Unprepared Americans Face Economic Annihilation

Too many Americans - particularly Baby Boomers - have saved very little capital for their retirement years:

The prolonged recession is making it harder for many workers to set aside money for retirement.

A new survey released Tuesday by the Employee Benefit Research Institute shows the percentage of workers who say they've saved for retirement slid to 69 percent in January, down from 75 percent in 2009.

Perhaps more alarming is the increasing number of workers who say they have little or no retirement savings.

More than a quarter of those surveyed said they have less than $1,000 set aside. That's less than a mortgage payment for many homeowners.

I can think of several factors that contribute to this predicament.  Yes, we all know the stock market has hurt the balances of most investors' 401(k)s and IRAs.  A larger contributing factor is probably the psychology of the Baby Boomer generation.  Their mantra in the 1960s was "live for today" with no thought for tomorrow.  Tomorrow has now arrived and former hippies find themselves unprepared.  Maybe the money they spent on pot and acid in the early 1970s should have gone into the stock market. 

There's another force hurting Americans:  their mortgage payments.  Check out the hint in the article that $1000 is less than many homeowners' monthly mortgage payment.  The so-called dream of homeownership - sold to naive Americans by an army of realtors, homebuilders, and bank loan departments hunting for commissions - has enticed people to buy houses that were larger and more expensive than they could afford.  Money they should have saved for retirement instead turned into negative equity on homes destined for foreclosure. 

A final contributor to the impoverishment of many soon-to-be-seniors is the boodoggle known as Social Security.  The massive unfunded liabilities in that entitelment program are well documented, but the damage it has done and will do to America go far beyond actuarial results.  The mere existence of this program for three generations has subtly taught many Americans that they don't have to rely upon themselves for financial security.  Instead, they chose to rely on empty promises from a government program that will be insolvent just when they need it most. 

I have relied on myself throughout my working life, even at those times when I was a hostage to the whims of incompetent supervisors and derelict employers.  I now have enough of a pile to survive indefinitely as long as I don't go into debt or do something stupid.  There's a lesson there somewhere.  What could that be?  Oh, yeah, I know:  save and invest as much of your income as possible starting on the first day of your working life. 

Terra Industries Buyout Approaching Endgame

Terra Industries (TRA) has been a takeover target since last fall when CF Industries (CF) made its initial offer of $24.50 (net of a proposed special dividend) per share.  That offer was later superseded by an offer from Norway's Yara for about $41.10 per share.  CF raised its offer last week to the equivalent of over $47 per share in what appears to be its final play for TRA. 

The best time to execute a merger arb trade on TRA would have been last week before CF's latest offer.  Now TRA trades at over $45 on speculation that they will abandon their agreement with Yara and seriously consider the new CF offer.  That is unlikely, as the appeal of CF's bid is contingent on CF's stock remaining high (one tenth of a CF share is part of the offer for each TRA share).  IMHO the speculation on a new deal is unfounded.  TRA will likely go with the "bird in hand" and stick with its agreement to sell itself to Yara.  Any investor buying TRA over 41 is probably throwing money away. 

Nota bene:  Anthony J. Alfidi has no holdings in TRA, CF, or Yara at this time.

Pushing Pension Plans Into Bad Banks

Pension plan adminsitrators have plenty to worry about between sub-par returns, unfunded payout liabilities, and illiquid assets stuck in their portfolios.  Now they're being urged to compund past mistakes with even more stupidity:

U.S. regulators are encouraging public pension funds that control more than $2 trillion to inject capital directly into the banking system by buying failed lenders, said people briefed on the matter.

This IMHO is a poor plan to "get back to even," something many financial commentators are urging retail investors to do.  Getting back to even for most investors who've lost money since the market peak of 2007 really means increasing one's risk appetite.  That is probably unwise given the bubble-like rise in equities since March 2009.  The FDIC, apparently running out of options after asking banks to prepay three years' worth of insurance fees, has hit on this plan as a way of forestalling the pending collpase of troubled regional banks without resorting to another TARP. 

Pension plan administrators may not be the sharpest tacks in the drawer.  Many of them followed the Yale model over a cliff; after all, the smartest guys in the Ive League were doing it and no one wanted to miss out on a hot hand.  They will continue in this tradition if they follow the FDIC's urging to put their capital into banks sitting on CRE debt waiting to blow up.  The last paragraph of the article cited mentions that distressed bank investors often end up on the hook for writedowns of bad loans.  I have no idea how pension plans will explain that to their retirees.  That's why I'm not buying stock in any shaky banks. 

