Sun Life and financial insurers

Sun Life (TSX: SLF) reported on Monday that when they report their next quarterly result, it will contain a very negative quarter. In the event of this quarter, it will be negative $621 million, operating amount negative $572 million.

By definition, financial insurance companies (such as those that provide annuities and “guaranteed income funds”) make their living by hedging. If they sell Joe Retail a product that will guarantee them 4% for the duration of the investment, the company will usually have a way of finding somebody else to give them 5% for the same period of time so they can skim the 1% in the meantime. Banks operate under the same principle, except for some strange reason they do not call it insurance.

When financial insurance companies cannot hedge properly, it will result in losses. In the event of SLF, and indeed, in the event of others such as Manulife, they have not hedged against the drop in equity markets and also the low rate environment and have been caught exposed – subsequently forced to take losses.

I have no idea whether SLF or other similar companies are under or over-valued at present. They are not easy companies to analyze and to determine where the risk is compared to the broad market.

The end of the volatility?

Volatility (VIX) has gone under 30% for the first time since the whole mini-meltdown in August occurred.

I’m still remaining very cautious. I have not been in a very literate or concentrative mode over the past few days and thus whenever I have found myself in that situation, do not make investment decisions.

The largest rallies happen with short squeezes

While the Canadian markets were closed due to Thanksgiving, the US equity markets skyrocketed up 3.4% on the S&P 500. There was no particular news other than nothing catastrophic happening over the weekend, but it has been my experience that sharp rallies up tend to be due to traders caught on the short side that suddenly buy into the markets.

I also remain fascinated with the history of the markets from 2008 to 2009 – about how most of the actual crisis was over in October of 2008, but the reverberations and pessimism came to a crescendo in February and early March. This was despite the fact that TARP and practically every liquidity measure conceived had been implemented and all that was left was for that excess liquidity to end up shoring credit across the entire marketplace.

The whole world knows about Greece, but calculating the after-effects of a default or restructuring is the tricky part – if credit goes into a deep freeze once again, we will likely see a miniature version of that crescendo. It could also be the case that we have seen it – if that is the case then the time to buy is now – but you’ll never know it until after the fact. This is indeed gives markets such an impression to outsiders that it is all luck. I remain pessimistic, however, mainly because the underlying cause of the problem – profligate spending by governments – has not been resolved. Any recovery is likely to be temporary at best until economic foundations can actually heal.

Turning point in the markets

I hate being a chart reader, but the markets are forcing everybody to be one since nobody knows what is going on – inflation or deflation? Recession or not? Euro-default or not?

A couple prevalent charts with trend lines (very crudely drawn) indicated:

S&P 500:

10-year Treasury Bond:

Unquestionably there is a lot of concern out there with the welfare of the global economy – perhaps ECRI’s recession call was one more spike in the coffin. However, at this time, buying (or going short treasuries) is the most difficult thing to do – and a trader always knows that the best trades are the ones most difficult to do.

Sadly we are all armchair macroeconomists at this point. However, I have been compiling a “hit list” of securities that have gotten hammered over the past month and am somewhat hoping that there is another plunge down – ideally deploying cash at the time nobody else wants to. While the debt situation in Europe is hardly resolved, the potential impact of a credit freeze is being priced in with these huge and volatile price swings that go up and down.