The mainstream media has gone Ga Ga over Morgan Stanley's latest results. Just take a look…
The Wall Street Journal Blog: Morgan Stanley Earnings: Sticking It to Goldman Sachs
Morgan Stanley, which beat earnings analyst expectations by posting better trading revenue than its rivals. While Goldman Sachs Group and J.P. Morgan Chase took hits to their trading books, Morgan Stanley's trading revenue doubled to $3.1 billion from a year ago. What was the secret?
Well, apparently the secret was to get your ass handed to you in the previous comparable period while simultaneously under performing your peers, then turn in a simply below mediocre performance the next reporting period and you will receive accolades from the mainstream media. After all, who cares about those [BoomBust]Blogs who actually bother to read into the results.
The International Business Journal: Morgan Stanley earnings surge, credits trading revenues to DVA …
On the revenues side, results in its three divisions were much improved from last year but slightly worse than last quarter. Net revenues in Global Wealth Management were impressive, coming in at $3.07 billion, compared to $1.92 billion last year and $3.1 billion last quarter.
Like rival Goldman Sachs (NYSE:GS), Morgan Stanley saw lower underwriting revenues from last quarter and last year, reflecting the difficult environment for investment banking. However, unlike Goldman, Morgan Stanley's trading revenues were strong, coming in at $3.3 billion, up 93 percent from last year and down 11 percent from last quarter.
I don't even think these guys bothered to read the results at all. They are comparing revenues pre-multi billion dollar acquisition with the post acquisition entity. Hey, I can double my revenues if I purchased a company that had 3x my revenues too! This is just sloppy! Yet, these euphoric headlines were all over the place as MS stock climbs nearly 10%. Yes, MS did relatively better than GS, but GS is a federally insured hedge fund (that's right, I said it), and we all know how most hedge funds do in times of volatility and declining prices. Well, I hate to rain on the positive earnings parade, but a couple of my subscribers have requested the truth be told!Reggie's Take:
In following up on our Q1 review of Morgan Stanley's Earnings (On Morgan Stanley's Latest Quarterly Earnings - More Than Meets the Eye???), 2Q10, net revenues declined 12.4% (q-o-q) to $7.8 billion primarily owing to decline in trading revenues and revenues from principal investments. Any comparison on year-on year basis is not appropriate as the current year includes the impact of results of Morgan Stanley Smith Barney which was acquired on May 31, 2009 as well as loss of $2.3 billion on account of DVA included in trading revenues in 2Q09. Trading revenues declined 10.8% (q-o-q) to $3.3 billion owing to the tough trading environment in both IRCC (Interest rate, Credit and Currency) and equity segments. In 2Q10, trading revenues included the positive impact of $750 million related to Morgan Stanley's debt-related credit spreads (DVA) versus minimal impact in 1Q10. Excluding the impact of DVA, trading revenues were down 30.8 %( q-o-q). Revenues from principal transactions were impacted by write-downs on certain investments. Revenues from Investment banking and Asset management were flat with growth of 1.9% (q-o-q) and 0.6% (q-o-q), respectively. Commissions increased 4.4% (q-o-q). Comp ratio remained the same as 1Q09 at 49% and the compensation expenses declined 12.0% (q-o-q) to $3.9 billion. Compensation expense included a charge of $361 million related to the UK government's payroll tax on 2009 discretionary bonuses. Non-compensation expenses were up 11.2% (q-o-q) at $2.4 billion due to higher legal costs and technology investment spends. Consequently, net income from continuing operations declined 29.8% (q-o-q) to $2.0 billion.So Reg, Why Don't You Tell Them How You Really Feel?
Okay, since you asked so politely…
The increased volatility in the markets has severely reversed trading revenue growth at Morgan Stanley. The reported trading revenues include the positive impact of $750 million representing change in the fair value of certain of its long-term and short-term borrowings due to changes in Morgan Stanley's credit spreads. Excluding DVA impact, the trading revenues plummeted 30.8% (q-o-q). For those of you who don't get it yet, that is showing the same negative path as Goldman's highly disappointing number (see The BoomBustBlog Review of Goldman Sach's 2nd Quarter, 2010 Performance: I Told You So!). The only reason why Goldman's drop was so much larger was because Goldman made so much more money than MS last quarter! The volatility disease is still in the patient.
Trading revenues account for 37% (TTM basis) of total net revenues of Morgan Stanley and fluctuations in this line item can significantly influence the revenues and profitability of the company. The effect of high volatility of trading revenues has trickled down to its net revenues and earnings and the same is reflected in the chart below:
Compare this to a similar graph for Goldman and you will see similar wiggly lines denoting earnings volatility stemming from reliance on trading…
The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don't call Goldman the world's most expensive federally insured hedge fund for nothing!
We have uncovered hints of solvency stress (considerably more so than that of Goldman's) and the usual high risk after pouring over Morgan's books. All paying subscribers can download our analysis and view of MS's latest results below (click here to subscribe):
MS 2Q10 review
MS 1Q10 Review (351.75 kB 2010-05-24 09:43:31). Historical MS analysis and valuations may downloaded as follows:
MS 4Q09 results (275.43 kB 2010-01-28 04:38:11)
MS Simulated Government Stress Test (2.49 MB 2009-05-05 11:36:25)
MS Stess Test Model Assumptions and Stress Test Valuation (339.99 kB 2009-04-22 07:55:17)
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