Morgan Stanley

Morgan Stanley has released its comprehensive quarterly metals outlook update for Q3, which while traditionally furiously wrong in its price targets for the assorted metals under consideration, represents one of the best reference materials for the underlying fundamentals behind each hard asset including base and precious metals, steel and bulk commodities, mined energy, rare earths, even such arcania as zircon and titanium dioxide. We suggest readers avoid the conclusion by Morgan Stanley which ultimately will be based on the firm's prop trading bias, and instead focus on the key supply/demand mechanics in any given product. For the sake of reference, we break down MS' outlook on gold, silver due to the special place these hold in the modern geo-political and voodoo economic discussions.

It was only yesterday when we observed that the story of GM's relentless channel stuffing has now gone mainstream. Sure enough, a few hours later, here is Morgan Stanley with a stick save so pathetic it does not even deserve commentary.

It just has not been Morgan Stanley's year: first the bank's prop desk got decimated by the massive tightening in MBIA CDS (previously discussed here), and then, as noted last week, the firm's rates desk got creamed by a massively wrong bet on 30s - 5s TIPS breakevens (courtesy of another ex-master of the universe who realized the hard way that things are not quite as profitable when you move away from being God's right hand guy). We previously broke down the details of the trade, and the only open question was: qui bonoed? Courtesy of the WSJ we can now close the file on that one. The firm, which as so often happens to be the case, that took Morgan Stanley to the cleaners is the one true rates behemoth, PIMCO, which sooner or later, always gets it pay day. Bottom line: "Pimco made about $50 million from its trade over several months." Perhaps prop trading really should be banned to protect banks, if not from their stupidity, then certainly from their hubris.

About a year ago, Goldman Sachs experienced an unprecedented P&L wipe out after in Q2 it bet on a decline in volatility, only to be caught offguard by the first Greek bailout which in turn cost the firm's prop desk hundreds of millions in losses. Now, about a year later, it is again the same sellside hubris and pretty much the same players that make a repeat appearance, after Bloomberg just disclosed that a very wrong way bet on 5 and 30 year TIPS breakevens has cost the interest-rates trading group "at least tens of millions of dollars." And while Jim Caron's traditionally wrong rates call has up to now only cost his clients money, this time it is his own trading desk that may be left collecting the shrapnel. But topping off the irony is that it is once again an ex-Goldmanite who is responsible for the actual trade. Per Bloomberg, "The interest-rate group is run by Glenn Hadden, who Morgan Stanley hired from New York-based Goldman Sachs in January." News of the loss made their way through the trading community earlier and was manifested in the weakness of the "hedge fund" banks: the Goldmans, the JPMs and, of course, the Morgan Stanleys of the world. As a result, MS is now forced to unwind the trade at a major loss (at least for the current quarter, we have to ask John Paulson if the trade is profitable on a cost basis), which will likely have substantial repercussions for the short and long breakeven curve for days, if not weeks.

It has not been Jim Caron's decade. The Morgan Stanley rates strategist, riding on the coattails of the always wrong Morgan Stanley economics team led by David Greenlaw, has been wrong in his annual rates call year after year after year. Which is unfortunate because while unable to see the forest for the trees, Caron does have a better grasp of rates than most other Wall Street penguins. That said, just like everyone else in the status quo, Caron has just come out with another short duration call (i.e. sell bonds), probably the 6th time in a row he has done that in the past 3 years. Perhaps 7th time will be the charm. Amusingly, Caron, terrified to be seen in the same camp as Bill Gross who is short bonds on fears that there will be nobody available to step in an buy the 80% of gross issuance that has been monetized by the Fed to date, make this very loud caveat on his short bond call: "To be sure, our shift toward short from neutral duration has nothing to do with the end of QE2 and related concerns that there will be a lack of demand to buy US Treasuries once the Fed stops buying them. As we have stated many times in the past, the outlook for the economy will be the main driver of yields, not the end of QE2." No, instead Caron believes that the sell off in bonds will be due to the same bullish economic growth call that he has been predicting over... and over... and over... and over... etc. More interesting is how he suggests the trade is implemented: in MS' view the best way to be bearish on rates is with a DV01 neutral 7s-10s flattener: "we continue to recommend being short 5s on the 2s5s10s fly. In line with the butterfly, and in order to express a more robust short duration position, we recommend a curve flattener on the UST 7s10s curve: · Sell $133.7mm OTR 7y Notes; · Buy $100mm OTR 10y Notes." Perhaps those who want to be short bonds, but for the right reason, that predicted by Zero Hedge and then Bill Gross, this may be one of the better ways to put the trade on.

