Last Monday was a humdinger, and all last week the markets were reacting. The
big news, of course, was Greeces Prime Minister George Papandreou announcing
that he would hold a referendum on the euro zone bailout. To say that he threw
the biggest monkey wrench into his own machinery would be a vast understatement.
Luckily, the Germans and the French basically told him that any more
dilly-dallying essentially would mean the country would be booted from the euro
zone and would have to go back to issuing drachmas, which of course it wouldnt
be able to do because the country would be bankrupt. While Greece was courting
bankruptcy, other news that roiled the markets last week was a real bankruptcy.
Jon Corzine, the former New Jersey governor and Goldman Sachs (NYSE: GS ) head,
essentially made bets that were too big for the britches of his current company,
MF Global (NYSE: MF ). Now there are a few hundred million dollars that somehow
arent well-accounted for. You and I arent institutional investors, but we still
can learn a few lessons from this massive blowup: Leverage kills. Its been
reported that MF Global had 40-to-1 bets going on. Thats huge. Its the kind of
trouble that killed Lehman, among other things. The lesson here is in the
growing popularity and danger of leveraged ETFs. In the right hands, under the
right circumstances … maybe. For most of us, these can be time bombs, and it
doesnt take much time. The financial sector has been down so long you could say
one has to look up to see bottom. Contrarians or Jon Corzine would have told
you that nows the time to buy, buy, buy. Im not so sure. Take note, though, that
investors who bet on Jon Corzine and MF Global have seen their money go bye-bye
due to big bets on the financial sector. The ratings agencies are close to
useless. S&P once again acquitted itself with honor, having failed to downgrade
MF Global until after the company filed for bankruptcy. Until that moment, S&P
had the company rated at the lowest investment-grade level and had only put the
company on a credit watch after the report of a massive loss in the week before
the company went under. Fitch Investor Services didnt do much better. Finally,
one real lesson here is that the failure of MF Global didnt bring down a house
of cards across the U.S. markets. This is not 2008 all over again, though Im
sure there are bearish pundits out there whod love to have you think it is. Lost
in all the turmoil was some decent economic news. Growth again seems to have
slowed a bit, but employment has improved slightly (the economy added 80,000
jobs in October, while unemployment dipped slightly from 9.1% to 9.0%), and
earnings remain strong. Interest rates, which had moved up as the fear trade
kicked in again this week, have moved back down. The 10-year Treasury currently
is at about 2.07%. Even there, the move in Treasury yields this year has been
astounding, and the Vanguard Extended Duration ETF (NYSE: EDV ) is up about 41%
for the year through Friday. As we edge higher, both the Dow and the Nasdaq are
in positive territory for the year. None of the major foreign markets are up for
the year, and some, like Germanys DAX and many Asian markets, are down in double
digits. With Greece now on board with the bailout, and MF Global relegated to
the pages of financial history (and possibly up for a Supporting Role Oscar in
the sordid tales of Wall Street run amok), lets hope investors begin to focus,
for once, on the fundamentals. They might like what they see I know that I do.
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