No replies to this topic

[TTHQ Staff]

HOME OF "PICTURES OF A STOCK MARKET MANIA" September 8, 2004 Longboat Global Advisors CROSSCURRENTS Alan M. Newman, Editor This excerpt from the September 7th issue has been posted to coincide with receipt by snail-mail subscribers.  The August 20th story in Newsday was headlined, "United likely to end pensions," a recant heard before and one we believe will be repeated often in the next decade.  This is very bad news, not only for United Airlines employees but for hundreds of thousands of other Americans who are laboring under the impression that their pensions are safe.  United filed for relief in bankruptcy court and said they would no longer contribute to their pension plans while in Chapter 11.  Although the hiatus could be temporary, it could be permanent, since the government has already rejected United's bid for a $1.6 billion loan guarantee to continue operating.  United claimed it "must have the cash flow and liquidity that the financial markets are willing to finance," leaving out the crucial part that the federal government will eventually have to pony up or else.  If the company terminates its four defined benefit plans, it would not only be the largest pension default ever by an airline but would place billions in future obligations right at the door of the Pension Benefit Guaranty Corp.  As of a year ago, PBGC estimated that U.S. pensions in defined benefit plans were under funded by more than $350 billion.  To place this statistic in a more amazing light, consider that the PBGC insures more than 32,000 private defined pension plans valued at an estimated $1.5 trillion, thus they are under funded by roughly 23% AFTER the largest and longest bull market of all time.  As for the cushion the PBGC provides, a $9.7 billion surplus in 2000 was estimated to be an $8.8 billion deficit just over a year ago.  Want more?  How about this chart?  You can read additional info at www.frbsf.org/publications/economics/letter/2003/el2003-16.html.  But we digress.  United has lost a grand total of $94.94 per share over the last ten quarters, every quarter a losing proposition.  The amount of the under funding at last glance was a measly $8.3 billion, equal to roughly $125 per share.  Stephen Schurr's piece in the Financial Times also raises eyebrows, claiming that companies in the S&P 500 still expect an 8.36% return this year for the pensions they fund for workers and retirees. Nevertheless, stocks are again disappointing and the S&P has no longer become the reliable vehicle that drove pension gains from 1982 to 2000.  The mighty 500 are barely ahead for the year.  According to Mr. Schurr's article, the average pension has 64% per cent in stocks, commensurate with the average equity allocation recommended by Wall Street Strategists, you know, those know-it-alls that remained heavily invested while the market collapsed from the manic peaks of 2000.  The assumed 8.36% return would place the S&P 500 at 1205, which looks pretty far from here and is perhaps somewhat unrealistic.  If you've been a subscriber for long, you know we have touched on this subject before and have termed pension problems as one of the greatest threats we face over the next few years.  We'll have much more to say as time goes on.  Stay tuned.   Suddenly, it appears that some observers have discovered value in Nasdaq stock prices.  Prices are lower, earnings are higher and those two circumstances are supposed to make valuations far more attractive than before.  It's ironic how belief fuels a mania.  Talk about your undertakings of great advantage, insiders know them when they see them.  Nasdaq presents a vivid picture of revulsion by the insiders who toil at the largest companies.  The top ten Nasdaq companies account for 41% of the Nasdaq 100, also known as the QQQ, and the ten by themselves are responsible for $960 billion in market capitalization, approximately 7% of the U.S. stock market and given their household name status, we may fairly presume they are also responsible for a substantial portion of total dollar trading volume in U.S. stocks.  A rough back-of-the-envelope calculation affords us the view that the ten issues depicted here will account for at least $1.88 trillion in trading this year, perhaps 7.6% of all dollars traded on the major exchanges.  Lest we forget, the QQQ itself trades about 3.7% of all dollars traded on the major exchanges.  Thus, Nasdaq's top ten have considerable clout.  However, the average P/E works out to 40.6.  Although this measure is not quite as high as we have measured in the past (60.2 as of July 3, 2003), the comparatively robust (yes, we are being quite sarcastic) valuations have done nothing to ease the furious manner in which corporate insiders are taking every opportunity to detach themselves from their shares.  Admittedly, we have previously seen far higher sale-to-buy ratios then the 18 to 1 ratio recently recorded, but the sheer number of sales remains about as extended as before.  In terms of total shares sold and shares bought, the ratio continues in la-la land, at 4561 to 1.  In fact, the ratio has been better a number of times before and was only exceeded in our March 30, 2004 tally, when the Nasdaq Composite traded at 2000.  Clearly, insiders knew what they were doing then since the Composite is now some 15% lower.  We still believe they know what they are doing.  For those who thrive on statistics, if you placed $10,000 in each of these companies ($100,000 overall) and waited a year, you would have roughly $720 in qualified dividends to show for your faith.  The average price-to-sales ratio for the Nasdaq giants is 7.05.  If General Electric traded at a similar valuation, its share price would be $94.  If General Motors traded at a similar valuation, its share price would be $2362.  Have a nice day. INTERESTED IN PERSPECTIVES YOU'LL FIND NOWHERE ELSE? ENROLL IN OUR FREE TRIAL IF YOU HAVE NOT ALREADY DONE SO BEFORE. WATCH FOR OUR NEXT REPORT IN TWO WEEKS ON SEPTEMBER 22nd.  DON'T WAIT! ASK FOR YOUR FREE TRIAL NOW! ABOUT ALAN M. NEWMAN Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S. The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation.  Broad samples of our work can be viewed at http://www.cross-currents.net/.  Subscription rates are $169 for one year and $89 for six months.  A FREE 3 issue trial subscription is available by emailing us (click the "free trial" link above).  Please note: trial requests must include name, address and phone number and must originate from the email address the trial is to be delivered.  Trials are only available by Email (.pdf files).  U.S. Mail subscriptions are available but include a nominal surcharge for postage and handling.