The Broken Pension Promise

March 2, 2012 Whither the defined-benefit pension? How low interest rates, the “fraudclosure” scandal and one bloated dinosaur of a company are conspiring to wreck your retirement
In search of a mystery seller: Separating the signals from the noise after gold’s beat-down
Take that, Warren Buffett: How gold really can generate an income stream
Spanish town looks to collect revenue from a few of its… best buds
The economic fever-chill cycle… a query about ETFs… Ron Paul raises his silver shield… and more!
If you thought the Fed’s penchant for low interest rates were a bear because you can’t get a decent return on a bank CD, think about this: The typical pension plan of an S&P 1500 company can meet only 75% of its obligations as of year-end 2011 — a post-World War II low.

In 2010, the funded ratio was still 81%.

Put together all the S&P 1500 companies, and they’re staring at a $484 billion aggregate pension deficit.

Big companies that still maintain “DB” pensions will have to scrape together $100 billion to keep their pensions funded this year, according to the consultant Milliman Inc.

That’s $100 billion they won’t have for dividends, or stock buybacks, or — heaven forfend — expanding operations.

The situation only gets worse as the era of low interest rates persists.

“Companies from defense contractor Lockheed Martin Corp. to aviation-electronics maker Honeywell International Inc. are caught in a vise,” according to Bloomberg.

“The Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.”

General Electric, 3M and Boeing also find themselves in the same fix.

“With the declining interest rates here in 2011,” says 3M’s CFO David Meline, “our liabilities did increase.”

Meanwhile, one of the primary “assets” held by pension funds is looking more and more shaky, thanks to the recent “fraudclosure” settlement between the major banks, the Justice Department and 49 state attorneys general.

A provision in the deal “allows for the banks to reduce borrowers’ balances in home loans that back securities which have been sold to investors, such as U.S. pension funds,” the Financial Times reported yesterday.

“Investors say they are being penalized for mistakes made by the banks, and have launched a campaign to limit potential losses to their holdings.”

Bondholders versus banks: If Vegas were laying down odds, you’d be better off picking one of 36 numbers at a roulette table.

True, private pensions are backstopped by the government’s Pension Benefit Guaranty Corp. Unfortunately, the PBGC is about to choke on the pension obligations of just one company.

American Airlines — the carrier our Dan Amoss saw as a “dead man flying” months before it filed for Chapter 11 last November — wants to terminate the pensions of 130,000 workers, foisting them on the PBGC.

“Josh Gotbaum, the PBGC’s director, has mounted an unusual public campaign against American,” Reuters columnist Mark Miller wrote two days ago, “arguing that the airline hasn’t made the case that it needs to terminate the plans.”

No wonder: The PBGC is already $26 billion in the red after the dust settled from the first phase of the Great Correction. American’s pensions would swell its future obligations by $10.2 billion.

“The use of bankruptcy court to shed pensions,” Miller writes, “raises questions about the long-term viability of the PBGC, and potential burden on taxpayers. While the PBGC has plenty of cash on hand to meet near-term obligations, the pressures could become unmanageable if a succession of underfunded plans were transferred to the agency.”

We’ll confidently make this forecast: Count on it.

The gold watch? Ancient history. And pension promises are next…

“This pension underfunding issue,” says Strategic Short Report’s Dan Amoss, “will grow to a crisis within a few years if the Fed keeps suppressing 10-year Treasury rates in the current 2% range.

“There’s no way underfunded pensions, under this low-interest rate scenario, will be able to achieve projected portfolio returns. So pensions will require massive draws of cash from their corporate sponsors” — just as GE, 3M and Boeing will have to do this year.

We know you don’t want to hear about this, especially with the weekend coming up. It’s one more bad piece of news for your retirement income, on top of low interest rates and the drawdown of the Social Security “trust fund.”

But we have a new idea that could help you fight back. More after we survey the markets…

Stocks are again cast adrift today. As of this writing, the major indexes are all down, but not much.

The S&P is holding above the 1,365 level that Jonas Elmerraji’s been watching. Small caps are taking the bigger hit; the Russell 2000 is down about 0.8%.

