One weekend ago, in an unexpected episode of Zero Hedge trolling by Jefferies economists, the junk-bond focused mid-tier investment bank sent out a note in which it defended the "recovery" as follows:
“Lightweights like Zero Hedge might point to a sub-50 ISM as another reason to hate equities, but there’s a reason why little ZH is a choker, a reason he’s got one of the worst records in predicting markets anywhere, just a harrable record, harrable, I mean, successful people have pointed out that he’s 0 for 2600. He’s succeeded at being wrong. Success is my son-in-law, I’m successful, my daughter is both beautiful and successful. I have many successful friends.” Made up quote, but the point is that it’s hard to be successful when just reacting to backward looking information. Our work suggests that by the time the ISM breaks 50 to the downside the market is already pricing in much of the concern--actually a break through 50 to the downside tends to be quite positive for the market over the next 12M even when you include recessionary periods. When that break of 50 hasn’t been associated with an immediate recession (i.e. perhaps now), median market performance is up 11% over the next 6M, and 21% over the next 12M. This week we got a better than expected ISM, and skeptics point to the fact that it’s still below 50, but that may be a positive. See supporting chart, table and methodology below. (T.J. Thornton, US Product Management).
We responded not by retaliating with childish name calling, but by showing both the recent collapse in Jefferies revenues, the stock price of Jefferies Group owner Leucadia...
... as well as the massive restructuring in the company's investment bank group, as a result of which countless current Jefferies employees would become former:
Jefferies Group LLC will merge its junk-rated loans and bonds business with the junk debt unit of its joint venture with MassMutual Financial Group, according to people familiar with the matter, in the biggest reorganization by a U.S. investment bank since the leveraged finance markets seized up last year.
Jefferies' management presented the changes internally as a way to boost efficiency and focus on clients, rather than a response to troubled deals, the sources said. It was not immediately clear if the combination would offer Jefferies more financial resources to increase lending.
In retrospect it appears the changes were indeed in response to troubled deals, but more in that in a second.
We further said, that if instead of trolling "fringe blogs", the company's economists actually did their job and actually "predicted" what was coming instead of cherrypicking goalseeked economic datapoints to "justify" the bank's falsely bullish outlook and help their employer be better positioned for the proper trading environment, Jefferies wouldn't be forced to report quarter after quarter of abysmal results.
Well, make that after another quarter.
Moments ago Jefferies, which is still on the investment banking cycle of reporting where its earnings (and in this case, losses) arrive one month ahead of the other banks, and as such is a good bellwether into overall Wall Street revenue trends, reported an absolute disaster of a quarter, its worst since the financial crisis.
The appalling numbers: trading revenue plunged 82% in the fiscal first quarter, leading to the firm’s first non-GAAP loss for the period since 2008. Unlike previous quarters, this time the collapse in sales and trading was not led by massive losses in bond trading but by a massive remarking to market of its equity exposure, which is not to say bond trading was ok: revenue from fixed income plunged 55%, while equities imploded by an unprecedented 99%, down from $203 million to just $2 million!
The result: a ghastly net loss of $166.8 million, which not even non-GAAP adjustments could make stink any less.
Dick Handler's apologetic commentary for the third month in a row could make life for the firm's CEO difficult if its main shareholder, Leucadia decides it has had enough. This is what he said:
"Our overall first quarter results reflect an exceptionally volatile and turbulent market environment during our first fiscal quarter, although our core businesses performed reasonably, considering the environment. A quiet December was followed by an extremely challenging January and first few weeks of February. Almost every asset class, including equities and fixed income, suffered significantly amid concerns about the pace of global economic growth, outflows from the high yield market, forced selling from hedge funds, uncertainty over China, a potential Brexit, and an overall void in liquidity.
But wait, aren't your "economists" expected to anticipate events such as these and help your traders position accordingly? Perhaps they have "more important things" to do with their time.
