Today is Thursday, May 17, 2012

Pension Funds

Mutual funds that are down 40% will have to go up 66.667% to break even

Mutual funds that are down 40% will have to gain 66% to get back to breakeven.

The big scandal brewing will be an investigation of “professional” money managers who failed to preserve the capital of mutual funds, pension funds, college endowments and banks’ equity portfolios. Think about their “investments” in Fannie Mae, Freddie Mac, which many institutional speculators rode to zero.

The mutual fund industry is dying because investors are learning that the funds stay fully invested not to follow their missions but to earn fees. Funds earn less if they are in cash rather than in stocks and bonds and ETFs.

Smart investors are moving to stocks and ETFs, which charge much lower fees than mutual funds charge. It is a lot easier to get out of ETFs than mutual funds. When I went to cash in March 2007, I had to write a letter to my mutual fund to get my money back. I’m now 88% cash and down 3.4%. The funds we sold are down 40% to 50%. And I’m making 4% on my cash and 40% annualized covered call income on the few stocks I own. I can live on that.

Institutional money managers run portfolios that are too large. A $5 billion or $30 billion assets fund can’t just go dump all of its stocks when the money manager realizes it’s time to get out or go from cash to equities when there is a confirmed rally.

The fallacy in Jaffe’s column is that investors buy funds expecting them to buy the asset classes that those funds specialize in. As noted above, investors buy funds not to beat their asset classes but to make money and at least preserve capital. About 98% of funds are failing their investors because they aren’t preserving capital.

I’ve been trying to figure out what Black 2008 means to the market outlook. Touts talk about all the cash on the sidelines? How many fully invested money managers have cash? How much? I’m afraid few have cash and those that have any don’t have much.

If you’re a speculator‚Äîand we’re all speculators‚Äî it’s hard to be bullish if nobody has the cash needed to make a rally more than a dead cat bounce.

Chuck Jaffe’s “Stupid investment of the week” is the stupid column of the decade. He bashes mutual funds that are in cash, but his readers, including me, come down on him hard. However, he did some good research and found few mutual funds have much cash. The column and comments on it are a good read.

Pension fund obligations will hurt earnings at hundreds of companies

Black October combined with the chances that there will be more losses before the end of the year could wind up costing the 350 companies whose stocks are in the S&P 500 more than $300 billion. If employers have to make up these losses by refunding their pension plans, as required under the Pension Protection Act of 2006.

Fifteen trade associations that represent employers that are caught in the pension squeeze have asked Congress “to help companies avoid having to freeze or end pension plans that may be inadequately funded because of the financial crisis,” Reuters reports.

Note the scare tactic being used by the employers that are seeking help from Congress. Help or pensions will be frozen or suspended. That would be a radical move, and General Motors, Ford and Chrysler might very well have to suspend or freeze their pensions due to the financial crisis regardless of whether Congress bails them out.

But most employers would suck up and refund their pension plans rather than get in trouble with their employees, retirees and unions.

For investors, it’s important to know which companies are most at risk. Here are names mentioned this week in the financial press that are varying degrees of risk:

• Lockheed Martin (LMT)
• General Motors (GM)
• Dow Chemical (DOW)
• Unisys (UIS)
• Qwest Communications (Q)
• AT&T (T)
• Consolidated Edison (ED)
• New York Times (NYT)
• Ryder Systems (R)
• Burlington Northern (BNI)

Daily charts for these stocks are here. Click on a chart to see more charts for a given stock.

I doubt that many analysts have factored the pension fund problem into their earnings forecasts for these companies, which makes their forward price earnings ratios and PEG ratios (PE/projected earnings) more suspect than usual.

A big rally before yearend would help reduce the severity of this problem.

I own GM and have covered calls on it.

For educational purposes only. Investigate before you speculate.