JEF - Jefferies Group

[Ross812]

Prevalou,

 

Note the press release stated "No meaningful exposure to Italy." So they have 2 billion in G7 ex Italy.

[Ross812]

On a side note.

 

This may be the BEST investment to make during the European debt crisis based on Munger's accuracy as a contrarian indicator.

 

Then again, the "Munger Correlation" could be considered a black box... 

[prevalou]

can I conclude that Jefferies is not a black box ?...

[fuluvu]

prevalou, Thank you for posting on the composition of sovereign debt obligations. Important information to know at this point.

[fuluvu]

the short hedges are classic short positions. I think the risk can be cancelled out in this case. The Net exposure is the net exposure.

 

A Jefferies spokesman confirms that the firm’s European debt exposure is in its role as a market maker, and not a proprietary bet, and that the short hedges are classic short positions – the same bonds, maturities and countries as the corresponding long positions – rather than holdings of credit default swaps (CDS).

 

The latter point is an important one, with concerns in the marketplace that the current debt deal on table for Greece – which includes 50% haircuts for bondholders but does not appear likely to trigger CDS payouts –calls the reliability of such instruments as hedges on sovereign debt into question.

[Ross812]

Jefferies Details Short Positions To Europe Debt Amid Concerns

1 hours 47 minutes ago - Dow Jones News

 

 

By Brett Philbin

Of DOW JONES NEWSWIRES

 

NEW YORK (Dow Jones)--Jefferies Group Inc. (JEF), seeking to stem the steep drop in its share price, on Thursday provided details of its exposure to European debt, saying it had a net $38 million in short positions, or no meaningful exposure.

Shares of Jefferies fell as much as 20% Thursday, adding to this week's declines, as investors concerns about the company's European debt exposure were renewed in a research note from ratings agency Egan-Jones.

Egan-Jones raised questions about the company's "sovereign obligations," saying those positions accounted for a large percentage of the company's shareholder's equity.

Jefferies quickly refuted those findings, saying recent reports focused only on the company's long inventory of $2.7 billion, but didn't account for offsetting short positions of $2.5 billion.

Jefferies said its net exposure to the European nations include positions of $5 million to Portugal, $28 million to Ireland, $104 million to Italy, $3 million to Greece, and a short position of $178 million to Spain.

A person familiar with the situation told Dow Jones Newswires that Jefferies exposure at the end of August was "similarly not meaningful."

In recent weeks, investors have, in general, punished bank stocks over fears about how much those firms could stand to lose if European banks defaulted on their debt. Many U.S. institutions are counterparties to bonds in Greece and other European nations.

Jefferies reiterated that when it "from time to time" takes positions in such sovereign debt, the positions are short term in nature, recorded in the trading book of its regulated U.K. broker-dealer, marked-to-market daily and fluctuate depending on customer demand, auction activity and opportunities in the market.

Egan didn't immediately respond to a request for comment.

Shares of Jefferies recovered following the steep drop and were recently off 7.7% to $11.34. Earlier, the stock fell to $9.79, its lowest price in more than two years.

The stock was hit hard on both Monday and Tuesday, plunging more than 9% in both trading sessions.

Concerns have shifted to Jefferies in recent days following the rapid downfall of broker-dealer firm MF Global Holdings Ltd. (MFGLQ). Jefferies is smaller than many large financial institutions and as an investment bank it relies more on short-term financing than other firms. The firm also isn't a bank holding company so it isn't subject to the same rules as larger rivals like Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS).

Jefferies however is a primary dealer, which means it's among a small group of institutions with which the New York Fed conducts monetary policy and which are obligated to participate in U.S. Treasury debt auctions.

 

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

(END) Dow Jones Newswires

11-03-11 1101ET

Copyright © 2011 Dow Jones & Company, Inc.

[fuluvu]

JEF supplemental release to confirm that short positions are not CDS.

NEW YORK & LONDON--(BUSINESS WIRE)-- In response to further questions from its investors, Jefferies reported that, with respect to its short sovereign debt positions, all are in securities. Moreover, Jefferies has no credit-default swaps hedging its sovereign debt positions, which as previously indicated are short-term trading positions that turn over approximately three to four times per week.

 

In addition, Jefferies reported it has a limited number of routine regulatory reviews in process, all of which are insignificant in scope and absolutely immaterial to Jefferies.

[Munger]

This may be the BEST investment to make during the European debt crisis based on Munger's accuracy as a contrarian indicator.

 

I see Ross has disagreed with me on HPQ, BAC, and JEF when all were at MUCH higher valuations.  He also has disagreed with me on DELL.  But hey -- he is feisty:)  Probably wise for Ross to get smarter about investing and avoid the personal attacks. 

 

And while hitting the books, he should also figure out what happened to the thesis underlying his dissertations on MU -- a stock that is now 30% below his entry recommendation price, a stock that he quickly sold after it popped following a week of Jim Cramer pumping on his show because Ross got nervous about market conditions...so much for long term investing based on sustainable competitive advantages and margin of safety...just buy a notoriously volatile stock (with a bad underlying business) and hope Cramer pumps on his show -- if stock pops, sell.  Ross you have figured out the mystery of investing -- congrats. 

