The Deep Value Play In Reinsurance Stocks: ALL, BRK.B, KIE, MRH, PIC, PRE, RE, RGA, RNR, WTM

Insuring oneself from disaster is financially prudent, whether you're a corporation or individual. To that end, the global insurance market has grown to be a $4.3 trillion dollar industry. Analysts expect that growth to continue, reaching over $5 trillion by 2014. However, one question does remain; who insures the insurers? Providing that backstop is a specialized group of reinsurance firms. When catastrophes strike, it's up to these companies to protect the losses of the better-known primary insurers like Allstate (NYSE:ALL). With the recent earthquake/tsunami disasters in Asia, robust damage from hurricane Irene in the Northeast and the tornado damage affecting the Midwest, the reinsurance sector has seen their stock prices plummet. In spite of the losses, the reinsurers could be one of the better "deep values" in today's market. Investors may want to take notice.

Looking Past the Storm Clouds
Despite the recent losses for the reinsurers, many analysts now think the sector could be a 'buy' going into the final quarter of the year. Currently, firms in the sector are trading at 85 to 90% of their book value. This is well below the historical long-term average of 120 to 130%. The industry is also seeing rising rates for catastrophe insurance. After 15 months of events such as 2010's Chilean earthquake and 2011's Japanese tsunami disaster, the industry has finally been able to significantly raise rates. Already in Asia, rates for large property reinsurance policies have risen nearly 60% since March. Analysts estimate that 2012 renewal rates for both Europe and North America will see large increases as well.

The sector is also benefiting from strong capital positions and conservative investments. Reinsurers within the Aon Benfield Aggregate (ABA) index, report total capital reserves of $242.4 billion as of June. Despite the robust climate for disasters over the last year or so, total reserve capital only fell by 1.7% since 2010. Analysts at Standard and Poor's said it would take a natural disaster that erodes 5 to 10% of reserve capital of the whole sector, before it would change its stable rating. Similarly, rating agency Fitch estimates that it would take a further $75 billion in insured losses over the next 24 months to cause concern in the sector.

Finally, the sector could be seeing increased sales in the next few months. Europe's massive financial regulatory overhaul (called Basel II) will require more companies to purchase additional reinsurance policies. This ultimately will enhance returns that reinsurers generate when they invest premiums, despite the low investment yield environment.

Reinsuring a Portfolio
With the reinsurance sector trading at historically low levels, now could be good time for investors to add to the sector. Funds like the SPDR KBW Insurance (NYSE:KIE) or the PowerShares Dynamic Insurance (NYSE:PIC) allow investors to bet on wide swath of the insurance industry. However, there are plenty of individual picks for those wanting more reinsurance focus.

Hurricane Irene left an estimated $7 billion to $13 billion of damage in its wake, far less than the initial predictions. To that end, the trio of Everest Re Group (NYSERE), RenaissanceRe (NYSE:RNR) and PartnerRe (NYSE:PRE) have the greatest sensitivity to hurricane season and could be good buys on the news.

Despite its recent losses due to the Midwest tornados, Montpelier Re (NYSE:MRH) could make an interesting buy. The company is undergoing a transformation by shedding its mono-line property catastrophe reinsurer yoke and moving towards a more diversified global reinsurer. Montpelier also remains focused on returning value to shareholders through share buybacks and dividends. Shares of the company yield 2.5%.

Finally, for those who want more safety from their reinsurance investments, there's everyone's favorite value investor, Warren Buffett. Via Berkshire Hathaway (NYSE:BRK.B), Buffett is one of the world's biggest reinsurers. Similarly, White Mountains (NYSE:WTM) boasts a variety of reinsurance lines among its operating subsidiaries.

The Bottom Line
In the wake of an unprecedented year of natural disasters, the reinsurance sector has seen many of their share prices plummet. However, due to this decline many stocks within the sector - like Reinsurance Group of America (NYSE:RGA) - are now trading at historic lows relative to book value. For investors, the time may be right to pounce on the values.

The Raids Continue and the Banking Cartel facing a Brick Wall/French banks downgraded

The world is now realizing that manipulation and control of the gold and silver price is mandatory by the bankers. I am afraid that they will continue to bash gold and silver until Greece implodes.
Many are starting to question the obliteration of free markets.

The price of gold was hit early in the session but rebounded nicely before comex closing time. Gold finished the comex session at $1823.50 for a loss of $3.30 and silver finished at $40.47 for a loss of 66 cents.
The world continues to burn as Moody's has just downgraded two of the major French banks (discussed below). It seems that nobody is allowed to default as one default will bring everyone down.

Let us head over to the gold comex and assess today's damage.

