Jefferies chief executive Rich Handler, who is also the head of its parent company Leucadia, sends out a letter every month to his bankers, traders, and analysts with some words of encouragement.
Given the crazy volatility in August, his most recent letter has special significance.
It was a brutal month on Wall Street, with investment banking trading teams getting crushed and hedge fund portfolios taking a nosedive.
Bloomberg News’ Laura J. Keller and Zeke Faux reported last week that a distressed debt trading desk at Jefferies lost around $US100 million. B
Bloomberg also reported that one of Goldman’s desks took a $US50 million hit.
In his monthly letter, obtained by Business Insider, Handler made reference to the trading desk losses, and said that the firm’s rivals were likely feeling the same pain.
He said: “A little has been written about one of our own trading desks and comparable desks at other firms. Those desks are not alone in feeling some pain. Unfortunately there is company both at Jefferies, and in all likelihood at similar and other desks across the trading floors of our competitors.”
He continued: “We don’t like this at all, but we are in the business of providing liquidity and capital to our clients. Generally, when we pick the right clients to support, they remember who was there for them in challenging times and are fair partners over the long term — and we all know it is a very long race, indeed.”
Shares of Leucadia, Jefferies parent company, slipped 8.76% in the month of August. The stock is down about 4.2% year-to-date.
Here is Handler’s full letter:
A Little Nicked, But Standing Tall — Jefferies Perseveres and Shines
-11.5%, -27%, -7% and -18%.
August was long and wild, but is finally in the history books. The system held up, but investors far and wide felt enormous pain and dislocation from the exceptional volatility. How much was real and based on true economic and corporate developments, and how much was sentiment compounded by the herd instinct and weaknesses in market structure, will only be known in coming weeks and months. Our guess is that both forces were at work.
China appears to be in a period of transition, which could last a while. This transition and its management will have a major impact on everything from commodities to currencies. Europe’s recovery is still going very slowly and, while they are enjoying the benefits of continued monetary easing, the continent is still early in the long-term process of balancing and coalescing the interests of all the Euro members. Russia, which was not that long ago seen to be embracing capitalism, is ensconced in the massive pain that comes from being economically dependent on a narrow export commodities base — oil and gas. By the way, the capitalism concept really never took hold in Russia because the only way lasting, open markets work is through transparency, a culture of integrity and rule-following, and a true legal system. Other emerging markets across the globe have either had major corrections or have been all but obliterated. This seems to happen every bunch of years, and our guess is that, while painful today, now is probably a good time to begin to get more involved in EM. The shining light in the world today is the U.S., as we have cleaned up our financial services industry, and have a culture of entrepreneurism, creativity, innovation, resilience and hard work.
All this said, we believe the U.S. and foreign central banks soon will begin to wean our economies and markets off an unprecedented amount of monetary intervention, which has given our markets a substantially straight up trajectory for a number of years. The world is struggling to find sustainable growth anywhere and, when we do, it appears there is a euphoria that develops that strikes us as potentially very dangerous. In summary, globalization is more real than ever, which means there are significant issues (and opportunities) everywhere and nobody should really be surprised if the result is further and greater volatility and uncertainty than we have been lulled into enjoying in recent years.
So what about those percentages above? They are the August 2015 intra-month declines from high to low for the S&P, Shanghai, Euro/Dollar and DAX, respectively. And we surely could have picked many more. The trading environment this summer went from painfully slow early on to outright choppy, and ultimately, a roller coaster ride. While many people find roller coasters fun, nobody enjoys watching stocks drop 10-20% in minutes, and then experiencing unprecedented and massive intra-day swings. Remarkably, and because of globalization, this happened in almost every country in the world. As happens during these periods of extreme volatility, there is a lot of pain inflicted everywhere in the financial markets. It doesn’t matter if you are trading blocks of equity, energy bonds, Chinese stocks, commodities, emerging markets or municipal bonds…there is nowhere to hide if you are active and engaged making markets, providing liquidity or managing money.
A little has been written about one of our own trading desks and comparable desks at other firms. Those desks are not alone in feeling some pain. Unfortunately there is company both at Jefferies, and in all likelihood at similar and other desks across the trading floors of our competitors. We don’t like this at all, but we are in the business of providing liquidity and capital to our clients. Generally, when we pick the right clients to support, they remember who was there for them in challenging times and are fair partners over the long term — and we all know it is a very long race, indeed.
Periods like this one are also another reminder why DIVERSIFICATION, one of our overriding principles in leading Jefferies and, more recently, the consolidated Leucadia, will always be a key tenet of our strategy. Jefferies has three primary business lines that are inexorably linked and inter-dependent. Our Equities, Fixed Income and Investment Banking businesses span the capital markets, and have the depth and breadth to serve the preponderance of the needs of our investor and corporate clients around the globe. At different points of time, every one of our sales and trading desks, sector teams and product areas has been the brightest shining star, and almost every one of them has had its moment of introspection and re-gearing. That’s what makes markets and ultimately builds great firms: perseverance, and the delicate balancing of short-term performance on the one hand and long-term investment and growth on the other. With tears and laughter, pain and pride, as well as endless effort and passion, we at Jefferies have maintained our focus and continue on our mission — serving our clients first and always, and building the great Wall Street firm for ourselves and all our partners in business and the markets.
At the same time, Leucadia serves as a watchful and supportive parent that enhances our commitment to winning long-term. Our industry faces what feels like the later chapters of the post-crisis environment and the re-regulation of the government-supported bank holding companies. With new leadership in many cases, the bite of the implementation of many new rules and requirements, and the strategic need to focus and prioritise, our competitors should finally resolve their business models and cultural goals in the near to intermediate term. We strongly believe this will only enhance our opportunity as clients need for our distinct capabilities grows larger.
We can’t predict what today and the future hold for valuations or markets, but we can commit to our clients and to all of you that we will be in the trenches doing all we can to serve and protect. Please join us in this, as we continue to build One Great Firm together.
Summer is ending and opportunity beckons,