Why the Jefferies Indicator is Slightly Bogus
Jefferies, which reports quarterly earnings a month before the larger U.S. banks do, is often regarded by investors as a harbinger of things to come from competitors like Goldman Sachs and Morgan Stanley.
So does Tuesday’s reported upswing in investment-banking and fixed-income revenues at Jefferies mean that the others had similarly successful quarters?
The quantitative trends at the three firms at times differ greatly year over year, a calculus made more complex by the fact that all three banks have changed their fiscal calendars since the financial crisis.
An example: for the first quarter of 2011, which tends to be a good period in general for Wall Street in sales and trading, Jefferies announced that fixed-income revenues were up a whopping 58 percent from the prior-year period, while revenues at Goldman and Morgan were actually down 35 percent and 28 percent respectively. During that same period, equities results for Jefferies were up 59 percent while Morgan’s were up by a less-significant 20 percent and Goldman’s were actually down 7 percent.
That said, the sentiment at the three banks does seem to be similar at times (either that, or their CFOs need to get a synonym dictionary to help with preparing earnings-call commentary). To wit: fixed income gains during the first quarter of 2011 were “broad based” at Jefferies, according to a company official last March. A month or so later, a Morgan suit told investors that increases in client flows across “all businesses” and geographies had been “broad based,” and an executive at Goldman thanked “broad based increases in client activity” for growth in fixed-income and equities client execution.
Some analysts, however, believe they can use Jefferies results during a given quarter as a baseline on which to apply either a discount or premium to the corresponding revenue areas at Goldman and Morgan, depending on what’s happening both environmentally and within the companies.
“It’s a very relevant exercise,” says one analyst, who is watching closely Tuesday. On the equities side, he says, Jefferies results may be “closely correlated” to those of Goldman and Morgan for this first quarter. On the fixed income side, “whatever Jefferies does, Goldman will do materially better, and Morgan will be more in line with Jefferies.”
We’ll check that out in about a month.