Jefferies Is a Long-Term Bargain
Shares of the New York investment company dropped 18% last week, closing at $12.07 on Friday, in the wake of the MF Global (MF) debacle. The shares were down 54% year to date. With the shares swinging back and forth as much as 20% in a day, short-term traders could make a killing if they guess correctly.
For the long term, with the shares trading at low multiples after pulling back so much this year and with Jefferies management team showing it knows how to handle market hysteria, the stock looks like a winner.
Since MF Global filed for bankruptcy last Monday, Jefferies has put out several releases to address the media panic over the company's exposure to MF Global and to European sovereign debt:
- Last Monday, Jefferies said that its exposure to MF Global totaled "less than $9 million in marked-to-market positions," resulting from "facilitating client orders as part of normal-course market making."
- On Tuesday, the company said it has "no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain," and that when it "from time to time takes positions in such debt," the positions are marked to market on a daily basis.
- On Thursday, Jefferies responded to some large European sovereign debt exposure positions being bandied about in the media, by explaining that net exposure was minimal, since a "long inventory of $2.684 billion" was mostly offset by "short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments." The company said that net exposure to Portugal, Ireland, Italy, Greece and Spain, was a "combined net short exposure of approximately $38 million equals approximately 1% of Jefferies' shareholders' equity."
- With the first statement on Thursday still not quelling the uproar, the company patiently explained later in the day that its entire net short sovereign position was entirely in securities, and it had "no credit-default swaps hedging its sovereign debt positions," which were "short-term trading positions that turn over approximately three to four times per week."
- On Friday, Jefferies CEO Richard Handler said in yet another press release that the company had decided that "the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed," and that at day-end, the company would disclose "CUSIP-level holdings in the securities" of the five European countries in question. In the same release, Jefferies illustrated the short-term nature of its sovereign trading positions, saying its net exposure to the sovereign debt of the five European countries was a $9 million short position.
- Then on Monday, Jefferies announced that it had reduced its "sovereign securities of the nations of Portugal, Italy, Ireland, Greece, and Spain," by an aggregate of "approximately $1.1 billion long and $1.1 billion short," or 49.5%, resulting in "no meaningful profit or loss on today's trading activity or our remaining positions." The end result was a smaller trading book and net exposure of "$59 million, or 1.7% of shareholder equity, with negligible market or credit risk."
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