Tuesday, June 28, 2011

If Greece Defaults Could it Bust the Buck in Your American Money Market Mutual Fund?



Most Americans don’t know that 55% of all the assets in American general money market mutual funds are invested in European bank CD’s and commercial paper. Moody’s and S&P have warned that if Greece defaults many European banks who are massive holders of Greek bonds would find significant declines in the value of commercial paper and other cash investments.
 
I think that if the markets re-price the money market investments from these banks the American money funds will be forced to break the $1.00 net asset value. This "breaking the buck" on a wide spread basis will cause a major run on the money funds. The last time there was a run on money funds was in 2008 and 2009 and then the Fed put up $180 billion to save the industry, but I don’t think they will do it again, because we don’t have the money. 
 
Changes ordered by the SEC last year in money market mutual funds didn’t, in my opinion, go far enough. The two problems that led the Fed to bail out the industry in 2008 and 09 were extended duration and lower credit quality. Both of these issues were designed to get higher yields and both backfired. With 55% of money funds assets in European banks these funds have too much exposure to these banks. 
 
I said in an earlier blog that I felt we could see as much as a 10% correction from the top of the market for the year. If we are going to get that 10% we need the S&P 500 to hit 1225. The current 200-day moving average is around 1250. We hit close to that 1250 level on June 15, 2011 when the S&P 500 had an inter-day low of 1258.

My best guess, as of right now, subject to adjustment that I will talk about in a moment, is that we will not hit the 1225 level this time around. It looks to me like we could have a nice rally from this level back to the 1360 to 1370 level on the S&P 500 by the end of August, but no new high.
 
I think the Fall of the year could see a significant decline in the S&P 500, perhaps as much as 20%. If that 20% were to be reached then it signals a new recession. What could make my target come sooner rather than later? As I have indicated in several past blogs the debt ceiling is critical.  If Congress does not extend the debt limit with spending cuts then I believe that interest rates will rise, stocks will fall and the dollar could go into free fall. We will feel like we are back in September 2008 all over again. The other factor could be a default by Greece or other countries on their debt. Watch for the votes on Wednesday and Thursday this week in the Greek Parliament for the austerity measures, also the budget and debt ceiling story for the direction of the markets and interest rates.

 
Dan Perkins

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