The Haiku of Finance for 03/07/10

Popping bubble loans
Deflate the desire to lend
Guarantee no more

Popping Chinese Bubble Wrap

When you were a kid, did you ever enjoy popping the bubble wrap that came with whatever new household appliances your parents bought?  I sure thought it was a hoot to make all those popping noises and irritate my family members.  It's even more fun when you grow up and get to pop a whole bunch of bubbles in localized loan portfolios:

China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.

China's national leadership is taking a bold step that America's leadership is unwilling to take.  Our state governments are very dependent on federal matching funds to fill gaping holes in their budgets (see my last post on California's budget woes).  China's recognition that it has pumped too much stimulus juice into its economy will be painful to experience firsthand, but afterwards their economy should be cured of any hunger for more unproductive lending.  Wringing bad debt out of an economy is a healthy step.  China will emerge from this recession stronger than the U.S. because of this action.

Our own leaders won't pop their bubble wrap, but they certainly act like children.

LTL Trucking Running On Flats

The trucking industry's Achilles heel is the cost of fuel.  Check out how the high cost of gasoline, plus the recession's effect on freight delivieries, is delivering a crushing blow to trucking revenues:

The less-than-truckload industry shrank 24.4 percent in 2009, as total U.S. LTL revenue plunged from $33.3 billion to $25.2 billion, according to an industry study.

The recession triggered by the 2008 global financial crisis spurred the worst decline in freight revenue in several years, the study by SJ Consulting Group revealed.

Long-haul truckers that have trouble consolidating deliveries will continue to struggle.  One trucking firm I like to follow, Landstar System (LSTR), was not immune from this revenue plunge.  LSTR's revenue plunged 24% in 2009, in line with the industry total mentioned in the article.  The good news is that LSTR's retained earnings continued to grow in 2009.  I like that.  I'll have to take a closer look at LSTR next week.

Nota bene:  Anthony J. Alfidi has no position in LSTR at the time this post was published.

U.S. Headed In Greece's Direction

Greeks have lately taken to the streets to protest austerity measures that are absolutely necessary if their country's government is to avoid insolvency.  The U.S. is now beginning to experience the same phenomenon:

Anger over increasing tuition and school budget cuts boiled over as students across the country staged rowdy demonstrations that led to clashes with police and the rush-hour shutdown of a major freeway in California.

I had the misfortune to be on a Muni train in San Francisco with some protesters yesterday afternoon.  They were all college kids headed to the Civic Center to voice their displeasure with state budget cuts.  Generation Z has been told that they deserve to have everything handed to them, and now they're up in arms that "entitlements" like four years of susbsidized drinking are about to be ripped from their hands.  I felt sorry for them as I watched them flood out of the train.  None of them have a clue about the budget train wreck awaiting California.  None of them have any alternative ideas for keeping state colleges funded.  None of them will likely be able to make full use of their degrees in sociology, psychology, political science, media studies, gender studies, ethnic studies, nonsense studies, useless studies, and crapology in the years of underemployment awaiting them after graduation. 

I'd suggest that these kids digest James Altuscher's recent article on how a college education has become a poor investment.  He's absolutely correct.  Hey, Gen Z:  Quit wasting time protesting and go learn a skilled trade making something useful.  It will pay off for you much more than your bachelor's degree ever will.

The Haiku of Finance for 03/05/10

Jobless report out
More permanent jobs go temp
Still tough to find work

Unemployment Posts Positive Surprise

My headline may be a bit disingenuous.  The financial blogosphere was expecting this week's unemployment report to be a massive disappointment to the downside.  The fact that the numbers were little changed is an encouraging sign:

Nonfarm payroll employment was little changed (-36,000) in February, and the unemployment rate held at 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction and information, while temporary help services added jobs. Severe winter weather in parts of the country may have affected payroll employment and hours; however, it is not possible to quantify precisely the net impact of the winter storms on these measures. For more information on the effects of the severe weather on employment estimates, see the box note at the end of the release.

The fall in construction employment is not surprising.  Big drops in existing home sales this year translate into even lower demand for new homes from homebuilders.  The increase in temp employment, as the press release notes father down, reflects cutbacks in hours worked by employees who previously worked full time.  That means consumer demnd will continue to be slack for some time until prospects for permanent employment improve.  This is not good for the prospects of long-term recovery.

Mr. Market is happy that this news is not as bad as expected.  Getting a bull market restarted will take reports that are a lot better than this one. 

Merck KGaA Makes Merger Maneuver With Millipore

Merck KGaA (that's the original German Merck, not to be confused with the U.S.-based Merck trading as MRK) has offered $107 cash per share for Millipore (MIL) to beef up its life sciences product line.  MIL currently trades at a P/E over 33, which looks expensive until you compare it to the average P/E of 37 for the entire medical instruments and supplies industry.  MIL's results also look better than average:  its ROE of 12.73% beats the industry's 9.8%, and its net profit margin of 10.31% surpasses the industry's 8.4%. 

