The Haiku of Finance for 05/17/14

Pension fund smoothing
New York deferring payments
Workers will get less

The Haiku of Finance for 12/04/13

Finally bankrupt
Broke city can wipe slate clean
Rebirth of Detroit

The Limerick of Finance for 10/06/13

The end of the old pension plan
Find a new job when you're an old man
City budgets in stress
Big debts are a mess
Future payments will fill a small can

Financial Sarcasm Roundup for 08/19/13

This particular roundup goes out to the moron who accused me of slandering him online after I was generous to him at a conference.  I didn't slander the guy; I insulted him.  He's too dumb to know the difference.  My sarcasm is meant for stupid losers just like him.  

BofA is legally assimilating Merrill Lynch.  This is one more nail in the coffin for those Merrill loyalists who thought their former parent would eventually be spun out.  BofA got a pretty raw deal when it was talked into saving Mother Merrill during the 2008 crisis.  It just goes to show how easily investment bankers can outwit commercial bankers in deals.  

Greece's debt holders no longer need to fear haircuts.  Germany is backstopping the hedge funds that hold Greece's post-bailout sovereign debt.  Someone at Davos must have made an algorithm-laden threat at the CDS spreads of leading Germany companies.  Germany's public statements on Greece are no longer reliable.  Frau Merkel is bending with the trans-Atlantic consensus that quantitative easing is good enough.  

The tech sector is slumping.  I got the impression from keynoters at several enterprise IT conferences that the tech sector has been having an increasingly difficult time lately squeezing additional margin out of services.  That's one reason why they're pushing cloud so hard.  The tech slowdown also indicates that social media has reached saturation and cheaper smartphones will add less to bottom lines.  You tech people need to go back and read everything I've blogged about enterprise IT, "innovation premiums," and overpriced smartphones to see how your darling business models are turning out.  There's still lots of room for disruption within inefficient IT models and tech providers know it.  

Major energy producers are buying less land for shale exploration.  The hot air is slowly escaping from the shale balloon because shale drilling is a victim of its own success.  The booms in North America have flooded the markets with so much cheap natural gas that there's little point in drilling for more.  This tempts me to look into natural gas royalty trusts to see which ones are undervalued.  

Pension funds are cutting out their middlepeople.  Investing by committee is a great way to underperform the broad market but the investment committees at plans and endowments are determined to keep doing it.  The dumb money is not going to get smarter but at least they'll be saving money on fees.  This development is good news if it forces underperforming hedge funds and private equity firms out of business.  

Financial Sarcasm Roundup for 08/05/13

I don't follow pop music, movies, celebrity gossip, or other nonsense.  Plenty of other snarky sites cover those subjects.  This is financial sector sarcasm, folks, plus whatever else I see about business that makes me shake my head.

Uncle Sam is finally overcoming local NIMBYism in renewable energy development with BOEM's first ever lease sale for an offshore wind farm.  The main obstacle to these types of deals has typically been small groups of well-heeled locals who don't want their ocean views ruined.  Let's play the world's smallest violin for these saps.  I hope they have hissy fits the next time they settle into their breakfast nooks and peer out their bay windows at brand new wind farms.  Smart energy policy eventually bets parochialism but you have to give it a few decades.

Michael Dell almost has his computer company back in hand but Carl Icahn isn't giving up his fight for control.  I respect Mr. Icahn's track record but this is one deal he just needs to walk away from.  He's already hurting the company by forcing Michael Dell's team to pay out an extraordinary dividend just to convince shareholders to approve the buyout.  The company could have used that cash productively but oooohhhh nooooo, the buyout king just had to extract one more pound of flesh.  

The Amazon guy bought the Beltway's main gossip rag.  There has to be a hidden agenda.  No way is an e-commerce visionary going to run a printed newspaper the old-fashioned way.  Warren Buffett praises Jeff Bezos' business acumen even though Amazon's net income turned negative after three years of rising revenue.  I suspect WaPo will soon be an online-only news outlet to compete with the Huffington Post, another overrated digital portal.  

