Has the stock market turned into a casino... again?

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Bitcoin has quietly skyrocketed above $62,000 to hover close to its all-time high. Some investors consider bitcoin as a gauge of the speculative assets, and its rising price cause them to suspect that the “casino crowd” is back in full force. You can see the inflow to BlackRock’s bitcoin ETC has soared in the last few weeks: (Source: Bloomberg) But the speculation isn’t limited to bitcoin. Bullish stock options saw soaring demand — similar to the 2021 year. Companies are now issuing risky bonds again. Big Tech also report strong earnings results to add the fuel to the fire. All the speculative trades led Apollo Management Chief Economist Torsten Slok to make a bold prediction that the Federal Reserve won’t cut rates this year due to sticky inflation. With people pushing asset prices up, it’ll make it tougher for inflation to slow down. - “The market’s just fighting the Fed and winning right now,” Emily Roland, co-chief investment strategist at John Hancock Investment Management, said in an interview. “There’s still euphoria, even though the Fed is kind of pulling away the punch bowl.” All in all, the S&P 500 and the Nasdaq scored 7th straight positive week in the last eight weeks. The rally has been unstoppable. The AI frenzy has been forefront of the rally, thanks to Nvidia’s meteoric rise in earnings. - “We’re seeing this big run up in tech because there’s a massive emphasis on what it might be — there’s so much emphasis on AI and this big sort-of redux of the late 90s,” said Jamie Cox, managing partner at Harris Financial Group. - “People [now] just completely disregard the rest of the market. And that’s generally does not turn out well,” Cox added. Hence the reason why incoming inflation data will be so important. It will determine the future rate decision for the central bank. If it keeps rising (or staying sticky at the current level), rate cuts are unlikely to come until way later. A Top “Low-Risk” Stock To Own Right Now Today’s Stock Pick: James River Group Holdings, Ltd ([JRVR]( The stock of James River Group is insanely undervalued. Let tell you why -- the EPS is projected to post $1.78 per share in 2023. The stock is currently trading at around $9.80 per share, so it’d be about 5.5 P/E for an excellent company. A little bit about James River Group: It is an insurance company that underwrites the Excess & Surplus (“E&S”) market. What is the E&S market? It insures things that standard carriers won’t cover – due to difficulty or high-risk exposures. Some examples are mobile homes, daycare centers, and oil companies. Here’s the critical trait to succeed in the E&S market – a carrier must have an inside-out knowledge of each segment. This means hiring specialists per segment, so they know true exposures to any loss. Naturally, major carriers choose not to do business in this market because of its requirement to specialize and too “niche” for them. Lower risk appetite for major carriers: The pandemic made major carriers risk-averse, exiting many coverages thus bringing opportunities for James River Group to cover these gaps in insurance. In the graph below, you will see how quickly the E&S market grew from 2017 to 2022. The growth accelerated for four straight years before “cooling down” to a solid 20% growth in 2022 (that was the latest available information that the company made to this date -- March 1st, 2024): (Source: James River Group) As a result, James River’s Gross Written Premiums exploded by 22% CAGR since 2013: (Source: James River Group) Rate increases: James River has a clear pricing power to cushion any long-term inflation effect. Because of the specialized nature of its business (which major carriers are unwilling to enter and compete on prices), James River was able to increase rates on renewal books by a compound rate of 72% in the last 26 quarters. (Source: James River Group) Conservative investments: Insurance carriers make money by taking premiums and investing them to generate income on the “float.” Some insurance carriers, such as Berkshire Hathaway, are more aggressive with their investments. Not James River. It takes more specialized knowledge to monitor its risks, so James River chooses to make extremely conservative investments. In other words, it doesn’t want to spend any time worrying about its investment portfolio. It averages about a 3% yield on its investments: (Source: James River Group) Its conservative philosophy spills over to its underwriting discipline. It has easily the lowest catastrophe losses as a percentage of loss ratio among its peers. (Source: James River Group) The combined ratio is excellent, as well. As a reminder, it measures how much a company pays out versus the premiums it collects. If it is above 100%, that’s bad. Generally, an insurance company earns enough from investment income that it can afford to lose a little bit on premiums. But still, top insurance companies have lower than 100% which means it earns profits from underwriting premiums alone. James River never had more than a 100% combined ratio since 2017: (Source: James River Group) Bottom line: James River Group is trading at an attractive valuation of about 7.44 P/E if we consider its forecasted EPS for 2023. It reduced the dividend payout due to tough years during the pandemic. But we have no doubt that it’ll be back on track and you could eventually be yielding as much as 4-5% at the current price. Now is the perfect time to buy this low-risk stock while it is still cheap. [EARN WHILE YOU LEARN! 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