Kurt Brouwer September 2nd, 2008

Here is a study on just who owns the bulk of the shares in Big Oil.  The study was done by Sonecon, an economic consulting firm run by a former adviser to President Clinton.

The Distribution of Ownership of U.S. Oil and Natural Gas Companies (Sonecon, September 2007, Robert J. Shapiro and Nam D. Pham)

…These data, along with previous analyses that we conducted, further suggest that ownership of oil and natural gas company shares is broadly middle-class.

42.7 percent are owned or held by mutual funds and other asset management companies that have mutual funds. Mutual funds manage accounts for 55 million U.S. households with a median income of $68,700, and the owners of mutual funds include 16 percent of households with incomes of $25,000 or less, as well as 83 percent of households with incomes of $100,000 or more.

Earlier analysis found that an estimated 27 percent of oil and natural gas company shares are held in private and public pension funds, and these funds manage assets, directly or indirectly, on behalf of 129 million pension-fund participants whose accounts have an average value of $62,280. For example, some 28 million public pension accounts in over 2,650 public employee pension funds represent the major retirement security for current and already-retired soldiers, teachers, police and fire personnel, social workers and office workers employed at every level of government. In 2004, these funds held approximately $64 billion in shares of U.S. oil and natural gas companies..

This chart shows the percentage breakdown of ownership in oil companies of all types:

Source: Sonecon

Peruse the numbers above.  I’m only focused on the first column in the chart — Oil & Gas Industry, which is the total ownership statistics of Big Oil as the media likes to call it. Based on the chart above, it’s pretty clear what group owns the biggest chunk of Big Oil — mutual funds.

But, who owns mutual funds? Mutual funds are owned by individual and institutional investors including retirement plans, endowments and charities.  The following chart spells out the number of American households that own mutual fund shares.

It’s from the Investment Company Institute (ICI) and its annual work, the Investment Company Fact Book.

Just as a point of reference.  There is a discrepancy in the numbers between the Sonecon study and the ICI Fact Book, which reports lower numbers for the number of households owning mutual fund shares.  I suspect the difference has to do with the definition of a household and other fairly arcane statistical matters, but I would go with the ICI number.

In any case, over 50 million households — that is 88 million people — hold shares in mutual funds.  Add in the holdings of Big Oil shares by public and private pension plans and you reach out to many more millions of Americans who are beneficiaries of public and private pension plans.

No doubt there are plenty of wealthy investors who own shares in oil companies directly or through mutual funds, but the point is still very clear.  Mutual funds are the investment of choice for Americans and mutual funds are the biggest owners of shares in Big Oil.

So, who owns Big Oil?  The answer is clear: we do.

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Kurt Brouwer August 4th, 2008

Anyone who has been paying attention to the jobs situation ‘knows’ that things are pretty bad.  After all, could headlines such as these be wrong?

Jobless rate climbs as 51,000 jobs vanish

AP August 1, 2008

If you assumed the headlines you see actually mean something, you are not alone.  However, you would be wrong.

Here is another example.  This headline is from a story on CBS News.  Upon reading the story, you would quickly realize that the actual facts presented tell a tale that is the opposite of what the headline shouts out in bold type:

Many CEOs Warn Of Looming Pink Slips

Nearly one-third of the country’s top executives expect to cut payrolls in the coming months, reflecting fallout from the housing bust as well as soaring energy prices.

At the same time, a survey by the Business Roundtable, released Wednesday, showed that most executives expect sales and capital investment to remain at current levels or even improve over the next six months… 

According to this piece, 31% of CEOs [nearly one-third] expect to cut payrolls, but the rest expect to keep them constant or even increase payrolls.  How is that story worthy of the headline?

Now, in all fairness, there has long been a struggle between those who write the stories and those who put in the headlines.  However, both are part of the journalistic process and if editors did not agree with the sentiments of the gloomy or sensationalistic headline scribes, they should change the process.

