Morgan Stanley (MS)

Since 1841, US equities have returned about 9% a year, versus bonds of about 05%. However, there are 2 extended periods; 1910 to 1945, and 1981 to 2016, where bonds and stocks gave roughly the same results, with less volatility in bonds. It’s no wonder that in both cases people got to like bonds a lot. In the late 1940s, when stocks started to outperform for the next 35 years, they went up 5 for 1. We have just come out of a period where bonds and stocks gave the same return. So arguably for the rest of our investing lives, we may see stocks outperform by a multiple in bonds. This one is a leader in institutional equities. 43% of their revenues come from wealth management. The wealth management business is the 2^nd biggest in the US. This is a business that is firmly focused on domestic equity. The company has quietly transformed itself into a wealth management machine. Dividend yield of 1.74%. (Analysts’ price target is $48.35.)

Under Obama’s reign, banks were persona non-grata. Under the Trump regime, he has actually said that higher rates are needed. Expects we will see a more supportive environment for investment banks, and companies like this are fairly well positioned to take on higher M&A’s, trading volumes. Higher interest charges will be beneficial. Structurally, this is an interesting place to look at.

Synthetic Long Position. He is looking out to January 2018. He buys a $45 Call and sells a $45 Put. That is exactly the same as if he went out and bought the stock. He is going to get exactly the same return, whether the stock goes up or down. The risk is all the way to zero, and the upside is unlimited. The synthetic is a way to participate in this, without getting involved in the currency issue. The $45 Call is going to cost you less then the sale of the $45 Put. You are going to end up with about a $2 US credit, so you have no money outlay.

(A Top Pick Jan 12/16. Up 47.71%.) They have done a great job with their wealth management business. With the recent election in the US, the Republicans want to dismantle Dodd-Frank, and the banks are salivating at those prospects. This remains an attractively priced stock, even without that.

MET-N vs. PRU-N. They will get a nice tailwind from a steeper rate curve. He prefers MS-N or GS-N to these two.

It has very strong foreign exchange trading. Their earnings are incredibly lumping and he would not use one quarter as a proxy for future results.

One of the largest financial services firms in the US. They have investment banking, securities investment management and global wealth management. Very diversified. They have the leverage to the growing economy in the US. Thinks it will see improvements in M&A activities and fees, and improvement in capital markets. Net interest margins should improve in an eventual higher interest rate environment. Broke above its 200 day moving average last month. Trading at 11X forward earnings and trading at a Price/Book ratio of .86%, which makes it pretty cheap. Dividend yield of 2.57%, which he expects to grow at 8%-9% over the next few years.

Until we get clarity in Europe these payers are all on hold. The question is about where the activity is in the world today. It is a hold if you own it.

Has a little bit of this, but has been paring back recently. When he looks at the US financial sector he has some concerns about M&A activity slowing down, and this one is a big, global, investment bank. Earnings could plateau, and potentially decline towards the latter half of 2016 and in 2017. Prefers some of the other financials including some of the large cap banks.

The bigger the fall the bigger the bounce. It may not be a perfect ‘V’ shape and may take more time to recover. It came down with a lot of other US banks. Over the long term, you are probably in an area to start picking away. Try to do so at a support level (low $20s).

Before the financial crisis, this was like a Goldman Sachs type firm. After the financial crisis, they were a wealth management firm that does some capital market business. Have de-levered the balance sheet from 30X leverage to 10 or 11 times. Earnings growth is really poised to move up sharply. He is looking for 20%-25% earnings growth in the next 2-3 years. Selling for less than tangible book value. A very stable earnings stream.

Came out with fairly disappointing numbers. The volatility in the 3^rd quarter really whacked the investment banks. All this has really done is to bring it back to where it was in 2011. If that volatility is not going to continue at the same level, you would have to think this is one of the better run and more tightly run investment banks. Also, it doesn’t have the commercial banking side as a distraction. If you want to be in an investment bank, this is one of the ones that you should consider.

(A Top Pick July 10/14. Up 11.11%.) Has been very positive on this company for a long time. A great wealth management business, on par with Merrill Lynch’s wealth management business in the US. One missing piece for them has been the lending side. Now that they have the charter to lend, they can increase and capitalize on that. This is a great avenue for them to grow revenue that they hadn’t had before. Doing very well on investment banking. The fixed income business is recovering. They are a big beneficiary of a rising interest rate environment. (Screen showed it as a loss, but Mark rightly pointed out that it was a gain.)

Bank of America (BAC-N) or Morgan Stanley (MS-N)? He thinks there is a lot more value in US banks than in Canadian banks. Doesn’t really have a preference between these 2. The US Bank ETF is a pretty good buy in here. What would really help you is to look at a stock chart and look at the 40 week or 200 day moving average and look where the stock is compared to that average, because it should supply some support.

He feels this bank will continue to make money, but not his favourite. He prefers Goldman Sachs and JP Morgan which he owns. He likes Goldman Sachs for their underwriting and likes JP Morgan for their scope which is enormous.