Wide Open For Business, Always

To Our Clients:

Our recently announced solid second quarter results reflect a world that is open for business and abundant in opportunity. More significantly, every one of us at Jefferies can see, feel and hear the many good things that are occurring across our firm: our Equities business globally is getting stronger, better and bigger; Investment Banking has terrific momentum, with much opportunity for further expansion; and Fixed Income continues to strengthen, with our team focused on filling the void left by others. The two of us are in the race with all of our team, regularly meeting with clients, and doing everything possible to recruit additional talent and strengthen our platform globally.

Despite a punch in the gut with the Greek volatility, indexes of stocks in the U.S. and several other major markets are at or near all-time highs. Interest rates, while up slightly, are still close to zero. Unemployment is down considerably. Productivity, thanks to the amazing innovations in technology, seems to be improving daily. Mortgage rates are still highly attractive, and financial institutions globally have mostly cleaned up their balance sheets. Capital markets across asset classes and geographies are wide open, mergers and acquisitions are happening daily, and even the market for private companies to access equity and debt capital is readily accessible from a variety of buyers. The declining price of oil has created a windfall for transportation companies and consumers alike. The Chinese stock market, while corrected from a probably unsustainable high, still has generated meaningful wealth creation. Japan continues its transformation. And back to Greece for a moment−while we hate to see people in pain in any country, to us the situation does not appear as systemically dangerous as it was just a few years ago.

During our professional careers, the two of us have lived through challenging market dislocations of various proportions in 1980, 1987, 1990, 1994, 1998, 2001, 2008 and 2011. There are only three things that are 100% certain:

1. There will be another period of extremely painful, scary and expensive volatility.
2. Nobody knows when it will happen. It could be tomorrow or a decade away.
3. The cause likely will be something only a very few people will see coming.

We are not saying that good times are over and it is time to panic and prepare for calamity. We have no clue when/how/where/why the next real problem will occur. However, we do try to live by two fundamental philosophies throughout our business careers:

1. Remain humble and do our best to do nothing stupid or arrogant during the good times,
2. Which will allow us to be in the best spot possible to take advantage of all the opportunity that is readily available during the bad times.

These two simple thoughts may sound very obvious, but in reality they are really hard to live by. When things are good, it is very easy to forget how bad things can get. When things are bad, it feels good times will never return. Good times have people reaching for yield in places they don’t understand.

Good times often wrongly means more leverage because perceived risk is so low. Good times can lull you into thinking you can do less work, make quicker decisions, and not worry so much because the odds are stacked in your favor. Liquidity is abundant and, if something goes wrong, you can just sell the position, division, or company because there are many exits at your disposal−we know how that one goes! You can justify overpaying for people or even businesses because on a pro forma basis, everything can be justified. Bad times have people tossing (sometimes puking) out good investments, people, divisions or companies. It is almost impossible to pull the trigger on any new investment because the daily fear and pain make it almost impossible to step back and have a long-term perspective. Relative values are nearly impossible to assess because everything seems to correlate and who wants to take any chances in times like these anyway?!

This relatively good period may last for years, and hopefully it will, but we have to make the smart decisions that will allow us to remain robust and well-positioned when the climate eventually does change. We must only take smart risk in support of our clients and avoid being too aggressive by following the herd. We do not have to supersize any risk−anywhere. That doesn’t mean we aren’t fully engaged, playing offense, supporting our clients, and actively planning for the future. We just need to accept the world for what it is today and preserve our wonderful liquidity, use our capital intelligently, make only the smartest hires or acquisitions, and in the case of Leucadia, only make investments that stand out uniquely in a world where true value is elusive.

Periods like this can be great ones for our clients and for companies such as Jefferies and Leucadia. Investors can make money, companies can grow, returns can be reasonable and people can smile. Keep smiling, but everyone should have their eyes wide open and make sure we are all protecting our foundations.

Sincerely,

Rich and Brian