Let’s step back from the pink slip abyss for a moment and look at a chart or two from the U.S. government’s Bureau of Labor Statistics (BLS).  This chart shows the total nonfarm employment in the U.S., adjusted for seasonality:

Employment, Hours, and Earnings from the Current Employment Statistics survey (National)

Source: Bureau of Labor Statistics

As you can see, the total number of Americans who were employed as of July of this year is slightly lower than those employed as of last July.  The number peaked in December and has been declining slightly ever since.  When you see this chart, do you think of surging pink slips or vanishing jobs?  In fact, to the eye the levels look about the same.

Employment, Hours, and Earnings from the Current Employment Statistics survey (National)

Series Id:     CES0000000001

Seasonally Adjusted

  Super Sector:  Total nonfarm

  Industry:      Total nonfarm

  NAICS Code:    N/A

  Data Type:     ALL EMPLOYEES, THOUSANDS

Source: Bureau of Labor Statistics

If you want to get technical, this table lists the numbers that underlie the chart above.  As of the most recent BLS report, you can see that there were 137,682,000 people working in America last July and there are 137,615,000 working this July.  The difference — 62 thousand jobs out of more than 137 million — is something like 1/20th of 1 percent.  Does that statistically insignificant decline warrant a headline such as this one?

U.S. Pink Slips Surge In July

 Forbes August 4, 2008

What does it mean to have surging pink slips?  And, even beyond the absurdity of the image, did layoffs really surge or have we simply seen a fluctuating employment picture since July 2007?  Employment went up a bit until December and since then we have seen a slight decline.  Nonetheless, the actual number of employed folks has remained well over 137 million all along.  Is that really news?

Here is one final chart from the BLS spanning the period of 1980 - 2008.  As you can see, employment has generally risen over this period, yet there have been several time periods when employment growth slowed or even reversed for a while before resuming the upward march.  Now, looking at it this way is not terribly exciting, but it’s far more objective than much of the reporting we see from the media every day.

Source: Bureau of Labor Statistics

I am not suggesting that the employment situation is awesome, nor am I assuming that job growth is going to resume next week.  We are going through an economic slowdown and this is likely to continue a while longer.  Nonetheless, the media’s portrayal of the jobs situation is at odds with reality as I see it.

For more on this topic, see Tom Blumer’s excellent piece at Pajamas Media

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Kurt Brouwer July 11th, 2008

This is a very long article from Forbes on state pension funds and the leveraged real estate investments they have made. For years, those looked very good, but now problems have arisen [emphasis added]. The tone of the piece leans toward impending doom, which is no doubt overdone because state pension plans have placed modest percentages of their assets in these leveraged real estate funds. However, the downturn in real estate is real and it appears as if pension plans are going to take a few lumps along with the rest of us.

The Other Real Estate Disaster (Forbes, July 21, 2008, Stephane Fitch)

Your state’s employee pension fund is probably (a) doing badly with recent real estate pools and (b) working very hard with the private equity operators of these pools to keep you in the dark.

Scott Lawlor and the managers at Pennsylvania Public Schools’ $63 billion pension fund had a beautiful relationship. From an office on New York’s Park Avenue Lawlor and his firm, Broadway Partners, ran real estate “opportunity funds,” fat with capital from the teachers’ pension and other institutions. He had invested the funds in a $10 billion pool of glamorous office properties like Boston’s John Hancock Tower. Lawlor delivered profits–or so the Pennsylvania fund managers reported–of up to 40% a year. The state fund managers kept capital flowing, both to his funds and to his pocket, in the form of fees.

Everything was private. No Wall Street analysts, no regulators, no outsiders and no interference. No ordinary Pennsylvania pensioner got to see Lawlor’s quarterly financial reports. The managers in their pension plan’s Harrisburg headquarters had all signed nondisclosure agreements with Lawlor.

The picture turned grim by March. Lawlor was struggling to keep his buildings, purchased with as much as 90% debt, from falling into the hands of lenders. He owed $1.2 billion of short-term “mezzanine” debt to New York investment bank Lehman Brothers (nyse: LEH) and other lenders. (The debt has since been extended.) The funds’ previous gains? Mostly, if not entirely, gone. It will be months before Pennsylvania’s 500,000-plus public school employees and retirees know how much of their $196 million in principal in Lawlor’s funds is left.

