Insuring Against Rate Hikes
There are still a lot of folks out there who believe that the U.S. Federal Reserve won’t start moving on interest rates this year, but I would bet they’re wrong.
The bond market is showing that inflation expectations are falling with the 10-year break-even rate – the yield difference between a straight 10-year Treasury and an inflation-indexed one – now at 1.83%. That basically means bond traders expect inflation of less than 2% in the coming months and when inflation is low, the Fed isn’t aggressive. That’s a fair enough argument against a rate hike, especially since oil prices are still low.
While the Fed has been saying it would prefer to see inflation above 2%, there are a couple of other factors that I think will prompt a hike sooner rather than later, probably in September.
For one, weekly jobless claims are now at the lowest level since 1973 and the unemployment rate now stands at 5.3%. We’re quickly approaching what the Fed and other economists generally consider “full employment,” the optimum level of labor market tightness. The other factor is activity in the real estate market is almost at healthy, pre-recession levels seen in the couple of years prior to the huge run-up and crash.
On top of that the Fed’s been running its zero interest rate policy since 2008, so it likely wants to stay ahead of the inflation that, coupled with a solid recovery, could trigger. That’s why last week, Fed Chair Janet Yellen told the Senate Banking Committee that she prefers to “tighten in a prudent and gradual manner.” That’s a solid indication interest rates are going up, and probably soon.
In anticipation of a rate hike, we’ve been adding companies to our portfolios in Personal Finance that will actually benefit from stepped up interest rates. Insurers are an excellent example of that, since in a normal interest rate environment they can make almost as much off their investment portfolios as they can by actually selling insurance.
When you pay the premium on your home owner’s or car insurance, the insurer doesn’t just stick that money in drawer and wait for disaster to strike. They invest that money mostly in bonds and some stocks, keeping just a fraction of each premium in ready cash. That way, if disaster doesn’t strike that premium money gets an extra profit boost.
Chubb Corp (NYSE: CB) is my personal favorite insurance company, the 12th-largest property and casualty insurer in the U.S. It’s very conservatively run, sticking to written policies that aren’t totally off the wall and likely to cost it big bucks down the road.
Its line of personal insurance operation covers the homes, jewelry, boats, art and other things that high-net-worth people tend to own. Its commercial operations mostly consist of business liability coverage, worker’s compensation and property coverage. And its specialty insurance covers board members, corporate officers and other fiduciaries, plus professionals for liability.
Net income at property casualty insurance companies is often subject to wild swings, given the difficulty of predicting when or where the next major hurricane or other natural disaster will strike. But Chubb is attractive to income investors because its shares currently yield 2.3%, and the company has increased its dividend for 32 consecutive years. Chubb also consistently repurchases shares, buying $1.6 billion of its own stock in 2014 and repurchasing $13.5 billion worth of shares since 2005.
Chubb also scores an 8 out of 10 on our IDEAL model, developed by our Chief Investment Strategist Jim Pearce, which has a consistent track record of picking winners.
But as much as I like Chubb, the stock you want to buy is ACE Limited (NYSE: ACE), another of our high scoring portfolio holdings. ACE has offered to buy out Chubb for a total of $124.13 per share, and the market clearly expects the deal to get done since Chubb is currently trading at almost every penny of that.
ACE is in the property and casualty business as well, but it tends to focus on larger corporate clients. It’s just as high of a quality company as Chubb, so the tie up actually makes perfect business sense (which is probably why the market is so sure it will happen). But there’s always risk that the deal won’t get done, so ACE shares have actually been trading down since the deal was announced. It’s the biggest transaction ever for the insurance industry, so ACE shareholders are probably right to be concerned.
The upshot here is that ACE is now so attractively valued, you’re getting a heck of a bargain on its shares even if the tie-up gets scuttled. And just like Chubb, ACE will benefit from better investment returns when interest rates raise.
You couldn’t ask for a better insurance policy against higher interest rates, and Chubb and ACE are just a few of the companies that we cover. With the long-term, proven success of Jim’s IDEAL stock system, you almost can’t afford not to read more about it.
