Crosscurrents
September 8/04
by Alan M. Newman
The August 20th story in Newsday was headlined, "United
likely to end pensions," a recant heard before and one we believe will
be repeated often in the next decade. This is very bad news, not
only for United Airlines employees but for hundreds of thousands of other
Americans who are laboring under the impression that their pensions are
safe. United filed for relief in bankruptcy court and said they
would no longer contribute to their pension plans while in Chapter 11.
Although the hiatus could be temporary, it could be permanent, since the
government has already rejected United's bid for a $1.6 billion loan guarantee
to continue operating. United claimed it "must have the cash flow
and liquidity that the financial markets are willing to finance," leaving
out the crucial part that the federal government will eventually have
to pony up or else. If the company terminates its four defined benefit
plans, it would not only be the largest pension default ever by an airline
but would place billions in future obligations right at the door of the
Pension Benefit Guaranty Corp. As of a year ago, PBGC estimated
that U.S. pensions in defined benefit plans were under funded by more
than $350 billion. To place this statistic in a more amazing light,
consider that the PBGC insures more than 32,000 private defined pension
plans valued at an estimated $1.5 trillion, thus they are under funded
by roughly 23% AFTER the largest and longest bull market of all time.
As for the cushion the PBGC provides, a $9.7 billion surplus in 2000 was
estimated to be an $8.8 billion deficit just over a year ago. Want
more? How about this chart? You can read additional info at
www.frbsf.org/publications/economics/letter/2003/el2003-16.html.
But we digress.
United has lost a grand total of $94.94 per share
over the last ten quarters, every quarter a losing proposition.
The amount of the under funding at last glance was a measly $8.3 billion,
equal to roughly $125 per share. Stephen Schurr's piece in the Financial
Times also raises eyebrows, claiming that companies in the S&P 500
still expect an 8.36% return this year for the pensions they fund for
workers and retirees. Nevertheless, stocks are again disappointing and
the S&P has no longer become the reliable vehicle that drove pension
gains from 1982 to 2000. The mighty 500 are barely ahead for the
year. According to Mr. Schurr's article, the average pension has
64% per cent in stocks, commensurate with the average equity allocation
recommended by Wall Street Strategists, you know, those know-it-alls that
remained heavily invested while the market collapsed from the manic peaks
of 2000. The assumed 8.36% return would place the S&P 500 at
1205, which looks pretty far from here and is perhaps somewhat unrealistic.
If you've been a subscriber for long, you know we have touched on this
subject before and have termed pension problems as one of the greatest
threats we face over the next few years. We'll have much more to
say as time goes on. Stay tuned.
Suddenly, it appears that some observers have discovered value in Nasdaq stock prices. Prices are lower, earnings are higher and those two circumstances are supposed to make valuations far more attractive than before. It's ironic how belief fuels a mania. Talk about your undertakings of great advantage, insiders know them when they see them. Nasdaq presents a vivid picture of revulsion by the insiders who toil at the largest companies. The top ten Nasdaq companies account for 41% of the Nasdaq 100, also known as the QQQ, and the ten by themselves are responsible for $960 billion in market capitalization, approximately 7% of the U.S. stock market and given their household name status, we may fairly presume they are also responsible for a substantial portion of total dollar trading volume in U.S. stocks. A rough back-of-the-envelope calculation affords us the view that the ten issues depicted here will account for at least $1.88 trillion in trading this year, perhaps 7.6% of all dollars traded on the major exchanges. Lest we forget, the QQQ itself trades about 3.7% of all dollars traded on the major exchanges. Thus, Nasdaq's top ten have considerable clout. However, the average P/E works out to 40.6. Although this measure is not quite as high as we have measured in the past (60.2 as of July 3, 2003), the comparatively robust (yes, we are being quite sarcastic) valuations have done nothing to ease the furious manner in which corporate insiders are taking every opportunity to detach themselves from their shares. Admittedly, we have previously seen far higher sale-to-buy ratios then the 18 to 1 ratio recently recorded, but the sheer number of sales remains about as extended as before. In terms of total shares sold and shares bought, the ratio continues in la-la land, at 4561 to 1. In fact, the ratio has been better a number of times before and was only exceeded in our March 30, 2004 tally, when the Nasdaq Composite traded at 2000. Clearly, insiders knew what they were doing then since the Composite is now some 15% lower. We still believe they know what they are doing. For those who thrive on statistics, if you placed $10,000 in each of these companies ($100,000 overall) and waited a year, you would have roughly $720 in qualified dividends to show for your faith. The average price-to-sales ratio for the Nasdaq giants is 7.05. If General Electric traded at a similar valuation, its share price would be $94. If General Motors traded at a similar valuation, its share price would be $2362. Have a nice day.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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