The total gold comex open interest fell by 5003 contracts despite the fine showing by gold yesterday.
I guess a few bankers covered their shorts as they did not like witnessing the turmoil the world is facing. The front options expiry month of September saw its OI fall from 292 to 95 for a loss of 197 contracts. We had 214 deliveries yesterday so the entire loss in OI was due to those deliveries and we still have an increase in gold ounces standing. The October front delivery month in gold hardly budged falling from 33,207 to 32,606 with a little over 2 weeks before first day notice. The big December contract saw its OI fall from 344,222 to 338,916 and it was here that the bankers lighted up on their shorts. The estimated volume today was quite good at 164,971. The confirmed volume yesterday was also pretty good at 198,669

The total silver comex continues to trade in a narrow open interest channel. Today we got a reading of 112,726 for a loss of 390 contracts with a rising silver price yesterday. The bankers are starting to realize that they are banging their heads against a brick silver wall. It seems that nobody wishes to vacate their longs.
The big December contract saw its OI fall by 600 contracts from 76,447 to 75,890 as some bankers thought the arena was too steamy for them. The estimated volume today was very very light at 35,186.

The confirmed volume yesterday was also light at 40,064. (more)

McAlvany Weekly Commentary

Handing Over the Keynes to the Kingdom: European Discipline Destroyed

Posted on 14 September 2011.

A Look at This Week’s Show:
- Germany is anticipating the worst with plans for an aid package for its banks (assuming an imminent default in Greece).
- Rumor has it that a new Greek currency has already been printed awaiting “the news.”
- How long/high will gold continue in this bull market? The duration of the gold bull market will endure as long as Keynesian bias dominates the halls of the Fed, Treasury and educational academia.

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Silver getting ready for a breakout Buy on weakness before the end of October

The period of seasonal strength in silver is approaching. How is the seasonal trade lining up this year?

Equityclock.com notes that the period of seasonal strength for silver during the past 20 years has been from Sept. 16 to April 11. The "sweet spot" is from the end of October to the end of February. The trade has been profitable in 14 of the past 16 periods including 10 of the past 10 periods. Average return per period during the past 10 periods was 22.9%.

Seasonality in silver is influenced by an increase in industrial demand during its period of seasonal strength. About 40% of silver is used industrially - in solar batteries, water purification systems, cellphones, circuit boards, plasma televisions and radio frequency indentification devices (RFIDs).

Growth in excess of 10% per year is expected to continue in these sectors. The demand for silver for photography purposes continues, but at a diminished level. Demand for jewelry continues to increase at a slow rate with growing discretionary income despite the higher price of silver. Demand for jewelry has been notably stronger in countries such as China and India.

Supply of silver from mine production also continues to grow. Analysts are projecting a 10% increase in 2011.

Demand for silver is expected to exceed supply in 2011 and beyond because of another factor: investment demand. Silver often is referred to as the "poor man's gold." Individual investors can afford to purchase a one-ounce silver coin with silver priced near US$41 much easier than a one-ounce gold coin with gold priced near US$1,860.

Silver, like gold moves higher when financial markets are uncertain, inflation is rising and geopolitical tensions are increasing. A surge in demand for investment purposes began in May 2006 when the first exchange-traded fund backed by physical bullion was launched. Since then, about 500,000 ounces of silver have been placed in inventory to back a series of exchange-traded funds that have been launched around the world. Accumulation for investment purposes is a major reason why Eric Sprott, chairman of Sprott Asset Management recently declared silver as "the asset of the decade."

On the charts, silver exchangetraded funds, trust units and related silver equity ETFs have an encouraging technical profile. All are in intermediate uptrends. All trade above their 50-and 200-day moving averages. All show positive strength relative to the S&P 500 index and the TSX Composite Index. However, short-term momentum indicators suggest that all currently are overbought and vulnerable to a short-term correction. The preferred strategy is to purchase the sector on weakness between now and the end of October.

A wide variety of investment opportunities are available in the sector. Best known and most actively traded security is the iShares Silver Trust (SLV/NYSE). Sprott Asset Management offers the Sprott Physical Silver Trust (PSLV/NYSE). Global X offers the Global X Silver Miners ETF (SIL/NYSE), an ETF that holds a diversified basket of 25 silver producer stocks. Holdings include Pan American Silver, Silver Wheaton, Hecla Mining, Silvercorp Metals and Silver Standard Resources.

Bull and Bear ETFs that offer two times the daily change in the price of silver also are available in U.S. and Canadian dollars.

Horizons offers the Horizons COMEX Silver ETF (HUZ/TSX), a unit based on COMEX futures contracts that trades in Canadian dollars and is hedged against U.S. dollar fluctuations.

John Brimelow Talks with James Turk

John Brimelow, of GoldJottings.com, and James Turk, Director of the GoldMoney Foundation, talk about premiums over spot paid for physical gold around the world. They explain the importance of India to the gold market and the growing force of China. They also talk about gold demand in the Middle East, Vietnam and Turkey.

