Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Wednesday, September 17, 2008: I
told you all -- all my readers -- NOT to invest in money market funds. Now we
see why. The first money market fund that will lose its depositors money emerged
last night. Let me explain and draw for you the larger lessons.
with the statement that all words are marketing tools. What a word meant yesterday
is not what it necessarily means today. The meaning of words are changed in
order to sell you something. Before you believe what you hear or what they want
you to believe, the only sensible action is to follow a Newton mantra: CHECK.
"money market fund" has always had a precise meaning. You put your
money in. You received a small interest. But you got 100% of your money back.
That was the conventional wisdom, the conventional meaning. But... and this
is the big BUT: A money market fund is a mutual fund. It can invest in whatever
it wants to -- anything its ultra vaguely-written charter allows it to.
Some funds --
maybe many funds --have invested in paper that's turning toxic, and some that
already has turned toxic. There is a continuum of safety in money market funds.
Some are ultra-safe. Some are ultra-speculative. You ask yourself a simple question.
Why is there such a broad spread in money market funds? .And the answer is simply:
Some money market fund managers wanted to juice up their returns they offer.
By having a higher return, they could attract more deposits and their management
fees would be higher. Everything on Wall Street is about fees. But chasing yield
a little increases your risk exponentially -- as we've discovered only too painfully
in recent months. A classic example is the auction rate securities disaster.
is the first lesson. The second lesson is: Don't believe the rating agencies,
or the stockmarket analysts. By the time they downgrade the thing you own, it's
usually too late. The only solution is threefold:
1. Cash is
king. Spread it among many banks, each in a a $95,000 FDIC-insured deposits.
2. Stay out.
You cannot successfully play this market. Your chances of making money in it
are slim to none. There's always a gotcha. Today's gotcha is spreading financial
contagion. Everyone on Wall Street is in bed with everyone else on Wall Street.
When one gets AIDS, they all do. Wait till you read about Constellation Energy
3. Listen to
Todd. He's protecting my ass. He tells me to "stay out, clip coupons
and play tennis." His advice makes sense.
Now to today's
story; Bloomberg says it best. I love that they update their stories:
Money Fund Falls Below $1 a Share (Update4)
Sept. 16 (Bloomberg)
-- Reserve Primary Fund became the first money-market fund in 14 years to
expose investors to losses after writing off $785 million of debt issued by
bankrupt Lehman Brothers Holdings Inc.
The fund, whose
assets plunged more than 60 percent to $23 billion in the past two days, said
the Lehman losses forced the net value of its assets below $1 a share, known
as breaking the buck. Reserve Primary, the oldest money fund in the nation,
fell to 97 cents a share and redemptions were suspended for as long as seven
funds are considered the safest investments after cash and bank deposits,
and Reserve Primary's losses come as confidence in financial markets has been
shaken by the collapse of subprime mortgages, the failure of 11 U.S. commercial
banks and Lehman's bankruptcy yesterday. The only other money- market fund
to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver,
which liquidated in 1994 because of investments in interest-rate derivatives.
uncharted territory,'' said Peter Crane, president of Crane Data LLC in Westborough,
Massachusetts, which tracks money-market funds. "That's certainly a stunner.''
run by closely held Reserve Management Corp. in New York, held $785 million
in Lehman Brothers commercial paper and medium-term notes. The fund's board
revalued the Lehman holdings as worthless effective 4 p.m. New York
time, the company said today in a statement.
Ming Lee Hatch said she couldn't immediately comment on whether the company
planned to secure credit to support the fund or wind it down. Investors who
requested redemptions by 3 p.m. today will get all their money back.
Poor's lowered its principal stability fund rating on the company's Primary
Fund and Reserve International Liquidity Fund Ltd. to `Dm' from `AAAm' because
of their exposure to Lehman Brothers.
placed nine other Reserve Funds on its credit watch list, it said today in
an interest-rate strategist in New York at Credit Suisse Securities USA, said
the fund's failure "exacerbates some of the flight-to-quality into Treasuries.''
Crane said Reserve
Management probably was unable to prop up the fund before halting redemptions
because it lacked the backing of a large institutional owner.
just didn't have the deep pockets to buy troubled securities out,'' he said.
