Morgan Stanley (MS)

(A Top Pick Dec 9/16. Up 12.4%.) Synthetic Long Position. Buy January 45 calls at $4.90 and Sell January 45 puts at $6.75. At the time, this stock was $43.73 and today it is $45.17, so the stock is up 3%, but the synthetic, assuming $16 a share went into margin, he needed $15.50. A much better way to play this.

An interest rate increase is coming, which is going to be more positive for earnings. Under the Obama regime, you had a very negative regulatory environment over time, and it was very difficult for money centred banks. Under the Trump administration, it seems to be much more positive, and moving forward there should be more upside in US banks.

The leading independent brokerage business, as well as one of the largest money managers in the US for high net worth individuals. A stronger economy, higher rates and more savings by consumers are all going to feed the stock. Dividend yield of 1.7%. (Analysts’ price target is $48.)

(A Top Pick Dec 9/16. Down 1.85%.) Synthetic Long Position. A play on financials and is still bullish on them. This is synthetically the same as owning the stock, but much more tax advantaged for a Canadian holder.

(Market Call Minute.) Of all the investment bankers, he would prefer J.P. Morgan.

This is 2 companies in one. One is the investment bank, which is very well-run and a very good business. The other is the financial services business, which is not very well-run. It is a shrinking company and the revenues keep going down. Given the problems with the financial services division, he doesn’t like this bank.

Because this is a broker/dealer, this is going to be more dependent on the financial markets. Because the financial markets and the US economy is doing well, this one should do well also. He prefers the larger money centred banks with a very large deposit base and consumer lending business. There is nothing wrong with this one, but he would suggest taking some of your money out and moving it into one of the money centred banks.

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.