JEF - Jefferies Group

[thepupil]

 

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.

 

the bonds have 27 ish years of 6.625% coupons = $178 plus par of $100 = $278 of future cash flows, they trade at $77. they too will multiply.  ;D

 

I hope the stock multiplies more.

[petec]

 

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.

 

the bonds have 27 ish years of 6.625% coupons = $178 plus par of $100 = $278 of future cash flows, they trade at $77. they too will multiply.  ;D

 

I hope the stock multiplies more.

 

Ha - fair point!

[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.

 

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.

 

Thanks for the discussion pupil.

 

I think where we're disagreeing is that 8.5% nominal is higher than the LT nominal equity yield. I think equities will yield something like 6.5% real + inflation over time.

 

I don't think you need hyperinflation to conceive of a scenario where bonds will under-perform equities.. If inflation is 2% or greater over the next 27 years, I think equities will do better.

 

That's not to say these bonds aren't a good trade over the next couple of years. I'm just doubting whether they're good investments to hold till maturity, especially if inflation rises to 3% or more.

[Picasso]

mcliu, you realize you get to compound the coupon payments over time right?  Let's say rates go up, inflation goes up, whatever, then you're just reinvesting your cash flows at even higher rates of return.  Buy some more LUK bonds that are now yielding 15% with your coupon payments.  You'll make even more over the long run than if rates dropped because this is a fixed return asset.  There's a reason why 100 years bonds exist with 6% rates of return.  You can fully fund a pension at those rates but no one wants to do it because of some silly notion of duration/inflation risk.  If 6-8% on long duration paper isn't juicy what the hell kind of returns are people still expecting from infinite duration equities?  Just shows me how bullish some people still are despite living in a 0% world.

 

Then add in the fact that you take on less risk than owning the equity and just look at what compounding 6-8% long term will do to your wealth.  You can actually fix that return with a bond, the equity is a wild card. 

 

Also inflation above 3% typically starts destroying market multiples.  It's also not a simple thing where equities always do better than bonds in a long-term inflationary scenario.  I think it's more important how you reinvest your cash in an inflationary scenario.  There's really only so much you can do with capital that is already being invested.

[thepupil]

I think equities will yield something like 6.5% real + inflation over time.

 

we absolutely disagree on that. agree to disagree here as it is way beyond the scope of Leucadia. if you are right, then we are all sitting pretty as we have nothing to worry about.

 

 

[mcliu]

mcliu, you realize you get to compound the coupon payments over time right?  Let's say rates go up, inflation goes up, whatever, then you're just reinvesting your cash flows at even higher rates of return.  Buy some more LUK bonds that are now yielding 15% with your coupon payments.  You'll make even more over the long run than if rates dropped because this is a fixed return asset.  There's a reason why 100 years bonds exist with 6% rates of return.  You can fully fund a pension at those rates but no one wants to do it because of some silly notion of duration/inflation risk.  If 6-8% on long duration paper isn't juicy what the hell kind of returns are people still expecting from infinite duration equities?  Just shows me how bullish some people still are despite living in a 0% world.

 

Then add in the fact that you take on less risk than owning the equity and just look at what compounding 6-8% long term will do to your wealth.  You can actually fix that return with a bond, the equity is a wild card. 

 

Also inflation above 3% typically starts destroying market multiples.  It's also not a simple thing where equities always do better than bonds in a long-term inflationary scenario.  I think it's more important how you reinvest your cash in an inflationary scenario.  There's really only so much you can do with capital that is already being invested.

 

So you're saying inflation is not a risk for bond investors?

 

Basically a 6-8% nominal yield on a long-term bond, is not actually a nominal yield, it's actually a real yield because your coupons can always be re-invested at a 6-8% spread above inflation?

[mcliu]

I think equities will yield something like 6.5% real + inflation over time.

 

we absolutely disagree on that. agree to disagree here as it is way beyond the scope of Leucadia. if you are right, then we are all sitting pretty as we have nothing to worry about.

