Jefferies Shares Plunged, Then Recovered: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of investment bank Jefferies Group (NYSE: JEF  ) were taking a beating in early trading today, falling as much as 20% before recovering substantially.

So what: It seems investors were worried that out-of-control European bets could put Jefferies at risk in a replay of what happened to MF Global. So, earlier this week, Jefferies issued a press release saying (and I'm paraphrasing here): "Look dudes, we have very little exposure to Europe, so chill out."

Apparently that didn't work as well as hoped. A credit downgrade from Egan-Jones reignited fears today, as the agency said it was worried about Jefferies' $2.7 billion exposure to euro-area debt. The bank tried to combat those rising concerns today by issuing another statement -- "Dudes, seriously, we're telling you we're not at risk from Europe" -- this time giving more granular detail. It noted specifically that Egan-Jones' numbers ignored the bank's offsetting short positions.

Now what: According to what the company is saying, it certainly doesn't seem like this is another MF Global in the making. And unlike MF Global, which was purposely trying to take on more risk, Jefferies is generally a conservatively managed bank. Unfortunately though, unless investors are convinced, this situation could be problematic for Jefferies since, as we've seen many times over, this is a confidence business, and if you lose the confidence of lenders and counterparties, you could be in big trouble.

As of this writing, Jefferies stock is down 4.2%, a marked recovery from earlier in the day. So it appears for now that the worst of the fears may have been allayed.

Want to keep up to date on Jefferies Group? Add it to your watchlist.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On November 09, 2011, at 10:24 PM, MHedgeFundTrader wrote:

    I have an usually sensitive notice. Maybe that is because it is so big. It is particularly attuned to detecting bullpucky in broker research reports. So when an analyst recently downgraded the mid-level broker, Jeffries & Co (JEF), on the back of its European debt exposure, the stench was overwhelming.

    I went to the website at and had a quick look at the balance sheet and income statement. The leverage was a conservative 12:1 and earnings were growing nicely. But when I looked at the chart, it had chapter 11 written all over it, the stock plunging 40% in days. Things were just not adding up.

    So I called someone I knew in senior management. The European problems were being vastly exaggerated. Total positions amounted to 2% of assets, and these were all fully hedged, both by underlying security and duration. The firm was about to post its entire European portfolio on its website with every detail, down to the last CUSIP number, an unprecedented level of disclosure. There is no need for an emergency dilutive capital raise whatsoever. What’s more, he only knew of one client in his department who had pulled funds in the past week, and he would probably return, once the dust had settled.

    It all had the makings of a classic bear raid to me. This is where some opportunistic traders spread false rumors about the health of a company in the hope of making some quick profits on the short side. With MF Global, once the world’s largest future broker, having gone bust on Monday, the market was particularly sensitive to this kind of news.

    This is still a financial, a sector that I am not exactly enamored with. So I am going to limit this position in the calls to only a high risk allocation of 2.5% of my portfolio. There are still plenty of black swans out there looking for a place to land. For my notional “virtual” $100,000 fund, this amounts to 10 contracts ($2,500/100/$2.40). With any luck, we’ll be out of this next week

    The Mad Hedge Fund Trader

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