Kraven Posted November 21, 2011 Share Posted November 21, 2011 Open letter posted on Jefferies website from management to clients, shareholders, etc. http://www.jefco.com/html/OurFirm/NewsRoom/PressReleases/2011/JefGrp_Letter%20to%20Shareholders.pdf Link to comment Share on other sites More sharing options...
Grenville Posted November 21, 2011 Share Posted November 21, 2011 Open letter posted on Jefferies website from management to clients, shareholders, etc. http://www.jefco.com/html/OurFirm/NewsRoom/PressReleases/2011/JefGrp_Letter%20to%20Shareholders.pdf Good letter from Handler laying out what sounds to be a short attack and Jefferies responses. It looks like they are doing what is required to build long term value. They are buying back debt and stock. Link to comment Share on other sites More sharing options...
stahleyp Posted November 21, 2011 Share Posted November 21, 2011 Let's look a JEF from the big picture. I do not know how to evaluate JEF. I don't think most people do. We can look at the nitty gritty of things, but I think that makes you miss the big picture too. What do we know? Financial firms are like black boxes, a ton of uncertainty but potentially big rewards. A lot of "professionals" missed out on MF Global, Lehman, etc, etc. Now a lot of "professionals" are bearish on JEF. The LUK guys own a big, big stake. And they have been buying more. So, we must ask ourselves, who knows more - the guys who probably don't have as big of a stake in the company or the guys from LUK? Plus, a lot of the brass at JEF own a lot of the outstanding shares. Again, this is speculative, because I do not know how to evaluate the firm. However, we rarely ever have perfect information. I would like to think, perhaps naively, that the brass and guys from LUK know more than any of us on the board or the analyst who are folllowing JEF. Link to comment Share on other sites More sharing options...
link01 Posted November 21, 2011 Share Posted November 21, 2011 i have to say, that was a fantastically insightful letter. the level of disclosure is both unprecidented, clear, & transparent. and, blast from the infamous past, necessitated, apparently, by malicious, rumor-mongering short-sellers jockeying for ill-gained profits at the expense of common decency. what a surprise! Link to comment Share on other sites More sharing options...
Kraven Posted November 21, 2011 Share Posted November 21, 2011 I agree that this letter was something else. I don't think I've seen anything quite like it. One has to believe that given the current environment and past history with the Lehmans and MF Globals of the world protesting "misinformation" that this letter had a team of lawyers, both internal and external, reviewing every word for veracity and triple checking their work. The letter is specific enough, that unless Handler is insane, this is the truth as he knows it using his best judgment. If not, he will be spending time as a guest of the feds for a period of years. Guaranteed he knows this fact and was advised of it. Link to comment Share on other sites More sharing options...
Grenville Posted November 21, 2011 Share Posted November 21, 2011 I agree that this letter was something else. I don't think I've seen anything quite like it. One has to believe that given the current environment and past history with the Lehmans and MF Globals of the world protesting "misinformation" that this letter had a team of lawyers, both internal and external, reviewing every word for veracity and triple checking their work. The letter is specific enough, that unless Handler is insane, this is the truth as he knows it using his best judgment. If not, he will be spending time as a guest of the feds for a period of years. Guaranteed he knows this fact and was advised of it. I appreciate both your's and Link's comments. I'm adding to my position and it's nice to see other's having a similar read on the letter. I don't want to be overly optimistic, but at the same time the downside seems reasonable. The bonds are still trading at attractive yields. Link to comment Share on other sites More sharing options...
link01 Posted November 21, 2011 Share Posted November 21, 2011 its probably earsier for me not to become overly optimistic because-- i'll admit it--- i'm cautious in this environment with reagrd to leveraged co's, particularly financials. and to top that off, i'm not a fan of ibanks that engage in principle trading for their own account, as i've said. and then there's that possible lawsuit re their partcipation in peddling mf global bonds shortly before they imploded. thats going to be a high profile case given the apparent hijinks surrounding blns of missing client funds. lawsuits scare me. they're unpredicatble & hard for a pleb like me to quantify. that said, i stepped up & bought a bit today. the fact that i've long considered them to be the 2nd best managed ibank counts for something, after all. at least at this price, torpedos be damned. Link to comment Share on other sites More sharing options...
oddballstocks Posted November 21, 2011 Share Posted November 21, 2011 Ok, read the letter good stuff, I want to call out a quote: "By the way, that same analyst also points to our 12.9x leverage at the end of August to be too high, but omits here the further material point that we have been operating successfully and profitably with similar leverage for years, including during the 2008-09 financial meltdown. In addition, he said that our leverage ratio was now higher because our stock was trading lower. As all of you probably recognize, trading prices are irrelevant to a company’s leverage ratio. Neither our equity, our debt obligations nor the cost to us of our existing debt changes one iota with market prices. What more can we say on this one?" So my question to the board, is Munger said analyst, and has he been on TV spouting off his nonsense? Link to comment Share on other sites More sharing options...
scorpioncapital Posted November 21, 2011 Share Posted November 21, 2011 $9.99 a share, 43% below tangible book value. Not a bad deal at all. Link to comment Share on other sites More sharing options...
