What We're Reading

The Bloomberg US Financial Conditions Index and the S&P 500 tend to move in pretty close unison. In March, however, they started to move apart in a manner similar to late last year, before the market took a nosedive. Once again, either financial conditions improve or the stock market corrects.

Source: Bloomberg

Shown below we see a similar wide divergence when looking at credit spreads (inverted in red) compared to the S&P 500 (in black). When financial conditions are healthy, credit spreads narrow since investors require less compensation for the risk of holding non-government securities. As financial conditions deteriorate and default risks increase, credit spreads widen. The credit markets were confirming the message of the stock market up until mid-2014 and have continued to diverge ever since. Either credit spreads narrow or the stock market adjusts.

Source: FinancialSense

Recently I became interested in the insurance industry while looking at the valuation of equities in general. I reviewed over 120 publicly traded companies within the industry and found 24 candidates, at least on the surface, that were worthy of further research. I looked at several areas to determine worthiness. Return on equity, shareholder friendliness, and consistent retained earnings growth were the primary determinants for worthiness. Arch Capital Group Ltd. (ACGL) was one of the 24 companies left after my initial analysis. As you all know, my analysis eventually leads me to reading annual reports. The ACGL annual report for 2004 is the cause for the following discussion(ok, monologue). The 2004 report is yet another shining example of why investors need to read the annual and other SEC financial reports released by the companies in which they invest.

In my world, purchasing stock in a publicly traded company is literally becoming part owner of said company. Any profits made by