Assets of major public pension funds fell 8.5% in third quarter

Most investors dislike rising rates. They make equities less attractive, and they cause instant markdowns to fixed income holdings. But pension fund managers welcome them with open arms. Why? Because companies are required to calculate the present value of their future pension obligations using prevailing rates. When rates rise, their current obligations fall.

While we have often documented the dramatic underperformance by the hedge fund industry over the past decade courtesy of a centrally-planned market in which it no longer pays to "hedge", culminating with countless hedge fund closures and substantial redemptions (mostly by now redundant Fund of Funds managers), today we learn that "vanilla" asset managers were also hurt over the past year in which the S&P went nowhere, and not just in Japan where the gargantuan,

Coach, Inc.’s (COH) profits plummeted 20% and it once again failed to meet revenue expectations for its third quarter of fiscal 2014 (3QFY14; ended on May 29, 2014).

It is no surprise that pension funds in the US are significantly underfunded (median 72% funded). California Public Employees’ Retirement System (CALPERS), specifically, is about 26% short of meeting its long-term commitments. Like most major pension funds, it uses smoke-and-mirrors to avoid this yawning gap by smoothing over a long enough timeframe where 'hope' for growth in assets triumphs over the reality of liabilities (through a 'rolling' 15- or 30-year window - that therefore never comes due).

With the equity market back to near-historical highs, Goldman Sachs' Jan Hatzius revisits his analysis of the predictability of asset price busts. The main predictors of busts are past asset price appreciation and past credit growth, followed by a rising investment/GDP ratio. Hatzius warns that their model says that the further US equity price gains of 2014 have pushed the risk of an equity bust back up - as the chart below shows to levels not seen since 2008/9.

Chevron Corp. said it’s cutting as many as 7,000 jobs as profits dropped for a fourth-straight quarter and the industry endures its worst oil-market slump since the 1980s. Third-quarter net income fell to US$2.04 billion, or US$1.09 a share, from US$5.59 billion, or US$2.95, a year earlier, Chevron said in a statement on Friday. The per-share result was 33 cents higher than the 76-cent average of 21 analysts’ estimates compiled by Bloomberg.