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The Coalition of the Ailing

by: Felix Salmon October 10, 2008 | about stocks: MS    
Felix Salmon

Felix Salmon

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I know that yesterday's blog entry on Morgan Stanley (MS) is doing the rounds, not least because I got a phone call from within Morgan Stanley telling me so. (They weren't very happy about it, needless to say.) But I also know because the comments just keep on coming, both here and at Seeking Alpha, blaming me for the fall in the MS stock price, saying that I want Morgan Stanley to fail, and calling me a "financial terrorist".

I can assure everybody who accused me of being short Morgan Stanley that I'm not, in any shape or form. In fact, I'm long, thanks to the index funds in my retirement account. I also wasn't passing on any rumors. But there's no denying the existence of some serious bears out there:

The Jan-2010 7.5-Put options are trading above $5: people are willing to pay $5 for the right to sell MS at $7.50, translating to a market sentiment of about 65% that the stock will become worthless.

Jessica Pressler picked up some typical MS comments from around the blogosphere and collected them for her own blog entry about John Mack:

His fingernails are bitten down so far that his fingers are bloody stumps. There is only one thing bringing him joy right now.
The silver lining on the cloud is that he knows that someone is looking after him. An army of commenters, like a band of guardian angels, have risen up to wage battle against Websites that have reported on such rumors. Who knew he had so many friends?

And then, wonderfully, a commenter on that blog entry came up with the best name yet for the G7 ministers meeting today in Washington: the "Coalition of the Ailing".

Which is really the perfect name also for the army of commenters attacking anybody who dares to question Morgan Stanley's viability.

Morgan Stanley closed at $9.68 per share, down 22% on the day and 60% on the week: it's now trading at just over 30% of its stated book value. Has any bank recently traded at a price-to-book ratio of 30% and still had any chance of surviving as an independent entity?

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This article has 7 comments:

  •  
    Oct 10 10:28 PM
    Felix, these last 10 days have had an eerie feeling about them.

    Its almost like SOMEONE just doesn't want the Leveraged Debt Industry to survive.

    C'mon, is that really surprising to anyone? What is the Leveraged Debt Industry up to anyway? It has a business model something like Let Us Wealthy Individuals and Corporations Exploit Poor People for Every Dime.

    Here's something else that's scary:

    In our local pape the October 10 front page news, ‘Nothing stops stock plunge,’ about the 679 point plunge in the stock market on Oct. 9, was juxtaposed with ‘They all filled up for $20, and now they’re all wanted,’ and article about ‘possibly hundreds’ of criminals stealing from a local company by participating in a gas card scheme.

    From my perspective, both articles are actually about the same thing: how far we have fallen, and how much farther down we have to go.

    It looks more and more to me like the companies whose profitability depends on Leveraged Debt are doomed.
    Reply
  •  
    Oct 11 08:01 AM
    Felix,

    Forget your blog. With your skill at scaremongering, you missed your true calling: an anchor on CNBC. If any of your readers have half a brain and believe this panic is a near-term phenomenon, then they need to recognize that this will be the greatest market buying opportunity of their lives. And, clearly, those companies that were unjustifiably beaten down the most by this unfounded fear offer the biggest buying opportunity. And in my mind, Morgan Stanley is #1 on that list.

    Let me share three important facts about Morgan with your readers:
    --One of the strongest balance sheets out of any financial services firm on the planet
    --Lowest securitized marks of any financial services firm in the world
    --One of the highest Tier 1 Capital Ratios of any bank holding company

    Oh, and by the way, I read on another blog that John Mack said this week at an employee town hall that the firm will not have to tap into the $700bn TARP fund. If true, this would be a clear testament to Morgan’s financial strength and the conservative marks on their balance sheet.

    And, Felix, think hard about this: Goldman’s market cap is currently FOUR TIMES the market cap of Morgan Stanley. Morgan blew away Goldman in the most recent quarter, and Morgan is far better positioned in this new environment with it’s platinum retail broker-dealer business (heeelllooo…not a capital intensive business AND a great source for the oh-so-important deposits). And perhaps even more important, the deal with Mitsubishi (the SECOND LARGEST depository institution in the world) will likely prove to be more of a strategic alliance than a capital injection. What else does Warren have to offer Goldman besides Geico insurance for their employees’ Ferraris?