Oil is selling off today, after poking above $110 late yesterday. That’s when Iran’s Press TV reported a pipeline explosion in Saudi Arabia… which Saudi Arabian officials immediately denied.

Hmmm… More Sunni-Shia New War skulduggery?

In any event, with the passage of time, traders have followed the sage guidance that comes from Internet message boards: “Pix, or it didn’t happen!”

With no pictures forthcoming, oil’s back to $106.57.

Gold is losing a bit of the ground it regained yesterday after Wednesday’s vicious sell-off. The bid is currently $1,709. Silver’s getting stomped again, down to $34.77.

And the picture of what happened on Wednesday is starting to come into focus.

“Looks like a large seller of gold in the market, as a 10,000 contract traded, downticked the price by $40 per ounce, and represents 1 million ounces of gold sold,” reads a note from CIBC World Markets.

“Unusual to see such a large single trade,” it added. “Not likely due to contract expiry, either.”

“Ordinarily,” adds a note from the London firm Sharps Pixley, “if a seller wanted to get the best price for his metal, he would seek to finesse the selling over time, hunting out liquidity (finding people who are the other side of his sell order) and thereby ensure he gets the best possible profit.”

Who did it? Depends on whom you want to believe. We see claims of “a large U.S. fund” along with a claim J.P. Morgan executed the order on behalf of “an Asian fund”.

Whoever it was, “this seller,” concludes Sharps Pixley, “was clearly simply out for effect.”

“I would buy gold at almost any price,” says Evy Hambro, manager of BlackRock Gold & General, the U.K.’s best-performing commodities fund,” as long as the fundamentals are strong.

“Gold has been incredibly strong for most of the past 10 years, and I see that trend continuing… Long-term fundamentals in the gold market appear supportive of prices, driven by constrained supply and rising demand.”

“Gold mine supply,” meanwhile, “was effectively flat from 2001-2010, despite the huge increase in the gold price over that period.”

“My favorite aspect of gold is that it is still a finite resource,” chimes in our income specialist Jim Nelson. “Of course,” he adds, “there are two sides to everything.”

“Obviously, gold comes with incredible security and wealth protection against inflating central bankers and weak fiat currencies. But you can’t live on that.”

True enough. For all his gold bashing, Warren Buffett does have this fact on his side: It doesn’t pay you an income stream.

“Protecting your wealth means nothing when you are trying to pay your bills, fund your children’s college education or plan a vacation,” says Jim.

“And until now, this has been the No. 1 problem facing gold investors. Sure, bury your gold in your backyard. Fill your safe with gold coins and bullion. But don’t expect to live off it. At least that’s always been the case.”

But no more. For the past seven months, Jim has been refining a strategy in which you can generate income from gold.

One of his recommendations can deliver a 24% every year in cash paychecks. Another can give you monthly double-digit income.

This is the best of all worlds: You get the peace of mind that comes with gold… plus steady income that crushes anything you can get from Treasuries, CDs or blue-chip dividend payers.

Jim calls it his “Gold-tirement” plan: It can make any of your worries about Social Security, low interest rates or dwindling pension funds a distant memory.

A big claim, we know… But Jim has the goods to back it up. You can see for yourself right here.

In the United States, cash-strapped cities and states often look to casinos as a quick fix to fill their coffers. In Spain, they’re just going to pot.

The Catalonian town of Rasquera will allow a “cannabis club” to plant marijuana on 17 acres of city-owned property. “This is a chance to bring in money and create jobs,” says mayor Bernat Pellisa. The club will pay the town 650,000 euros annually.

Restoring solvency, stoner style…

Spain’s marijuana laws are, in the words of the UK Guardian, “ambiguous.” Growing and possessing pot for one’s own use is legal; cannabis clubs say all they’re doing is making it easier to do so. The mayor says he’s vetted the idea with lawyers and it, um, meets the smell test.

“The deal will turn Rasquera, where local produce traditionally includes olives, almonds and goats, into one of the biggest legal suppliers of cannabis in Europe,” the Guardian says.

