Old Stuff
Are we there yet?
Everyone wants to know.... have we found a bottom yet in the stock market? Last October we wrote that a break of the 7400-7500 on DJIA would be critical and should see a move towards 5800. The past few sessions have seen the market bouncing around the 6500/6600 level so we are certainly close, if not quite at 5800. On the economic front, it seems to us that there really isn't a lot more to shock to the downside - the market expects unemployment to continue to rise and sees no immediate turnaround in GDP either in the US or abroad. The failure to see another dramatic sell off after the payroll report last Friday shows the market has reached some degree of equilibrium.But there are still other events which can drag the averages down. There is some justified fear of another round of credit crunch, perhaps from problems in the commercial real estate market, perhaps from insurance companies selling bonds which have been downgraded. Perhaps both. However, what we see as the big cloud over the stock market and corporate earnings is pension plans. The market went through a scare not too many years ago about underfunded pension plans and the effect they would have on corporate earnings. For awhile the market suffered but an improved economy brought sunnier thoughts. Should the market once again focus on the need for many companies to add funds to their pension plans at a time when capital is scarce it would not be at all surprising to see the DJIA on a 5,000 handle, if not testing 5,000. This go around there does not seem to be an economic corner to be quickly turned to allow the accountants to say 'never mind!'
This is not to say the accountants still can't play around with the numbers. They most certainly can as the pension rules are convoluted - firms can take averages over many years, have 'contribution holidays' and muck about with discount rates. This may buy time in the short run but if the stock markets do not make a dramatic turnaround the clock will run out and those firms with underfunded plans will be in quite a bit of trouble. Merril has been on top of pension obligations and they are estimating over $35B in pension expenses for 2009 - figured when the averages were considerably higher. What is worse is that if there is a shift out of stocks and into bonds, the capital shift could be in excess of $200B. More frightening still is most of these plans have assumed returns in excess of 8% a year yet government bonds are at record low yields (for now), well below that 8% bogey. And a certain portion of their equity assets are not just paper loses but instead are never to return - AIG, GM, BS, LEH, etc.
But that is just a small tidbit of the pension nightmare. This time, Wall Street may actually pay attention to the underfunded plans of states and local municipalities. Now we are talking some real dough! As an example - the principal retirement funds for New York State have fallen over 50% (no surprise) - $60 billion. While a decade of stock market 'growth' has been erased, has a decade of pension obligations? What of California, a third world basket case of a state which can't seem to keep its regular budget short falls from exceeding the GDP of many small nations. How will it meet its generous public employee pension obligations?
The good news? Well the total capitalization of the US stock market is roughly $7.9 trillion per the Wilshire 5000 index. So there is still money to be found by selling stocks for those who need to raise cash. The bad news? The market cap has dropped by over $10 trillion since the fall of 2007. No wonder everyone is feeling so poor!
