New Investment Project

School is finishing for the summer next week. This semester has been interesting, I have learned a lot, but not as much as I thought I would. I have been busy, but don't have as much as I would like to show for it. However I do have a couple of great projects to work on over the summer.

As always, I am trying to learn more about business and investing. I feel like I really need to dig in deep on a lot of companies this summer. So here is my new project: I have seven different sectors that I want to learn a lot about this summer; banking, health care, insurance, software, consumer non-cyclicals, oil, and mining. I am going to try to at least take a cursory look at every company in as many of these as I can manage over the summer, and delve deeply into researching any that stand out as exceptional companies or that seem exceptionally cheap.

Since I have had some recent experience with health care, I decided to start there. I don't know a lot about health care, but it seems unique in that consumers often have no incentive to manage price. I have been to the doctor a few times recently and asked them how much they bill insurance for. It is amazing how many tests I have had that cost $500 plus, that I don't get bills for, and never thought about how much they cost. The really interesting thing is that sometimes the doctors and nurses have no idea how much this stuff costs either.

Healthcare costs are rising, it makes up a bigger portion of our economy every year, innovation seems to be abundant, and the population is aging, that seems like a pretty good picture to me.

However, health care as a sector has performed poorly over the past three years, up only 3.37% annually. Why? I really don't know, maybe nobody is really making a lot of money, maybe P/E ratios are compressing, maybe there isn't going to be any growth, I don't know but I will find out.

I will be looking at companies in the Dow Jones U.S. Healthcare Sector Index. If you know anything about health care, would like to learn, or would just like to help, I would love to hear from you. I would love to hear what other people think about this sector and these companies.

e-mail me at: timothyb@timothyburger.com

Timothy Burger

United Airlines, Judge Screw Taxpayers and Workers

Yesterday U.S. Bankruptcy court Judge Eugene Wedoff approved a deal that would allow United Airline's parent company, UAL, to shift their pension obligations to the Pension Benefit guarantee Corporation, a federal agency. This deal is so bad, for so many people that I almost can's believe it. It is a sad commentary on the state of American business, and a looming disaster for taxpayers.

By shifting their pension obligations to the PBGC, UAL shifts the responsibility for paying employee retirement benefits to the Federal Government and to the taxpayers. This requires that UAL transfer all of its pension assets to the government as well, but since UAL has not fully funded its pension, in the end it is shifting a lot more liabilities than assets.

This is obviously a bad deal for taxpayers. The PBGC collects a small per worker premium from every company that has a pension, or defined benefit retirement plan. For this premium the PBGC essentially guarantees that if the company can't pay the pension then the taxpayers will step in and pay the benefits. In a world where companies adequately and responsibly funded their pensions only the worst companies would need to default on their pensions as they went bankrupt. However today that is not the case. Today many companies use overly optimistic return assumptions so they have to contribute less to their employee plans. A company may assume that pension assets will grow at 12% per year, even though the long run return on stocks is less than 11%, and half of their assets are in bonds which return even less than that. How you combine 11% and 6% to equal 12% is a mystery to me, but pension plans think they can do it. The result is that since they assume a higher rate of return, they put less into the plan, when they don't earn higher than normal returns, the plan is underfunded.

This is where the PBGC comes in. A company like UAL gets into distress, files bankruptcy and then wants to shed their underfunded pension. The result, according to the Wall Street Journal, is that taxpayers will pick up $3 billion in minimum funding contributions over the next five years. By the way, US Airways did the same thing three years ago.

If you think paying for UAL is bad, just wait until GM wants to do the same thing with their pension, which is currently $25.4 billion underfunded and pays for the retirement benefits of approximately 460,000 former GM workers, and will pay for their 120,000 current employees.

This is also a disaster for current workers and retirees who typically get 66-75% of their promised benefits. It is a real rip off for them, in most cases they took lower pay for years in exchange for these great "guaranteed" pension plans, and now they are going to get screwed out of them. This is really dishonest, UAL management has know for decades that they were underfunding those plans, and that paying benefits would be difficult yet they continued to negotiate deals, deals that their employees did their part of. This is really wrong.

A lot of companies have dropped pensions in favor of 401(k) defined contribution plans, where the employees share the burden, the employees own the assets and the company simply commits to providing a certain level of funding, rather than guarantee a certain level of benefit in retirement. 401 (k) plans are great because the employee controls them and knows what they own and how much they will be able to draw from it. It is not as popular with employees, but it is a lot more affordable for companies.

UAL competitors like Southwest have dealt with workers honestly and given them a 401(k), UAL hired people under the premise that they would get a pension and then didn't give it to them, it isn't fair to Southwest and its shareholders to bail out UAL. Bankruptcy court bailouts like this penalize honest competitors who operate in a responsible manner and meet the obligations they take on.

UAL will leave bankruptcy without many of the obligations they went into bankruptcy with. This will leave them with a lower cost structure and a better competitive position, and cheat a lot of people in the process.

In a free market I think you have to use whatever tools are available to you. UAL decided to use bankruptcy to get what they wanted. Frankly, I hope their employees use a massive "sick out" strike to cripple UAL on a busy holiday weekend, UAL management would get exactly what they deserve, unfortunately the passengers, who pay taxes would once again, get screwed.

Timothy Burger