 

Don't mean to harp on this, but what do you expect equities to return over the next 30 years?

[jay21]

Can we get back to LUK valuation (and asset coverage if you want to talk about the bonds)?

 

Didn't tyson report results? Any read across into naitonal beef? JEF still challenged imo.

[thepupil]

I have no earthly idea, but if i had to guess, 0-4% real across a number of scenarios.

 

the average real earnings growth of the S&P 500 over 10 yr periods from the 1800's to 2014 is something like 2%. And that was over a period of US corporate taking over the world. I am unsure if the next 30 yrs will be as good as the last 100 or whatever. No idea.

 

2.3% dividend, 2% real earnings growth, 2% inflation, would probably be a spectacular victory in the eyes of the asset management community. we are in a no-to low return, financially repressed, high valuation, world. Corporate profits are high, taxes are quite favorable, interest rates and inflation are benign, times have been quite good for US corps and I don't know if that will continue.  savers are not entitled to exorbitant real returns forever.

 

the s&p is down about 12% since GMO forecasted a negative return for US large stocks over the next 7 years. Their analysis bakes in some margin mean reversion  and multiple mean reversion which may or may not prove out, but I don't think that is irrational to expect.

 

If I had confidence i could get 6% real from stocks, I'd probably index (if i didn't enjoy this so much).

 

http://cdn.mymoneyblog.com/wordpress/wp-content/uploads/2015/12/gmo_7year_1511.png

 

I hope you are right. 6% real would heal a lot of problems (like our country's pensions for example) and would fund a lot of retirements and create enormous wealth. maybe i'm jsut a negative nancy. back to LUK.

[thepupil]

for those interested, JEF had a creditor presentation on 2/1, didn't really see too much new.

 

http://investor-relations.jefferies.com/presentations.aspx?iid=102756

1500080388.PDF

[mcliu]

I have no earthly idea, but if i had to guess, 0-4% real across a number of scenarios.

 

the average real earnings growth of the S&P 500 over 10 yr periods from the 1800's to 2014 is something like 2%. And that was over a period of US corporate taking over the world. I am unsure if the next 30 yrs will be as good as the last 100 or whatever. No idea.

 

2.3% dividend, 2% real earnings growth, 2% inflation, would probably be a spectacular victory in the eyes of the asset management community. we are in a no-to low return, financially repressed, high valuation, world. Corporate profits are high, taxes are quite favorable, interest rates and inflation are benign, times have been quite good for US corps and I don't know if that will continue.  savers are not entitled to exorbitant real returns forever.

 

the s&p is down about 12% since GMO forecasted a negative return for US large stocks over the next 7 years. Their analysis bakes in some margin mean reversion  and multiple mean reversion which may or may not prove out, but I don't think that is irrational to expect.

 

If I had confidence i could get 6% real from stocks, I'd probably index (if i didn't enjoy this so much).

 

http://cdn.mymoneyblog.com/wordpress/wp-content/uploads/2015/12/gmo_7year_1511.png

 

I hope you are right. 6% real would heal a lot of problems (like our country's pensions for example) and would fund a lot of retirements and create enormous wealth. maybe i'm jsut a negative nancy. back to LUK.

 

Fair enough, that makes senses.

 

My guess is based on historical performance which had been significantly better. Hence the preference for equities. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html For every 30 year period from 1928 to 2015, equities have returned between a low of 8% to a high of 13%. So, around 11 to 12% nominal returns.

 

Anyways, last post on this, back to LUK. Sorry about the thread derailing. :P

[benhacker]

mcliu,

 

"So, around 11 to 12% nominal returns."

 

Not to extend the thread longer, but I think you need to do a little research on geometric vs. arithmetic returns.

 

Based on the link, you are quoting arithmetic, but this kind of return is not relevant to what you experience by owning an asset long term.

 

Move to another thread if you have a question, sorry to prolong this one, one more time.

