Not Enough Risk At The Moose?

Morgan Stanley like I predicted posted a much worse loss then expected. The primary reason, like I predicted were bigger losses /writedowns in their Commercial Real Estate portfolio. Not to say I got this one right, you would have to be living in a cave the last 6-9 months not to realize that the Moose was treading badly in CRE. Well, let me take that back, many Wall Street analysts had them making money on lower loss assumptions in Real Estate. Don't know what Real Estate market they were analyzing, certainly not the one on this planet.

But what is somewhat troubling is the Moose's aversion to risk, from reading the earnings report, they really pulled back on many risk trading strategies, which severely hurt them this past quarter. Goldman, JP, BOFA (Ex-Merrill), even the morons at Citigroup had stellar trading results this past 3 months. The Jan-Feb-March period was shangra-la for fixed income, equities, and commodities prop trading, but Morgan Stanley couldn't participate as they sat out on the good times. What does this say about the state of affairs at the Moose? Were they the only ones to realize whats actually happening? Were they the only ones to cut down on risk? Moose's leverage ratio is down to 11-1 from 13-1 at the end of 2008. Goldman on the other hand is back up to 20-1 leverage. The drop in leverage is ultimately good for Morgan Stanley and the broader markets, but leverage ratios in general have started to rise once again, meaning risk appetites are again increasing. This is a development that must be monitored.

This is not surprising, as the financials are borrowing at zero interest rate levels and lending/investing much higher, as well as the nearly hundreds in billions they have raised via the governments TLGP program at low rates which they are using not to lend but to finance their trading positions.

OR..........

Is Morgan Stanley's lack of risk taking something that should be monitored? Is there something that the company is not telling the public about their debt exposure? Risk taking is as natural to the Moose, then say sex is to rabbits. If the Moose is not going to take risks, why should investors afford them a higher P/E Multiple relative to Goldman? Goldman currently trades at 12x 2009 earnings, while Morgan trades at 15X. The trade that investors are putting in is to go long GS and short MS, to take advantage of this PE abnormality. I personally think both companies should trade at around 7-8x 2009 earnings, until the broader credit markets/economies improve.

I can understand CEO John Mack is trying to remake the company into a more diversified company, the type that doesn't take such large risks that resulted in huge losses in 2007-2008, but the unexpected losses they had this quarter is a direct result of this type of strategy. Does this mean that Morgan wont have much bigger losses the rest of the year when markets eventually turn over and go back down? Are they already taking into account the next down leg of the credit cycle? Morgan's defensive strategy still could prove to be the right move if markets remain shaky. I commend the Moose (backhandedly) for taking such a stance, it actually looks like they learned something in this entire credit fiasco. I applaud the decrease in leverage to 11-1, when the markets do correct again severely, maybe the Moose will only take $5 Billion instead of the $10 Billion they took the last time when the markets "froze up".

Too many people have become too positive on the financials. The market has rallied nearly 30% on a roughly 70% move in the PHLX Banking Index. This market needs the financials to rally, and rally further, but these stocks are trading on air, and are running out of gas. The reasons I am still very negative on them are as follows:

-Buying the banks is like buying the economy. Its a leveraged bet on things getting better from here on out. I just don't see it as the market is running ahead of a general economic upswing. The markets have all of the face cards here.

-Does the general public have any clue how the banks are structured? The public still doesn't understand what the banks own on their books as well as off their books. The transparency is way to murky.

-Stress tests are out tomorrow, most believe that the regional banks like Suntrust, Regions, Zions, Fifth Third, and others need much more capital.

-The earnings have generally sucked, as I have written, the earnings are all accounting driven.

-The amount of wealth destroyed does not equal the amount that has been put back into the system, meaning the system needs an additional $5 Trillion of stimulus at this rate.

-More and more regulation of the financial system is on the way, the banks have been raping customers for years, now Congress is on the war path with credit card reforms.

-Banks are in no position to pay back TARP, no matter what they say.

-Retail Mortgage exposure is the tip of the iceberg, they figured out a way to sidestep CDS, and CDO RMBS exposure, but what about CMBS? HELOC? Auto Loans? Credit Cards?

-The market is too obsessed with the financials, these banks have become the high flying Tech/Internet stocks of the late 90's. Those stocks cratered and never came back, but the markets did. Why?...because the market moved on to other sectors.

-The government has not properly punished the banks for their absurd and ridiculous behavior, sure they are not the only ones to blame for the current crisis, but they are the only ones who to get bail outs... have they not?

-The underlying problems of the financial system have yet to be even investigated. The system is corrupt and rotten, letting the banks earn there way out with tax payer money sets a dangerous precedent for the future.