Thursday, August 11, 2011

Software and IT: Incremental European Weakness Begins; US Unlikely to Pick up Slack

This will represent opportunities for us.... Aivars Lode

JP Morgan North America Equity Research
Software and IT: Incremental European Weakness Begins; US Unlikely to Pick up Slack

We believe Software and IT spending will weaken further in the European region over the next several periods due to the outsized contribution from struggling governments there. We do not expect the US to pick up the global slack, as the US government also deals with economic and political issues, and data suggests waning improvement in the private sector.
• European and US Governments Represent a Significant 20-25% of Worldwide IT spending. This includes 10-15% from European governments and 8-10% from the US public sector.
• Europe’s Only Just Begun. Per our prior reports, it is logical that we would see incremental weakness in Europe starting mid year due to the outsized contribution to IT spending from governments there and timing around fiscal years. We expect further weakness from indirect government spending to be layered on over the next several periods.
• US Unlikely to Offset Europe. As US fiscal programs expire without spurring a meaningful private sector recovery, we anticipate reduced domestic government spending around new State and Federal fiscal years (Jul and Oct, respectively). However, incremental Federal Government intervention could further delay this impact.
• Though All Tech is Vulnerable, Software is Better Positioned. We continue to believe that investors will be better positioned in Software relative to other parts of IT primarily because of its highly recurring and highly profitable maintenance revenue stream. In addition, we prefer some Small-Mid cap names (LOGM, SWI, TLEO) given their lower exposure to Europe and/or value names (QSFT, CA, SYMC, ORCL) for safety.
• High Valuations and/or European Exposure = High Risk. Alternatively, we believe CTXS, CRM, PRO, RHT, and VMW could be at risk given their valuations and/or European exposure. While QLIK and TIBX have relatively high valuation multiples and disproportionately high European exposure (which will likely weigh on the shares), we believe company-specific factors might help to offset this in reported numbers. While MSFT and BMC may appear inexpensive, neither company has much prospect for growth, and there is a valid negative secular story for MSFT.
• Within This Context, We Prefer the Following Stocks in Other Tech Sectors: Software Technology Analyst Sterling Auty is positive on AZPN and SNPS, and cautious on ADSK and ANSS. European Software and IT Services Analyst Stacy Pollard is positive on SAP, AMS, and MSY, and cautious on LOG, IDR, CAP, and SOW. IT Hardware Analyst Mark Moskowitz is positive on AAPL, EMC, IBM, and NTAP, and cautious on DELL and XRX. Computer Services and IT Consulting Analyst Tien-Tsin Huang is positive on ACN and CTSH, and cautious on CSC. Communications Equipment & Data Networking Analyst Rod Hall is positive on QCOM, and cautious on CSCO.

Tuesday, August 9, 2011

Why This Crisis Differs From the 2008 Version

Not a bad summary of the differences between 2008 and now. The results are the same though investors sitting on the sidelines. This time the governments will need to restructure and take out costs as what happened in Australia in the 90's.
Thanks Jon for the article, Aivars Lode

Why This Crisis Differs From the 2008 Version
by Francesco Guerrera
Tuesday, August 9, 2011

It is a parallel that is seducing Wall Street bankers and investors: 2011 as a repeat of 2008, the history of financial turmoil playing in one endless loop.

As a big fund manager muttered darkly this past weekend while heading into the office to prepare for a tumultuous Monday, "The sense of déjà vu is almost sickening."

Those who think of 2011 as "2008 -- The Sequel" now have their very own "Lehman moment." Just substitute Friday's historic downgrade of the U.S. credit rating by Standard & Poor's for the collapse of the investment bank in September 2008, et voilà, you have a carbon copy of an event that made the unthinkable happen and spooked markets around the globe.

They got the last part right. Investors looked decidedly spooked on Monday with Asian and European bourses down sharply and the Dow tumbling 643.76 points, or more than 5%.

But market turbulence alone isn't enough to prove that history repeats itself.

