Friday, September 03, 2010

California's Unsustainable Pension Burden

To get some idea of what sort of stealth government deficits are looming, it's worth reading California governor Arnold Schwarzenegger's August 27th Wall Street Journal editorial.

Arnold presented a bar chart showing California's past and projected annual retirement costs for public employees rising from roughly $5B in 2007, to $10B in 2013, and more than 20B by 2018.

Reading the list of actions by the state's government favoring public pension gives you a headache.

Meanwhile, the governor presents another graphic showing private sector job losses in the state totally 1.2MM since 2008, while public sector jobs have only barely budged, losing perhaps 10K.

It's difficult to understand how US equity markets can be expected to soar while lurking public sector deficits and excessive spending provide an offsetting drain on economic resources.

If California, once the prized growth engine of the US economy, has fallen into this unsustainable situation, how many other states are in similar straits? Where will the resources come from to provide for these unpaid public sector pension promises?

Federalizing them won't cure anything. It will only encourage more unaffordable pension promises.

It's articles like Arnold's which makes me sceptical that recent equity market rises are also sustainable for more than a few weeks at a time.

Thursday, September 02, 2010

Whither The Equity Markets- Again?

How to interpret the recent roller coaster ride that has been the S&P500 Index?

Yesterday, the index rose over 40 points, to 1080.29. Yet, only four sessions earlier, the S&P closed at 1047.22. Back on June 30, the index closed just under 1031. Then up to nearly 1128 on August 9th.

By our proprietary volatility measure, the index regained in just yesterday all the volatility it had managed to shed since August 12th.

To me, the very fact that volatility has been, well, so volatile, suggests a lack of sufficient confidence in equities at present to underpin belief in a long, steady rise in values.

Plus, if you have followed the various apparent reasons for the equity index's recent lurchings between highs and lows, you, like I, know that the reasons for the declines, i.e., global economic weakness and lingering high US unemployment, are no closer to resolution than they've been for months. By contrast, the market rises seem to be short, sharp and a product of seemingly-myopic fixation on the rise in a few isolated economic indicators.

It's tough to know just when to go short, but the market dynamics, and our signals, suggest that this is the next likely direction for equity prices.

Wednesday, September 01, 2010

Gary Kaminsky On Stock Buybacks

Earlier this week, in his co-hosting role on CNBC's noontime program, Gary Kaminsky made a very coherent little presentation which reinforces an aspect of the proprietary equity research on which my equity portfolio selection and management strategy is based.

Kaminsky displayed price charts for Intel and Microsoft for the past few years. In each case, he demonstrated that, since each firm's substantial stock buyback programs, their prices had flattened.

I don't recall the exact dates for each equity, but the nearby Yahoo-sourced price chart for INTC, MSFT and the S&P500Index makes the case for the last five year period, within which has been each firm's buyback activity.

All three series are down for the period, with both companies below the S&P, meaning, adjusting for risk of lack of diversification, they've both done significantly worse than the index.

Kaminsky only said that he believes corporate senior managers lack the touch for timing their stock buybacks.

I'll go much, much further, based on my own research.

In a statistically significant sense, stock buybacks shrink capital. Capital growth is related to consistently superior total returns. So are some other fundamental measures, both inputs and performance, which accompany the growth of capital.

Shrinking production inputs is going to get you a low- or no-growth company. Which is why I have not considered either Intel or Microsoft to be a growth company for at least a decade.

That's what's really behind Kaminsky's charts and contention.

More power to him for reminding investors that companies which can't do any better than to shrink shareholder capital aren't going to be succeeding in highly-competitive, growth-oriented product/markets.

Tuesday, August 31, 2010

The SEC's New Board Nomination Rules

Yesterday's lead staff editorial in the Wall Street Journal trumpeted the victory of Saul Alinsky's tactics via the SEC's new, easier rules for union pension funds to force companies to place their board nominees on proxy ballots.

Without going into laborious (pun intended) detail, left-leaning SEC chief Mary Schapiro rammed through criteria owning only 3% of a company's equity for only 3 years in order to nominate up to 25% of a board's membership. The key difference is that, in the past, union pension funds would have had to pay for campaigns and mailings to achieve the same effect. Alinsky was on record as calling the 1960s proxy campaign against Kodak a watershed event.

However, on the same day as the editorial appeared, there was a discussion among some guests on CNBC involving the near-total extinction of institutional buy-and-hold equity strategies.

For better or worse, almost no professional money managers really sit on equity assets for years anymore. It's simply too risky in today's equity market environment.

That would imply that anyone taking advantage of this new SEC ruling is a rather backward, antiquated equity manager.

The Journal editorial alleges that this rule would make companies vulnerable to union coercion to do things like resign membership in the Chamber of Commerce, or explicitly back a government policy or favored administration legislation, regardless of the action's benefit for the company.

