Wall Street Harbinger Jefferies Reports Q4 Bloodbath: 73% Plunge In Fixed Income Revenue, 45% Drop In Equities

Following the conversion of all of its failed peers into bailed-out, FDIC-insured bank holding companies (speaking of which, where can one find a Goldman ATM these days?), middle-market focused Jefferies may be best-known as the last true investment bank standing. Or at least was until Leucadia came and gobbled it up a year ago.

But what Jefferies is best known for among Wall Street shareholders is that, by still reporting a Nov. 30 fiscal year end, 1 month ahead of everyone else, it provides an invaluable glimpse into the fortunes of its Wall Street peers with a 4 week advance notice, especially when it comes to its bread and butter: fixed income trading (recall that CEO Rich Handler was a Drexel bond trader when the firm blew up). And report it did earlier today, although most of Wall Street shareholders would rather it didn't, because the numbers were absolutely abysmal, and indicative of nothing short of a trading bloodbath on Wall Street in the latest three months of trading. In fact, if this is what one should expect out of the larger Wall Street names in a few weeks when the big banks close the quarter, then it may be best to skip earnings season altogether.

The numbers:

  • A 73% drop in Q4 revenue from fixed-income trading, down to $61 million from $227 million
  • A 45% drop in Q4 revenue from equity trading, down to $158 million from $290 million
  • A 24% drop in Q4 revenue from investment banking, down to $316 million from $417 million

Charted:

Overall, Q4 net revenue crashed by a whopping 43% to just $538 million (resulting in a net loss of $92 million) driven by the plunge in revenues from fixed income and equity trading. There is a caveat: it wasn't just a plunge in flow volumes: Jefferies decided that it was smart to have some prop positions on too. Positions which had yet another spectacular blow out. From Bloomberg:

Jefferies Group reported a 73 percent drop in fourth-quarter revenue from fixed-income trading as the firm sustained losses on distressed debt, including Fannie Mae and Freddie Mac securities.

 

“We experienced a very challenging fourth quarter,” Chief Executive Officer Richard Handler, 53, said in the statement. “Despite these results and our decision in respect of pursuing strategic alternatives for our Bache business, we believe Jefferies’s prospects for 2015 are solid, with our investment-banking backlog currently robust, and an expectation of more normal trading markets.”

Still, it is safe to say that with vol surging in the last quarter, most if not all banks will come well to the low side of FICC expectations: "Fixed income was affected by heightened volatility starting in September and a tepid trading environment that led to mark-to-market writedowns, the firm said. The bank reported $55 million in negative revenue from distressed trading following a slump in those markets, it said."

Finally, while it is not a secret that Goldman has almost single-handedly taken over the advisory business, mostly on the M&A (and stock buyback advisory) side, the tradeoff is that there is very little residual business left for everyone else, such as smaller firms like Jefferies.

Investment-banking revenue declined 24 percent because of “dampened capital-markets activity due to the unsettled markets, which in turn led to the postponement of deals into future periods,” the firm said in the statement.

The only good news, if any, is that Jefferies said the tabloid drama surrounding its ex-UBS rainmaker Sage Kelly did not hurt its revenues. "The impact from the unusual publicity in late October and November was immaterial” to earnings, the firm said in the statement. Which show that the cost to shut up the disgruntled Mrs. Kelly was far lower than the most optimistic estimates.