JEF - Jefferies Group

[mcliu]

What if inflation goes to 10%?

[wachtwoord]

What if inflation goes to 10%?

 

It's been higher than that for years.

[TorontoRaptorsFan]

I was in LUK for many years, but haven't been able to get comfortable with the new management.

 

I was in the same boat. I have no faith with current management. There are many other companies that I would rather hitch my wagon to.

[scorpioncapital]

Came to the same conclusion. I wonder how things turned out this way at LUK. A case-study in the making?

My guess is that the management both past and present made a one-way bet on run-away inflation, or rather, the need of central banks to print money and maintain ever increasing prices. But this bet not only is taking much longer than expected but one would think that the period 2009 to 2015 when the S&P500 doubled represented just such a period. Call it phase 1. Yet LUK stock did not do very well here either. My suspicion is that the stock was overvalued at the start of the period - trading at almost 2x b/v and investments were made at high prices and too early. This double whammy resulted in the pendulum now swinging the other way with a p/bv of less than 1 just as it might be the case that those assets are at a bottom of valuation. NB for example would sell for nothing now at the bottom of the cycle, so obviously they are keeping it.

 

One could argue that now is a good time to invest in terms of the assets owned but the voice in the back of my head says, if the management of the company took these past actions that were both poorly timed and poorly priced, what is to stop them from doing something silly again in the future?

 

[thepupil]

Btw, does anyone else think the 6 5/8% of 2043 @ $99 are cheap?

 

390 or so over the 30 yr seems like decent compensation for the credit risks of this business.

 

Compare the financials heavy i-shares preferred stock index at 5.6% and vanguard long term investment grade @ 3.76% and the vanguard long term corporate bond @ 4.2%.

 

I know some of you may scoff at this, but for the right buyer (like a retiree) this seems like decent relative value.

 

at the risk of being laughed out the room for accepting a low rate of return, I have recently purchased some more of these at 89 3/4% of par for a YTM of 7.5% for both my and my parents account (in an IRA for them).

 

these are 440 over the 30 year and are well collateralized by $7.6B or so of tangible equity (half of which is NOT  Jefferies). There is about $1B of holdco debt. So you are writing insurance on the bottom $1B of of Jefferies and other LUK equity and getting paid a reasonable equity rate of return to do so ( I don't believe the S&P or Russell will return anywhere close to 7.5% at current valuations over the next say 5-10 years). A further back up in rates only increases your rate of re-investment (<---this is a cop-out way to dismiss the duration risk).

 

I also own LUK stock, which I think is very cheap given the changes in the assets that are occurring, but the bonds are obviously a different set of risks/reward.

 

$83.5, 8.12%, 515 spread to the 30 year...I am hoovering these in.

 

I purchased some at 80.26 (8.47% yield) 575 spread over the 30 year. Thanks for the tip! (my limit order stood for a few weeks).

 

just traded yesterday at 76 5/8, 8.95% yield.

[wachtwoord]

Btw, does anyone else think the 6 5/8% of 2043 @ $99 are cheap?

 

390 or so over the 30 yr seems like decent compensation for the credit risks of this business.

 

Compare the financials heavy i-shares preferred stock index at 5.6% and vanguard long term investment grade @ 3.76% and the vanguard long term corporate bond @ 4.2%.

 

I know some of you may scoff at this, but for the right buyer (like a retiree) this seems like decent relative value.

 

at the risk of being laughed out the room for accepting a low rate of return, I have recently purchased some more of these at 89 3/4% of par for a YTM of 7.5% for both my and my parents account (in an IRA for them).

 

these are 440 over the 30 year and are well collateralized by $7.6B or so of tangible equity (half of which is NOT  Jefferies). There is about $1B of holdco debt. So you are writing insurance on the bottom $1B of of Jefferies and other LUK equity and getting paid a reasonable equity rate of return to do so ( I don't believe the S&P or Russell will return anywhere close to 7.5% at current valuations over the next say 5-10 years). A further back up in rates only increases your rate of re-investment (<---this is a cop-out way to dismiss the duration risk).

