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Posted on Thursday, May 6, 2010 - by Henry Walter
May 2010 Roundup
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
VIEWS and OPINIONS on the following topics:
- Kodak Pension Plan
- Euro Zone Issues
- Stable Funds
- “Sell in May and go away”
- Safe Haven Funds
- We have met the enemy and he is PowerPoint.
1. Kodak Pension Plan – Just as we were about to write an update on the Kodak pension fund based on the Eastman Kodak Company Annual Report on Form 10-K, we received in the mail YOU & KODAK, 2009 Annual Funding Notice & Benefits Update, 4.2010. According to the notice, the document is being distributed to all employees as well as retirees, LTD recipients and survivors. On page 2-5 is a fairly comprehensive report titled 2009 Annual Funding Notice for your enjoyment. Pension fund accounting is complicated, but as the notice indicates the funding target attainment percentage of a plan is a measure of how well the plan is funded on a particular date. So here are the numbers from the notice: 2009 118.04%, 2008 124.28% and 2007 93.22%. This data would indicate the pension fund is well-funded.
The Form 10-K (see page 95) has somewhat different numbers as the table below indicates.
In addition to being complicated, pension fund accounting is not exactly transparent, and we have been unable to reconcile the data in the two reports. At the bottom of the table in the Form 10-K is the following note which may help explain why the funding status went negative in a year when the stock market boomed: “The decline in funded status from December 31, 2008 to December 31, 2009 was primarily due to lower discount rates”.
Regardless, both sets of numbers indicate the pension fund is in reasonably good shape, particularly compared to other large corporations whose pension funds are way under funded. If you are or were an expert in pension accounting at Kodak, we would certainly appreciate your comments so we can pass them on to readers.
2. Euro Zone Issues – The stock market ended April on a sour note with the Dow down 158 points on Friday, April 30. The media had plenty of reasons for the decline, among them sovereign debt problems in Europe and, closer to home, the possibility of criminal charges in the Goldman Sachs controversy. But these could simply be excuses for a tired market that needs a rest after its remarkable rise of about 70% since the low on March 9, 2009.
Before we comment on the Greek debt crisis, below is a map of Europe to refresh your knowledge of European geography.
Media reports on Sunday (May 2) said that Greece reached an agreement under which it would accept a bailout package of direct loans from euro-zone countries and the International Monetary Fund with a potential value of 100 billion to 120 billion euros over three years. ( MarketWatch.com, May 2, 2010). That will probably be enough to ease market fears of “contagion” spreading to other highly indebted countries like Portugal, Spain, Italy and Ireland – for now. In order to secure the bailout, Greece had to agree to economic reforms that have already caused serious social unrest. Fiscally responsible Germany is not very happy with the outcome, and the agreement could possibly unravel in the next few weeks.
Apart from the profligate spending and rampant tax avoidance, Greece does not “own” its currency and therefore can not do what many countries do and that is print money to bail themselves out through inflation. In a year’s time or less, we’ll probably be back again worrying about the same problem. And don’t think for a moment that this problem is confined to some small country on the Mediterranean. If contagion results down the road it will affect the global economy including the U.S.A.
Just to show how bad things got before the bailout was announce, below is a chart of Greece’s benchmark 2-year note or sovereign debt (Chart by Money & Markets e-letter of April 30 using data from Bloomberg). Since late last year the yield shot up from around 2.1% to as high as 19% last week. For reference, the yield on the U.S. Treasury 2-year note is about 1%.
3. Stable Funds – There was an interesting article in the Wall Street Journal (Saturday/Sunday, May 1-2, 2010, page B8) entitled ‘Stable” Funds Are Looking Shakier by Eleanor Laise who frequently writes on the subject. The comments in her article and below are about stable-value funds in general and not specifically about the Kodak Fixed Income Fund.
As Ms. Laise points out, stable-value funds are designed to deliver steady performance and protect against losses. But financial-crisis fallout and changing market conditions are crimping these funds’ returns and imposing new restrictions on fund managers and investors. The funds, which hold roughly $700 billion, are available only in tax-deferred savings plans such as 401(k)s.
