I had several calls this week from clients regarding money market funds and government insurance. Essentially, the conversation would go something like this:
“Tom, I heard recently that the government will no longer be insuring money market funds. Should we do something about this? Should we be concerned?”
And I would reply “you DO know, that money market funds were never insured before last fall…right?”
“Really?”
It’s true. Most money market funds were not insured before the fourth quarter 2008. Oh sure, there were “insured” money market options/choices around before 2008. But their yields were so low, you needed a microscope to see them. And in case you did not know, the actual technical name for money market funds…ALL money market funds…is “money market MUTUAL funds.” Which is why you get a prospectus when you open a money market account.
The objective of a money market mutual fund is to maintain its’ $1.00 per share price, and return you a few bucks in interest/dividends. Make sure all those assets they were invested in added up to $1.00 every night. That’s it. Their marching orders: Keep that $1.00 price per share. Or die.
And last fall, a few money market mutual funds had some trouble maintaining their $1.00 per share price. Their assets get priced every business day. More on this part in a moment.
Anyway…when the “financial crisis” spilled over into 2009, the Government continued to extend their “insurance” on money market funds. That coverage will cease in October 2009 (very soon).
Part of the reason why interest rates on money market funds fell to zero was because:
- The Fed aggressively cut interest rates — and promises to keep them low, at least for the present time
- There is no incentive to pay a higher rate to attract deposits — all money market funds essentially became the same everywhere
- What’s the price (yield) for safety?
Knowing that the “government backstop” of money market funds may not be renewed in October, I instructed TD Ameritrade (during the month of August) to move all money market assets from their traditional money market fund (which carried the government backstop) to an FDIC insured money market fund. There is no cost or transaction charge involved in this move. It was done strictly for peace of mind.
Why did the government have to insure money market funds in the first place?
The answer: Lehman Brothers
Don’t misunderstand: Lehman Brothers themselves did not kill the safety of money market funds. It was “allowing Lehman Brothers to go under” that dragged money market funds with them. Like it or not, Bear Stearns and Lehman Brothers were two major players in the commercial paper market.
And commercial paper is what “drove the bus” called money market funds.
You didn’t really think money market funds were just T-bills, did you?
So…how was it that a money market fund at a bank or brokerage firm would be paying (for example) 1% and an outfit like ING could pay 3%?
Hmmm. Exactly what WAS in that money market over there? It certainly wasn’t all treasury bills.
But I digress. Lehman Brothers was not only a market maker/facilitator for the commercial paper market. They also borrowed heavily to fund their day-to-day operations with commercial paper.
OK, so remember a moment or so back when I wrote “a few money market mutual funds had some trouble maintaining their $1.00 per share price. Their assets get priced every business day”? Here is where things fell apart:
Lehman was a big player in the commercial paper market (as were all the big banks, along with GE Credit, Ford, GM and AIG, and others). When you manage a money market fund, and your balance sheet is choking on stuff like short term financing notes (commercial paper) from companies that may not open for business the following Monday…well…what do you think you can sell those investments for?
A lot less than you paid for them.
Which is why suddenly, money markets assets stopped “adding up” to $1.00 per share. It’s like walking home with a lousy report card in your hand.
Bad.
Taking Bear Stearns and Lehman Brothers out of the commercial paper market is like taking the umpires off the field in a Little League game. All that’s left are little kids who don’t know the rules. Actually, it’s not fair to compare those two companies with umpires. But a Little League game without umpires looks like disorganized chaos. And that’s when Uncle Sammy pulled up to the field, and change the rules.
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Tearing Apart the Headlines
by Thomas Mullooly on March 7, 2009
Did you know General Electric (GE) posted record revenues last quarter? That has not really helped their stock, has it? Remember always, price is the ultimate indicator, which is why I rely more and more on charts. Fundamental analysts and company management can pontificate all day long about market share, earnings and revenues. If the market doesn’t like it, the stock is going down.
I don’t think I’ll ever get tired of reminding people that the job of the media is to sell advertising. The fact that you get informed — or get information — is a side benefit.
I’m not saying the media dispenses incorrect information. What I’m saying is they tend to focus on some really dumb things, and then pound it over and over and over. Just keep reminding yourself: their job is not to hang around and “fill you in” on the news of the day. The media is there to sell ads. So their teasers and headlines will often be filled more with drama than facts.
And often, the drama persuades you into doing precisely the WRONG thing. My friend, Tom Dorsey has often said “Remember everything that is written or said in the media about Wall Street is made to make you do the wrong thing.”
Example of “News” headlines:
One of the headlines on CBS MarketWatch is Freedom Bank (Georgia) is the 17th bank failure in 2009. OK, look, in the previous recession, there were over 700 bank failures. Some will be spectacular. If we have less than 700 bank failures during this recession, now THAT will be news.
Here’s another:
General Motors shares trade near Great Depression territory. Face it, the stock trades for about a dollar, it’s not coming back. Sure, it might get to two dollars. But will this ever be a $30 stock again? I don’t think so, under its present structure. Now if they were to file bankruptcy, wipe out the common stock and reorganize (where the debt/bondholders become the new stockholders), anything is possible… see Kmart.
I am far more interested in learning what will happen to General Motors and the bondholders in a bankruptcy proceeding. The government has poured $13 billion into General Motors in the last few months, and company management is back at the trough asking for another $17 billion. Amazingly, the market capitalization of General Motors is less than $1 billion ($900 million currently — one third the size of Burger King). Where did all that money go?
And another:
This past week, the financial media focused on how the banks were killing the Dow Jones Industrial Average. This is total nonsense. Citibank trades for $1 per share, Bank of America trades for $3 per share. If these two companies filed for bankruptcy tomorrow (or were nationalized — essentially, the same thing), this would move the Dow Jones Industrial Average a total of 50 points. I wonder how long it will take Dow Jones to remove Citibank, Bank of America, General Motors and General Electric from the Dow Jones Industrial Average.
Another favorite topic:
Unemployment rate reaches 8.1%. Okay, lots of room for debate on this topic. Historically, the average unemployment rate hovers around 5%. Did you know, for the past 15 years, the economy has averaged an unemployment rate between 3% and 4%? This is actually a pretty spectacular news item, but no one was writing headlines about that. During economic recessions, the unemployment rate often reaches 10%. So be prepared for that, and don’t be surprised when that news arrives. In fact, there have been several times where the unemployment rate surges in the latter stages of a recession — and the first phase of recovery. You read that right — many times the unemployment rate will rise, as the economy is improving.
And lastly:
GDP numbers. The stock market fell out of bed last week when it was announced that fourth-quarter GDP came in at -6.2%. First of all, this should not be a shock to anyone. Secondly, the media never really puts it in its proper perspective. So let’s look at this number. It measures growth (or shrinkage) of the economy in the fourth quarter 2008. The quarter ended December 31, 2008.
The original estimate was released January 31, the preliminary number was released February 27, the final revised GDP for fourth-quarter 2008 will be released at the end of March. The final revision may be a completely different number — for better or worse. But by the time we get it, that information is petrified like a redwood. Irrelevant.
By the way, at the end of April we will receive the original estimate for first-quarter 2009 GDP. What do you think THAT number will be? I expect it will be absolutely dreadful. And the media will go crazy. Be prepared.
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