[Munger]

And where are the "details" on the hedge positions?

 

So JEF claims to have short securities that hedge its long sovereign debt positions, which it believes elimates the gross exposure to the sovereign debt?  These press releases are vey funny.

 

While I'm not short the stock, I am skeptical about the bullish thesis here.  Will be interesting to see how this all plays out.   

[Kraven]

Whenever Munger shows up the board always reverts to a debate that essentially amounts to who has the biggest equipment.  Nothing wrong with that of course.  Sometimes these little tussles can be amusing.  But guys, come on, whip it out and measure up and declare a winner.  You can all be BSDs.  There's no limit on how many can be on the board.

[fuluvu]

Munger,

 

According to the company, the positions are the result of the market making activities. Market maker needs to hold both long and short inventories. The positions are not their proprietary investments. It sort of makes sense to me, unless the company is lying to me.

[mevsemt]

And now JEF is positive for the day, I guess Mr. Market found his valium!

[Ross812]

Munger,

 

The comment was a joke. If you search your name on this board, you will see others have jokingly suggested the same thing. I don’t think anyone here is personally attacking you.

 

As for HPQ, BAC, DELL, and JEF, I agree that we often disagree about investments. I don’t mind black box situation (banks) if I believe the risk/reward are in my favor, and I don’t mind following Klarman, Valueact, Yackman, or Berkowitz into an investment if I can get in cheaper than they did. I’ve been burned in situations where I believed I understood the risks and was buying below liquidation value (my IPSU example earlier). I defended HPQ and BAC at higher valuations. I still believe HPQ is worth more than $40 and BAC is worth more than $12, I have averaged down in both. 

 

As for Micron, I haven’t gone back and looked at the company to see if my thesis is still intact. I said the company was worth more than $7 it was selling for when I wrote the review and suggested the company was fairly valued at $10.72 per share. I sold at $11.03 and said Jim Cramer was probably the reason the stock price increased so quickly. I was not going to hold the company at a higher price than what I stated was fair value. I held the stock for 6 months and made ~60%. I’ll sell BAC at $20 and HPQ at $50 too.   

 

For the record Munger. I think JEF is probably worth more than $22 where Leucadia bought the company. My cost average is right at $11

right now and I'll be looking to sell it around $22. Mevsemt, jef is now ~9% of my portfolio as well. Added Tuesday and today.

[BargainValueHunter]

http://ftalphaville.ft.com/blog/2011/11/03/725391/jefferies-we-have-to-explain-this-again/

 

Recall MF Global’s $1.3bn “proxy hedge” of its $7.6bn Italian and Spanish sovereign exposure, conducted through shorting French bonds. That short turned out to be far too small in terms of the notional amount, either given the size of the gross exposure and how the short would economically operate. Spreads on €100 of Italian bonds will move much more than €100 of French bonds. Ergo, your short in France should probably be a bit more than €100. MF Global’s strategy appears to have tried the opposite. That’s only one component of why it was a badly-constructed trade, amid the margin calls, but it’s worth noting.

 

Anyway, today’s statement from Jefferies is an effort to clarify that Egan-Jones and others have been looking at gross rather than net exposure. We were going to use this as an excuse to say that like other banks, the broker-dealer does itself no favours by making such disclosures so opaque as to fool an NRSRO, but above it seems clear enough. So we’re not sure why Egan-Jones chose not to net the exposure, except to say that perhaps it simply lacks faith in counterparty reliability at the moment and is uncomfortable with a firm levered 12.9:1 (a lot less than MF Global’s 40:1, mind) taking on certain levels of gross exposure. If so, we definitely won’t blame them for being cautious.

 

Then there’s this part of the Jefferies statement, also a response to Egan-Jones: “With respect to interest-income expense, Jefferies carries interest-earnings investments that turn over rapidly with its funding. As a result, Jefferies has had significant interest income in the past and should continue to have it in the future.” The “interest-earnings investments” it seems to be referring to is an acquisition from July of this year, when it bought the Global Commodities Group from Prudential Financial. But in truth we’re not sure what to make of it.

[fuluvu]

Egan-Jones Defends Its Downgrade of Jefferies

 

http://blogs.wsj.com/deals/2011/11/03/egan-jones-defends-its-downgrade-of-jefferies/?mod=yahoo_hs

 

 

After reading it, I am very skeptical on Egan-Jones downgrade. His defense is weak.

 

We don’t know how those shorts are set up and whether they completely offset their $2.7 billion [exposure].

(Can you downgrade based on UNKNOWNS? (instead of solid facts?))

