The Falling Knife

Two days ago I suggested that there might be an opportunity to be found in the carnage of Refco. Well, if there is value to be found, it is a lot smaller today than it was yesterday.

Today Refco announced that they will be closing their Capital Markets division for 15 days. The Capital Markets division held Refco's fixed-income, Repo, and Foreign Exchange operations. This division contributed about 50% of Refco's net income.

Without the capital Markets division (I could see forex emerging without a lot of damage, but for now let's pretend it is all gone), the value of Refco stock is substantially diminished. Without the Capital Markets division, Refco will probably earn about $.54 per share in 2006.

Today the stock opened for about 1 minute before trading was closed. In the past three days, the price of Refco stock has fallen from $15.60 to $7.90, a drop of almost 51%.

Brokers used to call it "catching a falling knife" when someone bought a stock in free fall because they thought they saw value in it. Today, Refco is the falling knife.


Timothy Burger
timothyb(at)timothyburger.com