Tuesday, June 16, 2009

Morgan Stanley Desperately Trying To Fit Square Market Into Round Prediction

MS analysts, fully blown out of the water with their prior prediction of a market top at 850, have decided to step into the bailout-infested Oracular waters yet again, this time saying that 950 is the absolute, positive top. How does the house of Mack come up with its conclusion? Simple - by cranking up 2009 S&P earnings by a whopping 20% from 40 to 51, and claiming the earnings trough will occur in Q3 2009.

Seeing how the year is half way done and half of that estimate is already baked in, in essence MS is saying it was wrong for the second half of the year by 50%. Where does the upside come from? Why, financials of course - just throw the big wild card in there. Nevermind the fact that toxic asset losses are, in the words of greatest financial cheerleader Dick Bove, "horrendous." Joe Sixpack (through his proxies Bernanke and Geithner) will step in and plug the holes in the financial dam with his taxes when needed, thus justifying MS' prediction. The upside: follow ons, follow ons, follow ons: banks pocketing 5% underwriting fees as the market squeezes higher and insiders sell their shares in droves (all based on market upgrades such as this one). The greatest fool theory indeed.

If there is anyone left who buys this, I have some 2007 vintage BBB, non-TALFed, Harlem-based, multifamily tranches (which Moody's is aggressively trying to upgrade to AAAA) I would like to sell you (using your favorite MS CMBS trader).

From the report:
We are increasing our 2009 and 2010 earnings estimates for the S&P 500 to $51 and $62 (from $40 and $57) and in turn bringing forward the trough in the earnings cycle (ex Financials) to 3Q09. We are also increasing our year-end price target to 900 based on a 2009 P/E multiple of 14.5x.

Our first call to take profits at 850 on the S&P 500 has proved conservative as outsized policy action and the resulting speed and breadth of data improvement have raised conviction in recovery much faster than we had anticipated. [um, what exactly data improvement are we talking about here? If TARP repayment on a massive short squeeze is improvement, so be it]

Having breached the 950 level, the rally may now be over. We are reluctant to put too much weight on short-term price action, and recognize that there could be another leg up which would take it back into our tactical 950-1000 target range. However, as the market has rallied, the risk-reward has shifted. Equity markets now implicitly need a V-shaped recovery to sustain further gains. [emphasis mine] We do not expect such a recovery and therefore believe the next move is more likely to be down than up.
And according to MS here is how we get there:

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