To borrow a phrase often used to rationalize investment bubbles, this time is different, and the bankers, investors and corporate executives who look at today's problems through the prism of 2008 risk misjudging the issues confronting the global economy.

There are three fundamental differences between the financial crisis of three years ago and today's events.

Starting from the most obvious: The two crises had completely different origins.

The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector's breakdown that caused the recession.

The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.

That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.

The second difference is perhaps the most important: Financial companies and households had feasted on cheap credit in the run-up to 2007-2008.

When the bubble burst, the resulting crash diet of deleveraging caused a massive recessionary shock.

This time around, the problem is the opposite. The economic doldrums are prompting companies and individuals to stash their cash away and steer clear of debt, resulting in anemic consumption and investment growth.

The final distinction is a direct consequence of the first two. Given its genesis, the 2008 financial catastrophe had a simple, if painful, solution: Governments had to step in to provide liquidity in droves through low interest rates, bank bailouts and injections of cash into the economy.

A Federal Reserve official at the time called it "shock and awe." Another summed it up thus: "We will backstop everything."

The policy didn't come cheap as governments world-wide poured around $1 trillion into the system. Nor was it fair to the tax-paying citizens who had to pick up the tab for other people's sins. But it eventually succeeded in avoiding a global Depression.

Today, such a response isn't on the menu. The present strains aren't caused by a lack of liquidity -- U.S. companies, for one, are sitting on record cash piles -- or too much leverage. Both corporate and personal balance sheets are no longer bloated with debt.

The real issue is a chronic lack of confidence by financial actors in one another and their governments' ability to kick-start economic growth. If you need any proof of that, just look at the problems in the "plumbing" of the financial system -- from the "repo" market to interbank lending -- or ask S&P or buyers of Italian and Spanish bonds, how confident they are that politicians will sort out this mess.

The peculiar nature of this crisis means that reaching for the weapons used in the last one just won't work.

Consider Wall Street's current clamor for intervention by the monetary authorities -- be it in the form of more liquidity injections (or "QE3") by the Fed or the European Central Bank.

So 2008.

Even if the central banks were inclined that way, pumping more money into an economy already flush with cash would provide little solace. These days, large companies are frowning all the way to the bank, depositing excess funds in safe-but-idle accounts, as shown by Bank of New York's unprecedented move last week to charge companies to park their cash in its vaults.

As for jittery investors, a few more billions minted by Uncle Sam or his Frankfurt cousin are unlikely to be enough to persuade them to jump back into the market.

In 2011, the financial world can't go cap in hand to the political capitals, hoping for a handout. To get out of the current impasse, markets will have to rely on their inner strength or wait for politicians to take radical measures to spur economic growth.

A market-led solution isn't impossible. At some point prices of assets will become so cheap that they will reawaken the "animal spirits" of both investors and companies.

As Warren Buffett once wrote to his shareholders, "we have usually made our best purchases when apprehensions about some macro event were at a peak".

The alternative is to hope that politicians in the U.S and Europe will introduce the fiscal and labor reforms needed to reawaken demand and investment growth. But that is bound to take time.

As often, the past looks a lot simpler than the present. But the reality is that, unlike 2008, governments' money is no good in today's stressed environment.

-- Francesco Guerrera is the editor of the Wall Street Journal's Money & Investing section.

2008 all over again? Stocks in free fall

Back about a year ago I mused as to when and what would cause the double dip (next stock crash) and here it is.