 

I also own LUK stock, which I think is very cheap given the changes in the assets that are occurring, but the bonds are obviously a different set of risks/reward.

 

$83.5, 8.12%, 515 spread to the 30 year...I am hoovering these in.

 

I purchased some at 80.26 (8.47% yield) 575 spread over the 30 year. Thanks for the tip! (my limit order stood for a few weeks).

 

just traded yesterday at 76 5/8, 8.95% yield.

 

Seems like a very good return for the risk. You own at at even higher prices than me right?

[petec]

Came to the same conclusion. I wonder how things turned out this way at LUK. A case-study in the making?

My guess is that the management both past and present made a one-way bet on run-away inflation, or rather, the need of central banks to print money and maintain ever increasing prices. But this bet not only is taking much longer than expected but one would think that the period 2009 to 2015 when the S&P500 doubled represented just such a period. Call it phase 1. Yet LUK stock did not do very well here either. My suspicion is that the stock was overvalued at the start of the period - trading at almost 2x b/v and investments were made at high prices and too early. This double whammy resulted in the pendulum now swinging the other way with a p/bv of less than 1 just as it might be the case that those assets are at a bottom of valuation. NB for example would sell for nothing now at the bottom of the cycle, so obviously they are keeping it.

 

One could argue that now is a good time to invest in terms of the assets owned but the voice in the back of my head says, if the management of the company took these past actions that were both poorly timed and poorly priced, what is to stop them from doing something silly again in the future?

 

That's the case with any management.  The fact is that a) prior management made huge gains over the long term and in fact in the run up to their handover; b) new management ran Jefferies very well for years before taking over here; c) new management pruned the portfolio here in a very sensible way and will continue to do so (e.g. I believe National Beef will be for sale when the cycle looks better, and it is improving); and d) the stock is now clearly positioned with permanent capital in front of a promising source of idea flow.

 

Is it perfect?  No.  Has every investment worked?  No (and now will they in the future, and nor have they ever at similar investment companies).  But on balance have the managers of both legacy companies done a good job, and are the two companies stronger together?...I'd say yes.

[thepupil]

Btw, does anyone else think the 6 5/8% of 2043 @ $99 are cheap?

 

390 or so over the 30 yr seems like decent compensation for the credit risks of this business.

 

Compare the financials heavy i-shares preferred stock index at 5.6% and vanguard long term investment grade @ 3.76% and the vanguard long term corporate bond @ 4.2%.

 

I know some of you may scoff at this, but for the right buyer (like a retiree) this seems like decent relative value.

 

at the risk of being laughed out the room for accepting a low rate of return, I have recently purchased some more of these at 89 3/4% of par for a YTM of 7.5% for both my and my parents account (in an IRA for them).

 

these are 440 over the 30 year and are well collateralized by $7.6B or so of tangible equity (half of which is NOT  Jefferies). There is about $1B of holdco debt. So you are writing insurance on the bottom $1B of of Jefferies and other LUK equity and getting paid a reasonable equity rate of return to do so ( I don't believe the S&P or Russell will return anywhere close to 7.5% at current valuations over the next say 5-10 years). A further back up in rates only increases your rate of re-investment (<---this is a cop-out way to dismiss the duration risk).

 

I also own LUK stock, which I think is very cheap given the changes in the assets that are occurring, but the bonds are obviously a different set of risks/reward.

 

$83.5, 8.12%, 515 spread to the 30 year...I am hoovering these in.

 

I purchased some at 80.26 (8.47% yield) 575 spread over the 30 year. Thanks for the tip! (my limit order stood for a few weeks).

 

just traded yesterday at 76 5/8, 8.95% yield.

 

Seems like a very good return for the risk. You own at at even higher prices than me right?

 

bluntly, i don't see the relevance of my cost, but it is about $84 1/8

[wachtwoord]

Btw, does anyone else think the 6 5/8% of 2043 @ $99 are cheap?

 

390 or so over the 30 yr seems like decent compensation for the credit risks of this business.

