Sunday, October 30, 2011


Individual investors continue to retreat out of equities.

The retreat of the individual investor out of equities continues apace.

In September, $14 billion of domestic equity mutual funds were redeemed. This follows $26 billion taken out in August and $28 billion in July.

It looks as though 2011 will be the fifth consecutive year of outflows, an all-time record.

Meanwhile, fixed income gathered almost $10 billion last month.

There are several reasons for this risk aversion on the part of the retail investor to continue:

* a weak jobs market
* economic uncertainty
* a continued volatile stock market
* stagnating incomes ("screw")
* rising costs of the necessities of life ("flation")
* still weak home prices

Stating the obvious, MF Global Holdings has been in the news lately. The company seems to have been caught with an outsized bet on eurozone debt at a time they were funding themselves with wholesales (non-deposit) borrowings.

It reported a large loss in its latest quarter and Moody's joined Fitch in assigning a junk rating to the company's debt. As a result the company is trying to sell assets in order to stay afloat.

What is the investment lesson of MF Global?

A first step in analyzing a company one should always first look at insider transactions (available for free on Yahoo! Finance) in order to gauge the appetite of management for their own company's shares. This is almost always my first step of analysis -- even before mulling over a company's financials.

So, what gives with insider buying/selling at MF?

Despite the persistent decline in its shares, insiders (with the exception of Corzine) have almost totally avoided buying shares over the last year.

Lesson learned.

On the positive side, personal spending continues strong, up 0.6% month over month and in line with expectations. As well, the final University of Michigan sentiment index was revised up from 57.5 to 60.9, still low, however, relative to the long-term average of 87.

On the negative side, as mentioned this week, personal income was up by only 0.1%, below expectations of +0.3%. Consumption is being buoyed by a drawdown of the savings rate (not a sustainable factor to further spending gains). Indeed, the savings rate has now dropped to about 3%, the lowest savings rate in three years.

Miller Tabak's Peter Boockvar reviews the close of sovereign debt bonds.

Miller Tabak's Peter Boockvar’s review of the close of sovereign debt bonds today:

With European markets closing, Italian yields are closing at the highs of the day with the five-year yield in particular closing at the highest level since 1997 at 5.75%. The two-year yield is up by 33 basis points, to 4.75%, the most since July 2008, and the 10-year yield is back above 6% at 6.03%, up 15 basis points on the day. Yields are up sharply in Spain, too, but remain off their recent highs. Yields in Portugal are mixed, and Irish yields are down across their curve as they remain a standout relative to their neighbors.

Explain the increase in Italian and Spanish yields over the last two days.

We are told that Wednesday night's eurozone solution was aimed at stemming the debt contagion in Europe.

But, how can we explain the increase in Italian and Spanish yields over the last two days?

For example, Italy attempted to sell 8.5 billion euros in bonds with maturities out as long as 10 years yesterday. It only sold 7.9 billion euros in bonds (low bid to cover), and the yield was an inflated 6.06%.

I suppose the answer is that the markets remain skeptical of Italy's willingness to address the needed measures to control their burgeoning debt load.

Life insurers have entered an ideal environment.

Life insurance stocks have likely entered an ideal environment of rising interest rates (the long bond was down by nearly 4 points yesterday), a benign stock market, expanding sales (VA) growth and an American consumer that is indifferent to the stock market, preferring guaranteed financial products to straight out purchases of stocks.

MetLife's (MET) terrific earnings, announced after the close yesterday, underscore the strong absolute and relative profit prospects for the industry. MetLife reported a headline earnings number of $1.11 per share vs. consensus for $1.06 per share but included a series of one-time charges in the quarter (including higher variable income, the impact of severe weather/catastrophic losses, liquidation of Executive Life, insurance department charges, etc.). Without all these charges, the company would have reported EPS of $1.29 --year-to-date core ROE is 12% through the first nine months. My earnings estimate for 2011 is $5.15 a share, and, subject to share repurchases finally being authorized by the Fed, over $5.50 a share seems reasonable for 2012.

The quarter's record variable annuity sales of $8.6 billion beat forecasts by $2 billion, corporate benefit premiums more than doubled expectations, and international sales (40% of the company) were strong as well.

The shares currently trade at a large discount to book value ($47.00) and at under 7x projected earnings. Excess capital is growing fast and could exceed $4.5 billion over the next two years.

All the positive influences affecting MetLife's quarter will have a salutary impact on the other life insurers – Lincoln National (LNC), Prudential (PRU) and the like. MetLife's shares have had a roller coaster ride in recent months, but my advice remains the same: Buy MetLife (and the other life companies); it pays.