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FCStone Self-Inflicted Wounds


What do you know? Mismanagement, blunders have repercussions.

"The earnings of this company will be volatile." Knowing this, I suppose I shouldn't have been shocked over FCStone's (FCSX) disappointing numbers, posted yesterday. But there were a couple of disturbing items in the report.

First, the company mismanaged a hedge position and it cost it a fair chunk. As a risk manager, this is an occupational hazard. But it's also the type of mistake that makes me cringe, especially given that it was seemingly unnecessary. FCSX tried to hedge out the impact of lower interest rates on its interest bearing assets. If the company had left that position alone and had recorded a low interest income quarter, I suspect most analysts and investors would have hardly flinched. Who doesn't know that there's no interest to be earned on cash balances? Instead FCSX tried to get cute with it and came out looking like doofuses.

Second, the high compensation costs on the consulting side of the business were troublesome. It may suggest that FCSX is not immune to the problems that plagued GFI Group (GFIG), and/or the type of shareholder unfriendly business model adopted by FTI Consulting (FCN). Consulting is the fastest growing segment of FCSX' business and if margins get cramped the stock's multiple will suffer.

That said, was the near 50% stock decapitation justified? Not in my opinion. I've bagged all the 30's and 25's strike puts I carried and replaced them with a fresh and larger batch of 17.50's. I had bought the higher strikes precisely to protect against what happened yesterday and I'm not gonna sit around and watch those puts waste away. But I'm not cavalier about the company or the stock. I still like the business its in and the company generally has an excellent reputation in its field. But it screwed up and that will cost FCSX for at least a good while.
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Position in FCSX
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