 

Compare the financials heavy i-shares preferred stock index at 5.6% and vanguard long term investment grade @ 3.76% and the vanguard long term corporate bond @ 4.2%.

 

I know some of you may scoff at this, but for the right buyer (like a retiree) this seems like decent relative value.

 

at the risk of being laughed out the room for accepting a low rate of return, I have recently purchased some more of these at 89 3/4% of par for a YTM of 7.5% for both my and my parents account (in an IRA for them).

 

these are 440 over the 30 year and are well collateralized by $7.6B or so of tangible equity (half of which is NOT  Jefferies). There is about $1B of holdco debt. So you are writing insurance on the bottom $1B of of Jefferies and other LUK equity and getting paid a reasonable equity rate of return to do so ( I don't believe the S&P or Russell will return anywhere close to 7.5% at current valuations over the next say 5-10 years). A further back up in rates only increases your rate of re-investment (<---this is a cop-out way to dismiss the duration risk).

 

I also own LUK stock, which I think is very cheap given the changes in the assets that are occurring, but the bonds are obviously a different set of risks/reward.

 

$83.5, 8.12%, 515 spread to the 30 year...I am hoovering these in.

 

I purchased some at 80.26 (8.47% yield) 575 spread over the 30 year. Thanks for the tip! (my limit order stood for a few weeks).

 

just traded yesterday at 76 5/8, 8.95% yield.

 

Seems like a very good return for the risk. You own at at even higher prices than me right?

 

bluntly, i don't see the relevance of my cost, but it is about $84 1/8

 

I should have formulated that differently as is: "When you first recommended it, it was trading quite a bit higher still, right?" If I ever ask anything you feel uncomfortable with feel free to ignore it.

[thepupil]

Btw, does anyone else think the 6 5/8% of 2043 @ $99 are cheap?

 

390 or so over the 30 yr seems like decent compensation for the credit risks of this business.

 

Compare the financials heavy i-shares preferred stock index at 5.6% and vanguard long term investment grade @ 3.76% and the vanguard long term corporate bond @ 4.2%.

 

I know some of you may scoff at this, but for the right buyer (like a retiree) this seems like decent relative value.

 

at the risk of being laughed out the room for accepting a low rate of return, I have recently purchased some more of these at 89 3/4% of par for a YTM of 7.5% for both my and my parents account (in an IRA for them).

 

these are 440 over the 30 year and are well collateralized by $7.6B or so of tangible equity (half of which is NOT  Jefferies). There is about $1B of holdco debt. So you are writing insurance on the bottom $1B of of Jefferies and other LUK equity and getting paid a reasonable equity rate of return to do so ( I don't believe the S&P or Russell will return anywhere close to 7.5% at current valuations over the next say 5-10 years). A further back up in rates only increases your rate of re-investment (<---this is a cop-out way to dismiss the duration risk).

 

I also own LUK stock, which I think is very cheap given the changes in the assets that are occurring, but the bonds are obviously a different set of risks/reward.

 

$83.5, 8.12%, 515 spread to the 30 year...I am hoovering these in.

 

I purchased some at 80.26 (8.47% yield) 575 spread over the 30 year. Thanks for the tip! (my limit order stood for a few weeks).

 

just traded yesterday at 76 5/8, 8.95% yield.

 

Seems like a very good return for the risk. You own at at even higher prices than me right?

 

bluntly, i don't see the relevance of my cost, but it is about $84 1/8

 

I should have formulated that differently as is: "When you first recommended it, it was trading quite a bit higher still, right?" If I ever ask anything you feel uncomfortable with feel free to ignore it.

 

nope, not uncomfortable, I was just saying my opinion or where I bought it shouldn't matter in your investment decision. moving on though. one thing that is funny about this bond is that some retail guys routinely get run over on it, yesterday, $11K traded at $82.25, then like an hour later $600K traded at $76 5/8%. bid ask is wide and the mark-up is big for guys without a a clear view of the trading history and bid/ask, so be careful.

