Pensions in Distress


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A recent Bloomberg article “Newspaper Publisher McClatchy Skips Payment to Pensioners” (1) shows, how when it comes to retirement, we are alone.

pensions

When it comes to pensions we may be on our own and it’s hard to see the future of pensions will work.

The Bloomberg article tells an all too familiar story… corporations and unions made big promises to employees, but have not been able to do what they said.

The article says: The McClatchy Co., the newspaper publisher that’s teetering near bankruptcy, skipped a payment to some of its pensioners.

The Sacramento, California-based company operates 29 newspapers including the Miami Herald, The Charlotte Observer and The Kansas City Star. Other large newspaper companies are also in turmoil, with tens of thousands of newsroom jobs cut over the past decade.

The company faces a mandatory $124 million contribution to its pension plan in 2020.

Underfunded Plan

The pension plan was underfunded by about $535 million, according to an accounting last year. The company asked the federal government to waive its required contribution, but was denied.

S&P Global Ratings forecast a grim 2020 for McClatchy, warning in November that the company doesn’t have enough money to pay its 2020 obligations. “It could engage in a distressed debt exchange or file for Chapter 11 bankruptcy before September 2020, when the bulk of its mandatory pension contributions are due,” S&P analysts Thomas Hartman and Vishal Merani wrote in a report.

Justice Robert Jackson, Judge at the Nuremberg trials is quoted as saying:  It is not the function of the government to stop the citizen from falling into error; it is the function of the citizen to keep the government from falling into error.

Bertrand Russel,  in “An Outline of Intellectual Rubbish” warned us about trusting our future to governments, unions and big business when he wrote:“As soon as we abandon our own reason, and are content to rely upon authority, there is no end to our troubles”.

The US government denied McClatchy a waiver on the additional funding so now it’s likely the company will simply go bankrupt because as the saying goes, “one cannot squeeze blood from a turnip”.

The Federal Government also doesn’t want this responsibility because the The Pension Benefit Guaranty Corporation (PBGC) is broke.

The is a federal agency, but it is not funded with tax dollars. Instead, it is funded by premiums collected from defined-benefit plan sponsors, assets from defined-benefit plans for which it serves as trustee, recoveries in bankruptcy from former plan sponsors, and with earnings from invested assets.

In its 2019 Annual Report (2) the PBGC says:  The Pension Benefit Guaranty Corporation’s (PBGC) Fiscal Year (FY) 2019 Annual Report, released today, shows a record deficit of $65.2 billion in its Multiemployer Insurance Program at the end of FY 2019. This increase from $53.9 billion at the end of FY 2018 was mostly due to interest rate changes that drove up the value of PBGC’s future payments to failed multiemployer plans. The Multiemployer Program, which insures the pensions of 10.8 million Americans, is highly likely to become insolvent during FY 2025.

A law passed late at night as part of the 2014 omnibus spending bill designed to keep the government from shutting down. The Kline-Miller Multiemployer Pension Reform Act (MPRA) allows union pension plans to appeal to the Treasury

This started happening in 2018 when the Treasury Department granted approval for the Ironworkers Local 17 pension fund in Cleveland to cut retiree benefits as much as 50 percent!

Workers covered by state and municipal pension plans can be in even worse shape as they have no federal guarantee program but at least states cannot file for bankruptcy since they have the “sovereign power” to tax.

How Well-Funded Are Pension Plans in Your State?

pensions

Graphic from the tax foundation.org article “How Well Funded is Your State Pension” (2) which says:

Recently released data from The Pew Charitable Trusts shows the strain on state retirement systems nationwide as state pension funds strive to keep pace with benefits owed to public employees.

Fiscal year 2017 (the most recent data available) saw a combined $1.28 trillion in state pension plan funding deficits. While massive, this was actually a decrease from Fiscal Year 2016’s $1.35 trillion gap. Pew attributes this improvement to strong returns on investment from higher-risk plans that helped some states to narrow their funding gaps since last year. To be fair, the improvements have been modest. The message is still clear: many states face a pension crisis.

Throw these facts into the pot with the fact, according to the annual Social Security and Medicare trustees report,  that says total costs of the program, which covers the old age and disability insurance programs, will exceed income in 2020 – for the first time since 1982.  The program will have to dip into its reserves to cover benefits this year and these reserve funds are expected to be depleted in 2035, at which time the program will no longer be able to pay out benefits in full.

