JEF - Jefferies Group

[Liberty]

Hitting new 52wk lows.. Wish I understood that company better, because they sure have a great reputation. But I still don't feel like I understand enough what they own to buy some.

[rijk]

looks attractive at $12, below BV and a PE below 10, assuming $200-250 million normalized earnings power...

 

LUK's cost basis seems to be around 18 and Berkowitz recently purchased > $20....

 

anybody else interested?

 

regards

rijk

[hyten1]

i am hoping someone can share their thoughts about jef

 

i am a bit confused as to why jef would be a good investment where  luk had put in over $1bill dollars in it. In general i don't like an ibank biz model, not that type of biz i like to invest in.

 

what makes jef so different and unique? what is luk up to?

 

[rijk]

thanks valuegeek

 

the risk highlighted in the article is exactly what is playing out right now, there were some questions regarding compensation becoming a really huge number in the q3 call and management didn't really have a good direct response other than saying that comp was already included in net income and net income was an after tax number......... any concerns here???

 

 

regards

rijk

 

 

"The danger, of course, is that not that Jefferies will make the kind of bets that sank Bear Stearns or Lehman Brothers, but that its growth will turn out to be too ambitious for a low-growth era. If investment banking slows markedly because the economy stalls, for example, all those new hires may be burdensome for Jefferies’ balance sheet. The firm got a taste of the new austerity in the second quarter, when its fixed income revenues fell 30 percent from the prior quarter, in line with a market decline. Like its rival Lazard, however, Jefferies has a restructuring operation that can help bolster its business during economic downturns."

[rijk]

seems like the MF Global situation is dragging down everyone, including JEF, management stated on the q3 call that europe exposure is non existent on the asset side and minimal on the liability side (diversified funding).....

 

regards

rijk

 

http://online.wsj.com/article/SB10001424052970204528204577008090428088540.html?mod=business_newsreel

[fuluvu]

JEF still down 15%. Market ignore company statement and is ruled by fear right now.

 

"Jefferies confirmed today, in response to questions from investors and analysts, that it currently has no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain. To the extent Jefferies from time to time takes positions in such debt, they are short term in nature, are recorded in the trading book of Jefferies’ regulated UK broker-dealer, are marked to market daily, and fluctuate depending upon customer demand, auction activity, and opportunities in the market place. Jefferies does not have any repo-to-maturity activity or related off-balance-sheet derivative activity.

 

Jefferies, Markets, MF Global"

[Cardboard]

Well, it is fear and it is not.

 

Greece found a way here to destroy the European economy. 2 to 3 months delay (my estimate for a referendum), then a likely NO vote. That is enough to plunge the continent into a full blown recession and possibly worst before the vote is in, in part due to credit that will start to seize up at some point. This event basically triggers a further plunge in other PIIGS debt which will hamper their ability to refinance (higher yields) and force asset rightdowns at banks. If the vote is YES, it may help repair the confidence in the EURO and with it help the other PIIGS. However, with the amount of time involved and what could happen in between, it seems to me that the damage will not be neutral.

 

That is why I think that Europe needs to now find a way to isolate Greece and get it out of the Eurozone. I don't know if it is possible at a minimized cost to Europe. Or Europe needs to take control of Greece in some ways and force the adoption of the latest resolution without that stupid referendum. Kick them out of NATO. Adopt a full embargo. We have seen them demonstrate, they will demand a referendum and will vote NO. It has become a very ugly situation and I am now not sure what a democratic and peaceful solution is. Some much tougher measures may now be required, but a cost to the economy here seems a given.

 

Then the China PMI came at 50.4% for October which is awfully close to a contracting number.

 

I have two choices here. Either I ignore all the macro data, stay leveraged with some calls that expire in the not too distant future on companies that are still very cheap and make out like a bandit if nothing happens or I sell some today with a market that is certainly higher than a few weeks ago. I have no intention to sell any of my straight equity. With these I can afford to wait and go through a full blown depression if we have one.

 

In any case, I am really fed up of this macro BS. Tough to see a nice end to all of this.

 

Cardboard

[Munger]

Not sure how to reconcile the JEF press release re essentially no sovereign debt exposure and this move by Egan Jones, which cites large sovereign exposure.

 

As I previously posted, the most recent JEF conference call was anything but reassuring.

 

And as I also previously posted, I don't have a confident opinion on JEF but I am puzzled by LUK's outsized exposure to a second tier investment bank with a bloated compensation structure.