2 Young 2 Die and other important matters on yet another Friday afternoon before the shit could hit the fan three day weekend...

Asked about the fate of the economic "recovery", which incidentally is nothing more than a $2 trillion dollar dilution-funded blip on the depressionary downtrend commenced in December 2007, Greg Peters, the head of fixed income research, at Morgan Stanley, the firm whose other fixed income strategist Jim Caron will now have been proven wrong three years in a row following his annual broadly bullish call for a jump in rates (not based on bearish considerations such as those postulated by Bill Gross... bullish), tells Tom Keene that the recovery is "Too Young To Die." Yep. That's the justification. Alas there was no mention that the 98 year old ponzi scheme perpetrated by the Fed since 1913 is now "Too Obvious To All." And when that fails, many of the same people who get paid huge sums of recycled taxpayer money to come up with catchy four word slogans while spouting flawed economic projections will suddenly find themselves "Too Pitchforked To Fly Away (To Non Extradition Countries)"

And like clockwork, the expect avalanche of economic downgrades greenlighted by Jan Hatzius begins. Heading up the lemming crew, as always, is Morgan Stanley's David Greenlaw. "We are adjusting our GDP growth forecast lower for the third time this year. We now look for +3.3% GDP growth over the four quarters of 2011 (versus +3.6% in our April update). Essentially, this puts us back to where we were in early December – before policymakers enacted a package of tax cuts aimed at stimulating the economy." In other news David, how do you spell roundtrip (and is a refund due)? Or "hockeystick?" Or how about an imminent push for more QEasing once the inflationary "shock" is forgotten (unless Saudi Arabia falls to the tsunami of "spooks on the ground" in which case all bets are off), just in case the virtuous cycle doesn't quite kick in, in this 3rd, and soon to be failed, attempt to jump start the economy. In other news, we can't wait to hear what validation LaVorgna, who is always at the very end of the lemming bus, comes up with to justify his feverish enthusiasm over the economy, which once again proves to be worth the amount of money DB's customers pay the firm's sales coverage to bet against them.

And the hits, er, cuts, just keep on coming. Q1 GDP, which everyone now has forgotten was supposed to be the inflection point in the new and improved American Golden Age story: remember that whole payroll tax benefit which was expected to contribute 1.5-2% GDP points, is being cut by everyone. From an original consensus of nearly 4%, this number is now down more than 50% according to Wall Street's cadre of so-called economists. The latest lemming to join the Jan Hatzius downgrade wagon (yes, folks: Goldman is and always will be the key factor in any swing in convention wisdom as today's move in crude demonstrates so vividly) is Morgan Stanley's own David Greenlaw who a month ago couldn't contain his enthusiasm about the explosion in US economic activity. So much for that giddyness... And now that Q1 GDP is done, look for Q2 and H2 GDP downward revisions, and screams of protest demanding more fiscal and monetary (QE3) stimulus. Since the fiscal route is a dead end, we let readers conclude what that means for the future of the DXY and all the carry trade derivatives.

Matt Taibbi has resurfaced with another stunner of Wall Street impropriety which will lead to merely more silence, even more unanswered questions and be quickly buried by the kleptocratic oligarchy: "It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment."

When we reported on some peculiar action in MBIA CDS back in February, we said that one of the reasons for the massive tightening in MBIA CDS which ripped from 55 pts up to 37 pts in the span of two weeks was possibly on CDS commutation speculation (this in addition to ongoing aggressive litigation by MBIA against mortgage originators who may be commutating CDS in a quid-pro-quo fashion to achieve prompt settlement). But whatever the reason for the move, one thing was certain: one bank more than anyone, will be hurt materially by the move - Morgan Stanley. As we said "According to a source, Morgan Stanley was short risk the monoline after it had obtained protection on a static pool of CMBS via an MBIA-related entity called LaCrosse Financial. And as LaCrosse wrote protection against the static pool that was non-transferrable by Morgan Stanley, the bank hedged its counterparty risk by purchasing protection on MBIA itself. So while CDS was blowing out, MS was profiting. Then over the past two weeks, the bank has seen hundreds of millions in paper P&L evaporate through the window. The only question is when will Morgan Stanley close its now underwater protection (which continues to bleed a substantial amount of theta), especially since the actual credit event may have just been pushed back indefinitely. In other words, those who are short the MBIA CDS may wish to wait just a little longer, and see just what the breaking point on Morgan Stanley's collateral call is." Well, per another source, and per Euro Money magazine, that breaking point has been reached and MS has now been forced to close its exposure, at a loss that some speculate could be in the billions.

