Don’t Be Surprised to Wake Up Inside of a Vortex

I closed out the day up, thanks to my rapid sales and EXH, VXX, TZA shorts. I did some reshuffling and I now have 20% of assets in WNR (yes, I bought today), 5% in GSVC, 20% short in EXH, TZA, VXX and 60% cash. The reason why I am so quick to sell is due to the possibility we all wake up to the market indicating down 10%.

Despite the cocaine driven euphoria of last week, the problems are really “that” intense. Although speculation and liquidity are able to drive stocks higher, the fundamentals, which actually mean something, are telling you to run.

Like I said numerous times in the past, the downside to the S&P is around 700-800. For the love of dead dogs and deranged cats, we are at 1,200! Think about how ridiculous that is, the market being up for the year, then get back to me with a real investment strategy.

If you want a real tangible reason to sell, look no further than SLF. First, let me remind you that insurance firms have massive exposure to equities and need yields to be rich. The fact that stocks have underperformed and treasuries have soared is the worst case scenario for them. Consider the fact that pension funds use inane math to calculate performance, such as 8% 10 year returns–based on “history.” Well that number is derived by the dependence on yield from US treasuries. Now that yields are drill bits, they need to outperform in stocks. Well, aside from the 14% one week return, stocks have been sucking dick. Hence, look forward to massive pension shortfalls and comically bad earnings reports from the likes of SLF, MET, HIG and others.

Sun Life earnings press release:

The Company expects to report a loss of $621 million for the quarter. On an operating basis, the loss is expected to be $572 million. Results for the third quarter include losses related to substantial declines in both equity markets and interest rate levels, which particularly impacted the individual life and variable annuity businesses in SLF U.S. The third quarter was a period of exceptional market volatility. North American equity markets dropped by 12% – 14%, while yields on fixed income securities fell amid economic uncertainty in the European Union and U.S. monetary policy actions aimed at lowering interest rates on long-term treasuries. In the U.S., treasury rates reached historic lows, with 30-year yields down 146 basis points to 2.91%. Under the Canadian insurance accounting model, the future impact of September 30, 2011, market conditions is reflected in our current period results.

Losses from equity market and interest rate movements were at the high end of the ranges previously disclosed in the Company’s Management’s Discussion and Analysis for the second quarter of 2011. Key drivers which resulted in market impacts at the high end of the estimated ranges included uneven movements across the yield curve and the impact of large, simultaneous movements in both interest rates and equity markets. Updates to the Company’s actuarial methods and assumptions, which generally take place in the third quarter of each year, contributed approximately $200 million to the loss. Sun Life Assurance Company of Canada remains well capitalized, with a Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio that is estimated to be approximately 210% as at September 30, 2011.

The Company currently expenses hedging costs for variable annuities and segregated funds in the period in which they are incurred. In the fourth quarter of 2011, the Company plans to make a method and assumption change related to the valuation of its variable annuity and segregated fund liabilities whereby it will provide for the estimated future lifetime hedging costs of these contracts in its liabilities. This change is expected to result in a higher level of future earnings from in-force contracts than would be the case using the current methodology. The impact of this change on the net income of the Company in the fourth quarter will depend on interest rates and other market conditions as at December 31, 2011, as well as further refinements to the valuation methodology. If this change was made under current market conditions the expected one-time reduction in fourth quarter net income is estimated to be approximately $500 million. The impact of this change on the MCCSR ratio of Sun Life Assurance is expected to be positive, as the increase in variable annuity and segregated fund liabilities will reduce the amount of regulatory required capital for these products.

“Losses from equity market and interest rate movements were at the high end of the ranges previously disclosed,” Sun Life said in a statement.

 

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