Morgan Stanley

We get a glimpse into the latest leading unemployment indicators courtesy of Fox Biz' which notifies that Morgan Stanley in addition to previously reported job cuts, will also be shutting another 300 branch offices and cutting as many as 1,200 jobs over the next year in an attempt to reduce overhead. The primary reason for this: "there has been a significant slowdown in small investors turning to brokers to execute orders; many investors are sitting on cash because they are fearful of the recent volatility in the markets. Because of the declining retail order flow, every major brokerage firm will have to cut staff, Morgan even more so because of the overlap from the Smith Barney acquisition." Apparently promises by the SEC and the quant/HFT community that the May 6 crash will never, ever repeat again are insufficient to placate the investing population which is now justifiably turning its back on equity investments, as seen by last week's massive ongoing outflow from domestic equity mutual funds. Absent Obama making another March 2009-like appearance discussing attractive "profit and earnings ratios", we don't see a material catalyst to change risk perceptions.

The most recent "it's time for risk on" note from Morgan Stanley is pure comedy defined. Jim Caron is now openly fishing to try to get any last remaining greater fools into the HFT shark infested swimming pool. The punchline: "front-end risk metrics remain stable, as 3m Libor sets slightly higher at 0.537, which is actually lower than was expected on Friday. Tactically, as a result, I think the time is ripe to put on risk right now." The salvage attempts by the TBTFs are becoming a surreal Lewis Black skit. Oh well, one always needs to goal seek "better then worst case data" to fit with the imminent risk on reversal. Looks like gold longs got the memo and saw right through it.

We had more respect for Jim Caron: the man who has traditionally been very objective in his estimation of market risk comes out with this particular measure of "notable risk improvement" - "3M LIBOR set a mere 0.2bp higher than it did yesterday – this morning at 0.53781%." Seriously? He also proceeds to give some other dead cat bounce indicators which are supposed to demonstrate that all is well in the world again. Obviously when confidence in the global Ponzi is dangerously low, the voices of any naysayers must immediately be silenced. We are just confused why hedge funds continue to exist in this "alpha is now extinct" environment: we have gotten to a point where one buys if other buys, Risk On, and vice versa, Risk Off. Why pay someone 2 and 20 to do this is beyond us.

Liquidity. A word you will hear often-repeated today, in fact the more you hear it, the less of there is. Here is Morgan Stanley's Jim Caron discussing why worsening USD funding conditions will force the Fed's FX swap lines to start being used again, now that FX implied USD Libor has passed 1.22%. The problem (for Ben Bernanke) is that the market knows these exist, and yet that has not stopped Libor from rising. If even the blanket promise of endless money printing to satisfy dollar demand is insufficient to prevent the liquidity run, what else can the Fed do?

The whole world is still stunned from what just happened today. In essence, Germany has taken a major step to not only declaring it is the master of the European continent and all those who don't like it can just focus on their own bankrupt banks (Sarkozy), but is breaking ranks with the US, as the surprising nature of today's move was aimed not so much at European "speculators" but at Wall Street. Furthermore, knowing full well it may soon lose access to US capital markets, Germany is likely preparing to abandon the EU and EMU (to which "good riddance" is likely all it has to say). But the key implication from today is that Bernanke must now move with urgency to find a way to keep the pressure on the dollar as he is now solidly losing the currency devaluation race. The impact of this on major multinationals and on the "must do" reflation experiment could be cataclysmic. Additionally, without gobs of new domestic liquidity to prop it up, the US market will now likely collapse, further forcing Bernanke to act against the interests of the US Middle class and America's savers. We can not wait to see what he pulls out of his sleeve. With ZIRP ravaging the nation, and negative interest rates still illegal, he may just find his hands very much tied.

In the meantime, here are some preliminary shocked observations on today's events from Goldman Sachs and Morgan Stanley.

The WSJ reports that "Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter say, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis." In essence, Abacus comes to Times Square. And the latest soundbite for today's media feeding frenzy: the "Dead Presidents." So going down the list: Goldman - check, Morgan Stanley -check, Merrill, Deutsche and UBS - to come, especially once Khuzami finds a replacement to fill his recused status when investigating the German bank.

Yesterday we discussed the statistically impossible trading desk results of Goldman Sachs, which reported in its 10Q that it lost money on exactly 0 days last quarter, and was profitable on 63 out of 63 days. Today we find that the rape and pillage of the middle class was not isolated to Goldman, and that JP Morgan also had a flawless quarter. And if the odds of Goldman making 63 out of 63 are virtually impossible in any universe in which risk goes hand in hand with return (but in those in which monopolies are encouraged and bailed out), the coincidence of the two main firms that control the world having a perfect track record is impossible². And since things in reality tend to be zero sum, when everyone makes money, someone may be tempted to ask the question, just who is losing money? And the answer, dear taxpayers, and [Goldman|JPMorgan] clients, is you.