Did you know that you won't be getting much of a pension if you're a municipal government employee?  Well, now you do, and you can thank chronic underfunding.  City workers in Vallejo, Stockton, and Detroit can pioneer new odd jobs after hours that other government employees can copy nationwide.  Of course, you would have known this if you'd been reading my blog for a couple of years.  

Speaking of odd jobs, a few idiots who've been ripping off the San Francisco veterans' community really ought to find more honest lines of work.  They'll need to earn cash to cover their legal fees.  

Eminent Domain as Nightmare Fulfillment of Unfunded Public Pensions

Detroit's bankruptcy filing is making many other municipalities nervous about their unfunded liabilities for retiree pensions and benefits.  A drawn-out bankruptcy fight will be a nightmare for politicians who stake their reputations on good governance and successful turnarounds.  Government retirees are still a potent political force and will fight in court for what they think they deserve, regardless of the fiscal harm they cause.  States will sell assets to settle their debts if public employee unions do not willingly take cuts in promised benefits.

I do not know whether the Michigan State judge's injunction against Detroit for filing bankruptcy will be overturned by a federal court.  Bankruptcy law is rarely exercised for municipalities so any new case law will set clear precedents for whatever bankruptcy wave is coming.  There is plenty of precedent for one extreme measure that municipalities may consider if their backs are against a fiscal wall.  That would be the seizure of private assets under eminent domain whose resale will make municipal bondholders and pension recipients whole.

This nightmare scenario could easily unfold if state and local politicians believe fighting public employee unions in court will harm their re-election prospects.  The US Constitution prohibits the government from taking private property without just compensation but legal history leaves the definition of "just compensation" to state and local governments.  Consider also that property owners who endure a taking under eminent domain may be compensated in the form of a "condemnation award."  I'm not an attorney, but I'm under no impression at present that such an award absolutely must be in the form of cash or in-kind property.  My nightmare is that private property owners in Detroit or elsewhere may see their land seized and businesses condemned with their only "just compensation" as some new non-marketable junior security issued by a broke municipality just for such an occasion.  The IOU would of course be worthless but the property seized would be sold to other parties (presumably with political connections) and the proceeds used to fund pension liabilities.

Consider also that the people charged with enforcing this confiscatory doctrine - police, judges, government clerks - are all beneficiaries of this process if they depend on defined benefit pensions.  Their interests would theoretically align with fulfillment of a strict interpretation of contractual obligations outside of federal bankruptcy proceedings and against the interests of taxpayers and private property owners.  Finally, consider that legal precedent also allows the taking of personal property and intangible property.  I do not see any legal barrier to the confiscation of privately held liquid investments such as brokerage accounts or bank accounts.

This is a thought piece that I very much want to be invalidated.  I truly want Detroit to have a successful restructuring through federal bankruptcy proceedings that are unencumbered by state-level judicial maneuvers.  I do not at all look forward to the depressing prospect of desperate politicians, backed up by destitute law enforcement officers and government functionaries, confiscating private assets under eminent domain just to placate some very vocal unions.  I want to be wrong about this prospect.  I would like bankruptcy attorneys and legal scholars to debate this scenario in the public sphere and prove my concerns to be unfounded.  

Advisors Add Little Value With Higher Fees or Smaller Clients

My loyal readers know that I used to be a financial advisor.  No one wanted to pay for my advice or trust me with their assets.  I have often wondered why some investors pay "professionals" who abuse their trust and underperform benchmarks.  Some investors are just stupid, and their trusted advisors are just crooks.

The financial advisory profession is increasingly throwing away smaller investors.  Advisors make little money from smaller accounts and believe they seldom grow into larger accounts.  I saw this attitude a lot in the office where I worked.  Top-producing brokers considered non-millionaire clients to be worthless and several layers of management discouraged new advisors from pursuing such prospects.  I would have loved to have had a bunch of six-figure net worth clients just to prove that someone considered me trustworthy.  "Trust" in finance means a verifiable track record of work, no matter how unfavorable the result of said work.  Smaller investors just won't timely service or good advice from full-service firms anymore because their advisors want them to go away.