 

 

 

Jefferies Group Inc: EJR lowered BBB to BBB- (Neg.) (S&P: BBB)

Synopsis: Changed environment - the problems of MF have increased scrutiny of other medium-sized broker/dealers. We are concerned about the values included the $2.7B of " sovereign obligations " per page 24 of the Aug. 2011 10-Q representing 77% of shareholders equity. Although not as highly leveraged as MF Global's 40:1, we would prefer that JEF maintain a lower leverage than its 12.9:1. Note, the fiscal statements of JEF are skewed by the change in fiscal years. The financials are respectable especially given the tough operating environment. An item to watch is the $108M rise in interest expense (reflecting in part the $420M purchase of Pru Bache's Global Commodities Group) On the pos. side, JEF is a respectable competitor.

 

 

[txlaw]

The press release you're referring to said the following:

 

Jefferies confirmed today, in response to questions from investors and analysts, that it currently has no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain.

 

It didn't say that JEF had "essentially no sovereign debt exposure."

[Ross812]

I think this is one of those situation where the baby is being thrown out with the bathwater. JEF was lowered to BBB- because another second tier investment bank with 3x more leverage was exposed to debt from PIIGS and went bankrupt. Think of it this way. JEF has 70% of shareholder equity in sovereign debt which until the last six months has been considered a low risk asset; they reiterate they are not exposed to the five problem nations in Europe; they employ the 30% leverage of MF Global; yet, somehow JEF is now more risky than it was on Monday? I think the Leucadia guys know what they're doing on this one. JEF is worth a minimum of $12 and I would bet this time next year will be somewhere north of $20...   

[BargainValueHunter]

LUK is was crashing as well...for obvious reasons.

 

Grab some while you can!!  8)

 

http://finviz.com/chart.ashx?t=LUK&ty=c&ta=1&p=d&s=l

 

Update: Oops. Too late!  :-\

[tombgrt]

Why was JEF halted?

 

Just because the stock plummeted? Lol.

[tombgrt]

Why is LUK down 8% because JEF is crashing? Their market cap is $6b and they have a 30+% in JEF and some bonds? At day low it seemed like the market already thought is was worth nothing.

 

edit: Bought a very small position.

[prevalou]

Berkowitz has lots of positions on black box companies (MBIA, Citigroup, Bank of America) and is invested in Jefferies

Ackman has some Citigroup

 

[mevsemt]

Couldn't resist... just put ~9% of my portfolio in JEF...

[tombgrt]

Couldn't resist... just put ~9% of my portfolio in JEF...

 

That is a bold bet!  8)

 

I bought a small position in LUK.

[fuluvu]

Insiders purchased total of 8 million shares on Sept. 22. at price of $12.5.

 

[Munger]

Valuegeek

 

I have no confident opinion on Jefferies -- I don't know how anyone could.  You seem to trust management and their claim of "hedged" positions -- I can't tell you for certain that you are wrong.  I personally am not willing to take the leap of faith -- there are better risk/reward opportunities. 

 

The last JEF conference call was a disaster -- management was not straightforward in response to any of the more difficult questions.  I also see a lot of risk with Jefferies because in my experience it is very difficult to establish a perfect hedge --LEH and BEAR claimed to be hedged as did MS, C etc during the crisis, which proved to be delusional. 

 

Further, Wall Street as a business is facing an extended period of challenges, which will adversely affect all of the investment banks -- there is no quick business rebound for these companies...will be many years before we see sustainable profits reach previous peaks, if ever for some companies.  On a side note, the NY metro economy is going to get hit by a mack truck as a result of the sustained downturn in Wall Street business and the consequent layoffs (which will be larger than currently announced)...would not want to be long real estate in the area, which hindsight will show had been one of the larger bubbles in US prior to the music stopping.

 

Regardless of how this turns out, I remain puzzled by LUK's outsized exposure to JEF -- an over-levered, mediocre company with a bloated cost structure in a mediocre industry (at best). 

 

 

[Ross812]

Bears Stearns also did not come out and say they had no exposure to sub-prime mortgages. As a value investor you have to go against the herd. The herd is saying "CF Global is a second tier investment bank that filed for chapter 11; therefore, other second tier investment companies must be at risk of filing for chapter 11. Sell Jefferies Group!" Every time you invest in common stock you are buying a black box. As an investor, you can identify within a margin of error what a company should be worth, but you cannot stop management from running that company into the ground and eroding your margin of safety.

 

I learned this the hard way. Imperial Sugar (IPSU) had a refinery explosion which resulted in an insurance settlement worth $14 a share in cash. The company still had a fully depreciated Mississippi sugar refinery and a 60 million dollar 50% interest in Wholesome Sweeteners (a sugar alternative company growing at 20% per year). I calculated the company was worth at a minimum 170 million in cash + 50 million for the operating refinery + 60 million for the Wholesome Sweeteners investment. The liquidation value should have been somewhere around 280 million. Shares could be bought for $9 or ~108 million for the company. I then watched as management spent the 170 million rebuilding and outfitting the new sugar refinery, got killed in their hedging activity, and issued themselves shares which they sold along the way. Today IPSU is selling for $6.8 a share 83 million and cannot make any money refining sugar.

