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On Morgan Stanley’s Latest Quarterly Earnings – More Than Meets the Eye???
It has taken a while
to get this out, but the core message hasn’t changed. It is strongly suggested that all invested in the public equity and fixed income markets review the entire Pan-European Sovereign Debt Crisis, for I will be forced to drop the "European" portion of the title momentarily...
1Q10 Results review
For 1Q10, MS reported
significant increase in its net revenues to $9.1 billion from $6.3
billion in 4Q09 and $2.9 billion in 1Q09, primarily driven by trading
and principal investments revenues which increased to $4.1 billion
versus $1.3 billion and $205 million in 4Q09 and 1Q09, respectively.
Trading and principal investment revenues in 1Q10 increased off
improvement in debt-related credit spreads and better results in Fixed
Income. Revenues from Investment banking and Asset management,
distribution and admin fees increased 21.4% and 126.7% (y-on-y) to 1060
million and $1,963 million, respectively. However, both the categories
reported a quarter-on-quarter decline in revenues of 36.6% and 0.6%,
respectively. Commissions earned for the year increased 63.8% (y-o-y)
and 1.1% (q-o-q) to $1.3 billion. Compensation expenses increased to
$4.4 billion from $2.0 billion in1Q09 and $3.8 billion in 4Q09, while
non-compensation expenses were up 38.4% (y-o-y) mainly off MSSB
inclusion and higher business activity. Consequently, net income from
continuing operations increased to $2.1 billion, which was further
supported by a $382 million tax benefit associated with prior year’s
undistributed earnings of certain non-U.S. subsidiaries.
All paying subscribers can download our analysis and view of MS’s
latest results here: 
MS 1Q10 Review (351.75 kB 2010-05-24
09:43:31). Historical MS analysis and valuations may
downloaded as follows:
MS 4Q09 results (275.43 kB 2010-01-28
04:38:11)
MS Simulated Government Stress Test (2.49
MB 2009-05-05 11:36:25)
MS Stess Test Model Assumptions and Stress Test
Valuation (339.99 kB 2009-04-22 07:55:17)
Those who don’t subscribe should reference my warnings of the
concentration and reliance on FICC revenues (foreign exchange,
currencies, and fixed income trading). Morgan Stanley’s exposure to
this as well as what I have illustrated in full detail via the the Pan-European Sovereign Debt Crisis series, has
increased materially. As excerpted from “The Next Step in the Bank Implosion Cycle???“:
The amount of bubbliciousness,
overvaluation and risk in the market is outrageous, particularly
considering the fact that we haven’t even come close to deflating the
bubble from earlier this year and last year! Even more alarming is some
of the largest banks in the world, and some of the most respected (and
disrespected) banks are heavily leveraged into this trade one way or
the other. The alleged swap hedges that these guys allegedly have will
be put to the test, and put to the test relatively soon. As I have
alleged in previous posts (As
the markets climb on top of one big, incestuous pool of concentrated
risk… ), you cannot truly hedge multi-billion risks in a
closed circle of only 4 counterparties, all of whom are in the same
businesses taking the same risks.
Click to expand!
So,
How are Banks Entangled in the Mother of All Carry Trades?
Trading
revenues for U.S Commercial banks have witnessed robust growth since
4Q08 on back of higher (although of late declining) bid-ask spreads and
fewer write-downs on investment portfolios. According to the Office of
the Comptroller of the Currency, commercial banks’ reported trading
revenues rose to a record $5.2 bn in 2Q09, which is extreme (to say the
least) compared to $1.6 bn in 2Q08 and average of $802 mn in past 8
quarters.
High
dependency on Forex and interest rate contracts
Continued
growth in trading revenues on back of growth in overall derivative
contracts, (especially for interest rate and foreign exchange
contracts) has raised doubt on the sustainability of revenues over hear
at the BoomBustBlog analyst lab. According to the Office of the
Comptroller of the Currency, notional amount of derivatives contracts of
U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09
from $87.9 trillion in 2004 with interest rate contracts and foreign
exchange contracts comprising a substantial 84.5% and 7.5% of total
notional value of derivatives, respectively. Interest rate contracts
have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09
while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion
between 4Q-04 to 2Q-09.
In
terms of absolute dollar exposure, JP Morgan has the largest exposure
towards both Interest rate and Forex contracts with notional value of
interest rate contracts at $64.6 trillion and Forex contracts at $6.2
trillion exposing itself to volatile changes in both interest rates and
currency movements (non-subscribers should reference
An Independent Look into JP Morgan, while subscribers should
reference JPM Report (Subscription-only) Final –
Professional, and JPM Forensic Report (Subscription-only)
Final- Retail). However, Goldman Sachs with interest rate contracts
to total assets at 318.x and Forex contracts to total assets at 11.2x
has the largest relative exposure (see Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 Kb, Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb, Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25
Kb,). As subscribers can see from the afore-linked analysis,
Goldman is trading at an extreme premium from a risk adjusted book
value perspective.
This rather lengthy post is continued on my blog at http://boombustblog.com/reggie-middleton/2010/05/24/on-morgan-stanleys-latest-quarterly-earnings-more-than-meets-the-eye/ (scroll down to the point where you left off here).
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My Grandmother never did get a card from MS or GS for the money they borrowed from her @ .25% interest?
From a 30,000 foot perspective, MS if I recall had placed (at least publicly) its bet on inflation, like madhedgefundtrader, calling for higher Treasury interest rates later this year. Right now, deflation looks like the right bet, and that has got to have some repercussions. Now it may be that MS really bet on D but pumped I, which would not surprise me.
Are you implicating they would LIE TO US!?