First, I think the editorial is a bit over the top on the coercion angle. I think it's legitimate to expect such coercion, but I think it's wrong to believe that companies will simply fold on the issues, or that the union pension nominees will automatically be elected, or, being elected, will be able to force the board and company to do their bidding.

But the SEC's rule, in the context of today's equity management approaches, seems, itself, antiquated.

If very few managers, perhaps even including those managing money for union pension funds, hold that much equity for that long, is the rule even going to be able to be invoked very often?

I've argued in prior posts, found under the "shareholder democracy" and "corporate governance" labels, that the former term is a myth, as currently used.

The only "shareholder democracy" in which I'm interested is one that assures me instant, liquid markets for buying or selling equities. My equity strategy doesn't include corporate actions or board composition in its factors for selections. It actually prohibits me from owning an equity for as long as 3 years in any significant concentration.

So, if most institutional investors hold for significantly less than 3 years, constantly seeking the best potential returns in the equity markets, is the SEC's new proxy rule going to affect those investors and their behaviors?

Supposing that the Journal editorial's implication is correct, and those companies in the crosshairs of union pension funds suffer worse performance and returns, then investors will have already moved out of those companies' equities before the real damage occurs. And, if this happened, in a recurring fashion, won't the union pension fund board nominees begin to be defeated, as their elections are publicly shown to damage shareholder wealth?

In fact, the reality of shorter institutional holding periods, and greater turnover of holdings, pretty much makes slower-moving SEC rules moot, don't they? Investors are buying and selling on a much shorter cycle than the SEC's proxy rules take to change boards.

Maybe this is much ado about nothing.

Monday, August 30, 2010

Talking His Book This Morning On CNBC: Bob Doll

BlackRock's equity chief Boll Doll is on CNBC this morning talking his generic book- again.

This time, I happened to hear Doll contend 'I don't think we've actually ever seen a double dip recession.'

Now, I've heard quite a handful of eminent economists, Nouriel Roubini included, appear on CNBC last week to weigh in on the US economy. Many feel that growth has faltered, a full-blown recovery is not underway, and there is a fairly good chance that US economic activity will decline again shortly.

Call it what you will, these economists, with less at stake in the equity markets than Doll, seem quite a bit more sanguine.

Doll, by contrast, seems to be cheerleading in every CNBC appearance. He never sees a falling market, only one requiring patience, or preservation of cash for subsequent buying. It's like BlackRock has decided as a matter of policy that they will never call a down market or a market crash.

Bad for business. Especially when you are mostly long and don't want your CNBC morning forecast to destroy your own equity positions by the time the opening bell rings at 9:30AM.

Which reinforces my tendency to take the views of very prominent equity managers like Doll, with substantial publicly-accessible funds, with a great amount of scepticism. They simply have too much at stake in the market to speak candidly.

Operational Failure & Loss Of Consumer Trust

I periodically buy groceries at a local, smallish chain called Kings. It was, some years ago, acquired by Marks & Spencer of the UK, then sold again, to whom I don't recall. The chain is known for good-quality produce and an upscale selection of merchandise, as well as very good and pleasant service.

The chain used to encourage customers to use the chain's affinity card, but that stopped some months ago. Recently, perhaps to challenge Stop 'N Shop's policy of giving a 2 cent credit for each bag brought by the customer, Kings announced that, henceforth, they would give a 4 cent/bag credit.

Stop 'N Shop has self-checkout of two varieties, about one of which I wrote in that linked post. Thus, it's easy for the customer to enter the number of bags they have brought, and receive the credit.

Kings has no self-checkout. Only human cashiers.

Thus, it's been my experience over the past few months, that perhaps as often as 4 times in 10, the cashier won't remember to ring up the 4 cent bag credit. Typically, it's a teen-aged employee who neglects to do this, despite my prominent display of one of the chain's own distinctive mesh plastic bags upon checking out.

This has caused an interesting reaction in me. While realizing that we're only talking about 4 cents, I never the less find myself annoyed when the cashier fails to notice my bag and deduct the paltry amount.

In the past six months, my attitude toward the chain has gone from one of respect and overall positive image, to one of increasing annoyance at their inability to execute on their own bag credit policy.

Better, in my opinion, that they simply drop it, or assume you have a bag and just show a deduction, than cause minor disappointment by failing to implement a policy they chose to rather publicly trumpet.

Now, I feel like I'm being lied to by the chain, since the odds of the cashier correctly implementing the policy is not different than a coin toss, unless I start selecting older cashiers for a 4 cent payoff.

Hardly worth the effort.

But Kings' management has now, well, managed to make me believe they are becoming as inept as Stop 'N Shop's own management team. Only the latter is much larger, headquartered in another state, and more understandably incapable of sensible behavior.

Kings isn't.

It's clear that Kings' managers aren't making the bag credit policy important to cashiers, because they don't seem to pay much attention to whether a customer has a bag, or not. So it's a failure of training, monitoring and rewards for competent cashier behavior.

I wonder how many other customers are beginning to slowly, subtly change their opinions of the chain from this small but very noticeable failure?