Buffett to Expand Energy Wager ‘As Far as the Eye Can See’- Bloomberg 06-09-14

Salient to Investors:

Warren Buffett has been shifting toward capital-intensive businesses like energy and transportation, while reducing reliance on insurance operations and stock-picking. He is planning more investment in energy, in part in renewable power, as far as the eye can see.

Buffett sees the steady but far from spectacular gains of the past five years continuing.

Read the full article at http://www.bloomberg.com/news/2014-06-09/buffett-to-expand-energy-wager-as-far-as-the-eye-can-see.html

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Boomers as Retail Clerks Shows Why Greenspan Saw Low Growth Era – Bloomberg 12-18-13

Salient to Investors:

  • Expanding populations fueled global prosperity with both workers and consumers but global aging threatens to cause chronically weak economic growth, a more volatile international economy and the risk of a new financial crisis triggered by innovative investments dubbed “death derivatives.”
  • Rob Arnott at Research Affiliates said our era of the most benign demography for GDP growth in history is ending, and a future with vast numbers who no longer produce and a diminished workforce assures class and generational conflict. Arnott and colleague Denis Chaves said living standards will rise more slowly as the demographic tailwind of the post-World War II era turns into a headwind.
  • A 2012 National Academy of Sciences study predicts US output per person through 2030 will rise only two-thirds as fast as in the past half-century due to falling birthrates and longer lifespans. The ECB says European workers must double their productivity – to levels seen in the 1990s Internet boom in the US – for economic growth to reach just 2 percent.
  • China’s working-age population over the next two decades will shrink as a result of its one-child policy, reducing more than 2 percent from annual growth.
  • The IMF posits that central bankers’ traditional tools may prove ineffective in economies dominated by older populations, leading to greater volatility, while persistently low interest rates could invite frequent brushes with deflation or reckless private-sector borrowing.
  • The BIS said that if people live just 3 years longer than current forecasts – or the typical margin of error – the $15 trillion to $25 trillion in global pension fund obligations will increase by $1.4 trillion to $3 trillion, and losses arising due to longevity risk may affect destabilize the financial system.
  • An American male born in 1940 had a life expectancy of just over 61 years versus over 76 years if born in 2012.
  • The National Academy of Sciences said that the US is not facing an insurmountable challenge if it adopts early changes to Social Security, Medicare and Medicaid, higher savings rates and longer working lives.
  • 19 percent of Americans age 65 and older work, the highest level since 1965 and almost twice the 1985 low.
  • Eurostat predicts that by 2050, fewer than 2 European workers will support each retiree versus 4 today.
  • The Census Bureau estimates that by 2030, more than 1 in 5 Americans will be at least 65 versus 1 in 7 today, and by 2056, the over 65s will outnumber the under 18s for the first time.
  • George Magnus at UBS said the labor supply is going to become stressed, and a return to 3 or 4 percent growth is not going to happen. Magnus said immigration at 10 to 20 times current levels could help Europe avoid further declines in the working-age share of its population but that is not going to happen.
  • The US labor force over the next decade will grow at an annual rate of just 0.5 percent, or one-fifth the rate between 1974 and 1981.
  • Annual US growth rates will likely fall below 2 percent versus more than 3 percent during the two decades that preceded the last recession.
  • National Academy of Sciences said that even if the US admitted almost 1 million extra immigrants each year, the retiree-to-worker ratio would continue rising.
  • More than 40 percent of Japan’s population is neither employed nor looking for work.
  • Greenspan said the sheer number of retiring baby boomers already has rendered obsolete the inverted yield curve forecasting tool.
  • Patrick Imam at IMF said older individuals have little appetite for borrowing or risk so may be less sensitive to interest-rate movements than younger populations. Imam said the Fed et al may need to act more dramatically to manage an economy dominated by the old: like raising or lowering interest rates by a full percent rather than the customary quarter-point moves.
  • Most corporate pension plans already are underfunded: Towers Watson say the 429 Fortune 1,000 companies that sponsor defined-benefit plans were $418 billion short at the end of 2012.
  • Amy Kessler at Prudential Financial said pension managers do not use up-to-date tables and so may perceive that their liability is lower than it actually is.
  • If each covered person lived on average one year longer than anticipated, the global pension bill would rise by $450 billion to $1 trillion. A cure for cancer, for example, would mean that the investment banks et al that assume longevity risk would face catastrophic losses as pension plan participants lived years longer than envisioned.
  • Adam Posen said the demographic changes facing pension funds and insurance companies is scary and remain among the biggest dangers for which there is simply no good answer.

