content than their 1-cent and 5-cent face value is undisputable proof of how much value the dollar has lost since its founding. This is not good news for the U.S. dollar, whose reserve currency status is largely built upon confidence that it will remain a stable store of wealth."
These statements completely misunderstand the modern fiat currency system our government employs. The ReCapitulator despises laws made for these purposes, but the conclusions regarding the stated weakness of the dollar resulting from a (historically ephemeral) rise in commodity prices are not valid. Specie money backed by commodity is degreaded when the commodity in question (gold, silver, whatever) is degraded...but the dollar is not pegged to any commodity or metal. Stating that the difference between the commodity price levels (which are priced in dollars) and the face value of coinage is certainly not "undisputable proof" of the dollars weakness "since its founding". This is more of a commodity arbitrage type of argument as opposed to an argument supporting prospective dollar weakness, and the ReCapitulator reminds his readers to be extremely skeptical of commentary predicting dollar weakness based on same.
"The foremost reason is that when nations choose to eliminate their smaller coinage or degrade the metal content in their coins, it is commonly a tell-tale sign of the currency’s devaluation. To discontinue production or shift metal content would be a blatant admission of the loss of purchasing power of the dollar, and it is beneficial to hide this so as not to damage the dollar’s reputation, even if it means losing millions in minting costs.
Currently, the dollar’s position as the world’s reserve currency is very precarious. Several central banks around the world, including Russia’s, Sweden’s and Qatar’s, have announced they are reducing dollar holdings. Most recently, even China has indicated that it will reduce its dollar holdings.
The fact that pennies and nickels are now worth more for their metal content than their 1-cent and 5-cent face value is undisputable proof of how much value the dollar has lost since its founding. This is not good news for the U.S. dollar, whose reserve currency status is largely built upon confidence that it will remain a stable store of wealth."
These statements completely misunderstand the modern fiat currency system our government employs. The ReCapitulator despises laws made for these purposes, but the conclusions regarding the stated weakness of the dollar resulting from a (historically ephemeral) rise in commodity prices are not valid. Specie money backed by commodity is degreaded when the commodity in question (gold, silver, whatever) is degraded...but the dollar is not pegged to any commodity or metal. Stating that the difference between the commodity price levels (which are priced in dollars) and the face value of coinage is certainly not "undisputable proof" of the dollars weakness "since its founding". This is more of a commodity arbitrage type of argument as opposed to an argument supporting prospective dollar weakness, and the ReCapitulator reminds his readers to be extremely skeptical of commentary predicting dollar weakness based on same.
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