 

 

“They claim it’s beautifully hedged,” Mr. Egan said. “Our view is that we’re skeptical until we see complete proof of that. In the past, the hedges haven’t been as perfect as originally presented. We don’t know how those shorts are set up and whether they completely offset their $2.7 billion [exposure].” Jefferies didn’t immediately return calls for comment. Mr. Egan said his firm’s downgrade resonated for two reasons. One, investors are skittish about exposure to sovereign bonds, which Mr. Egan called the “toxic assets of 2011.” Two, Egan-Jones keeps “getting more and more market presence every single month,” Mr. Egan said. Egan-Jones has been issuing ratings since 1995. Investors pay the firm for its ratings, rather than debt issuers.

[scorpioncapital]

Initiated position at $11.25/share...

 

If Egan is a rating agency why do they have the same information as a public investor? They said they are skeptical of the hedges and want to see the "details". What? A rating agency that doesn't have the data and rates companies? ANYBODY can do this.

 

Ok, I rate Jefferies AA, about the same as the US government.

 

[Munger]

Anyone who thinks perfectly hedging $2.7B of sovereign debt is easily accomplished is seriously misguided -- in fact, I would say, rather than easy, it is impossible...no doubt there are hedges in place but whether they prove effective is an entirely different story...Egan is right to be skeptical until greater transparency is provided.

 

 

[Munger]

While it is not easy to run a hedged market-making book, it most certainly isn't "impossible".  

 

In the way presented in the press release -- I believe impossible.  To essentially assert we have short almost $1 of European bonds against every $1 of sovereign debt and therefore we have virtually no exposure because the change in value on each side of the book will always offset is disingenuous at best and a complete lie at worst -- assumes the investing public is a bunch of suckers.  Simplistic and misleading would be an appropriate description of the press release...

 

And if they have devised perfect hedges -- what is the harm in disclosing the details...would eliminate all noise on this issue and earn management the respect of the skeptics...

 

 

That said, one would have thought that he would do so before going public with a downgrade backed by the simplistic and misleading talking point that sovereign debt

 

As I heard the interview, Egan noted that he presented his work to management, asked for more transparency in response to their rebuttals citing the short positions, and management was unwilling to provide the transparency.  Now management is allowed to provide limited info on the hedges -- there are no SEC rules that state otherwise -- but Egan is equally allowed to be skeptical.  I don't see Egan as a bad guy here.

 

 

All said, that doesn't mean that Jefferies is a good investment.

 

I agree.  A big question is whether this company (as currently configured) will be able to generate sustainable profits that justify the current valuation. 

[scorpioncapital]

I don't get why people are worried about companies that hold mostly US government debt! This is plain ridiculous. In fact, it's kind of funny that they are even hedging that. The reason they are is because they are market-makers, not proprietary traders.

[txlaw]

I don't get why people are worried about companies that hold mostly US government debt! This is plain ridiculous. In fact, it's kind of funny that they are even hedging that. The reason they are is because they are market-makers, not proprietary traders.

 

Apparently, actual market making is now considered a subpar business.

[vinod1]

http://www.bloomberg.com/news/2011-11-01/selling-more-insurance-on-shaky-european-debt-raises-risk-for-u-s-banks.html

 

Selling More CDS on Europe Debt Raises Risk for U.S. Banks

U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.

 

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.

 

Maybe we need something like this to get real financial reform.

 

Vinod

 

 

[Cardboard]

While I believe that the panic here might be just that. For example, while Meredith Whitney is wrong at times, it is interesting for her to come out and praise an executive as she did. I have a hard time seeing a $0.50 on the dollar with this investment.

 

Other investment banks such as MS and GS are trading at much lower multiple of book and earnings while I would argue that both have much stronger franchises. Why not buying these instead?

 

So what is the thesis? And, I don't believe that "it has fallen from $27" and "Leucadia owns a significant stake at much higher prices" means much.

 

Is this just a trade, betting on a quick rebound and exit?

 

Cardboard

[Munger]

From the lead article in today's WSJ:

 

For the past two years, MF Global Holdings Ltd. may have disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter, according to an analysis by The Wall Street Journal.

 

Relative to JEF, I make no accusations but would highlight the following from my post on Sept. 23 -- analysts unable to get straightforward answers to a number of questions, including:

 

1) sudden shrinking of the balance sheet at quarter end (four quarters in a row)

 

 

Any owner of this company should demand that management provides transparency in this regard, especially in light of MF Global.

 

[Grenville]

The valuation thesis is that they are presently under-earning because of their growth in headcount.  Simply, they expense the salaries associated with new hires today even though the associated revenues take 12-18 months to ramp.  This is why I think that its important to consider what their comp ratio reflects.  The Leucadia guys basically said as much in response to a question from Tweedy Brown at their AGM.

 

The fact that it doesn't look superficially cheap (relative to competitors) is actually what makes it interesting.

 

Hi Valuegeek,

 

Is there a transcript of the LUK AGM or audio recording? The insight on the JEF investment is much appreciated.

[prevalou]

Could you tell me where you find the information about sudden shrinking of Jef balance sheet at quarter end (four quarters in a row)?