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25256Pension fund mess

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  • Michael Dewolf
    Nov 16 1:30 PM
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      sent to me from www.safemoneyreport.com:

      "Dear Michael Dewolf,

      A couple of months ago, we told you about a little known, but
      "perfectly legal," accounting scam that companies use to
      their profits: In a nutshell, companies exaggerate earnings
      based on expected gains in employee pension plan investments.

      We warned you that those expected gains were turning into huge
      losses, and they would force companies to fork up billions to
      make up for the pension fund deficits, slashing billions from

      NOW, that's exactly what's beginning to happen:

      * SBC Communications is expected to take a $1 billion to $2
      billion charge in order to make up for its pension losses --
      that means earnings will be chopped by 20 to 40 cents a share
      next year!

      * Honeywell International warned that it will need to dump
      $900 million into its employee pension plan this quarter ON
      TOP OF the $100 million it added in the third quarter -- that's
      $1 billion SO FAR. Without the $900 million infusion, the
      company expects the pension deficit to reach $1.7 billion by
      the end of the year.

      But Honeywell employees shouldn't consider this a fix. Much
      of the $900 million will be in the form of Honeywell stock.
      That means, if Honeywell's stock keeps dropping -- already
      down 43% since hitting its 52-week high on April 16 -- the
      pension fund will continue to sink into the red.

      * IBM's pension fund, a big source of its earnings growth
      during the bull market, has also taken a big hit over the past
      year. The company recently announced that it is reducing the
      assumed rate of return of its pension fund to 8 to 8.5% in 2002,
      which will knock $700 million off its net income for the year.

      To plug the drain on its cash reserves, IBM is also going to
      stuff the pension fund with its own shares. IBM announced that
      it may issue $1.5 billion in stock, buy it back, and put it in
      the company's pension fund.

      The big dilemma: The greater the pension fund deficits, the
      greater the hit to earnings and stocks. AND the deeper the
      decline in stocks, the bigger the deficits in pension funds.
      It's a vicious circle that is just beginning to swing into
      full motion.

      We fully expect the next leg down in stocks to be huge -- and,
      ultimately, we expect the Dow to fall to 5,000 or lower before
      this bear market is over. "

      Posted by Michael Dewolf
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