What's Important in the Financial World (11/4/2011) MF Global Scandal, Groupon IPO, AMD Layoffs

The fate of Greece remains undetermined. Rumors are that Prime Minister George Papandreou will leave as part of a brokered agreement to get the opposition party to support austerity measures. There are also rumors that Greece may be expelled from the eurozone. This expulsion, which Greece would have to decide upon, would cause what was unimaginable just a week ago. Greece could stand alone, but such an action would trigger defaults on its debt, which would badly damage the balance sheets of some of the region’s largest banks. Greece also would become isolated as a trade partner, which would push it into a multiyear recession. So far, global stock markets have had only modest reactions to the turmoil. That could change radically if a bailout unwinds.

AMD layoffs. AMD (NYSE: AMD) said it would cut 10% of its workforce, which is 1,400 people. One of the troubling things about the decision is that AMD is a healthy company financially. It is another in a line of companies that do not absolutely have to cut costs but are doing so to improve margins. AMD’s low-end chip business has poor returns. The demand for PC chips continues to fall. So AMD acted prophylactically.  More large American corporations are likely to do the same, as it is clear the economy has not made a quick turnaround.

Groupon raises IPO share price. Unexpectedly, Groupon (NASDAQ: GRPN) raised the price of shares for its IPO to $20, about $4 above the expected range. The company’s business model and losses have come under scrutiny by investors. Many analysts who follow companies that offer coupons online believe it will never be a highly profitable business. But, it is one Groupon will be able to stay in for a long time. The IPO will yield $700 million and value the company at $12.7 billion. The demand for the shares is a signal that investors continue to believe the largest Web 2.0 firms will grow at a rate similar to Google’s five years ago. For the Groupon valuation to be realistic, the company would have to become highly profitable as Google did.

Starubucks’ earnings are grande. Starbuck’s (NASDAQ: SBUX) earnings are a sign that the relatively well-to-do remain willing to pay $4 for fancy coffee drinks. Net income in the period that ended October 2 increased to $358.5 million, or $0.47 a share, from $278.9 million, or $0.37 in the same period a year ago. Starbucks said sales of its Via instant coffee had helped results. But, without strong demand at Starbucks retail outlets, earnings could not have been so strong. Same-store sales for the quarter were up 10%.

MF Global may have goosed balance sheet. The Wall Street Journal reports that MF Global may have dressed up its balance sheet for investors. The financial firm may have disguised debt and risky trading positions. If so, it will not be the only time a bank made “adjustments” to its balance sheet to appear more healthy than it actually was. MF Global CEO Jon Corzine, former head of Goldman Sachs (NYSE: GS), may be in greater trouble than was assumed when the small investment house filed for Chapter 11.

Douglas A. McIntyre