It's no prettier at the institutional end of the advisory spectrum.  A Maryland study of state pension funds shows that plan sponsors are overpaying and getting poor performance.  The higher the fees they pay, the worse their returns.  These clients are not amateur investors with $100K in assets that advisors don't want.  No ma'am.  These are retirement plan sponsors with tens of million of dollars in assets to manage.  They've been screening advisors for years using very detailed investment strategies.  They still get ripped off by professional advisors who can't outperform benchmarks.

The shop talk around the offices of institutional investment managers is much the same as it is in the retail wealth management world.  I worked for a large institution that specialized in managing retirement plan money.  The team leads in the client relationship management division were just as arrogant and clueless as top-performing wealth managers.

None of the pros are looking out for investors.  It doesn't matter whether they say they are.  Some clients are stupid and some fiduciaries are crooks.  The rest of both groups may just not know enough or care enough to do the right thing.  That's why it doesn't bother me that none of them want anything to do with me.

Financial Sarcasm Roundup for 12/26/12

It's one day after Christmas and I'm not any less sarcastic than I was yesterday.

The fiscal cliff is approaching and the relevant parties just can't stop launching trial balloons to impress the folks back home.  Both parties want to lower corporate tax rates in the name of competitiveness.  There's no way such a complicated reform will get done this year but that won't stop the preening and posturing.  Lowering the corporate tax rate while eliminating deductions probably won't raise revenue but it will make CFOs' jobs easier, so maybe some grateful corporate treasuries will step up their giving to super-PACs.

Japan is going nuts.  Their ruling political coalition has voted specifically to destroy the yen with monetary stimulus.  That's like putting some anemic patient on a cocaine diet in the hope that it will accelerate their metabolism.  Forget about structural reforms.  I'm so glad I don't own Japanese stocks or yen.

Some New Jersey union pension fund is suing to block the NYSE-ICE merger.  Come on already.  They should be grateful anyone wants to buy an American exchange at what is likely the high point of the U.S. equity market.  That means ICE is probably at its high-water mark too, and competition from dark pools and internal crossing networks make this merger all the more fortuitous for both exchanges' shareholders.

Here comes the mother of all re-fis.  The Administration is considering a refinancing handout to even more borrowers, along with nationalizing the rest of the secondary mortgage market.  I knew all along that Washington was going for it but it's still thrilling to see my suspicions confirmed in print.  I invite my readers to search my blog articles throughout 2011 and 2012.  You'll find several articles where I propose that large-scale mortgage modification programs would be a transmission mechanism for a wage-price spiral if the federal government flooded them with cash.  If this latest policy boondoggle is enacted, the necessary mechanism to launch hyperinflation will be in place.

The primary Treasury dealers are dumber than ever.  They're hoarding bonds and reducing sales to the Fed. This is the wrong thing for a dealer to do with the U.S. bond market at an all-time high.  The smart thing to do is unload winning positions onto the last sucker in the room - the Fed, of course - and shift the bank's business lines into things like non-dollar debt from emerging markets.

Shoppers didn't come through for retailers this year.  I've been waiting for a downturn in retail activity and this one's been a long time in coming.  Better late than never.  The average American probably has enough unused stuff in their closets and storage sheds to equip several emerging market households, and yet buying more stuff is in our cultural DNA.  The silver lining to any hyperinflationary period is that ordinary folks will be cured of their impulse to consume with abandon.

Finally, the SEC gets my Alfidi Capital award of the day (okay, there's no such thing but it sounds generous) for innovation.  The agency charged with regulating our capital markets is finally acquiring a system that allows it to watch the capital markets.  Funny, I've been using ordinary financial websites and online brokerages for almost two decades.  In true government contracting fashion, they bought a complete system rather than subscribe to terminals and feeds from Bloomberg and Dow Jones.  I recall reading during the financial crisis of 2008 that the Treasury Secretary had the ability to monitor credit markets in real time from his desk.  I don't have to name the Wall Street players who have a vested interest in the keeping the SEC blinded, in exchange for future private employment for the agency's top investigators.  In that context, I expect the SEC's new market monitoring system to work exactly as intended, especially since initial access to the system will be limited to a handful of people.  Read between those lines.

