Vinny’s Blog

Believe me I did not want to write anything today. I went to a racetrack past weekend and I have tons of photos to sort through and actually wanted to write something about that experience becaue it’s more fun. But so much is happening in the markets this week that it’s impossible for me to not write anything about it. So……….RaceTrack experience can wait…may be you will read about it over the weekend…..but for now…….

Today let us look at money again. Looks like there are forces that are shifting and altering people’s view about investing in stock market that covers pretty much your personal portfolio, 401k, mutual fund investing, insurance policy and what have you. Most people reverted back to cash. Easiest to maintain in cash is CD and Money Market. And then it turned out they did not find comfort in holding cash either……specially Money Market accounts.

Money Market accounts in US are most popular because they provide immediate liquidity a bit more in return due to ever so slightly higher interest rates and ease of maintenance – which is none. Generally speaking once a client opens a money market account, that’s it. Move money in it or out as desired and no other maintenance is required. Now these accounts are not insured by FDIC but they earned the reputation of being very stable and safe, they almost guaranteed that a client’s investment will not fall below principal amount. In other words if a client opened a money market account with 100 dollar deposit, client will recover 100$ in worst case scenario. This is not a guarantee but this is the reputation MM accounts had earned.

Assets in money-market funds, considered the safest investments after cash and bank deposits, rose to a record $3.59 trillion this month as stock and commodity markets fell. Investor confidence has been shaken by the subprime-mortgage collapse, the demise of Lehman and Bear Stearns Cos., and the failure of 11 U.S. commercial banks.

Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve the $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.

There you have it – safest investments after cash and bank deposits. But is it safe any more ?

Sept. 17 (Bloomberg) — Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

Shareholders pulled more than 60 percent of the fund’s $64.8 billion in assets in the two days since Lehman folded. Losses on the securities firm’s debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement. Redemptions were suspended for as long as seven days.

Let me help you understand that last sentence - Redemptions were suspended for as long as seven days. Meaning people could not withdraw their own money.

Here is another MM fund going below 1$.

The $260 million Colorado Diversified Trust has also fallen below $1 a share because of losses on New York-based Lehman’s debt, according to the S&P statement.

Here is one MM fund that had to secure funding to prevent losses.

Evergreen Supports Funds

Boston-based 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’ held $494 million of Lehman debt.

Evergreen liquidated the $403 million Ultra-Short Opportunities Fund in June after it fell 20 percent this year. San Francisco-based Charles Schwab Corp. is being sued by investors over losses in its Yield-Plus Fund, which is down 30 percent.

What may happen next, how people may react ?

“This is going to unsettle investors and probably create further runs on other money funds,” Geoff Bobroff, a mutual- fund consultant in East Greenwich, Rhode Island, said in an interview.

Widespread withdrawals from money-market funds would aggravate the global credit crunch because they are major buyers of short-term debt issued by corporations and financial companies.

“We could see massive withdrawals from the money-market fund industry with the money going to bank deposits and T- bills,” Michael Cloherty, a New York-based analyst with Bank of America Corp., wrote in a research note yesterday.

Here is that article if you wish to read…

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLwxHK3Ygc8s&refer=home

- Now if all of this is making you feel little un-comfortable about your money market account…please don’t be alarmed. Just like we have highly skilled ‘experts’ working in FDIC we have someone equally ‘expert’ for money market accounts saying this.

ICI President Paul Schott Stevens released a statement attempting to bolster investor confidence in money-market funds.

“The fundamental 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.”

GM, UBS Short-Term Debt Costs Soar as Money Fund Breaks Buck

By Bryan Keogh

Sept. 17 (Bloomberg) — Short-term debt costs for General Motors Corp., UBS AG and Sears Holdings Corp. soared as the oldest U.S. money-market fund saddled investors with losses, sapping confidence in assets once considered among the safest.

Here comes the panic…people are withdrawing money from MM accounts and investing in Treasuries.

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 as investors abandoned higher-yielding assets for the safety of the shortest-term government securities. That followed the bankruptcy filing of Lehman Brothers Holdings Inc. and a government takeover of American International Group Inc.

“The sort of panic going round the money market world is what they’ve been investing in is not as safe as they thought it would be,” said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse Securities USA LLC, one of the primary securities dealers that trade with the Federal Reserve. “The only thing they want to invest in is Treasury related.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajhFF2lQvSBc&refer=home

Once again I hope you know and remember that - MM accounts are not FDIC insured.

If you’re scared that you, too, are going to get slammed, put your money in an FDIC-insured savings account and/or invest it in a money-market fund at a major firm that will be publicly humiliated if its funds drop. This is no guarantee, of course (the fund that lost money today is a big one), but it’s better than investing in little money-market funds no one has ever heard of.