 

You can calculate to your heart’s content and have a huge margin of safety and still lose money. Management is going to make or break your investment thesis. Management is ALWAYS a black box that doesn’t show up on the balance sheet.

 

[Munger]

Bob Rodriquez wouldn't go near any of these companies.  Any true value investors should follow him.  With the exception of Buffett, Klarman, and possibly Prem -- I believe he is the best in the business.  And he certainly didn't get caught with his pants down during the financial crisis -- he has been spot on throughout his career. 

[T-bone1]

I think part of the issue is that they are long $2.5 billion or so of soveriegn debt and "short" a similar amount . . . but they likely aren't short similar debt on the other side.  The offsetting position is likely a long position in CDS. 

 

This brings up a number of possible problems, the least of which is counterparty risk.  The biggest potential problem in my mind is what happens if the EU continues to allow ordered defaults (which is what the Greek deal is) without triggering CDS - if this happens JEF could be screwed. 

 

The position is large enough that they probably can't just sell the CDS or bonds, they will probably have to carefully ladder out of both sides of this position at the same time to avoid being net long or short if there is a big move in either direction - which is very possible in the current environment.  Of course to get out of this position is to kill a major trading operation and a decent part of their business, which is also not good.

 

I think Egan Jones has it right, there is some real risk of a decent loss here - in getting out of the position, having it move against them etc, and a small tail risk of a large loss - if their bonds go down and CDS declines at the same time because of a lack of faith in the validity of that vehicle. 

 

I think things will turn out fine for JEF, but I'm not touching it.

[tombgrt]

You can calculate to your heart’s content and have a huge margin of safety and still lose money. Management is going to make or break your investment thesis. Management is ALWAYS a black box that doesn’t show up on the balance sheet.

 

This. Please, let's not have another Munger-like "All-financials-are-black-box-companies-not-worth-taking-the-risk"-discussion. Investing is about probabilities and trying to take the right side of the bet. And for every risk and every crappy company (aside from the worst) there is a valid price at which it will be a good investment. It is not about knowing every detail and being 100% sure nothing can fail.

[mevsemt]

http://mevsemt.blogspot.com/2011/11/couldnt-resist.html 

 

Wish me luck!

[Munger]

"I'm trying to persuade you from speaking before you've done your homework." -- I infer that you seem to be confident in your opinion because you have done your homework on a black box by reading the SEC filings...OOOOOOOOOOOOOOOOOOOOOOOOOOOK -- gotcha on that one.

 

"Further, the fact that the industry has struggled, is struggling, and likely will continue to struggle, plays into Jefferies' hand, because they're able to attract talented workers and grow their business at high returns on capital as their competitors shrink." -- I am CERTAIN that this statement is pure nonsense...did your due dilligence lead you to a giant pitcher of kool aid.  The financial crisis should have disabused all of any notion that there is collectoin of special "talent" capable of defying the laws of basic arithmetic at any of these companies.  Once upon a time, Fuld, Mack, Pandit, Winkelried, Corzine, Johnson, Raines, Gary Cohn, Rubin, Summers, Meriwether, Ranierie, Maheras, Cane etc were viewed as supreme talents...good marketing schemes but reality proved quite different.

 

JEF may or may not survive -- I don't know.  But here is what I do know for certain -- this an over-levered, mediocre company with a bloated cost structure in a mediocre industry (at best)...a company that dodged every relevant question on the last conference call. 

 

[prevalou]

look at the 10 Q

 

level 1 sovereign bonds=2000m$

level 2 sovereign bonds= 690 m$

 

and footnotes

 

Sovereign Obligations

•   G-7 Government and non-G-7 Government Bonds : G-7 government and non-G-7 government bonds are measured based on quoted market prices obtained from external pricing services. G-7 government bonds are categorized within Level 1 of the fair value hierarchy and non-G-7 government bonds are generally categorized within Level 2.

 

•   Emerging Market Sovereign Debt Securities : Valuations are primarily based on market price quotations from external data providers, where available, or recently executed independent transactions of comparable size. To the extent market price quotations are not available or recent transactions have not been observed, valuation techniques incorporating foreign currency curves, interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value. Emerging market sovereign debt securities are generally classified within Level 2 of the fair value hierarchy.

 

Which countries are in the G7:

US, Canada, UK, Germany, Japan, France, Italy. So except Italy , level 1 exposure doesn't concern PIIGS.

 

Moreover, a lot of sovereign obligations on the liability side are level 1 (if it was cds, it would be classified level 2 or 3 and in thederivative item.