• Tag Archives Liabilities
  • Margin Debt Sets Four New Peaks This Year – a Red Flag with a New Twist

    According to the latest data from the New York Stock Exchange, margin debt has hit new peaks four times this year, starting with a new record of $513 billion in January; $528 billion in February; $536.9 billion in March; and reaching a whopping $549 billion in April. The most recent reading for June shows a decline to $539 billion – but that is still an increase of 64 percent from the margin level of January 2008, the year of the epic financial crash on Wall Street.
    Spiraling margin debt, where investors pledge securities at their brokerage firm to obtain a loan, typically to buy more securities, is frequently associated with stock market crashes. The dot.com bust followed a margin buying binge in 1999 and early 2000. Margin debt exploded from $153 billion in January 1999 to $278.5 billion by March of 2000, according to data from the New York Stock Exchange archives.
    Loans using securities as collateral may be even more dangerous this time around. According to an enforcement action filed by the Massachusetts Securities Division on October 3, 2016, brokerage firms may be pushing securities based loans on their clients for purposes of mortgage funding, tax liabilities, weddings, and graduations. The enforcement action was brought against Morgan Stanley, the behemoth brokerage firm that gobbled up Smith Barney brokers, but the charges include an interesting statement from a former Morgan Stanley broker that suggests that another giant brokerage firm, Merrill Lynch, is offering similar loans. The statement from the broker reads:
    ‘Morgan Stanley told our office during the end of February [2015] and beginning of March to pitch this product to all its customers. Management said they were doing this to keep up with its major competitor, Merrill Lynch, who was already offering express credit lines. They told us that there was big money to be made by having our customers take out credit since the variable interest rate was profitable to the company and they could just sell out of the customers positions if the customer failed to make the payment. They told us to call our customers to tell them that they could use the credit line to buy a house, pay for a home improvement project, buy a car and/or pay for school, etc. They asked us regularly how many people we had put in these products and used measurement tools to compare us amongst our peers. I did not feel comfortable recommending every customer establish a credit line because I felt that my role as a Financial Advisor and Fiduciary was to help customers save and make money and not go into bad debt.’

    This post was published at Wall Street On Parade on August 14, 2017.

  • What Ponzi Scheme? Public Pensions Average 0.6% Return In 2016 Despite 7.6% Assumption

    We’ve frequently argued that public pension funds in the U. S. are nothing more than thinly-veiled ponzi schemes with their ridiculously high return assumptions specifically intended to artificially minimize the present value of future retiree payment obligations and thus also minimize required annual contributions from taxpayers…all while actual, if immediately intangible, underfunded liabilities continue to surge.
    As evidence of that assertion, we present to you the latest public pension analysis from the Center for Retirement Research at Boston College. As part of their study, Boston College reviewed 170 public pension plans in the U. S. and found that their average 2016 return was an abysmal 0.6% compared to an average assumed return of 7.6%.
    Meanwhile, per the chart below, the average return for the past 15 years has also been well below discount rate assumptions, at just 5.95%.

    This post was published at Zero Hedge on Aug 2, 2017.

  • S&P 500’s Biggest Pension Plans Face $382 Billion Funding Gap

    People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the super low interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans.
    Of course, the percentage of workers covered by traditional defined benefit plans – those that pay a lifetime annuity, often based on years of service and salary – has been declining for decades as companies shift to defined contribution plans such as 401(k)s. But each time a pension plan is terminated, canceled or altered, thousands of workers are affected.
    Last month, the 70,000 participants in the United Parcel Service Inc. pension plan learned they won’t earn increased benefits if they work after 2022. Late last year DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands Inc. offered some former employees a lump-sum buyout to offload some of its pension liabilities. General Electric Co. has a major problem. The company ended its defined benefit plan for new hires in 2012, but its primary plan, covering about 467,000 people, is one of the largest in the U.S. And at $31 billion, GE’s pension shortfall is the biggest in the S&P 500.

    This post was published at bloomberg

  • Incoming MASSIVE Quantitative Tightening

    No, the “risk” from “quantitative tightening” is not The Fed.
    Yes, the reduction of their balance sheet will be a tightening.
    But you’re a fool if you think this is the only — or even the largest source of such tightening over the next number of years — 10 to 15 years from now, in fact and starting effectively now.
    There is in fact, as of right now, $5.486 trillion worth of “tightening” that will take place between now and 2034 and it will probably start in permanent form within the next two years.
    Where is it?
    Social Security and Medicare.
    The system holds bonds as a buffer between demographics. This is a good thing, by the way, because there are baby booms and baby busts in any economy. By holding bonds during “boom” times the system has the assets to pay liabilities during busts.