Cerberus Makes Hasty Exit From Freedom Group

Investment decisions should always take fundamentals into account.  I say "should" because sometimes a portfolio manager's fiduciary duty to satisfy a client's whims take priority over a sound investment in a healthy, market-dominant company.  Cerberus is selling its stake in Freedom Group because that will satisfy CalSTRS' demands.  This decision has nothing to do with whether the investment in question has been a winner.  The chief product of this particular sector has seen record-breaking sales in 2012.  Cerberus is a middle step between institutional investors and the capital markets.  It has to pay as much attention to future rounds of fundraising as it does to the performance of present holdings.  Satisfying CalSTRS now assures a future audience for Cerberus' fund offerings.

Some investors let emotions rule their thinking.  Big news events that hit close to home have an impact that financial models can't measure.  Bad news about one school can upset teachers anywhere, and their plan sponsors' money managers are paid to listen.  A state pension plan forcing its money manager to leave a healthy firm should be able to explain to its pensioners why it won't be able to pay their benefits if it can't achieve its target discount rate.

Full disclosure:  No positions in entities mentioned.

Machinist Union Strike Bodes Poorly For Lockheed

The machinist union at Lockheed Martin has voted to strike.  The company's offer to line out the defined benefit pension for new hires was a red line the union couldn't cross.  That's too bad, because the future of defense companies like Lockheed depends very much on keeping pension liabilities down in the face of declining defense budgets.

This particular strike will very likely cause a work stoppage at the primary assembly facility for the F-35 fighter, Lockheed's bet-the-company cash cow for the next three decades.  This troubled program somehow survived a Nunn-McCurdy breach that should have caused dramatic changes to the platform.  The plane has already cost at least 50% more than originally planned and now work will be delayed for weeks by this strike.

Multirole fighters were affordable when their structural engineering and avionics were simpler.  Reconfiguring multiple systems several times for the same airframe, including for a VSTOL version, has not proven to be the cost-saving procurement method originally promised.  No one at DOD seems to care.  That's too bad, because the federal government's eventual budget cliff-dive will render it unable to pay for its most coveted legacy weapon systems or backstop the losses of its prime contractors.  The striking machinists need a plan B.

Full disclosure:  No position in LMT at this time.  

Defense Contractors At Risk From Pension Obligations

Moody's is saying that America's leading defense contractors are at risk from underfunded pension plans.  There is little comfort in arguing that contractors' ability to bill the government for their pension gaps will reduce the risk to their balance sheets or credit ratings.  The government's ability to pay any unanticipated pension shortfalls is limited by the total appropriations for a given fiscal year.  DOD's typical practice is to reduce Operations and Maintenance spending when it finds contingency-driven costs exceeding budgeted estimates.  Paying such a sudden request for pension shortfalls will force DOD to rob money from O&M accounts even earlier in a fiscal year than it already does.  This will place any contingency operations at serious risk and force DOD to seek even more frequent supplemental appropriations throughout the year.

This unheralded DOD accounting change will add a measurable burden to the federal government's already large unfunded liabilities.  The defense industry lobbyists who pushed for this change shouldn't gloat.  Any acceleration in the U.S. government's default/hyperinflation inflection point accelerates the day when defense contracts will be paid in hyperinflated dollars or go unfunded altogether.  The defense sector has gained hypothetical relief for its balance sheet and credit rating pressures in the face of an oncoming fiscal train wreck.  

The Haiku of Finance for 02/08/12

Greece blows off reform
Only one sticking point left
Pensions must be cut

Fed Study On Demographics And Markets Ignores Boomers' Lack Of Savings

The Federal Reserve's economists can be counted on to provide food for thought.  The downside is that they sometimes only cover half the story.  The San Francisco Fed recently published an Economic Letter comparing age demographics to stock market returns.  The theory is sound; after all, prices for stocks are driven as much by demand for investment and the supply of shares available as any other marketable good.  One major problem with this study is that Boomers may not have enough invested in the stock market to make withdrawals on a scale that will depress market returns. 

This study assumes that Boomers' retirement assets are significant enough to move the market upon conversion to cash.  Evidence of Boomers' savings do not support this assumption.  More Americans than ever before have negligible to zero retirement savings.  One quarter of all Baby Boomers are totally without any retirement resources at all. 

