Taking Cover

http://www.nytimes.com/2010/07/04/your-money/04stra.html?emc=eta1

Taking 7 semesters of Philosophy (including "Metaphysics!") in college was not wildely exciting for me. Taking 7 semesters of Theology (also required) was broadening but, alas, not exciting either (the big finale was that "Metaphysics" is where philosophy and theology "meet." Really?!?!).

One of my few memories of that ordeal was a position that Descartes (or, was it Pascal?) took on "religion": his point was, why not bet on religion? That way, if there is a God, you'll be OK. If there isn't a God, at least you had some life rules to go by and what did "observing" a religion cost you?

Descartes (or his pal Pascal) had a good point.

Now we have Robert Prechter, a market forecaster and social theorist (perhaps a good combination), who is convinced that we have entered a market decline of staggering proportions - perhaps the biggest of the last 300 years! People who laugh at this idea need to read Nouriel Roubini who called the shot on the crisis that some say we are still in (and, those same people say we are headed for a "double-dip" recession). Most economists see the the Great Recession as having ended last year based on the strict definition of consecutive quarters of GDP growth (like many other things that economists do, their definition is overly quantitative and short sighted). We've had two or three 'positive' GDP quarters in a row so things are returning to normal, albeit slowly: consensus forecast. We don't think so, and, we would posit that Roubini doesn't either. For more on this, see our "Third Depression" post which attaches Krugman's thoughts.

Back to Prechter: his position is based on his version of the "Elliot Wave" theory - which is described as a "technical approach" to market analysis that uses "fractals" (repetitive patterns) for predictions of future market movements.

Prechter's approach is very much like the philosophical advice we referred to above: "I'm saying, 'Winter is coming. Buy a coat.' ... Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead. It's pretty benign advice to opt for safety for a while." His formal advice is that individual investors should move completely out of the market and hold cash and cash equivalents for years to come.

Keeping it real, it would be appropriate to go with Prechter's prognostication because it's "conservative" and then see what happens in the "short term." We don't offer investment advice here. But we do think he has a point. We thought Roubini was off-the-walls in the first half of the last decade when he kept predicting the "sky was falling." Michael Lewis (whose book, "The Big Short" is a current best seller) wrote a scathing article in the fall of 2006 about how ridiculous Roubini's positions on a coming Great Recession were, until it happened. Now Lewis has a best seller written about what happened and why. We wonder what Lewis and Roubini have to say to each other now at the great gatherings of the intelligencia like Davos. Roubini is not the type to say, 'I told you so', but many more people are listening to him than used to, including Lewis.

Food for thought.

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Just a quick follow up on a subject we discussed last fall: it would appear that, as of last Thursday, people unable to get health insurance because of a pre-existing medical condition now have a new option. The federal government announced it was accepting applications for its new Pre-Existing Condition Insurance Plan, which was authorized by the health care overhaul bill. To be eligible, people must be uninsured for at least 6 months and have been turned down for coverage by a private insurer because of a medical problem.

Texas has a program (Texas Health Insurance Pool) for this situation but the premiums are double standard rates. The new federal program will charge similar rates to average individual market premiums charged to "healthy" people.

For those who might have missed the debate in Congress last fall, insurance companies "DROP" people from medical coverage when their medical bills are considered to be too expensive for the "insurers". These cancelations are called "cessions." They happen to 25,000 covered individuals per year. "Cessions" is a fancy word for unethically removing medical coverage from someone who is really ill (ergo, the high costs) because those costs could make a dent in the insurer's profit margin.

Most insurance companies are a good investment - ask Warren Buffet. But insurance companies can remain a good investment without cessions.