[scorpioncapital]

ROE is ~3% and yield on purchase price of common is maybe around 5%. If the bond is yielding 8% that's really amazing. Seems to me the rational thing to do is to buy back the bonds at a discount instead of buying back the common stock.

 

On a side note, put options for June at $13/share seem to be selling at 0.65. That's 20% on collateral at my broker and if you are put you get the shares for $12.35. That seems really cheap. Leucadia alone (ex-Jefferies) was trading around this valuation during the 2008 financial crisis and while they do have 50% i-bank, the rest are pretty much industrial assets.

 

[Picasso]

pupil, as a similar play what do you think of the Icahn 2022's? Over 9% of yield, similar ratio of debt to tangible equity, less duration.  I doubt Icahn blows himself up even though these energy bets hurt. 

 

At the same time, the 2023 Leucadia notes are down to 93 and roughly 7% yields.  That's pretty no brainey too. 

[thepupil]

I also like the Pershing square 2022's at 8% YTM, but the minimum $250K issue size is not appropriate for my 27 yr old self's qbalance sheets. Will check out the ICahn's, thanks!

 

On the LUK's, whike I obviously see the benefit of decreasing duration, it also decreases your upside to spread tightening.

[petec]

I'm not a bond investor so sorry if this is an ignorant question but why buy the bonds over the equity?

 

My thinking is there is nothing in LUK's portfolio that you know will be valuable in 2043: you are *totally* dependant on good management (not true of, say, KO).

 

Therefore, you have equity-like downside in the bonds but only bond-like upside.

 

 

[thepupil]

-as a bond investor I get paid back a lot quicker, so I'd argue that a 2043 bond is less long term than an equity with an immaterial dividend. 6.625 / 77 = 8.6% current yield. Every day I sit on my ass I'm accruing interest that (slowly) de-risks the position. In a world where neither the stock investor nor the bond investor is able to sell at a good price, at least the bond investor gets his money back in 11.5 years. Obviously he doesn't make a return of it goes to zero after that, but I'm just trying to point out that both the stock and bond are subject to the same "long term terminal value" problem you highlight. I recognize it's a little hokey to point out the "payback period" of an investment, but your objection to the bond's long term nature also holds true for the stock, it's just that you think you would sell the stock before 2043; you can also sell the bonds before then; in both cases you are subject to the market's bid.

 

- at $77  and 630 over the LUK bonds have upside not usually associated with well-covered bonds. Let's say the stock has 50% upside over 2 years,  for argument sake. Let's say if LUK goes up 50%, the bonds tighten and rates are relatively benign such that they rally to $95, that would be 24% upside from price appreciation from the current $77, plus you are clipping coupon at 8.6% / year. You get close to the stock (50% versus 40%). Now if you think LUK is a double or triple, then the math looks more favorable for the stock. At the moment, for those tolerant of duration and less bullish on the stock above the mid to high $20's, I think the bonds offer nearly as much upside as the stock with a lot more downside protection in the event of further deterioration in fundamental value

 

- I could be wrong, you are more subject to inflation, the bond's interest is taxable as ordinary income, duration of 10 may be the wrong move ( though US fixed income looks remarkably cheap to the world's offerings), etc.

 

EDIT: also, I own the stock too. I'm just a lot more confident that I'm right that the bonds are cheap, than I am that the stock is cheap. I am bigger in the bonds. Also, you can use the bonds' copious carry to offset theta on calls if you want the stock upside too. That's kind of a way to "build your own convertible".

[mcliu]

A big risk with the debt is if inflation picks up significantly. With equity, you're at least somewhat inflation-proof over time..

[thepupil]

I think stocks generally are more vulnerable to inflation in the short to medium term (0-10 years), actually. Over multi-decade time periods, stocks are obviously a better inflation hedge because their coupons grow. But I'll once again point out that bonds generally have a lower duration than stocks. I'd argue, stocks are more sensitive to increases in the cost of capital and increases in real rates. If you use a growing earnings yield as your coupon, generally you will find most stocks have higher duration.

