Morgan Stanley

Greece is on its way to becoming a "new, critical fragile state," and the ECB and EU will have to keep it on life support for years after it exits the common currency.

• Greece is Relevant: Central Banks Warn Greek-Led Euro Stress Threatens World (Bloomberg)
• Greece is very Relevant: World Economies Prepare for Panic After Greek Polls (Reuters)
• ECB's Draghi flags euro risks, spurs rate cut talk (Reuters)
• And as usual, beggars can be choosers... Hollande Urges Common Euro Debt, Greater ECB Role (Reuters)
• Wait and flee - Electoral uncertainty sends the economy into suspended animation (Economist)
• The EU Smiled While Spain’s Banks Cooked the Books (Bloomberg)
• Osborne’s £100bn Plan for UK Economy (FT)
• Two Cheers for Britain’s Bank Reform Plans: Martin Wolf (FT)
• BOJ Holds Policy Ahead of Greek Vote with Eye on Global Markets (Bloomberg)
• China Hits Back at U.S. Criticisms at WTO (Reuters)

Halfway into the year, my warnings on the FIRE sector are starting to come into there own. The first look, banks and bank stock analysts!

Wait, this can't... Europe is imploding, the world economy is crashing, and the Spanish banking sector has failed, and the BBA is telling us that in over 3 months Libor has moved by at most... 3 bps, has actually been unchanged for weeks and weeks on end, and has been used by construction workers in the place of a spirit level?

Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade.

Morgan Stanley's *hilarious* comic strip on our *hilarious* credit markets.

While the ever-present analogs to the last few years of crisis-response-improvement-complacency (CRIC), as Morgan Stanley so clearly described, have provided a clear picture of what to expect, the treja vu is now starting to fade in one very important market indicator. As BofA notes, the forward expectations of Fed Funds rates have finally started to shift from an endless string of 'hope' for growth and reflation just around the corner and rate hikes any quarter now (despite the Fed's 'exceptional' chatter) to a much less sanguine pit of despair that rates will indeed stay low for 'ever' reflecting a stagnating deleveraging economic reality. At some point they will be right as the Japanization of rates around the fiat world becomes the new normal and 'smart/fast-money' traders appear hope-less.

All you need to read.

Update: 9:00 am has come and gone... and no global bailout unlike November 30, 2011. Not a good sign for those expect a central-bank D-Day.

While minutes ago the Bank of England followed in the ECB's footsteps, it was the China central bank that stole England's thunder, announcing an unexpected rate cut moments before 7 am, and thus finally joining the global easing party: this was the first Chinese interest rate cut since 2008. As a reminder, hours before the global central bank intervention on November 30, China announced its first (50 bps) reserve requirement cut since 2008. Is today's PBOC move, which is the first cut of deposit and 1 year lending rates also since 2008, a harbinger of something much bigger to come any second now?

We have quite vehemently reminded readers of the dismal drop in US (and global) macro data over the past few months. These disappointing economic surprises and the ensuing global growth weakness will, Morgan Stanley believes, lead to a global policy response (rate cuts where rates can be cut and QE where they can't) and while they expect this monetary policy to work in many important emerging economies, they are doubtful as to whether it will make a material difference to growth in developed economies. Certainly, there are obvious risks to growth (Euro rupture and US fiscal cliff) that could counteract any QE effect but they rather critically note that unconventional policy is effective when the issue is systemic stress; it is less so when growth is the concern. The QE2 rally was largely due to better macro data, which coincidentally started right after Bernanke hinted at QE2. If macro data stays weak, they expect any 'Pavlovian' QE3 rally to last hours or days, not weeks or months. The bull case for a tradable rally is one of simple observation that prior central bank action has coincided with important market turning points but the more skeptical MS strategists suspect this more correlation than causation as they point to the muted effect monetary policy has in an extended deleveraging to stimulate activity.

Little to be said here: everyone's favorite proxy of all that is broken with Europe, and now the retail investor, Margin Stanley just closed at the lowest price since December 2008. The move lower continues as Zero Hedge warned back in September of 2011. Compare this to Jim Cramer's February 2 pronouncement that Morgan Stanley is a "dirt cheap stock"... at $19.66!? The 40% prolapse in the four months since (120% annualized?) probably make it dirtest cheapest?

Instead of a "botched" event, the Facebook IPO is actually a total success by Wall Street standard, since concerted effort appeared to have been made  to ensure an "acceptable" return for the insiders.

May is a month most would like to forget, especially those short IG 9-18 (and understandably so: in a world in which the virtuous cycle is now broken, and in which the only upside catalyst is central planner intervention, the money printers have been eerily silent). So just to remind readers of everything that happened in the past month, here are 95 slides from MS with the definitive summary of, well, everything that happened in the past month.

Perhaps the only thing more spectacular than being punk'd by a rogue shareholder who uses the proxy statement of one of the world's biggest financial firms as a public venue for some quite disturbing humor, is that nobody in the US has decided to do this to the hated US financials firms. Yet.

So Facebook keeps falling, and is now floating around the $27 mark.  We’re a third of the way down to my IPO valuation of FB as worth roughly $2-4 a share (or 5-10 times earnings), although I wouldn’t be surprised for the market to stabilise at a higher price (at least until the next earnings figures come out and reveal — shock horror — that Facebook is terrible at making money). The really stunning thing is that even after all these falls, FB is still trading at 86 times earnings. What the hell did Morgan Stanley think they were doing valuing an IPO without any viable profit model at over 100 times earnings? The answer is that this was an exit strategy. This IPO was about the people who got in early passing on a stick of dynamite to a greater fool which incidentally is precisely the same bubble mentality business model as bond investors who are currently buying negative-real-yielding treasuries at 1.6% hoping to pass them onto a greater fool at 0.5% (good luck with that).