7/23/12…corporations, governments, and pension funds

From Keep Calm and Carry On: “The only difference between a rut and a grave is their dimensions.” – Ellen Glasgow.

Bloomberg Quote of the Day: “All generalizations are dangerous, even this one.” – Alexander Dumas

This week’s economic calendar is fairly light. The highlight of the week will be the advance estimate of 2012 Q2 GDP (Friday). This report will also include benchmark revisions which could change the quarterly details of recent growth but is unlikely to change the general pattern of sluggish growth over the past 3 years. We will also get July New Home Sales (Wednesday), July Durable Goods Orders (Thursday), and final July Consumer Sentiment (Friday). Courtesy of Steve Wood, Insight Economics, Walnut Creek, CA.

Bloomberg Top Stories:

*CNOOC to Buy Nexen for $15.1 Billion in China’s Biggest Overseas Purchase

*Bond Yields Fall to Records as Stocks Slide With Euro on Crisis Concerns

*Debt Crisis Deepens as Spanish Region’s Bailout Woes Add to Greek Concern

*Global Sales Slowdown Masked by U.S. Companies Topping Earnings Estimates – have you notice how many are equaling estimates or beating them by just one penny??? TB

*McDonald’s EPS pf $1.32 Misses Analysts’ Estimate of $1.38; Shares Decline – DUH!

*BofA Withdraws 1,500 ATM’s From Simon Malls, Valero Stations to Cut Costs – !!!

*Diamond’s Departure Fells Final Pillar in London’s Gordon Gekko Generation

*Colorado Shooting Suspect’s Prosecution for Movie Theater Massacre Begins

*Iraq Coordinated Blast Kills 93 Across Country in Deadliest Day This Year – SICK!!!

*Companies Bemoan Delays as Rookie Buyers Flub Contracts 101 – one-third of govt acquisition buyers have less than 5 yrs experience – vs 6.8% in 2001 – bad news!

Volume was slightly lower at 3.8B vs 3.93B shares. The range since 7/29’s QE surge of 4.56B (above average) now stands at just 2.06B-3.93B shares range – mostly high-freq trades.  NYSE stocks executed without the aid of the ETN market finally topped 1B for the first time since June 29th (quarterend): 1.0B vs 757M shares, with the bad news being that this was a significant down day! Forget options expiry this was deeper as the Euro-region crisis got worse via Spain. For the week the average was just 757M shares! This is the first time in 14 sessions where volume was even 800M shares. The average for 2012 is 811M shares and since 7/2 just 704M shares, levels not seen since week ended 12/30/11! 47 of the last 75 sessions have been less than 800M shares. Since 2/29 there have been just 16 ‘average’ days (mostly down!), including 3/16’s high for 2012 of 1.65B (4.85B including ETNs) and just 15 have been above 900M – 936M is 12 month average. Since 11/1 there have been just 15, 1B share days…11 in 2012! Since 2/6 there have been 15 sessions less than 700M shares. 159 of the last 179 sessions have been less than the 12 mo ave (89%)!

Advance/Declines were negative. Here are last five: -2x vs +1.1x vs +1.6x vs +2.1x vs -1.3x on NYSE and -2.8x vs -1.3x vs +1.5x vs +1.2x vs -1.8x on Nasdaq. Breadth was similar: -3.2x vs +1.1x vs +1.4x vs +2.3x vs -1.6x on NYSE and -3.3x vs +1.5x vs +2.4x vs +1.3x vs -1.4x on Nasdaq. New 52 week highs fell by 1/3 to 190 vs 290 (7/3’s 504 is the high), while new lows rose 50% to 99 vs 67. The ratio is +1.9x vs +4.3x vs +3.6x vs +2.9x vs +3.6x vs +6x vs +1.3x vs +2.3x vs +3.8x vs +5x vs +5.7x vs +14x vs +20x. About to go negative again? The S&P VIX rose to16.27 +.82 – from 15.45, lowest since 3/26 – the low for this year.

