Friday, May 22, 2009

Chasing The Diminishing Marginal Buyer

In a flagrant example of chasing the marginal buyer as others offload their shares, Morgan Stanley just came out with a research piece which upgrades the price targets of virtually all banks by 33% on average (better known as stratospheric escape velocity).

It would seem Goldman's upgrades are not sufficient to bring the slowest, marginal buyer into the fray - the effort has now gone viral. Most amusing is the Bank Of America new target price which is increased from $25 to $32: quick, if readers call and buy at least 100 BAC shares in the next 10 minutes, they can lock in a phenomenal, unprecedented, one-time 180% upside to target. In fact, if you buy now, you will also get not one, not two, but 4 Sham-Wows to soak up the tears in 3 months when the upside to the new target will be roughly 1000%.

Among Morgan Stanley's key bullet points which are supposed to bring mom and pop bank stock buyer out of hibernation are:
  • Raising price targets on the large-cap banks by 33%, on average, due to lower betas and a resulting lower cost of equity (lower beta? we hope MS realizes that financial stocks ARE beta these days, as for lower cost of equity, that will likely be better evaluated once State Street and BoNY actually allows shorting in financials to return)

  • TARP: We think most banks will repay TARP by 4Q09 (well, duh - someone has to get paid bonuses without Barney Frank having a say in it)

  • We use 2012 for normalized earnings (phew, most others are pricing in 2049 future earnings: good to see that MS retains credibility and has really good visibility over the next 3 years)
  • Attractive industry view. We believe the risk of the bear case has been significantly reduced (you don't say)
In other news: tomorrow BAC upgrades BAC on the thesis that other banks will upgrade it.

P.S. Amusingly, in the compost heap of vile intentions known formerly as the equity market, BAC now is down while RF (which had the dubious distinction of being the only stock which had its TP lowered by MS) is up.

As for BAC's "low beta", it is indeed true that at Raw Beta of 2.806 (see below) there are only about 400 companies in the S&P 500 that have a lower beta.

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