The retirement plan “has seen some decline in value this past quarter,” says Charles Spiller, head of private equity and real estate investments at the Pennsylvania teachers’ fund. But he refuses to comment on Broadway. Last September he valued positions in 58 private real estate investment funds at a total $3.6 billion. What’s this pot of money worth now? That’s a secret for a few more months, and Spiller isn’t releasing any of the communications he’s had from the fund operators about their recent results.

Enticing investors with the lure of returns exceeding 20%, opportunity funds are the slickest deal in real estate. They account for one-sixth of $2 trillion in total net assets in private equity, says the London firm Private Equity Intelligence, which tracks the industry. A year ago the most closely studied funds in the U.S. were holding $213 billion in commercial real estate equity, leveraged 70% on average. Traders of swaps contracts on the leading commercial property index were recently betting on a correction of up to 15% in values–which would result in $100 billion in writedowns.

This is the other meltdown–the one you haven’t heard much about. It’s not part of the real estate and credit contagion that started with the subprime calamity, then spread to all corners of the debt market. This misadventure has its own origins in hubris, battered further by dumb mistakes and bad timing. The catastrophe may not stack up quite as high as the $350 billion in writedowns that investment funds and banks have registered in the bond markets, but for small investors all across America whose retirement pools poured 1% to 5% of their assets into opp funds, heavy losses–only beginning to surface–could be a sizable blow. If the setbacks for pension funds are severe enough, it could force state governments to raise taxes to cover shortfalls and induce companies to cut back on dividend payments to shareholders in order to set aside additional money for their private workforce pensions.

Many opportunity funds are black boxes. What these investments are worth is often anybody’s guess until they’re liquidated, typically seven to ten years after they finish raising capital. They’re virtually unregulated–a recent statement by the Financial Accounting Standards Board leaves it to the funds to address fair value–and private equity groups don’t have to file regularly to the Securities & Exchange Commission. When they do give out internal rates of return, they’re usually expressed as a rough percentage of money originally invested. Rarely are they adjusted for leverage.

The failure to account for leverage is what makes these private equity pools so popular. In a rising market, which real estate enjoyed until a year ago, leverage turns average performers into seeming geniuses. In an up market a mediocre real estate manager enjoys million-dollar paydays, according to the customary formula that gives operators of private equity pools up to 20% of gains.

Say the manager buys a building for $100 million, putting down $30 million of your money and borrowing the rest. Over the next three years it appreciates to $150 million. Interest on the mortgage adds up to 20%, or $14 million. Before fees, you have made $36 million, a 120% return. That comes to 30% a year. But the unleveraged return was only 14.5%. Which return number, 30% or 14.5%, is the one most likely to be talked about?

In a down market, of course, leverage turns average performance into a disaster. But the operators of the pools are not expected to share 20% of the losses. No, the losses belong 100% to the providers of the equity capital. That would be you, if you’re a taxpayer…

See California Public Employees Take Big Hit On Real Estate for more on real estate investments in state retirement plans.

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Kurt Brouwer June 5th, 2008

The Wall Street Journal’s MarketBeat Blog is one of my first reads in the morning. In this post, David Gaffen points to strong results for that icon of middle America — Wal-Mart.

Folks Gotta Eat, As Wal-Mart Shows (MarketBeat Blog, June 5, 2008, David Gaffen)

The nexus of constrained consumer budgets, high fuel prices, and the one-time windfall of the government’s stimulus checks is in the parking lot of the nearest Wal-Mart, Costco, or other major discounter.

Shares of Wal-Mart and Costco both moved up sharply following May retail sales reports that were bolstered by purchases of grocery items, gasoline and other necessities that these stores sell at lower prices than other retailers.

…Wal-Mart, in its commentary, cited the stimulus checks as a factor in May’s strength, adding that “our focus on price leadership continued to drive the performance in grocery.” BJ’s Wholesale Club Inc. posted an 11% increase in sales of perishable food items, bolstering that company’s sales.

With food and gasoline prices remaining high, Mike Binger, portfolio manager at Thrivent Asset Management in Minneapolis, says the discounters “are the ones consumers are being driven to because the consumer is constrained.”

Wal-Mart has weathered the downturn well — shares are up 21% since the beginning of the year, making it the best performer among the members of the Dow Jones Industrial Average. BJ’s, which is down Thursday, has also done well, gaining 20% headed into Thursday trading.

