4/1/13…sadly, not an April Fool’s joke

From the Friars Club Encyclopedia of Jokes: “We’ve all been blessed with God–given talents. Mine just happens to be beating people up.” – Sugar Ray Leonard

Bloomberg Quote of the Day: “Chance fights ever on the side of the prudent.” – Euripides…wanna bet??? TB

Data indicates that 1Q13 GDP is tracking well above consensus estimates coming into the quarter and now looks to be at the high end of forecasts (1.8-2.3%).   Real consumer spending, leading indicators, housing starts, and consumer sentiment rose. Labor market trends are improving. Inflation remains modest.

This week’s economic calendar is packed with important indicators. The highlight of the week will be the March ISM Manufacturing Survey (Monday) and March Employment Situation (Friday). We will also get February Construction Spending (Monday), February Factory Orders, and March Motor Vehicle Sales (Tuesday), March ADP Employment and March ISM Non-Manufacturing Survey (Wednesday), February International Trade and February Consumer Credit (Friday). Courtesy of Economic Advisory Service

Bloomberg Top Stories:

*Yen Gains, Asia Stocks Fall After Tankan Misses Estimates; Treasuries Drop

*S&P 500 Rally Seen Showing Analysts Are Too Slow or Investors Too Sanguine

*Michael Dell Said to Weigh Blackstone LBO Only With Guarantee of CEO Role

*Treasuries’ Appeal Outside U.S. Only Grows in $3 Trillion Account at Fed

*Russia Rules Out Rescuing Cyprus Savers Facing Wiped Out Deposits at Banks

*Rallying Stocks Hand Investors Best Gain of Quarter, Extending 2012 Streak

*SAC Siege by U.S. Is Seen at Crossroads With Steinberg Case’s Old Evidence

*Ford Fusion Leads U.S. Sedan Comeback Driving Gains That Elude Camry

*Fannie Mae Rising Profits Intensify Questions Over Mortgage Finance Future

*Brazil’s Bovespa Sinking as Earnings Lag Behind Analyst Estimates

*Argentine Bonds Decline After Government’s Proposal to Default Holdouts

*Venezuelans Desperate for Dollars Get Defrauded Online as Bolivar Plummets

*Kim Says Nuclear Weapons Country’s Top Priority as Korea Tensions Climb

*House Conducts Listening Tour on Immigration as Senate Pushes Law Rewrite
…the quarter ended not with a bang but a whimper except for two strange bedfellows: Dow Transports +1% and Dow Utilities +1.2%!!! The best the rest could do was up 0.4% with the Russell 2000 small cap up just 0.1%! Volume was higher but not impressive for a quarterend:

*NYSE Volume rose to an  average 3.27B shares, up from a weak 2.9B shares. REAL Volume rose to 876M shares from a weak 596M, but not great for a quarterend

*Dow Utilities up for third straight session the best performer! UP 1.2% vs +0.3% vs +0.9% vs -0.1% vs +0.2%. Question if stocks are strong why are utilities? Good question!

*Dow Transports were only other index to gain 1%, while Dow/S&P rose 0.4%

NYSE Volume was rose to 3.27B shares from a weak 2.9B shares (lowest since 2/11’s 267M) vs 3.16B vs 2.92B vs 3.32B vs 3.74B vs 3.15B vs 4.93B (2013 high), average of last 18 sessions is 3.3B shares – and slipping! Real NYSE volume surged to 876M shares, highest since 3/15 (options expiry!) vs 596M shares vs 558M shares -lowest since 2/11 – vs 655M vs 620M, vs 673M vs 731M vs 676M vs 1.825B (12-month high!!!). Despite the surge, the average for the week is just 674M! The range since 2/11 is 497 to 1.83B with an average of 742M shares. Last Friday’s 1.83B shares was second only to 12/21’s 12 mo. high of 1.88B shares. Note that 8/15’s (options expiry) was the only day since 2/28 to register over 1B shares with no other sessions reaching anywhere near 800M shares!!! Ave vol. 12 mos. 739M, ytd 720M. Thanks to yesterday, there are now just ten 800+M shares in 2013… record for the 21st century?