Read the full article at http://www.bloomberg.com/news/2013-12-19/boomers-as-retail-clerks-shows-why-greenspan-saw-low-growth-era.html

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Soros to Goldman Poised to Win on Crisis-Era Housing Bet – Bloomberg 09-24-13

Salient to Investors:

Goldman Sachs, JPMorgan Chase and George Soros are poised for IPO gains from investing in Essent Group, a Bermuda-based mortgage insurer in 2009.

Mortgage insurers are rebounding on property prices now rising at the fastest pace since 2006 and with the government reducing its role backing home loans.

Jack Micenko at Susquehanna Intl said mortgage insurers are the best way to play the housing recovery.

Jim Ryan at Morningstar said mortgage insurance will play an increasing role in facilitating first-home purchases as the economy strengthens as not many people have the 20 percent to put down, especially first-time homebuyers.

Jason Stewart at Compass Point Research & Trading said there is a lot more capital and a lot more competition for each loan, so that will start to impact returns.

Rob Haines at CreditSights said insurers like Essent have advantages over competitors burdened by losses from pre-crisis loans.

Read the full article at  http://www.bloomberg.com/news/2013-09-24/soros-to-goldman-poised-to-win-on-crisis-era-housing-bet.html

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Obamacare Insurance Costs Affordable, Kaiser Survey Finds – Bloomberg 09-04-13

Salient to Investors:

Larry Levitt at the Kaiser Family Foundation said for the most part insurers are finding the market for Obamacare attractive and are pricing accordingly. Levitt said it is surprising how inexpensive some of the Bronze plans will be: they carry high deductibles and significant out-of-pocket costs, but for catastrophic protection there will be some inexpensive options, particularly if you are eligible for a tax credit.

The highest premiums in the Kaiser survey are in Vermont and New York, who require insurers to charge the same amount to people of all ages.

Christine Eibner at Rand Corp. said their analysis found no widespread trend toward sharply higher prices in the individual market.

Read the full article at  http://www.bloomberg.com/news/2013-09-05/obamacare-insurance-costs-affordable-kaiser-survey-finds.html

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UBS’s Friedman Favors U.S. Stocks, High-Yield Bonds – Bloomberg 06-28-13

Salient to Investors:

Alexander Friedman at UBS says:

  • What Fed has done is not unexpected and the market reacted because it was ahead of itself. All the Fed was saying was that the US is doing OK, that the data is trending as it should, and that it has confidence that in the future it will be able to unwind QE, which is a positive.
  • Some investors were caught overleveraged in fixed income so there is unwinding of the carry trade. In countries like Australia, India and some emerging markets, a lot of investors hold bonds in local currencies which is a risk so expect significant volatility on the emerging market side.
  • China less a risk than perceived because it is just trying to re-balance and is willing to sacrifice some short-term growth to get control over the credit situation and avoid bubbles.
  • Biggest risk to investors is in misinterpreting the Fed, which creates a buying opportunity.
  • Last week the market saw much of the repricing of the tapering risk and so we won’t see a repeat in September. Assuming we see the positive economic data for the next few months which is necessary for the Fed to begin tapering then the market will focus away from life support and more on underlying growth.
  • Buy where underlying monetary policy will match the underlying  requirement and where there is economic growth: meaning US equities, US high yield equities which are oversold and now offer 6 to 8 percent returns over the remainder of 2103.
  • Wary of gold, which was an emotional trade against currency debasement and so has room to decline further.
  • Wary of emerging markets, including Australia, neutral on Europe.
  • Not yet seen bond money switching to equities as most of the money into equities has come from cash and money markets. We will see a shift from bonds to equities for many reasons, not least the immutable force of  demographics such as the elderly selling fixed income savings over time and there is no yield in them.
  • US high yields with equity characteristics are attractive.
  • Expect tapering around December although market is pricing in September. When it happens, US economic data will be trending positively and rising rates will accelerate the housing recovery story as it will cause fence sitters to buy to avoid the mortgage rates increases. Tapering of $10 billion a month is priced into the market and do not expect to see rates rising until 2015.
  •  US financials and insurance companies are a bet that rising interest rates will help their profitability.
  • The Russell 2000 stocks are more attractive because they have more cyclical exposure and exposure to the recovering US story as opposed to the global story where there is still sub-trend growth. With dividends and share buybacks, stocks offer a 4.5%- 5%  yield in 2013 which is attractive.
  • Long the dollar against many alternative currencies because of recovering economy and the Fed slowly winding down QE.
  • Less optimistic about Eurozone, and short Australia.
  • China rebalancing a good thing as banks have been lending too aggressively and China wants to avoid a credit bubble since shadow banking is such a huge proportion of their credit market. Clamping down on lending means it will be more expensive for companies to borrow so GDP will suffer a little bit. China growth could slow to as low as 7 %  causing more volatility short-term but OK over the longer term. Less concerned about China, which has great foreign reserves and is less reliant on foreigners owning local bonds with risk of money exit, unlike Australia, South Africa and India
  • The emerging market is a decent to good place to have a strategic allocation and you want exposure there for the longer term but short-term there is a lot of volatility.  Most worried about countries who have financed deficits with foreign money so when that money leaves they end up in a scary spiral. Countries like South Africa, India, Brazil.
  • Before the end of the year expect to see re-escalations of crises in the Eurozone for many reasons. The Eurozone periphery is like the emerging market with the same concerns including the unwinding of leveraged positions and volatility. After the German election we won’t see a path to true fiscal integration and banking union but instead a recognition that France is very weak, Germany won’t act alone, and that France and Germany are not acting together. Europe needs true labor reform in countries that are not competitive and that is very difficult
  • France is a concern because it has poor underlying economics and Hollande is weak politically.
  • Biggest concern is Spain, which is too big and quite vulnerable and will enter a program with the troika that will be put off politically until the last-minute after volatility spikes over the next 4 to 6 months.

