Showing posts from August, 2010

Magna Cum Laude?

CBC News reports, Magna, Stronach deal to go ahead:
Magna International said Tuesday it will move ahead with a deal worth nearly $1 billion to have founder Frank Stronach give up control over the auto parts giant.Dissident shareholders opposed to the plan have notified the Aurora, Ont.-based company that they do not intend further legal appeals, Magna said in a release.
A day earlier, the Ontario Divisional Court upheld a lower-court ruling approving the proposal. The dissident shareholders included the Canada Pension Plan Investment Board, Ontario Teachers' Pension Plan, OMERS, the Alberta Investment Management Corp. and British Columbia Investment Management Corp.They had opposed the size of the premium over the present value of the company's shares — about 18-fold — to be paid to the Stronach family trust, and argued it would set a dangerous precedent for similar, future deals in terms of the loss of shareholder value.The deal provides for Stronach to receive $300 m…

Our Ever Shrinking Pension Payouts?

Becky Barrow of the London Mail reports, Our ever shrinking pension payouts: The millions facing lowest returns on investments since records began:
Millions approaching retirement could be devastated by the worst pension payouts since records began. Despite saving the same amount of money into their pensions, they face the dire prospect of getting about half the income they would have received 15 years ago, research reveals today. It comes on top of the collapse in final salary pension schemes, with millions locked out of the best type of retirement provision. Experts said employees who want to retire are facing a nightmare which no previous generation has had to cope with. The plunge in pension payouts is because annuity rates have nose-dived. Annuities offer a guaranteed monthly income to those who have saved into a pension pot. But over the last month several major investment firms, such as Aegon, Aviva and Legal & General, have started to cut their annuity rates. Their riv…

Where We Are?

My last comment on economic hypochondria generated a great deal of anger on Zero Hedge where the comments got nasty, so I want to address some of the valid criticism.

Mr. Wesbury's assertion that the economy is "fine" is ridiculous, and I did edit my post to bluntly state this. When the official unemployment rate stands close to 10% and wider measures of unemployment are almost twice that figure, things aren't "fine".

But I agree with Mr. Wesbury that far too many people have taken gloom & doom views to the extreme, and that the US economy might be in better shape than these people are willing to admit.

Last week, the Liscio Report posted an interesting comment on their blog, Where we are?:
Here’s an updated guide to “where we are”—how the U.S. economy is faring relative to the average of previous financial crises around the world. Though individual details vary, we’re following the script pretty well.In the graphs of four major indicators (click on char…

A Bad Case of Economic Hypochondria?

Following my latest post on whether the Fed has defused the neutron bomb, a senior pension fund manager sent me a link to AXA Investment Managers' latest weekly comment by Eric Chaney, Deflation may have won a battle, but not the war.

It is an excellent read which demonstrates why any discussion on the inflation/deflation debate that doesn't take into account what's going on outside the US is missing the bigger picture. I quote the following:
Although contemporaneous estimates of output gaps are somewhat elusive, the broad picture is clear: a growing portion of the global economy is facing inflation risks and the bulk of developed economies is no longer in the deflation danger zone. This uneven dynamic distribution matters a lot for investors, who need to make up their mind about inflation. One key lesson from the past cycle is that price movements have a larger common component than in previous times; call it the globalisation factor. Matteo Ciccarelli and Benoît Mojon esti…

Has the Fed Defused the Neutron Bomb?

Bruce Friesen of Global Investment Solutions forwarded Randall Forsyth's article which appeared in Barron's earlier this week, Deflation: the Neutron Bomb of Balance Sheets:
Low interests rates have made these the best of times for borrowers but the worst for savers and investors.Blue-chip corporations never had it so good with the likes of Dow Jones Industrial Average members International Business Machines (IBM) able to issue new three-year notes at 1% and Johnson & Johnson (JNJ) paying less than 3% for new 10-year debt.But these historically low bond yields have a darker side: According to a new report from Fitch Ratings, ultra-low interest rates will exacerbate the underfunding of many U.S. corporations' pension plans. Just as with American workers who have failed to save enough for retirement and have seen their assets lose value, companies also will have no choice but set aside more of their earnings. And just as that means belt-tightening for consumers, it…

