Author Topic: JEF - Jefferies Group  (Read 601998 times)

HJ

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Re: JEF - Jefferies Group
« Reply #820 on: July 02, 2014, 07:15:36 PM »
In general I think people recognize that fixed income trading is a very challenged business.  As far as influence of rate level on fixed income trading revenue, it's not just the absolute level, but also the shape of the curve.  Most fixed income books are funded short term (inventory is considered "aged" if held for longer than 30 days), even though 2's-10's spread is still actually fairly steep in historical context, the funding spread for anything other than plain vanilla treasuries and agencies has blown out since the crisis, and hasn't really come back in (partly driven by money market funds continuing to shrink).  Last couple of years, everybody benefitted from the recovery trade, whatever inventory you carried moved up.  At this point, however, that trade has pretty much run its course.  In addition, the buy side has gained a lot of leverage against the intermediaries.  Inventories for most fixed income desks has come way down.  Quite a few buy side entities (GSO, ARES, Carlyle, Babson, etc.) run larger balance sheet than the intermediaries.  And in fixed income, ability to throw around balance sheet still wins business.  Often times these days when a corporate client look for financing, they can completely bypass the street, and go directly to these funds.  For an entity like Jefferies, there is no doubt that they are shrinking the capital deployed in this business.  In many ways them not being subject to same amount of regulatory oversight (the most recent leveraged lending guideline for example), could give them advantage over the big banks.  But these days their high yield desk is not just competing against desks of other banks, but also all the new credit funds, often times affiliated with private equity shops who control the borrowers to start with. 

The fixed income business on the street is going through structural changes, and it's still not quite clear what the new market structure, business models and return on capital will look like.  The only thing people are certain of is that the future looks quite a bit worse than the past.


txlaw

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Re: JEF - Jefferies Group
« Reply #821 on: July 03, 2014, 08:23:03 AM »
In general I think people recognize that fixed income trading is a very challenged business.  As far as influence of rate level on fixed income trading revenue, it's not just the absolute level, but also the shape of the curve.  Most fixed income books are funded short term (inventory is considered "aged" if held for longer than 30 days), even though 2's-10's spread is still actually fairly steep in historical context, the funding spread for anything other than plain vanilla treasuries and agencies has blown out since the crisis, and hasn't really come back in (partly driven by money market funds continuing to shrink).  Last couple of years, everybody benefitted from the recovery trade, whatever inventory you carried moved up.  At this point, however, that trade has pretty much run its course.  In addition, the buy side has gained a lot of leverage against the intermediaries.  Inventories for most fixed income desks has come way down.  Quite a few buy side entities (GSO, ARES, Carlyle, Babson, etc.) run larger balance sheet than the intermediaries.  And in fixed income, ability to throw around balance sheet still wins business.  Often times these days when a corporate client look for financing, they can completely bypass the street, and go directly to these funds.  For an entity like Jefferies, there is no doubt that they are shrinking the capital deployed in this business.  In many ways them not being subject to same amount of regulatory oversight (the most recent leveraged lending guideline for example), could give them advantage over the big banks.  But these days their high yield desk is not just competing against desks of other banks, but also all the new credit funds, often times affiliated with private equity shops who control the borrowers to start with. 

The fixed income business on the street is going through structural changes, and it's still not quite clear what the new market structure, business models and return on capital will look like.  The only thing people are certain of is that the future looks quite a bit worse than the past.

Excellent post -- thanks for sharing your insight.

Grenville

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Re: JEF - Jefferies Group
« Reply #822 on: July 03, 2014, 08:54:11 AM »
For whatever it's worth, I've decided to part ways with LUK. A couple of things in combination have driven my decision:
+ Ian Cumming leaving the board
+ CFO planning on stepping down (health reasons)
+ Potential business relationship with former SAC Capital upper management (FFH shorting/lawsuit)

I wanted to wait to see the results of the energy projects, but the above in combination pushed me to move on.

LongTerm

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Re: JEF - Jefferies Group
« Reply #823 on: July 04, 2014, 02:15:39 AM »
For whatever it's worth, I've decided to part ways with LUK. A couple of things in combination have driven my decision:
+ Ian Cumming leaving the board
+ CFO planning on stepping down (health reasons)
+ Potential business relationship with former SAC Capital upper management (FFH shorting/lawsuit)

I wanted to wait to see the results of the energy projects, but the above in combination pushed me to move on.