According to the article, there is a significant shortage of wrap contracts causing higher fees and other problems. Wrap fees have shot up in the past few weeks to roughly 0.20 to 0.25%, from as low as 0.06% previously. Stable-value investors should prepare themselves for lower returns. The shortage of wraps is causing some managers to hold higher cash balances, a drag on performance. The average stable-value fund delivered 3.1% last year, down from 4.6% in 2008, according to Hueler Cos., which tracks such things. (As of April 1, 2010, the return on the Fixed Income Fund was 4.28%.)
As you would expect, during the financial crisis, participation in stable-value funds rose to about 35%, and has since declined to about 25%. To read the full article Google the title.
4. “Sell in May and go away” – We have always been interested in the old Wall Street adage which holds that the worst five months for stocks begins in May and ends in September (one variation uses 6 months or May-October). In this week’s Barron’s (May 3, 2010, page 17) in the ‘This Week Preview’ section, Barron’s points out that for the past 60 years through April 28, a $10,000 investment in the Dow Industrials in the “bearish” months resulted in a loss of $474, while a like investment in the ‘bullish’ months gained $529,000, according to the Stock Trader’s Almanac.
We personally tend to cut back our exposure to equities in the bearish months, but it is important to note that the batting average for this approach is about 80%, in other words in some years, like 2009, it doesn’t work.
5. Safe Haven Funds – Also in this week’s Barron’s (May 1-2, 2010, page B9) is an article titled Safe Haven: ‘Mutual Funds That Act Like Hedge Funds’. The article notes that Morningstar’s ‘long-short’ mutual fund category includes market-neutral and absolute-return funds, which are designed to generate returns in any market environment. But there is a price for that downside protection: underperformance when markets rise sharply.
Morningstar’s top pick, their so-called “analyst pick”, is Gateway Fund, with annualized returns of 3.2% over the past five years and an expense ratio of 0.94%. Todd Rosenbluth, mutual fund analyst at S&P Equity Research, says two other long-short funds worth a look are Diamond Hill Long-Short Fund with an annualized return of 4.3% over five years and an expense ratio of 1.48%, and Aberdeen Equity Long-Short Fund with a five-year annualized return of 4.6% and fees of 1.74%. (Warning these funds have front end loads and we question the return for Diamond Hill.)
Your writer is currently looking at TFS Market Neutral Fund (TFSMX) rated 5 stars by Morningstar with a five-year annualized return of 9.50 but expenses of 2.49%, a little on the high side, but no front end load.
More conservative investors can benefit most from the diversification these funds offer. But before you even think about investing, talk to your financial advisor.
6. We have met the enemy and he is PowerPoint – On a more humorous note, the New York Times (Tuesday, April 27, 2010), showed on page 1, top center, the PowerPoint diagram below. PowerPoint is, or was, popular in the military establishment.
Upon seeing the diagram, Gen. Stanley A. McChrystal said, “When we understand that slide, we’ll have won the war”.
For questions or additional information on this blog entry, please contact us.
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Posted on Wednesday, April 21, 2010 - by Henry Walter
BERKSHIRE HATHAWAY’S ANNUAL LETTER 2009
Please note – The views and opinions expressed in this article are those of the writer and do not necessarily reflect the views and opinions of High Falls Advisors, LLC. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
Many investors eagerly await Berkshire Hathaway’s annual letter which was released on February 26, 2010, and can be retrieved at http://www.berkshirehathaway.com/letters/2009ltr.pdf .
Berkshire’s performance over the last 45 years, from 1964-2009, is amazing. The compound annual gain in per-share book value was 20.3% and overall gains 434,057%, compared to 9.3% and 5,430% for the S&P 500 with dividends. Using the market price as the yardstick, the gain from the start of 1965 is 22% compounded annually, and an 801,516% market-value gain for the entire 45-year period. (As startling as those percentages may seem, they come directly from the Berkshire report.) Buffett and Charlie Munger are careful to warn investors that Berkshire’s performance advantage has shrunk dramatically as its size has grown.