Public Pensions and California's Fiscal Future

Governor Schwarzenegger wrote an op-ed piece for the WSJ, Public Pensions and Our Fiscal Future:
Recently some critics have accused me of bullying state employees. Headlines in California papers this month have been screaming "Gov assails state workers" and "Schwarzenegger threatens state workers."I'm doing no such thing. State employees are hard-working and valuable contributors to our society. But here's the plain truth: California simply cannot solve its budgetary problems without addressing government-employee compensation and benefits.As former Speaker of the State Assembly and San Francisco Mayor Willie Brown pointed out earlier this year in the San Francisco Chronicle, roughly 80 cents of every government dollar in California goes to employee compensation and benefits. Those costs have been rising fast. Spending on California's state employees over the past decade rose at nearly three times the rate our revenues grew, crowding out prog…

Pension Ponzi Scheme $16 Trillion Short?

Laurence J. Kotlikoff, professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking”, wrote an op-ed piece for Bloomberg, Retiree Ponzi Scheme Is $16 Trillion Short:Social Security just celebrated its 75th birthday. Love it or hate it, it has done its job and should retire. We need a new system, the Personal Security System, which retains Social Security’s best features, scraps the rest, and covers its costs. Social Security’s objective -- forcing people to save for retirement -- is legit. Otherwise millions of us would seek handouts in our old age. But Social Security has also played a central role in the massive, six-decade Ponzi scheme known as U.S. fiscal policy, which transfers ever-larger sums from the young to the old. In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain le…

TRS Responds to "Death Spiral" Comments

In response to my last comment on whether pensions are the next AIG, Dave Urbanek, Public Information Officer at the Teachers’ Retirement System of the State of Illinois (TRS), sent me this message:
Please remove your post of Tyler Durden’s inaccurate analysis of the Illinois Teachers’ Retirement System. It is not excellent. It is wrong.TRS is not in a death spiral. We’ll still be operating and paying pensions for years to come.
We could potentially sell $3 billion in assets if the Illinois General Assembly does not come up with its annual contribution to TRS. The state owes us $2.35 billion. Two other state pension systems are also selling assets until the state makes its payments to them. That is the only reason we are selling assets.
We are not selling assets because we are on the risky side of any investments, as Mr. Durden claims. Here are the facts: We could potentially sell $3 billion in assets. Last year our investment income totaled $4.6 billion – a 13 percent retu…

Are Pensions the Next AIG?

Tyler Durden of Zero Hedge posted an excellent comment, Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations.

I quote the concluding remarks, but it's worth reading the entire comment:
Alas, at this point it is too late: for TRS, and likely for many, many other comparable pension funds, which had hoped that the Fed would by now inflate the economy, and fix their massively incorrect investment exposure, the jig may be up. As liquidations have already commenced, the fund is beyond the point where it can "extend and pretend", and absent the market staging a dramatic rally, government bonds plunging, and risk spreads on CDS collapsing, the fund is likely doomed to a slow at first, then ever faster death.

Then one day, Goldman's risk officers will call the TRS back office, and advise them that due to its "suddenly riskier profile" established in no small part …

Financial Retraction Ahead?

James Mackintosh of the FT reports, Wolf’s frustration bodes ill for investment flock (HT: Pierre):
Stanley Druckenmiller, one of the masters of the investment world, this week announced his retirement saying that he had become frustrated over the past three years with his inability to make outsize returns.

After 30 years running Duquesne Capital Management – while also spending time with George Soros, when he helped make $1bn on Black Wednesday by forcing the pound out of the European exchange rate mechanism – he is due some quality time with his fortune.He is not, however, alone in his frustration. Fellow managers of “global macro” hedge funds, which bet on currencies, bonds and equity markets, have been having a rough time this year. In theory, the wild swings in the value of the main currencies and dramatic shifts in government bond yields should be the perfect environment for macro managers.In practice, it turns out that even the smartest investors find these markets ha…

Welcome to the Wolf Market?

A couple of interesting articles appeared this Sunday. Graham Bowley of the NYT reports, In Striking Shift, Small Investors Flee Stock Market:
Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market. Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds. If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked. Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday. One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their ow…