    This post was published at Market-Ticker on 2017-07-21.

  • Brodsky: This Is A Red Flag Warning

    Red Flag Warning
    Two identifiable dynamics may signal significant market shifts imminently:
    1. The US debt ceiling will be debated soon and signs point towards a messy outcome.
    2. Recent economic data have been weak, confirming our thesis that US economic growth is slowing and will not be reversed until a recession is acknowledged.
    Debt Ceiling
    Excessive debt has a way of catching up with people and institutions, and the first true test for the US government may be at hand. Congress was expected to raise the debt ceiling by October or else Treasury could not fund all the government’s programs and current obligations. Yet talk of Trump tax reform in 2016 may have given taxpayers incentive to defer their liabilities. As a result, Treasury received about 3 percent less in revenues than expected, accelerating the timetable to debate and raise the debt ceiling. Progress on raising the ceiling will unlikely be made in August, as Congress is in recess.

    This post was published at Zero Hedge on Jul 17, 2017.

  • Illinois “Budget Deal” Is Likely The Death Knell For The State’s $130 Billion Underfunded Pensions

    Last August, in a post that attempted to explain why public pensions are really about $8 trillion underfunded, as opposed to the $3-$5 trillion that you frequently see tossed around in the press, we described pensions in the following way:
    Defined Benefit Pension Plans are, in many cases, a ponzi scheme. Current assets are used to pay current claims in full in spite of insufficient funding to pay future liabilities… classic Ponzi. But unlike wall street and corporate ponzi schemes no one goes to jail here because the establishment is complicit. Everyone from government officials to union bosses are incentivized to maintain the status quo…public employees get to sleep better at night thinking they have a “retirement plan,” public legislators get to be re-elected by union membership while pretending their states are solvent and union bosses get to keep their jobs while hiding the truth from employees.
    And while we weren’t specifically writing about Illinois at the time, that state’s recent “budget deal” perfectly mimics our point and illustrates precisely why America’s underfunded pension ponzi schemes continue to grow at alarming rates, despite going largely unnoticed by soaring equity markets, and will ultimately be the catalyst for a major correction in the U. S.
    So, what are we talking about? As Bloomberg points out today, one of the ways that Illinois managed to “fix” its budget crisis, was by simply “kicking the can down the road” on their future pension funding requirements…pensions which are already only ~35% funded as it is.

    This post was published at Zero Hedge on Jul 14, 2017.

  • 5 Charts That Explain Just How Screwed Your State Is

    We’ve spent a lot of time of late discussing the precarious financial positions of states like Illinois, Connecticut and New Jersey which each suffer from their own myriad of financial threats including massive budget deficits, monstrous unfunded pension liabilities, pending debt downgrades, etc. In case you’ve missed those notes, here is a recap for your amusement:
    Illinois State Official: “We Are In Massive Crisis Mode, This Is Not A False Alarm” “From Horrific To Catastrophic”: Court Ruling Sends Illinois Into Financial Abyss Connecticut Capital Hartford Downgraded To Junk By S&P Connecticut Gov. Signs Exec. Order Taking Over Spending After State Fails To Pass Budget Of course, while Illinois gets all the bad press for being the undisputed champion of the “worst state in the union” honor, there are many other “up and comers” (yes, we’re looking at you California with your massive unfunded pension obligation) aggressively vying for the title.
    In fact, the Mercatus Center at George Mason University (GMU) has recently compiled a fairly comprehensive study, based on a number of objective financial metrics, ranking the 50 U. S. states according to their overall fiscal condition. Among other things, GMU analyzed the following metrics:
    Cash solvency. Does a state have enough cash on hand to cover its short-term bills? Budget solvency. Can a state cover its fiscal year spending with current revenues, or does it have a budget shortfall? Long-run solvency. Can a state meet its long-term spending commitments? Will there be enough money to cushion it from economic shocks or other long-term fiscal risks? Service-level solvency. How much ‘fiscal slack’ does a state have to increase spending if citizens demand more services? Trust fund solvency. How large are each state’s unfunded pension and healthcare liabilities? All of which resulted in the following ranking map.

    This post was published at Zero Hedge on Jul 11, 2017.

