It's a Market of Money, Not a Money Market
Be careful where you're putting your money.
Minyanville prides itself on delivering the financial news you need to know before you know you need it.
Entering September, we offered that this would be a month to remember and one that would define the financial landscape into year-end and beyond.
Halfway through the month, we’ve seen the nationalization of Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG), the bankruptcy of Lehman Brothers (LEH) and a forced union between Bank America (BAC) and Merrill Lynch (MER).
It is, in a word, surreal.
While all eyes focused on the seismic shift in the financial landscape—and, more importantly, the massive attempt to contain the derivative contagion—another nugget of news emerged under the surface.
The Reserve Primary Fund, a money-market mutual fund with $62.6 billion in assets as of August 31st, fell below $1 a share in net asset value—also known as “breaking the buck”—due to a $785 million loss on Lehman Brothers (LEH) debt, which is now being valued at zero.
As of 3:00 pm on Tuesday, total fund assets stood at $23 billion, or a $40 billion hit since Friday. Redemptions have been delayed for as long as seven days as the fund wrestles with a run.
I guess it’s not a “great choice to park emergency cash or other money you might need soon.”
We’re not making light of the situation. Instead, we’re drawing your attention to this dynamic because most people stash their cash in a money market and assume it’s safe.
This is precisely why my long-term nest egg is fully backed by treasuries and devoid of commercial paper. This is what we’ve been talking about with regard to reading the fine print on your bank statements.
Yes, we were early but no, it’s not too late.
The simple truth is that, while the government is on overdrive to absorb—or at least slow—the debt destruction and credit unwind that we’ve been warning about for years, nobody knows how it will manifest.
Case in point is Constellation Energy Group (CEG), which is down almost 50% the last two days due to counter-party exposure to Lehman Brothers. This was a seemingly safe utility, my friends, not an exotic, high-risk vehicle known for financial engineering.
I offered two scenarios this morning regarding how the world plays the hand we’ve been dealt. It’s not a call to arms as much as a plea for awareness and context of understanding. Capital preservation, debt reduction and financial intelligence has been our battle cry and the onus is on us to take control of our financial fortune.
That means different things for different people but, as a start, you might wanna check the fine print on your money market fund. It remains my view that the inclusion of commercial paper isn’t worth the incremental basis points your bank has dangled in front of you.
May peace be with you.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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