We think it important that investors read this letter even if they are not shareholders. The letter is 19 pages, but you can skip the parts covering the specific Berkshire operations. Here are a few highlights that we found of value or interest.
“From the start, Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it.”
Buffett writes about the importance of liquidity to provide financial flexibility and the ability to take advantage of opportunities, citing the sweet deals Berkshire negotiated with Goldman Sachs and GE when the financial system went into cardiac arrest in September 2008, noting that Berkshire was a supplier of liquidity and capital to the system, not a supplicant.
One part that your correspondent particularly appreciated having worked at Kodak for 35 years was the following statement referring to the fact that Berkshire now has 257,000 employees and hundreds of different operating units, “But we will never allow Berkshire to become some monolith that is overrun with committees, budget presentations, and multiple layers of management.”
He likes regulated utilities and railroads, as evidenced by Berkshire’s recent purchase of BNSF and earlier purchase of MidAmerican Energy saying “It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems.”
He talks at length about his failure in letting NetJets descend into a major problem for Berkshire.
And he notes that Berkshire has put a lot of money to work during the chaos of the last two years. “It has been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurances. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.”
Buffett also gives his views on derivatives, high-priced investment bankers and value-destroying deals, but we’ll let you read about that yourself. We will close this with one more quote.
“The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged or by insurance. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”
For questions or additional information on this blog entry, please contact us.
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Posted on Thursday, April 15, 2010 - by Henry Walter
April 2010 Roundup
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
Since a picture is worth a thousand words, here are some “pictures” of the financial markets and economy you may find of interest.
To avoid becoming complacent, remember what happened in 2007-8. Things can get ugly in a hurry. As an ancient Chinese Zen Master said: “Hope for the best, prepare for the worst, and expect the unexpected!” The chart below shows the Standard & Poor’s 500 Index, courtesy BigCharts.com, for the last three years.
By some measures, stocks are still expensive. This chart, courtesy of The Wall Street Journal, shows that while the current price/earnings ratio is well below the 44.20 reached in late 1999, at 20.34, it is still well above the long-term average of 16.36.
The next chart, courtesy www.decisionpoint.com shows that what investors are willing to pay for dividends or earnings streams, fluctuates widely over time. The top panel shows the S&P 500, the middle panel the price/earnings ratio, and the lower panel the dividend yield, all since 1926.
This chart from www.chartoftheday.com (04/03/2010) shows that the recovery of jobs since the recession began is much slower than after previous recessions.
Solid red line – job losses following the beginning of the current recession
Dashed gold line – job losses following the beginning of the last recession
Dashed blue line - line – job losses following during the average recession (1950-1999)
We think that the Economic Cycle Research Institute (ECRI) is one of the best forecasters of economic growth. The recent data raises a yellow flag. We will be watching it closely.
Since the market lifted off in March 2009, emerging markets have performed much better than the U.S. market. (Source: Martin Weiss, Money & Markets 04/05/10.)
Gold has been resting for a few months, but as investors worry about inflation and fiat money many believe that prices are headed higher.
The price of crude has recovered from below $40 to above $80. Demand for oil and gasoline is growing rapidly in most countries outside of the U.S. and Europe. In addition, much of the world’s reserves are in unstable countries.
Natural gas prices continue to be weak as the U.S. now has a surplus based on new technology that enables companies to produce it from shale in areas such as the so-called Marcellus play. As we have noted, now may be a good time to accumulate high quality natural gas companies at reasonable prices.
Back in late 2009, investors were willing to loan money to the government for 10 years and accept a return as low as 2%. Not any longer. Interest rates are creeping up as investors view the massive borrowing by the Treasury and deficits as far as the eye can see. This chart plots the interest rate on the 10-year Treasury Note (place a decimal point between the two digits on the right).
Finally, a couple of charts based on information from the Employee Benefits Research Institute (EBRI) that are self-explanatory.
In the next issue, if the information is available, we will report on the Eastman Kodak Pension Fund for 2009.
For questions or additional information on this blog entry, please contact us.
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