MF Global's Kevin Davis (Memorial) Chart du Jour

Futures brokerage (emphasizing the first syllable) MF Global Ltd (MF) celebrates the first anniversary of its listing on the New York Stock Exchange this week. NakedShorts’ contribution to the festivities is an annotated look back o’er these last 12 tempestuous months.

Ooops. But — assuming a King Canute pose against the overwhelming tide of negativity — it’s not all bad news. Well, it wasn’t on Friday.

After chalking up new intraday ($3.38) and closing ($3.48) lows on Tuesday, Jul. 15, the stock bounced with the rest of the financial sector, before sticking on a svelte 27 per cent on Friday when the company filed an 8K announcing the more-or-less completion of its somewhat fraught recapitalization plan. MF closed at $6.24 after a late day ramp that tickled $6.50.

Statement of the bleeding obvious: where the stock goes from here is anybody’s guess. Technically, it is at short-term resistance around Friday’s close, but above that faces relatively clear sailing to the 50-day moving average near $10.50. Its first serious resistance level is in the $12.50-$15.00 range, where it traded for much of April and May. The stratosphere? How about the 200-day moving average, breathing very thin air over $20.

MF’s performance since its IPO on Jul. 26, 2007, when it was spun out from UK-based Man Group Ltd [EMG.L], has been an unmitigated train wreck, bringing to mind the opening sequence of The Fugitive, with shareholders in the Harrison Ford role.

 

The IPO priced at $30, below its planned range, first traded at $26.16, and closed at $25.62. It didn’t trade above the IPO price for two months, and made its closing high, $31.53, on Oct. 29, 2007. The short history includes 23 days when it gained more than 5 per cent, and 19 days when losses exceeded 5 per cent, including the 65percent smashage on Mar. 17, 2008.

And the shareholders ain’t out of the woods yet.

• The stock has spent way too much time flirting with $5, a pain threshold for institutional holders, such as they are.
• The company has lost considerable credibility in the analyst community (which may qualify as a compliment, given the credibility-free nature of the analyst community), suffering, among other indignities, removal from the Focus List at JPMorgan.

“A business that was stabilizing post risk management issues has again been destabilized by earnings problems and lack of investor confidence evidenced by the onerous terms MF had to pay for its capital refinancing,” said analyst Kenneth Worthington, who miraculously maintained his overweight rating. Go figure. And...

 

• Any further management trippage or bumblage could mark the end. The key risk — now off the table, until next time — is the credit ratting; if it drops below the current BBB, Man, better known as the world’s largest hedge fund management group, would have the right to pull the brokerage business. That move would be problematic for Man, which still owns a heavily debased 20 percent stake in MF, but might well be fatal for its malevolent spawn.

Despite the potentially foul portents, NakedShorts’ Falling Anvil Portfolio spit in the eye of the fates Tuesday, adding another lump at $4.02 late in the day, leaving the current position’s cost basis just 15 percent overhead. The plan, always subject to change, is to start working some wide, in light of the stock’s volatility, trailing stops at around $8, and to start unloading when, make that if, it sees $10 again.

The thesis, such as it is, is that MF has a still valuable franchise, although its earnings capacity is substantially impaired by the cost of its refinancing, additional continuing expenses it will face in attempting to eliminate the prospect of another another rogue trading shambles, and the sharply slowing growth of its core operations clearly evidenced by its Fiscal 2009 Q1 results. Oh, and corporate governance could use an accident repair shop, but that story is for another day.

Disclosure: NakedShorts’ Falling Anvil Portfolio is long MF.

Material Modifications to Rights of Security Holders etc
US Securities and Exchange Commission Form 8K
Jul. 18 2008

JP Morgan removes MF Global from focus list
Reuters Jul. 1 2008

Earlier on NakedShorts:

Too expensive to axe?
Jun. 25 2008