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FedWatch: Are money market funds “breaking the buck?” Certain “yield enhanced short term bond funds” which have been offered as higher yield substitutes for money market funds have been feeling the pinch from the credit markets. The latest victim is a company that you’d not normally think of as a finance company, General Electric Company. “The diversified manufacturing company's money management arm, GEAM, which oversees the $5 billion GEAM Trust Enhanced Cash Fund, is still invested in the fund, but GE warned last week that it would sell holdings amid tough market conditions. It allowed the handful of institutional investors who put money alongside GE's assets to get out first, letting them redeem at 96 cents on the dollar.” Wachovia, Legg Mason and Bank of America are putting up hundreds of thousands of dollars to shore up their money market funds. There has not been a single money market fund that “broke the buck’” since 1994. Apparently, these institutions don’t want to be the first. This is putting even more stress on the financial system. Is your money market fund safe? As banks, mutual fund companies and other financial institutions work to shore up their money market funds, investors are asking themselves, “Are they safe?” The answer isn’t so clear when it comes to money market funds. They are not covered by the Federal Deposit Insurance Corporation, sometimes even if offered by a bank. Instead, there is an implicit understanding that the net asset value will always be $1.00 per share. What can you do about your own money market funds? The first thing is to ask the company if there is any exposure to subprime mortgages. Second, check the yield. If your fund is paying more than the average money market fund, it may be using “yield enhancements” that come from mortgage derivatives. Third, does the company that sponsors your money market fund have substantial assets? If so, they will be more motivated to preserve the asset value of their money market funds. Finally, why not invest in a money market fund that is based on U.S. Treasury securities? If your company doesn’t offer one, find one that does. Producers and Consumers… …don’t usually have a lot in common, but this week there is a common theme running in both the Producer Price Index and the Consumer Price Index. The theme is, the headline that makes the front page of your newspaper isn’t telling you what you really need to know. For example, the headline for the Producer Price Index told us that the cost of finished goods rose .1% in the month of October. But the year-over-year cost of finished goods (Table A) increased from 4.4% in September to 6.1% in October. How they got the math for the headline to work is beyond me. Table B is even worse, since the cost of crude goods jumped from 11.4% in September to 25.7% in October. Our business owners must be magicians, to get a 25.7% increase in raw goods to come out the other side at only 6.1% increase in finished goods. Japan market is getting nastier…
China fears impact of U.S. slowdown.
Exports contribute more than a third of China’s economic growth and 10% of its gross domestic product. China is not prepared for an economic hard landing when our economy slows down. We may see evidence of this as early as the Christmas shopping season, which is fast coming upon us. Consumers and markets on the precipice.
Bonds buoyed by bad news.
Foreclosures hit a snag.
A comeback for the dollar.
A sudden shift for Gold investors.
Prices at the pump drop.
Oil inventories had been dropping since early October, putting pressure on finished petroleum products, such as gasoline and heating oil. This week saw an unexpected rise in oil inventories while OPEC cut its forecast for global oil demand. Imports of crude oil are also up 831,000 barrels from the previous week, alleviating the supply strain.
Natural gas prices may lead the way down for other sources of energy.
The War on Error. J.R. Nyquist makes a great observation on the men that lead our country, especially regarding the war in Iraq. Everyone has heard the phrase, “Good Enough for Government Work.” It implies that government work is second rate. In defense of the government workers, there is incompetence, but the vast majority of people working for our governments at all levels are hardworking employees doing very difficult jobs. Unfortunately, the jobs being undertaken and the bureaucracies needed to do them are so massive that the individual is lost in the shuffle. And it is too easy to take potshots at “incompetence” when individual initiative is frowned upon. Bob Woodward quotes former Defense Secretary Donald Rumsfeld as saying, “The charge of incompetence against the U.S. government should be easy to rebut if the American people understand the extent to which the current system of government makes competence next to impossible.”
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…with
nearly a 15% decline in the past month. Last night’s market didn’t
offer a reprieve, as the Nikkei sold off due to worries about Japanese
banks exposure to the subprime markets. You have to understand that it
all started here. In order to keep the Japanese economy afloat, it’s
Central Bank offered loans to all comers at virtually 0%. This gave the
U.S. mortgage market a boost through teaser rates, interest only and
variable rate mortgages to anyone that could fog a mirror. Now the
chickens are coming home to roost.
We
are seeing a lot of rotation by investors out of stocks and into bonds.
But they aren’t the only investors concerned enough to buy our
treasury bonds. 
The
The
colder weather this week was not unexpected by natural gas producers and
shippers. The high inventory levels was enough cushion to allow lower
prices, says the 