Watch the full video at  http://www.bloomberg.com/video/ubs-s-friedman-favors-u-s-stocks-high-yield-bonds-p2pzBodIRoqFJMPLPcixdg.html

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MetLife Cuts 2,500 Advisers Seen Lacking Chance of Success – Bloomberg 05-30-13

Salient to Investors:

MetLife cut its adviser force by a third, eliminating 2,500 jobs as the company scales back variable annuity sales and turns to other nations for growth.

MetLife has 5,000 advisers who sell insurance and investment products, down from 7,500 in February of 2012.

Danny Sarch at Leitner Sarch Consultants said salespeople are having a harder time breaking into financial-services fields. Rules have limited cold-calling, and potential customers have become more likely to turn to advisers suggested by friends.

The largest banks are cutting back broker training.

Sean Dargan at Macquarie said there has not been an influx of younger advisers to replace the advisers who are going to retire.

Read the full article at http://www.bloomberg.com/news/2013-05-30/metlife-cuts-2-500-advisers-seen-lacking-chance-of-success.html

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Stalking the Silent Financial Killer in Our Midst – Bloomberg 04-09-13

Salient to Investors:

The vast majority of older Americans face steep and rising health-care costs that threaten to bankrupt them and are doing little to protect themselves.

Only 1 in 5 companies with at least 10 employees offers long-term care insurance. Medicare doesn’t cover long-term care. Millions face spending themselves into poverty until Medicaid kicks in – a third of Medicaid’s budget.

90 percent of people don’t buy long-term care insurance policies, which are expensive and confusing. Many leading insurers have stopped selling them. Several insurers stopped selling long-term care products after underestimating how much they would have to pay out in benefits, while low interest rates reduce investment returns on premiums collected.

Bruce Chernof at the SCAN Foundation says we have five years to find a solution. Howard Gleckman at the Urban Institute says there’s not an obvious solution though it might make sense to combine longevity and long-term care insurance in one product. Gleckman says universal coverage is unlikely.

Universal coverage is the only option for Americans too unhealthy to buy long-term care insurance. Insurance companies reject 1 in 5 people who apply for long-term care insurance in their late 50s.

Read the full article at http://www.bloomberg.com/news/2013-04-09/stalking-the-silent-financial-killer-in-our-midst.html

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Legg Mason’s Miller Says Bank Stocks to Rise on Housing – Bloomberg 1-08-12

Salient to Investors:

Bill Miller at Legg Mason said because housing has done so well, the next move there is in financials. Miller said an improved housing market means banks’ mortgage origination businesses will improve.

Miller’s fund had 40 percent of assets in financial stocks as of Sept. 30, and owns insurers and mortgage REITs.

CoreLogic said US home prices rose 5 percent in September from a year earlier, the biggest 12-month increase since July 2006.

Read the full article at http://www.bloomberg.com/news/2012-11-08/legg-mason-s-miller-says-bank-stocks-to-rise-on-housing.html