“Right now, given the concerns that we have over the size of this package and all of the spending in this package, we don’t think it’s going to work,” Rep. Boehner said yesterday (Sunday) on NBC-TV’s “Meet the Press.” “And so if it’s the plan that I see today, put me down in the ‘No’ column.”

The plan – detailed in a Money Morning report last week – could potentially pass the Democrat-dominated House without Republican support, The New York Times reported. But the stimulus plan will face major opposition when it comes before the U.S. Senate, U.S. Sen. John McCain, R-Ariz., told “Fox News Sunday.”

If at least two Republicans don’t approve the bill, the proposal won’t be able to achieve the majority vote of 60 it needs to be filibuster-proof. McCain said he also plans to vote “No” unless the stimulus bill is changed.

“We need to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes,” McCain said. “We need to cut payroll taxes. We need to cut business taxes.”

Added McCain: “We need to have a commitment that after a couple of quarters of [gross domestic product] growth that we will embark on a path to reduce spending to get our budget in balance.”

McCain lost the November presidential election to Obama.

That’s not all that’s taking place in what figures to be a busy stretch this week.

The economic calendar will heat up this week as economists get their initial look at U.S. gross domestic product (GDP) data for the 2008 fourth quarter. Needless to say, the results are not expected to be pretty, with analysts predicting a 5% contraction during that final three months of the year.

The report is due out Friday.

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported in early December. This downturn – and the bigger-than-usual job cuts that have resulted – could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010, many economists fear.

The U.S. economy shrank 0.5% in the third quarter, marking the slowing pace since 2001 and continuing a still deepening recession that has wrung the markets since last year. GDP advanced 0.9% in the first quarter of last year and 2.8% in the second quarter, Bloomberg News reported.
Dana Saporta, an economist at Dresdner Kleinwort Ltd. in New York, told Bloomberg projects a 5.4% overall contraction in the fourth quarter. Analysts expect the malaise to carry over well into this year.

The stimulus packages – money spent by the newly departed Bush administration, as well as one planned by the newly installed President Barack Obama – will have a lot to say about how long the U.S. economy stays down. As the Republican opposition comments demonstrate, with Congress (the Democratic members, at least) promising a stimulus package by President’s Day (February 16th), Obama will have his hands full initiating some “give and take” from the dissenters of the current plan.

On Wednesday, U.S. Federal Reserve Chairman Ben S. Bernanke also leads the first Fed policy meeting of the Obama administration though he and his policymaking cohorts have no more wiggle room when it comes to cuts in the benchmark Federal Fed rate.

But the Fed statement should provide insight into the additional measures the central bank has in its arsenal to help jumpstart the economy.

Earnings season also moves forward with energy companies prepared to show the ill-effects of the drop in oil prices.  Exxon-Mobil Corp. (XOM) and Chevron Corp. (CVX) announce late in the week, as does consumer products giant Procter & Gamble Co. (PG).  Amazon.com Inc. (AMZN) also reports quarterly earnings during the week and analysts are speculating whether investors will cheer its results a la Google Inc. (GOOG) or frown along the lines of eBay Inc. (EBAY).

Market Matters

Last Tuesday, Barack Obama took the oath of office (for the first time) and became the 44th president of the United States.  In his inaugural address, President Obama called for “action, bold and swift – not only to create new jobs, but to lay a new foundation for growth.” He then acted “boldly and swiftly” by freezing the pay of high-ranking members of his administration.  One of those potential members, U.S. Treasury Secretary-nominee Tim Geithner, faced the wrath of Congress for his role in the mis-handling of the banking bailout plan and for his failure to pay a mere $34,000 in taxes.  Since the treasury secretary oversees the Internal Revenue Service, certain “rule sticklers” in Congress frowned upon his “careless mistakes.”  Still, he was approved by the Senate Finance Committee and is expected to be confirmed – just in time to oversee the distribution of that next round of Troubled Assets Relief Program (TARP) money.

While Obama begins a new job and tries to “faithfully execute the office” (rather “execute the office faithfully”), a few financial execs are headed for the unemployment line.  John Thain, formerly of Merrill Lynch & Co. Inc. fame/infamy, stepped down or was forced out from his role at Bank of America Corp. (BAC) after failing to disclose dramatic losses prior to the shareholder approved acquisition.

