Money Market Fund Update

In a recent post, I warned about the dangers of chasing high money market yields. Kevin Depew at Minyanville had this to say in item #3 of his “Five Things You Need To Know:

This morning on its earnings conference call Panera Bread (PNRA) was forced to detail why the company had to write down $1 million due to a short-term investment in the Columbia Strategic Cash Portfolio, an enhanced money market fund through Bank of America (BAC) that we wrote about in Five Things back in early December.

Since 2004 Panera has held an operating cash level of $10 to $15 million in a cash reserves fund, a traditional money market fund. Amounts above that threshold the company held in the Columbia Strategic Cash Portfolio.

According to PNRA CFO Jeffery Kip, in November of last year the company had $26.5 million in the Columbia fund – more than 75% what PNRA says is the maximum balance kept in the traditional money market fund, which to me seems like a lot of risk for a few extra basis points – and asked BAC to remove the funds, but were not allowed to do so. Shortly thereafter, of course, we learned that BAC and Columbia had frozen the fund to redemptions.

OK, so we’re almost halfway into February and PNRA is now writing down $1 million. Time to move on, right? Not exactly. Since November, PNRA has withdrawn approximately $8.2 million from the fund, which according to Kip is 98.7 cents on the dollar. They still have $18.2 million in the fund, which is still more than 20% of the max value the company keeps in traditional money market funds.

Meanwhile, PNRA is valuing its investment in the fund at about 96 cents on the dollar, but how? According to the company, this valuation is based on direct market quotes, valuations from Interactive Data Corp., the ratings agencies, and the company’s assumption that anything in the fund with lower than an A rating (approximately 6% of the holdings) returns an average of 40%.

We’re not so sure this is the end of the story.

Again, the danger of trying to squeeze an extra percentage point or so out of a money market fund can prove to be a risky proposition. Breaking the buck can happen with any high yielding money fund given the lingering credit crisis. Even if I sound like a broken record, you’re better off rather being safe than sorry by keeping your idle funds in a U.S. treasury only money market fund. Check with your custodian as to the choices they are offering.

Market Comment: The markets ended higher yesterday on not great, but better than feared, retail sales data. Our Domestic Trend Tracking Index (TTI) barely crossed its long-term trend line to the upside by a scant +0.11%. Since our domestic sell signal on 1/18/2008, the TTI has been bouncing slightly above and below the dividing line between bull and bear territory. We need to see a clear break in one direction or another before taking any positions.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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