[Picasso]

mcliu, you realize you get to compound the coupon payments over time right?  Let's say rates go up, inflation goes up, whatever, then you're just reinvesting your cash flows at even higher rates of return.  Buy some more LUK bonds that are now yielding 15% with your coupon payments.  You'll make even more over the long run than if rates dropped because this is a fixed return asset.  There's a reason why 100 years bonds exist with 6% rates of return.  You can fully fund a pension at those rates but no one wants to do it because of some silly notion of duration/inflation risk.  If 6-8% on long duration paper isn't juicy what the hell kind of returns are people still expecting from infinite duration equities?  Just shows me how bullish some people still are despite living in a 0% world.

 

Then add in the fact that you take on less risk than owning the equity and just look at what compounding 6-8% long term will do to your wealth.  You can actually fix that return with a bond, the equity is a wild card. 

 

Also inflation above 3% typically starts destroying market multiples.  It's also not a simple thing where equities always do better than bonds in a long-term inflationary scenario.  I think it's more important how you reinvest your cash in an inflationary scenario.  There's really only so much you can do with capital that is already being invested.

 

So you're saying inflation is not a risk for bond investors?

 

Basically a 6-8% nominal yield on a long-term bond, is not actually a nominal yield, it's actually a real yield because your coupons can always be re-invested at a 6-8% spread above inflation?

 

It's a risk for all investors but when you're fixing a high enough return what does it matter?  I'll fix 30-year paper on money good issuers @ 10% all day and let inflation be what it is. 

 

Who knows what the reinvestment rate looks like, but if it's lower you'll have a bond trading at par and you'll probably want to find other things to do with that coupon.

 

 

[mcliu]

mcliu,

 

"So, around 11 to 12% nominal returns."

 

Not to extend the thread longer, but I think you need to do a little research on geometric vs. arithmetic returns.

 

Based on the link, you are quoting arithmetic, but this kind of return is not relevant to what you experience by owning an asset long term.

 

Move to another thread if you have a question, sorry to prolong this one, one more time.

 

Hi benhacker, I was quoting geometric (compounded) annual returns for 30 year periods. You can check my spreadsheet.. Is my math off?

30_Year_Returns.xlsx

[benhacker]

yes, MCLIU, you math is "off".

 

Your 30 year calculations are correct, but you ignore all data points (individual year) before 1958, which I think biases your data (basically, you include great depression years in starting dates, but not ending dates)... further you ARITHMETICALLY average, the 30 compounded (geometric) numbers... which isn't an "average" return, at least in the way I think most investors want to think about it.

 

If you geometrically average 1927 - 2015, you get 9.5%

 

If you geometrically average 1958 - 2015, you get 9.8% (I just did the compounded math for both off your spreadsheet #'s, similarly to how you did 30 year).

 

Either of these numbers are reasonable to state what I think you were trying to state.  Further, and why I responded, is that your data source (the original) already did these calcs.... showing the geo average was 9.x%.

 

all of this may seem like a nit, but a 1.5% difference is a tremendous variability in 30yr + returns, not to mention it's connection to the discussion about the excellent bargain the LUK bond is, if you think it's money good, relative to a broad market index.

 

Further, I would posit that long run returns for essentially every reason possible (US stock comment), will be lower in the future than in the past (two big ones I think matter are below):

 

1) Lower cost of capital, and real rates (required returns for equity in the 30-60's are not similar to today).

2) Higher P/adjusted B and P/E valuations by 20-50% measured apples to apples, so some level of mean reversion and excess competition are in the cards.  This is related to #1, but I think is distinct as we will see when ROEs and earnings go down.

 

I think overall equity markets probably do 3-4% real on a normalized price level going forward.

 

I think we are *not* at a normalized price level yet...

 

Send a PM, or start a thread as I asked before if you have more back and forth you want on this.

 

Cheers,

[mcliu]

yes, MCLIU, you math is "off".

