Sub Prime Woes
How Some Mortgages Are Like Load Funds
Many borrowers are now finding that getting out of their mortgage can be financially painful, according an article in the New York Times:
Homeowners whose loan rates are soaring may want to head for the exits. Many of them, though, will find no way out. If they sell their home or
refinance, they will face a penalty of thousands of dollars for paying off their loans early."
While we feel sorry for the borrowers who were not aware of penalties, millions of mutual fund investors have faced a similar unexpected punishment when trying to move out of one fund and into another.
Back end load funds were invented by the mutual fund industrial complex as a way create the illusion of selling a no load fund (a fund where the investor pays no sales commissions to buy) while still collecting the load. The sales fee, or load, in only charged when the investors sells. To this day, most back end load class fund investors have no idea there is a large commission involved - as high as 5.75% - when they sell shares... ...read the rest of this article»
Safe Money Market Fund Yields Plummet
It looks like the era of earning a nice risk-free 5% is over. The Federal Reserve hasn’t even lowered the Fed funds rate (the main driver of money market yields) from the current level of 5.25% and many good low fee money market funds are already yielding closer to 4%.
Uncertain times on Wall Street have sent even high-risk investors running for cover. Demand for the lowest of the low risk investments – U.S. Government Treasury bills – has sent yields way down. Today’s terrible jobs number and continued boo-scary foreclosure news has all but assured investors that interest rates are heading down fast and furious, lest the economy tailspin into a depression.
What this all means is a nice old fund like Vanguard Treasury Money Market Fund (VMPXX) yields 4.48%, 10% less than just a few weeks ago. Higher fee money market funds like T. Rowe Price U.S. Treasury Money (PRTXX) are now yielding 3.88%. As new money goes into these funds, their managers are forced to load up on lower yielding debt, which waters down the higher-yield holdings.
Interestingly, money market funds that own CD’s and commercial paper (highly rated, sort term debt backed by corporate America, not Uncle Sam) still yield around 5% (and higher). The perception is that this debt now has some risk - if not default risk than liquidity risk. Vanguard Prime Money Market Fund (VMMXX) yields 5.1%. Fidelity Cash Reserves (FDRXX) yields 5.11% - even more than it did a few months ago. Both funds tip the scales at about $100 billion in assets.
Apparently people don’t like seeing “Countrywide Financial Corp” in their money market portfolios anymore.
And there are some issues here... ...read the rest of this article»
It's Not All Sub-Prime's Fault
Sure, the sub-prime mortgage mess played a big part in this week's wild market gyrations, but it wasn't the only factor. Charley Blaine at MSN Money says there's plenty of blame to go around, and points the finger at hedge funds, quant models, even the securities and exchange commission.
What's Happening?
Yikes! It's a Dow-dropping-subprime-panic-triple A-summer-meltdown. Jim Juback at MSN Money explains the reasons behind the latest Wall Street wipe out in language you don't have to be Ben Bernanke to understand:
How did all this happen? As any good con man will tell you, the success of a con depends on the mark wanting to believe. The victim, in essence, talks himself into getting fleeced.
In this case, the global investment community wanted to believe that Wall Street and other centers of financial engineering could manufacture investment-grade, long-term debt to meet the huge demand of insurance companies, pension funds and central governments for predictable, long-lived and safe interest-paying investments. Because the need for this paper was so great, these marks were willing to suspend belief. They knew in their heads that you can't manufacture investment-grade debt. But in their hearts they wanted to believe. They needed to believe. They had to believe.
Because, you see, it's the only way out for an aging world that's running a huge shortage of the real stuff. So investors were all too willing to buy fake investment-grade paper -- at prices commanded by the real investment-grade stuff -- until finally the con was revealed as assets were marked to market at 50% or less of their assumed value."
So basically it's all old people's fault.
E*Trade Stops Offering HELOCs Below Prime
In another sign that lending standards are tightening fast, starting today E*TRADE Financial Corporation (ETFC) no longer offers home equity lines of credit (HELOC) at rates below Prime regardless of a borrower’s credit rating or equity in the home. This comes just a few days after some less liquid, investment grade mortgage related securities were repriced downward, hurting some safe bond funds... ...read the rest of this article»
Merrill Lynch: Suckers For A Bubble
There seems to be quite a bit of surprise among Wall Street today at how much money Merrill Lynch (MER) lost in the great housing bubble:
Merrill Lynch & Co., the world's largest brokerage, lost nearly $10 billion in the last three months of 2007, its biggest quarterly loss since it was founded 94 years ago, after writing down $14.6 billion of investments slammed by the ongoing credit crisis….Merrill Lynch posted a net loss after preferred dividends of $9.91 billion, or $12.01 per share, compared to a profit of $2.3 billion, or $2.41 per share, a year earlier….Wall Street analysts had been forecasting a loss of $4.93 per share…"
This shouldn’t surprise mutual fund investors: Merrill Lynch is a sucker for bubbles.
Sure most investment banks are guilty of letting irrational exuberance get in the way of rational analysis, but Merrill Lynch has earned a special place among big money managers as the firm that thinks rising tides that lift all boats never recede.
One gem is this New York Times editorial by Bruce Steinberg (then chief economist for Merrill Lynch) penned in October 1999, countering the growing belief among skeptics that the stock market had become a dangerous bubble:
But the doomsayers are looking for signs of disaster where none exist. The American economy has performed better in the 1990's than at any time in history, and there is no end of that success in sight….The bubble theory rests on arguments that the stock market is overvalued…Assets are said to have become overvalued, leading to overconsumption and an overheating of the economy that will inevitably end in a violent correction -- a stock market crash. But this argument will not stand up to a careful analysis…
The pessimists' misinterpretations begin with stock prices, which have indeed grown rapidly... However, values are highest in the sector where growth prospects are highest and demand is accelerating: technology. With the technology stocks excluded, the price-earnings ratio for the rest of the companies in the index is around 19. Adjusted for interest rates, that's comfortably in line with the experience of the past few decades."
This was less than five months before the S&P 500 peaked and then promptly fell around 50%. The S&P 500 today is almost exactly at the level it was over eight years ago when this cry for more insanity was penned (Merrill Lynch stock is currently lower than it was then, but that hasn’t stopped hundreds of millions in bonuses from being paid). Steinberg was fired in 2002 at the very bottom of the market. ...read the rest of this article»