Aivars Lode

2008 all over again? Stocks in free fall
U.S. credit downgrade sends investors stampeding out of equities; large caps down 5.6%; Dow sheds more than 500 points
August 8, 2011 11:04 am ET
U.S. stocks tumbled, giving the Standard & Poor's 500 Index its biggest decline since November 2008, amid concern that a downgrade of the nation's credit rating by S&P may worsen an economic slowdown.
The 10 groups in the S&P 500 fell between 2.2 percent and 7.8 percent. Ford Motor Co. and Caterpillar Inc. slumped at least 7.4 percent, pacing losses in stocks most-tied to the economy. Bank of America Corp. tumbled 16 percent to lead financial shares in the S&P 500 down 7.7 percent. Chevron Corp. fell 5.1 percent as oil sank to an eight-month low. Newmont Mining Corp. rallied 3 percent after gold climbed to a record.
The S&P 500 retreated 5.6 percent to 1,132.32 at 2:18 p.m. in New York. The gauge slumped 12 percent in three days, the most since November 2008, and fell to the lowest since September 2010, on a closing basis. The Dow Jones Industrial Average slid more than 500 points. The Russell 2000 Index of small companies slumped 6.5 percent, entering a so- called bear market, down 23 percent from its April 29 high.
“There's no reason to get in front of this train,” Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion, said in a telephone interview. “Yes, there's cheapness in the stock market, but right now emotions are high. There's enough uncertainty out there. People are moving towards no risk. That includes Treasuries, which is ironic.”
Bear Market
The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country's stocks amid concern the economic recovery is at risk. Global equities tumbled and European shares entered a so-called bear market. The Stoxx Europe 600 Index has now fallen 21 percent from this year's high on Feb. 17. The S&P 500 has fallen 17 percent since April 29.
S&P lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5, while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements. S&P also said the U.S. rating may be reduced to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.
Equities extended losses today as S&P also lowered credit ratings on Fannie Mae, Freddie Mac and other lenders with a “direct reliance on the U.S. government,” spurring concern over the ripple effects of the loss of America's AAA rating.
Treasuries Rally
Treasuries rose today. Two-year yields fell to a record low after Japanese Finance Minister Yoshihiko Noda said U.S. Treasuries were attractive. Group of Seven nations said they will take every action necessary to stabilize financial markets after the U.S. credit rating downgrade.
Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., increased holdings of Treasuries to 10 percent from 8 percent and cut cash holdings to 15 percent from 29 percent.
“If you're an investor and you say -- I'm worried about what's going on in the world, I'm worried about liquidity and safety, you basically have no place to go other than the Treasury market,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in a telephone interview. His firm oversees more than $38 billion.
Barton Biggs, who last week called U.S. equities a “strong buy,” said he cut risk in his Traxis Partners LP hedge fund. “I've taken some risk off, and I hate to do it, I think it's probably the wrong thing to be doing,” Biggs, who helps manage $1.4 billion as managing partner and co-founder of Traxis, said in a Bloomberg Television interview. “But I'm a fiduciary to a certain extent, and I've got to protect my capital.”
Volatility Soars
The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 32 percent to 42.18, the highest since May 2010, on a closing basis.
The Morgan Stanley Cyclical Index of 30 stocks tumbled 6.7 percent. The Dow Jones Transportation Average, which is also a proxy for the economy, retreated 5.3 percent. Ford sank 7.4 percent to $10.04. Caterpillar decreased 7.6 percent to $84.08.
The KBW Bank Index of 24 stocks slumped 8.6 percent. Bank of America dropped 16 percent, the most in the Dow, to $6.85. American International Group Inc., the bailed-out insurer, sued the largest U.S. lender by assets, over $10 billion in losses on mortgage-bond investments.
‘Double Dip'
“The bias that exists, and that is gaining credibility, is that a double dip is ahead of us,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “If that's the case, then something like Bank of America is going to have to raise substantial equity externally.”
Berkshire Hathaway Inc. Class B shares slumped 2.5 percent to $69.44. Warren Buffett's Omaha, Nebraska-based company is among firms that may be downgraded by S&P as the ratings company reviews insurers after stripping the U.S. government of its AAA rating.
“Our view of these companies' fundamental credit characteristics has not changed,” S&P said in a statement today as it cut the outlook to “negative” on Omaha, Nebraska-based Berkshire. “Rather, the rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers' financial strength.”
Buffett lost his AAA rating from S&P last year after agreeing to buy railroad Burlington Northern Santa Fe. He said Aug. 6 that the ratings firm erred in cutting the U.S. grade and that the country should have a “quadruple A” rating. Buffett didn't immediately respond to a request for a comment.
Newmont Mining Rallies
Gold climbed to more than $1,700 an ounce for the first time amid concern that the global economy is slowing. Oil and copper tumbled. Chevron decreased 5.1 percent to $92.61. Newmont Mining rallied 3 percent to $56.02.
Only two other stocks in the S&P 500 advanced. O'Reilly Automotive Inc., an auto-parts retailer, gained 0.4 percent to $58.56. Procter & Gamble Co., the world's largest consumer- products company, rose 0.1 percent to $60.65.
The downgrade may spook investors, causing sentiment to grow more bearish in the short term, but corporate fundamentals, including balance sheets with more cash than debt and earnings growth, will continue to push the S&P 500 higher by the end of the year, strategists at Barclays Plc, Citigroup Inc. and JPMorgan Chase & Co. said. While Goldman Sachs Group Inc. cut its year-end target for the S&P 500 to 1,400, Barclays held its 1,450 estimate.
‘Minimal' Effect
“The medium to long-term effects of the U.S. sovereign downgrade are minimal, even as the short impact could be turbulent,” Thomas Lee, JPMorgan's equity strategist in New York, wrote in an e-mailed note.
The S&P 500 retreated 11 percent from July 22 through Aug 5 amid concern about an economic slowdown. The benchmark gauge for American equities was still up 77 percent from a 12-year low through Aug. 5 following government stimulus measures and higher-than-estimated corporate earnings.
Per-share earnings increased 18 percent among the S&P 500 companies that have released quarterly results since July 11, according to data compiled by Bloomberg. About three-quarters of the companies have topped the average analyst profit forecast, the data show. Sales rose 13 percent during that period.
“We had a terrific earnings season,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $275 billion. “We're not going into a recession. Now is not the time to panic. This is where you start to put cash back to work.”
--Bloomberg News--

