The ERISA (Employee Retirement Income Security) Act of 1974 set down rules for how employee retirement pension and medical plans must be run.

In particular, it set rules on how traditional “defined benefit” must be run, including required contributions by the employer to ensure that the fund has the money needed to pay out promised benefits, professional management of the fund assets, and periodic reports to employees.

Two results:

–an explosion in size of the brokerage and investment management businesses, and

–a seismic shift by companies away from traditional promises of specified retirement benefits (like pension payments to retirees of a specified percentage of their salary while working) to defined contribution plans. In the latter case, the firm periodically pays a specified amount into a tax-deferred retirement account for the employee. This essentially transfers the economic uncertainty of an employee living an extra-long life from the firm to the employee. And it empowers/obligates the employee to take control of his own investment decisions.

The big exception to this shift is government entities, which by and large have retained traditional pension plans for their workers.

ERISA requires that pension providers make regular reports to plan participants on how well funded they are, meaning how much has the provider put aside as a percentage of what it calculates is needed to make the pension payments they are committed to. On average in the US, state plans are about 80% funded. In my home state of New Jersey, on the other hand, funding is somewhere in the 50%-60% range.

These figures can easily change with the ups and downs of the financial markets. And they have the potential to look ugly during a periodic economic downturn that can depress prices in public markets.

Hence, one of the big appeals of private investments–that there’s no Mr. Market pushing current prices down during recessions.

…everything meaning private equity, private debt and private credit. Private here means not traded on public securities exchanges like the NYSE, NASDAQ, COMEX or their equivalents anywhere else in the world.

The US pension law ERISA, the Employee Retirement Income Security Act of 1974, which applies to most of private industry, set standards for how employee pension plans must be run. It requires that they must operate competently, fairly and transparently–with full disclosure of benefits, costs and funding.

Whether well-foreseen or not, ERISA had gigantic economic impacts.

—suddenly, a career on Wall Street, formerly the refuge of D and below students, became an aspirational goal

—demand for professional corporate money managers, with their cadres of securities analysts, exploded

—a massive switch from defined benefit pension plans to defined contribution began (defined benefit = company promises a specified payment, typically a percentage of salary, adjusted annually for inflation, to the employee, starting at retirement and continuing until death; defined contribution = the company makes periodic payments to a pension account, where the employee chooses the general portfolio construction and withdraws money, subject to legal minimums, on retirement.

By and large, however, government entities retained the traditional defined benefit pension plan structure. I’m not sure why, other than it gave lawmakers continuing control over all payments into their pension plans. And maybe–I’m not sure why–the hope was to find superior managers whose prowess would mean less need to add funds to the pension pool.

more tomorrow

MU is one of the main global makers of memory semiconductors, the other key producers being the South Korean firms Samsung Electronics and Hynix.

The memory business is in many ways similar to mining, in that both industries are highly capital intensive, their products don’t have many unique characteristics to differentiate one from another, and there are enough makers that customers, particularly of base metals, often have considerable market power. So these businesses–and their stocks–are prone to booms and busts.

We’re now in boom–the midst of an AI-chip generated surge in demand for tech hardware in general and DRAM in particular, with memory prices up by at least 4x over the past 12 months.

The stocks of the big three DRAM makers skyrocketed starting in the second half of last year, as a looming DRAM shortage became apparent, as well as when the Nvidia-Broadcom frenzy that preceded the memory chip craze was beginning to lose steam.

(As it turns out, I bought MU in the portfolio I’m actively managing during 4Q2025 and sold the last of it in June. This was partly due to price, partly because I wanted to reduce my exposure to IT.)

The three manufacturers are already starting to do what commodity product producers always seem to do when they’re flush with cash–expand. Korea has announced it intends to double DRAM capacity through an investment of half a trillion dollars. MU is expanding as well. But it is also asking customers for take-or-pay contracts in order to reserve output from new plant.

Generally, these contracts are agreements requiring a given customer to purchase specified amounts of output at specified prices from the new MU plant. The customer must pay whether it takes output or not, although if it chooses not to take output, it will sometimes be able to get a discount on later purchases. Presumably, MU will use these contracts to get better financing terms from lenders for the new capacity.

