By Moran Zhang: Subscribe to Moran's RSS feed
November 18, 2011 12:08 PM EST
On Wall Street, where traders find an edge by having their orders placed a millisecond earlier than the next guy's and the speed at which trades are executed seems constrained only by physical barriers like the speed of light, nothing moves faster than a negative rumor.
On Monday, March 10, 2008, rumor started that investment banker Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon, the speculation created its own reality, and the race was on to keep Bear Stearns' crisis from ravaging the wider market. And we all know what happened after that.
As the reporting of unexpectedly gargantuan, supposedly once-in-a-lifetime losses by esteemed financial institutions has seemingly become the market's norm during the ongoing financial crisis, investors have understandably become ever more skeptical. Multiplying their fear through the interconnected web of gossip and news that flows through the financial institutions of New York and London, they've grown almost paranoid, maniacally trying to avoid any situation where they're the last one left when the party ends and the lights go off.
Could this be the case with Jefferies Group Inc., a mid-market pure play investment bank that has been battered for weeks first by a steady feed of negative rumors?
Here are the facts: Following the collapse of MF Global, which shook investor confidence in a wide array of financial firms, Jefferies' bonds were downgraded by rating agency Egan-Jones over short-term funding worries. Traders have since pounced, many surely believing they have spotted the next Bear Stearns, Lehman Brothers, or MF Global. The company's efforts to assure the market it's not in trouble have been largely ignored, and bearish sentiment in the future of the bank has been underscored with heavy short-selling of its public shares.
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From October 28, shares of Jefferies Group Inc. (NYSE:JEF) have lost almost half of their market value. On Thursday, the company's stock was trading at a new 52-week low level of $9.50, before rebounding to a closing price of $10.11, down 21 cents or 2.03 percent. Shares dipped further in early-morning trading Friday, down 6 cents to $10.05 on the New York Stock Exchange. By comparison, the NASDAQ-100 Financials Index, is down 6.7 percent for the period.
"Few people believe Jefferies Group because we heard the same sort of denials from firms like Lehman Brothers, Bear Stearns and MF Global. Brokerage firms have very little credibility when it comes to making public statements to protect the firm," Andrew Stoltmann, a Chicago-based securities attorney at the Stoltmann Law Offices, told IBTimes.
Down Across the Board
If those dealing in the companies' shares are pessimistic in their sentiment, traders in Jefferies bonds and options seem to be downright apocalyptic in their assessment.
Thursday closed with over 11,000 of the November 9-strike puts on Jefferies stock being traded at 5 cents. That trade won't be profitable unless Jefferies' shares closes below $8.95 by November expiration - which is today. Similar put activity is also being seen for options expiring in December.
The stock's put-to-call ratio, a telling indicator that gauges how many options are bearish on the stock relative to how many are bullish, is decidedly favoring the doomsayers. Thursday, put volume was outpacing call volume by about 4 to 1
Trading in the firm's bonds also shows signs of high distrust. Thursday, $500 million of Jefferies' 3.875 percent bonds due November 2015 fell 3.5 cents to 75.5 cents on the dollar at 4:17 p.m. in New York. The debt pays a yield of 11.8 percent, 10.92 percentage points more than similar-maturity U.S. Treasuries
That yield exceeds the 10 percentage-point spread considered distressed. It is also more than the average of 8.8 percent for high-yield or speculative-grade issuers, according to Bank of America Merrill Lynch index data.
"We believe that, putting aside short-term downticks caused by rumors, half-truths, and short-selling, our stock price on any given day - including today - is influenced by the pressure facing the entire financial-services sector as well as the market generally," Richard Khaleel, a spokesperson for Jefferies, told the IBTimes, "Our operating and funding model, which has served us well for many years, continues to do so: our inventory, which is liquid and turns over frequently, remains readily financeable; and our cash on hand remains around third-quarter's $2 billion level."
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