Ground Floor: Halfway through October is the time when traders start seriously estimating those end-year bonuses, and analysts are wheeled out to give a view on the likelihood of a market crash before the end of the month. To have one crash in October (in 1929) was bad enough, to have a second, Black Monday (in 1987), really upset superstitious traders. Both of those events cause even sanguine participants to treat the 10th month of the year with a little extra caution.
Markets have struggled to cope with a number of global crises since October 2004, including the Asian tsunami, Hurricane Katrina, the recent Pakistan earthquake and a racheting up of paranoia about the Asian flu pandemic. Stubbornly high oil prices continue to keep traders on their toes but - as always - they remain optimistic that things will be higher by the end of the year (traders are always secretly optimistic even when they're in the middle of a crisis).
Nevertheless, the fact that the Fed hasn't signalled the end of its interest rate increase mode means that some of them are pessimistic over the possibility of a rally during the next 10 weeks. Although the ECB walks its own path on interest rate policy, a rate-cutting Fed instead of a rate-hiking Fed would be a confidence booster to everyone who thinks that equities are currently an undervalued class.
Still, just because they're cautious doesn't mean that they won't be trading, though in Ireland the property pages still vastly outnumber the business ones in newspapers which makes me feel that, as a nation, we're still more wedded to bricks and mortar than any other asset class. And October won't make the slightest bit of difference to that.
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I'm sure the investors who sunk money into the New York futures broker, Refco, last August, weren't thinking that this October would be quite so dreadful. Refco was one of the biggest commodities brokerages in the world with offices in 14 countries. The company raised $670 million (€636 million) in an IPO two months ago but last week its (now former) chief executive, Phillip Bennett, who made $139 million at the flotation, was arrested and charged with securities fraud.
On Thursday last week Refco stopped trading capital markets. On Friday it closed its securities divisions. On Monday it sold its core business and filed for bankruptcy. Bennett has been accused of concealing information about Refco Capital Markets (a subsidiary of the company controlled by him) which owed Refco itself more than $500 million.
The outstanding debts of Refco Capital Markets apparently went back about seven years and were supposedly transferred at various points during that time from Refco itself. Had the obligations of Refco and Refco Capital Markets been made clear at the IPO, the shares most certainly would not have opened at $22 and subsequently traded up to $30.50. They were changing hands at $7.90 before trading was halted. The US Attorney, Michael Garcia, is charging that Bennett concealed the debt so Refco's financial situation looked stronger ahead of the IP0.
The bombshell was dropped on the company's website by a news story which said it had discovered an "undisclosed affiliate transaction" but then went on to say that their financial statements couldn't be relied on. It was all so different from the information put out at the time of an acquisition of a majority stake in the group last year by the Thomas H Lee group which was talked about as a precursor to the IPO, reminding readers that the stock of the Chicago Mercantile Exchange more than tripled in its 18 months as a public company.
It also quoted Bennett saying that the firm's trading activity last year was "roughly equivalent to that of the volume of the entire Chicago Board of Trade".
The financiers to the Thomas H Lee acquisition, like the advisors to the IPO, is a roll call of the great and the good of the US financial world. Somehow all these highly-paid guys with financial expertise didn't manage to spot the "affiliate transaction"!
The investor group which has bought the brokerage business for $768 million, JC Flowers, is run by a former Goldman Sachs partner and a co-head of the Goldman Sachs fixed income division, Mark Winkelman, has been appointed chairman. He thinks Refco has a "tremendously bright" future. Goldman Sachs were advisors to the IPO. The investors in the IPO were looking for a bright future too. But what's the betting that in a few years Refco will be ripe for a sale again and everyone will be enthusiastic over the possibility of another killing?
Even though I rattled around markets for a good chunk of my career, I'm always stunned at how much money some of these companies make. Partners make the biggest money by selling to other investors who want a bit of the glory. The funny thing about futures and commodities exchanges is that their original purpose was as insurance for farmers to lock in a price for their produce. There were real people and real goods behind the trades. Now there's little more than the hope of making a fortune by getting lucky.
I'm sure Phillip Bennett was feeling very lucky last August. But now he's holed up in his Park Avenue apartment and has had his passport confiscated. If he's found guilty he could be exchanging Park Avenue for 20 years in jail. The original IPO investors were probably feeling lucky too when they saw the share price break through $30. Now they're just feeling hard done by. No tripling of their initial investment like with the Chicago Mercantile Exchange. No easy money after all.
Just that horrible October feeling again.
