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An Alternative To Money Market Funds

September 2018

August is behind us and what a month it was!! The S&P 500, Russell 2000 and the Nasdaq Composite Index all reached record highs last month. Meanwhile, the Dow Jones Industrial Average ended August less than 2.5% away from its all-time high. If President Trump and Prime Minister Trudeau are able to craft a revised NAFTA agreement, the equity markets could have an explosive rally into the end of 2018.

The yield on the 10 Year US Treasury appears to have peaked on May 18 @ 3.13%. Since then the yield has remained steadily below the 3% level with a few exceptions. At the end of August, the yield on the 10 Year US Treasury was 2.86%, 23 basis points above the yield on the 2 Year US Treasury. Market strategists remain concerned about an inverted yield curve, as it often leads to a recession. The Federal Reserve Bank of Cleveland reported that an inverted yield curve has preceded the last 7 recessions in the US.

The Federal Reserve next meets September 25-26 and is expected to raise rates a quarter point at this meeting. In fact, Goldman Sachs issued a report in late August which forecast two more hikes this year along with four additional quarter point increases in 2019. Some members of the Federal Reserve have expressed concern about the expected rate increases, with good reason. The yield on the 10 Year US Treasury remains dramatically higher than yields offered on several comparable sovereign debt issues.

The desire for higher yields has led some investors to foolishly pursue far riskier debt offerings. For example, Puerto Rico issued over $70 billion in municipal bonds before its historic default. In June of 2017, Argentina raised $2.75 billion in a debt offering with a 100 year maturity!! Its history of debt defaults, six times in the past 100 years, failed to deter demand for this offering which was 3x oversubscribed. Argentina is now seeking assistance from the IMF as the peso reached a record low vs. the US Dollar last month.

Tesla, in another oversubscribed offering, issued $1.8 billion in debt in August 2017. Tesla has never made a penny of profit in its history and will likely need to raise more capital in the coming months as it continues to burn through cash. Tesla is now facing an SEC probe along with a number of class action lawsuits after its CEO Elon Musk falsely claimed last month that funding was secured to take Tesla private at a cost of $420 per share.

My weekly radio show airs each Friday at 12.30PM EST on WWPR 1490 AM. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows and newspaper columns are available here.

If you are unhappy with the returns now offered by money market funds feel free to contact us.

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