This is why we take value investing seriously so when it comes to our future, reason, math and common sense are our partners, not our reliance on authority.

Gary

Prophet Words for Profit in 2020

Here’s ten most important words (and numbers) for the 2020 decade…  MSCI World Index All-Time High Valuation December 31, 1999.

Keep these word and numbers in mind when thinking about the stock market this year.

Here is the all time high valuation for this index.   Price to book 4.23.  Price Earnings Ratio 35.7. Average dividend yield 1.30%. 

Those were the all time high valuations for the Morgan Stanley Capital World Index in December 1999, just before the dot.com bubble burst.

Here is a chart of the Dow Jones Index for the past three decades.  You can see that bubble pop just before the beginning of the 2000 decade.

microtrends.com

Let’s compare some valuations.

                                                                                 Price to Book       P/E       Average Dividend

The All World MSCI World Growth Shares           5.22                28.4                 1.28%

MSCI  US Index                                                               3.65                 23.1                  1.83%

MSCI Word Index                                                           2.57                 20.0                  2.33%

MSCI World Index All-Time High                            4.23                  35.7                  1.30%

MSCI USA Index                                                            3.65                  23.1                   1.83%

These valuations create some important investing questions.

“Will the 2020 decade be more like the 2000s decade or the 2010 decade?”

“How close can the USA Index come to the all time high watermark before there is a correction?”

“Will the poor valuation of growth shares globally lead to a shift from growth shares to value shares?”

“Do shares world wide still have plenty of room to rise?”

Ask me again in January 2030 and I will know, but since no one knows the answers now, proceed with caution.

For the past four years, my strategy, to protect against the next stock market crash and yet gain from rising share prices is to invest in an equally weighted  of the value based portfolio of country ETFs we invest in and track in our Purposeful Investing Course is formulated.

The valuation of the top value portfolio we use as the basis of our portfolio is  now price to book  1.41, P/E ratio 14.4 and average dividend yield of 3.78%.

An equally weighted combination of top value markets offers the highest expectation of long-term risk-adjusted performance and the valuation of the top value portfolio is now undervalued by 37% compared to the MSCI World (Standard) Index, by 50% compared to the MSCI USA Index and by 62% compared to the MSCI World Growth Index.

Since no one knows what the future will bring, investing in value makes the most long term sense.

Our Purposeful Investing Course (Pi) teaches an an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

Sticking to math based stock market value and country ETFs eliminates the need for hours of research aimed at picking specific shares.   Investing in an index is like investing in all the major shares of the market.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pi portfolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2019.

70% is diversified into developed markets: Australia, France, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in emerging markets: Brazil, Chile, China, Colombia, the Czech Republic, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the good value markets.

For example, the iShares MSCI Australia (symbol EWA) is a Country Index ETF that tracks the investment results the Morgan Stanley Capital Index MSCI Australia Index which is composed mainly of large cap and small cap stocks traded primarily on the Australian Stock Exchange mainly of companies in consumer staples, financials and materials. This ETF is non-diversified outside of Australia.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for almost every market.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (Pi).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Included in the basic training is an additional 120 page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.

This year I will celebrate my 52nd anniversary of global investing and writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Those five decades of experience have taught me several incredibly valuable lessons.

The first lesson is that there is always something we do not know.

The second lesson is that stock market booms and busts always eventually return to value.

Third, the only sure way to succeed is to use time not timing.

Time is your friend when you use a good value strategy.  The longer you can hold onto a well balanced good value portfolio, the better the odds of outstanding success.

A 45 year portfolio study shows that holding a diversified good value portfolio (based on a  good value strategy) for 13 month’s time, increases the probability of out performance to 70%.  However those who can hold the portfolio for five years gain a 88% probability of beating the bellwether in the market and after ten years the probability increases to 97.5%.

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report and access to all the updates of the past two years.

 I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know in the first two months for a full no fuss full refund.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197.   Use the coupon code this week and you can still save 50% off.

Your subscription will be charged $299 a year from now, but you can cancel at any time.

Gary

(1) www.bloomberg.com/news/articles/2020-01-02/cash-strapped-publisher-mcclatchy-skips-payment-to-pensioners

(2) www.pbgc.gov/news/press/releases/pr19-12

(3) taxfoundation.org/state-pension-plan-funding-2019/