Slip-Sliding Away

Zero return in the last five years--and heading south...

Last month I took a look at the investment portfolio of the Maine Public Employees Retirement System (MainePERS) and suggested that the fund was ill positioned for a deflationary economy. In particular, the pension fund is overweight stocks--and dangerously exposed to the financial sector. Two of its top ten equity holdings are Bank of America and JP Morgan Chase (see the table below).

Those chips should have been taken off the table six months ago. An update at the MainePERS website shows that the fund's shares in Bank of America and JP Morgan Chase decreased in value by 19.2% and 17.9% respectively in the three-month period ending on June 30. We can hope that this was because of a reduced share-count, i.e. that fund managers smartly sold shares before this spring's sell-off, during which stock prices for both companies declined by over 20%. Given that the fund dropped a cool half-billion during the quarter (-6.4%), however, it is more likely that we simply rode the shares down, Six Flags style.

The Maine Center for Public Interest Reporting has posted an alert at its website (www.pinetreewatchdog.org) regarding Maine's pension liability and the huge impact it will have on the state budget going forward. The state has underfunded MainePERS by $4.4 billion and must make up the difference out of the General Fund by 2028. The gap is based on the dubious assumption that the MainePERS portfolio can generate returns of almost 8% annually between now and then. The portfolio's recent performance is hardly reassuring in that regard.

Worse, just as the pension gap is growing, so is the shortfall in the state's operating budget, a shortfall now expected to exceed $1 billion in the next biennium. You cannot rob Peter to pay Paul when Peter is flat broke.

Largest Holdings at June 30, 2010:

Top 10 Equity Holdings Market Value Exxon Mobil $ 66,477,991 Apple 51,352,113 Microsoft 43,881,980 IBM 42,349,442 Procter & Gamble 39,276,284 General Electric 38,006,304 JP Morgan Chase 37,104,601 Johnson & Johnson 36,994,416 Bank of America 36,864,697 Berkshire Hathaway Cl B 34,714,558 Top 10 Equities $ 427,022,386

For a detailed analysis of states' pension woes,
check out this report by Courtney Collins and Andrew J. Rettenmaier.

From the executive summary:

Many state and local government pension plans' liabilities are calculated using discount rates that are not commensurate with the risk they may pose to taxpayers. Accounting standards allow pension funds to calculate their liabilities using a discount rate comparable to the expected rate of return on the funds' assets. This typically high discount rate tends to reduce the size of a pension plan's accrued liabilities. However, pensioners have a durable legal claim to receive their benefits and consequently, it is more appropriate to use a lower discount rate in calculating the plans' accrued liabilities.

Due to the use of high discount rates, the liabilities of state and local government pension plans are underestimated. For example, recent reports by the Pew Center on the States and others indicate that assets will cover about 85 percent of the pension benefits owed to participants. But other studies that adopted lower discount rates have found liabilities may actually be 75 percent to 86 percent higher than reported. As a result, taxpayers' role as insurer may be much greater than anticipated.

Tuesday Twosome

Dan Seals and John Ford Coley

Nights Are Forever Without You

Manipulating the Currency, Remaking the Culture

The dollar has fallen in value ever since the Federal Reserve was created.


James Quinn, "How Welfare and Warfare Are Destroying Our Country"

[excerpts:]

The way to get elected in the U.S. since the 1930s has been to promise voters benefits while ignoring the long-term costs. The defense industry and their lobbyists benefit by creating phantom enemies around the globe and stirring up the masses through fear and propaganda. The other beneficiary has been the banking syndicate and their owned printing press called the Federal Reserve. The welfare promises and constant warfare over the last century wouldn’t have been possible without the Federal Reserve and their ability to create constant inflation.

Politicians discovered that the populace will go along with their never ending military adventures if they were bought off with promises of generous pensions, free medical insurance, subsidized housing, unlimited drug benefits, farm subsidies, tax loopholes, and thousands of other voter boondoggle payoffs. The Federal Reserve printed the fiat currency, the military industrial complex created the enemies, young Americans fought and died in foreign countries in undeclared wars of choice, and corrupt politicians promised unlimited benefits to the masses in search of votes while rigging the tax system to benefit the rich and powerful. The creation of the Federal Reserve and the Federal Income Tax in 1913 unleashed politicians from the chains of fiscal responsibility....

