Journalists and Ratings Agencies Guilty of Whiplash?

I plead guilty too. As with past liquidity events, the subprime and adjustible rate mortgage meltdown is following the same model. First, everyone says everything’s fine and that there aren’t any problems. Then once problems appear, the news media, pundits, ratings agencies, and regulators find themselves behind the curve, and they race to get ahead of it, thereby exacerbating the very problem they denied existed the week before!

Of course, who can blame them? It’s not like the outcome of these events has already been written. What you and I do today and tonight will determine whether the overreaction was justified or not!

Will Sub-Prime Mortgage Issues Impact Money Funds?

Though the chance is remote, some are speculating that troubles in the sub-prime mortgage sector could eventually filter through to money funds. (See “News” on our site at http://www.cranedata.us). We’re looking through portfolios now with a focus on the “extension risk” of extendible asset-backed commercial paper (ABCP), extendible commercial notes (ECNs), and secured liquidity notes (SLNs).

Traditional certificates of deposit (CDs) and commerical paper (CP) are unlikely to be impacted, unless the loss reserve issues snowball into a major problem. Though highly unlikely, it’s theoretically possible that even an HSBC could move from the highest rated credit to questionable more rapidly than imagined. With financial companies, a liquidity flight could fell even the mightiest.

We’re perusing portfolio holdings, looking for potential trouble spots, and will let you know if we find anything interesting. Let us know your thoughts!

Index Funds vs. ETFs: Bogle’s WSJ Editorial “‘Value’ Strategies”

John Bogle wrote an excellent editorial in Friday’s Wall Street Journal (http://online.wsj.com/article/SB117099466838903386.html?mod=opinion&ojcontent=otep) criticizing the spread of ETFs and praising the traditional index fund. ETFs are the antithesis of index funds — focusing on narrow sectors, rapid trading and performance. 

Bogle says of the “iron law of the markets”, “Gross return in the market, less the cost of the financial intermediation, equals the net return actually delivered to market participants. To the extent that ETFs increase intermediation costs, it follows that they must reduce the returns of investors as a group.”

While currently outside our main bailiwick of money market funds and “cash” investments, Crane Data (http://www.cranedata.us) will begin tracking index funds (but not ETFs) later this year, in order to begin calculating indexes and averages on stock, bond, balanced and other mutual funds.

I agree wholeheartedly with Bogle, that mutual funds are still the solution, and that low-cost, broadly diversified, long-term portfolios and investments are the only sure path to wealth. Keep up the good work, Jack!

Sincerely,

Pete Crane

President 

Crane Data LLC

Publisher

Money Fund Intelligence &

Index Fund Intelligence (coming soon!)

http://www.cranedata.us

Next Fed Move

My preference is always to understand the common wisdom/thinking of the market, and then to predict whether the new events will move the target over or under the current betting. I’m in the over camp and have been for some time. (I predicted a 6.0% Fed funds rate in early 2006. Never wrong, just early;-) So I think the next Fed move will be up, and I’m guessing it’ll be in June (28). (It’s no fun guessing with the consensus!)

Of course, flat is good, very good, for money funds. And if you know anything about me and my business, it’s that what’s good for money funds is good for Pete Crane. Hikes are bad short-term, but good long-term, and cuts are good short-term and bad long-term (for money fund assets … and for Crane Data’s business).

You’ve probably heard most of the arguments for weaker-than-expected growth, and for stronger-than-expected growth. If you haven’t, your guess is probably going to be better than ours. I’m all for predicting, but advise against betting … on anything!