  1. new 52 week highs which have ranged from 121-709, rose sharply to 613 vs 348 vs 422 vs 512 vs 356 (also on a big rally???) vs 531 vs 328 vs 282 vs 584 vs 652 vs 410 vs 413 vs 560 vs 630. New lows nearly halved to 36 vs 60 vs 44 vs 56 vs 33 vs 36 vs 43 vs 50; recent high 98. It was quarterend…get it???
  2. Advance/Declines were positive but only modestly so at +1.7x vs +1.1x vs +2.2x vs -1.4x vs +1.7x on NYSE and +1.3x vs -1.1x vs +1.4x vs -1.1x vs +1.5x on Nasdaq. Breadth was similar at +1.7x vs -1.1x vs +2.5x vs -2.2x vs +1.8x on NYSE and +1.6x vs +1.5x vs +1.7x vs -1.5x vs +1.3x on Nasdaq.
  3. The Dow rose 0.4% vs -0.2% vs +0.8% vs -0.4% vs +0.6%. Dow Transports rose a nice 1% but Dow Utilities took honors at +1.2%…not a positive development! Both Nasdaq indices rose by 0.4% and have not been a factor in the rally. The Russell 2000 FELL by 0.1% vs flat vs +0.6% vs flat vs +0.3% vs +1%.
  4. NYSE Financials rose 0.4% vs -0.4% vs +0.5% vs -0.6% vs +0.6%. Brokers had no traction and closed FLAT vs +0.1% vs +0.1% vs -1.2% vs flat vs +1.6% vs -0.7% vs -1.1% vs -0.2%. Both bank indices were lower by 0.1% vs -0.6%. BofA the most active: -0.4% and in danger of breaking $12 vs -0.4% vs -1% vs -1.3% vs -0.1% vs +0.6% vs +1% vs -0.1% vs +3.8% – the range is $11.11, on 12/17 to $12.78 last Thursday! It closed at $12.18, lowest since 3/14 Note: 12 cents is a 1% change!!!
  5. Lastly volatility (S&P VIX), declined modestly to 12.70 -45 or 3.4% after ‘gapping down on the open. Since ‘gapping up’ on 3/18 (from a multi-year low!!!), and surging to 15.40 in two days (on Cyprus!) it has declined and gone sideways but oscillating wildly and is now back below  40/50 day m/a’s (13.56/13.47) but not that the 200 day is way up at 15.86 which illustrates how complacent the markets remain…ytd the average has been 13.53 with a range of 19.28(2/25!) to 11.05 (3/14) – amazing for that short a time period. Feel lucky?

European equity markets remain closed as is Hang Seng, Asian markets mixed: UK C vs C vs +0.4 vs +0.6% vs -0.6% vs +0.1%; France C vs C vs +0.4% vs -1.5% vs +0.4% vs +0.2%; Germany C vs C vs +0.5% vs -1.3%! vs +0.1%; Japan DOWN 2.1% vs +0.5% vs -1.3%! vs +0.2% vs -0.6%; Hang Seng -0.7% vs C vs -0.7% vs +0.7% vs +0.3%; Kospi -0.4% vs +0.6% vs flat vs +0.5% vs +0.3%; India +0.2% vs C vs 0.7% vs C vs +0.1%. U.S. stock futures reopening after being closed for Good Friday: DOW +11 in a very narrow trading range; SPX +0.40; NDQ +4.

Bonds were little changed Thursday due to an early close ahead of Good Friday, weaker overnight: 10 yr Treasury 1.88% -1/4 vs 1.85% (recent range is 2.06% to 1.85%), and the 30 yr’s 3.26% to 3.05%, closed 3.10%, now 3.135 -1/2. The long TIP, which had also rallied sharply to 0.57% closed at 0.60% and is now 0.62% -5/8; the high yield was 0.67%. Libor update: 0.243% 3 mos., 0.445% 6 mos. Foreign bond yields closed again today mixed after troubled Greece fell sharply again Thursday, but from a very high level: Germany 1.29%; UK 1.77%; Italy 4.75%; Spain 5.04%; Portugal 6.24%; Greece 12.09% vs 12.30% vs 12.57%!!! vs 11.66% vs 11.37% vs 11.48% vs 11.21% vs 11.06% vs 10.58%.  

Gold closed lower higher and more importantly below $1600 for only the second tmie since 3/15! It remains well below resistance and way below the 1/17 high of $1699.90. It closed at $15595.700 -$11.50 on a narrow inside day, The recent intraday high was $1618.30, almost to the 40 day on 3/21 but that move fizzled!  2/21/13’s low was $1554.30 – not seen since May 2012! Last time it was below $1500 was Sept. 2011. $1600 is critical! The breakdown through the 40/50/200 day m/a’s puts major resistance $1613-1670 – falling steadily, res/sup at $1600, a double bottom from 8/14-15, also a psychological level. Overnight it is $1598.40 +$2.70. Crude closed modestly higher at $97.23 +.58, with another intraday high of $97.35, highest since 2/15! It now has a range of $91.60-$97.35 since 3/12! The recent low is $89.33, lowest since 12/26, set on March 4. It remains well above the 50 day ($94.56), and 40 day ($94.19)! Overnight, $96.61 -.62

 

Some random thoughts after a long weekend…thanks to the Sunday paper (funnies?):

Many unhappy returns…that would be for pension funds. Back after the 2000 crash, TB attended a conference in London which featured a panel of pension consultants (actuaries there. He was chomping at the bit to ask a question when the finished pontificating about their work. The question was this: how, could you have continued to assume reinvestment rates of 8% on stock portfolios ad infinitum? Furthermore, as stock peaked and bond yields rose to where a 30 year bond yield was at 8%, why didn’t you recommend rebalancing at least, since equities had risen to over 80% of the portfolios of pension funds? They exchanged stares until one of them stammered ‘there aren’t enough bonds’ What? Did they ever examine the size of the bond market in relation to stocks? Could they not have recommended gradually rebalancing in order to lock in those stupendous returns of the prior decade? No, they did not. In the interest of preserving decorum TB let it slide but the point was not missed by the other portfolio managers in the audience…bond portfolio managers.

