Morgan Stanley

"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.

So far the stock market has has been having its cake, and eating it with relish too. With stocks having rallied almost 80% from the lows, the one market participant that still seems to not have gotten the memo of a surging economy is the bond market. To the credit of Merrill's Harley Bassman, 10 Year spreads have been trading in a tight range between 3.2% and 3.8% for almost a year (no doubt in big part precipitated by the Fed's control of a vast portion of the bond and MBS market). Should equities take another major leg higher, whether due to NFP or other reasons (most likely momentum inertia), it is very likely that the 10 Year, which many believe has been patiently waiting for deflation to finally be realized, will finally snap its tight trading range and go higher. Much higher. Morgan Stanley sees the 10 Year going wider by 60 bps in the next 90 days.

When asked by Maria Bartiromo on why Morgan Stanley was picked to sell the Tsy's Citi stake, Geithner replies: "That's not a decision i can speak to. We have a good team of people who looked at the competition carefully and made a good judgment." Is Blankfein officially isolated by the administration now? We wonder when Goldman will look at the market carefully and decide to make the good judgment it is time to buy (i.e., for Goldman's prop desk to sell). Also, on whether the UST will be selling its AIG stake (Goldman's ears perking up here): response meanders [thank god Paulson is not trying to avoid the topic here], but no firm committment.

Charlie Gasparino who last week interviewed John Mack (and, we contend, failed to ask any truly provocative questions especially as pertains to MS' record prop trading losses), contends that the reason why Morgan Stanley was picked over GS in selling the Treasury's shopping Citi stake, even as Pandit's firm is set to quadruple and become the most valuable worthless company in the world (with one quadrillion outstanding shares, and a projected price per share of $16, well you do the math), is Goldman's increasingly shaky public image. And that the firm's negative perception may ultimately alienate more investment banking clients who wish to avoid the "fallout of working with Goldman."

The following presentation from November 2009 highlights the top 15 institutional investors that matter more than anyone to Morgan Stanley: essentially the execution and head PM guys who throw MS orders of $100 million and above (all the way to $1 billion and higher). Among the companies listed are BlackRock, Capital Group, Fidelity, Gartmore, GIC, Norges Bank, Wellington, Eton Park, Jabre Capital, James Caird, Meditor, Moore, Och Ziff, and, of course, Paulson. As for the trader envy (as in my G-V is bigger than your Dassault), here are some names to remember Greg Bennett, Nigel Bolton, Philippe Jabre, John Paulson (duh), Greg Coffey and Julian Rifat. Oh wait, did we say Julian Rifat, the same guy that just got busted in the biggest UK insider trading scandal? Hmm: looks like Morgan Stanley sure has an eye for talent. We can't wait to see the metal detectors at Morgan Stanley's Christmas party, as clients demand a bug-free environment. Also, if you didn't make the list - don't despair. Just make sure you front run about $10 billion worth of orders in 2010 and you are golden.

David Roche, former Head Of Morgan Stanley Research And Global Strategy, and currently president of Independent Strategy shares perspectives that should be read closely by any bull who believes that there is anything else to this market rally than pure liquidity driven euphoria riding on the coattails of the Fed's Quantitative Easing program. Deconstructing one by one all the myths that make up the arsenal of every pundit who appears on CNBC to talk up their book, Roche concludes "Of course, the insider game between financial institutions and the central banks can go further. But we do not want to be a part of it because it is unsustainable. It is as finite as QE." And QE is ending in one month, at about the same time when Greece will have to bailed out as its money will finally run out. About 30 days and counting.

Zero Hedge has long been bearish on the prospects for the German Bund, whose yields at 50-year record lows, can only go up. Couple this with German CDS which still inexplicably trades inside of the US, and the fact that the PIIGS fallout is certain to wreak fiscal and/or monetary havoc on the core of the Euro zone, or alternative a favorable resolution is sure to end the Bund flight to safety trade. We have discussed both Bund short and German CDS long positions for those readers who can establish such exposure. Yesterday afternoon, Morgan Stanley's European Interest Rate Strategist came out with a Bund short call along precisely the same fault lines that we have uncovered in Europe's shifting te(c|u)tonic lines.

Now that American equity markets are controlled by Atari and Commodore, which in turn means stocks go up or down purely based on nanosecond colo lag variations, investors who wish to invest in stocks based on this crazy thing called fundamentals are forced to look elsewhere. One such place could be Europe, and now that the Baltic states, Greece, Portugal, Spain, Iceland and Ireland are literally living on an IMF's prayer, the first market which will take a big leg down will in all likelihood be Europe. Starting with that bearish assumption, we present several ideas out of Morgan Stanley's "Sellers' Compendium February 2010" by Ronan Carr. As the title of the report indicates, Europe bulls may want to skip this post. For everyone else, let's dig in.

"Equities tend to do well when real rates are rising, but there are risks that it could be different this time if higher yields are driven by an inflation scare and/or heightened fiscal concerns. 'Start of tightening' remains our dominant theme of the year, and we continue to expect a consolidation in equities associated with the start of tightening. Market volatility around the start of Asian tightening and announcement of more onerous financial regulations confirms our long held view that the start of tightening could be many things other than the first Fed hike. With the general willingness of authorities to move away from crisis mode in recent weeks, we believe the tightening phase has now started and will intensify, and we expect positive payrolls will lead to a change in Fed language and the start of excess liquidity withdrawal in the next few months. We see 6% downside to MSCI Europe in the next 12 months and recommend selling into strength." - Teun Draaisma, Morgan Stanley

First Meredith Whitney, then JPM, then everyone else, and now Barclays. The firm that stole Lehman whacked its estimates of GS and MS, on expectations of a 7% decline (after a 6% increase) in equity volumes, due to a "lower ETF volume expectation as well as lower NYSE-listed volumes that benefited handsomely in 2009 from exacerbated trading volumes in highly volatile, low priced financial stocks that we expect to subside in 2010." This new assumption is making Barclays reduce EPS estimates across the board: "In short, estimates are coming down modestly driven by lower return expectations in both equities and fixed income, lower inflow expectations across both asset classes, and lower equities and futures trading volumes as well as debt and equity underwriting volumes. The downward adjustments are not large, but they do reflect the challenging comparisons that most of the companies in our coverage universe are up against in 2010following what, by all accounts, turned out to be a very strong year for capital markets companies in 2009."

Morgan Stanley, which recently made the daring call for a 5.5% yield on the 10 year by the end of 2010, and which has recently caught the attention of many finance pundits, provides some more projections for 10 year rates not only in the US but globally. Curiously, out of all countries, Morgan Stanley only sees Japan lower by the end of 2010, with all developed countries higher, but none moving as much as the US. Furthermore, by the end of 2010, only Australia will sport a 10 year rate wider than the US, predicts MS.

Morgan Stanley, appears to have reacquired the title of the "Riskiest Bank on the Street" with increasing VaR and declining risk adjusted returns that reflect growing risk in its investment portfolio, which is rife with assets that I am quite bearish on.