Evergreen Investment Management Co. said yesterday it had secured support
from Wachovia Corp., its parent, to protect three money-market funds from
losses linked to debt issued by Lehman. The funds' Lehman holdings totaled
funds, which are regulated in the U.S. by the Securities and Exchange Commission,
strive to preserve a $1 a share net asset value, meaning that investors can
always get back their principal, as well as interest earned by the fund on
its investments. They are required to hold debt that matures in 13 months
or less, with a weighted average maturity of 90 days or less. The securities
must have top short-term corporate debt ratings.
mutual-fund assets were $3.58 trillion as of Sept. 10, just below their peak
of $3.59 trillion set a week earlier, according to the Investment Company
Institute, a Washington-based trade group.
and its counsel apprised staff of the fund's situation earlier today and discussions
between staff and the company and its counsel are continuing,'' Andrew J.
Donohue, director of the SEC's investment management division, said in a statement.
"SEC examiners are on-site at the fund to monitor activities.''
Paul Schott Stevens released a statement attempting to bolster investor confidence
in money-market funds.
structure of money-market funds remains sound,'' he said in the statement.
``These funds are subject to strict regulation governing credit quality, liquidity,
diversification and transparency.''
spokesman David Skidmore declined to comment.
chairman of Reserve Management, often said the best money-market funds should
be "boring.'' He derided other funds that invested in securities
linked to subprime mortgages and other risky debt.
assets rose 95 percent in the year ending June 30 to $125 billion, as investors
sought safety from falling equity markets. Banks and other institutional investors
accounted for 65 percent of total assets.
the reporter on this story: Christopher Condon in Boston at firstname.lastname@example.org
actually caused today's credit crunch? We're
in election season. The Democrats and the Republicans have their own self-serving
(but wrong) explanations of what happened. In a nutshell, here's what really
the late 1990s, tech stocks exploded on Wall Street. Everyone made out. By March
of 2000, tech stocks started to fall and continued to fall through 2002. That
was known as The Tech Wreck. About $5 trillion in stockmarket valuation
was lost. There were fears the economy would suffer a recession because of this
evaporation of pseudo-wealth. Alan Greenspan, Reserve Bank head, stepped in
and lowered interest rates and lowered and lowered and lowered. He encouraged
-- in fact, exhorted -- the banks to lend and lend. They did. The cheaper money
is, the more a borrower can borrow. The borrower cares less about the interest
rate and only about what his monthly payment will be.
Wall Street had discovered securitization. That changed the nature of banking.
No longer did your local bank lend you money on a mortgage, hold the mortgage
and collect your payments for the next 30 years. Now your bank signed you to
a mortgage and promptly sold it to someone else, who sold it to someone else,
who sold it someone else. Everyone made a commission on the sale. That was good.
But no one cared about its quality. That was bad. The name of the game was to
create and sell mortgages -- not to create and sell good mortgages. Any
mortgages. That lead to the creation of a whole new "banking" system
-- mortgage brokers who made mortgages, sold them to banks, who sold them to
other banks, who sold them to financial institutions, who sold them to China,
Europe, Australia. You name it.
And finally, Congress
blessed the whole thing by encouraging Fannie and Freddie to buy as many mortgages
as they could. And Congress pretended to stand behind Fannie and Freddie, thus
absolving Fannie and Freddie's management from any responsibility for buying
garbage mortgages. In the end Fannie and Freddie actually owned more than half
of all the housing mortgages in the United States. New mortgages were coming
at such a rapid rate that no one had the time (or the inclination) to check
whether the loans were any good, were half good, or were just plain rotten.
credit, he warned Congress that Fannie and Freddie were too large and a mess.
But no one in Congress listened. No one had the stomach to break that golden
egg -- the housing boom.
SEC, the state regulators, Congress and zillions of other government officials
all knew how disgusting and dishonest mortgage practices had become. How the
brokers were preying on helpless individuals with "creative", deceitful
sales practices like adjustable rate mortgages.... And how they were encouraging
the borrowers to lie on the mortgage application forms. There were NINJA loans
-- no income, no job, no asset loans. There were No-Doc loans -- no documents
to back up the statements on the application forms. And there were the "Put
down an income level we need, not what it was actually." I don't make this
stuff up. Borrowers routinely lied about their income, saying it was three or
four times higher than what it actually was. If you want a house and the broker
is telling you to put your income down as $150,000, you'll do it. After all,
owning a house is the Great American Dream.
So, who's to blame?
Alan Greenspan, because he lowered rates to a point where you could not afford
not to borrow? Congress because they encouraged Fannie and Freddie to lend to
everyone and his dog. Fannie and Freddie management because they bought garbage
loans but made themselves huge bonuses in the process? The various regulators
because they didn't clamp down on shoddy and dishonest mortgage sales practices?
Or the American public who signed for loans they couldn't afford because they
wanted a roof over their heads of their own?
How to solve this?
