Does "American Airlines" Need To Terminate Its Pensions in Bankruptcy?

American Airlines' parent company AMR corp, which is currently in bankruptcy, wants to eliminate its four pension plans, which it says is a "multibillion dollar liability on its balance sheet".

The Pension Benefit Guaranty Corp. disagrees, and says that American can emerge from bankruptcy without terminating its pensions.

They say that American still has $3 billion in cash and Delta, which has higher pension costs, is currently profitable. Also, Continental did not have to terminate any of its pensions during its bankruptcy.

The Pension Benefit Guaranty is the federal agency that takes over pensions when the original companies can no longer run them. Instead of tax money, they are funded by premiums paid by companies with pension plans.

However, the premiums that Congress allows them to charge aren't enough, and they are currently running a $26 billion deficit which, according to a "Chicago Tribune" article, would become $35 billion if they took over AMR's pensions.

Because of this deficit, they would only be able to pay each American Airline pensioner up to $54,000/year. This would short change some retirees, such as pilots.

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Kindle Version Of "Stock Trading Riches" Reaches Top 100 Business and Investing Best Seller List

Today, the kindle version of my book Stock Trading Riches reached the top 100 on the Kindle Business and Investing best seller list.

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To Be A Good Trader Or Investor, You Must Learn To Control Your Emotions

To succeed while trading the stock market, you need to be able to control your emotions. You can't become angry or fearful when you are on a losing streak. Alternatively, you can't become euphoric or greedy when you are winning.

Individual stocks, the stock market itself, and trading systems all run on cycles. They will enter money-making modes some of the time and then, without warning, switch.

The only thing we can predict 100% is that, whatever the current state of the market, it will eventually switch, and then eventually return.

If you jump out of the market when it is down, there is a good chance that you will miss the rebound. Similarly, if the market has been strong for a long time, and has reached fantastic heights, you can't become greedy and buy a lot, because the market may fall.

To keep myself from trading impulsively on emotion (and losing), I developed a simple trading plan that lightens my positions as they reach high levels, and starts scaling in as my positions go down.

As a result, I built up my positions at good prices, and scale out as the market goes higher.

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Introduction to Market Capitalizations For Stocks

A stock's market capitalization (market cap) is computed by multiplying the stock price by the number of shares outstanding. So, if a stock's price was $50 and there were 10 million shares, the stock's market cap would be $500 million.

Stocks can be separated into 4 groups, according to their market capitalization:

1. micro caps - below $300 million

2. small caps - between $300 million and $1 billion

3. mid caps - between $1 billion and $5 billion

4. large caps - over $5 billion

I talk in more detail about market cap analysis in my book Stock Trading Riches because it's important for investors to allocate their portfolios among all market caps to provide diversification, avoid cyclical returns, and take advantage of "regression to the mean" (e.g. one market cap segment outperforms another, but then they converge).
Market cap is calculated by multiplying the number of shares outstanding by the share price. For example, if stock ABC issued 6 million shares, and the price of each share is $6, then ABC has a market capitalization of $36 million.

In general, micro caps are new companies that are just hitting their stride. Small caps tend to have their infrastructure in place and are in growth mode. Mid caps are big regional or national companies. Large caps tend to be established multinational corporations.

Stocks within each market cap share important characteristics in the areas such as growth rate, risk, dividends, visibility, and international exposure.

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For Many, Trading Dreams Turn Into Frustrations

Many people get interested in trading after hearing about rich hedge fund managers, or getting a slick sales brochure from a "trading guru" trying to sell his latest system.

They see the well-chosen examples from the sales literature, understand how the system works, and then day-dream about the fortune they will make.

Then, they start trading and either under-perform the markets (if involved with un-leveraged stocks / funds), or else lose a substantial portion of their principal (through futures and options).

I know this, because it also happened to me. When I first started trading, I read all the gurus' literature, and decided that making a living from trading would be easy. I started day dreaming about what I would spend the money on.

Of course, I since learned that it's not that easy to get rich quick trading.

On the other hand, many frustrated would-be traders then completely quit trading and investing. This is a mistake because everyone needs some exposure to stocks and the stock market - otherwise your retirement savings will suffer "losses" through not keeping up with inflation.

I found the middle-ground between aggressive and conservative investing: I created the Stock Trading Riches system.

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Aon Insurance's Move to London: An Example of How Shareholder's Votes Aren't Always Simple Decisions

A month or so ago, Aon Corp. (one of the world's largest insurance brokers) announced that they would move their headquarters from Chicago to London. Even though only a few jobs would be affected, it was considered a blow to Chicago's prestige as an international financial capital.

Aon's board said the decision was made to lower their corporate tax rate and allow them to access $300 million of cash they have outside of the U.S. They made it seem like a simple, cut-and-dry issue.

