Your thoughts about the estimated $800 billion in underfunded pension liabilities for the S&P 500? The underfunding is to come from cash earnings.
story.news.yahoo.com
(I heard on CNBC this a.m. -- estimates for the S&P 500 companies is some
$800 billion.)
Ticking Sound May Be a Pension Fund
Fri Nov 1, 3:03 PM ET
NEW YORK (Reuters) - Wall Street is waiting for the next shoe to drop. The
next smackdown may come from the big hole the stock market's crash has
punched in corporate pension funds.
Corporate underfunding, as it's called, is a ticking time bomb that will
cast more doubt on the profitability of the nation's largest companies and
the market's rebound.
"In the years ahead, earnings are likely to be depleted by pension
liabilities," says John Hussman, publisher of Hussman Econometrics and
professor of economics at the University of Michigan.
"Many companies continue to make assumptions about the probable return on
stocks that has no relationship with the rate of return that stocks are
actually priced to deliver," he says.
Investors should wise up to the implications of companies clinging to
expectations the stock market will deliver double-digit gains because what's
left of their battered 401(k) retirement money is at risk, Hussman says.
By one account, 50 of the biggest American companies have seen 90 percent of
their pension surpluses go up in smoke during the bear market.
BAD NEWS BELOW INVESTORS' RADAR
The sad truth is the companies will have to sweep up much of their already
pencil-thin earnings to cover pension shortfalls.
While some companies have begun to infuse billions of dollars into their
depleted pension funds, more than a hundred names in the Standard & Poor's
500 index (^SPX - news) have still not acknowledged the problem.
Credit Suisse First Boston estimates that a whopping 325 of the 360
companies in the S&P 500 index that have defined pension funds will have
shortfalls this year.
In a sign that not much has changed since the fairy-tale days of the 1990s,
UBS Warburg, the Swiss banking giant, says 118 companies in the S&P 500
continue to report a pension surplus on their balance sheets, even through
they're running a deficit after the stock market sank more than 20 percent
this year. The last time the pension deficit issue dogged the nation's
biggest companies was during the 1993 bear market.
The list of companies includes big-cap names such as International Business
Machines Corp. (NYSE:IBM - news), Ford Motor Co. (NYSE:F - news) and
Ingersoll-Rand Co.(NYSE:IR - news)
GM'S BIG BET
General Motors Corp., the world's largest car maker, this month warned 2003
earnings could be cut by $1 billion or more because weak equity markets and
low interest rates would result in higher pension expenses. The market value
of GM's pension fund assets shrank by 10 percent in the first nine months of
2002..
GM (NYSE:GM - news) had assumed the money would grow by an unrealistic 10
percent, which exceeds the stock market's historic return of 6 percent a
year.
Earlier this month, Standard & Poor's chopped GM's credit rating to just a
couple of notches above junk status, saying the company's worldwide pension
obligations may be underfunded by a staggering $28 billion by the end of the
year. On Friday, S&P also cut Ford's long-term debt ratings to -- you
guessed it -- just two notches above junk-bond status.
On Friday, the stock of Cigna Corp. (NYSE:CI - news), the third-biggest U.S.
health insurer, lost almost $3.5 billion in market value -- a day after the
company cut its earnings estimates because of higher costs for health
benefits and pension funds. On Thursday, Cigna said shareholder equity would
be cut by up to $700 million in the fourth quarter from increased
liabilities to fund pensions.
In the roaring bull market of the late 1990s, few people worried about
corporate pension funds. But the pendulum has swung back the other way after
the 2-1/2-year-old bear market. Companies struggling to make money in the
tough economic environment must now divert billions of dollars to get their
pension funds up to snuff.
There is no getting around the problem. Unless the stock market stages a
dramatic recovery, pension shortfalls will have to be made up from cash.
So the longer the bears hang around, the greater the damage to pension
funds. If one study is to be believed, stocks may underperform for years.
Stocks will be viewed as a "high-risk, low-return investment," says Deutsche
Bank, which estimates there's only a 23 percent chance that U.S. stocks will
outperform bonds over the next 20 years.
The big issue facing investors is this: The risk of being in stocks has
climbed and remains in the danger zone even after the market's bone-jarring
drop.
"More pain is to be expected for equity investors and more riches for their
bond counterparts," Deutsche Bank says.
Stocks may be pricing in more bad news. Since the start of the year, the
market has had a series of "wonder" rallies, which have been built chiefly
on companies "beating" expectations of analysts with incredibly poor
forecasting records, as opposed to just plain good earnings.
MORE SWINGS THAN TARZAN
"There have been four false 19 percent rallies in the Standard & Poor's 500
index and eight in the Nasdaq during this bear market," says James Stack of
InvesTech Research. "All have ended with the market going to new lows.
That's not characteristic of a new bull market."
The fundamentals of Corporate America are still not sound. Poor earnings
continue to be the source of Wall Street's malaise even after the recession
supposedly ended.
Typically, investors focus on the future, eager to put money on the table in
anticipation of a turnaround. The market turns six months before earnings
start to improve. But so far the bears have still not left the building,
which suggests the good times won't be rolling until at least the middle of
next year.
The pension fund issue is creating a newer and perhaps a bigger problem for
the stock market.
Many investors are staying on the sidelines, preferring to focus on the
market's probable sub-par return. And they're ignoring the bizarre
assumption of companies like GM, which are not operating in the real world
(news - Y! TV), with expectations that their pension investments will grow
by 10 percent.
On Friday, the three major U.S. stock indexes finished higher for the third
straight week -- the longest such stretch of gains since August. For the
week, the Dow Jones industrial average (^DJI - news) rose 1.5 percent to
close at 8,444, while the S&P 500 also gained 1.5 percent, finishing at 898,
based on the latest available figures. The Nasdaq composite index (^IXIC -
news) jumped 3.4 percent to end at 1,331. |
