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Money Market Morass

By Jon Nadler       Printer Friendly Version
Jan 30 2009 4:34PM

Good Afternoon,

Global investors were out in force on the last trading day of this first month of 2009, seeking anything that had either little risk, or no counterparty liability at all. Their search was largely fruitless, save for a few more tonnes of gold, silver, and platinum, which were promptly stashed into various vaults around the world. The GLD ETFs tonnage was last seen closing in on the 845 tonne figure, having already surpassed Japan's holdings in size. New York spot metals dealings tallied the following gains with only one hour to go in the afternoon electronic session: gold - up $18.90 at $929.20 per ounce, silver up 30 cents at $12.66, platinum up $14 at $987, and palladium down (?) $1 at $192 per ounce. Rhodium went its own way, dropping $90 to settle below gold and platinum, at $860 per ounce.

What else was up? The US dollar, at 86 on the index. Oil, only by a very slight margin, to $41.58 per barrel. Back to the gold/dollar divergence as the week drew to a close. US GDP numbers loomed large today, and players were huddled in deep trenches, taking the inevitable fallout from the Dow (down 123 points at last check, and very near the 8K mark). Gold's mission to close out the week and the month out at or near a half-year high was accomplished. Next week, perhaps a try for $940-$952 - should the safety chase bring more scared souls onto the bandwagon. That said, both gold and silver are now in overbought territory. Let's see what may have motivated the latest safe-haven quest buying spree for bullion. Not a difficult task, these days.

Finding a positive headline in market and economic news this Friday, was confined to keyword searches that somehow contained the word "gold" and/or "precious metals." In part, that explains the fourth assault on the higher price levels, being a successful one today. Highs of $929.60 were recorded in bullion as fresh records were set in euro terms and as market participants awaited grim news on the US economic front this morning. The data validated their fears, even if not their worst ones: US GDP figures showed a 3.8% rate of contraction, but if inventory buildups are excluded, the figure rises to 5.1% - fairly close to analyst estimates. This kind of contraction has not been seen since 1982 in the US. On the other hand, Japan's factory output fell 9.6%, the largest such decline on record.

Economic spin doctors were out in force today, with some cheering the 'not as bad as expected' number, while others pointed out the harsh reality of a deep contraction 'no matter how you slice the numbers.' Most see only a slimmer than slim chance of a 2009 recovery, now that businesses as well as consumers have pulled their horns in so far that momentum may take over an a deflationary spiral could ensue. Warehouse space is a phenomenal business to be in, these days...The dollar appeared to take the news as a good excuse to make further headway on the index, in a safe-haven play of its own. 

Today's roundup of all things falling includes an assortment that reads something like this: European inflation dropping to the lowest level since the creation of the common currency, Honda's profits plunging by 90%, Toyota and Porsche recording larger and larger declines in revenue, freefalls in same at NEC, Hitachi, Fujitsu, Dexia, Banco Popular, and Exxon Mobil, the Nikkei slumping 250 points, and just to round things out, Mr. Blagojevich fell from his Governorship, while the world's glacier's shrank for the 18th consecutive year.

Oh, there was one thing that rose last year: sales of alcoholic beverages. Go figure. Something else that might drive Wall Streeters to reach for the nearest bottle: bonuses (especially lavish ones) are now an endangered species. President Obama blasted 'shameful' payouts to execs, while AG Andrew Cuomo is said to seek the return of $4 billion in such perk money from Merrill.

Risk is everywhere one looks. Or, so it seems. Something that may have gone under the radar with all of the headlines concerning bad loans and dropping consumption has certain market watchers up at night. Bloomberg's Christine Harper reports on the landmine that no one better step on:

"James “Jes? Staley, head of JPMorgan Chase & Co.’s investment unit, said the $4 trillion money-market fund industry is the “greatest systemic risk? to the financial system that hasn’t been adequately addressed.

“What keeps me up at night most of anything we do at JPMorgan Asset Management is the money-market fund space,? Staley said at a discussion hosted today by Credit Suisse Group AG in Davos, Switzerland. “One of the things that has to come out and get a lot more attention and discussion is how do we take the systemic risk posed by money funds out of the system??

