There is blood on the street, and the stampede continues with equities currently in a self-perpetuating corrective cycle linked to the higher volatility.  The sentiment is driven by the main equity indices, but most of them (such as the Dow Jones Industrial Average) have too few companies making the index.  As the result of the historically high volatility, the attack on just one company will bring the whole index sharply lower and then the panic selling comes in. 

A quick plunge in the indices intiated by a major industrial automaker bankruptcy, could push the volatility index substantially higher than 1987.  As Certified Financial Planner Certificants, Mr. Simos and I know there are only two options for the big three automakers to legally eliminate there employee Defined Benefit Pension liabilities.  They can claim bankruptcy, effectively shifting the liability of making Defined Benefit contributions to current employees and annuity payments to retirees over to the Pension Benefit Guarantee Corporation (PBGC) or, pay up to age 65 for each working employee.  These are the only options for the automakers to rid themselves of the Defined Benefit liabilities.  Their cash flow problem leaves only one option. 

This is the long-term process American companies have been going through since the invention of the Defined Contribution 401k plan in the eighties.  The steel industry did it in the nineties, the airlines did it after September 11th, and we could see another industry follow in their corporate foot steps. 

Posted on Wednesday, November 19th, 2008 at 11:03 am. You can skip to the end and leave a response. Pinging is currently not allowed.