Kurt Brouwer November 15th, 2007
Recently, we reported on a number of mutual fund management companies taking financial hits in order to preserve the ‘buck’ or the $1 net asset value (NAV) of their money market mutual funds when they had problems with complex investments (see below for more).
General Electric Asset Management ran a very short-term bond fund — technically not a money market fund I guess, but pretty darn close. Though bond funds do have a fluctuating NAV, this fund was apparently intended to preserve the $1 NAV, while earning an enhanced yield. Unfortunately, it took a 4% hit to NAV, which is pretty big hit when compared with the very small additional gain as this article from Barrons points out [emphasis added]:
Mortgage Woes Damage a GE Bond Fund (Barrons Online, November 14, 2007, Andrew Bary)
‘A SHORT-TERM INSTITUTIONAL BOND RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar…
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Kurt Brouwer November 15th, 2007
I recently read an interview in the Washington Post with Brad W. Setser, the Council on Foreign Relation’s currency expert. One of answers he gave was pretty revealing in terms of what China can and cannot do. First, here is a little background he gives on why China and other export-driven emerging economies do not want currency appreciation against the dollar:
Understanding the Falling Dollar (Washington Post/Council on Foreign Relations, November 12, 2007, Lee Hudson Teslik)
[Brad W. Setser]: ‘…the dollar is being supported, even now, by the resistance in many Asian economies–not just Asia, also many emerging economies around the world–to any strong increase in the value of their currencies against the value of the dollar. And by intervening to hold their currencies down, they are in effect holding the dollar up, not necessarily against the euro but against their own currencies. So I certainly think that has an impact…
[Lee Hudson Teslik]: ‘…There’s some concern that China will rapidly sell down its dollar reserves and that that will push down the dollar even further. How fast could they do that, feasibly, and is it a problem for the United States?
[Setser]: …But in my mind, so long as China resists more rapid appreciation of the renminbi [China’s currency] versus the dollar, it’s rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it’s a big enough player that it would put downward additional pressure on the dollar. So long as China itself pegs to the dollar or manages its currency primarily against the dollar–technically China has a crawling peg, and it’s clear from a range of economic analysis that it’s crawling mostly against the dollar, not against a true currency basket–then if it puts pressure against the dollar, it’s also putting pressure against its own currency…
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Kurt Brouwer November 14th, 2007
The dollar has been in a long-term decline since it peaked in 2001. See How Far Has the Dollar Fallen? And Why? for a more in-depth look at the reasons for the dollar’s decline.
At this point, we are starting to see signs that a turnaround may be in sight as this piece from the Wall Street Journal suggests [registration required; emphasis added]:
Unloved Dollar Might Just Win Favor Again (Wall Street Journal, November 14, 2007, Mark Gongloff)
‘The dollar has become the world’s financial instrument that nobody seems to love…
…The Federal Reserve’s broad dollar index, which measures the buck against a basket of currencies, is near its lowest level in 11 years. The dollar has tumbled 44% against the euro since 2002. Even the lowly Japanese yen, which has tended to be weak against the dollar, is up 7% against it this year.
There are good reasons the dollar is becoming an outcast. The U.S. credit crunch dangles over it like an anvil. Currency traders expect the Fed to respond by cutting short-term rates. That’s potentially bad news for the dollar because it would mean investors get relatively less interest for holding their assets in dollar deposits compared with other currencies like the euro or pound.
Yet all this dollar bearishness has some analysts and investors thinking the out-of-favor currency could be due for a bounce.
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Kurt Brouwer November 14th, 2007
As we have reported for quite a while, cash is building up rapidly. In this piece from Larry Kudlow’s blog, we see some interesting data on how much money is building up and how the big investors are parking — not investing for the long haul — immense amounts of money [emphasis added]:
Kudlow 101: The Run to Cash (Kudlow’s Money Politic$, November 14, 2007, Larry Kudlow)
‘…Here’s what’s happening right now—one of the key reasons stocks have been beaten up of late. There’s a huge run to cash going on…
…The 10-year Treasury bond keeps falling. From 5.30 percent last spring all the way down to around 4.21 percent today. That is not an inflationary scare.
I believe we’ve had a big trading bubble in euros, oil, and gold. The real underlying issue here is a deflationary wave. People want to hold cash. The big guys are investing in money market funds, not stocks, for the time being. And that has caused the volatility…’
To build on Kudlow’s point, the Investment Company Institute just reported a milestone in money market mutual funds assets:
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Kurt Brouwer November 13th, 2007
The fallout from the subprime lending mess continues to ripple through the financial markets. Today, we have a report on concerns about money market funds that invested in structured investment vehicles (SIVs). SIVs are among the most complex investments ever devised on Wall Street, a place that loves complexity. Essentially, SIVs are pooled investment funds typically issued by banks and sold to investors. An SIV has a tiered structure in which it issues short-term notes backed by assets such as credit card debt and then invests the proceeds from the notes in long-term securities.
Now, due to the credit crunch that was initiated by subprime lending woes, SIVs are also hurting. As a number of money market mutual funds have invested in short-term securities issued by SIVs, problems have ensued. From the Wall Street Journal [emphasis added]:
SEI, Rival Money Market Funds Go On Offense To Avoid ‘Breaking the Buck’ (Wall Street Journal, November 13, 2007, Diya Gullipalli & Tom Lauricella)
The crisis of confidence rattling credit markets is putting new pressure on money-market mutual funds, traditionally some of the safest investments around.
Money-market funds aim to maintain a $1-per-share price and losses on any investments that drive their share price below that mark — known as “breaking the buck” — could send investors running for the door. That’s a possibility facing a number of money-market funds that hold troubled investments called structured investment vehicles — or SIVs, complex investments that have come under selling pressure amid bond-market turmoil…’
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