Morgan Stanley: Sell the Rally in Financials
April 28, 2008
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Morgan Stanley (NYSE: MS) advised clients on Monday to sell into the rally in financial stocks. Morgan analysts Betsy Graseck, Cheryl Pate and Justin Kwong anticipate further dividend cuts, increased dilutive equity offerings and the continued deterioration in the credit markets.
The comment which was perhaps the most revealing of all, Morgan analysts suggested that we are only in the “3rd inning” of difficulties in the credit markets. This makes Morgan Stanley one of the first - and one of the only - banking institutions that has come out with an extremely negative outlook on the financial markets. The vast majority of financial institutions have recently declared that “the worst is over;” leading to a rally in financial stocks. Indeed, financials in the S&P 500 are trading up more than 15% from the March 17th fall of Bear Stearns.
Have conditions really improved that dramatically since that fateful Monday? That’s a simple sounding question with a complex set of answers. The credit markets have improved, in terms of increased liquidity, with the Fed opening up the discount window for investment banks. However, the real economy, which has had only a minimal impact on the financial markets thus far, is deteriorating rapidly. Home prices are continuing to decline, costs of living are continuing to increase (look at the price of oil and food for examples), and the job market is reeling. The real economy will come back around and hit the financial institutions far harder than the freeze in the credit markets did. The Fed put out one fire, but threw gasoline on the other - through massive inflation - and we have not even begun to witness the effects this will have on our economy.
I am encouraged by Morgan Stanley seeing through the false rally. Their belief that we are in the 3rd inning is probably very close to the truth. We have seen roughly 8 months of deterioration, making the 9th inning scheduled to start in late 2009. I think that might be a bit optimistic, but far more in-line with reality than the “experts” who control the financial media would have you believe.
If you subscribe to the belief that we are in the 3rd inning, then you might want to consider purchasing shares in SKF, an inverse exchange traded fund that goes up 2% for every 1% financial stocks go down. Check out an earlier investing blog post that discusses SKF in more detail, as well as the housing and credit crises.
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Further objective investing commentary:
FreundInvesting.com contributor Ryan Freund is as far away from the rally as possible. He also does not own any shares in any of the companies mentioned in this article. The FreundInvesting.com disclosure policy never lies.
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See - I don’t know about this. Financial stocks have been so beaten up, that I think they’re a good long-term hold. Selling them now almost implies buying them back later, and for tax-purposes, as well as peace-of-mind, as well as not have many other attractive investments, I wouldn’t put a huge chunk of my portfolio in these stocks but then again nothing right now seems impervious to the global economy - besides the “credit crisis” will largely alleviate itself through inflation. If prices go up, then assets rise, which leads to a supply of wealth for the credit market… anyway the new pick of the day is now domestic car makers particularly GM because if fuel prices remain high people will likely buy new, hybrid vehicles.
Hi John,
The business models of banks and ibanks was forever changed with the bailout of Bear Stearns. Their earnings in the past few years were attained through massive leverage, and that worked for a while, but now it’s time to unwind all the leverage. This will have a direct impact on earnings for the forseeable future, far greater than the amount of loss the shares have seen. There’s a real possibility another bank or ibank dies soon (or is taken over). Few are safe (JPM, GS, ML seem to be the best), but I wouldn’t invest in any of them.
I am short Lehman Brothers at the moment, and fully expect them to drop 50% from current levels before a true “bottom” is in.
would you please stop using iBank it sounds INCREDIBLY GAY! Based on my inside sources investment houses have been slowly acquiring stock in banks because they believe they are a long-term hold. Let’s face it inflation is going to flesh out a lot of this stuff and a time-frame of 4/5 years probably benefits these stocks. saying that the business model is forever changed might be too sweeping of what has actually happened but if that is so, then everyone’s f-ed from the start. not that there isn’t substantial change in the air… get the pun?
http://www.reuters.com/article/ousiv/idUSL0353675920080503
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