A Friendly Poke To Be Aware of the Opportunity and the Risk

Our personal position, for what it is worth, is that the markets are healthy, wide open for business and there is no imminent disaster on the horizon, although risks abound.  Equity markets are at an all time high, the high yield and loan markets are once again vibrant, IPOs (especially tech) are becoming almost routine, and liquidity globally is more than perfectly adequate.  When you add to this picture that interest rates globally are low and appear destined to remain low for the foreseeable future combined with “very decent” corporate profits, why shouldn’t we raise the “all clear” or even “charge” flags and become ever more aggressive?  Today, we are signaling “full speed ahead” for some of our constituencies, but we are also raising a mild “caution flag” for others.

On the one hand, every CEO who is a potential issuer of stock, bonds or a loan should be aggressively taking advantage of this favorable environment, as it rarely lasts long and a warning bell is never rung before the moment will pass.  It is always best to raise capital when you easily can, versus when you must.  Jefferies Investment Bankers should be apprising our clients of the opportunity to readily amass or refinance capital to further cement the likelihood of even greater long term success.  Strategic transactions can be pursued with confidence in both the economy and the markets.  Today we are asking every one of our Investment Bankers to be out “pounding the pavement” and utilizing all of our talent and resources to achieve the best for our clients and to pursue smart, well-conceived deals.

At the same time, when things are indeed flowing, it is amazing how those of us on the capital deployment side can forget how stupid we feel when the cycle quickly turns (or even pauses).  This is when we look back at some of our investments, positions, strategic decisions, personnel choices or capital structures and wish we had a close friend we respected who reminded us just a short time prior to please just “be careful.”  As we said above, often the warning bell doesn’t sound.  In trading and investing in periods like now, we may be feeling the pressure to be “100% in,” despite the fact that nobody is getting paid handsomely for risk.  All we are saying is that this is the perfect time to pause and take a breather, reflect on exactly what positions and investments we own, take a sober look at the new ones we are about to make, honestly assess all new strategy initiatives, and examine closely the quality and motivations of any significant decisions.

It is very possible (and we believe likely) that nothing will substantially change and the current bullish climate will continue “as is” for the foreseeable future.  However, it is difficult to see an environment much rosier, and that usually suggests the downside risk may win the arm wrestle with upside potential.  We therefore feel strongly about the need to move along if one is contemplating raising capital, and to be cautious if one is long capital or risk.  Even if markets go further than we might expect, all of us will be well served by some honest self-reflection and re-evaluation of our respective businesses and goals.  If we do this well for ourselves and take the even more important step of helping our clients do the same, we will make sure that regardless of the timing and severity of the future inevitable cycles, we will all be able to play for long term success.

Happy to pause and reflect with all of you,

Rich and Brian