I never discuss my personal financial transactions on this site. I don’t feel it’s relevant and I have no need for the hassles it creates. If you want to know what I think, look at my signals and read my blog. I cannot be any more blunt or transparent than I already am. However, I am going to make an exception for the topic of this post because it’s important enough for me to share. Note that I am not naming names as my personal experience and opinion of the issues here should not bias others. All I want to do is encourage you to consider the risks and make up your own mind if you have reason to evaluate your own situation.

I was custodian for some educational funds originally gifted by me and other family members. Originally, the money was placed into a large mutual fund family and in the 1990’s, the equities had tripled in value. Unfortunately, I didn’t pull them into cash soon enough to avoid all the damage done during 2000-2003 disaster. Reflecting my personal view of market risk, I was comfortable switching from the equities into the mutual fund family’s money market fund. Something about 5% returns was appealing to me! However, as the year has progressed, I became concerned about all the yield-enhancing assets in the money market funds. I greatly hope that we do not see a “breaking of the buck” but it’s certainly possible in my opinion, and I’d rather not have a firsthand account to share on that one.

Two weeks ago, I received the annual report of the money market mutual fund with valuations as of July 31, 2007. Approximately 40% of the assets were Asset Backed Commercial Paper and SIVs. Nice! Some of the names were familiar entities who gained notoriety for the wrong reasons.

The CEO letter accompanying the report was dated September 14th and you would think that it would contain some discussion of the credit crisis that occurred during the prior two months. Nope. Instead, I was treated to a summary of GDP, unemployment and inflation - who cares? Additionally, I heard about the Fed’s rosy statement from the June FOMC meeting - who cares? I got an insightful quote of S&P 500 gains during the prior 12 months of 16.13% - who cares? The only cautionary talk was a light criticism of the easy money in mortgages and private equity deals - no kidding? There was no mention of CDOs and ABCP and SIVs despite what we all knew from the statement date until the 9/14/07 letter.

Maybe it was wise for the CEO to not call attention to these issues or the fact that they represented 40% of the fund, but it certainly concerns me. At the end of the CEO letter, there are priorities for the fund: safety of principal and highest possible yield consistent with safety of principal. And a statement that the fund “invests only in high quality” obligations. Considering what was in the fund, I am not sure using the words “only” and “high quality” were accurate representations. And then came the CYA attempt- “Although a money market fund seeks to maintain the value of your investment at $1.00 per share, it is possible to lose money in the Fund.” Now that’s the first dose of risk and reality in this entire letter.

I sold out of the entire position and deposited it with a financial institution. I am getting less return but it’s still in cash and insured by the FDIC. I have no idea whether this or any other money market mutual fund will run into trouble because of all the CDO/ABCP/SIV problems, but I have yet to figure out why they should be exempt from having to deal with this mess. For far too long, I failed to really dig into the assets in this fund and I just glanced at the yield, skimmed the letters and looked over the statement. The past year has been a wake up call and once I really analyzed the assets and my risk profile, I did what I had to do and closed out. If you have a money market mutual fund, please don’t take the yield for granted - take the time to evaluate the fund.