Is Your Money Market Fund the Next Subprime Mortgage Debacle?

click here to read full article

And talking about FDIC here it is – it’s official now that they have shortage of funds at FDIC, if you read my posts regularly. You know I had been talking about this for approximately 4 months now….and finally here it is….and its’ official. Well it’s through the media but I guess this is as close to it we are going to get……….

Federal bank insurance fund dwindling
Tuesday September 16, 7:49 pm ET
By Marcy Gordon, AP Business Writer

Federal bank insurance fund dwindling, regulators consider options for replenishing it

And once again your Tax dollars are at work…first Bear then Fannie and Freddie then AIG now FDIC.

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

The FDIC’s fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.

Here is the biggest risk to FDIC. Washington Mutual

A Washington Mutual failure would dwarf the largest bank collapse in U.S. history — Continental Illinois National Bank in 1984, with $33.6 billion in assets.

By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.

Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.

But Whalen said the Federal Reserve, the Treasury and Congress should “immediately devise” and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks.

“While the FDIC already has a credit line in place and this figure may seem excessive — and hopefully it is — the idea here is to overshoot the actual number to reinforce public confidence,” Whalen wrote in a note to clients. “Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: ‘Show us the money.’”

More tax dollars could be at work….. as always here is link to that article.

http://biz.yahoo.com/ap/080916/bank_deposits_safety.html

And now look the gap between 2 reports that predict up coming bank failure numbers. First one is from FDIC itself.

There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month.

Wilbur Ross sees about 1,000 bank closures: report

Monday September 15, 3:18 am ET

http://biz.yahoo.com/rb/080915/wilburross_banks.html

Here is Wamu’s statement after their ratings were cut to junk.

Standard & Poor’s Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody’s and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company’s stock price has plummeted.

WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be “significantly above” required levels and that its outlook for expected credit losses is unchanged.

Now it’s time to bring you THE news that I knew was always true….if you remember my past 2 posts in last 2 days….USD and Gold and USD Again…I repeatedly said that I don’t believe USD could be high and Gold could be down….and boy was I right….turns out I was more than right…..it’s up 80$ in one day !!!!!

if you missed buying…………well you missed…buying!!

Pushing gold down this time of the year was just an idiotic idea to tell you the truth. It’s Diwali (festival) time in India, where people traditionally buy gold, that time is soon followed by marriage season where again Indians buy gold. India is world’s largest gold importer and has been for past 30 years. Pushing gold down at this time of the year was only going to fuel the demand…….it’s that simple.

I don’t think this fight between USD and Gold is over. Those in power will do anything and everything to crush Gold. However if rules of economy apply……right one should be the winner.

Here are few headlines on Gold since morning…..on Sep-17^th.

Gold Soars Most Since 1999, Silver Surges on Demand for Haven

By Pham-Duy Nguyen

Sept. 17 (Bloomberg) — Gold surged the most in nine years as investors sought the safety of precious metals on concern that the credit crisis will deepen, leading more financial institutions to fail. Silver soared the most since 1979.

http://www.bloomberg.com/apps/news?pid=20601012&sid=anHz6u9EZSCI&refer=commodities

Gold climbs nearly 7 pct on safe haven buying, oil

Wed 17 Sep 2008, 13:56 GMT

http://africa.reuters.com/business/news/usnBAN753785.html?rpc=401&

…I don’t see any fundamental change that dictates strong support for USD. And just when I am about to make this post I found this…..

Dollar sinks as financial woes unnerve investors
Wednesday September 17, 4:28 pm ET

Dollar sinks as turmoil in financial sectors unnerve investors; Bonds, gold jump

http://biz.yahoo.com/ap/080917/dollar.html

“Finally, some of the dollar bulls may have said, what a minute, why are we holding dollars,” said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. “The U.S. is ground zero for the latest round of financial meltdown.”

Wow look at that- just 2 days ago the media was all Ga-Ga on $$ and global weakness was the cause for $$ to go up…and not even 48 hours later….these $$ bull (in other words called morons) FINALLY realized, “what a minute, why are we holding dollars.” That’s actually ‘wait’ a minute I guess. So you see I am not the only one who makes grammatical and spelling mistakes. You can find them just as easily on Yahoo too.

-Bear/ Fannie Fraddie / Lehman/ AIG/ Wamu/ Money Market Account / FDIC /Dow down 300+ points repeatedly…looks like hell is breaking loose. These are tough times, these are trying times……….exercise caution. Don’t panic …generally one makes more mistakes when paniked.

Alan Greenspan referred to it as  : Economy in ‘once-in-a-century’ crisis. I think he forgot to mention that it is going to have once is a century type aftereffects as well.

[views and opinions expressed on this site are mine and you need not agree with them. You should not make any decision financial or otherwise based upon material you read here on this website. For that you must contact a an expert in the relevant area of your need]