 

An inflation shock would be terrible for the S&P at 19X earnings, that's a 5.26% earnings yield with no maturity. duration of 19 before accounting for change in coupons (which earnings wouldn't necessarily rise with inflation).

 

I'm unsure how LUK's earnings would change if there was a big spike in inflation. I know Cummins/Steinberg said at the meeting that the businesses were a bet on inflation but I'm not sure how all the moving parts would react.

 

the long LUK's are at a nominal 8.5% return and mature in 27 years. This is much lower duration than stocks generally. I keep harping on duration because I think you are saying rising inflation = increase in rates = increase in yield on bonds = decrease in price. But I'd also point out there is 600 bps of credit spread there that is not directly related to inflation/rates.

Rates/inflation could hurt you by 300 bps and the bonds could tighten to their issuance spread of 300 and you'd have no change in price and still be clipping coupon for example.

 

some googling reveals some supportive stuff on the duration of stocks/poor inflation hedge/etc.

 

http://ftalphaville.ft.com/2015/05/06/2128525/no-stocks-arent-a-good-inflation-hedge-try-bonds-really/

http://www.risklatte.com/Inv/061202.php

http://www.dailyfinance.com/2012/03/09/investing-error-stocks-not-inflation-hedge/ 

http://www.hussmanfunds.com/wmc/wmc040223.htm

 

[mcliu]

With equities, earnings eventually catch up to the effects of inflation. Just look at S&P 500 earnings over the last 3 decades. S&P 500 earnings were ~$20/share in the 1980s and over $120/share today.

 

If you had a bond over the same period, your coupons would have been the same throughout the 30 year period.

 

I'm assuming you're planning on holding this bond till maturity. Not sure if duration matters in that instance.

 

If you plan to trade it over the next couple of years, it's possible the bonds will outperform equities even if inflation climbs moderately.

[scorpioncapital]

I'm not so sure inflation is so great for stocks. Buffett wrote an article called How inflation swindles the equity investor which describes how the poor economics of most businesses prevent them from being able to pass on costs to consumers and that it is specifically high return on equity businesses that provide the better inflation hedges. I.e. just buying any old stock won't be the best strategy in this scenario.

[thepupil]

With equities, earnings eventually catch up to the effects of inflation. Just look at S&P 500 earnings over the last 3 decades. S&P 500 earnings were ~$20/share in the 1980s and over $120/share today.

 

If you had a bond over the same period, your coupons would have been the same throughout the 30 year period.

 

I'm assuming you're planning on holding this bond till maturity. Not sure if duration matters in that instance.

 

If you plan to trade it over the next couple of years, it's possible the bonds will outperform equities even if inflation climbs moderately.

 

we generally agree, but I don't think your objections apply to a bond at an 8.5%-9% nominal yield when stocks yield 5.6% (earnings) and 2.3% (dividend).

 

On the bond in question (with the usual bond assumption of reinvestment at the current YTM, to which there of course is risk) your return is ~8.5%, which will basically be the return on stocks with no multiple change and historical growth of 6%.

 

So even though stocks have growth going for them, a non-growing 8.5% yield can keep pace allllll the way to maturity. And because of its lower multiple,higher yield, and actual maturity it has less mark to market risk to changes in required rate of return (duration).

 

A money-good 8.5% bond, whether it be a 5 yr or a 10 yr or a 1000 yr, should generally be competitive w/ stocks, because it already yields an equity rate of return.

 

I think i'm being repetitive and don't mean to get into a never-ending argument, but saying "a big risk with the debt is inflation....equities are inflation proof over time...equities will be better over long periods because their coupons grow" is not as simple as it seems.

 

I don't plan on holding them to maturity, because I believe they will re-rate over the next several years if/when liquidity comes back and JEF/LUK proves it ain't blowing up anytime soon and shouldn't be a 600 over type of credit. But I'd be willing to bet that if I did, I'd outperform the S&P 500 with them. Basically I'd be willing to bet the S&P will not return 8.5% for 27 years.