Perhaps the other three-quarters of the Baby Boom generation will be the ones depressing the stock market with their withdrawals.  All it would take is for them to figure out how much to withdraw.  Most Baby boomers don't even know how to plan for their needs in retirement.  There is no way they can estimate how much of their portfolios they'll have to liquidate. 

The Fed economists may be correct, but we are equally likely to stumble into a chaotic period where stock market prices remain the plaything of central bank monetary experiments.  Retirement assets that are out of individual investors' control - like 401(k) plans and public employee pension plans - may be subject to nationalization and confiscation if a dollar collapse forces the U.S. government to repay its foreign creditors in desperation.  If that happens, stock prices may not be hurt all that much if equities are surrendered to the Chinese central bank as payment in kind for U.S. Treasuries.  A collapsing dollar would prompt the Chinese to demand progressively more equities in exchange for Treasuries sinking in value as a dollar crisis progresses.  It seems that such demand would sustain U.S. equity prices in the face of Boomer withdrawals, negating the Fed researchers' conclusions. 

Follow this think-piece to its conclusion.  China will end up owning the U.S. stock market and Boomers who haven't saved will "withdraw" devalued U.S. Treasuries from what remains of their former employers' sponsored plans.  See, it won't be so bad after all. 

State Pension Plans And Hedge Funds Make Us All Miserable

Well, my evening is hereby ruined.  I was planning to have some fun watching videos of dancing cats or some such aimless baloney, but I had to go scanning financial headlines first.  It's a habit I just can't break.  Today I scanned some headlines that indicated I would be just miserable if I kept on reading.  Now I can share my misery with my readers.   

Let's read about desperate state pension fund managers drastically increasing their bets on hedge funds.  They feel compelled to roll the dice, swing for the fences, and do whatever it takes to increase their chances of meeting impossibly high discount rates that will fund future payout liabilities.  I stopped rolling my eyes long ago whenever I heard hedge fund managers spout their sales mantras of "equity returns with bond risk."  That kind of nonsense unwound many a hedge fund in the liquidity crunch of 2007-2009 and only the Fed's easy money policies saved the remainder. 

If reading about stupidity in finance doesn't make you miserable, paying higher taxes to fund it certainly will.  State and local government pension funds are so underfunded that the tax increases needed to save them will destroy taxpayers.  Let this sink in.  The extra taxes needed to maintain upper middle class lifestyles for municipal employees will eliminate the rest of the middle class within one generation. 

The easy fix is to eliminate defined benefit plans for government workers and pay out pensions that funds can support today, at sustainable levels, until they can be phased out in favor of defined contribution plans.  Nothing in government is that easy.  That means we'll do things the hard way with municipal bankruptcies, shutdowns of vital public services, and/or confiscatory levels of taxation. 

There you have it.  Now I hope you're all as miserable as I am for seeing once again just how much pain America is about to take thanks to its legions of useless professional money managers.  Misery loves company.  I also love keeping company with attractive women but there aren't any within arm's length right now.  That makes me even more miserable. 

YRCW Teamsters Scrape Out Pension Contributions After All

So this is what the fuss was all about.  YRCW is still losing money and yet resumes contributions to the Teamsters' pension plan instead of focusing its cash on operations.  Contributing $21mm per quarter is a meaningful chunk of the company's current burn rate and is precisely 21% of the new capital they are supposed to arrange from restructuring their debt.  The Teamsters never took their eyes off the prize; by agreeing to a debt restructuring, they ensured they would be able to further pillage the company of cash while it continues to spiral down the tubes.  Greed wins again. 

If the company had chosen to file for bankruptcy months ago, it could have torn up that horrendous agreement with the Teamsters and start fresh with a new agreement giving them exactly zero pension contributions.  That is now a missed opportunity and YRCW's other creditors will be poorer for it. Trucking companies with their eyes open can now see exactly what happens when union members get board seats.  The unionized workforce will always put its own needs ahead of the company's, even at the risk of their employer's survival.  Heads up, Arkansas Best (ABFS) . . . you could be next.

Full disclosure:  No position in YRCW or ABFS.  I have better places to put my capital to work than in unionized companies. 

