Blood-in-the-streets investing may sound cold, heartless, and a cheap way to make a buck, but we’re investors. We’re looking for political turmoil . . . financial hardships . . . assassinations . . . bloody uprisings . . . the events that seed wealth.
It was 2001 when severe political and economic crises stripped 50% off the Turkish lira as hundreds lost their jobs. But had you bought the "crisis" opportunity, buying shares of strong but beaten-down companies, you’d have made a small fortune. Turkcell, for example, plunged from $24 to $1.50, only to recover to $16.52 following the crisis.
Billionaire George Soros made billions in a single day playing England’s Black Wednesday currency crisis.
When Poland was invaded in 1939, most people sank their money into savings bonds. Not John Templeton. While everyone else panicked, he bought $100 worth of every penny stock on the NYSE, only to quadruple his money in four years.
So when Bear Stearns imploded on liquidity issues, you couldn’t help but use the crisis-led broad market selloff as a buying opportunity. At least, that’s what we did at SC Trading Pit.
MF Global Stock Jets 60% Higher Two Days After an $11 Selloff
It was around February 29 when MF Global stock plunged from $30 to $14 after an unauthorized employee trade cost the company $141.5 million. Reportedly, Evan Dooley traded wheat contracts in amounts that exceeded how much he could trade. But in a show of bullishness, insiders began loading up, including CEO Kevin Davis, who bought 60,000 shares between $16.28 and $17.15.
All went well until Bear Stearns got a $2 buyout offer and rumors of MF Global’s demise began circulating. In sympathy with Bear, MF Global plummeted 78% on fears that the collapse could spread.
But the selloff was nothing more than overreaction, and we bought the stock only to watch it snap back two days later.
Said the company (per Briefing.com), "MF Global understands the significant concerns across the markets . . . We are seeing no impact on our repo lines. In addition, MF Global has no exposure to sub-prime mortgage-backed securities that have been the root cause of the current market environment. While the company uses third party repo lines, we have alternative funding in the event those lines are not available to the company.
"The company is very well capitalized with $1.4 bln in a committed, undrawn credit facility. As previously announced, as of today, volumes and net revs for the current quarter to date remain at higher levels than in any comparable period during the current fiscal year. In addition, client funds are at a higher level today than on February 27, 2008, or at the end of the third quarter ended December 31, 2007."
The company has enough cash ($46.6 billion) to offset debt and no liquidity crisis. This was a stock taken down on nothing more than false rumor, and quickly became a "blood in the streets" buying opportunity, one that helped some SC Trading Pit readers realize a quick 60% gain.
But the opportunity to buy hasn’t passed . . .
MF Global Ratings Scare . . . Not to Worry
On Wednesday, MF Global announced that it had raised margin requirements specific to equities derivatives markets, adding to market liquidity worries. News was that MF told clients to put up more cash to cover derivative positions – a move that could lead to millions of dumped shares – or close the positions.
While the news sent MF down 80 cents on Thursday, it creates another opportunity to buy on the cheap. The move may be nothing more than a smart attempt to effectively manage its risk exposure after the Bear Stearns collapse. It seems they may want to prove they are managing risk well to avert any downgrade from Moody’s.
According to reports, "Moody’s Investors Service retained MF Global Ltd’s ‘Baa1′ long-term issuer rating, on review for possible downgrade, and said it will focus on the specialty broker’s plans to achieve a stable long-term capital structure and its risk management practices."
Rumors are a dime a dozen. But if you pay attention there’s always an opportunity to buy good stocks on the cheap. We’re always looking for similar opportunities in SC Trading Pit.
Ian L. Cooper