The U.S. welfare-warfare state is not the result of any one political party’s agenda. The Republican Party and the Democratic Party have cooperated to achieve this result. Republicans passed the largest entitlement expansion since LBJ in 2003. Democrats have just proposed the largest military budget in the history of mankind. It isn’t easy to run the National Debt from $5.7 trillion in 2000 to $13.1 trillion today. It takes cooperation and mutual ineptitude on the part of both parties to achieve such a spectacular result.

The complete article, including the author's list of six "immediate actions required to avoid a catastrophic collapse," can be found at TheBurningPlatform.com.

Loon Count 2010

Loon with chick at Worthley Pond, 07-17-10

[photo: Thea Palanza-Parker]

On Saturday the Maine Audubon Society coordinated its annual Loon Count on Maine's lakes and ponds. There is local evidence that the loon population is holding its own. At Worthley Pond in Peru, nine volunteers took up posts either on shore or in watercraft during the designated observation period (7:00 to 7:30 a.m.). There were known to be six resident loons on the Pond--including a two-week-old chick--and they were all sighted during the official half-hour window. Count 'em!

This was the most ever recorded at Worthley Pond since the annual count began in the mid-1980s. It was also the first time that a chick was counted (last year's surviving chick did not hatch until after the count). Afterward Cathy Hazelton hosted a breakfast for the counters at her father's camp on Annie Lane.

The Worthley Pond Association keeps a website, complete with photo gallery, here.

Inventory Coming Out of the Shadows

Keith Jurow, "Why Are Banks Withholding Highend Repossessions Over $300,000 From the Market?"

[excerpt:]

This year, banks in the Chicago area have foreclosed on a huge number of expensive homes. RealtyTrac lists 2,650 repossessed homes for more than $300,000 and 169 for more than $1 million.

Here is where it gets really interesting. Out of 28,829 repossessed properties, there were only 1,292 listed by lenders as "for sale." The vast majority of these available homes were inexpensive. A mere 29 homes over $300,000 were for sale. In other words, the banks have withheld from the market 2,621 properties listed at $300,000 or higher....

With so many homes listed for more than $300,000 now languishing on the Cook County market, it is somewhat understandable that the banks would be reluctant to add their foreclosed homes in this price range to a weak market. When you add in the 7,550 defaulted properties in this price range which have not yet been repossessed by the banks, you can get a sense of the soaring number of homes that is ready to inundate an already glutted market. When these homes come onto the market, as they eventually must, prices will inevitably plunge.

Dade County (FL), Orange County (CA), and Bergen County (NJ): same story.

Complete article viewable at RealEstateChannel.com.

Tuesday Twosome

Mark Knopfler and Emmylou Harris

Why Worry

Deficit Drivers

federal deficit à la carte

[excerpt:]

Some commentators blame recent legislation--the stimulus bill and the financial rescues--for today’s record deficits. Yet those costs pale next to other policies enacted since 2001 that have swollen the deficit....

Just two policies dating from the Bush Administration--tax cuts and the wars in Iraq and Afghanistan--accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including the associated debt-service costs. These impacts easily dwarf the stimulus and financial rescues. Furthermore, unlike those temporary costs, these inherited policies (especially the tax cuts and the prescription drug benefit enacted in 2003) do not fade away as the economy recovers (see Figure 1).

Complete analysis at Center on Budget and Policy Priorities website.

Wise Up, Investors

John Hussman, Ph.D., "Misallocating Resources"

[excerpts:]

There is little question that we have, for more than a decade, squandered our productive resources in the pursuit of bubbles. Almost unbelievably, real private gross domestic investment is lower today than it was 12 years ago, and much of the gross domestic investment that we have made in the interim has been destroyed in mispriced speculative activity such as residential construction and commercial real estate development....

