What's next for Morgan Stanley shares on Wall Street?

Whats next for Morgan Stanley shares on Wall Street?
It was no surprise Morgan Stanley surged after it beat Wall Street's admittedly modest expectations.

dubai - Bond trading revenues were the silver lining in second-quarter earnings

By Matein Khalid

Published: Sun 24 Jul 2016, 3:42 PM

Last updated: Sun 24 Jul 2016, 5:49 PM

This year was an annus "horribilis" for Morgan Stanley - actually its worst year since the autumn of 2008 when Lehman failed, the universe almost ended and then chairman/CEO John Mack claimed a short-selling cabal almost wiped out the investment bank that had once been Wall Street's most prestigious, white-shoe partnership. This year saw Morgan Stanley hit by a plunge in the 10-year US Treasury debt yield, carnage in the energy junk bond market, losses in fixed income trading and Brexit. So it was no surprise Morgan Stanley surged to 29 after it beat Wall Street's admittedly modest expectations.

True, second-quarter revenues and profits were both down, if much less than the draconian "whisper numbers" I heard from friends in the prop trading world. Paranoia is a professional asset for anyone who trades global markets, as the bloodied veterans of London and Istanbul in the past month alone will agree. Ironically, bond trading revenues were the silver lining in Jamie Gorman's second-quarter earnings, as was his progress on expense control. Earnings per share of 0.75¢ on $8.91 billion in revenues was a superb performance in the lousy operating environment global investment banking/capital markets experienced in April, May and June 2016.

Morgan Stanley traded at $40 in August 2015 and fell as low as 25 in the aftermath of Brexit since its London unit "passports" a disproportionate amount of business into Europe from its trading/banking aeries in Canary Wharf. Morgan Stanley shares have been derated by the financial markets since its fall from its peak was so brutal and protracted at four times the fall in the financial sector index fund. The stock market does not believe Gorman can engineer a profit and revenue turnaround in 2016.

I believe the stock market is wrong and took advantage of Morgan Stanley's distressed levels to generate 25 per cent return premia via selling high-delta puts. Since consensus Street estimate is EPS of $2.86, the Morgan Stanley trades at 10 times earnings, which means there is still juice left in the shares, especially since the bank passed the Federal Reserve stress test and increased its quarterly dividends to 20¢.

Even though Jamie Gorman cautioned against "taking victory laps", his transformation of Morgan Stanley from a wham-bang thank you Mack debt trading firm a decade ago under John Mack to one of the world preeminent, fee income-driven, asset aggregators and wealth managers has now borne fruit. It is a pity Morgan Stanley quit wealth management in the UAE but some of the most talented bankers I respect in the DIFC happen to be Morgan Stanley alums - Big Red Markland in private wealth and May Nasrallah, the Arab world's preeminent female investment banker among them.

I see myriad catalysts that justify a move higher in the bank shares in the next six months. The Fed has approved the board's $3.5 billion stock repurchase programme. Morgan Stanley yields 2.2 per cent in a world where Uncle Sam's ten year IOU pays a mere 1.50 per cent. The bank will slash another $1 billion in costs in 2016-17. Even the FICC is finally on a roll with $1.3 billion in second-quarter revenues, even though Morgan Stanley experienced the Black Death on its bond trading desks. Project Streamline (Gorman's epic cost-cutting drive) will boost the bank's return on equity and its valuation multiple as Wall Street reprices future growth. This means it is not unrealistic to expect Morgan Stanley to trade at 34-35 by December.

Friends and readers asked me about the gold miners index fund (GDX), up 104 per cent in 2016. The time to buy this fabulously profitable index fund was six months ago when I flagged it in this column, not now when the big move has happened.

The writer is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae

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