The bond market is showing that inflation expectations are falling with the 10-year break-even rate – the yield difference between a straight 10-year Treasury and an inflation-indexed one – now at 1.83%. That basically means bond traders expect inflation of less than 2% in the coming months and when inflation is low, the Fed isn’t aggressive. That’s a fair enough argument against a rate hike, especially since oil prices are still low.
While the Fed has been saying it would prefer to see inflation above 2%, there are a couple of other factors that I think will prompt a hike sooner rather than later, probably in September.
For one, weekly jobless claims are now at the lowest level since 1973 and the unemployment rate now stands at 5.3%. We’re quickly approaching what the Fed and other economists generally consider “full employment,” the optimum level of labor market tightness. The other factor is activity in the real estate market is almost at healthy, pre-recession levels seen in the couple of years prior to the huge run-up and crash.
On top of that the Fed’s been running its zero interest rate policy since 2008, so it likely wants to stay ahead of the inflation that, coupled with a solid recovery, could trigger. That’s why last week, Fed Chair Janet Yellen told the Senate Banking Committee that she prefers to “tighten in a prudent and gradual manner.” That’s a solid indication interest rates are going up, and probably soon.
In anticipation of a rate hike, we’ve been adding companies to our portfolios in Personal Finance that will actually benefit from stepped up interest rates. Insurers are an excellent example of that, since in a normal interest rate environment they can make almost as much off their investment portfolios as they can by actually selling insurance.
When you pay the premium on your home owner’s or car insurance, the insurer doesn’t just stick that money in drawer and wait for disaster to strike. They invest that money mostly in bonds and some stocks, keeping just a fraction of each premium in ready cash. That way, if disaster doesn’t strike that premium money gets an extra profit boost.
Chubb Corp (NYSE: CB) is my personal favorite insurance company, the 12th-largest property and casualty insurer in the U.S. It’s very conservatively run, sticking to written policies that aren’t totally off the wall and likely to cost it big bucks down the road.
Its line of personal insurance operation covers the homes, jewelry, boats, art and other things that high-net-worth people tend to own. Its commercial operations mostly consist of business liability coverage, worker’s compensation and property coverage. And its specialty insurance covers board members, corporate officers and other fiduciaries, plus professionals for liability.
Net income at property casualty insurance companies is often subject to wild swings, given the difficulty of predicting when or where the next major hurricane or other natural disaster will strike. But Chubb is attractive to income investors because its shares currently yield 2.3%, and the company has increased its dividend for 32 consecutive years. Chubb also consistently repurchases shares, buying $1.6 billion of its own stock in 2014 and repurchasing $13.5 billion worth of shares since 2005.
Chubb also scores an 8 out of 10 on our IDEAL model, developed by our Chief Investment Strategist Jim Pearce, which has a consistent track record of picking winners.
But as much as I like Chubb, the stock you want to buy is ACE Limited (NYSE: ACE), another of our high scoring portfolio holdings. ACE has offered to buy out Chubb for a total of $124.13 per share, and the market clearly expects the deal to get done since Chubb is currently trading at almost every penny of that.
ACE is in the property and casualty business as well, but it tends to focus on larger corporate clients. It’s just as high of a quality company as Chubb, so the tie up actually makes perfect business sense (which is probably why the market is so sure it will happen). But there’s always risk that the deal won’t get done, so ACE shares have actually been trading down since the deal was announced. It’s the biggest transaction ever for the insurance industry, so ACE shareholders are probably right to be concerned.
The upshot here is that ACE is now so attractively valued, you’re getting a heck of a bargain on its shares even if the tie-up gets scuttled. And just like Chubb, ACE will benefit from better investment returns when interest rates raise.
You couldn’t ask for a better insurance policy against higher interest rates, and Chubb and ACE are just a few of the companies that we cover. With the long-term, proven success of Jim’s IDEAL stock system, you almost can’t afford not to read more about it.