Quote of the Week
“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” Warren Buffett
Stocks finished higher on the week, helped by a stronger than expected jobs report on Friday. The Dow closed last week up 0.8%, the S&P 500 was up 1.5%, and the Nasdaq was up 2.4%. For the year the Dow is down 1,1%, the S&P 500 is up 3.2%, and the Nasdaq is up 11.4% led again primarily by the FANG stocks. We are still seeing a separation between the big tech stocks and the rest of the market which is not a good sign going forward.
Trade developments also impacted markets as the U.S. imposed a 25% tariff on $34 billion of Chinese imports, the first part of the $50 billion announced earlier this year. China responded immediately by placing tariffs on U.S. shipments of approximately the same dollar amount on goods including soybeans, pork products, and automobiles to name the major products. The Chinese have aimed the tariffs at the heart of Trump Country. It looks like this is going to get nasty. Plus, don’t forget the 25% and the 10% tariffs on steel and aluminum that are hitting China and the rest of our allies including Canada, Mexico, the European Union.
While trade tensions are escalating, Wall Street believes a trade war is a low probability event because they see tariffs as more of a negotiating tactic than a definite and desired outcome. We shall see if the rest of the world likes to be bullied into an agreement.
U.S. industry has already started to feel the pain of the current American led trade war. Now it is happening. U.S. manufacturers are reporting rising costs and difficulties in sourcing ahead of the tariff deadlines. These companies say that the metal tariffs, combined with the threat of falling export business, all caused by tariffs, is threatening to make them stop hiring or making new investments. An Ohio manufacturer of excavation equipment said: “We had a good year last year, and we’re in the middle of a good year this year, but we are very concerned about the tariffs”.
If the rest of the world digs in their heels, this trade war will spark a recession. This could be the turning point in the Trump presidency whichever way it turns out.
Have you ever had a house fire? We did many years ago while living in Utica, New York. Fortunately, our insurance coverage was excellent but not because I designed it that way. I was just lucky. Over this last weekend, I was looking at some old 35 mm slides, came across pictures of the damage and thought an article on home insurance would be appropriate for our weekly letter. Accordingly, I found the following article on the internet that has some useful insights.
Lessons from the North Bay Fires by Robert Huebscher, 6/17/18
Californians live in fear of a devastating earthquake. But homeowners are far more likely to suffer a loss from a fire or even a sewer backup. The proper insurance protects against those losses. But, according to Brian Trouette, many homeowners lack sufficient coverage.
Trouette runs an eponymous (big word – means giving their name to something) insurance agency in San Ramon, CA, and works with advisors, CPAs and other professionals to help their clients get proper home insurance coverage. He worked with many homeowners who suffered losses as a result of the North Bay Fires, which claimed 44 lives and destroyed nearly 6,000 structures in Napa and Sonoma counties last October.
Too many homeowners treat insurance like a commodity and buy the cheapest policy, according to Trouette. Then they don’t review their insurance to reflect issues such as liability coverage or changes in replacement cost.
“After the North Bay fires, people discovered they weren’t covered,” Trouette said. “They don’t necessarily need better insurance, but they need to know what their current policy covers.”
For example, he asked, does your insurance cover the increased cost of bringing a structure up to code? “The only way to understand coverage is to read the policy or have someone who knows insurance do this for you,” Trouette said.
The dangers of being improperly insured
You have to worry about things like sewer-backup and building-code upgrade coverage. Carriers build policies knowing that customers won’t understand or research this, Trouette warned. On top of this, salespeople will compromise the quality of a policy to make a sale, he said. “When you start a conversation with a salesperson stating you are looking to save money, they will find a way to save you money – often at the expense of covered causes of loss.”
If you research carriers, you will see that their customer satisfaction ratings are fine. The reason, according to Trouette, is that 90% of their claims fall into an average category. Most people tend to have smaller losses so carriers insure to that type of loss. The 10% of claims that are outside of the bell curve of the average claim end up being the ones where people have trouble.
Many carriers base their coverage on average losses. So, if you have a $5,000 claim you won’t find out that your policy has a sublimit on rebuilding to new code. It is only on large losses where consumers begin to see the built-in protections the middle-market carriers create to protect themselves. People with small claims walk away satisfied, but those who have major claims do not. If the consumer satisfaction surveys used dollar amounts of claims to weight customer satisfaction surveys, the ratings would be much different.
