Jon Corzine's US Grant Moment

Posted: Nov 01, 2011 12:01 AM

Jon Corzine, former New Jersey governor and head of MF Global, made what in our world is called a bad trade. He bought the PIIGS and sold France against it, essentially doing to Man what he did to the Garden State. Only this time, there is no Chris Christie to come to the rescue—MF Global filed for Chapter 11 bankruptcy this morning after a deal to sell assets to another brokerage fell apart overnight.

Thank goodness he didn't have ambitions for higher office. The last time we had such ham-handedness in financial matters, Grant was treating Grant & Ward like he treated the rebels at Antietam.

MF Global is one of the largest derivatives brokers in the world. They’re also a major market maker: 80% of the locals who make the two-sided markets for futures, options, ETFs and OTC products here in Chicago go through Man. But since the CME, NYSE and NY Fed have all suspended MF Global, essentially they’ve been put into liquidation-only mode. This is a pretty serious situation, and it’s a fundamental reason that the market is getting hit early in today’s session.

First, for any of you who have futures accounts with Man, understand that those funds are kept in customer-segregated accounts, which are separate from MF Global as an entity. Your money is your money, and after everything shakes out it will find a new home. But if you have a foreign currency account, those funds are treated differently—be sure and follow up on that as soon as possible.

This situation with MF Global is going to leave a big footprint—essentially what’s happening here is that a huge hedge fund is selling everything. It’s also going to affect liquidity, creating a vacuum which could be big to the upside or the downside. Today is also the last trading day of the month, so action related to mark-to-market accounting is also a factor. As investors, what should we be doing?

Back when I was trading on the floor at the CME, I had a very, very wealthy customer who loved to put on futures positions. Because he was a big customer and loved to trade, I decided to buy him a trading jacket and bring him down to the pits one day. That morning, he watched the action for all of 15 minutes—an order would come in, someone would bid it up, someone would sell it—and he had the whole thing figured out.

“Jack,” he said. “This is just like when I was in the auto parts business. I would give hubcaps away for free unless someone asked how much hubcaps were. Then I’d charge him $5.” Supply and demand, simply and eloquently explained by a very smart man who made a tremendous amount of money in his lifetime.

I bring that story up because on a day like today, it’s important to be mindful that smart money understands supply and demand. Right now, it’s standing off to the side, waiting. It’s recognizing that of the 290 S&P companies that have reported Q3 earnings, 220 have beaten Wall Street expectations. It knows that markets never move in straight lines, and that a digestive pullback after the run we’ve seen this month is both healthy and bullish. It’s letting Man liquidate. It’s being patient now, but eventually, it will step in and find value. Why pay $5 for a hubcap when you can get one for free?


Don’t forget: the Biz 880 Miami Money Expo, this Thursday, November 3 at the Mayfair Hotel in Coconut Grove, FL. Join me, Daniel “The MoneyMan” Frishberg, Bull & Bear Institute, Currensee and other financial experts for this FREE event, featuring breakout sessions in futures, stocks, forex, real estate and more. Your ticket includes a FREE lunch care of Charles Schwab. Register now!
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