 

Of course, if hyperinflation takes hold, equities that get through such tumult (and gold), win over any nominal instrument, no matter how high the yield. i won't argue about that. anyways, probably enough ink spilled on that.

 

 

[thefatbaboon]

Pupil, you're being very patient spending so much time on hyperinflationary risks which I would imagine is "important concern" number 72 in the list of concerns to be evaluated in the Luk bond!

[petec]

-as a bond investor I get paid back a lot quicker, so I'd argue that a 2043 bond is less long term than an equity with an immaterial dividend. 6.625 / 77 = 8.6% current yield. Every day I sit on my ass I'm accruing interest that (slowly) de-risks the position. In a world where neither the stock investor nor the bond investor is able to sell at a good price, at least the bond investor gets his money back in 11.5 years. Obviously he doesn't make a return of it goes to zero after that, but I'm just trying to point out that both the stock and bond are subject to the same "long term terminal value" problem you highlight. I recognize it's a little hokey to point out the "payback period" of an investment, but your objection to the bond's long term nature also holds true for the stock, it's just that you think you would sell the stock before 2043; you can also sell the bonds before then; in both cases you are subject to the market's bid.

 

- at $77  and 630 over the LUK bonds have upside not usually associated with well-covered bonds. Let's say the stock has 50% upside over 2 years,  for argument sake. Let's say if LUK goes up 50%, the bonds tighten and rates are relatively benign such that they rally to $95, that would be 24% upside from price appreciation from the current $77, plus you are clipping coupon at 8.6% / year. You get close to the stock (50% versus 40%). Now if you think LUK is a double or triple, then the math looks more favorable for the stock. At the moment, for those tolerant of duration and less bullish on the stock above the mid to high $20's, I think the bonds offer nearly as much upside as the stock with a lot more downside protection in the event of further deterioration in fundamental value

 

- I could be wrong, you are more subject to inflation, the bond's interest is taxable as ordinary income, duration of 10 may be the wrong move ( though US fixed income looks remarkably cheap to the world's offerings), etc.

 

EDIT: also, I own the stock too. I'm just a lot more confident that I'm right that the bonds are cheap, than I am that the stock is cheap. I am bigger in the bonds. Also, you can use the bonds' copious carry to offset theta on calls if you want the stock upside too. That's kind of a way to "build your own convertible".

 

Thanks.  To be clear, I wasn't *objecting* to the long term nature of either the bond or the stock - and I agree that the stock is even longer term than the bond (by definition).

 

My point is that I hold the stock because I see a cheap way to play "clever people with cash and opportunities" story.  In other words, I think there is a decent chance the stock will multiply in value several times over by 2043.  But there is also the chance of a wipeout, clearly.  My fear with the bond would be that a wipeout in a levered investment bank's equity might well impair the bond too.  So I see the upside/downside as being highly skewed for the equity but much less attractive for the bond.

 

That said I'm not criticising your investment, just seeking to learn - I can see the attraction in the bond too and if I can wrap my head round the risks I may well buy some.

[WhoIsWarren]

"clever people with cash and opportunities" story.....In other words, I think there is a decent chance the stock will multiply in value several times over by 2043

 

'Zactly ;-)

 

I'm a simple man.....not trying to be too complicated with my approach here. Long the equity.  Getting longer the equity as the price goes down.

[petec]

An inflation shock would be terrible for the S&P at 19X earnings.

 

 

Absolutely agree.  All depends on your starting point: at these valuations, stocks are a terrible inflation hedge because multiples will compress rapidly if inflation rises and it'll take years to inflate back to the nominal starting point.

 

The same would happen to bonds, but the shorter duration the better and as you say bonds as a rule are shorter duration than stocks.  Short term bonds and gold are your winners if you expect inflation.