    To put it simply, Morgan is no Lehman…it ain’t even close. The current fear in the market will abate in the near-term and Morgan doesn’t need to tap into the unsecured debt market until at least 3Q09 (more than enough time to ride out the wave of fear until the CDS spreads decline).

    Morgan has a long future and I’m going long in their stock. And if any of your readers follow my lead and make a profit, they shouldn’t thank me. They should thank you, a CNBC anchor-in-training, for your fear tactics. They also, of course, should thank that career tort-lawyer, politician running the SEC or reopened the shorts to batter good, sound companies during this crisis of fear.

    Get and agent, Felix, and get on CNBC.

    Kind regards,
    --JP
    Reply
  •  
    Oct 11 08:19 AM
    All things fair, I'm very glad that your blog got so much traction.
    As one who has analyzed the financials recently, MS was on my shopping list and yesterday was a good day to start Thanksgiving early.

    I completely agree with the previous poster about MS's profile.
    Also, I think that the economic powers of the world have learned their lesson - so MS has more than angels looking after it now.

    IT IS THE EXAMPLE TO SET THINGS STRAIGHT.

    Watch LIBOR plummet on Monday and let the domino effect begin!

    VR
    Reply
  •  
    Oct 11 12:50 PM
    Let's be clear, Felix, about why you're getting so much heat and why people are calling you a fear monger. Your post yesterday gave zero details on why *you* think that MS is a good or bad company in the long-term. Instead of actually putting your own thought into the realities of their balance sheet and their ability to produce profits (which is what their stock price is supposed to be about in the first place), you relied on obtuse generalizations and extremely suspect comparisons.

    You think they're comparable to AIG because their balance sheets are about the same size?? Really? That's it? That's as far as you delve into their balance sheets, the bottom line? If so, then you have no business commenting on stocks off any sort. A simple look at the bottom line of a balance sheet tells you absolutely nothing. It's the quality of the assets within that tell you something about the company.

    Even the most cursory look inside the balance sheets of AIG and MS will note stark differences. Most importantly, AIG (looking at their 10Q for the quarter ending 6/30/08) had a paltry amount of liquidity available to them. Their cash balance was only $2B and they had very few other liquid assets. They had only $20B in receivables and $6.6B in investment income due. This means their truly liquid assets amount to only about $29B. $836B of their $1T in assets were tied up in securities whose actual value is unknown and possibly much less than reported in the balance sheet, and may not be readily sold in this environment anyway.

    Morgan Stanley's balance sheet (from 10Q for the quarter ended 8/30/08) shows 10 times the amount of cash ($23.7B), plus $29B in US Treasuries, plus $36B in foreign treasuries, plus $65.8B in receivables. So, even if you include only the above and discount some other potentially liquid securities they list, their liquidity position totals up to $154.5B! Over 5 times what AIG had.

    There's no comparison between AIG and Morgan Stanley's balance sheet and the way you equated them is completely irresponsible.

    What's more, while Morgan Stanley's income had dropped significantly in the last year (as every financial institution has), they're still making a profit! AIG was already swinging to a $5B loss in June which likely was accelerating before the takeover.

    Take a look inside the balance sheet some time, there's actually some real facts to be had.
    Reply
  •  
    Oct 11 03:29 PM
    @rich
    What's more, while Morgan Stanley's income had dropped significantly in the last year (as every financial institution has), they're still making a profit""&quo...

    Rich, take a look at their profit, the value of their bonds go down so they book a profit!!!!!!

    If their bonds go to zero they'll really make a big profit!!!


    On paper at least, the wonders of mark to market.
    Reply
  •  
    Oct 11 04:48 PM
    Felix:

    So **you** are the cause of the drop at MS.... Tag! You're it!

    Jim Cramer
    Reply
  •  
    Oct 12 03:33 AM
    We have a coalition of the clueless here in the comment section. This is not about whether MS is a viable enterprise. This is about perception. Whether anyone will trade with them Tuesday. If no one will, they are toast. Liquidate and distribute the remains to the stock holders. Those are the realities of what is going on here. Their only worth is as an ongoing enterprise making deals.
    Reply
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