  • Illinois Now Has a Budget, and a Huge Backlog of Bills to Pay

    After going over two years without any kind of fiscal plan, Illinois’ state government now has a budget after the state’s legislature overrode a veto by the state’s governor to impose large tax increases on the incomes of the state’s residents and corporations. Unfortunately, Illinois’ legislature made no effort to address the state’s biggest liabilities.
    Must Read State Pension Crisis Leading to High-Tax Exodus
    The Quad-City Times has the story:
    Illinois finally has a budget plan after two years. Now, to start paying bills.
    The Democratic-controlled Legislature’s vote last week to create a $36 billion framework over Republican Gov. Bruce Rauner’s vetoes ended the nation’s longest fiscal stalemate since at least the Great Depression. At the core of the budget was a $5 billion income tax increase.

    This post was published at FinancialSense on 07/10/2017.

  • State Pension Crisis Leading to High-Tax Exodus

    Many public pension plans are dragging down their respective state and local governments, and the root of the problem is legislative inflexibility and demographic shifts, stated Chicago resident Jim Bianco, head of Bianco Research.
    This time on FS Insider, we spoke with Bianco about the massive public pension funding gap, now reaching a tipping point, and Illinois’ politically-created downward spiral.
    The Public Pension Straight Jacket
    The reality is, the state of Illinois, where Bianco resides, could become the first ever to get hit with a junk status credit rating.
    The cause is the unfunded liabilities associated with public pensions in the state. In 1970, the state of Illinois rewrote its constitution, Bianco noted, and added language forbidding changes to any pension or union contracts the state, city, or any entity within the state entered into.
    A couple of years ago, the state proposed some rules to make state pensioners pay more into their pension in return for fewer benefits. The state supreme court said these contracts couldn’t be changed, however. The only way was to amend the state constitution, which is unlikely to happen, Bianco noted.

    This post was published at FinancialSense on 07/06/2017.

  • True Religion Files For Bankruptcy As Amazon Claims Another

    Nearly one year after rumors about its upcoming bankruptcy first emerged, overnight US-based denim retailer True Religion Apparel finally threw in the towel when it filed for bankruptcy protection, signing a pre-packaged restructuring agreement with most of its lenders.
    True Religion, a company whose denims Reuters says have “gradually fallen out of style”, filed for Chapter 11 creditor protection in the U. S. bankruptcy court in the District of Delaware (case Case 17-11463), and listed assets and liabilities in the range of $100 million to $500 million (see full filing below). According to the prepack agreement agreed upon by lenders, including TowerBrook Capital Partners, will slash the company’s debt by over $350 million. The jean vendor also said it has secured DIP financing from Citizens Bank for up to $60 million.
    True Religion Brand Jeans is pleased to announce it has secured critical stakeholder support for a comprehensive financial recapitalization of the Company’s capital structure. In signing a Restructuring Support Agreement (‘RSA’) with the substantial majority of its Term Loan Lenders and its Sponsor, TowerBrook Capital Partners, the Company will reduce its debt by over $350 million and convert it into the substantial majority of the reorganized Company’s equity. To implement the terms of the pre-arranged restructuring expeditiously, the Company filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware, and expects it will take 90 to 120 days to obtain confirmation of its pre-arranged plan by the Bankruptcy Court. Throughout the implementation of this process, True Religion will continue to operate its business without interruption to customers, employees and business partners.

    This post was published at Zero Hedge on Jul 5, 2017.

  • Pensions Timebomb In America – ‘National Crisis’ Cometh

    Pensions Timebomb – Pensions ‘Are Going To Be A National Crisis’
    – America’s underfunded pension system is ‘not a distant concern but a system already in crisis’…
    – Tax may explode as governments seek to bail out insolvent pension plans
    – Illinois, California, New Jersey, Connecticut, Massachusetts, Kentucky and eight other states vulnerable
    – The simple mathematical mismatch at the heart of the pension crisis…
    – Why the pension crisis really is ‘America’s silent crisis’…
    – Pensions timebomb confronts Ireland, UK and most EU countries

    By Brian Maher, Managing editor, The Daily Reckoning
    ‘This is going to be a national crisis…’
    ‘This’ being America’s woefully underfunded pension liabilities, according to Karen Friedman. She’s the executive vice president of the Pension Rights Center.
    (A place called the Pension Rights Center does in fact exist. We checked.)
    MarketWatch columnist Jeff Reeves howls in confirmation that ‘collapsing pensions will fuel America’s next financial crisis.’

    This post was published at Gold Core on June 30, 2017.

  • Welcome To The Third World, Part 24: Illinois About To Default?

