Bring Sanity to Bloggers on Money Fund Issues

I’d like to call on anyone who is able and familiar with issue surrounding money funds to check some blogs and try and bring sanity to some of these doomsayers. The Wall Street Journal’s MarketBeat Blog Discusses “When $1 Is Not Worth $1″, by David Gaffen (http://blogs.wsj.com/marketbeat/2007/11/15/when-1-is-not-worth-1/#comment-13890). While this isn’t the “world-is-ending” tone of most, the follow up posts are leaning that way. Please help join me in telling the world that money fund investors will be okay, that losses in SIVs will be minimal and manageable, and that investors are fine sticking with funds!

Thanks!
PeteC

Criteria for Choosing Money Funds

Since I’ve been getting the question a lot recently, I thought I’d put down some thoughts on what I suggest investors look for when choosing money funds. I’m always wary of yield, so I recommend ignoring the No. 1 performer and going with a “B” student. Common wisdom also suggest picking a recent top fund, but I’d advise looking at longer-term rankings and performance.

Bigger is better. Not only do you get deep pockets, but expenses usually are lower in larger funds. Perhaps more importantly for small investors, conveniences and service is likely to be higher at a larger firm. So go large with the fund and the provider.

Don’t bother with treasury or government funds. You don’t need the safety, and you lose the yield and liquidity. Look for a conservative investors base….

I’d be happy to discuss and would love to hear your thoughts!

What’s Behind the Money Fund Asset Surge?

Money market mutual funds continue to gain assets at a dramatic pace, rising by $171 billion since the commercial paper market squeeze began the first week of August. Year-to-date, money funds  have grown by an incredible $447 billion — already a greater increase than 2001’s $440 billion increase, the recordholder for the largest single year asset gain. Where’s all the money coming from?

Market commentators usually say “flight-to-quality”, but this makes little sense when one looks at the overall stock and bond markets, which haven’t really declined. Certainly, we’re seeing inflows from banks, bonds, and particularly CDOs and esoteric securities. Undoubtedly money is also moving away from more aggressive hedge fund, private accounts, and market neutral strategies — hedges which haven’t hedged and which have seen a number of accidents. But the overall carnage has been far lighter than news reports would have one believe.

I think the answer of what is driving money fund flows and what’s been driving money fund flows is the same as it’s been. A growing economy throwing off more cash, higher 5% rates generating higher income, and a continued rebound from record low levels of cash both in corporate coffers and in investment portfolios. (Contrary to popular reports, I believe companies were holding near record low levels of cash, and certainly stock funds are holding record low cash.)

Money funds likely continued to take money back from banks and from brokerage “bankerage” sweep programs. While we may see a rate cut on Tuesday, money funds continue to hold a gigantic yield advantage over their bank competition, Countrywide’s of the world exempted. I’d love to hear your thoughts and to delve into the recent surge in more detail. E-mail me at pete@cranedata.us with comments, or post away!

Lessons from The Recent Money Market Scare

While it perhaps may be too early to declare victory and say that money funds have made it through the recent CP Market Seige unharmed, it’s never too early to start learning lessons from crisis (since the next one may be right around the corner!). Here are some initial observations.

1) Money funds are clearly able to withstand significant shocks without endangering their $1.00 NAVs. While there may end of being more than one “takeout” where fund advisors purchase troubled securities at “par”, or above-market value prices, no fund was ever in real jeopardy of dropping to $0.99. Even some of the funds holding extendible securities said they “couldn’t taken a lot more stress” before their stable value was threatened.

2) Don’t believe everything you read or see. While the media may be getting more criticism than they deserve due to the fact that they were being misinformed by interested parties, they deserve plenty. Don’t forget to differentiate though. CNBC and Bloomberg got things wrong, oversensationalized and likely even caused the majority of the panic, while The Wall Street Journal kept things sane and factual.

