Today (JEF) Jefferies released their earnings which drastically beat low expectations, and as a result the stock is up about 20%.  This is an extremely well run investment bank, and the largest shareholder’s are Leucadia, and the CEO Richard Handler.  Both Handler and Leucadia have proven to be extremely astute managers and investors in the past.  Jefferies was barraged by some of the worst financial analysis that I have ever seen from Egan Jones, whom made gross misstatements about their exposure to Europe.  Basically he reported what their long exposure was without mentioning that they had significant short hedges, and his excuse for the mistake was that he had limited space to work with.  The stock plummeted below $10 as the CNBC gang correlated their business operations with those of MF Global.
Jefferies made all the right moves.  First the CEO got out in front of the rumors and showed his trading books with tremendous transparency.  Jefferies bonds tanked as well and Jefferies took advantage of the cheap prices by buying back their own debt resulting in a nice multi-million dollar profit this quarter.  They also prudently bought back stock and reduced leverage, taking advantage of the discounted pricing, as opposed to letting the discounted pricing dictate what they were going to do.  At TTCM we bought both the bonds and the stock in various accounts, but more importantly this is the exact template that we need to see from the other financials.  Regulators need to come up with a framework and let the financials operate within, and the companies need to aggressively buy back stock, reduce debt, and continue refining their operating cost structure.  Another wonderful example of this type of opportunistic initiative by management was done by none other than Warren Buffett.  Berkshire is absurdly cheap and has been for a while, so Buffett came out and said that he would do his first ever stock buyback at 110% of book value or less.  He has never done this before which shows you how strongly he feels about that.  Compare this with companies like Citigroup, Morgan Stanley, Bank of America, AIG, GS, whose stocks are trading at .2-.7 times book value, but because of regulatory conditions requiring the highest levels of capital in history, their hands are tied from doing anything.  Buffett’s stock rallied nicely and hasn’t traded below 110% of book value since he came out with the statement.
The bank stocks haven’t performed well because the executives are operating with their hands tied behind their backs, as they never know what amount of capital they need, or what the new stress tests criteria will be.  This is not how America has ever done business and it is a key reason why this economic recovery has been so mild.  The great thing about this country is that eventually we do get it right.  In the words of Winston Churchill “Americans can always be counted on to do the right thing …… after they have exhausted all other possibilities.”
Below is the WSJ article on Jefferies for you to review at your leisure.  Thank you very much!