YRCW Teamsters' Pension Benefits Cut By Older Teamsters

When a ship is sinking, the crew can either band together to save it or crowd into whatever lifeboats remain.  In the case of YRCW, it looks like senior Teamsters had their lifeboats prepared well in advance at the expense of their younger brethren.  The Central States Pension Fund is cutting benefits available to YRCW employees.  It's worth noting that not all Teamsters will share the pain.  Younger retirees are the ones seeing their pensions capped, while older retirees will still reap full benefits.  Younger pension plan beneficiaries are thus subsidizing the full benefits of their older counterparts while paying the exact same dues for union membership. 

Teamsters under the age of 55 need to think long and hard about the representation they're getting.  Why pay union dues if all you get for this privilege is to see older union workers take your pension?  There's a good topic for discussion at the next all-hands meeting. 

Teamsters Ready To Pull Trigger On YRCW Pension Default

Poor YRC Worldwide.  They just can't catch a break lately.  First their CFO quits, and now their unions demand interest payments that will immediately trigger the bankruptcy of the company if enacted.  The company's other creditors won't put up with these games forever.  No one has unlimited patience when dealing with unions, but now that Teamsters are getting YRCW board representation they will have the opportunity to test the limits of such patience. 

YRCW's survival is now clearly in the hands of its Teamsters.  If they are selfish enough to demand a higher interest rate on their deferred pension contributions, the company will fail and they will get little or nothing.

Teamsters, think hard about what you're about to do to yourselves.  Think very, very carefully about the imminent consequences of your greed and inability to think long-term.  The survival of your employer depends entirely on whether you're not collectively stupid enough to demand something you have no hope of receiving. 

Full disclosure:  No position in YRCW at all.  Ever. 

The Haiku of Finance for 03/04/11

Pension fund shortfall
One point five trillion dollars
That is one big gap

San Francisco Blockbuster Pension Bonus

Leaving pension decisions to voters may not be any wiser than leaving them to fiduciaries.  San Francisco voters agreed in 2008 to tie increased pension contributions from new hires to an increased payout for current retirees, provided the pension fund performed well.  The fund rocketed higher thanks to the bailouts and stimulus spending that have inflated asset values of late.  The new problem is that SF's pension plan is now massively underfunded in regards to future liabilities:

As San Francisco struggles under ballooning pension and health care costs, the city’s retirees will receive unexpected cost-of-living bonuses totaling $170 million. The city’s anticipated budget deficit for the coming year is $360 million.

Current retirees can thank new hires for this one-time intergenerational transfer of wealth.  Think of it as a reverse inheritance not based on familial ties. 

My fellow residents of The City and I will be paying more in sales taxes to receive fewer municipal services thanks to this budget blowout.  This is the kind of dilemma that has set the stage for municipal bankruptcy warnings, and San Francisco is not immune from the same troubles that sent the city of Vallejo into financial trouble.  Persistent deficit spending and unfunded pension liabilities destroy the status of muni bonds as safe havens for wealth preservation. 

The solution to unintended consequences like this is to take pension formulas out of the ballot box and defined benefit structures out of pension plans.  Investment managers may not be able to predict market returns, but they should be able to match liabilities to returns if they are not hamstrung by arbitrary payout requirements.  If their fund performance can't support a given payout level, then the payout will not occur and retirees will have to live with what their accumulated account can support.  That's what private sector 401(k) investors have to do.  Public sector employees should get the same deal. 

Full disclosure:  I do not own San Francisco municipal bonds. 

Broken Pension Plans Magically Fix Themselves

Let's take a fun trip through the looking glass into never-never land over the rainbow, or some such nonsense.  Oh, the agony of pension fund managers who watch their unfunded liabilities gradually grow larger, unabated:

Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.

Whatever shall we do?  Fear not, my dear.  We can always borrow the money to fill up the pension plan . . . er, from our pension plan:

Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. 

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

If any of the above sounds like a good idea to you, I must congratulate you for getting the quality of government you deserve.  This fun fairy tale is par for the course in economically illiterate America.  It's certainly fun reading.  My highly intellectual regular readers will of course see right through this shell game. 

If you're counting on a public pension to be there for you in any significant way, you need to stop counting.  Many Americans can't count anyway thanks to those very same public employees teaching in public schools.