They consider central bank gold interventions and the use of gold buys to offset foreign exchange reserve accumulation. They talk about the pressure on the Swiss franc and South Korea’s gold purchase.

Top technical analyst: Stocks in danger of 21% plunge from here

Patterns in the Standard & Poor's 500 Index's price graph show the U.S. equity measure may slump 21 percent, said Bank of America Corp. (BAC)'s Mary Ann Bartels.

The benchmark measure of U.S. equities closed at 1,154.23 last week. Bartels, a New York-based technical analyst at Bank of America, said the index is at risk of falling to between 1,020 and 1,100, known to traders as Fibonacci levels that represent 50 percent and 38.2 percent retracements of the bull market since March 2009. Further losses that push the S&P 500 down to between 910 and 985 are a possibility, she said.

"Unfortunately, nothing in our work suggests that the market is improving," Bartels wrote in a report today. "More importantly, we are more concerned now that the downside risk could be more than we originally forecast."

Bartels, who ranked third among analysts who study price charts in Institutional Investor's 2010 survey, said last month that her year-end projection of 1,400 on the S&P 500 depended on the Federal Reserve announcing measures to stimulate the economy. Fed Chairman Ben S. Bernanke refrained from doing so at a speech on Aug. 26 in Jackson Hole, Wyoming.

Bartels said on Aug. 2 that the S&P 500 needed to stay above 1,250 to maintain its bull market or risk extending its decline from this year's peak to about 17 percent. The gauge's slump in August, its biggest in 15 months, helped extend the slide from April 29's high to 16 percent.

The Great American Economic Lie

The idea that the economy has grown at roughly 5% since 1980 is a lie. In reality the economic growth of the U.S. has been declining rapidly over the past 30 years supported only by a massive push into deficit spending.

From 1950-1980 the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less than 150%. The CRITICAL factor to note is that economic growth was trending higher during this span, going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust, which fueled productive investment in the economy. Secondly, the economy was focused primarily on production and manufacturing, which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates, which peaked with economic expansion in 1980.

As we have discussed previously in "The Breaking Point" and "The End Of Keynesian Economics" (PDF file), beginning in 1980 the shift of the economic makeup from a manufacturing and production based economy to a service and finance economy, where there is a low economic multiplier effect, is partially responsible for this transformation. The decline in economic output was further exacerbated by increased productivity through technological advances, which, while advancing our society, plagued the economy with steadily decreasing wages. Unlike the steadily growing economic environment prior to 1980, the post 1980 economy has been plagued by a steady decline. Therefore, a statement that the economy has been growing at 5% since 1980 is grossly misleading. The trend of the growth is far more important, and telling, than the average growth rate over time.

This decline in economic growth over the past 30 years has kept average Americans struggling to maintain their standard of living. As their wages declined, they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed-based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom. By the end of 2007 the household debt outstanding had surged to 140% of GDP. It was only a function of time until the collapse in the "house built of credit cards" occurred.

This is why the economic prosperity of the last 30 years has been a fantasy. While America on the surface was the envy of the world for its apparent success and prosperity, the underlying cancer of debt expansion and lower personal savings was eating away at core.

The massive indulgence in debt, what the Austrians refer to as a "credit induced boom", has now reached its inevitable conclusion. The unsustainable credit-sourced boom, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread mal-investments. Not surprisingly, we clearly saw it play out "real-time" in everything from subprime mortgages to derivative instruments that were solely for the purpose of milking the system of every potential penny regardless of the apparent underlying risk.

When credit creation can no longer be sustained, the markets must began to clear the excesses before the cycle can begin again. It is only then (and must be allowed to happen) that resources can be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.

The clearing process is going to be very substantial. The economy is currently requiring roughly $4 of total credit market debt to create $1 of economic growth. A reversion to a structurally manageable level of debt would involve a nearly $30 Trillion reduction of total credit market debt. The economic drag from such a reduction will be dramatic while the clearing process occurs.

This is one of the primary reasons why economic growth will continue to run at lower levels going into the future. We will witness an economy plagued by more frequent recessionary spats, lower equity market returns, and a stagflationary environment as wages remain suppressed and the costs of living rise. However, only by clearing the excess can the personal savings return to levels that can promote productive investment, production and ultimately consumption.

The end game of three decades of excess is upon us, and we can't deny the weight of the balance sheet recession that is currently in play. As we have stated in the past — the medicine that the current administration is prescribing to the patient is a treatment for the common cold — in this case a normal business-cycle recession. The problem is that this patient is suffering from a cancer of debt, and, until we begin the proper treatment, the patient will continue to wither.