    The train wreck that is the state of Illinois has generated a lot of questions lately, including ‘Will its government ever pass a budget?’, ‘Will it ever pay its overdue bills?’, and ‘Is it possible for a state to go bankrupt?’
    Looks like we’re about to get some answers to these questions, along with one more: ‘What happens to the financial markets when people finally realize that Illinois is far from the only impending bankruptcy?’
    Today’s Wall Street Journal has an anecdote-filled article illustrating what certainly looks like a case of terminal financial mismanagement (How Bad Is the Crisis in Illinois? It Has $14.6 Billion in Unpaid Bills):
    Among the many, many data points:
    The state comptroller predicts unpaid bills will soon top $16 billion. ‘It is almost hard to say those numbers out loud because they seem so insane, but that’s where we are right now.’ Unfunded pension liabilities now total $250 billion. That’s about one-third of state GDP, and is in addition the myriad other debts taken on in recent years.

    This post was published at DollarCollapse on JUNE 28, 2017.

  • Pension Funds Have $4T Hole, Even a 5% Market Decline Could Be Catastrophic

    US pension funds do not have a pretty probability path going forward, a Moody’s report pointed out. The potential that certain pension liabilities increase at a time when reliance on pension funds avoiding major investment losses is a demographic and investment management issue. What about the situation right now? Moody’s starts out by stating: US public pension funds’ adjusted net pension liabilities (ANPLs) surpassed $4 trillion nationwide in 2016, reflecting poor investment results and declining discount rates.
    Moody’s: Just a 5% Loss in US Pension Funds Investment Returns Equates to 25% of Payroll
    Examining forward-looking modeling, Moody’s analysts Thomas Aaron and Timothy Blake see a probability path filled with potholes for pension funds, including investment performance.
    Pointing to a 5% loss in pension returns equating to ‘increases unfunded liabilities by an amount equal to 25% of payroll,’ the June 20 report points to a potential $103 billion shortfall. ‘Pension fund investment performance has never been more critical to government credit quality.’

    This post was published at FinancialSense on 06/23/2017.

  • Canary In The Coal Mine: Unfunded Liabilities Have Turned Illinois Into A ‘Banana Republic’ On The Brink Of Bankruptcy

    Illinois is the perfect example of what happens when your state is run by fiscally irresponsible dunces for decades. The state is buried debt, and hasn’t passed a budget in over 700 days. 100% of their monthly revenue is being consumed by court ordered payments, and the Illinois Department of Transportation has revealed that they may not be able to pay contractors (who are working on over 700 infrastructure projects) after July 1st if the state doesn’t pass a budget. To top it all off, the state’s credit rating is one step away from junk status, the lowest of any state. Because of these factors, Illinois may become the first state to declare bankruptcy since the Great Depression.
    Governor Bruce Rauner has gone so far as to call his state a ‘banana republic.’
    The state’s comptroller has admitted that ‘We are in massive crisis mode.’
    And a reporter for the Chicago Tribune thinks Illinois has gone so far past the point of no return, that the state should be broken up. He recently wrote what basically sounds like a suicide note for Illinois.
    Dissolve Illinois. Decommission the state, tear up the charter, whatever the legal mumbo-jumbo, just end the whole dang thing.
    We just disappear. With no pain. That’s right. You heard me.

    This post was published at shtfplan on June 22nd, 2017.

  • Moody’s: Modest Downside Could Spark $3 Trillion Surge In Pension Liabilities

    Some very simplistic math from Moody’s helps to shed some light on just how inevitable a public pension crisis is in the United States. Analyzing a basket of 56 public plans with net liabilities of $778 billion, Moody’s found that just a modest downside return scenario over the next three years (2017: +7.2%, 2018: -5.0%, 2019: 0%) would result in a 59% surge in new unfunded liabilities. Moreover, given that total unfunded public pension liabilities are roughly $5 trillion in aggregate, this implies that a simple 5% drop in assets in 2018 could trigger a devastating ~$3 trillion increase in net liabilities.

    Meanwhile, Moody’s found that even if the funds return 19% over the next three years then net liabilities would still increase by 15%. Per Pensions & Investments:
    In its report, Moody’s ran a sample of 56 plans with $778 billion in aggregate reported net pension liabilities through three different investment return scenarios. Due to reporting lags, most 2019 pension results appear in governments’ 2020 financial reporting, Moody’s noted. The plans had $1.977 trillion in trillion assets.
    Under the first scenario with a cumulative investment return of 25% for 2017-’19, aggregate net pension liabilities for the 56 plans fell by just 1%. Under the second scenario with a cumulative investment return of 19% for 2017-2019, net pension liabilities rose by 15%. Under the third scenario with a 7.2% return in 2017, -5% return in 2018 and zero return in 2019, net pension liabilities rose by 59%.
    In 2016, the 56 plans returned roughly 1% on average and would have needed collective returns of 10.7% to prevent reported net pension liabilities from growing.