Two thoughts:

–the massive increase in capacity planned by the global DRAM industry creates the worry that demand may not keep pace with this new supply–and that any overcapacity that emerges will cause a plunge in DRM prices, and

–the take-or-pay structure conjures up images of public utilities rather than of gold mines, dimming the future possibility of MU having the kind of through-the-roof pricing we’re seeing at present. Arguably, this places a hard cap on future PE multiple expansion–as well as the appeal to more speculative investors.

In any event, all this would argue that the best for all these firms is at least temporarily in the rear-view mirror.

IBM announced today, a week ahead of when results would otherwise have been revealed, that its sales and earnings for the quarter had fallen by about 3% below its guidance/expectations.

The stock has declined by about 25% on this news, as I’m writing this about an hour before the close.

The reason for the shortfall, as I understand it, is that–as I would presume to have been common knowledge–the company’s customers have been dealing with skyrocketing costs of physical components like DRAM. So after buying hardware, they have less cash left over for software. It may also be that they have decided that component prices are only going higher, and as a result have pulled hardware purchases forward, leaving even less money available to pay for IBM’s wares.

Two thoughts–to be clear, I’ve never been a big fan of IBM and can’t recall ever having owned it, other than in index funds:

–a loss of a quarter of a company’s market value because of a 3% shortfall seems like a little much, and

–I wonder why the market needed IBM’s help to connect the dots that more spend on hardware means less for software. Of course, the answer may be in whatever caused the stock’s huge leap ahead during the second half of May.

What I find very interesting is that the market seems to have been so clueless. Where were the securities analysts? That this has happened with an industry titan underscores to me that much of Wall Street has left fundamental securities analysis behind and is heavily depending on rapid reaction, presumably by trading bots, to news releases.

If so, what an opportunity for you and me.

One of my early bosses (three levels up from me as a portfolio manager) was very fond of saying, “Trees never grow to the sky.” It mean, of course, that even the most powerful upward impetus for a given stock has its limits. Where that upper bound may be is not set through a flat-out rule–or at least not by any rule that I know of.

When you find a stock that you don’t own yet, but which your analysis says has incredible growth potential, you typically look for something to sell in order to buy it. The target “something” may be your largest position (that you’ve allowed to run past your normal position size limits), or a stock that has already had a very good run and is closing in on a sky-high valuation, or the inevitable clunker that your eye somehow skips over when running down the list of your holdings and performance.

Sometimes, though, even if the position size and surprisingly good recent performance are telling you to trim, you don’t do so. For me, it’s partly that I don’t like to have a lot of cash in what is intended to be a portfolio of stocks and partly that I haven’t found that next good thing. It could also be that I haven’t seen a sharp signal that the situation that is allowing the company to make extraordinary profits is about to change.

My guess is that we’re seeing this kind of warning signal now in the memory chip business. The basic story, as I understand it, is that adding capacity in memory chips is extremely expensive, takes several years to come on line and is the domain of a small number of specialized semiconductor manufacturers. As larger chunks of this relatively fixed capacity are directed to making AI-related product, a shortage of regular old DRAM has developed. Prices have tripled or quadrupled and new capacity now being planned is a long time away.

…but Apple has just indicated that it is exploring using Chinese-made chips in its cellphones

This may come to nothing, although the fact that it’s Apple and that the company has announced this publicly seems to imply that Chinese output is at least a plausible substitute for US or Korean chip offerings. It’s hard to know how all this will play out, however. In the meantime, I think this possibility will act as a drag on all the DRAM stocks. (I’d been scaling out of MU before the Apple announcement and have since sold the rest of my position), In an adjacent arena, NVDA has been pointing out for some time that denying China access to the most advanced AI chips will ultimately backfire, because it will simply incentivize that country to develop its own substitutes. Still, one can see how the trajectory of NVDA shares has flattened since this development. My guess is that the same combination of strong recent performance and new questions about the underlying story will act as a brake on MU.

For what it’s worth, I also think that the amazing strength of IT last year and this is in part the market reaction to government policies that, intentionally or not, mimic those of developing economies. The tried and true formula in that arena is to emphasize export-oriented manufacturing and avoid the domestic economy. My sense is that Wall Street is shifting away from that stance. Whether this is stretched valuations or anticipation of future change isn’t clear. But that’s what current price action is telling me.