Oct 31, 2011

MF Global-Another Failed Corzine Venture

October 31, 2011

Happy Halloween.

Equity markets are opening weak this morning on the last day of October as concerns about MF Global weigh on the financial shares, concerns about the European plan emerge, and a wicked storm pounds the Northeast, leading to Halloween being ‘postponed’ in some cities.

MF Global, the futures broker run by Jon Corzine has been suspended from trading on the CME and from doing business with the New York Fed. The stock has also been halted. Rumors have abounded about the firms holdings and wrong way bets, including those on European sovereign-debt. There have been discussions with potential purchasers, however, domestic banks seem to be frozen out of the transaction due to regulatory concerns, leaving private equity and other non-bank investors to sort through the assets. The company’s bonds have soared, and are now yielding 35.2%. Corzine, who took over the firm in march 2010, famously increased the firm’s risk position and used proprietary capital provided by JC Flowers to trade on the firm’s behalf. It seems a bankruptcy filing is imminent.

Food prices are up 8% year over year, putting pressure on restaurant chain margins. Recent surveys show that chains have raised prices by an average of 2.5%, less than the increase in food costs, but certainly significant. If the price hikes hold, it could negate margin pressure on the companies and help comps. If consumers reject the price hikes, then comps could face significant pressures. McDonald’s (MCD) and Chipotle (CMG) will be two companies to monitor, although casual dining chains could face greater pressure as discretionary income continues to lag.

From Peter Boockvar—“In the category that nothing is for free, in response to the push on the part of US Gov’t officials to expand the HARP program to allow more home owners with underwater mortgages to refinance, the Norway sovereign wealth fund said they sold all of their FNM and FRE MBS securities due to the heightened pre-payment risks.”

The Super Committee for deficit reduction meets this week, and the early consensus is that the group is set to fail given the highly partisan makeup of the teams and the restrictive mandate and time frame they have been given. Some are calling this new budget battle a Generational War, pitting older Americans against younger Americans. This moniker has arisen since items such as Title I funding for low-income students, the Head Start health and nutrition program, Child Welfare Services, and vaccines could be all be hit by the automatic cuts while the $1 trillion Medicare and Social Security programs are exempt from the automatic cuts. It should be entertaining theater over the next few weeks as the news shifts back to the US.

Japan intervened in the currency markets last week as the value of the Yen moved to its highest level since the end of World War II. Unilateral currency interventions rarely work. The move put pressure on APAC markets last night.

The Federal Reserve policy committee is scheduled to meet this week, and the meetings could result in some interesting commentary. Five of the boards members have been outspoken against the position of Chairman Bernanke. Two of the five fell the bank hasn’t done enough to support the recovery, while three argue the bank has gone too far.

Mario Draghi has taken the reigns at the ECB in the midst of an unbelievable crisis. Jean-Claude Trichet, the former president, was French, and thus came from a country of relative stability. Draghi comes from the troubled Italy, and observers are questioning his ability to remain neutral in spite of the issues it may cause his home country.

The SEC chided and fined FINRA for doctoring records before an SEC inspection. According to the SEC, this is the third time in eight years that FINRA has given the commission “misleading or altered documents.” Remember that FINRA is the successor to the National Association of Securities Dealers (NASD).

A great weekend of sports as the Cardinals won the world series, the Eagles pounded the Cowboys, and the Trojans beat the Cardinal (at least in my narrow world).

Have a great Halloween.


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