Consumer-based sites and tools are “really useless,” according to Trouette. The California Department of Insurance maintains a website and database. To illustrate its weaknesses, Trouette compared policies from two insurance companies on its site. It showed that both policies had 100% coverage, but the one policy included 20% extended replacement cost. Yet both showed just “replacement cost” coverage on the site.
“The only way to ensure proper protection is to read the policy,” he said.
Properly insuring the contents of a home
Some items, like jewelry, which have personal significance and can and should be insured. Art, jewelry, china and silver must be itemized. There is coverage, he said, but with limits if you don’t itemize with what is sometimes called a “personal property floater.” Homeowners should review their itemizations yearly, especially if they are actively buying or selling items.
Contents coverage is usually based on a percentage of the replacement cost of the home. Homeowners should list all their contents on the appropriate form – everything, he said, “from spices to finger-nail clippers.” Give this to the carrier, who will tell you the depreciated value. If homeowners don’t want to make a list of their contents, he said taking pictures is a great idea
Homes should be insured for their rebuild or replacement cost, not for the appraised value or what a homeowner thinks is its market value.
It’s critical to get an accurate estimate of the replacement cost. Trouette told of a situation where company A correctly determined a home’s replacement cost was $2.5 million, but company B suggested only $763,000 of coverage, based on the types of homes it typically insures. A naïve consumer would have been victimized, Trouette said, by being underinsured, possibly in order to save money. “Company B doesn’t expect to cover $2.5 million homes,” he said, and misestimated the replacement cost.
If you want to use a carrier that is not used to insuring your level of home, pay a contractor to give you a bid, Trouette said.
Some policies will pay no more than cash value of the damage to a home until actual repair or replacement is complete. But other policies have replacement-cost coverage, which is much better and will pay you whether or not you repair, replace or rebuild. This is very powerful advantage but, he said, both policies read very similarly.
Some policies offer what is called “extended replacement cost,” which gives the homeowner a cushion. For example, a 25% extended replacement cost rider on a $1 million policy gives you $1.25 million of coverage. But, Trouette warned, this is not an excuse to intentionally underinsure a home in order to save money on premiums. This cushion is intended to cover things like inflation and changes in the cost of labor or material to rebuild the home.
If you have a loss
Before you hire an agent, ask if they will help with claims. That way, if you have a loss, you can ask your agent for help. Some agents who work for a carrier won’t do this, Trouette said, but independent agents generally will.
Always communicate with the carrier via email, Trouette said. If you communicate via phone, follow up via email to document the conversation.
Don’t change your building plans until you’ve agreed with the carrier as to what you are going to build. Don’t make changes unless you agree that it is cost-neutral, he said.
When you rebuild you must bring your home “up to code.” This affects issues like testing for lead and asbestos, and new energy codes. Policies should include something called “ordinance and law” (O&L), which is also referred to as building-code upgrade coverage, he said. Carriers treat the O&L as a separate loss covered at a potentially lower rate. O&L coverage is generally an “extra” coverage
“When an insurance carrier says ‘extra,’” Trouette said, “it usually means less” Carriers call out specific coverage like sewer backup or building code upgrade in order to put a limit on potential claims.
“I’ve never heard a positive story about a third party adjuster,” Trouette said. “They have no credit with the carriers. Carriers don’t care what TPAs think. TPAs are very aggressive and will show up while your house is still on fire.”
Some policies include loss-of-use coverage, but Trouette warning that this is often underestimated and, as a result, can be costly. A 12-month loss-of-use policy is not enough, he said. He recommended two years as the minimum for loss of use.
Don’t cancel your policy when you have a fire, he said, because you need it to cover the contents of your rental. In addition, a big loss often makes you uninsurable, so you don’t want to be without any coverage.
He offered a final bit of advice for when you begin rebuilding your home, “The road to recovery is paved with city and country bureaucracy and permits.”
By the Numbers
WORSE OVER TIME – The growth in the nation’s economy is reported on a quarterly basis and is revised twice after the initial “advance estimate.” For the 1st quarter 2018, growth was originally pegged at +2.3% (a quarter-over-quarter result stated as an annualized number), then reduced to +2.2% growth a month later, and finally dropped to +2.0% growth a month after that. That’s the first time the latter 2 readings have each declined following the initial reading since the 1st quarter 2014 (source: Commerce Department). Michael A. Higley, BTN 07-09-2018
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.