The one biggest bond bear since December 2009, Morgan Stanley, has just thrown in the towel, and instead of expecting 4.50% on the 10 Year by June 30, the firm has now pushed back its target by 2 quarters. Which means that its longer 5.50% Target on 10 Years has been scrapped. The firm's strategists have also adjusted their call on Fed hikes (now expected to occur no sooner than 2011 instead of September 2010). Lastly, the firm's most vocal call, one for a substantial 2s10s steepening to 325 bps has also been moderated from Q2 to Q4. We also include the latest Rates Strategy slide deck from MS.

Morgan Stanley's Stephen Roach spoke with Bloomberg's Tom Keene earlier, pointing out the most troubling statistic about recent market activity, which has to do with both the frequency and amplitude of catastrophes: "The crises are coming with greater frequency. Over the last 25 years we have had an average of one crisis every 3 years. The gap this time is 18 months. The scale is bigger. This is a much more serious problem in the eurozone than the Asian financial crisis." So intercrisis half-life continues to decline as the severity jumps exponentially. In other words, in nine months we will need a combined Fed-ECB-BOE-PBoC-BOJ effort for about $10 trillion just to calm the markets. 4.5 months after that, $100 trillion more... And so forth. Enjoy.

• Final step towards bilateral loans and IMF stand-by agreement taken
• The aid package limits the near-term liquidity risk and buys more time
• But the long-term issue of debt sustainability (i.e., solvency) remains
• Debt restructuring unlikely in the near term, but possible longer term
• Financial market reaction to the package will determine whether it works
• Key factors are additional austerity measures the IMF/EU are asking for
• Near-term event risk: last political or legal hurdles
• Contagion: Focus back on other peripheral countries (Portugal, Spain)
• Portugal may be too small to matter; Spain would raise capacity issues.
• Periphery needs to act now, in our view, and propose additional austerity measures

The full blown curve inversion that is taking the PIIGS by storm is slowly coming to a TBTF near you. As the chart below shows, the 5s/10s in CDS curves for the most prominent banks are now inverted, while the bulk of them are flat at best. Should the ongoing pounding in GS stock continue, look for flatness to slowly creep to the 4, 3, 2 and 1 Year marks.

"Somewhat paradoxically, the show of solidarity for Greece by other euro area members and the ECB raises the risk that the euro will break apart eventually. Seceding from the euro area to devalue is very costly and risky. But seceding to revalue and introduce a harder currency is easier. Germany might opt to do so one day. * The road to such a break-up scenario leads through even more fiscal profligacy and divergence in the euro area, a politicisation of monetary policy, and a weaker currency. Recent events suggest that the trip down this road has started." - Morgan Stanley

Morgan Stanley closed this deal in June, 2007 at the point when the residential markets were crashing. It defies the imagination why they would at this critical moment raise and commit $8.8 billion to the commercial real estate market. What were they thinking? Hint: fees.

Greg Peters, and other strategists from Morgan Stanley are out warning anyone who will listen that what is going on in the economy is a fool's rush (we would add predicated by momos who know nothing about reading financial statements but everything about dollowing a trend) and that MS' core advise to clients is to "sell into strength." Here is how Morgan Stanley differs from the consensus. Also discussed are returns before and after the EPS season, and how to hedge surging implied asset correlations.

In this morning’s Option Investor, Jim Brown makes an interesting comment on Greece’s attempt to move some of its bonds in the U.S. market. Here’s what he wrote:

If you don't want to bid for U.S. debt you could walk on the wild side and bid on up to $10 billion in Greek debt being sold in the U.S. sometime over the next 2-3 weeks. Morgan Stanley is the likely candidate to sell the debt after a Goldman Sachs effort fell apart from lack of bidders. Greek finance minister George Papaconstantinou will lead a U.S. road show sometime after April 20th in an effort to drum up interest. Greece is trying to sell itself as an emerging market, Balkan country and thus investors will get a higher yield from emerging market debt. I guess that is a good ploy if they can sell it but I think U.S. investors may be a little more intelligent than that. Secondly, if Goldman could not sell the debt I doubt Morgan Stanley can either. Greek 10-year debt yields rose over 7% intraday today.

We had not heard of the earlier Goldman attempt. This could get interesting.