Posts Tagged ‘crisis’

They’re back…

Wednesday, June 29th, 2011

In his press confence following the FOMC’s June meeting, Gentle Ben Bernanke fielded a question from a New York Times reporter on the potential effects of a Greece default. In his answer was a comment about money market mutual funds that struck fear in the hearts of those who remember 2008, when a money market “broke the buck.” Money market Funds are always priced at $1.00 per share; what changes is their yields. In 2008 it was the result of Lehman Brothers failed, marking the extent of the financial crisis. Prior to that it had only happened once, in 1994.

Here’s part of what he said in response:

So we have asked the banks to essentially do stress tests and ask, looking at all their positions, all their hedges, what would be the effect on their capital be if Greece defaulted. And the answer is that the effects are very small. It’s also the case that — well, we don’t oversee the money market mutual funds. We have been kegeping a close eye on that situation.There again, the situation is similar in some sense in that except — with very few exceptions, the money market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems. They do have very substantial exposure to European banks in the so-called core countries: Germany, France, etc. So to the extent that there is indirect impact on — on the core European banks, that does pose some concern to money market mutual funds. And is a reason why the Federal Reserve and other regulators are continuing to look at ways to strengthen money market mutual funds.In terms of the impact of the problem in Greece on the United States, as I’ve indicated, the direct exposures are pretty small. And we’re doing all we can to monitor those exposures. However, as we saw in a small situation, a small case last spring, a — disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices, and so on.

When thinking of one’s portfolio it’s hard enough to stomach a loss, but in a money market fund it’s unfathomable. Not to worry, dear client, we use the Federated money market funds. They’ve never owned any Greek debt and only hold debt of the best of the best global banks. The contagion effects–get to know that phrase–are what should keep folks up at night. After Greece is Portugal, then Spain.

According to John Mauldin–in his June 25 letter,

“because if Greece is allowed to go, there is real reason to believe that the problems will spread arther quickly to the rest of peripheral Europe…By the way, another source notes that US money-market funds are not rolling over the commercial paper to some of the banks (like Spanish ones), so there is a liquidity squeeze coming to European banks in peripheral countries.”

As Deborah Cunningham, Chief Investment Officer for Federated’s money markets put it in a Wall Street Journal article on the subject,

The problem is perception as much as reality. Though only one fund officially broke the buck in 2008, it caused a crisis for the whole industry. “It’s the contagion effect that people are looking at,” Ms. Cunningham says.

If you’re concerned about your non-Federated money market, one thing to look for is something like “Prime” in the fund’s name. “Federal” or “Government” or “Treasury” should ease your conscience, although prospectuses often leave enough leeway for them to invest in just about anything.


BP an Analog for Japan?

Wednesday, March 16th, 2011

I saw the story immediately below and began thinking about BP disaster as an analog for Japan.  I know, I know–plugging a hole in the bottom of the ocean isn’t the same as stopping a nuclear problem–I mean, we know that, right?  Recalling those images, though, from the undersea cameras as they tried to snake this or that mechanism down there seemed plenty complicated–and they used concrete in that disaster, too, right–makes it sound not so far fetched.

Anyway, here’s the story.  Doesn’t it sound familiar?

So I took it a step further.  In the chart below you’ll see three panels.  In the top and bottom panels are charted BP’s stock and the S & P 500 starting 19 days before the April 20, 2010, well disaster, respectively.  The middle panel shows the Japan ETF (EWJ) from 19 days before the earthquake.  I adjusted the Y-axis on that panel, and it’s, coincidentally, not far off the scale of the BP chart.  It took the S & P 500 about 28 weeks to recoup its pre-spill levels.  From the leak to the bottom of BP stock’s decline was about ten weeks.  I didn’t try to figure out when the well had been plugged/capped because–you’ll recall–there was endless talk about endless lawsuits from the spill; I figured the bottom in the stock was a better measure.

Here are takeaways

  • This thing feels a lot like BP, with the markets trading off every single news story.
  • At times it seemed like we’d have an Old Faithful right in the Gulf, which is to say it seemed like it’d never be plugged.
  • Comparing stock prices to then, there turned out to have been a lot of great values, although BP has yet to get back to its former glory, although that seems like a stretch.
  • I’ve probably taken this to far from the very beginning, but if we take the former bullet point a bit further, we might conclude that avoiding the Japan ETF and investing, instead, in Japan recovery (think oil spill recovery) ideas, might be rewarding over time.

We never want to let time and history be the sole factors in investment decisions, but they can provide useful signposts.  Yes, the situations are absolutely different this time, but I will guarantee you that the traders have not changed a whit.  They’re still prone to swings of emotion, and that’s what makes history-doesn’t-repeat-itself-but-it-often-rhymes such a useful saw.


“Who the #€££ do you think you are?” British politician to the EU

Thursday, December 2nd, 2010

Sorry, again, Mom, if you’re checking the blog, but this video features the H-E-double-hockeysticks word.  His speech emphasizes a line in a recent report from BCA Research on Ireland’s dillemma,

The big problem for Ireland today is that fiscal austerity without a large currency devaluation is like committing economic suicide – without a cheapened currency to re-create nominal growth, fiscal austerity can only serve to crush aggregate demand and precipitate an economic downward spiral.

He also repeats the dominoes to go after Ireland . . . Portugal and Spain, after which bailouts, the ECB’s emergency bailout money is gone.


And in response, Jean Claude Trichet, European Central Bank chief, had this to say:

Here is more on the speaker, Nigel Farage


Weekly Recap & Outlook – 07.30.10

Friday, July 30th, 2010

Tower Private Advisors

Recent posts


  • Market upate – resistance still = resistance
  • Two very important papers released
  • Most economic news supports the double-dip view–a view we don’t yet espouse