Orr files Detroit bankruptcy plan with big 34% pension cut

Derelict Russell Industrial Complex, Detroit, Mich. (Via Wikimedia Commons)

WASHINGTON, February 21, 2014 – Detroit’s emergency manager, Kevyn Orr, filed a complex bankruptcy plan with the U.S. Bankruptcy Court in Detroit today. The filing is a cautiously optimistic move signaling that the endgame of the nightmarish collapse of Detroit—once one of America’s greatest and most powerful cities—may be nearing its painful climax and conclusion.

That conclusion, however, is likely to be a drawn out affair, as a substantial number of creditors as well as the city’s long rapacious public employee unions are certain to file numerous suits that will likely slow, but not stop, the forward motion of an inevitable reality.

According to CNBC, the draft plan will allow “city pensioners to receive $4.3 billion in payments and bondholders about $1.1 billion during the next 40 years. That draft also detailed plans to help pensioners keep more of what they are owed by using state and private funds to protect against the sale of city-owned art at the Detroit Institute of Arts.”

Included in the plan is a 34 percent reduction in monthly pension benefits for certain beneficiaries of the city’s grossly underfunded and unaffordable retirement plans.

Ultimately, everyone and everything monetarily involved in this greatest of American urban financial and social disasters will take a substantial haircut in any settlement. But it’s Detroit’s public employee unions and the politicians they bought and paid for—some now inhabiting jail cells at public expense—will finally have the opportunity to learn what most American taxpayers already know; namely that the days of living high off the hog, courtesy of the public trough, are finally drawing to a painful close.

The filing doesn’t seem to have had much of an effect on Wall Street at the moment, perhaps because Detroit no longer figures as prominently in the American economy as it once did back in the city’s glory days.

As options expiration week draws to a close, the Dow is currently up about 30 points just after 12 noon EST, while the S&P 500 is up a bit over 4. Commodities and bonds are mixed. Likely, the market will close slightly up or slightly down today. Nothing impressive or convincing, as the market is still somewhat overbought, a weekend without a trading escape hatch looms, and Mondays lately have tended to have a bearish bias, so traders don’t seem to be making a big commitment today, one way or the other.

Today’s trading tips

We reiterate our rather nonspecific advice from yesterday’s column. The market still looks a bit frothy to us. We still expect some nastiness early next week to relieve this condition. We’ve added more shares of HDGE, a complex bear ETF that seems to be effective in protecting at least part of our portfolio during these pockets of stock market turbulence. It’s not looking too positive for HDGE today, but we expected that since we’re more worried about Monday and Tuesday when this hedge may come in handy.

Again, we’re just hoping to score a few more bucks before the “sell in May” syndrome kicks in, which we still think might happen earlier than later as the economy is in slowdown, maybe due to the bad weather or maybe not.

Whatever the case with Mother Nature, however, the full economic horror of Obamacare will continue to sink in as retail purchasing power is gradually and massively redirected to the healthcare sector which will badly damage sales of discretionary consumer items.

We look for the retail sector to do poorly in at least the near term and are instead looking to put on more positions in the pharmaceutical and managed care areas if only those prices would come down to earth long enough for us to grab some shares on markdown.

Have a good weekend.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He currently owns shares of HDGE.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk. Caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Detroit, Michigan at Milwaukee Junction looking south/west at Russell Industrial Complex

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