Sunday, September 21, 2008

We dodged the end of the world, but…

As we prepare for the coming week, I do think it is worthwhile spending a little time going over what happened and more importantly what didn’t happen last week. While the first three days of the week were the biggest and baddest roller coaster ride I have ever been on, the scariest day of the week was Thursday.

On Thursday, The Reserve Fund, the oldest and first money market fund said that it would have to suspend redemption's and would probably break the sacred $1.00 level. On Friday they suspended redemption's on about 12 of their money funds and warned that some of them might open at between $.91 to $.97 cents on the dollar. Other money market funds last August had the management kick in money to keep the price at $1.00. Many of the funds management companies decided that this time around they were not going to put up any additional funds. I think the reason they backed away was that they could not quantify the amount of the exposure.

We have in excess of $3 trillion dollars in money market funds and if the Fed had not stepped in we would have had a run on the bank, (money market funds) exceeding the great depression. The Fed is going to offer insurance that money funds can purchase to insure the $1.00 value. This insurance will be around for a year and then will disappear.

I think that breaking the $1.00 has forever changed the consumer confidence in money market funds. When these funds begin redeeming shares there will be a small run on the bank with increased withdrawals. The real question is where will investors put their money? The trustable options continue to shrink and for the moment the 90 Day T-Bills are paying a negative return.

I want to make it clear to all of my readers that even though we had a great rally off the bottom last week we are not out of the woods. Congress has to agree to the ideas from the administration and the global markets have to think things will get better.
While I am happy that we had the big rally the broad markets as of the close of Friday are still down over 15% year to date.

I expect to see the market move higher Monday morning as the short sellers will be coming up against the market closing to cover their naked short positions. It would not surprise me for the markets to sell off into the close tomorrow. The big unknown is how many naked shorts there are in the market. Watch for huge volume tomorrow as the shorts are covered.

Dan Perkins

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