Last Monday was a humdinger, and all last week the markets were reacting. The big news, of course, was Greece’s 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 wouldn’t 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 aren’t well-accounted for. You and I aren’t institutional investors, but we still can learn a few lessons from this massive blowup:
- Leverage kills. It’s been reported that MF Global had 40-to-1 bets going on. That’s huge. It’s 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 doesn’t 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 now’s the time to buy, buy, buy. I’m 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 didn’t do much better.
- Finally, one real lesson here is that the failure of MF Global didn’t bring down a house of cards across the U.S. markets. This is not 2008 all over again, though I’m sure there are bearish pundits out there who’d 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 Germany’s 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), let’s hope investors begin to focus, for once, on the fundamentals. They might like what they see — I know that I do.