 

Your 30 year calculations are correct, but you ignore all data points (individual year) before 1958, which I think biases your data (basically, you include great depression years in starting dates, but not ending dates)... further you ARITHMETICALLY average, the 30 compounded (geometric) numbers... which isn't an "average" return, at least in the way I think most investors want to think about it.

 

If you geometrically average 1927 - 2015, you get 9.5%

 

If you geometrically average 1958 - 2015, you get 9.8% (I just did the compounded math for both off your spreadsheet #'s, similarly to how you did 30 year).

 

Either of these numbers are reasonable to state what I think you were trying to state.  Further, and why I responded, is that your data source (the original) already did these calcs.... showing the geo average was 9.x%.

 

all of this may seem like a nit, but a 1.5% difference is a tremendous variability in 30yr + returns, not to mention it's connection to the discussion about the excellent bargain the LUK bond is, if you think it's money good, relative to a broad market index.

 

Further, I would posit that long run returns for essentially every reason possible (US stock comment), will be lower in the future than in the past (two big ones I think matter are below):

 

1) Lower cost of capital, and real rates (required returns for equity in the 30-60's are not similar to today).

2) Higher P/adjusted B and P/E valuations by 20-50% measured apples to apples, so some level of mean reversion and excess competition are in the cards.  This is related to #1, but I think is distinct as we will see when ROEs and earnings go down.

 

I think overall equity markets probably do 3-4% real on a normalized price level going forward.

 

I think we are *not* at a normalized price level yet...

 

Send a PM, or start a thread as I asked before if you have more back and forth you want on this.

 

Cheers,

 

Okay, thanks for clarifying. I'll pm you. Cheers.  :)

[ATLValue]

http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=AE3E00B9-91E2-D1FA-6C18765D3A968D73

 

Long term equity returns in the US (1900 - 2015) was 6.8%

 

 

[thepupil]

10-K and comp plan are out

https://www.bamsec.com/filing/119312516470064?cik=96223

https://www.bamsec.com/filing/119312516470064?cik=96223

 

breezed through (5 mins), didn't see anything too new or surprising...JEF sucks, national beef sucks, the energy sucks, linkem sucks, berkadia is good but probably over-earning, harbinger is good, homefed is sleepy, the rest don't matter

 

the comp plan isn't the highest of bars. Handler and crew definitely didn't go to the michael pearson "must compound stock at 1000% annualized to make a shit ton of money" school of executive comp.

 

as a stockholder: myeh...it's all about the long term, which is what i said in 2013, 2014, and 2015  ;D

 

as a bondholder: well they haven't blown up yet so here's to getting that fat coupon in April!

 

 

[JBTC]

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.

 

Have had the stock for a few years, but wonder if you guys have more specific expectations in terms of how the business will perform.

 

1) In terms of the commodity-related businesses, are you expecting the commodity prices will come back and lift them? Or are there opportunities for them to transact - buy, sell, fix, consolidate - to create value?

 

2) JEF. Rich Handler ran JEF brilliantly in the past, but what about the performance in recent years? Post crisis JEF expanded aggressively to Europe and Asia. How did that work out? Is there anything obvious JEF can do to improve its market position? Other than valuation, why is it better to have exposure to JEF instead of GS?

 

3) The idea flow between the JEF and LUK - is it flowing and have we seen much?

 

Just a bunch of questions I ask myself from time to time.

 

 

[scorpioncapital]

"f Leucadia’s TSR and ROTDE annual growth rates are less than 4%, our Executives will not receive any 2016 incentive compensation. If Leucadia’s TSR and ROTDE both grow by between 4% and 8% on a compounded basis over the three-year measurement period, each of our Executives will be eligible to receive 2016 incentive compensation of between $12.5 million and $25 million in RSUs. This incentive compensation level is intended to place our Executives in the median range among Leucadia’s peers (at approximately the 50th percentile level). Three-year annual growth rates of 8% in ROTDE would increase tangible equity by approximately $1.6 billion; and three-year annual growth rates of 8% in TSR would result in aggregate share-price appreciation of approximately $1.6 billion. If

 

 

TSR and ROTDE growth rates are greater than 8%, our Executives are eligible to receive up to an additional 50% in incentive compensation on a pro rata basis up to 12% growth rates. No additional incentive compensation will be awarded for TSR or ROTDE growth rates exceeding 12%."

