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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Big Changes Ahead for Oil?
by Thomas Mullooly on March 27, 2010
We saw a pretty significant signal recently from the oil sector. A relative strength sell signal.
This does not mean oil immediately becomes a terrible place to have money at work in March or April 2010.
But longer term, it suggests oil will (likely) under-perform the overall markets. And, it’s possible the sector could significantly under-perform.
This is really important, in more than one way.
First, let me walk you through another example where a sector gave a relative strength sell signal. The Financial sector gave a relative strength sell signal in April 2007. Think about that. That signal came before any of the mortgage stocks melted, well before Bear Stearns imploded (like nearly a year before that event) and significantly (18 months) before Lehman Brothers collapsed. And long before things like “sub-prime mortgages” and “TARP” became household terms.
And since “financial companies” were the largest component of the S&P 500 (at the time), it was a pretty serious signal for the whole market.
What was even MORE significant was that April 2007 was the first time that chart had flashed a relative strength sell signal…period.
Sure, some financial stocks rallied – and were even good trades AFTER the relative strength sell signal in April 2007. But those gains were fleeting, and most were only short term trades. You were trying to swim upstream in downward environment.
What relative strength charts can tell us is which areas will out-perform (or under-perform) their peers (or the whole market). And relative strength signals tend to last (on average) about two years.
Relative strength is not a trading tool.
So, oil, as a sector, has now given a relative strength sell signal. This is important because as the market has improved over the past year we’ve seen some common characteristics: as oil prices climbed, the dollar fell. Are these two actions mutually exclusive? Probably not. However, in some ways, in the last twelve months oil became a proxy for inflation – and for the markets overall. We saw areas rich in natural resources (like Latin America) perform really well over the past 12 months.
And now, in the last few weeks, we’ve seen the dollar strengthen (somewhat), we’ve seen emerging markets slow down (again, somewhat) and the price per barrel of oil has leveled off around the high 70′s-low 80′s area.
This does not imply oil will collapse with absolute certainty. After all, the market generally looks pretty virile. It also does not mean we will absolutely see Lehman-style collapses in the area either. But never say never.
This is the first relative strength sell signal the oil sector has given, dating all the way back into the 1990′s.
This is one big reason why I have stopped buying in the oil patch and the emerging markets. These areas were “hot to trot” a year ago. Now, I am more skeptical about investing in these areas. Too many times, investors will look at “what did the best last year” and blindly stick their 401k money there, or invest in the hot mutual fund of 2009. Last year’s superstars may become this year’s (or next year’s) duds.
Be careful! Again, this signal could foreshadow conditions that may not appear for a few months, or even a year. Or not at all. The sector could just stall. But I’d rather be early, than a minute late.
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