Jefferies's Fragile Green Shoots

There's still a cold wind blowing through the markets.

Jefferies Group posted its worst quarterly loss since 2008 on Tuesday, but it sounds as if Chief Executive Richard Handler would like everyone to focus on the green shoots that popped up after that frosty winter quarter. The question is whether they are hearty or simply ephemeral.

Because the firm's fiscal quarters end a month before the rest of Wall Street's, it's tempting to look at its results as a harbinger for the bigger investment banks.

Those green shoots 1 , such as they are, may be what are most tempting to examine, more so than the quarterly loss, which was driven largely by an 18 percent slump in the shares of KCG Holdings Inc., the trading firm in which Jefferies holds a large stake.     

A Major Drag

Jefferies owns a large stake in KCG Holdings, whose shares slumped in the firm's first fiscal quarter

Source: Bloomberg

Equity and commodity markets snapped back, high-yield inflows have been at record levels and hedge funds appear to have stabilized, Handler said in the firm's earnings release. Sales and trading revenues for the first 10 days of the firm's second quarter have been above recent averages, and the investment banking backlog is stronger, he added.

Those types of green shoots for investment banks were certainly easy to see over the past month. The S&P 500 jumped 11 percent from Feb. 11 to March 11, while the KBW Bank Index surged 16 percent and New York-traded crude oil jumped a whopping 47 percent during the same period.

Yet the ink was hardly dry on Jefferies's statement when the green shoots started to appear as if they might be withering. Oil is down more than 6 percent in the first two days of this week, and the "relief rally" rebound in stocks looks as if it could stall right at the 200-day moving average in the S&P 500. In the equity options market, the recent calm has a suspicious feel to some traders who are loading up on products meant to protect against more volatility, according to Bloomberg's Joe Ciolli. More volatility could mean investment-bank clients continue to postpone or cancel planned business.  

Meanwhile, current-quarter earnings estimates continue to plumb new lows for big investment banks like Goldman Sachs and Morgan Stanley and money centers like JPMorgan Chase, Bank of America and Citigroup. The last we heard form JPMorgan and Citigroup, they were bracing for significant declines in investment-banking revenues in the current quarter.

In fact, the overall outlook for U.S. corporate profits for the first quarter continues to deteriorate at an alarming rate, even after excluding energy companies:  

Turbulence Ahead?

The stock market could be in for more volatility as estimates for first-quarter earnings growth continue to trend downward

Source: Bloomberg

Note: Based on weekly survey by Bloomberg's Wendy Soong

And the market for initial public offerings still looks weak:  

Soft Stretch

Market volatility has left a dent in initial public offering activity in the U.S.

Source: Bloomberg

That's the problem with green shoots -- they're fragile and easily trampled upon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Our words, not his.

To contact the author of this story:
Michael P. Regan in New York at

To contact the editor responsible for this story:
Daniel Niemi at

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