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What's the TED Spread?
Tweet Share on Facebook September 17, 2008 Comment (3)Today, the gulf between the three-month U.S. Treasury yields and the three-month LIBOR rate—aka the TED Spread—widened to its highest level since the 1987 stock market crash. LIBOR (pronounced LYE-bor) is the interest rate at which banks charge each other on the London interbank market.
So, what's the significance? Essentially, the TED Spread measures market stress by revealing the willingness (or reluctance) of banks to lend money to one another. "A jump in the spread shows how panicky banks are, in that they are charging each other a bigger interest-rate premium than money lent to the U.S. government," says CNNMoney. (You can find more on the implications here.)
Why did the spread widen? Three-month rates on T-bills dropped to their lowest since at least 1954, Bloomberg reports, as "a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest-term government securities." Remember, a "flight to safety" sends bond prices higher and yields lower, because bond prices move inversely to yields.
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If Your Insurance Company Fails
Tweet Share on Facebook September 17, 2008 Comment (1)So your holdings should be safe if your brokerage fails, but what if your insurance company goes belly up?
Financial planning firm Fisher Financial Strategies offers some answers:
• Insurance companies are regulated by the states, which typically require them to participate in a state guaranty fund or guaranty association. The purpose is to back up the policy obligations of any insurance company that fails.
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Reserve Primary Fund: Investors May Lose
Tweet Share on Facebook September 17, 2008 Comment (13)The money market industry was shaken yesterday when the shares of one of its oldest and largest funds—the Reserve Primary Fund—fell below $1, making it only the second money market fund in history to "break the buck." Once the fund crossed that threshold, its adviser slapped a seven-day freeze on redemptions as investors bolted for the door.
Said Peter Crane of Crane Research Data (via Marketwatch), "This appears to be the first case where a retail investor will lose money in a money market fund." After all, investors have come to know money markets as safe havens for their short-term or emergency cash. Crane called the situation an "anomaly."
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Vanguard CEO: Index Investors, Don't Get Spooked
Tweet Share on Facebook September 16, 2008 Comment (3)Dozens of fund managers got frantic calls from shareholders yesterday, asking everything from whether their fund held any Lehman, AIG, or Bank of America to what the manager planned to do about it. But you wouldn't expect calls to flood into a fund family built on indexing—that is, hands-off investing in an index that is transparent to anyone who cares to look up the holdings. But Vanguard received an uptick in phone and Web traffic yesterday, says the firm's brand-new CEO, Bill McNabb, who was in D.C. for a conference. Here are a few insights he offered, as well as advice for jittery shareholders:
On why the market drop doesn't "have to be devastating":
Investors are asking the natural questions: How does this affect me? Do I need to worry about it? The good news is with highly diversified portfolios, these events—while traumatic—don't have to be devastating. It'll be some time before people see the full impact of how this plays out ... it's going to take some time. Our role is to be straightforward and to make sure that we're giving very clear answers and to take a little noise out of the marketplace. -
3 Pros' Takes on Today's Crazy Market
Tweet Share on Facebook September 15, 2008 CommentGiven that stocks hit the skids today, what should regular investors do, if anything? Below, three pros offer their take on the market, as well as advice for investors:
Stephen Lieber, CIO of Alpine Mutual funds
Take on the market: What's happened is essentially a reflection of broad insecurities accelerated by various developments and statements. This is a continuing trend, and we don't see an immediate stop to it. The market is apprehensive. There is a dominant fear of unknown valuation and risk. Until we get past that moment, it's going to be difficult. In areas where there is no fear, people will be reasonably secure. Coca-Cola, for example, is close to making a new high.
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Funds With Large Stakes in Lehman
Tweet Share on Facebook September 15, 2008 Comment (5)The Lehman Bros. bankruptcy filing means the company's bond and stock holders are also in trouble. But what about mutual funds with large stakes in the company? According to Morningstar, which lists portfolio holdings as of June 30, funds with the largest exposure include:
- Fidelity Select Brokerage & Investment, 4.4 percent of assets
- Morgan Stanley Financial Services, 3.2 percent
- Legg Mason Partners Aggressive Growth A, 3.2 percent
- API Efficient Frontier Value, 2.5 percent
- Tanaka Growth, 2.4 percent
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Google's Next Frontier: Video Games?
Tweet Share on Facebook September 12, 2008 Comment (1)Chris Morris of Forbes asks: Is Google as a video game publisher within the realm of possibility? He says the company is already testing the waters for the launch of its Web-based virtual world, "Google Lively," and the acquisition of AdScape, an in-game advertiser. So far, Google has downplayed talk of entering the game-publishing world, Morris says, but the company could approach gaming in the following ways:
With its financial war chest, the company could easily acquire one or several casual game development houses, using those to deliver in-game advertising via Adscape.... The company could just as easily acquire a top- or mid-tier developer and court the hardcore PC gamer.... Google also has several existing technologies that could be used to create games.
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SEC Looking Into Glitch That Led to UAL's Stock Drop
Tweet Share on Facebook September 11, 2008 CommentThe Securities and Exchange Commission has opened a preliminary inquiry into the circumstances surrounding the erroneous release of a 2002 news story that resulted in a steep drop in UAL Corp.'s stock, the Wall Street Journal reports. The SEC aims to determine whether there was any improper behavior behind the story, which was picked up by Google's news service, says the WSJ.
Late Wednesday, Tribune Co. said a technology failure at Google—which drudged up a 2002 Chicago Tribune story about United Airlines' bankruptcy—caused a plunge in UAL's stock Monday. Shares fell from $12 to as low as $3 but then recovered.
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ETFs to Buy, ETFs to Avoid
Tweet Share on Facebook September 11, 2008 Comment (3)Last night on "Nightly Business Report", personal finance columnist Jason Zweig (and author of Your Money and Your Brain) gave some refreshingly specific pointers on choosing an ETF—and avoiding duds (the bolding is mine):
A, be sure the ETF is very diversified. Find out how many stocks the ETF owns by checking its portfolio holdings. I would avoid ETFs that own fewer than 50 stocks. B, see how much the ETF will cost you by looking up its annual expense ratio. You should almost always be able to find an ETF that charges less than one-half of 1 percentage point in annual expenses. C, whatever you do, stay away from any ETF that uses what's called "leverage" in the hope of beating the market. Watch for code words like "ultra," "inverse," or "2X," which definitely deliver more risk but give no guarantee whatsoever of a higher return.
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Groundbreaking ETF Crashes and Burns
Tweet Share on Facebook September 11, 2008 CommentAfter failing to attract enough investors, JPMorgan Chase said it's liquidating the first actively managed U.S.-traded ETF, which was created by Bear Stearns (called the Bear Stearns Current Yield Fund.) Bloomberg reports:
The fund's opening was closely watched by money managers who want to offer actively traded ETFs as a lower-cost, more tax-efficient alternative to traditional index mutual funds, said Gary Gastineau, who runs ETF Consultants LLC in Summit, New Jersey. As of June 30, about 96 percent of its shares were still held by Bear Stearns Asset Management Inc., a unit of JPMorgan, according to the regulatory filings.
