Wild Times at MF Global Holdings

Today Moody's downgraded MF Global (MF) to Baa3 putting them on the verge of junk status. Then, MF announced that it has upped the Q3 earnings report to tomorrow morning instead of Thursday. This all comes after last week MF had to increase capital after the Financial Industry Regulatory Authority (FINRA) raised concern about exposure to European sovereign debt.

All of this new has led the stock to a hit a fresh 52 week low of $3.48 today. All the way down from a 52 week high of $9.28 back in January. Considering financial like Goldman Sachs (GS) and Morgan Stanley (MS) have had huge bounces recently, it should be concerning to any investor that Wall Street knows something.

Is this extreme fear warranted? Is $6.4B of exposure to Italy, Spain, Belgium, Portugal, and Ireland with a weighted maturity of October 2012 worthy of a drop from $7.5 at the start of August?

Heck, Citigroup (C) stock is already above levels from mid-August with sights on the pre market collapse levels. Even Regions Financial (RF) that still owes TARP money to the government has rallied.

Sure all these companies are different, but it seems so unlikely that MF faces any major risk from debt exposure to Italy or Spain that matures in a year. A time period covered by the EFSF.

According to statements from the company today, it seems apparent that the company has moved up earnings so that it can address the fears in the market. Being in the quiet period prior to earnings provides a great advantage to those wanting to spread fear. Hence, Stone Fox Capital bought shares in our Opportunistic Levered (Arbitrage) model this afternoon to take advantage of the opportunity presented by the market.

As always our Covestor model positions show up on Market Pulse on Yahoo! Finance so anybody can check our investment claims. As a note, sometimes the trades are slow to appear.

Considering the risk, we've only bought a half position and will look to deploy the full position if the news tomorrow is positive. The risk appears very over stated., but it isn't prudent to go rushing in full on.

Anybody not following MF recently should know that Jon Corzine (yes the former governor of New Jersey and Chairman at Goldman Sachs) took over the CEO role about 18 months ago and is in the process of transforming MF into a GS like company. Raising their focus on investment banking and asset management.

While still early in the transition, any investment is a bet on the experience and talents of management. Considering the regulatory environment and Corzine's connections one has to think that he has an advantage especially considering MF has no target on them like GS or MS.



Statements from MF suggesting all is well:

• As of June 30, MF Global had exposure to about $6.4 billion of securities, net of hedging, to Italy, Spain, Belgium, Portugal and Ireland with a weighted average maturity of October 2012, according to a regulatory filing in August.
• The portfolio is “sound and well structured,” MF Global said today in a statement. All of the European government securities mature by December 2012 before the expiration of the region’s rescue fund, the European Financial Stability Facility, the company said.
• “We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for MF Global, said in the e-mailed statement. “The maturity characteristics, ratings profile and European support facility for lower rated credits reinforce our view that that the portfolio is sound and well-structured.” 

Disclosure: Long MF. 

 10/25 Update: Nice call. NOT! MF plunged 47% today. Should've gotten out at the open but made the classic mistake of turning a trade into an investment. The action today was unwarranted. The report was no worse than what GS produced. Considering the open of around down 10% it appears that most of the fears surround the $6.3B exposure to European debt. Considering the maturity and known of it is Greece, the market has gone crazy here. Will look to add to the position as the market stabilizes. 

10/26 Update: After another 40% drop this morning, we added more to our position in the $1.26 range. Book value remains at $7 and the European debt risk is nothing like the subprime real estate. Subprime had 80, 90% losses while the debt of Italy, Spain, Belgium only risks a 10-20% haircut in the worse case scenario especially over the next 12 months. The risk is not similar though the market has reacted the same.