However, MIL trades far in excess of P/Es of direct competitors like Alcon (ACL) at 24, Baxter International (BAX) at 16, or Covidian (COV) at 27.  Merck is paying this premium to earnings presumably because MIL's product line fits its own strategy well.  Would other acquisition targets be superior fits for Merck KGaA?  The firms named above have far larger market caps, so Merck KGaA is playing within its league by acquiring MIL. 

Nota bene:  Anthony J. Alfidi has no position in MIL, MRK, Merck KGaA, or any other company mentioned at the time this post was published. 

Coca-Cola Plans Sweet Combination With CCE

Coca-Cola (KO) and its largest bottler, Coca-Cola Enterprises (CCE), are planning a complicated merger.  CCE's current shareholders will receive a $10 cash payment per share in exchange for new shares in the part of CCE that will retain control of its European bottling operations.  If CCE's price remains near $25, as it has in recent days, the $10 payment will result in an ex-dividend adjusted share price around $15 for the "new" CCE after the transaction closes.  Shareholders should find this acceptable provided CCE can successfully institute its planned $1B share repurchase and proposed $0.50 annual dividend (an increase from the current $0.36 dividend).  Note that the transaction's announcement qualifies this plan by making it subject to funding from continuing operations. 

Furthermore, KO's assumption of $8.9B worth of CCE debt and $0.6B in unfunded pension obligations relieves CCE of a significant financial burden.  Subtracting this consideration from CCE's enterprise value of $20.68B leaves the new CCE (before new debt issuance) with a notional enterprise value of $11.18B, a discount to its present market cap of over $12B.  KO probably believes structuring the transaction this way is a bargain compared to an outright takeover of CCE followed by a separate sale of its European business units.  This looks like a very smart, efficient deal for both KO and CCE shareholders.

Nota bene:  Anthony J. Alfidi has no position in KO or CCE at the time this post was published.

Germany Holds Fast to Denials of Greek Aid

Rarely do we get to watch the death of multinational regimes in real time.  The last artificial empire to fall was the Soviet Union.  Now we get to watch the European Union come apart:

Greece’s pledge to ramp up planned budget-deficit cuts by half failed to yield commitments of financial assistance from Germany, Europe’s biggest economy, to help solve its financial crisis.

Given what looks to be a likely Greek default on its bonds, followed by departure from the EU, followed by similar dramas in Spain and elesewhere, a relevant question would be . . . why not short the euro?  I'm not sure that's a viable investment strategy simply because the largest European economies may choose to remain in Euroland to keep the currency viable. 

The Haiku of Finance for 03/02/10

Another report
Finds nothing at all has changed
Nobody listened

Nothing Has Changed, Economically Speaking

I've been syaing lately that the U.S. economy is not out of its crisis.  If you won't believe me, maybe you'll believe a bunch of supposed notables and geniuses:

Even as many Americans are still struggling to recover from the country's worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

Note the language used in the report warning of a "calamitous global collapse."  Go back and search my posts tagged with the keywords "economic annihilation" and you'll realize that Establishment analysts are catching on to what the blogosphere has been chirping about for some time.  The intrepid bloggers in my link list and beyond are vindicated.  At a minimum, the report's finding that bank balance sheets are lies should give investors pause when considering bank stocks as investments. 

AIG Takes First Step Out of Hole

AIG, that massive money pit that all American taxpayers have tried to make whole on behalf of Goldman Sachs, has begun to pay back what it owes us:

American International Group Inc. is selling a cornerstone of its business, Asia-based life insurer AIA Group, in a government-approved $35.5 billion deal. The sale to British insurer Prudential PLC could reduce by nearly one-fifth the amount of federal bailout money still invested in struggling AIG.

But officials and analysts say it's not clear whether taxpayers will eventually recoup all the money AIG drew from a $182.5 billion rescue package the government committed to at the height of the 2008 credit crisis. In return for that package, the government got a nearly 80 percent stake in the insurer.

Read the last paragraph again if you're one of those folks who bought AIG stock in the pennies thinking it was a sure thing. Profit margins and operating margins continue to be negative. The company continues to lose money, so any future asset sales are a race against wasting assets. The longer it takes to sell off the next chunk, the less the whole firm will be worth. The firm is worth about $52B once liabilities are netted out, so even if the firm's remaining assets are sold at a premium the taxpayer will still lose about $130B from the rescue package.

Nota bene; Anthony J. Alfidi has no position in AIG at this time, thankfully.