 

 

Is this plan an improvement over the old one?

[JBTC]

"f Leucadia’s TSR and ROTDE annual growth rates are less than 4%, our Executives will not receive any 2016 incentive compensation. If Leucadia’s TSR and ROTDE both grow by between 4% and 8% on a compounded basis over the three-year measurement period, each of our Executives will be eligible to receive 2016 incentive compensation of between $12.5 million and $25 million in RSUs. This incentive compensation level is intended to place our Executives in the median range among Leucadia’s peers (at approximately the 50th percentile level). Three-year annual growth rates of 8% in ROTDE would increase tangible equity by approximately $1.6 billion; and three-year annual growth rates of 8% in TSR would result in aggregate share-price appreciation of approximately $1.6 billion. If

 

 

TSR and ROTDE growth rates are greater than 8%, our Executives are eligible to receive up to an additional 50% in incentive compensation on a pro rata basis up to 12% growth rates. No additional incentive compensation will be awarded for TSR or ROTDE growth rates exceeding 12%."

 

 

Is this plan an improvement over the old one?

 

Does everyone agree this is a low bar?

 

How much should we read into this as an indication of insufficient management quality?

 

 

[MrB]

"f Leucadia’s TSR and ROTDE annual growth rates are less than 4%, our Executives will not receive any 2016 incentive compensation. If Leucadia’s TSR and ROTDE both grow by between 4% and 8% on a compounded basis over the three-year measurement period, each of our Executives will be eligible to receive 2016 incentive compensation of between $12.5 million and $25 million in RSUs. This incentive compensation level is intended to place our Executives in the median range among Leucadia’s peers (at approximately the 50th percentile level). Three-year annual growth rates of 8% in ROTDE would increase tangible equity by approximately $1.6 billion; and three-year annual growth rates of 8% in TSR would result in aggregate share-price appreciation of approximately $1.6 billion. If

 

 

TSR and ROTDE growth rates are greater than 8%, our Executives are eligible to receive up to an additional 50% in incentive compensation on a pro rata basis up to 12% growth rates. No additional incentive compensation will be awarded for TSR or ROTDE growth rates exceeding 12%."

 

 

Is this plan an improvement over the old one?

 

Does everyone agree this is a low bar?

 

How much should we read into this as an indication of insufficient management quality?

 

I will just assume that is a rhetorical question

 

I like this though,

"Holding Period Mandates No Sales or Transfers for Six Years until 2022: RSUs will not be eligible to vest until the end of 2018 and will be subject to forfeiture if the executive resigns or is terminated for cause. Our Executives cannot sell or otherwise transfer vested RSUs until January 1, 2022."

[ratiman]

There really should be a rule that no stock compensation will be issued below tangible book value. I mean, why should management be rewarded (with below-book stock) for underperformance? And if the stock is below book, why isn't the company simply buying back shares instead of paying management to underperform? It's really kind of obscene that management sits on $1B of dead money in a meat packer while paying itself in undervalued stock. Sell the meat packer and timber and shut down the bond trading and return cash to shareholders.

[colinwalt]

There really should be a rule that no stock compensation will be issued below tangible book value. I mean, why should management be rewarded (with below-book stock) for underperformance? And if the stock is below book, why isn't the company simply buying back shares instead of paying management to underperform? It's really kind of obscene that management sits on $1B of dead money in a meat packer while paying itself in undervalued stock. Sell the meat packer and timber and shut down the bond trading and return cash to shareholders.

 

+1^2

[JBTC]

Hey, considering Allan Mecham added 58% and Bruce Berkowitz cut 55% of their respective LUK holdings in 4Q, surely I wasn't the dumbest out there by holding onto my shares.  :)