In an effort to stop the negativity – and no doubt to try and protect his own job – BofA Chief Executive Officer Kenneth D. Lewis and several cronies bought more than 500,000 company shares, a move that earned a collective yawn from investors.

Citigroup Inc. (C) will be replacing Chairman Win Bischoff with ex-Time Warner Inc. (TWX) CEO Richard Parsons, and also announced its intent to sell Japan’s Nikko Cordial Securities, a move that confirms that brokerage will no longer be considered a core business.  In other financial news, State Street Corp. (STT) reported a far-worse-than-expected quarter from its asset management business; U.S. Bancorp (USB) announced that profits fell to the lowest level since 2001; Capital One Financial Corp. (COF) posted a huge loss in the quarter and predicted that credit card defaults will only grow in 2009.

Across the pond, Royal Bank of Scotland Group PLC (ADR: RBS) forecast an annual loss above $40 billion which would be the largest ever reported in the United Kingdom.  On the heels of that news, the British government introduced new measures to its bailout plan, including a form of insurance to limit future loan losses.  Investors were hoping that earnings from non-financials would fare better, but Microsoft Corp. (MSFT), eBay, General Electric Co. (GE), Advanced Micro Devices Inc. (AMD) and Xerox Corp. (XRX), among others, disappointed with weak results as well (though Google and Apple offered some bright spots).  Time Warner, Intel Corp. (INTC), and Clear Channel (among others) announced layoffs, proving that most sectors of the economy are hurting.  Non-government arranged deals still exist as Pfizer Inc. (PFE) attempts to acquire pharmaceutical rival Wyeth (WYE) and Mexican billionaire Carlos Slim. Carlos Slim plans to invest $250 million into The New York Times Co. (NYT), The New York Times reported.

Economically Speaking

A rather slow week on the economic calendar last week allowed investors time to focus on the earnings data.  Housing starts fell for the sixth straight month and building permits, a predictor of future activity, dropped to the lowest level ever reported.

The never-ending layoff announcements continued to hinder the labor picture as jobless claims surged far more than expected.  In China, GDP rose by 6.8% in the fourth quarter, a number that would have prompted parades in this country. In China, however, those numbers confirm dramatic slowdowns in the world’s third-largest economy.

The “weak” report means that growth for all of 2008 came in as 9%, the first year since 2002 that China’s growth rate fell below double-digits.

Weekly Economic Calendar

Source: Financial Crisis Challenges Escalate as Republicans Announce Plans to Oppose $825 Billion Obama Stimulus

• Sales of existing homes fell 3.1% in October, the lowest drop in four years, Reuters reported. Over the past year, medium home prices also declined 11.3% to $183,300, the biggest percentage drop since the National Association of Realtors began keeping records in 1968.

• Chile’s gross domestic product beat forecasts and grew 4.8% in the third quarter. Domestic demand was strong, as was energy output. “These figures surprised the market and showed that the Chilean economy is surprisingly resistant to a rapid deceleration,” Juan Pablo Castro, an economist at Banco Santander SA in Santiago, told Bloomberg. “Consumption is still growing at around 6 percent even though you’d expect to see the effects of inflation and interest-rate rises.”

• Shares of Solar power manufacturer SunPower Corp. (SPWRA) jumped yesterday after the company announced it had completed an 18-megawatt solar electric power plant in Badajoz, Spain. The plant’s SunPower Tracker follows the sun as it moves across the sky, increasing sunlight capture by up to 30% more than conventional fixed-tilt systems.

• China oil titan Cnooc Ltd. (CEO) and undisclosed partners may spend up to $29 billion to develop deposits in the South China Sea. The state-run oil company is making a big push to feed domestic energy demand as well as put its flag in an oil-rich aquatic area where its facing exploration competition from Vietnam and Indonesia, Bloomberg reported.

• Alpharma Inc. (ALO) yesterday (Monday) agreed to King Pharmaceuticals Inc.’s (KG) $1.6 billion cash takeover offer. The deal values Alpharma at $37 a share – a 54% premium to the company’s closing price on Aug. 21, the last trading day before King’s initial $33-per-share bid.