3) Money fund advisors, CP and ABCP dealers need to speak up. Money market funds, which could have done a much better job prior to the crisis in educating their non-institutional investors on commercial paper and ABCP, were nowhere to be found when the crisis broke. Some were out talking, but most merely denied that they held certain troubled securities. Companies must let fund managers, who are the only ones who know why these things are safe, speak up. And dealers must defend their product. Imagine if a Tylenol was found with poison and the company responded with a “No comment!”. Where were/are the ABCP issuers and dealers saying their product is safe?

4) More disclosure is needed. Though this is always the answer and rarely helps, this one will be a layup. We’ll also likely get less complicated structures, because even with disclosure few can understand what some of the asset-backed CP and ABS are. Expect to sleep through a number more seminars going forward.

5) You can’t get more yield with the same risk. Competitors to money market funds are the real losers in “Shorts’ Great Credit Squeeze Gambit” of 2007″. Money market funds already are seeing competitors’ money pouring in, and it’ll likely be a very long time before LIBOR-plus funds, separately managed accounts, direct investment in money market securities, ultra-short bond funds, stable value funds, enhanced cash funds and other “yield-plus” strategies are able to regain the confidence of investors.

Were False Rumors on Money Funds Spread Purposefully?

Over the past two weeks, a number of news outlets mistakenly claimed that first AXA “Money Market Fund” and later Sentinel “Money Market Fund” had dropped by 20% and ceased redemptions, respectively. Of course, these were wrong. AXA was actually AXA Libor Plus strategy and Sentinel was a separately managed account run for commodities firms by Sentinel Management Company.

Neither were anywhere near a money market mutual fund. AXA was attempting to earn a ridiculously high LIBOR plus 50 basis points (0.5%),w hich would be about 5.8%. (Not even a long-term bond fund could expect this type of return.) Sentinel, though claiming to be “cash management”, apparently was nowhere near. Their maturity profile sounds like it was long-term and the yields (we heard 7%) were positively pyramid-scheme-ville. This brings us to the question of who kept pushing and repeating these false claims.

I have personally heard each of these more than 10 times, so I’ve become suspicious that these are not merely mistaken interpretations. I believe these lies were kept alive by some in an attempt to drive the market lower, specifically to drive the prices of asset managers lower. I hope those people that were used to spread these falsehoods will remember who told them about these events, and will discount any future claims by these people.

Are High-Yield Checking Accounts from Brokerages For Real?

Saturday’s Wall Street Journal writes “Brokers Bank Perks to Lure Cash Accounts” (http://online.wsj.com/article/SB118618794881087880.html?mod=googlenews_wsj), and discusses the trend of brokerages offering high-yield checking accounts. ”​The new accounts differ from brokerage firms’ current cash management programs, by adding higher interest rates and ATM-​fee rebates. But do these perks outweigh the hassles of switching?” asks the piece.

(E*​Trade’​s Max-​Rate Checking pays 4.​25%, Fidelity’​s mySmart Cash pays 3.​5%, and Schwab’​s High Yield Investor Checking pays 4.​25%.)

Why would the brokerages, who have just moved their customers from high-yielding, competitive money market mutual funds to low-yielding bank deposits in their “sweep” accounts, be so generous all of a sudden? There are two possible answers. No. 1: “Wallet share”. The “singularity” of mutual funds, brokerages, and banking is finally here, so they’re battling for other financial firms money.

Or, No. 2: “It’s temporary.” The big 3 – Fidelity, Schwab and E*Trade — all have tremendous exposure to the hot money day trading crowd, so when one offers an attractive proposition, the others must counter to keep from losing too many of these trigger-happy web-surfers.

I’d love to hear anyone else’s thoughts, and you’ll undoubtedly be hearing a lot about brokerage checking over the next few weeks. (Check http://www.cranedata.us for news!) Let me know (pete@cranedata.us) if you’ve heard of any additional offers or if you have any news too!

Is a Market Crash Good for Money Market Funds?

While many people believe that cash mavens like myself are thrilled at the prospect of greedy speculators getting their comeuppance in a market meltdown, this is less than half true. Money market mutual funds will benefit in the short-term from the ongoing market correction. There’s no doubt about that. But people tend to focus on short term market share shifts rather than the big picture of the “rising tide”.

