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Bloody Spring

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I know I’m a bit of a crank to leverage pension policies so heavily into my own personal investment outlook and strategy. Even so, that’s never failed me, not once. I pulled out of the market completely just before Black Monday 1987 and stood back that very morning laughing about what was about to happen, simply because I didn’t want to be buying across the aisle from what then was one of the largest pension fund sales in history. And the few individual stock purchases I’ve made during my life all made very heavy earnings from short-term knowledge of the pension plans of the companies (none of them clients, of course – I do steer very clear of using any insider information for my personal investing). I can’t even begin to count all the times I’ve watched new cash head to the market from pension plans anxious about accounting rules, riding the buying up in my own 401(k) equity investments. Then this past year, I had no interest in being among those having to balance out all the selling that pension investment reallocation strategies had been necessitating, so I’ve been happy to have not lost a dime in the market during its recent meltdown.

So let’s point out yet another potential pension influence: those 2009 pension cost figures about to be revealed in the first quarter financial statements about to be issued by companies with calendar fiscal years. One speculation pegs the increased pension cost at a level that would pretty much wipe out 2009 earnings for pension sponsors (those that don’t sponsor pensions being untouched by the higher pension costs, of course, so only suffering earnings erosion from the general economic malaise). My own personal estimate looks for a pension cost increase of only half that speculation, but even that more favorable expectation would hit corporate earnings like a sucker punch . . . . delivered by a wrecking ball!!

And much the same way as earnings estimates in early 2007 and early 2008 failed to anticipate pension cost decreases those two years, so too even the most dire earnings estimates making the rounds on the street these days have not yet taken those significantly higher pension costs into account.

Aside from several obscure pension forecasters whose word has not yet been recognized, so far the only indication of this wrecking ball has come in the form of some early warnings from du Pont and one or two other companies, but with none of those early warnings having yet put the dent that will have to be made in earnings projections. By the end of April, the naked truth will be hitting hard. And I believe we’ll see blood flowing through the ditches. And be hitting that basement floor like we were thrown down at it.

But even if many of the pension plans that have survived this ugly decade close their doors or freeze their benefits, the market meltdown of the past two quarters has hit an important wall: either more pension funds follow the lead of GM and others into permanent reallocation; or else pension plans take a temporary reprieve from their investment policies (not unlike how the stock markets have granted grace periods on otherwise applicable delisting requirements) . . . or we’re about to see an acceleration of the leveling out and turnaround in pension fund equity investment that I had originally anticipated coming in the final quarter of 2009 or early 2010.

In English? Like I predicted verbally three weeks ago and reiterated in writing earlier this week, I see the current “rally” as only a temporary bounce. So then when I refer to blood in the ditches and being thrown at the basement floor, I believe we still have a real chance of seeing the Dow cross below 6k before Memorial Day. But whereas earlier this year I anticipated steering clear of equity investment until late 2009, if not until 2010, I might now be making my turn as early as Memorial Day. Especially if the bottom has dropped out between now and then. And although I do look beyond pension policy – to the global economy and to technical factors and to a host of other influences – like so many times before, pensions will play a major role in my decision if I do move then: the worst of the info on pension cost increases will have been fully factored in by then; but we might then be seeing some serious money come to the demand side of the markets in the form of pension investment rebalancing back up to some higher equity mix. Meaning we might then see the market leap off a bloody spring and head straight up.

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Written by macheide

25 March 2009 at 3:15 pm

Posted in calls & puts

3 Responses

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  1. I’m tentatively tabling the second step of this post.

    The first step I leave solidly in place: over the course of the coming month, sponsors of pension plans will be issuing first quarter financial statements showing significantly lower 2009 earnings, as hit by pension costs for 2009 that will average at least four times 2008 levels. Since I find it very highly unlikely that such a severe hit to corporate earnings has yet been factored into even most pessimistic earnings estimates, I’m expecting the markets to be brutal through Memorial Day.

    But past Memorial Day, I had expressed hope of seeing earlier arrival of a turning point in pension fund investment in equities: whereas throughout 2008 I had projected that turning point as not arriving until very late 2009 or into 2010, today I briefly touched hope that renewed equity investment by pension funds might be seen on a large scale as early as June 2008. Which would give me that second step: fuel to shoot the market straight up.

    Alas, I was basing that hope on research published earlier this month, which suggested that pension fund trustees had lowered their equity investment targets only marginally following the 2008 meltdown. Although I’d not seen any marketplace evidence (as in, any major new stock buying) through the first quarter of this year (even in March’s bounce, which has largely been a technical correction to February’s freefall), I was prepared to tentatively accept the premise. Pending independent research of my own.

    Which I’m still at the very beginning of conducting. But based on what I’ve seen from poring through disclosures representing half of S&P 500 companies’ pension assets, the published research report almost appears to have been fabricated. While I find that almost crazy, given the source of the report, actual disclosures made by pension sponsors suggest that the first quarter’s continued non-investment in equities by pension funds was NOT just a mirage. While this might not hold for the remaining half, what I’m seeing so far is that for the overwhelming portion of invested assets, pension plan sponsors have shifted their target allocations for equity investments DOWN to accommodate the lower markets (i.e., similar to how I pointed out is being done for exchange de-listing rules).

    Unless and until pension funds hold the line, don’t look for that “second step” to be taken. So if I’m right about the bloodshed in April and May, then Memorial Day might give us another short-term technical bounce investment opportunity, but still not yet fueled by the big, solid money.

    More on this to come as I continue doing my own background research.


    25 March 2009 at 8:03 pm

  2. […] Posted in άctuary « Bloody Spring […]

  3. […] that we were only seeing a temporary bounce, sharpening my feelings that we might be in for a bloody spring as we wade into the thick of the first quarter’s earning reports. And held onto my belief of […]


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