There is no global, easy quick solution. You deal with it, crisis to crisis,
as we dealt with Bear Stearns, Fannie and Freddie and AIG. You pray we don't
run out of money. If we do, interest rates will skyrocket and the dollar will
plunge. Oh, did I say interest rates will climb, guess what? LIBOR has just
reached seven-year high. This morning London Interbank Offered Rates reached
a seven-year high this morning.The overnight Libor rate in U.S. dollars soared
3.33 percentage points to 6.44 per cent today, its biggest jump in at least
seven years, according to the British Bankers' Association. The Bank of England
and the European Central Bank have said they are monitoring market conditions
closely. And so frankly, am I.
the story on Constellation. This is from Forbes:
Stung By Lehman Link
Maurna Desmond, 09.16.08, 2:40 PM ET
The New York
Stock Exchange halted trading of Constellation Energy on Tuesday just before
2:00 Eastern due to a trade imbalance related to the unwinding of newly bankrupt
investment Lehman Brothers Holdings, according to TradetheNews.com.
The energy firm
plunged 56.1%, or $17.25, to $30.74 during afternoon trading; stocks rose
60.0% higher than usual as investors sold significantly more than they bought.
They were nervous about the Baltimore-based energy firm's exposure to Lehman
Brothers Holdings. The firm denied this vulnerability in a regulatory filing
Monday, but several analysts expressed continued concerns about the link.
On Monday, JPMorgan
drew attention to concerns with Lehman counterparties and capital with specific
reference to Constellation Energy. Citigroup also said in a research note
that the bankruptcy of Lehman Brothers Holdings and the sale of Merrill Lynch
will create a considerable amount of uncertainty, leading to a sell-off in
the whole energy sector. The note shows that Lehman holds about a 5.4% stake
In a Securities
& Exchange filing dated Monday, Constellation Energy Group said it did
not see a "material effect" from Lehman exposure. Constellation
Commodities is a counterparty with two Lehman Brothers subsidiaries that deal
in commodities transactions. The obligations of Lehman Commodity Services
and Eagle Energy are guaranteed by Lehman, and the Lehman bankruptcy filing
gives Constellation Commodities the right to terminate the transactions, according
to the filing.
also reported that it has a stable capital position because it has aggregate
credit facility commitments of $6.1 billion with a large consortium of banks,
including Lehman Brothers Bank providing $150.0 million in credit.
chart. By the way, this is a really well-managed company.
Chinese say, "May you live in interesting times." Frankly,
I had my fill of interesting times. Good news: yesterday I recommended shorting
Morgan Stanley. I did. I hope you did. It's down today. By the way, the Russian
stockmarket was down 17.5% at one stage today before it bounced
back a little. I'm not playing Russkie stocks.
Leah and Rose always meet every week at the local Starbucks. One day, Leah says
to Rose, "All we ever seem to do is talk about the unimportant things in
life. Today, for example, weve talked about the rudeness of our local
kosher butcher, what the weathers like in Southampton, , and our Rabbis
recent poor sermon. Next time we meet, why dont we have a serious discussion
on world affairs?"
"A good idea," says Rose.
So the following week, while they are waiting for their lunch to arrive, Rose
says, "So lets talk already."
Leah says, "OK. What do you think about the situation with Red China?"
Rose replies, "Not much - it wont go with your green tablecloth."
One day, as Rachel is cleaning her daughter's bedroom, she notices
a letter on the pillow. Worried, Rachel reads the letter:
Im sorry to have to tell you this but Ive eloped with my new boyfriend.
Hes so different, Mum. What with his pierced tongue, his tattoos and
his big motorcycle, Ive found real passion with him. I'm also pregnant.
But dont worry, Mick says that we will be very happy living in his caravan.
He even shares my dream of having a big family and he wants to have more children
Hes very clever as well. Hes taught me how to grow marijuana and
I agree with him that it doesn't hurt anyone. So we'll be growing it not only
for us but also for all his friends.
Don't worry about our finances. Mick has arranged for me to appear in some
homemade video films. I can earn $150 per scene, more if there are three men
involved. Don't worry, I'm 16 years old and know how to take care of myself.
In the meantime, Mum, please pray that science will soon find a cure for AIDS.
Mick deserves to get better.
PS This letter
is not true its all make believe. Actually, I'm at our neighbor's
house. I just wanted to prove to you that there are worse things in life than
denting your car.
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
click on my email address. You have to re-type it . This protects me from
software scanning the Internet for email addresses to spam. I have no role
in choosing the Google ads on this site. Thus I cannot endorse, though some
look interesting. If you click on a link, Google may send me money. Please
note I'm not suggesting you do. That money, if there is any, may help pay
Michael's business school tuition. Read more about Google AdSense,
here and here.