So, bottomline is if the institutions i am keying on, are doing an asset re-allocation to more heavily equities weighted, they will just keep buying hell or highwater.
I am starting to question that hypothesis. I am not sure anyone else has. This gave me the clue just this evening.
Read the snip in bold. What if pension funds just pack it in. Go from 60% equities to 40% equities? How massive would that be. Why shouldn't they. The public has largely given up contributing money and is starting to pull out. Will the next decline cause some pension funds to just say screw it?
prudentbear.com
Favored snips
So much here I do not know where to begin
November 14 – Bloomberg: “National Century Financial Enterprises Inc., which faces lawsuits over mismanagement of cash reserves, sold $725 million of bonds to two money-market investment programs, said a managing director at Moody's… The bonds, whose credit ratings were cut to junk status three weeks ago, were pooled with other securities to create so-called asset-backed commercial paper. Investors in asset-backed debt are repaid by dedicated revenue streams such as payments on credit cards, loans and customer bills. One program holds $500 million of National Century's debt, said Sam Pilcer, a managing director in charge of commercial paper ratings for Moody's… The program is guaranteed by a 'highly-rated bank' so investors won't suffer losses on the commercial paper, Pilcer said. He declined to name the programs and the bank. The other commercial paper program sold $225 million of National Century's debt two weeks ago.”
November 13 – Bloomberg: “National Century Financial Enterprises Inc., which is facing lawsuits over mismanagement of cash reserves, sold almost $50 million of bonds to three money-market investment programs, analysts at Fitch Ratings said. The bonds were then pooled with other securities to create so-called asset-backed commercial paper… 'There's $40 million of exposure in one program and less than $10 million in the other two,' said Deborah Seife, who rates asset-backed commercial paper at Fitch. She declined to name the affected programs. Many unrated or low-rated companies find the asset-backed market an easier place to raise money by promising lenders revenue from bills due from customers as collateral. There is about $710 billion of asset-backed commercial paper outstanding, representing about 52 percent of the total market… In the asset-backed commercial-paper program that holds $40 million of National Century debt, a swap counterparty rated F1+ covers any losses on the underlying assets, Seife said.”
November 14 – Bloomberg: “New Jersey plans to remove the head of its pension management division after state funds lost more than $6 billion last quarter and $20 billion over the last three years, people familiar with the matter said. The top manager in the Division of Investment…would cease overseeing $56 billion in pension funds and move to a new government job until he takes early retirement on June 30, the people said. Lawyers were negotiating an agreement, which would be reached as early as today, the people said… 'Many other state pension funds have had losses because they have similar investment strategies as New Jersey's,' said Parry Young, an author of a Standard & Poor's analysis titled 'Public Pension Funds Under Stress.' Some states 'are re-evaluating how they invest as well,' Young said. New Jersey pension funds lost $20 billion, or 24 percent, during the past three years.”
November 14 Bloomberg: “New York Mayor Michael Bloomberg said he would seek a 25 percent increase in the city's property tax and reduce the workforce by 8,000 during the next 19 months to help close budget gaps.”
November 11 Associated Press: “Eighteen months ago, the city's economic engine was chugging along so mightily that a record $3 billion surplus allowed City Hall to cut taxes, hire thousands of people and plan two new baseball stadiums costing $800 million each. Today, New York City is looking at its worst fiscal crisis since it went to the brink of bankruptcy in the 1970s. The city faces a projected $6 billion deficit next year, thousands of layoffs and big tax increases. The thought of new ballparks has become the most anachronistic of pipe dreams.”
November 14 – Associated Press (Alexa Bluth): “California faces a more than $20 billion budget deficit for the second straight year, according to projections released Thursday by Legislative Analyst Elizabeth Hill. Lawmakers will be forced over the next 19 months to fill in a $21.1 billion deficit - one quarter of the state's total operating budget - and could face $12 to $16 billion deficits for at least six more years, said Hill, the Legislature's nonpartisan economic adviser. 'There is no easy way out of this predicament,' Hill said. Gov. Gray Davis signed a $98.9 billion budget Sept. 5 - a record 67 days late - that used a combination of cuts, borrowing and increases to the state's revenues, including the suspension of a tax break that allows businesses to write off losses, to fill a $23.6 billion gap.
Even Fannie Mae, with all the questions (some legitimate) regarding its hedging operations, ended the third quarter with a “Derivatives in Loss Position” liability of $7.8 billion. This was, however, offset by “Derivatives in Gain Position” asset of $3.1 billion. And while Fannie is forced to mark its derivative loss to market (calculate/estimate a gain or loss based on current market conditions), at least it enjoys unrealized gains on its $760 billion mortgage portfolio. Looking at the FHLB balance sheet, we are puzzled by the scope of interest rate hedging that would lead to a $17 billion liability (loss?). The vast majority of assets comprise “Advances” to member institutions and short-term Fed funds sold. On the liability side, we see the preponderance of long-term borrowings. We don't get it…but they do admit to “intermediating” in derivatives for their member banks.
Not surprisingly, chairman Greenspan does not address unfolding Credit market problems as THE critical issue for financial markets and the U.S and global economies. Mr. Greenspan and most economists retain great faith in the U.S. economy's inherent growth bias. Repeatedly, he and others have trumpeted the economy's “resilience,” and we have regularly rebutted that the leading forces at work were an abnormal monetary/service sector economy stoked by unhealthy and unsustainable Credit and speculative excess. It is the monetary regime of “contemporary finance” that has been amazingly resilient. We see only further evidence that this “regime” is unstable and increasingly vulnerable.
With our view of escalating Credit problems, we see little possibility for anything other than brief respites from the “uncertainty overhang.” With liquidity abundant, these respites will feed intermittent stock market rallies and an attendant boost in confidence (and spending). The true ongoing problem, however, is anything but investor psychology, and no amount of positive thinking will rectify gross structural impairment. As analysts, we think in terms of the created edifice of fragile debts structures and financial and economic Bubble distortions. Unlike Dr. Greenspan, we view the U.S. economy as grossly imbalanced. Looking through the eyes of a traditional business cycle economist, he sees little cyclical inventory overhang in the industrial sector. Yet, Greenspan remains blind to deep structural maladjustments in the New Age “Service Sector” economy. The acutely fragile financial system impaired by many years of gross speculative and Credit excess – and the residual irreparable damage done to the real economy – that will keep “risk premiums” extraordinarily high going forward. The problem is not “uncertainty,” but bad debt. The great system “overhang” is found in leveraged speculations. |