On the eve of the shareholder vote, however, they had to comply with SEC regulations, and disclose the risks of the move:

1. Some shareholders might get taxed during the switch from a U.S. to U.K. company.

2. The IRS might fight the U.S. to U.K. switch. If Aon lost, the projected cost savings may not occur.

3. The litigation might take so long that, if Aon lost and the U.S. to U.K. move was undone, it might be too late for investors to file an amended 2012 tax return to claim a refund of the taxes from risk #1.

4. Shareholders like companies to buy back stock, but English companies face more restrictions than Delaware corporations for stock buy-backs. For example, they may have to get 75% of shareholders to vote in favor of it.

5. They may not be allowed to continue to pay their dividend until they built up "distributable reserves".

6. Finally, there is the risk that Aon may get removed from the S&P 500.

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The Fuggerei - Really Long, Long Term Investing

The Wall Street Journal had an interesting article about people living in the Fuggerei - a Roman Catholic housing settlement for the poor in Augsberg, Germany. People who live here still pay the same rent that was set when the Fuggerei was first opened - in 1520!  Then, the rent was 1 Rhein Guilder a year and 3 daily prayers for the well being of the Fugger banking family (make up your own jokes about "Fugg"ing bankers ;-) ). Today, the equivalent to 1 Rhein Guilder/year is 0.88 euros ($1.23) per year. The founder of the Fuggerei was Jakob Fugger "The Rich": Jakob the Rich was Wall Street long before it existed. He minted coins for the Vatican, bankrolled the Holy Roman Empire and helped steer Europe's spice trade in the early 16th century to become one of the wealthiest and most powerful financiers in history. He left more than seven tons of gold to his successors -- and a good deed. Much of the Fugger business empire crumbled over the next 150 years, battered by wars and soured credits. But the walled Fuggerei, with its picturesque lanes and seven gates in the heart of this onetime European banking capital, still stands. The Fuggerei is a good testament to the power of long term investing - even at conservative rates of return. In the late 17th century, after losing money in riskier investments, the bulk of the trust was invested conservatively - in old forest holdings.  Since then, over the last 200 years, the trust has never lost money.  The returns have ranged from 0.5% - 2%.

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Who Really Benefits From Hedge Funds? - Review of Simon Lack's "The Hedge Fund Mirage"

The wealth of top hedge fund managers is the stuff of legend, but how about their clients - the "sophisticated" investors such as pension funds and wealthy individuals?

As Wall Street veteran Simon Lack says in his new book The Hedge Fund Mirage, "Who can name even one hedge fund investor whose fortune is based on the hedge funds he successfully picked?"

According to Lack, only a handful of superstar hedge fund managers made most of the industry's profits. As a broad investment class, he finds hedge funds to have been a terrible place to keep your money:

"If all the money that's ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good."

An even more shocking conclusion from the book is about the fees that hedge funds collect - which really kill any hope of a good return.

After crunching the data, Lack found that, from 1998 - 2010, investors made $70 billion, while hedge funds pocketed $379 billion in fees!

In conclusion, Lack feels that the fault doesn't lie with the hedge fund managers, but with the "sophisticated investors".

I agree, because one thing I have found during my almost 20 years of trading experience is that, in finance, people believe the complex and exotic is superior. They feel sophisticated and intelligent when, at cocktail parties, they can brag about investing in sexy things like hedge funds.

Every time I tried to trade sophisticated, leveraged instruments like futures or options or on margin, I underperformed or lost money. Instead, when I switched to trading plain old stocks using the Stock Trading Riches formula - which is simple, dull, and boring - I started doing very well.

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Ground Hog Day, Stock Trading, and Probability

Today is Ground Hog Day, and ABC News had an article on Punxsutawney Phil (the famous groundhog from Pennsvlvania).

The legend is that, if the groundhog sees his shadow, then winter will be 6 weeks longer. If it is cloudy, and he doesn't see his shadow, then spring will arrive early.

The ABC New article states that "It turns out the ultimate prognosticator- and his copycat counterparts- are wrong more often than they are right."

It then also states that "An analysis by the National Climatic Data Center found there is no correlation between Phil's predictions and the actual weather."

What's interesting is that, technically, these 2 statements contradict themselves. Being "wrong more often than right" is not the same as "no correlation" - and this has implications for developing a trading system.

If you develop a system for predicting the weather or for trading stocks, if your system does terribly, then you haven't failed. You would simply reverse the interpretation.

The worst thing that can happen when testing a trading system is not losing all your money - it's getting random results.

For example, if you tested a system of buying stocks on the first Tuesday of the month and selling 3 days later (this is a made up example), and you lost money 84% of the time, then this might not be a failure.

Why? Because this means you could short stocks on the first Tuesday of the month, and buy to cover 3 days later - which would win 84% of the time. (Of course, you would have to confirm that the total amount of money made on the winning trades exceeds the total amount lost over the 16% of the time where the rule failed).

The result you would not want would be to find that the rule broke even and gave no meaningful advantage. This would mean that, no matter which side you took, you would not expect to make enough to cover your trading costs (commissions, slippage, etc.)

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