Oddly, these big-box stores may also benefit from high fuel prices because consumers can buy apparel, groceries and other non-discretionary items all in one location, thus saving on gasoline that would be spent making trips to several stores.

Wal-Mart’s outlook for June is strong; the company expects a 2% to 4% increase in sales. “Consumers have to buy where they perceive they’re able to get a good value,” Mr. Binger says.

I read recently that Wal-Mart saves Americans over $100 billion on basic goods each year. The company is also moving forward aggressively with walk-in medical clinics as this New York Times piece [emphasis added; free registration required] indicates:

Wal-Mart Will Expand In-Store Medical Clinics (New York Times, February 7, 2008, Milt Freudenheim)

Moving to upgrade its walk-in medical clinic business, Wal-Mart is set to announce on Thursday plans for several hundred new clinics at its stores, using a standardized format and jointly branded with hospitals and medical groups.

...Many patients have said they like the convenience of the walk-in clinics’ weekend and evening hours, the short waiting times to see a nurse practitioner, and the posted price lists for a limited menu of care like tests and prescriptions for sore throats and ear infections and seasonal flu shots.

The typical customer is a mother with runny-nosed children in tow. About one in five customers pay cash. Wal-Mart says 55 percent of patients at its store clinics do not have health insurance, like 47 million other Americans.

“The clinics are the latest big example of how you could think about consumers and what their needs are, rather than a health care system exclusively designed around the needs of providers,” said Margaret Laws, director of an innovations program at the California Health Care Foundation, an independent group that finances health policy research…

I don’t know if this is right model for delivery of basic medical services or not. What I do know is that Wal-Mart is doing something in this area and that is a good thing. All the committees, symposiums, conferences, press releases and so on won’t actually do anything to help people. It takes a pioneer to actually put something into practice to find out what works. Good for Wal-Mart.

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Kurt Brouwer June 2nd, 2008

Source: Wikipedia

Pensions Picking Dollars, Shorted By Hedge Funds (Bloomberg, June 2, 2008, Bo Nielsen & Anchalee Worrachate)

Whenever pension funds, mutual funds and insurance companies decide they should own dollar assets that are out of favor with hedge funds, the hedge funds lose.

Institutional investors bought more dollars than they’ve sold this year, according to State Street Corp. and Bank of New York Mellon Corp., the largest money managers for institutions. That’s significant because speculators such as hedge funds raised bets against the greenback by 36 percent, data from the Commodity Futures Trading Commission in Washington show.

History indicates institutional investors may be on to something. The dollar gained in 71 percent of the quarters over the past decade when they were net buyers, according to Boston- based State Street. They bought more than they sold in all of the quarters when, like now, benchmark interest rates were below inflation and the current account deficit, the broadest measure of trade, exceeded 3 percent of the economy.

“The dollar can do quite well in this slow-growth environment,” said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh, a mutual and pension fund that manages the equivalent of $283 billion. “We’ve had for some time a positive position on the U.S. dollar.”

After falling to a 13-year low of 78.993 in March, the dollar has gained 2.5 percent to 80.993, according to a trade- weighted index maintained by the Federal Reserve that includes the euro and yen. It has rallied 3 percent versus the euro to $1.5527 since hitting a record low of $1.6019 on April 22.

`Next to Capitulate’

Dollar buying among institutional investors from mid-March has been twice as strong as the 12-month average, according to Bank of New York Mellon, which has $23 trillion under custody. That coincides with the Fed’s bail-out of Bear Stearns Cos., a move that signaled that the central bank wasn’t going to let a securities firm fail and drag down the economy.

“Institutional investors have been gradually building a long-dollar position,” said Michael Metcalfe, the London-based head of macro strategy at State Street, which has $14 trillion under custody. “It reflects a belief that the dollar will rebound. Bearish currency speculators will be the next to capitulate.”…

Interesting piece from Bloomberg [emphasis added above].

Pension plans versus hedge funds. Should be very interesting. Pension plans have far greater assets and they can afford to be patient. Hedge funds tend to be more aggressive and they are faster-moving. This may be a re-run of the tortoise versus the rabbit.

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