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This Industry Is Getting Irresistibly Cheap

By Ian Davis
Monday, August 11, 2008

The world is getting riskier... just look at the numbers.
 
High-yield bonds, also known as "junk bonds," are riskier than regular government bonds or traditional "investment grade" bonds. These are bonds issued by companies that have black clouds hanging over them. And they offer higher yields to compensate investors for the increased risk.
 
As recently as one year ago, high-yield bonds yielded just 2.7% more than risk-free Treasury bonds. This was a small premium to compensate folks for taking on extra risk. Boy, has that changed...
 
High-yield bonds now yield 6.2% more than Treasury bonds. Investors are demanding higher rates of interest because of the credit crisis and inflation concerns.
 
Another nasty number for risk: 28%. This is the loss in the Datastream Property and Casualty Insurance sector since last summer. This industry insures against all types of personal and property damage. For a price, these companies absorb the risk of owning assets or getting hurt.
 
As you can see from the chart below, investors don't want to own stocks in the business of risk. The property and casualty insurance sector has been "guillotined" in the last year. Even Warren Buffett's powerhouse insurance firm, Berkshire Hathaway, has lost 22% of its value recently.
 
Property & Casualty Insurance Takes a Nosedive
 
This 28% haircut has made the property and casualty insurance sector one of the cheapest around.
 
Property and casualty insurers are trading for less than 10 times earnings and close to book value. They're also trading at good discounts to their historic levels. The price-to-earnings ratio for the sector is currently 13% below its median. The price-to-book ratio is at a more modest 8% discount.
 
Despite these cheap valuations, I don't expect much from this sector for months to come. When a sector experiences a severe selloff, it usually grinds sideways, even dropping a little. I call this the "sandpaper" stage. We have to wait for investors to get frustrated enough with the sector to give up completely.
 
So I don't think now's the time to buy. But the sector is getting incredibly cheap... and it should be a terrific buy soon (more credit problems are the wild card here, however).
 
When that time comes, the best-performing insurance ETF is the PowerShares Dynamic Insurance Portfolio ETF (PIC). This ETF tracks an index of 30 U.S. insurance companies. You also have the ultimate insurance stock, Berkshire Hathaway, to consider.
 
Good investing,
 
Ian Davis




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%