Monday, August 8, 2011

What Business is Wall Street in ?

Not a bad take on things.

Aivars Lode

What Business is Wall Street in ?

Mark Cuban | August 8, 2011 at 6:13 pm

Another post from last year that i thought was relevant again:
What Business is Wall Street In ?
May 9th 2010 11:36AM
My last two posts were designed to stimulate discussion. But lets talk the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.
The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.
The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.
I recognize that one is illegal, the other is not. That isn’t the important issue.
The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?
I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.
Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.
The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game” The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars. They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.
Again, I’m not passing judgement one or the other. I’m just recognizing what is going on in the financial world today.
It’s rare for companies to go public these days. Just as rare for secondary offerings. The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States. I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it.
So back to the original question. What business is Wall Street in ?
Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), then flows into companies in the form of equity.
My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.
And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.
Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.
Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.
There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big ? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible ?
Update at 10pm 5.9.10
One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate ?. For any High Frequency or big leverage derivative folks out there- is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade if things went against them ? Could there be hidden AIGs that few people know about or a bunch of AIG like situations ,which in aggregate fail and put the system at risk ? I have no idea. Just asking the question.

Sharp Rift in a Strike at Verizon

In Australia during the 90's as our crisis was coming to a head, strikes where common place and it was through these strikes that individuals realized there was no additional money and the only alternative was to take a paycut or be outsourced. New business's where formed providing the same services without the involvement of the unions. There is 9% unemployment in the USA today therefore plenty of people who want a job.

Aivars Lode

Sharp Rift in a Strike at Verizon
Published: August 7, 2011

The decision by 45,000 workers at Verizon Communications businesses to go on strike Sunday over proposed benefit cuts reflects sharp battle lines. On one side is a highly profitable telecommunications company that is eager to trim costs in its declining businesses; on the other are unionized workers who fear that the many concessions demanded by their employer will force them to give up decades of hard-won gains.
Enlarge This Image
Chester Higgins Jr./The New York Times

Striking Verizon workers outside its headquarters downtown. The two sides remain far apart.

The walkout is unusual at a time when unemployment is steep and organized labor has lost several big battles. But union leaders are angry that Verizon has budged little from its long list of demands during six weeks of negotiations. The unions have resisted Verizon’s requests for concessions on scores of issues because the company has been very profitable overall, with net income of $6.9 billion in the first six months of this year.

