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Seeking Alpha

Tuesday, August 07, 2012

Knight Capital Group's Ironic Imaginary Valuation

valuation
At $3.07 a share, after its 24% drop Monday, Knight Capital Group (NYSE: KCG) looks to be priced exactly right. That’s because, while it secured funding to stay afloat, it did so at great cost to legacy shareholders while admittedly saving what they had left. So I find it ironic that some are seeing KCG worthy of a higher value now. To me, that is amusingly anomalous to the mathematic malfunction that nearly erased the company.

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Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Knight Capital Group


Knight Capital Group (KCG) secured a lifeline of $400 million in equity financing from a consortium of investors including Jefferies (NYSE: JEF), Blackstone (NYSE: BX), GETCO LLC, Stephens, Stifel Financial (NYSE: SF) and TD Ameritrade (Nasdaq: AMTD). In doing so, the company stayed afloat, yes, but it gave up 70% of equity, the equity of legacy shareholders.

Some are talking today about the franchise value of Knight, the potential gain for the new shareholders, and the ongoing opportunity for all parties moving forward. While it’s true the company avoided bankruptcy, the odds of it rising from here back to $10, representing a 233% gain, are equal to the odds that the company sported in July to rise from its price then of $10 to $33. In other words, the only thing that was saved was the $3 per share investors have left and the jobs of the executives and the employees of Knight. The potential of the company is probably unchanged despite whatever creative capital minds might construct to sooth the wound. What was lost, and it was lost, was $7 per share or 70% of capital for each legacy shareholder of Knight who not long ago saw quotes of $10 a share for their stock.

Knight Capital Group KCG Chart


The stock is priced right according to the efficient market (in theory), but I would say from here there is more likelihood of downside, given the potential for shareholder lawsuits and regulatory penalty. Given the broad reaching impact of mankind’s colossal failures in finance, more recently made famous by algorithmic trading and also the mortgage security malfunction at the hands of Wall Street and the rating agencies, these latest algorithmic errors are likely to bring down the hammer of Capitol Hill once again. So, I would avoid Knight’s shares rather than imagine value where it is not.

Article should also interest Goldman Sachs (NYSE: GS), J.P. Morgan (NYSE: JPM), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), McGraw-Hill (NYSE: MHP) and Moody's (NYSE: MCO) investors. Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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Monday, September 19, 2011

Madame Lagarde’s Hopeful and Impossible Vision

Lagarde IMFAs I watched the replay of IMF Director Christine Lagarde’s address to the Woodrow Wilson International Center for Scholars, through which she discussed global economic challenges and solutions, I found her described “narrow path” forward akin to navigating through a minefield while taking on fire from the enemy. While it is possible, as she said, it is also highly unlikely to survive, as I suppose very few realize, save perhaps securities markets participants.

spiritual healerOur founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Madame Lagarde’s Hopeful and Impossible Vision



With all due respect to the gracious lady, Madame Lagarde painted a scenario that will be extremely difficult to push through, because it not only requires the cooperation of forces within nations (read political opponents), but also between nations which have historically opposed and competed against one another. Hey, we all got along well enough when it was a matter of sharing the riches, but now that it’s a matter of survival, you would expect the dogs to act to their nature. And, by dogs, I mean each of us. Or, will crisis unite us?

To this, she implied that the emerging nations cannot avoid the crisis, as they will need customers for the goods they so efficiently produce and for the natural resources they are so blessed with. And she is right, and China, Russia, Brazil and India know it, but, and more so for some than others, they will only help the developed world for the best price they can exploit. That said, given that their development has been expedited by the purposes of the western world, not to mention all the aid monies that have been extended by developed nations for the sake of those in need in the past, a little grateful payback would be nice now.

If I may extend my critical review: Somehow, I suspect what the emerging nations may attain, and here I’m speaking of any collateral assets, not the more important presence they will gain in the global assemblies of nations (like their stake in the IMF), might be taken back from them later, which would be a great insult to the pride of the prideful Chinese. Perhaps, this stage of the global crisis is only laying the foundation for the next then, where the stability of the civility of the world is once again undermined. Isn’t that already happening in the Middle East and North Africa? Some say democracy is most beautifully taking root there, but I say, the ground is not fertile, and instead its barren plain will simply flood over. While despot dictators ruled, there was also civility and order, but now I see chaos in its place.

Madame Lagarde spoke of balancing between expense management and stimulative spending. It sounds like trying to take a scientific measurement with a plank and two buckets full of stones. It’s a heavy burden, and difficult if not naive to believe accomplishable. And she even acknowledged the dynamic environment, advising governments to recognize and react nimbly to the subtle shifts in economic growth, and to adjust to it, managing between austerity and stimulus for the sake of posterity. It was as if she ideologically placed virtuous, wise and perhaps perfect men in the place of faulty leaders. I found the IMF chief’s multiple usage of the word “virtuous” quite appropriate, if not targeted to tug at the hearts of the Chinese.

God bless her though, because she fills her role well. It is the IMF’s responsibility after all, to play mother and disciplinarian. She has to clean up the mess we’ve made. And you know, some of the ideological discussion I have been critical of here, I declared necessary myself in a recent article. Perhaps it is just my lack of faith in mankind that has caused me to question its will to pursue what is obviously necessary for the survival of the same. Nonetheless, the world’s leaders have quite a load to bear today. Not only must they have the foresight to consider the long-term prosperity of the whole, over the more optimal short-term opportunities for their individual states, but they must then sell this selfless option to a populous that will view it as an unnecessary act of submission. It is quite a noble path Madame Lagarde paves for the world’s leaders. I only hope the struggle does not become too painful before they embark down it.

This story is likely to interest investors in the Dow Jones Industrials Index, including large multinationals that play important roles in the global economy and are thus sensitive to it. Those stocks closed out last week as such:

Stock Name and Symbol

Friday’s % Change

Alcoa (NYSE: AA)

-0.1%

American Express (NYSE: AXP)

+1.5%

Boeing (NYSE: BA)

+1.7%

Bank of America (NYSE: BAC)

-1.4%

Caterpillar (NYSE: CAT)

-0.8%

Cisco Systems (Nasdaq: CSCO)

-0.3%

Chevron (NYSE: CVX)

+0.4%

Dupont (NYSE: DD)

+1.4%

Walt Disney (NYSE: DIS)

-0.1%

General Electric (NYSE: GE)

+1.6%

Home Depot (NYSE: HD)

+1.0%

Hewlett-Packard (NYSE: HPQ)

+1.1%

IBM (NYSE: IBM)

+1.7%

Intel (Nasdaq: INTC)

+2.0%

Johnson & Johnson (NYSE: JNJ)

+0.3%

J.P. Morgan Chase (NYSE: JPM)

-1.1%

Kraft Foods (NYSE: KFT)

+0.3%

Coca-Cola (NYSE: KO)

+0.3%

McDonald’s (NYSE: MCD)

+0.3%

3M Company (NYSE: MMM)

-0.1%

Merck (NYSE: MRK)

+0.6%

Microsoft (Nasdaq: MSFT)

+0.5%

Pfizer (NYSE: PFE)

-1.8%

Procter & Gamble (NYSE: PG)

+2.5%

AT&T (NYSE: T)

+1.4%

Travelers (NYSE: TRV)

+1.5%

United Technologies (NYSE: UTX)

-0.2%

Verizon (NYSE: VZ)

+1.5%

Wal-Mart (NYSE: WMT)

+0.3%

Exxon Mobil (NYSE: XOM)

+0.7%


Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Iran war

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