Wednesday, January 07, 2009

Pension Bailouts, Jobs Lost and Fraud, Oh, My.....

I've had the uncomfortable position of knowing a little too much about the underfunded pension liabilities of US corporations for far too long (one my first jobs in college was analyzing corporate pensions).

When I refer to "underfunded pension liabilities" it's just a formal way of saying that what the pension owes exceeds the value of the assets held by the pension plan. This number has fluctuated over the past few years and it is not as important to the average American anymore because so few of us are pension plan participants. However, the 2008 swing from a small surplus at the start of the year (assets exceeded obligations), to a $400 billion deficit is going to have a meaningful impact on corporations across the US (see story here). The swing to such a huge deficit is principally a result of the weak performance of the equity markets last year.

Corporations are obligated to make up for these shortfalls, usually through additional pension contributions. These are dollars that can't be invested in new technology, new plant expansion, new employees, etc., so I expect the impact from pension losses to be a weight around the neck of the US economy through the next few years.

While not all retirement plans mirror the results of corporate pension plans it is going to be worth watching the investment performance of other non-corporate retirement plans (think public employee retirement plans, federal employee retirement plans, etc). Another year like 2008 and the retirement system of the US will need a bailout.

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The markets were jittery all day after the ADP payroll data. As I've said, the ADP data has been bad as of late - but ADP has taken steps to try and be a better predictor of the BLS data that comes out on Friday. Other bloggers have noted that this is a fools game.

The BLS data is flawed, so chasing a bad forecast is clearly a bad idea. ADP (and other payroll providers) have access to information far more valuable than just the number of jobs gained or lost in a month. They can tell you accurate information on hours worked, pay increases or decreases, temporary staff added or subtracted. This is really valuable, real-time data that would help corporate decision makers and policy makers so much more than a guesstimate predicting a flawed government forecast.

But, I think ADP likes all of the free publicity their data is earning them, so don't expect a change anytime soon.

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The story of Satyam Computer Services and the fraud perpetrated by their CEO was not a major mainstream media story, but I think it is sending shockwaves throughout corporate America. In essence, Satyam was the modern day Indian success story - offering high quality software and IT support to hundreds of global companies at a fair price. The problem seems to be that the CEO was changing the financial statements when they didn't meet his liking.

This is not an indictment of all Indian IT firms, but it is going to create a good deal of skeptism among corporate users and will lead to more scrutiny of offshore resources.

On a separate note - Satyam is headquartered in Hyderabad, India, where my lovely bride happens to be right now (TopChef is on honey - Padma says "Hi"). Isn't technology great? You can give a shout-out to your wife via a blog from Clayton, NY to central India (forecast for today 85 degrees and sunny).

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A final note about the markets - I don't think that it is a coincidence that on the day that President-elect Obama's team leaks that the deficit could top $1.2 trillion next year, that China has let it slip that they might be losing interest in our dollars. This was clearly meant to be a signal that while China needs the US to perk up to support their own growth, they are concerned over the amount of stimulus being proposed and what it may mean for the value of the US currency.

This can be one of the first big domino's that could trigger an end to the low rate interest rate environment in the US. Watch this carefully.

Cheers!

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