Verizon notes that most of its lines of business that deliver services over wires — the part of the company where the striking workers are employed — are in decline. The bulk of the company’s profits come from Verizon Wireless, a thriving, nonunion joint venture that is majority-owned by Verizon.

The strike is the largest in the nation since 74,000 General Motors workers walked out for two days in 2007, although some union leaders warned that the Verizon strike could last much longer because the two sides remain far apart.

Union leaders and workers said the walkout would inevitably cause significant delays in phone repairs and in installations of its fast-growing FiOS television and Internet services in customers’ homes. But Verizon officials said the company had tens of thousands of managers ready to step in to do the work normally done by the striking workers.

Verizon’s chief executive, Lowell C. McAdam, took a hard line on Sunday, arguing that workers in Verizon’s heavily unionized wireline businesses must agree to cost reductions. The wireline businesses, which include home and business telephone landlines as well as the FiOS services, have had declines in their customer base and profitability in the last decade, amid growing competition from mobile phones, cable companies and services like Skype and Vonage.

“It is clear that some of the existing contract provisions, negotiated initially when Verizon was under far less competitive pressure, are not in line with the economic realities of business today,” Mr. McAdam wrote in a letter on Sunday to the company’s management to discuss the strike. “As the U.S. automobile industry found out a few years ago, failure to make needed adjustments — when the need for change is obvious — can be catastrophic.”

The strike involves Verizon repair technicians, FiOS installers and call center workers from Massachusetts to Virginia. The walkout was called by the Communications Workers of America, which represents 35,000 of the strikers, and the International Brotherhood of Electrical Workers, which represents 10,000.

Verizon wants the unionized workers to start contributing to their health care premiums, including $1,300 to $3,000 a year toward family coverage. The company has also called for freezing pension contributions for current employees, eliminating traditional pensions for future workers, limiting sick days to five a year, and eliminating all job security provisions.

“What they’re asking is hard for us to swallow because the company had profits of $22 billion over the last four years,” said Joe Iorio, a field technician based in Brooklyn, who has worked for Verizon for 15 years. “They’re crying poverty, they say they can’t afford to pay us. We’re just not going to stand for it anymore.”

Several union members said they were insulted that they were being asked to make deep concessions when Verizon’s top five executives received a total of $258 million in compensation, including stock options, over the last four years.

Verizon says its unionized employees are well paid, with many field technicians earning more than $90,000 a year, including overtime, with an additional $50,000 in benefits. Union officials say the field technicians and call center workers generally earn $60,000 to $77,000 a year before overtime and that benefits come to far less than $50,000 a year.

Michael Parker, executive vice president for a communications workers’ local in Annapolis, Md., said it was not easy to go on strike. “It’s a scary thing — we have 45,000 families that don’t have income coming in,” he said. “But we have to draw a line in the sand and defend what we believe in. We bargained for 50 years to gain these things, and we don’t want to give that back.”

Jeff Kagan, founder of a telecommunications research firm in Georgia, said the strike would undoubtedly slow construction of Verizon’s FiOS network and installation of FiOS in homes, but the short-term hit was worth it to Verizon.

“Their traditional local phone business is shrinking, while the other parts of the business are still growing,” he said. “It’s just a matter of restructuring so they can remain competitive. If they’re not competitive, Verizon will lose business and everyone loses — investors, customers and workers.”

Richard Hurd, a professor of labor relations at Cornell, said the two unions felt Verizon was trying to humble them by pushing them to adopt some of the same, less generous benefits that many of the company’s 135,000 nonunion workers have. “When you challenge unions like that, in a sense the company is pushing them into a strike,” he said.

In 2000, Verizon had another big strike, when 86,000 workers walked out for two weeks, causing widespread delays in repairs.

