Leucadia National and Jefferies CEO, Richard Handler, is “more optimistic” than before the financial crisis.
“It has been a complicated, perhaps too long and volatile combination/integration of Leucadia and Jefferies. Issues arose at both companies that had to be addressed, fixed and changed. While we will never declare victory and the world is rarely predictable, the combination of where we are positioned today, along with the following observations and thoughts (not promises or assurances), leads these two realists to be more optimistic about our prospects than we have been since prior to the financial crisis,” Handler wrote in Leucadia National’s annual shareholder letter on Monday that he co-authored with the firm’s president, Brian Friedman.
Leucadia National (LUK), a holding company, acquired investment bank Jefferies in a $3.6 billion deal in November 2012. Handler, who’s led Jefferies’ since 2001, also became the CEO of Leucadia as part of that transaction. Handler along with Friedman are the second management team in the Leucadia’s 40-year history. Handler is also the third CEO in Jefferies’ 50-year history and one of the longest-tenured at a Wall Street bank.
Often referred to as “baby Berkshire Hathaway,” Leucadia owns businesses in financial services, agriculture, energy, and international telecom, among other industries. One could argue that Leucadia is a bellwether of the economy.
In the letter, Handler makes a case for CEO optimism, listing some observations and thoughts. He also noted what might hurt business.
Bullish on rising rates
First, he pointed to interest rates.
“U.S. interest rates appear to be moving up naturally through the normal functioning of the markets versus the Fed leading them. This is very good news,” Handler wrote.
His thought is that moving away from artificially low rates will allow active investment managers, who are clients of Jefferies, to once again pick the right stocks instead of competing against passive index funds. He also notes this will be good for investors and for companies that benefit from normalized rates, specifically pointing to Jefferies, Jefferies Finance, Berkadia, FXCM, LAM, Fidelity & Guaranty Life, KCG and Foursight.
Handler warned: “Of course, on the other hand, if there is a surprise gap up in rates, this would cause a lot of pain, fast.”
Bullish on deregulation
The shift toward a more pro-business environment and the move toward deregulation should bode well for Leucadia’s holdings.
“As markets and companies adjust to what they perceive is a pro-business climate and potentially less onerous regulation, it should bode well for many U.S. businesses, including Jefferies, Jefferies Finance, KCG, Vitesse, Juneau, Golden Queen and National Beef,” Handler wrote. “We don’t necessarily believe any of these businesses will experience significant deregulation, but on the margin a lessening of the headwinds should help. A pro-business environment should also help Jefferies’ corporate client base and activity should continue to accelerate with CEO confidence improving.”
Bullish on lower corporate taxes
Another reason for optimism is the expectation for lower corporate taxes.
“A lower U.S. corporate tax rate with the possible repatriation of stranded foreign cash should be a big positive for the economy and financial markets in general and hence Jefferies and our other financial services businesses stand to benefit. Corporations’ net incomes will increase and so will activity and aggressiveness (‘animal spirits’),” Handler wrote, adding, “While our NOLs will be nominally less valuable (there will be a non-cash write-down), they will continue to offset $3.4 billion of future taxable income, regardless of the tax rate. Indeed, we would welcome the write-down in exchange for the lower tax rates.”
The letter goes on to detail more reasons Handler is upbeat, while also reflecting on challenges of the recent past.
Jefferies, the company’s largest business, suffered its worst operating quarter during the first quarter of 2016 amid the firm’s internal resizing and repositioning that began in late 2015. Meanwhile, Leucadia’s second-largest holding, National Beef, was also going through a down period in late 2015, early 2016.
“In sum, although our two largest businesses, Jefferies and National Beef, limped through parts of the last two years, they have regained their stride and appear to be very well positioned to sprint for the foreseeable future,” Handler wrote.
Shares of Leucadia have climbed nearly 11% in 2017. The stock is up more than 37% since the election. Shares are up more than 57% since a Wall Street Journal article in March 2016 declared the company “no longer lovable.”
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.