JPMorgan Asset Management oversees about $500 billion of money-market funds, Staley said. The funds aren’t allowed to set aside capital to absorb investment losses, leaving no “margin of error? against a potential collapse, he said. Staley’s remarks follow a set of proposed regulatory changes for the money-market fund industry from the Group of Thirty, an independent policy organization whose members include Treasury Secretary Timothy Geithner and Lawrence Summers, head of the White House’s National Economic Council.

The recommendations, if adopted by regulators, would force money funds to choose between accepting banking-industry controls or giving up accounting rules that help them maintain a stable $1-a-share net asset value, or NAV, which makes them the safest investment after bank accounts and Treasury bonds. The proposals in the Group of Thirty’s Jan. 15 report were made in reaction to the collapse of the $63 billion Reserve Primary Fund in September. Reserve Primary became only the second money fund to drop below $1 a share, or break the buck, because of losses on debt issued by bankrupt Lehman Brothers Holdings Inc.

Reserve Primary’s fall triggered an industrywide run on money-market funds that invest in corporate debt. That, in turn, froze the global commercial-paper market, cutting off a source of short-term capital for thousands of companies.

“The widespread run on money-market mutual funds has underscored the dangers of institutions with no capital, no supervision and no safety net operating as large pools of maturity transformation and liquidity risk,? the report said. JPMorgan’s Staley blamed money funds for Lehman’s collapse and the near bankruptcy of Bear Stearns last year. The funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble, he said.

“The people who brought down Lehman and almost Bear Stearns weren’t the banks, they were the money funds,? Staley said. David Glocke, head of taxable money-market investments at Valley Forge, Pennsylvania-based Vanguard Group defended the industry.

“I’m aware there are those who want to blame the money- market industry for taking away the punch bowl,? he said. “But issuers need to maintain diverse sources of funding.?

The Group of Thirty proposals would require money funds maintaining a $1 NAV to be regulated like banks with similar regulation, supervision and government insurance. If a fund manager didn’t want to reorganize as a special purpose bank, it would have to give up the stable NAV of $1 a share, according to the proposals.

Money-market funds regulated by Rule 2a-7 of the Investment Company Act of 1940 strive never to fall below a $1 NAV, preserving investors’ principal while paying interest. Fund investments are restricted to highly rated securities maturing in 13 months or less and don’t have to be marked to market value every day.

“It would split the fund business, in effect: half into bank deposits and half into ultra-short bond funds,? said Peter Crane, president of Crane Data LLC, a money-fund tracking firm in Westborough, Massachusetts. Crane predicted the industry would fight the proposal “tooth and nail? and has the influence to win. “It’s too big and important for such a dramatic change to be made,? he said. Ianthe Zabel, spokeswoman for the Investment Company Institute, a Washington-based trade group, declined to comment on the recommendations.

“My first reaction was ‘Don’t kill the patient’,? Joan Swirsky, an attorney at Philadelphia-based law firm Stradley Ronon Stevens & Young, said about the proposals. “This needs to be thought through quite a bit because there are a lot of possible unintended consequences.?

Swirsky, author of the book “The Guide to Rule 2a-7: A Map Through the Maze for the Money Market Professional,? warned the recommendations could have the unintended effect of drawing money out of the commercial-paper market.

Vanguard’s Glocke said the regulatory proposals should focus on securities issuers that lack adequate liquidity.

The money-fund industry “has a strong history of performance and offers an attractive place for people to invest cash,? said Glocke, whose firm oversees $199 billion in money- market assets. The ICI created a working group in November to offer recommendations following Reserve Primary’s collapse. Zabel said the group would release its report in the first quarter of 2009.

“We are aware of the recommendations and we are studying them,? John Heine, spokesman for the U.S. Securities and Exchange Commission, the principal regulator of money funds in the U.S., said. Money funds that invest in corporate debt held $1.84 trillion as of Jan. 20, still less than the $1.97 trillion they held when Reserve Primary collapsed, according to iMoneyNet, also of Westborough, Massachusetts. Total money fund assets have risen since then by 11 percent to $3.82 trillion.

JPMorgan Asset Management oversees about $1.1 trillion for its clients, including $500 million in money-market assets, Staley said. "

Rest up, a busy week is in the making. Tread carefully.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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