Friday, October 28, 2011


Now we know what MF stands for!

MF Global’s debt rating was cut last night by both Fitch & Moody’s. This begs a few questions:

Do we still listen to the ratings agencies?

The better question to ask is Why do we still listen to the ratings agencies?

I would think the only reason is because most investors just sit around all day with their hands in their pants waiting for someone else to do all of the hard analysis. The stock analysts do the same thing waiting and hoping that some other poor schmuck has done the work for them. Its an incredible circle jerk of idiocy.

What happened from the time MF Global blew up Tuesday till last night made Fitch & Moody’s wake up?

Does the fact that MF is an out of control debt and leverage machine just dawn on them while watching that riveting Game 6 of the World Series last night?

Does anybody on this planet actually do any credit analysis other than skim the headlines on Twitter?
One only has to look at MF Globals financials and filings to show the incredibly stupid 33 to 1 leverage that MF and Corzine built up since his hiring.

All of the analysts had this puppy wrong. Every one of them even after Tuesday’s implosion had this wrong. The simple fact that counterparty risk was more of an issue then the European Sovereign Debt per the analyst community was ludicrous. The idea that $6.3B in ESD was not an issue in the implosion is bottomline lazy analysis. Its easy to say counterparty and ratings risk. Its not easy to analize. It takes hard work running the figures.

One of the reasons counterparties today are not trading with MF is the fact that they were downgraded last night. The other reason is that they are tapped out via the REPO Market.

When companies catch a ratings downgrade they immediately have higher cost of capital. Counterparties demand more capital via collateral calls and demand larger haircuts/funding in the REPO market. Both of these are major MF Global problems at the moment. This was exactly what happened to AIG.

Back to the downgrades.

Why the downgrade from Fitch & Moody’s?

EUROPEAN SOVEREIGN DEBT Exposure! This was and is the problem but listening to the analyst community it wasn’t a factor in MF’s problems. MF Global owned $6.3B in face value ESD. Most of this debt was probably held on margin - leveraged to the hilt via the over night Repo Market.

I can here it now. MF Global and Dexia are isolated cases Its not a big deal. Buy the banks! Buy the financials!

This is just one of many implosions we will likely see over the coming months as obviously the lessens from Lehman/Bear/AIG/Wamu/Wachovia were never learned. Why learn from mistakes when Socialism and bailouts are public policy in market circles?

First Rule: Dont listen to sell side analysts.

Second Rule: It’s always the debt that matters.

Third Rule:   Leverage is like sex. When its good its great. When its bad lets get out of town.

Fourth Rule: Lose Repo Funding - Call the undertaker.

Fifith Rule:   If you are stupid enough to forget/break the first four rules make sure you drag enough people into the abyss with you.

Thursday, October 27, 2011

Thoughts On Europe & Magical Thinking

As I read the news flow coming out of Europe this morning I see GREEN. Futures are up a whopping 34 handles from yesterdays Globex Session close. The markets tend to trade to the path of least resistance and of course we all know that resistance is futile when markets are dominated by government policy intervention.

Screw Diamonds! Socialism and tax payer flush funds are a traders/speculators/bankers best friend.

Look for this market to trade to at least 1280-1300 level  on the futures before reality sets in. What is that reality you may ask? Like my old man always says reality is not what you see in the mirror but how the next guy sees you looking in the mirror. Its really circular farcical logic, but that's what investors want and that is what they will get. Its Western Culture at its finest. The avoidance of pain is paramount to living in a Western Culture.

Kick the can down the road.
Buy some more time.
Extend and Pretend.


A few days ago European Policymakers couldn't even schedule a meeting to discuss the crisis. They actually were kicking the meeting down the road. Markets reacted violently by sending the SPX down by 2%. Silly Rabbits - Tricks/Bad Debts are for Kids but Socialism/Bailouts are for the elites.

Back on the subject of Rabbits. Did the Europeans pull one out of the hat? One would think they have when looking at the DAX which is flying up 5.35%. Like the CARS singing oh oh It's Magic, one would think by looking at the sea of green on the screen that all has been magically fixed. Maybe Joan Didion was right after all when she wrote the "The Year Of Magical Thinking." Magical thinking works until reality sets in. Steve Jobs thought he can beat Cancer by magically thinking it doesn't exist. I am pretty sure the Europeans have the same thinking pattern as the Apple founder.

Lets review.
The only agreement that was reached was what we were all aware of. 50% haircuts for Greek Debt was already figured. Bank Recapitalization was already needed. The agreement basically buys time for the banks to posture their governments for continued bailouts.

My questions are:

-Does Austerity continue for the weaker periphery nations?
-Are the inherent flaws within the single currency Euro still intact?
-Will trade deficit nations continue to consolidate their budgets?
-Will growth worsen for trade deficit nations?

As Marv Albert  says.....The answers are all a resounding YES!

What European policy makers achieved was an offering to the German Banks and citizens. They wanted bailouts and austerity and that is what was delivered.

Bottomline. THE ECB will use the EFSF to put a bid and floor under sovereign debt until it cant any longer. What was averted I must admit was a system wide bank panic - Lehman 2.0 doesn't look like its in the cards.
Substantial capital (Tax Payer Funds) has been set aside (Bonus Pool) in the case of widespread bank failures or recapitalization needs.

Markets are reacting for good reason as the short term looks good. The Europeans were able to remove the absolute worst case debt crisis scenario, but what we have is just a muddle through scenario. This is not as plan. Markets need to grow out of this debt mess. My thinking is that austerity will continue to put pressure on budgets which will lead to massive protest movements across Europe.

If budgets worsen on the periphery we should expect to revisit this issue in the coming quarters and the crisis will once again ripple through the market forcing Euro leaders into greater action.

Magical thinking helped Joan Didion out of her deep depression. Good for her. It didn't work for Steve Jobs and it won't work for Europe.

Wednesday, October 26, 2011


We all saw the effects of poor risk management and excessive leverage in full force in the plunge of MF Global Holdings. The stock lost 47% in yesterday’s trading.

Do we really need to go over the results?
Can’t we just look at the facts?
Do we really need to spin the same broken record day after day?

The words excessive leverage, inadequate capital requirements, poor risk talking and management, and potential ratings downgrades should not be new to anyone who lived through the 2008 credit crisis.


People are still shocked that companies are run into the ground following the above meme.  I am truly shocked to find out there is gambling going on at the World Series Of Poker.

Just reading the research reports describing MF Global is downright tiring. How many times do we need to read the same thing over and over again

Let’s see.

1- Excessive Leverage – CHECK!

2- Not Enough Capital – CHECK!

3- Zero Risk Managment – CHECK!

4- Counterparty Risk - CHECK!

5- Potential Ratings Downgrade – CHECK!

What is truly troubling here is that MF Global’s European Sovereign Debt exposure is totally being discounted. The company has exposure to $6.3B in ESD, which is being supported by $1.2B in shareholder equity as of yesterdays close.

Why do you think most analysts and investors are pushing this to the side? Well of course – Bailouts! Tax Payer Funded Slush Funds. The thinking here is that this is non issue. Doesn’t matter if they have $1 or $100B in exposure as long as the EFSF/IMF/ECB are backstopping the losses. If this is not moral hazard I don’t know what is.

I am not saying that MF Global will be bailed out. They probably will be forced into a miserable death just because Jon Corzine didn't leverage the company enough. If Jon Corzine wants to save his company he should get on the horn with the guys at GS and be on the other side of say a couple trillion in derivatives.

Doing the same thing over and over again in the real world leads to insanity, but in the financial services world it just leads to more bailouts.