The markets have a “shoot first and ask questions later” mentality that is not really working too well for Jefferies Group, Inc. (NYSE: JEF) right now.  After the MF Global implosion, investors are looking for the “who could be next” in the soup.  A report out of credit ratings firm Egan-Jones has brought up concerns of it needing capital and that its borrowing costs are high.  It also noted that the leverage was too high at 13-1.   To show how bad this is, Jefferies shares closed at $14.72 on Friday, October 28.  Since the MF Global implosion, shares today are now down to $11.60 after another 5% drop.

What is sad is that Jefferies has denied having a massive exposure to European debt.  The company refuted this: “To be clear, as of August 31, 2011, Jefferies had no meaningful net exposure to European sovereign debt. Recent reports and calculations appear to have been focusing only on long inventory of $2.684 billion but not taking into account the fact that there were offsetting short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments.”

Jefferies further noted that as of the opening of business today, the firm’s net sovereign debt exposure to the PIIGS as follows:

• Portugal $5 million
• Ireland $28 million
• Italy $104 million
• Greece $3 million
• Spain <$178 million>

Investors remain skeptical.  Jefferies has traded over 27 million shares before 1:30 and that is already ten-times normal trading volume.  The stock is down over 5% $11.60 but shares were briefly trading under $10.00 early this morning.

This sounds like a situation where exposure was magnified and then the situation morphed from speculation to rumors.  Sadly, very few investors have trust of what is reported out of large financial firms.

JON C. OGG

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