What caused the collapse? First equity:
Although our Equities revenues declined to $2 million for the quarter from $203 million for the first quarter of 2015, this was primarily attributable to a $145 million difference in net revenues related to two listed equity block positions, including KCG, and our share of the results of our Jefferies Finance joint venture. The two equity block positions generated pre-tax, mark to market losses during the quarter that totaled $82 million, $67 million of which is unrealized, including KCG, which was written down by $37 million. This compares to the combined net revenues of the same positions of positive $30 million during the first quarter of 2015, a year-on-year decline of $112 million.
And then credit:
Leverage lending activity and related liquidity was very muted during the quarter, and two loans Jefferies Finance closed during the quarter and held for sale as of the end of the quarter were marked down by a total of $38 million. That is reflected in our share of Jefferies Finance's results. The two loans held for sale in Jefferies Finance as of the end of February 2016 were marked at prices believed to be required to clear their sale, with the potential for gains should markets improve prior to sell-down.
There was the odd defense of the balance sheet, which explained the firm's ongoing gross derisiking as well as its dramatic reduction in risk positions as confirmed by the 13% drop in VaR:
Our balance sheet at February 29, 2016 was $35.2 billion, down $3.4 billion from 2015 year-end and $8.6 billion from the year ago period. We estimate period-end tangible leverage to be 9.8 times. We continue to have ample excess liquidity. At the end of the first quarter our liquidity buffer was about $4.3 billion and represented 12.9% of gross tangible assets. We repaid our $350 million March debt maturity today from cash on hand and have retired a net $784 million of debt in the last six months. Our Level 3 assets decreased 10% to $489 million, from the year end level of $542 million and represents 3.6% of inventory. Average VaR for the quarter of $8.4 million was lower by 13%, compared to $9.7 million for the fourth quarter."
Jefferies Finance's equity is $949 million. Jefferies Finance is highly liquid and positioned well to serve our clients in this important business as the market recovers. We recently strengthened our Leveraged Finance origination team and expect to grow further our presence in this segment.
But first the team will be substantially trimmed, as reported last weekend. Handler went on:
New issue equity and leveraged finance capital markets were virtually closed throughout January and February, which resulted in many of our potential Investment Banking capital markets transactions being postponed until some stability returns to the markets. As we have done through many other turbulent periods in our history, we reduced our already smaller balance sheet to continue to reduce risk during this difficult period. We are humbled by Jefferies' quarterly loss and will strive to deliver the better results that our shareholders deserve and Jefferies is more than capable of achieving.
Humbled enough to actually read the economy correctly, or still unhumbled to where your novelty clown "economist" appears on Bloomberg TV wearing "I Heart QE" hats? Actually, we have a feeling said economist was instrumental in soothing investor nerves with the following Dick Handler line:
While we are early in the second quarter and one can never predict the future, it appears markets have not only stabilized, but aggressively snapped back. Bank holding company stocks in the U.S. and globally have halted their sell-off, high yield inflows have been at record levels, hedge funds appear to have stabilized, equity markets have rebounded, and energy/commodity prices have improved significantly. We are experiencing mark-ups in our block equity positions and believe there may be potential upside in the value of the loans held for sale in Jefferies Finance should the current market tone continue. Our core businesses are performing well, with total sales and trading net revenues for the first ten trading days of our second quarter averaging above our recent periods' mean results, and our investment banking backlog is stronger.
Yes, Jefferies just extrapolated a trend based on 10 trading days, which considering its novelty "market strategist" - who seems to be good at anything but actually 'strategizing markets' - appears on TV dressed as follows...
Typical Wall Street economist: betting it all on central bank bailouts for 2600 days running pic.twitter.com/knCOTCsDve
— zerohedge (@zerohedge) February 21, 2016
... is not really unexpected.
We wish Jefferies well, and that sooner or later the much "hearted" Fed QE will return and help the bank regain its central-bank infused mojo, in lieu of actual analysis by its highly overpaid cadre of forecasters.