Munger Posted November 21, 2011 Share Posted November 21, 2011 Another day, another press release -- very funny. Confirms management just doesn't get it... Mr. Market is a weighing machine over the long term and no press release can change the reality of JEF terrible business performance. The primary risk lies with the business model. Levered at "only" 13-15x, JEF can barely earn its cost of capital. Why in the world should a company like Jefferies (2nd tier IB that grossly overpays its executives) be allowed to lever up 13-15x -- insane. Lenders are realizing the risk and will logically demand higher interest rates in order to borrow their $. Funny exchange recently on CNBC between Barry Knapp of Barclays and Sean Eagan. Mr. Eagan reiterated that he believed JEF carried too much debt to which Mr. Knapp responded to the effect of -- "well, if JEF isn't allowed to lever up 13-15x, how do you expect the company to make any money?" Mr. Eagan was polite in his response but should have asserted -- if an investment bank needs to lever up 13-15x in order to make money, the capital is clearly better served in other hands. This fact is true for all investment banks. Why are they entitled to lever up 13-15x just so they can pay enormous salaries and barely earn more than their cost of capital? Over time, Mr. Market will surely remind these companies that they enjoy no such entitlement. As for LUK -- their recent purchases typify the maxim: there is no such thing as being half pregnant. Full disclosure -- not short or long JEF or LUK. Just enjoying the popcorn. Link to comment Share on other sites More sharing options...
coc Posted November 21, 2011 Share Posted November 21, 2011 Another day, another press release -- very funny. Confirms management just doesn't get it... Mr. Market is a weighing machine over the long term and no press release can change the reality of JEF terrible business performance. The primary risk lies with the business model. Levered at "only" 13-15x, JEF can barely earn its cost of capital. Why in the world should a company like Jefferies (2nd tier IB that grossly overpays its executives) be allowed to lever up 13-15x -- insane. Lenders are realizing the risk and will logically demand higher interest rates in order to borrow their $. Funny exchange recently on CNBC between Barry Knapp of Barclays and Sean Eagan. Mr. Eagan reiterated that he believed JEF carried too much debt to which Mr. Knapp responded to the effect of -- "well, if JEF isn't allowed to lever up 13-15x, how do you expect the company to make any money?" Mr. Eagan was polite in his response but should have asserted -- if an investment bank needs to lever up 13-15x in order to make money, the capital is clearly better served in other hands. This fact is true for all investment banks. Why are they entitled to lever up 13-15x just so they can pay enormous salaries and barely earn more than their cost of capital? Over time, Mr. Market will surely remind these companies that they enjoy no such entitlement. As for LUK -- their recent purchases typify the maxim: there is no such thing as being half pregnant. Full disclosure -- not short or long JEF or LUK. Just enjoying the popcorn. If any bank in America has proven they can handle leverage, it's Jefferies. Why they shouldn't be allowed to lever up to 13x is beyond me. Link to comment Share on other sites More sharing options...
scorpioncapital Posted November 21, 2011 Share Posted November 21, 2011 "Mr. Market is a weighing machine over the long term and no press release can change the reality of JEF terrible business performance." Do you know JEF's stock price in 1990? 20 years ago up to today's low of $10/share? Revenues from 150million to 2.5 billion per year (estimated as of this year end). JEF has blown the S&P out of the ballpark. If anything it proves JEF's superb business performance. As an aside, I'm an IB customer and investor and IB is not at all like JEF, not even close. Link to comment Share on other sites More sharing options...
Viking Posted November 21, 2011 Share Posted November 21, 2011 Munger, given the importance of 'reputation' in this business, my view is JEF has no choice and must respond to the acusations. LUK's involvement is interesting; it tells me that JEF likely has the financial backing in the near term to fight through the allegations (LUK likely has the ability to bring other investors in should JEF need to raise money). Heavy insider buying is a positive. The fact the company is repurchasing debt and shares at attractive prices also is positive (meaning they likely do not need capital). And yes, it is a black box. This one looks very similar to FFH back in 2003 & 2004. Investment decision looks like it really comes down to do you trust management? For disclosure purposes, after reading the letter (and spending the past week reading up a little) I made a small purchase today. Link to comment Share on other sites More sharing options...
