November 04, 2008 4:26 PM
Market is rising amidst all bad news proving it a tad bear market rally.
Be prepared, for next wave of meltdown..
The Coming Insurance Meltdown
You’ve seen hundreds of subprime lenders bite the dust, with New Century Financial and Countrywide leading the way …
You’ve seen giant banks like Washington Mutual and Wachovia suffer a similar fate.
You’ve watched in horror as major investment banks like Bear Stearns, Lehman Brothers and even the giant Merrill Lynch were bailed out, bought out or simply wiped out.
Perhaps most shocking of all, you’ve seen the abject failure of the two biggest, supposedly “safest and soundest” mortgage companies on Earth — Fannie Mae and Freddie Mac.
Each time news broke on these shocking failures, stock markets crashed — not just here in the U.S. , but around the world. Investors lost trillions of dollars.. Entire countries took another step closer to the edge of the abyss.
Strangely, however, the crisis that’s in one of the most critical financial industries of all has been barely noticed at all.
Yes, there was a temporary news explosion after the AIG fiasco and it burst into headlines for a few days. But AIG was so promptly bailed out by the government that most investors put it out of their minds. Washington immediately declared the AIG crisis “over.” Wall Street said it was just an “anomaly.” And both insisted that “the rest of the insurance industry is doing just fine.” Not true!
How do we know? We have identified 46 insurers with $500 million or more in assets that are at an elevated risk of failure, and, earlier this month. And if the pattern of financial failures we’ve seen so far persists, size will be no obstacle.
Until now, we were virtually the only ones talking about this. But this week, we have noticed a fundamental shift in Wall Street sentiment, and yesterday, the shift began to hit the fan …
- ING gasping for air: Shares of this global insurance giant ING have plunged nearly 80% this year. The most recent blood-letting struck after the company announced it lost a staggering 1.6 billion euros ($2 billion) on stocks, bonds, structured credit and real estate. Result: It’s grabbing 10 billion euros as part of a large Dutch government bailout package. Its CFO has resigned in disgrace. And these events raise serious questions as to how long it can survive.
- Aegon shares smashed! With its stock also down nearly 80% in twelve months, the Dutch owner of Transamerica Corp. just announced it will post a huge third-quarter loss due to investments in Lehman Brothers, Washington Mutual and other assets. It has canceled its dividend. It, too, had to reach for a lifeline — $3.8 billion from the Dutch government. And it may soon ask for more here in the U.S. if Washington lets insurers take their turn in the soup line.
- Harford shares killed! Hartford Financial Services has lost almost 90% of its value this year — and more than half its market value yesterday alone! Why? Because it just posted a third-quarter net loss of $2.6 billion on writedowns of investments in guess who: Fannie Mae, Freddie Mac, Lehman Brothers and AIG.
- The biggest U.S. and Bermuda-based insurers have piled up a total of $98 billion in losses — much in still unrealized losses — since the beginning of last year!
This could get a lot worse. So beware!
Here’s my view of the big picture:
First and foremost, we’re in an absolutely, crystal clear, bear market. That’s the big trend, and nothing that happened this week — or is likely to happen in the foreseeable future — is going to change that. Quite to the contrary, if anything, the insurance industry disaster that’s now in the making could help ACCELERATE that bear market decline.
Second, this week we’ve had a classic bear market rally. Some short sellers (especially in Germany ) got squeezed temporarily. The Fed tried to prop things up with a rate cut. And Wall Street cheered — a bit.
Third, the bear market rally now appears to be on its last legs. This provides an ideal entry point to stake out positions in inverse ETFs — exchange traded funds that are designed to profit in down markets. Why? Because thanks to the latest rally, they’re trading right now at bargain prices.
Fourth, as you’ve seen from the collapses all over the world, the bear market has now gone GLOBAL! And as you’ve seen from the global insurance companies I just cited, so has the insurance crisis. Result: In the next phase, some of the worst declines of all are bound to be in FOREIGN stock markets.
Until next time,
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