25256Pension fund mess
- Nov 16, 2002sent 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
* 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
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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