Making Money Alert
A WARNING FROM THE FINANCIAL FRONT
11/14/2007
The news from the financial front continues to disturb. This week we saw a different twist in the subprime mess -- the risk that some banks may have trouble with their money market funds. Yes, you read that right, trouble with money market funds!
This time the culprit was online brokerage firm E*Trade Financial Corp. (ETFC). The company’s shares were punished severely on Monday, as the shares plummeted nearly 60% over concerns about questionable subprime securities on its books.
Although E*Trade’s main business is online investing, the company also runs a bank that makes and buys mortgage loans, as well as invests in securities backed by mortgages. The company warned in a filing last Friday that problems with these investments would lead to bigger-than-expected losses. That filing prompted financial sector analysts to issue a bevy of downgrades on ETFC shares.
The real worry here, as I see it, is that the fallout from exposure to high-risk mortgages has begun hurting companies that on first reflection wouldn’t seem vulnerable to the subprime infection.
Money market funds normally are considered the safest places for investors to park their money and, as subscribers to my investment advisory services know, I am a big fan of the safety of the money market. And while it’s extremely unlikely that investors in money funds would lose their capital, it is disturbing and downright scary to hear that a segment of E*Trade’s business could be vulnerable to subprime loans.
“The mortgage black hole is, I think, worse than anyone thought,” said Tony James, president of private-equity firm Blackstone Group, in a call with analysts on Monday. Gee, it sure sounds like Tony has been an Alert reader for the past year or so!
I have never recommended E*Trade to anyone, nor have I ever liked the firm. At the end of the last bear market, the firm had trading execution problems. Now the company is battling rumors that this subprime problem may cause a bankruptcy.
I always got the impression that E*Trade was more of a day trading firm, and not the kind of brokerage firm that helps you grow your wealth. The bottom line is that if I had a friend who had an E*Trade account, I would advise him or her to close it and move the money to Schwab or Fidelity.
My friends, the E*Trade news is something you can use as your own personal financial fire drill. If you have a Treasury-only money fund option at your brokerage or mutual fund company, then you might want to rotate your cash from your traditional money market fund into the Treasury-only option.
If you currently have access to an ETF like the iShares Lehman 1-3 Year Treasury Bond (SHY), then you might consider buying this short-term bond fund with your money market allocation. SHY is a great alternative to money funds, as it provides about the same yield and approximately the same liquid access to your capital.
If you’d like more strategies on how to manage your money in the face of the current subprime mess, I invite you to check out my Successful Investing advisory service.
This market is going through some uncomfortable growing pains, and the sooner you put a sound, proven philosophy behind you, the sooner you can get that peace of mind your money deserves. For more on my Successful Investing service, click here now!
Domestic vs. International: A Tale Of Two Indices
While things appear to be rather sullen in the domestic equity market, the international markets continue to push higher.
In the chart here of the S&P 500 Index, we see that 1,405 is one very critical support level. We bounced off of this level during the summer sell off, and since then we’ve managed to remain above this breaking point.
We came very close to hitting this support level last week, as the S&P 500 sank to about 1,440. I think that if we break below the summer lows, we basically can call it a bear market in domestic equities.
No, we are not there yet, but all it would take is another big volume down day to kick the bulls out of the paddock and bring on those grumpy old bears.
Fortunately, that domestic bear isn’t lurking anywhere near international equities.
As you can see from the above chart of the iShares MSCI EAFE Index (EFA) -- a very good bellwether measure of the international equity markets -- we can see that it is indeed safe to travel overseas with your portfolio.
Despite a slight pullback in late October and early November, EFA continues trading above both its short-term, 50-day and long-term, 200-day moving averages.
If you have international equities in your portfolio, congratulations! You are taking advantage of both the falling U.S. dollar and the global economic boom.
So, will domestic equities start to act like their international brethren, or will international stocks start following the path to the dark side?
Only time will tell, but one thing I can tell you for sure is that we’ll be here to sort it all out for you.
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Always Something New In Fabian Land 2
The innovation never stops in Fabian land.
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Blogs Away: A Fabian Aural Fixation
Want to hear my latest rant about the state of the financial markets? Well, listening and watching now is as easy as a mouse click.
To listen to the audio blog, simply click here.
Becoming The Bull
Back and forth the struggle consumes us all
Trying to keep a level head
In the most unsettling of times
Today I’ll become the bull.—Atreyu, “Becoming The Bull”
There I go again, quoting from rock music lyrics. Hey, who says wisdom is relegated to great works of literature? In this thoughtful verse, Atreyu reminds us that no matter what kind of strife surrounds us, keeping a level head will allow you to “become the bull,” i.e., you can take control of your charge. In these most unsettling of times, I think this is great advice for us all.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else.