Two thoughts occur to us: 1) The Greeks, themselves known for olives, might want to look into this. 2) We’re wondering why we haven’t heard anything from our office in Spain in a while. We’re headed over there next month to check up on them…

“I always find The 5 Min. Forecast very useful and entertaining, but so far, I haven’t seen anyone commenting on the near-term impacts from the impending confluence of several macroeconomic trends in the USA.”

“Those trends are: The ultra-bloated money supply, super-low velocity of money, incoming cash from the panicky eurozone, downward-trending leading indicators pointing to a recession on the horizon and the bubble du jour stock market.”

“Specifically, how can we know whether or not the bloated money supply will create sufficient inflation in the stock market prices to offset declining real (but increasingly inflated) earnings? How does one play such a situation when not only is the game constantly changing, but the value of the chips is no longer stable?”

“If the stock market is now rising on low volume due to liquidity created by the bloated world money supply as well as a lack of profitable alternative investments in Europe, will the mild recession forecast by ECRI be able to overcome the inflation and fear trade and cause a pullback in U.S. stock prices, or will it just appear to slow stock price growth (maybe like what’s going on in China)?

“To short (the market) or not to short, that is the question.”

The 5: This comes back to the fever-and-chills scenario we painted briefly on Monday. The economy and market recovered for much of 2009 and then slowed down after QE1 ended. Then came QE2 in the second half of 2010 and things took off again. Then QE2 wound down and everything started looking ugly in the late summer/early fall of 2011.

Now the Fed is promising ultra-low rates through 2014 and smashing the long end of the yield curve. You could be forgiven for thinking of it as QE3 by another name. And sure enough, there’s fever again.

This fever-and-chill cycle could drag on longer than you might think. But it can’t go on forever, and when it ends, it will end in tears.

“This is just a very curious story!” a reader writes. “I was investing in the Global X Farming ETF (BARN) because The 5 mentioned many times over that investments in farming should pay off handsomely in the future.”

“As this was a listed security, I was of the opinion that the responsible bourses would let only reputable companies issue and trade ETFs and they would also supervise these entities. Now I realize that the Global X Farming ETF does not exist anymore. How is such a thing possible in a totally regulated financial market like the USA?”

“Can you explain how such things happen, and also draw your readers to the fact that this company, obviously, is not trustworthy?”

The 5: Nothing suspicious as far as we can tell. Global X shut down eight ETFs last month, including BARN, because they couldn’t attract enough assets to make their operation profitable.

There’s a lesson in here about not jumping into brand-new ETFs until they get a chance to establish themselves. If it’s ag exposure you want, there’s ample liquidity in MOO for stocks and DBA for farm commodities.

“The powers that be,” writes a reader with another theory about why gold got whacked on Wednesday, “know that Ron Paul will take his best damn shot and use gold and silver as the best money.”

“What better way to give Bennie an ‘out’ than by thrashing gold and silver prices once he starts, so he can smugly point at the gold gyrations and claim the dollar is more stable and less prone to those damn speculators in the shadows?”

The 5: Hmmm… As coincidence would have it, the good doctor hauled out a Silver Eagle during Bernanke’s testimony on Wednesday, explaining it could buy four gallons of gasoline in 2006 and 11 gallons today. “That’s preservation of value.”

Silver had already fallen from $37.50 to $36 when he said that… but it plummeted to nearly $34 in the following 15 minutes.

Just sayin’…

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. “It’s a win!” says an email just in from Abe Cofnas.

We were on the edge of our seat wondering how Abe’s mock trade in the binary options market would make out this week… enough to hold off publishing today’s 5 till after the close.

“When our Wall Street 30 binaries expired at 4:00 p.m. today,” says Abe, “the underlying Dow futures were trading for 12,968 — more than enough to put our 12,925 binaries in the money. A winning binary always pays out $100. That means we made a $17.75 profit for each of our binary positions.”

All told, a 24% gain between Monday and Friday. “I dare you,” Abe adds audaciously, “to name another investment vehicle with that kind of reliable profit potential in four days or less!”

Stay tuned for another mock trade next week… followed soon by a chance to get in on the action yourself.
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