One of the speakers was a man named John Ralfe, who as head of corporate finance for Boots PLC, recommended, over the objections of senior management, shifting the entire pension fund (which was securely overfunded) from stocks to 100% bonds. He persuaded the board and it was done although he was ridiculed by the investment community, but not for long as stocks continued to slide.

John is now a friend, and while we don’t share our thoughts frequently, he continues to be active trying to persuade companies to use bonds to defease their pension liabilities. Of course, at these low levels of interest rates, it doesn’t work, but the idea of matching assets to liabilities is not only well established but banks who have violated this principle have paid a hefty price if not been taken over.

The problem with this approach over the past five years however is two fold: first, the yield on a bond assumes reinvesting the coupon at the yield to maturity when the bond was first purchased. In 2001 this was not a problem, today it is an impossibility. Still, John’s approach was to ladder a portfolio of bonds meeting the obligations of each year through principal and boosting it with the income.

A major problem with this is that many bonds are being issued at high premiums (I have seen premiums of 25% or more in order to ‘boost’ the income for bond funds which do not amortize the premium and thus will sustain huge losses when rates rise.

But is this anywhere near as bad as making assumptions that stocks will increase in perpetuity by 8% per year? How do they justify maintaining this assumption when over the past five years the annualized S&P 500 returns have only been around 5%…and that is only thanks to the last couple of years (worse, in the last two years, all those gains occurred in the first quarter with huge volatility that produced no added value in the rest of the year). Sell in May and go away…or sooner and this in a year with scant retail participation!. The gains in the just completed quarter were 10%  – but that could be the high for the year, especially since the S&P 500 is now up 11.8% over the past 12 months!

Yet public pension funds…who are forced to provide their return assumptions…are still using 8% (Minnesota for one), and 7% (California, who boasts the two largest retirement systems). Minnesota two years ago bolstered state and local fund swith a ‘one-time’ injection yet according to the Star-Tribune:

More than two years after the Legislature acted to shore up Minnesota’s public pension plans, some indicators show the plans are worse off than they were before the legislation.

The plans to pay for the retirements for more than 729,000 current and retired state and local government employees are $16.7 billion short of being fully funded, a deficit that’s $4 billion larger than it was in 2010.

The plans were about 80 percent funded when the reforms were passed. They’re now at about 75 percent.

How do they propose to regain that 75-80% underfunding? Dunno…and neither do they, especially when that is based on flawed assumptions for an 8% return!

Nevermind, anything Minnesota – or any other state does – pales in comparison the Great State of California.  First, despite numerous bankruptcy filings, initially Vallejo and lastly Stockton, no significant improvement has been made to reducing obligations – i.e. cutting payouts. Also, back before the 2000 bust the state (and at least one county that I am well aware of, Contra Costa), increased benefits to retirees…unheard of in a defined benefit plan and equally irresponsible! Then, after the bust to continue to use flawed assumptions is – or should be – criminal!

But wait, for the state it gets better: last November, according to a Bloomberg article, the state issued $500 million of bonds  that were to be used for ‘operating expenses.’ Miraculously, $300 million of this amount was diverted to prop up the pension funds! What if a corporation did this the article proposes? The SEC would take action (ok, might take it given their lack of action since 2000).

The article continues saying that just four months later, the state despite a proposed seven-year $50 billion tax increase  – most of which was to go to education – CalSTRS which handles teachers retirements requires an additional $4.5 billion a year for THIRTY years! This, to cover the ‘unfunded liability. That $4.5 billion is 167% of the annual amount the local school districts expected to get from the tax increase!

Sure, Governor Brown is culpable but so is the Governator (Schwarzenegger) who to boost his votes increased salaries and benefits for state prison guards! That is what happens when it is OPM: other peoples money!

Note that a 7% return compounded for ten years doubles. Do you honestly believe this is going to happen. So what do you think will happen to that unfunded liability? You got it, it will GROW!!! Still, no effort to curb benefits or wages.

Now, for those of you who have been ‘duped’ into believing the federal government is the problem, what do you think will happen when payments to states are cut? Remember, a state cannot file for bankruptcy…and that is precisely why the federal government must be able to run deficits. Oh, and about balancing the state budgets. Gimmicry of the worst kind is done and given the size of the pension fund payments the most egregious one currently is delaying the payments to the pension funds long enough to put them in the next fiscal year. Jack Welch, the master of managed earnings, would love this!

Good luck and God bless the United States of America. We will need it. Our problems can and eventually will be fixed…we are not Cyprus, Greece, Ireland, etc. But when?

TB

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