If we as a nation fail to allow market discipline, to create incentives for research and development, to discourage speculative bubbles, to accumulate productive capital, and to maintain adequate educational achievement and human capital, the real wages of U.S. workers will slide toward those of developing economies. The real income of a nation is identical its real output - one cannot grow independent of the other....

For a moment, at least, it is good to be a corporate insider, particularly at major financial companies. First, you get to report productivity gains and "operating profits" - not by making smart investments in productive assets, but instead by writing up debt thanks to Treasury intervention, by misstating your balance sheet thanks to FASB changes last year, and at industrial firms, by cutting the number of workers per unit of capital. Next, you quietly write off large losses on bad investments and unrecoverable loans as "extraordinary expenses," to which investors pay no notice. And to add insult to injury, you deliver a significant portion of the remaining profits to yourself as "incentive compensation," followed by buybacks of stock to offset the dilution, which investors actually cheer because they don't realize they've been taken for suckers.

Complete article viewable at HussmanFunds.com.

Tuesday Twosome

Indigo Girls

Closer to Fine

Source: Annaly Capital Management

Peter Atwater, "How Is the Credit Card Industry Making Money?"

[excerpt:]

Since the beginning of 2007, the correlation between the unemployment rate and residential mortgages has tightened significantly, while the correlation between the unemployment rate and credit cards has broken down...[suggesting] a fundamental change in consumer credit behavior as consumers are “reprioritizing” monthly cash flows away from lower cost debt (first mortgages) to credit cards, home equity lines, and other higher cost borrowings.

Complete article viewable at Minyanville.com.

Tuesday Twosome

Alison Krauss and Robert Plant

Killing the Blues

From the Bookshelf...

[excerpts:]

My family and friends expected that I would welcome being "normal," be appreciative of lithium, and take in stride having normal energy and sleep. But if you have had stars at your feet and the rings of planets through your hands, are used to sleeping four or five hours a night and now sleep eight, are used to staying up all night for days and weeks in a row and now cannot, it is a very real adjustment to blend into a three-piece-suit schedule, which, while comfortable to many, is new, restrictive, seemingly less productive, and maddeningly less intoxicating....

After my suicide attempt, I had to reconcile the images of myself as a young girl who had been filled with enthusiasm, high hopes, great expectations, enormous energy and dreams and love of life, with that of a dreary, crabbed, pained woman who desperately wished only for death and took a lethal dose of lithium in order to accomplish it....

There is, for me, a mixture of longings for an earlier age; this is inevitable, perhaps, in any life, but there is an extra twist of almost painful nostalgia brought about by having lived a life particularly intense in moods. This makes it even harder to leave the past behind, and life, on occasion, becomes a kind of elegy for lost moods.

Kay Redfield Jamison, An Unquiet Mind

Featuring: Grafton Loop Trail

This morning's Maine Sunday Telegram has a piece (with photos) on the Grafton Loop Trail off Rte. 26 (trailheads in Newry and Grafton Notch). Cathy and I maintain the 3.1 miles from the highway to the summit of Puzzle Mountain and have backpacked the entire loop. What a resource!

Though the GLT was designed with backpackers in mind, Puzzle Mountain is a popular destination for day-hikers. We'll show you the way if you are interested. For more info, shoot your message to billhine@gmail.com.

Flip Charts

State of the Union, in pictures.


Initial Unemployment Claims:

Yesterday's figure of 472,000 is heading the wrong way--up!


Figures released today show the average work week heading back down.


Unit Labor Costs:

Wage deflation is here--
which explains why big-ticket purchases are down (see below).

MBA Purchase Index:

Applications for loans for new homes are at a 13-year low.

New Home Sales:

The figures for May were dismal, just 300,000 units annualized.

Auto sales:

The 5.6 million units sold in the first half of 2010 are not enough to restore profitability to the industry.


TED spread [LIBOR vs. U.S. Ten-Year Bond Yield]:

Inter-bank lending has loosened up in the past few weeks, which is a positive, but...


Yield on Greek Ten-Year Bonds:

The risk of sovereign default rises as the euro fix announced in May loses credibility. The global financial crisis is not over.

Want more slides?
The Heritage Foundation has a sequence on government spending,
beginning with this one:

[click for more]