'Money Market Substitutes' Get Hit by Subprime Woes

[Bikerdude]

Originally Posted by cyclone6

And then the news of money market funds having problems - at least Sentinel Management Group. Something is up..

I was just listening to a market person interview (forgive me I don't remember his name) and he was saying the market is being driven by emotion and not fundamentals. He also pointed to the "Sentinel" MM failure story as being false (it was not a MM fund that was having problems) to make his point.

He said he thought the market was a great buy here but cautioned that emotion can drive prices lower short term. I'm doing some nibbling here.

[toofrugalformycat]

TexasGal,

I ERed in March of 2000, triggering a huge drop in the stock market. I too was SS. What helped me? Two things, perspective and exercise. I'd recently visited parts of the world where if you didn't get malaria or dengue, you were likely to be shot at or go hungry, and would likely die young regardless, so losing my investments to the stock market didn't seem quite so bad by comparison. And the exercise (intense) gave me endorphins, and worked off some of my desk job fat as well as anxiety.

You're doing a great thing for your mom. But hanging out exclusively with an older person can add to your fear level, I know. You might consider investigating ways to get a break, even an hour or two a week would help. In my experiences in living with an elder, I found getting up early and working out for a couple of hours made me feel much better and didn't cut into the caregiving, since she slept in anyway.

Sounds like the garden work is a workout already, eh?! Along those lines, yesterday I was harvesting some greens from my raised bed when suddenly my left foot sunk into the ground, then the rest of me landed kerplop on my heiny. Turns out the rains (and perhaps my overwatering) had generated something like a sinkhole. It goes wayyyy down. I need to fill it up with something before my carefully composted raised bed soil falls down it!

[TexasGal]

toofrugal,

Here in rural East Texas if you sink down in a hole it is probably a gopher hole or mole run. I have them all over the lawn. I've really tried to keep things pretty and I get lots of comments on how great everything looks. But I am beginning to understand why lots of people don't even try to have lawns. They just let it go and when the grass dies, there is nothing to mow or water and nothing for the varmints to eat (grasshoppers for instance). I absolutely HATE grasshoppers, and ours are big and fat from eating all of my plants. If I had the energy I'd go out and fight with them. But I don't.

It's about 105 here with the heat index, no gyms, nowhere to work out even if I wanted to. I would probably have to get up at 4 AM in order to walk the streets in reasonably cool (80 with 70% humidity). I'm too lazy for that. I have never loved to exercise. I always hear about endorophins but have never experienced "getting happy" during or after exercise. But I know it is good advice and sooner or later I am going to have to get serious about it.

I am going to have to do something for myself though. I can tell that just sitting here all day with mother is wearing on me. I did it with my dad for months before he died, and it is all catching up with me.

Thanks for helping me gain some perspective. Yes, I have it so much better than so many people. I don't want to fall into the trap of feeling sorry for myself. I am privileged to take care of my mom. She was always there for me, and I am happy to help her.

TG

[Running_Man]

Originally Posted by Bikerdude

I was just listening to a market person interview (forgive me I don't remember his name) and he was saying the market is being driven by emotion and not fundamentals. He also pointed to the "Sentinel" MM failure story as being false (it was not a MM fund that was having problems) to make his point.

He said he thought the market was a great buy here but cautioned that emotion can drive prices lower short term. I'm doing some nibbling here.

WHY is the market a great buy here? It is basically where the market was at the start of the year. What has changed in the 7 months since to make this a better opportunity than it was in January? The fact that banks and hedge funds cannot revolve their 90 day paper? KKR is dropping like a stone and has 9 billion in commercial paper outstanding. These are the potential situations for money market accounts where their basis could break the buck. While the risk of falling off the cliff in value like KKR may be low, I fail to see what makes the market today a great buy versus January....
KFN: Summary for KKR FINANCIAL CORP. - Yahoo! Finance

[Bikerdude]

Originally Posted by Running_Man

WHY is the market a great buy here?

If I had to guess because he thinks its going up from around this point? If I had his email I would give it to you so you could ask him yourself.

[haha]

Originally Posted by Running_Man

It is my understanding it is not mortgage paper that the MM are holding that is in trouble but AA paper for banks in their name that was being rolled every 90 days over. But since mortagages cannot be resold right now noone is willing to relend the money to the bank at AA rate. Therefore the only asset that is left to back the commercial paper the bank can no longer obtain is depreciated mortgage paper. As a for instance a German bank has losses of 4.5 billion on a default from subprime mortgage paper and may not be able to get it's commercial paper rolled over. Therefore the bank if forced cannot come up with the money to repay the commercial paper and will have to sell assets it has on hand to meet obligation which is the subprime paper. Since it is no longer at par the MM will be repaid at less than par unless the bank eats the difference.

If this were to spread to more common areas it would be an ugly scene.....

I understand the first part- this bank is having difficulty rolling paper. But their only way out of paying is bankruptcy- the bank is the credit behind the paper held by the MMF, not whatever asets the bank may hold. If the bank defaults, the MM is in trouble. But the bank can't just say- "Hey, I need a discount on that amount I owe you. At least they can't in the US.

Ha

[d]

Originally Posted by Bikerdude

...He also pointed to the "Sentinel" MM failure story as being false (it was not a MM fund that was having problems) to make his point. ...

two further points perhaps worth considering with Sentinel:
1) they catered to hedge funds (roosting chickens)
2) although by "objective" a short-term fund, it held many floaters (>80% of portfolio), some with maturities as long as 30+ years
as noted, hardly a MM fund.

[Olav23]

Now seems as good a time as any to move some of my money market money around. Currently it is in the Prime at vanguard. I live in NYC, so in my tax bracket, it might make sense to park it in the New York Tax-Exempt Money Market Fund.

This is the credit breakdown:

MIG-1/SP-1+ 82.9%
A-1/P-1 12.5%
AAA/AA 4.0%
MIG2 0.0%
A 0.6%

Average Maturity 33.0 days
Average Quality MIG-1

What do you guys think? Will I run into more credit risk with these bonds? (I assume mostly munis and such)

Or should I just go with the taxable Federal Money Mkt Fund or Admiral Treasury Money Market instead?

Thanks!

[FIREdreamer]

Olav,

The NY tax-exempt money market fund does have some credit risk, although, as for the VG prime money market fund, the risk should be quite low since they invest in the highest quality debt available.
If you want to truly remove credit risk, then you have to invest in debt instruments fully backed by the US government. The VG Federal Money Market fund has zero credit risk, and pays an interest rate close to what the prime money market fund pays.