• Xerox Corp. (XRX) yesterday (Monday) said that 2009 profits are generally in line with analyst expectations and that its strong contingent of repeat customers coupled with cost cuts will help it weather the economic downturn. The company, which last month said it plans to cut about 3,000 jobs, or 5% of its work force, expects 2009 profit to range between $1 a share to $1.25 a share.

• The price of crude oil yesterday (Monday) rose $4.57 a barrel, or 9.15%, to settle at $54.50 a barrel on the New York Mercantile Exchange. Oil climbed more than $5 earlier in the day, reaching a session high of $55.30 a barrel on hopes that equity markets will continue to recover.

Source: Global Investing Roundups, Tuesday, November 25th, 2008

Assuming the stock market doesn’t move much from here, a typical U.S. company can expect its pension expense – a direct charge against profits – to increase between 20% and 30% in 2009.

With such a hefty burden ahead, it’s not difficult to understand that this pension fund crisis will certainly exert a downward pressure on corporate earnings, and doubtless on stock prices, too.

But there is a silver lining: By choosing your stocks carefully, you can dodge this pension-fund crisis altogether. To make sound choices, it’s first necessary to have some knowledge of pension systems, and the funding crisis that’s brewing up like a summer squall.

Pension-Fund Proliferation Leads to Pension-Fund Crisis

The pension fund problem emanates from the huge expansion of pension funds after World War II, when companies saw additional pension promises as being cheaper than cash wage increases. And they were cheaper: Big industrial companies like General Motors Corp. (GM) were growing rapidly, meaning they had relatively young work forces who could be expected to pay pension contributions for many years before being eligible to receive pensions.

Add a certain amount of old-fashioned sloppiness in the accounting – for instance, the total value of pension liabilities didn’t have to be reported at all until 1985, and have only been brought onto the corporate balance sheets under the recent pension-focused accounting rule, SFAS 158 – and you can see why defined-benefit pension plans, in which workers got a benefit based on a percentage of final salary, were popular with all concerned.

The defined-benefit pension system got into serious trouble in the 1980s – thanks to some developments from the decade before. Under the ERISA Act of 1974, employers were forced to make payments to the Pension Benefit Guaranty Corp., so employees would be paid if the employer went bust. As the 1970s wore on, high inflation (which led to higher wages, and therefore higher pension obligations) and lousy stock markets (which reduced the pension funds’ returns), caused many defined-benefit pension schemes to become seriously under-funded, creating a major risk to employee benefits.

The Generally Lousy Moves of General Motors and General Electric

The aging work force didn’t help: By 1980, GM had stopped expanding and was moving towards its current position, in which retirees outnumber active workers.

The industry’s new solution was the so-called defined-contribution plans, such as today’s ubiquitous 401(K) accounts, in which employers and employees combine to fund employee pensions. These had one modest benefit for the employee: They were much more “portable” than defined-benefit plans.

Under the old pension system, if you had completed 20 years at General Motors, you were basically stuck there until retirement. And employers really liked 401(K) plans, as well, for this new format meant that they were freed from being responsible for employees’ welfare in retirement (a huge cost savings in the retirement area, thanks to the massive escalation in health-care costs, as it turned out). Employers also could generally substantially reduce the percentage of employee wages they devoted to pension contributions.

Defined-benefit plans had something of a comeback in the 1990s, when inflation declined and the stock market rocketed ahead so fast that the under-funded pensions of the 1970s disappeared, and were replaced with over-funded pension plans, so that employers no longer needed to make contributions. The result was that many companies took holidays from making pension contributions, boosting their earnings, their stock prices and the value of their top management’s stock options by doing so.

General Electric Co. (GE) even went further; it figured out a way in which it could make negative pension contributions, essentially withdrawing money from the pension fund, and boosting its earnings still further by doing so. GE Chief Executive Officer John F. “Neutron Jack” Welch (whose tenure at GE was from 1982-2001) never missed a trick – as that company’s unfortunate shareholders, employees, and customers are only now discovering.

Possible Pension Profit Plays

Since 2000, stock market returns have been lousy. What’s more, bond yields have declined. That’s had the effect of raising the nominal value of pension liabilities, which are calculated 30-40 years ahead and then discounted back to the present day by some appropriate bond rate.

When you factor in the recent downturn, it’s easy to see why defined-benefit pension contributions will be zooming up.

So, how do you deal with the pension-fund crisis?