I think I have to agree with you on this, although what pushed me over the edge was the amount of leverage Jefferies has brought to the combined entity; the inherent risks of a financial institution which, in a liquidity event like 2008, can bring the whole company crashing down to zero is not what I originally signed up for when purchasing Leucadia. And of course I don't like Handler's whole NYC penthouse kind of thing. I'm slowly reducing my stake and will probably just leave a token position in case I can get more comfortable with the balance sheet in the future.

valueyoda

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Re: JEF - Jefferies Group
« Reply #824 on: July 04, 2014, 02:59:19 AM »
I personally think that the liquidity and solvency risk of Jefferies within the Leucadia structure is largely overblown given the holding company's financial resources. Furthermore, I think that Jefferies is a necessary - and of the more stable - profit and book value generators within the company right now. Leucadia was always a good investment because they had the balls to take large levered calculated bets on individual investments. This caused highly volatile return numbers, but very strong results over longer periods of times. The reverse is true at the moment. The company is currently drowning in liquidity and has too few meaningful investments that will cause large profits going forward. One of the more interesting long term bets they've made recently, was the Harbinger position. 

Given the large period of inaction and flat book value growth, I think that investors might be pleasantly suprised by new investments that will be added. I think that the right course of action should be a gradual accumulation rather than disposition of Leucadia shares at these valuations (maybe even some Leucadia LEAPS). The relative inaction shown by Leucadia is also noticeable at Loews (a company I always had a lot of respect for), as they have been hesitant to deploy their cash balances in new large investments.

valueyoda

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Re: JEF - Jefferies Group
« Reply #825 on: July 04, 2014, 03:09:06 AM »
My cheapskate nature has always appealed to Buffett's frugality. However, simply because Handler is more willing to spend a portion of his substantial net worth on a more luxurious lifestyle, does not make me worry about his capital allocation abilities. Bill Ackman, Dan Loeb and hundreds of other famous investors like to live a bit better without compromising their attention for their investors.

jay21

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Re: JEF - Jefferies Group
« Reply #826 on: July 04, 2014, 06:36:12 AM »
I personally think that the liquidity and solvency risk of Jefferies within the Leucadia structure is largely overblown given the holding company's financial resources. Furthermore, I think that Jefferies is a necessary - and of the more stable - profit and book value generators within the company right now. Leucadia was always a good investment because they had the balls to take large levered calculated bets on individual investments. This caused highly volatile return numbers, but very strong results over longer periods of times. The reverse is true at the moment. The company is currently drowning in liquidity and has too few meaningful investments that will cause large profits going forward. One of the more interesting long term bets they've made recently, was the Harbinger position. 

Given the large period of inaction and flat book value growth, I think that investors might be pleasantly suprised by new investments that will be added. I think that the right course of action should be a gradual accumulation rather than disposition of Leucadia shares at these valuations (maybe even some Leucadia LEAPS). The relative inaction shown by Leucadia is also noticeable at Loews (a company I always had a lot of respect for), as they have been hesitant to deploy their cash balances in new large investments.

I largely agree with this.  I do not think JEF has too much risk in it.  There are a few minor things to not like here, but it's at less than BV so I think I am being more than compensated for my few minor quibbles.
@jay_21_

scorpioncapital

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Re: JEF - Jefferies Group
« Reply #827 on: July 04, 2014, 07:32:26 AM »
Jefferies has the most conservative balance sheet of the larger investment banks. Something like 9-10x leverage.
I am reducing my stake in LUK over the next 6 months by 10%, it's a giant ship and it seems that value gains are to come in the years ahead. One thing we might say is it was quite overvalued a few years ago (in hindsight) and I think that with the changes in management and entering the investment banking business we are going to tread water until some catalyst or investments season. However, as Philip Fisher wrote, sometimes perceptions of valuation change very quickly and suddenly, we just don't know when. What we have to distinguish is if there are some "headwinds of mediocrity and complexity" which are a downward pull on this business. Are they ahead of the curve, are they making good investments and managing existing businesses for growth? Can they earn a decent return? These are fundamental questions.
« Last Edit: July 04, 2014, 08:56:14 AM by scorpioncapital »

Spekulatius

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Re: JEF - Jefferies Group
« Reply #828 on: July 04, 2014, 10:06:04 AM »
If you want to own an investment banking business right now, just buy GS. It's cheaper based on P/tangible book than LUK and outearns JEF in terms or ROA.

The problem with the current structure is that the rest of LUK will serve as a piggy bank, in case JEF has a need for capital (like in 2008). do, I think they will always have excessive liquidity in the holding company going forward.
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WhoIsWarren

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Re: JEF - Jefferies Group
« Reply #829 on: July 08, 2014, 09:28:59 AM »
A Jefferies quarterly letter by "Rich and Brian".  This is exactly the type of tone an investment bank should keep.

http://www.jefferies.com/cmsfiles/jefferies.com/files/insights/tickr/jefferiesinsights_july2014.pdf