Monday, October 31, 2011

MF Global, Corzine: Too Much Leverage?

Risky "prop trading" and too much leverage -- especially with respect to European debt -- during these treacherous times, has taken a toll on one of the larger and prouder names within the financial industry.  It appears that Interactive Brokers is one of the leading bidders on MF Global's assets.

The tentative plan calls for MF Global's holding company to file for bankruptcy protection and derivatives trader Interactive Brokers Group Inc to buy the assets, The Wall Street Journal and The Financial Times reported.

The company, which under Corzine ramped up more risky proprietary trading, is suffering because of low interest rates and bets it made on European sovereign debt, making it possibly the most prominent U.S. casualty yet from the eurozone debt crisis.

Read more here:


This article talks about MF Global & Corzine's history + risk taking.

The company insisted it was being prudent with its risk taking. In its most recently quarterly presentation last week, it argued it had low levels of illiquid assets, known as "level 3" assets. It pointed out that European sovereign investments are relatively safe, because they mature relatively soon -- by the end of 2012 -- and the European Financial Stability Facility backstops these countries through mid 2013.

Some former employees agree. On a risk scale of 1 to 10, "Corzine took us from being around 1 to maybe 3 or 4. He didn't take us to 11," said one former trader.

To these people, Corzine did exactly what the company needed to do to keep growing. And some who worked with him said portraits of him as a gunslinging trader are misguided.

"I can't speak to MF Global, but if he applied the same process there as he did when was conducting the affairs of government, I have to say he is a thoughtful, careful and prudent businessperson," said Steven Goldman, who served as Corzine's commissioner of banking and insurance in New Jersey from 2006 to 2009 and is now a partner at law firm Kramer Levin Naftalis & Frankel. "Decisions were never made from the hip."

Tuesday, October 25, 2011

The Example of Kodak (Trend is your friend)

The sad story of Kodak, once a powerhouse and film monopoly, has made the rounds lately, as the stock has dropped to around a dollar a share, from the mid-teens just 3 years ago, and the mid-20's 4 years ago.  The stock peaked at around 80 in 1999.

With a large cash hoard just a few years ago, and such a good brand name, many investors are surprised that Kodak declined so much over the past few years (even with the rise of the digital camera).

Click here to look at the chart.  The 3 or 5 year chart shows the big decline.

Forbes had a good article on some of the history about Kodak -- why some believed they would succeed, and the story of some of their failures:

When Kodak was founded in 1888, quality was its “fighting argument.” It gladly gave away cameras in exchange for getting people hooked on paying to have their photos developed  — yielding Kodak a nice annuity in the form of 80% of the market for the chemicals and paper used to develop and print those photos.

Inside Kodak, this was known as the “silver halide” strategy — named after the chemical compounds in its film. Kodak had a fantastic success formula that keyed off of international distribution, mass production to lower unit costs, R&D investment to introduce better products, and extensive advertising to make sure consumers knew about Kodak’s superior quality.

Read more here:

Many believed that Kodak, with it's cash flow and cash supply, would be able to recover from digital cameras.  One of the most highly-respected investment gurus, legendary Bill Miller of Legg Mason also believed in Kodak.

Maverick value investor Bill Miller has apparently sold his stake in Kodak (EK). Filings show that the manager of the Legg Mason Capital Management Value Trust (LMVTX), who put together a 15-year winning streak against the S&P 500 through 2005, sold 18.2 million Kodak shares late last year and during this year’s first-quarter for about $3.89 each on average.
The fund realized a $551 million loss through the divestiture, according to a report by Bloomberg.
At one time, Miller owned nearly a quarter of Kodak’s shares. He and other Legg Mason fund managers reportedly held onto the shares for more than a decade, even after Kodak suffered big losses.

Read more here:

It's actually interesting to us -- how different types of investors and traders can outperform the markets using various strategies.

One moral of the story, for us -- is that no matter what we "think," we will follow our trading systems and trading strategies (that we have researched, based on decades worth of data).  We generally follow trends, and use tight risk management controls.  In this case, following the trend may have helped some Kodak investors...

Thursday, October 13, 2011

Stock Market Indicators 10/13/11 10am (ET)

After the oversold stock market rebounded (about 12% from the recent lows!), our indicators have changed a bit since our last stock update on 9/27/11, when the S&P was at 1145.  Currently, the S&P is at 1195.

  • Our long-term model is still bearish, but gives only a "slightly bearish" signal.
  • Our intermediate-term (overbought) model has changed from neutral to "slightly bearish."
  • Our short-term indicators are dependent on shorter-term market action, but are currently bearish.
Traders may be interested in the short-side of the stock market, but note that the indicators are just slightly bearish.  However, they are bearishly aligned.  Long-term investors may want to wait and add to positions on weakness.  

Friday, October 7, 2011

WSJ on Managed Futures & Diversification

Managed futures are growing as an alternative investment strategy -- and here is a WSJ article on managed futures.

"Managed futures made a name for themselves in 2008, notching a solid gain as the stock market took a sickening tumble. ...

What buyers of managed-futures funds can expect is an investment that provides diversification for a portfolio because it doesn't move in lockstep with stocks. What they shouldn't expect is that a managed-futures fund will necessarily cushion any losses from stock investments as well as those partnerships did three years ago." 

Read more here:

Wednesday, October 5, 2011

On Rambus

Here are some meaty tidbits about Rambus with respect to Micron and their AT (Anti-Trust) lawsuit.

"...investors are waiting to hear the verdict and damages in the case Rambus (Nasdaq:RMBS) has brought against Micron. Whatever the merits of the Rambus case, the reality is that other players (Samsung and Infineon) have chosen to settle with Rambus and there seems to be an expectation that Micron is going to be found liable at least to some extent. The question, then, is how much of the potentially $14 billion in damages that Rambus wants will the company actually get (and how will it be split with co-defendant Hynix)? As Micron has about $10 billion in shareholder equity, this isn't a small issue. 

The Bottom Line

Crippling Micron isn't going to get Rambus what it wants or needs (which is money), and neither will pushing the company into bankruptcy. Still, there is a real risk that Micron could be on the hook for quite a lot of money to be paid out over quite a long time. Micron will almost assuredly appeal an adverse verdict, but this is a large potential liability that is difficult for would-be investors to accurate discount and factor into their models." 

Read more:


With all of the activity in the stock, here is a link to see up-to-the-second bid-asks (thanks to EssexElectric at InvestorVillage).