Here are the results of last 5 sessions, all indices except Utilities down: Dow -0.9% vs -0.3% vs +0.8% vs +0.6% vs -0.4%; Transports -2.2%!!! vs +0.9%! vs +0.6% vs -0.7% vs -0.8% vs;Dow Utilities +0.3% vs +0.1% vs +0.4% vs +0.2% vs -0.3%; S&P 500 -1% vs +0.3% vs +0.7% vs +0.7% vs -0.2%; Nasdaq Composite +-1.4% vs +0.8% vs +1.1%! vs +0.5% vs -0.4%; Nasdaq 100 -1.3% vs +1.1% vs +1.3%! vs +0.6% vs -0.3%; Russell 2000 -1.3% vs -0.4% vs +0.7% vs +0.4% vs -0.5%; NYSE Financials -1.8%!!! vs -0.3% vs -0.4% vs +0.7% vs -0.3% (KBW Banks -1.9%! vs -0.5% vs -0.7% vs +1.1% vs -0.1%; Nasdaq Banks -1.2%! va -1.1%! vs -0.5% vs +1% vs -0.6%). NYSE Financial Leaders: BAC -2.6%! vs -3.6%!!! vs -4.9%!!! vs +0.9% vs -0.1%; GE +0.3%. Not leaders, but… JPM -1.65 vs -1.4%! vs -0.1% vs -0.3% vs -2.7%; C -2.3%!! vs -1.9%! vs -1% vs +2.1% vs +0.6%. WFC -1% vs +0.6% vs -0.5% vs +0.3% vs +0.3%; USB -0.6% vs +1%!!! vs +1.6% vs +0.5% vs +0.2% vs +2.2%!t; MS -3.2% vs -5.3%! GS – 0.7% and -3.6% for the week. Note that BofA closed at $7.08 with a low of $7.06. Last time it traded below $7 was May 22nd! It hit $8.18 on…June 29th…for window dressing no doubt!

Global stocks getting SLAMMED: FTSE -2%! vs -0.7% vs +0.3% vs +0.1% vs -0.3%; CAC 40 -2.2%! vs -1.1%! vs +0.6% vs +0.6% vs +0.5%; DAX -2%! vs -0.6% vs +0.9% vs +0.2% vs +0.5%;Nikkei -1.9% vs -1.4%! vs +0.8% vs -0.3% vs +0.4%; Hang Seng -3%!!! vs +0.4% vs +1.7% vs -1.1% vs +1.8%; Korean KOSPI -1.8%! vs flat vs +1.6% vs -1.5%! vs +0.2%;Indian Sensex -1.6% vs -0.7% vs +0.6% vs +0.5% vs flat. U.S. stock futures also being hammered: DOW -164!!!; SPX -15.90!!!; NDQ -37.50!!! OUCH!!!

Bonds very strong with new record lows on 10’s and 5’s (0.55%!): 10 yr 1.41% +7/16 – new record low!; 30 yr 2.49% +1-1/4. Long TIP 0.29% +13/4. Also a record low!The 5 yr TIP yields -1.22%; 10 yr -0.69%.Bills 0.06% 1 month; 0.09%!!! 3 months; 0.14% 6 months. Reverse Repo 0.21%. 3 mo. Libor 0.45%, and 0.73% – trying to go lower! European problem sovereign 10 years, Germany-benchmark: 1.13% -3 bp’s; Italy 6.34% +20; Spain 7.39% +20; Greece 25.96% +123!!!; Portugal 10.38% +2;Ireland 5.98% +5.

Gold closed slightly higher on an inside day and has put $1600 out of reach for an 11th day, closing 1582.80 +$2.40. 7/12’s intraday low of $1547.60 is lowest since June 1. The hit is $182 since 2/28! 2/28’s $1792.70 intraday high not seen since 11/16! The record high is $1923.70, a buying climax on 9/6. Res is $1592, the 40 day and $1588, crossed!, then $1664, the 200 day. 5/2’s o/n low of $1526.70 was lowest since 12/29! Overnight it is $1566.60 -$16.20!!! Crude fell after four weird up days after closing at highest since 5/22 ($92.94) and closed at $91.44 -$1.22. The intraday low on 6/28 of $77.28 was lowest since 10/5/11. SUP at the 40 day (85.02), and the 50 day (86.67), RES at the 200 day (96.33). First support WAS $89.17, the 11/1/11 low, res at $92.52-54, the lows of 12/16-12/17, a prior double bottom. It is now $88.43 -$3.40!!! This obliterates a five day rally which failed after barely taking out $92.54. Took out $89.17 like buttah!

Yesterday was a horrible day with both Nasdaq indices falling 1.4% and the Russell which was the outlier on Thursday and only loser except the Dow! You expect volatility on options expiry but this was clearly more as it just kept falling…partly Spain but also warnings from CEO’s trying to protect their stock by casting blame on European drag.

A second horrible day for bank stocks…again the most significant was BofA which lost another 2.6% – 11.1% in three days, cancelling the 4.6% surge on earnings Monday – where it was testing $8 it is trading below $7 in o/n market, not seen since June 4!

What we have here is the summer doldrums and worries about Europe, the elections and the Fiscal Cliff. Tell it goodbye. Dow is off 164 in o/n futures! A big groan!

. . .  – – –  . . . (SOS!)  . . .   – – –  . . .  (SOS!) . . .   – – –  . . .  (SOS!) . . .   – – –  . . .  (SOS!)  Note exclamation points added to the SOS’s! It’s ramping up!

…sounds like a lot on the table but won’t trouble you with much…just highlights (low?).