Munger Posted November 21, 2011 Share Posted November 21, 2011 Do you know JEF's stock price in 1990? Look forward not backward. Kodak was a great company during parts of the last century but that is no reason to own the stock today. IB industry economics have changed dramatically for the worse. During this period, JEF has become a far different company -- diving head first into an industry experiencing a structural decline in economic returns. Link to comment Share on other sites More sharing options...
prevalou Posted November 21, 2011 Share Posted November 21, 2011 I would be interested to know why it is an industry experiencing a structural decline (looking forward) in economic returns Link to comment Share on other sites More sharing options...
BargainValueHunter Posted November 21, 2011 Share Posted November 21, 2011 http://app.quotemedia.com/quotetools/chartcache/201295.png http://app.quotemedia.com/quotetools/chartcache/182957.png Link to comment Share on other sites More sharing options...
alpha231616967560 Posted November 21, 2011 Share Posted November 21, 2011 BVH - what is this chart all about exactly? Link to comment Share on other sites More sharing options...
Guest Hester Posted November 21, 2011 Share Posted November 21, 2011 Comparing investment banks to Kodak is powerfully stupid. Link to comment Share on other sites More sharing options...
AZ_Value Posted November 21, 2011 Share Posted November 21, 2011 I would be interested to know why it is an industry experiencing a structural decline (looking forward) in economic returns Me too. What gives? Thanks. Link to comment Share on other sites More sharing options...
Munger Posted November 21, 2011 Share Posted November 21, 2011 Comparing investment banks to Kodak is powerfully stupid. LOL -- the passion and anger is so funny. I do enjoy. Some might say that not understanding the nature of the comparison is "powerfully stupid." But for a simpler mind, let me try the following -- Bear Stearns and Lehman Brothers were aggressively guided by "visionary" leaders and had phenomenal 15-20 year runs and then collapsed under the weight of a over-levered business model that didn't adjust to changes in industry economics. Maybe those buying the stocks in 2007 based on the "visionary" and aggressive leadership, strong past performance, and high insider ownership were slightly misguided?:) Here is the primary point for the truly simple -- look forward not backward. Link to comment Share on other sites More sharing options...
rranjan Posted November 21, 2011 Share Posted November 21, 2011 Ok, read the letter good stuff, I want to call out a quote: "By the way, that same analyst also points to our 12.9x leverage at the end of August to be too high, but omits here the further material point that we have been operating successfully and profitably with similar leverage for years, including during the 2008-09 financial meltdown. In addition, he said that our leverage ratio was now higher because our stock was trading lower. As all of you probably recognize, trading prices are irrelevant to a company’s leverage ratio. Neither our equity, our debt obligations nor the cost to us of our existing debt changes one iota with market prices. What more can we say on this one?" So my question to the board, is Munger said analyst, and has he been on TV spouting off his nonsense? I always feel that those kind of analysts should be singled out by name. If an analyst can come up with this kind of crap then ponitng out will help everyone to take their rest of the views accordingly. Link to comment Share on other sites More sharing options...
Munger Posted November 21, 2011 Share Posted November 21, 2011 I would be interested to know why it is an industry experiencing a structural decline (looking forward) in economic returns Me too. What gives? Thanks. Margin compression + higher capital intensity across all businesses. Further -- major business lines have been impaired just as JEF aggressively pushes into these areas -- e.g., asset backed origination (primarily mortgages), securitization, sales/trading, and proprietary trading drove industry profit growth over the past 10 years...this business has been permanently impaired. Last (and maybe most important given the leverage) the cost of capital has gone up (for non TBTF companies) and will only go higher over the next 10 years. And if you really, really had to own an investment bank because you believe the future is bright for this industry, how could anyone in their right mind buy JEF over GS or MS? Link to comment Share on other sites More sharing options...
prevalou Posted November 21, 2011 Share Posted November 21, 2011 If we look forward, why would it be a margin compression ? The sector is consolidating and european banks could throw the towel. Less competition=better ROI. Link to comment Share on other sites More sharing options...
stahleyp Posted November 21, 2011 Share Posted November 21, 2011 I would like to know munger's long term returns. :-X Link to comment Share on other sites More sharing options...
Munger Posted November 21, 2011 Share Posted November 21, 2011 If we look forward, why would it be a margin compression ? The sector is consolidating and european banks could throw the towel. Less competition=better ROI. True for some business lines but wrong for most. Further, the primary source of margin compression has not been a proliferation of new companies but the growth of electronic sales/trading. On the advisory side, none of the major players will be throwing in the towel -- and margins steadily decline in these businesses because much of the "advice" has gotten commoditized. The biggest problem for all investment banks is that the asset backed business has been seriously impaired -- origination, securitization, sales/trading, proprietary trading of asset backed securities (primarily mortgages) was a major source of profits. And for JEF -- a big problem will be the rising cost of capital...which is why the company has frantically tried to restore "confidence." Given that I have no position in JEF, I'm not going to discuss further -- unless there are new developments for the company. Best. Link to comment Share on other sites More sharing options...
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