As recently as Wednesday, union and Verizon officials said they thought a strike was highly unlikely. But several union officials said on Sunday that they were stunned that Verizon still had 100 proposals for concessions on the negotiating table on Saturday, including ones to eliminate Martin Luther King Jr.’s birthday and Veterans Day as holidays.

“No one expected six weeks of bargaining would produce absolutely no movement or compromise by the company,” said Robert Master, a communications workers spokesman. “This was an unprecedented situation.”

Verizon officials have repeatedly said that the two unions broke off talks on Sunday, but union officials said they have asked for new meetings, and Verizon has refused.

Digging deep for income streams

As we have discussed many times in this BLOG, the move to stable dividends will be driven by an aging population looking for stable returns. This is gaining more momentum in articles penned by investment advisers.

Aivars Lode

Digging deep for income streams
Using multiple investment strategies can create dependable distributions
By Thomas Applegate
August 7, 2011 6:01 am ET
Recent studies have shown that about 78% of the financial assets in the United States are held by retirees and baby boomers over 50. A large portion of this group isn't covered by a traditional pension plan. They will need to rely on personal savings and rollovers from their 401(k) plans to support themselves during retirement, which could last 20 years or longer. As such, it is urgent for financial advisers to help clients construct portfolio solutions that provide steady, consistent income while maintaining or increasing principal to help ensure that they don't outlive their assets.

Related to this story
In today's low-interest-rate environment, creating such a portfolio seems like a Herculean feat. Traditionally, retirement portfolios have consisted of an ample weighting to safe, income-yielding investments — such as Treasury or high-quality corporate bonds for income, and dividend-paying stocks — to add a little growth and income.
However, with 10-year Treasuries and the Barclays Capital U.S. Aggregate Index yielding 3.2% and 2.8%, respectively, and dividend yields from the S&P 500 near 2%, the opportunity to generate sufficient income from traditional retirement investments alone is questionable. Further complicating the issue is the negative impact on principal that bonds face, should interest rates rise.
Although the search for a consistent payment stream may seem daunting, if we expand our idea of what an income portfolio should look like, and utilize the full range of investment alternatives and financial tools available, we can construct a portfolio designed to provide dependable distributions and the potential for capital appreciation.
To start, we need to rediscover the concept of diversification. In modern portfolio theory, diversification is used to help improve the risk-adjusted return of a portfolio. It also can play an important role when focusing on generating income.
Combining multiple sources of income, we can create a portfolio that provides a regular payment stream by relying on different sources during various economic and market cycles.
Diverse income sources can be drawn from a robust list of asset classes beyond traditional stocks and bonds. For example, we can generate interest from floating-rate loans, and high-yield and global bonds, while dividends can come from international developed, emerging-markets and small-cap stocks, as well as from real estate investment trusts.
Including alternative investments also may improve diversification.
Using mutual funds to construct such a portfolio makes gaining exposure to these asset classes relatively easy and efficient. Yields from funds in these categories — which can be estimated based on current averages, historical trends and market conditions — can be allocated to create a relatively predictable “base case” portfolio yield.
To capture additional payment sources, we can expand our income opportunity set further to include such items as capital gains, premiums from writing call options and the potential return of capital.
Using a covered-call strategy to generate income in a portfolio is a common practice for advisers and investors alike.
Writing call options on indexes that track the underlying holdings in a portfolio or mutual fund closely also can help generate income and provide a source of distributions during volatile or down equity markets.
Returning capital can be an additional way to support a dependable payment stream if all other sources within a portfolio fall short of distribution needs. When the net asset value of the portfolio is rising, returning capital merely represents a return of unrealized gains, and the original principal is maintained or increased.
However, if capital is returned to cover distributions and the net asset value falls, the capital returned actually reduces the balance of the investor's principal, in essence returning a portion of the original investment.
As the boomers move into retirement, advisers will be increasingly called upon to create endowmentlike portfolios that deliver a consistent payment stream while also maintaining or increasing principal balances.
Combining several of these concepts and techniques may help provide a solution.
Thomas Applegate is a client portfolio manager, and Rachael Camargo a portfolio specialist, for ING Investment Management