Author Topic: JEF - Jefferies Group  (Read 538267 times)

scorpioncapital

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1544
    • scorpion capital
Re: JEF - Jefferies Group
« Reply #1160 on: February 09, 2016, 08:58:40 AM »
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.
« Last Edit: February 09, 2016, 12:12:12 PM by scorpioncapital »


Picasso

  • Hero Member
  • *****
  • Posts: 2015
Re: JEF - Jefferies Group
« Reply #1161 on: February 09, 2016, 10:38:31 PM »
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. 
« Last Edit: February 09, 2016, 10:45:07 PM by Picasso »

thepupil

  • Hero Member
  • *****
  • Posts: 1144
Re: JEF - Jefferies Group
« Reply #1162 on: February 10, 2016, 03:50:19 AM »
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.
« Last Edit: February 10, 2016, 03:52:20 AM by thepupil »

petec

  • Hero Member
  • *****
  • Posts: 1548
Re: JEF - Jefferies Group
« Reply #1163 on: February 10, 2016, 04:13:17 AM »
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

  • Hero Member
  • *****
  • Posts: 1144
Re: JEF - Jefferies Group
« Reply #1164 on: February 10, 2016, 04:40:05 AM »
-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".
« Last Edit: February 10, 2016, 06:14:45 AM by thepupil »

mcliu

  • Hero Member
  • *****
  • Posts: 517
Re: JEF - Jefferies Group
« Reply #1165 on: February 10, 2016, 10:37:55 AM »
A big risk with the debt is if inflation picks up significantly. With equity, you're at least somewhat inflation-proof over time..

thepupil

  • Hero Member
  • *****
  • Posts: 1144
Re: JEF - Jefferies Group
« Reply #1166 on: February 10, 2016, 12:11:44 PM »
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

  • Hero Member
  • *****
  • Posts: 517
Re: JEF - Jefferies Group
« Reply #1167 on: February 10, 2016, 01:17:28 PM »
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

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1544
    • scorpion capital
Re: JEF - Jefferies Group
« Reply #1168 on: February 10, 2016, 02:11:32 PM »
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

  • Hero Member
  • *****
  • Posts: 1144
Re: JEF - Jefferies Group
« Reply #1169 on: February 10, 2016, 03:40:07 PM »
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.