 

 

[thepupil]

-as a bond investor I get paid back a lot quicker, so I'd argue that a 2043 bond is less long term than an equity with an immaterial dividend. 6.625 / 77 = 8.6% current yield. Every day I sit on my ass I'm accruing interest that (slowly) de-risks the position. In a world where neither the stock investor nor the bond investor is able to sell at a good price, at least the bond investor gets his money back in 11.5 years. Obviously he doesn't make a return of it goes to zero after that, but I'm just trying to point out that both the stock and bond are subject to the same "long term terminal value" problem you highlight. I recognize it's a little hokey to point out the "payback period" of an investment, but your objection to the bond's long term nature also holds true for the stock, it's just that you think you would sell the stock before 2043; you can also sell the bonds before then; in both cases you are subject to the market's bid.

 

- at $77  and 630 over the LUK bonds have upside not usually associated with well-covered bonds. Let's say the stock has 50% upside over 2 years,  for argument sake. Let's say if LUK goes up 50%, the bonds tighten and rates are relatively benign such that they rally to $95, that would be 24% upside from price appreciation from the current $77, plus you are clipping coupon at 8.6% / year. You get close to the stock (50% versus 40%). Now if you think LUK is a double or triple, then the math looks more favorable for the stock. At the moment, for those tolerant of duration and less bullish on the stock above the mid to high $20's, I think the bonds offer nearly as much upside as the stock with a lot more downside protection in the event of further deterioration in fundamental value

 

- I could be wrong, you are more subject to inflation, the bond's interest is taxable as ordinary income, duration of 10 may be the wrong move ( though US fixed income looks remarkably cheap to the world's offerings), etc.

 

EDIT: also, I own the stock too. I'm just a lot more confident that I'm right that the bonds are cheap, than I am that the stock is cheap. I am bigger in the bonds. Also, you can use the bonds' copious carry to offset theta on calls if you want the stock upside too. That's kind of a way to "build your own convertible".

 

Thanks.  To be clear, I wasn't *objecting* to the long term nature of either the bond or the stock - and I agree that the stock is even longer term than the bond (by definition).

 

My point is that I hold the stock because I see a cheap way to play "clever people with cash and opportunities" story.  In other words, I think there is a decent chance the stock will multiply in value several times over by 2043.  But there is also the chance of a wipeout, clearly.  My fear with the bond would be that a wipeout in a levered investment bank's equity might well impair the bond too.  So I see the upside/downside as being highly skewed for the equity but much less attractive for the bond.

 

That said I'm not criticising your investment, just seeking to learn - I can see the attraction in the bond too and if I can wrap my head round the risks I may well buy some.

 

- I own the stock too; for all our sake i hope it kills the bonds in terms of short term and long term performance.

 

- my long bloviating was more in response to mcliu's comments re inflation = better for stocks than this long term bond, not yours petec. within a normal range of inflation, I disagree with that premise and probably spent too much time talking about it. as thefatbaboon points out, very high inflation is probably one of the last things to worry about here (liquidity, bid-ask, DB blow up killing JEF (more on that), JEF killing JEF, general credit spreads, normal fluctuations because of duration etc. should be higher up worries)

 

- re a JEF blow-up:  interestingly the bonds trade about 100-200 wider than JEF 2043's last time i looked (they are in the low $90's with a similar coupon), which is the traditional relationship because holdco's are usually more risky than subs (since holdcos are dependent on divs from subs to service debt). I personally think the that LUK bonds would survive a JEF collapse and are less risky, but I don't expect the market to agree with me on that anytime soon. i don't really see the asymmetry you do with respect to upside/downside because I think the risk of a JEF blow-up is very minute (famous last words) and i actually think the bonds would be okay in terms of default; they certainly would not be okay in terms of mark to market. I considered shorting the JEF's at $93 ~7%, against them, but the liquidity mismatch (the JEF's are more liquid, almost anything is more liquid than these) scared me, and I don't really feel the need to hedge away all the carry.

 

-one thing to note is the bonds have been finding new buyers in 2016, after a dearth of trading last december, they seem to trade a lot more often, $3MM traded yesterday at around $77 1/4 and there have been some bigger trades on the way down. I credit myself for talking about them way too much everywhere i go. somewhere out there someone saw these posts and said mmmmmm carrryyyyy and bought the bonds (just kidding, i give myself far too much credit there).