    This post was published at Zero Hedge on Jun 22, 2017.

  • Trump Reports Income Of $594 Million, Net Worth Of At Least $1.1 Billion

    Late on Friday, the U. S. Office of Government Ethics released a 98-page financial disclosure form according to which President Trump reported income of at least $594 million for the period from 2016 and through April 2017 and assets worth at least $1.4 billion; he also had personal liabilities of at least $315.6 million to German, U. S. and other lenders as of mid-2017 implying a net worth of just over $1.1 billion. The disclosure form was Trump’s first since taking office.

    “President Trump welcomed the opportunity to voluntarily file his personal financial disclosure form,” the White House said in a statement, adding that the form was “certified by the Office of Government Ethics pursuant to its normal procedures.”
    On the income side, the largest component was $115.9 million listed as golf-resort related revenues from Trump National Doral in Miami, down from $132 million a year ago. Income from his other hotels and resorts largely held steady according to Reuters. Revenue from Trump Corporation, his real-estate management company, nearly tripled, to $18 million, and revenue from Mar-a-Lago grew by 25%, to $37.25 million helped perhaps by the doulbing of the club’s initiation fee to $200,000 after Trump’s election.

    This post was published at Zero Hedge on Jun 17, 2017.

  • ‘Madoff Whistleblower’ Harry Markopolos Has Uncovered A New Fraud

    Authored by Robert Huebscher via Advisor Perspectives,
    Harry Markopolos, the investigator who exposed the Bernie Madoff Ponzi scheme, has uncovered a new fraud. The unfunded status of the pension fund of the Boston Transit Authority (the ‘MBTA’) is $500 million bigger than previously thought, according to Markopolos. This will have a significant impact on the municipal bond market, especially if it turns out that the MBTA’s problems are endemic among similar pension funds.
    The unfunded status of a pension fund is the market value of the assets minus the present value of the liabilities, discounted at an actuarially determined interest rate. For most public pension plans, this number is negative; the liabilities exceed the assets and it is underfunded.
    Although the full details are not yet known, Markopolos said the $500 gap is due to bad investments, fraudulent accounting and unrealistic actuarial assumptions.

    This post was published at Zero Hedge on Jun 12, 2017.

  • Household Net Worth Hits A Record $95 Trillion… There Is Just One Catch

    In the Fed’s latest Flow of Funds report, today the Fed released the latest snapshot of the US “household” sector as of March 31, 2017. What it revealed is that with $110.0 trillion in assets and a modest $15.2 trillion in liabilities, the net worth of the average US household rose to a new all time high of $94.835 trillion, up $2.4 trillion as a result of an estimated $500 billion increase in real estate values, but mostly $1.78 trillion increase in various stock-market linked financial assets like corporate equities, mutual and pension funds, as the stock market continued to soar to all time highs .
    At the same time, household borrowing rose by only $36 billion from $15.1 trillion to $15.2 trillion, the bulk of which was $9.8 trillion in home mortgages.
    The breakdown of the total household balance sheet as of Q2 is shown below

    This post was published at Zero Hedge on Jun 8, 2017.

  • S&P Downgrades Qatar To AA-, Credit Risk Spikes To 2017 Highs

    Citing expectations of notable slowing in economic growth andconcerns about fiscal and current account deficits widening, S&P has downgraded Qatar from AA to AA- as credit risk premia hit 2017 highs.
    Qatar credit risk is at 2017 highs (but remains well below Jan 2016 recent highs…
    Full Statement from S&P…
    On June 5, 2017, a group of governments including Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links with Qatar. We believe this will exacerbate Qatar’s external vulnerabilities and could put pressure on economic growth and fiscal metrics. We are therefore lowering our long-term rating on Qatar to ‘AA-‘ from ‘AA’ and placing it on CreditWatch with negative implications. The negative CreditWatch encompasses numerous downside risks to the rating as a consequence of recent events, reflecting that we could lower the ratings if domestic political risks were to substantially increase or if government indebtedness increases materially quicker than we currently expect. We could also lower the ratings if our assessment of contingent liabilities from the banking system or the government’s related entities were to increase, or if Qatar’s external financing lines were withdrawn.

    This post was published at Zero Hedge on Jun 7, 2017.