Auto insurance was highlighted as a tough area of property casualty by Josh Shenker of Citigroup in this week’s Property Casualty Insurance Roundtable.

Mr. Shanker: We’re fairly leery of the personal lines market, particularly the
auto market. Names that we have sell recommendations on are Progressive and
Safeco (SAF). Principally speaking, we see competition as being quite strong,
and yet the pricing war has only begun to have its initial effects. We should
see higher competition going forward.
At the same time, expenses are much higher for the industry and you need to
advertise and pay brokers a lot. There isn’t really room to cut the margins of
these businesses, which have gotten leaner over the years as well. We’ve seen
companies like Progressive and Safeco fire heavy capital return packages over to
their shareholders. That possible catalyst has already happened and is likely
near its end in terms of its ability to help these stocks out. The stocks are
too expensive. We continue to look for soft top lines, higher expenses as the
result of increased advertising as well as increased broker compensation,
overall margin deterioration and a lack of ability to increase what has already
been offered to shareholders in the form of a capital return.

See the issue here

Eric Landy of Morninstar tries to help us think through the cycle in the homebuilding sector - and when we might expect to see a turnaround.  And it isn’t easy.

TWST: As you look at the business, where do we stand in the cycle? Is that not
important?

Mr. Landry: It’s extremely important. The problem is it’s not easily figured
out. If it were, the industry wouldn’t be saddled with all the extra inventory.
That said, it’s helpful to take a look where the industry’s been in terms of
supply and demand to get a view of what it’s up against.
It looks to us like the country as a whole is currently saddled with at least a
1 million-unit oversupply of housing units.
How do we arrive at that estimate? There are several avenues, the simplest of
which is to look at the housing vacancy survey put out quarterly by the Census
Bureau. Currently there are about 2.2 million vacant owned houses for sale, or
2.8% of total owned units. That’s an all-time high. We have never seen anything
like it before, neither on an absolute nor a percentage basis. Looking back a
couple of decades, the series has averaged a vacancy rate of about 1.5%-1.65%.
If you assume that’s equilibrium and do the simple math, you get somewhere
between a 900,000 and 1 million-unit oversupply. This doesn’t include homes for
sale that are currently occupied, so it may be conservative. Let’s assume,
though it’s accurate.
Going forward, household formation is the primary driver of housing demand over
the long term. Interest rates and, to a lesser extent, job formation are much
more powerful factors over the short to medium term, but both are more difficult
to forecast. Simply stated, it’s tough to build more houses than households that
are formed and expect to stay in equilibrium. So if you look at the demand side,
there are several demographers forecasting that somewhere between 1.3 and 1.6
million households will be formed annually over the next decade. This is an
increase from the prior 10 years due to the fact that echo boomers will be
entering prime headship age and strong immigration. Add to that an estimate for
net removals (through disasters like fire, hurricanes as well as dilapidation
and teardowns) plus demand for second homes, and you get total housing demand of
somewhere between 1.7 and 2.2 million units annually.
Starts peaked at almost 2.1 million in 2005, fell to about 1.8 million in 2006
and probably will be down another 20% to 30% this year. So if demand is at the
high end of that 1.7 to 2.2 million range, and current production is somewhere
around 1.5 million, you can see that oversupply should be soaked up in a
relatively short period. If demand is on the lower end of that scale, and
production rates stay where they are, it’s going to be a squishy market for
quite some time.

More here.

An interview in this week’s TWST is with Daniel Brdar of FuelCell Energy (FCEL).  The question that always interests me with any kind of alternative energy is who the customers are and how they use the products:

Mr. Brdar: From the customer side, we are fortunate to have some terrific early adopter customers who have a passion about the environment and who want to adopt a superior technology. As a result, we find a lot of those in locations like California, in Asia, where there is a lot of concern about CO2 emissions in the environment, and in the Northeast. We have customers like Sierra Nevada Brewery and Cal State Northridge, which want to be a leader in their space. Starwood Hotels is another example where they want to be green. They want to do the right thing for the environment, but they also want to save money. What we’ve been able to do was to attract some world-class partners to help us commercialize our products. So we’ve worked with companies like Chevron, Caterpillar, POSCO Power in Korea and Marubeni in Japan - very high profile strategic partners that recognize the value that our product can bring.

It’s actually part of our Industrial Electrical Report

Some  market thoughts from one of the money managers we interviewed this week.  Gerald Jordan is a theme investor who looks for 1-2 year secular themes and tries to invest accordingly.  He likes oil service stocks as you will see:

Mr. Jordan: Exactly. Our largest single theme in all of our funds is energy, specifically oil service and drilling. The oil service and drilling companies have been terrific stocks over the last six months. We think they will continue to work well here. We believe that overall global energy prices are going to remain buoyant because of many of things that most people know about, like overall demand, both domestically and internationally, particularly the international demand growth in Russia, China, India and South America.
We think those trends will continue and that overall demand growth of 1.5% per year globally will continue. At the same time, we’re depleting reservoirs that have been around for years. It’s getting harder and harder to find oil to replace the oil that we are depleting. It’s going to require far more spending to look for oil and a far greater number of rigs working at any one time. It’s a treadmill where people are going to have to run faster and faster just to stay in place. Now, whether that helps the exploration/production companies at this point remains to be seen because they are not going to see any real volume growth. Their earnings gains are going to be predominantly based on rising prices for the commodities. The reason we have biased ourselves toward oil service and drilling is because they can see prices improve and can grow units. In addition, the stocks are incredibly cheap right now. So there is a bias for a number of different groups of money managers to own these stocks.
We think the final end game is for private equity to get involved. Our largest holdings are in the offshore drilling area, and their contracts tend to be three to five years in length, making an LBO a less risky bet for private equity players. One of our largest holdings is a company called are Transocean (RIG). All of their revenues for this year are booked, 85% of their revenues for 2008 are booked, 60% are booked for 2009 and probably 35% for 2010. There are very few businesses that can say that they’ve got ironclad contracts. Recently, Devon Energy (DVN) announced that they were going to delay an exploration project in the Gulf of Mexico because of the lack of availability of rigs in the 2009-2010 time frame. That has put a bid in the stocks, but it reiterates the idea that there is going to be more and more demand for rigs in the future. Additionally, we think national oil companies are going to start to do more and more drilling, even if it means that their costs for drilling rise, because it will be in the best interest of those nations to continue to grow production, or at least keep production flat. A lot of these places are starting to see production flatter right now.

His interview is in this week’s TWST  and this is the most recent energy service issue from TWST.

His other two big themes are in a part of financial services and healthcare.