By now it is no secret that the end of QE2, should one actually transpire as the alternative is surging bond yields which as described yesterday means gross interest expense as a percentage of total US revenue would hit a Weimaresque 30%+, the collapse in equities will be dramatic, once the marginal buyer of up to $8 billion in daily risk disappears, and as was further pointed out recently, the only variable that every asset class correlates with with no exception is the Fed's balance sheet. And while the drop in equities is all but guaranteed, a more important question is what happens to not only Treasury rates but to the shape of the curve. Even though the jump in rates seems inevitable (to those whose career does not depend on pursuing the lemming-like call of the sellside groupthink wild), the finer nuances in the curve shift have not seen a broad discussion. Morgan Stanley's Jim Caron, whose predictive track record leaves much to be desired, has released an analysis of what the end of QE2 will look like from a rates perspective. We urge readers to take this analysis with the same dose of skepticism as any FX recommendation from Goldman's Thomas Stolper.

Unless we are reading this just released 13G from the China Investment Corporation wrong, Morgan Stanley has just gotten a new second largest holder of its stock. According to the 13G, CIC now owns 150,782,379 shares, or 9.97% of the outstanding stock, compared to 34,719,468 as of August 9, 2010, which in turn was a sneaky decline of 1.6 million shares from the prior period. Instead of buying our bonds, are the Chinese now looking at purchasing our banks directly? The attached chart shows how MS' holdings looked just before this 13G filing. CIC is now the top 2 holder of MS stock, just behind State Street with 163.7 million shares.

Something scary this way comes from Morgan Stanley's Quantiative and Derivative Strategies: "market conditions over the last two weeks are somewhat reminiscent of that during the August 2007 ‘Quant Crisis’. In only a few days, a number of quantitative long-short equity funds experienced unprecedented losses in seemingly ‘normal’ market conditions. We do not suggest here that the magnitude of hypothetical losses match those from 2007, however, there is little question that the rotation has drawn attention of many quant investors." In other words, the massive groupthink trade that we have been warning about for months may be about to claim its first mass casualties. The just released report by author Charles Crow elaborates what many have been suspecting, yet few dared to voice: "Recent substantial factor movements in Europe have contributed to portfolio volatility and, in some cases, abrupt performance degradation. Portfolios positioned to take advantage of prevailing factor trends may have suffered substantially over the last two weeks." Is the groupthink trade about to end? If so, does that mean the funds will be forced to stop "not fighting the Fed" as this is really the only factor-driven trade that has made sense. If so, we have reached the critical point where being aligned alongside the Fed has no incremental marginal returns, at least for the non-Primary Dealers. This could promptly transform to a watershed event, especially since as Morgan Stanley adds, the market currently has "relatively low liquidity" to absorb the fringe moves.

It must suck to be a banker at Morgan Stanley these days. While their colleagues at Goldman make a not too shabby $430k, MS' workers are forced to toil over a measly quarter of a million. The company today reported total year end compensation of 'just' $16,048 million which amounts to $256,627 per person, or 40% less than Goldman. Granted, the number is a whopping 50.8% of LTM revenues, and it is a 7.5% increase from last year's $238,652 average... but there is a catch: in 2010 employees employee comp subject to deferral increased by 50% from 2009, from 40% to 60%, and a whopping 80% for operating committee members. So not only are they getting paid less, but they are not going to get it at all for many years. No wonder MS is now the administration's favorite insolvent company IPOing bank (except, of course, for the case of AIG, whose nationalization saved Goldman Sachs. It is only natural that that one is IPOed by... Goldman Sachs).