First, hedge fund operator Chanos blasted HPQ as a short on Thursday despite new CEO Meg Whitman’s plans. He scoffed at them! They have fleet of SEVEN Gulfstream V’s with staff hanger facilities, etc. but cut that perq? Of course not…both she and board members can use them for their personal jaunts and thanks to an asleep at the switch IRS pay just the fuel cost…unbelievable! She says they need them for all their international operations…uh huh…hasn’t she heard of NetJets? Think how many other companies do the same…remember when Ford hired Boeing’s Mulally and while he has done a great job he flew home to Seattle and back every weekend as part of his contract! Hello???


Now on to government…first the state of Minnesota. They put in a law to encourage investment in start-ups located entirely in MN and having 25 or fewer employees. Under that law ‘investor angels’ got a tax rebate for putting up money. A huge waste of state funds…read taxpayer…as these are knowledgeable investors who understand risk/return and even they don’t want the tax ‘refund’ – yes refund…even if they don’t pay taxes in Minnesota they get the refund of up to 25% of their investment???


Then a Bloomberg story today on government procurers lack the experience to negotiate contracts and have to resort to lawyers which is slowing down the process and creating chaos. Aarrgghh!!!


Lastly on the issue of state and local governments, the big elephant in the room is the pension funds. Thanks to avoiding reality by changing the investment assumptions to accurately measure market performance, public pension funds continue to use assumptions of 7.5%-8% returns. First, they didn’t adjust them in 2000 and then they didn’t adjust them after 2008…even though in the interim they came nowhere close to matching them. A word on those assumptions: every day that you miss that target the unfunded liability increases – think of it as daily compounding and at that high a level it is a monster.


David Kotok of Cumberland Investment Advisors published the returns for the fiscal year ended June 30, 2012 for CalPers…the largest public pension fund in the U.S. (TB strongly recommends you sign up for this FREE newsletter at www.cumber.com/singup.aspx . Here are the results for CalPers over the past 12 months:


Public Equity –  7.2%

Private Equity –  5.4%

Fixed Income +12.7%

Real Estate    +15.9%

Timberland    +11.0%

Infrastructure   +8.4%

Liquidity          +4.6%

Inflation Assets+0.1%

Absolute Rtn   -2.0%

TB continues:

This combined, due to weightings, for a +1% total return vs the target return of 7.5%!

Furthermore, the attributed losses to ‘poor manager selection’ despite the fact that many equity managers performed below the averages…and still are. Note that the performance fees paid to some of these managers are high  and are being increasingly paid by even small pension funds to offset their losses…to no avail! If they have good staffs they could do as well or better on their own. Furthermore, thanks to poor fiscal accounting and juggling of books by the entities, pension fund contributions are being paid after the end of the fiscal year to help balance the budget…potentially magnifying the losses even more – unless the market plunges while they are waiting for the funds…of course the bigger portfolio will then suffer losses so tough luck!


Under ERISA rules, a manager or a plans management can be held personally liable for mismanagement. There are only two involved who can’t be: the accountants and the advisors who provide the return assumptions! Think about that…the two that can do the most harm are held harmless. Is that a great job or what?


In 2000, at a conference in London, TB asked a panel of actuaries why they didn’t rebalance when the weightings on stocks got so out of line to bonds. After a moment of silence one sheepishly said: there aren’t enough bonds! This provoked nervous laughter from the audience, except TB who was fuming. Around yearend 2000 they could have switched from equities to bonds locking in their excess returns and still earning 8% or more on the bond portfolio which would insulate it permanently. At the very least they should have recommended rebalancing to 60% equities, 40% bonds, from well over 80% stocks!


Lastly, kudos to Michelle Bachman for finally getting the GOP leadership (sic) to stand up for what is right. TB has asked if there are any leaders out there and once again the only one is John McCain…perhaps being a POW sharpens your senses to moral wrongs. He was later joined by House Speaker Boehner who in the past has refused to defuse all sorts of false allegations saying let the people decide, including Obama’s birth certificate while promulgating the falsehood that the entire budget deficit happened no Obama’s watch. Balderdash!


Of course this is a natural occurrence when the leadership fails to bring the members in line. Remember when Boehner and others were asked which of the candidates would be the best challenger and every responsible person said: they would all make good presidents. That is what TB meant when he said that the flaw was in setting out from the beginning to make Obama a one-term president, and then ‘anyone but Obama.’


So we had a chain of Herman Cain, Rick Perry, and of course Bachman with no one taking them to task…except the other challengers. The tone was sent when Dick Cheney attended the inauguration in a wheel chair after ‘injuring his back while moving boxes.’ Few believe that and it showed disrespect – not for Obama but for the office itself.


Meanwhile, Obama should get off the Bain issue and show his leadership by offering solutions. This, in turn, might force Romney to do the same. One can hope.


It is time for all politicians to start acting as adults before we have another wave of McCarthyism….one of the darkest periods in our country’s history.


Hope you all have a great week.




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