December 21, 2011
He huffed and he puffed – but he stopped short of blowing their house down.
“He,” in this case, is Sean Egan of Egan-Jones Ratings, the bête noire of embattled investment bank Jefferies Group (JEF) and its CEO, Richard Handler. Egan on Tuesday held back from making further demands on Jefferies to bolster its balance sheet by raising new equity – at least, for the time being.
Egan isn’t being quixotic or altruistic, of course. His comments came hard on the heels of the release by Jefferies of its fiscal fourth-quarter results. Those numbers themselves were as dismal as had been anticipated: The company reported its profits nosedived, to 21 cents a share from 31 cents a share in the year-earlier period. But, Jefferies also reported it had trimmed its balance sheet significantly and reduced leverage levels – both moves calculated to appeal to Egan and any other investor or analyst worried that the investment bank might be irreparably damaged by sizable exposure to European sovereign debt, or by the poor trading and deal-making environment that has hammered investment banking operations across Wall Street this year.
The news temporarily bolstered investors’ enthusiasm for Jefferies, which watched as its stock price soared nearly 23% to end the day at $14.50 a share. True, after-hours trading trimmed a nickel from that price, but that’s still an astonishing performance by a stock that, even after a forceful marketing campaign by the company, still languished well below its recent highs.
Egan says he’ll take a closer look at Jefferies once the firm releases its annual 10-K filing, providing more detailed insight into its financial position, in a few weeks’ time. The risk, of course, is that Jefferies may only have acquired some breathing room, and that the pressure will be back on both the company and the share price as the New Year begins. Certainly, few of the fundamentals that led to this state of affairs on Wall Street show any signs of improving. The European sovereign debt crisis is far from resolved, despite recent initiatives that pulled Greece, Portugal and Italy back from the brink of default and economic meltdown.
Even if the crisis can remain contained, the wider question of whether 2012 will see economic growth strong enough to buoy the global economy remains alive and well. Any day, investors could wake up to headlines that will wreak havoc on financial markets, and on the ability of firms like Jefferies to continue generating fees from core businesses like trading, market-making and underwriting.
The results of such a challenging environment are painfully evident. In its preliminary report for the year, released yesterday, market data firm Dealogic announced that global investment banking revenues only a few weeks from the end of the fourth quarter were 47 percent below year-ago levels; revenue generated from underwriting IPOs (initial public offerings of stock) plunged an astonishing 71 percent.
While Jefferies may control its balance sheet, the amount of leverage it views as acceptable and even its headcount, it has no power over the broader environment in which it must do battle with Wall Street rivals. Nor can it influence market sentiment. As long as Egan – the most vocal of the firm’s critics – holds his fire, the stock may well perform in line with other financial stocks heavily exposed to the investment banking cycle. But that may not be enough for yesterday’s relief rally to be more than a flash in the pan.