Morgan Stanley’s $4 Billion Week

Morgan Stanley


sure made the most of the four day week last week, adding 14 percent, or more than $1 billion per day to its market cap .

Upgrades from CLSA analyst Mike Mayo and JPMorgan’s Kian Abouhossein were clearly big factors, as is the expected resolution of a dispute with Citigroup over the value of the Smith Barney wealth management joint venture. Keefe, Bruyette & Woods analyst David Konrad argues the disagreement is likely to be won by Morgan Stanley.

Morgan Stanley

Assuming he’s right, Morgan Stanley shares could see an additional pop. Still, it’s hard to envision Morgan Stanley outperforming other big banks for an extended period. Abouhossein argues the bank is pursuing “the right strategy” in shrinking its fixed income unit, while Mayo contends investors want a “more aggressive restructuring” of the business. Abouhossein writes that the bank’s capital position is stronger by certain metrics, while Mayo offers a complex formula looking at credit default swaps spreads over three different periods to arrive at a price to tangible book value that exceeds Morgan Stanley’s current one by a healthy margin.

Still, none of this analysis presents a compelling case that Morgan Stanley is moving in a radical new direction. Mayo might agree. He contends in his report that shareholders will push for radical changes soon if the company doesn’t start to deliver better results.

But what kind of radical changes might we be talking about? Morgan Stanley has revamped its fixed-income business so many times in the past few years even its own traders must have lost count. A fresh analysis of capital levels or historical swap spreads can only take the stock so far. The dispute with Citigroup over Smith Barney — the companies are $4 billion apart in assessing the value of the business — mostly serves to highlight the fact that Wall Street still lives in a fantasy world of accounting maneuvers. Morgan Stanley may win this round with Citigroup, but it will lose the next one, or the next. With suspicion of the securities business at an all-time high, nothing short of sustained, real earnings over a few quarters will satisfy investors that Morgan Stanley has turned the corner.

—By’s Dan Freed

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