Pension:

There was a provision in the Highway Bill passed in July that allows companies to calculate their future pension obligations by using longer-term interest rates instead of the current low interest rates. The impact of this is that current earnings will be overstated for those companies that choose to use this method and pension obligations will continue to be underfunded. For example, at the beginning of this year, General Electric’s pension plan was underfunded by $18.4 billion. They initially planned to contribute $1 billion in 2012 and $2 billion in 2013 to the plan. Because of the provision in the Highway Bill, GE plans to contribute only $400 million this year and $100 million next year.

The impact of this change is twofold. First, the risk to retirees increases because the plan becomes even more underfunded. Second, it overstates earnings for GE in 2012 and 2013. According to estimates, GE will earn about $15.5 billion in 2012 and $17.5 billion in 2013. The reduced pension costs add about 4% to earnings in 2012 and almost 11% in 2013. It is similar to refinancing your mortgage to an interest only loan – you have more money in your pocket currently, but you still owe the full amount of your mortgage.

Election:

Elections have an impact on investing. In the 1994 election, control of the House of Representatives changed from Democrats to Republicans. This change had a major impact on investing. How? Capital gain tax rates were reduced, while the tax rates on dividend income remained at the higher ordinary income tax rate. This caused investors to seek stocks that generated capital appreciation -i.e., technology shares – and shun income oriented stocks.

Never in our lifetimes have we seen such a stark contrast in views between the candidates and the potential ramifications to investing these views have over the next four years. Regardless of who wins the election, investment opportunities will exist. We have determined what areas we believe will be investment opportunities under each candidate and will be looking to capture those opportunities in the months ahead.

Hurricane:

Our thoughts and prayers go out to those on the East coast. Jim was born in New Jersey and took many vacations to the Jersey shore. We are confident that New Jersey will rebuild so that many more families can enjoy the Jersey shore.

Two thoughts on the Hurricane:

1) We know that America will rebuild and recover from this catastrophe. It is our nature. It makes us proud to know that not only do we rebuild our country, but we also help other countries when they are in need.

2) We are hearing cost estimates for this storm in $20 -$80 billion range. This is huge. To put it in perspective, our budget deficit in 2012 was $1.089 trillion. We are spending the equivalent of anywhere from 54x to 13x the cost of Hurricane Sandy in deficit spending each year. This can’t continue – our budget deficit should be priority number one.

Happy Halloween to all!!!

Sincerely,

Your THOR Team