As I’ve said elsewhere and in my Money Fund Intelligence newsletter (http://www.cranedata.us/products/money-fund-intelligence/), money funds want a rising market and a growing economy. A growing economy throws of more cash than a shrinking one, and a rising market allocates assets to stocks automatically — the cash and bonds then need allocations to keep pace.

Nonetheless, it appears we need these period reminders to shake the idiots loose from the bus. And we’re not one to leave the buckets in the garage when its raining assets. So, “cash is king!” It’s a more dangerous world! And for G-d’s sake, if there’s any chance you may need the money in the next two years, move it to money market funds!

Troubles in CDO SIVs?

While I initially dismissed any risk to money market funds from continued turmoil in the mortgage and CDO (collateralized debt obligation) market, some money fund professionals are growing concered. Money market mutual funds invest in “tranches” of CDOs and SIVs (structured investment vehicles), though we believe CDO-laden SIVs to represent less than 10%, probably around 5%, of money fund assets. (Other money market securities wouldn’t likely be impacted.) 

Some say that there could be problems even with AAA-rated SIV conduits with subprime exposure. Ratings agencies in general are still downplaying the risks, but funds are going through there portfolios thoroughly. We’ll be researching this, but let let me know if you have any thoughts on the blog or via e-mail (pete@cranedata.us). And watch http://www.cranedata.us for news in coming days.

Money Funds Superior to Bank Savings

After re-reading The Wall Street Journal Online’s “Investments to Soothe a Worried Mind” (http://online.wsj.com/article/SB118323777385654322.html?mod=googlenews_wsj), I was disappointed with the Journal’s downplaying of the attractiveness of money market mutual funds vis-a-vis bank savings and CDs, and vis-a-vis longer term fixed income and equity investments. The Journal is not alone, though. Almost every article on “cash” includes bank savings, as if they’re an equal, or better choice, than money market funds. Will no one give money funds credit for 35 years of higher interest rates?

First, the problems with the Journal piece. They, like most, compare money funds 7-day current yields, a simple (no compounding) versus bank APYs, which include compounding. This makes banks seem more attractive than they actually are (and as if the bank will actually keep that yield for a year!).

They also make no mention of bank savings’ limited withdrawal capabilities. Finally, the WSJ, and most reporters, make no distinction between a Vanguard, which serves millions of investors with market-beating returns year after year, and no-name internet banks which have thousands of customers at best, and which have little or no history (and likely no future) paying competitive rates.

Money market mutual funds offer higher yields, more convenience, and a more transparent regulatory and rate-setting regime, and have clearly proven their superiority to bank savings and money market deposit accounts over their 35 year history. The Journal and many recent financial reporters don’t seem to understand what millions of investors do, that money market mutual funds are the better choice for investors’ savings not only in the current environment, but over the long run.

Danger, Will Robinson!

While I try not to be perpetually bullish or bearish, my partner keep urging me to read websites like http://www.prudentbear.com. I laugh and say “They’re always bearish.” But, as the saying goes, just because you’re paranoid doesn’t mean they’re not watching you.

I’m also never one to try and time the markets, and I have blind faith in the American way and capitalist system. But the odds of stocks, bonds and financial markets continueing on their merry way grow smaller with each month. Stocks and bonds are way long in the tooth, experiencing what must be their longest and most impressive bull markets in history.

Of course, as Jim Grant says, everyone “talks their book”. My book is money markets and “cash”, so I’m clearly biased towards safety and money market mutual funds. (Not that there’s anything wrong with that;-) While one shouldn’t time markets, one also should always be aware of the odds. Though you can beat them in the short-run, over time the house always wins.

The odds keep getting better for cash, and worse for long-term investments, particularly bonds. The Wall Street Journal writes today, “Long-Term Rate Rise Prompts Strategy Shift”  http://online.wsj.com/article/SB118230552514241477.html?mod=home_personal_journal_left and breaks out the tired old playbook that says extend maturities when rates pop up.  Nobody tells you what to do when rates keep going and going and going though….

While of course noone can predict the future (or if they could, they wouldn’t tell us), I’m feeling very good about being in the cash business. I have a feeling it’s about to get real popular here….