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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Saks Unwilling To Issue 15% CRE-Backed Notes, To Raise Convertible Instead

In yet another market test for commercial real estate appetite (or the lack thereof), a few days ago, troubled retailer Saks, using Morgan Stanley as interest (or lack thereof) solicitor, attempted to raise bonds in order to pay down its revolver (hm, expensive capital paying off cheap capital - definitely not a trend these days) and other upcoming maturities: Saks has quote a lot of them - roughly $190 million in bonds coming due by the end of 2011. The bonds would have been secured by Saks' real estate assets. The "market" took MS's call, listened politely, hung up, took 10 minutes to complete a few cycles of LMAO/ROFL, then called back and said: "Done... at 15%." (Apparently, the market was not privy to the latest release from Merrill indicating the palpable stabilization in retail commercial real estate.)

As was expected, the company turned white then balked at these "usurious" terms. Saks, which has recently gotten some short squeeze luvin' thanks to "beating" EBITDA expectations of -11mm EBITDA (well, not without a rub: a calendar shift from Q1 08 to Q2 09 had quite a dramatic, beneficial, and non-recurring impact, much the same way that the "December" calendar shift did miracles for GS and MS), was hoping the stupid market would see through this permanent secular collapse and totally buy into the temporary bear market outperformance. Alas, this "outperformance" will likely not placate Peter Schoenfeld who 2 days ago filed a rather angry proxy letter, appropriately titled: "It's time Saks' corporate governance practices enter the 21st century." It is fair to wager that raising 15% capital to pay off something that has sub 5% interest would likely not have had quite a soothing effect on Mr. Schoenfeld.

Anyway, long story short, Saks has now decided to issue a convertible offering instead: $80 million to be precise, and preliminary price talk currently is in the 7.5-8% range, with a 15-20% conversion premium. Underwriters are Morgan Stanley and the ever-shadow-luring Goldman Sachs. Of course, this means that once the issue is completed, the SKS short squeeze has to persist for another mere 21% price gain, before Schoenfeld and other shareholders get the dilution middle finger yet again. Then again, as stocks these days tend to run up anywhere between 10% and 100% in the days after a follow-on offering (in fact the bigger the dilution, the higher the run up), this could end up being the best thing for activist and other SKS investors, who at this point may be wise to wait, get the imminent SKS upgrade from some or other TARP-beneficiary, and get the hell out of dodge.

But the bottom line is that if secured debt can barely be raised at a 15% yield even in this most exuberant of rallies, then the pain for other CRE-backed issues (that are unwilling or unable to use the equity underwriting services of several quite prominent, CRE "experienced" banks) might just have their work cut out for them quite soon.

Disclosure: no SKS holdings. thank the almighty

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A Glitch In The MStrix?

For the first time in many days, MS has dropped a major block from their advertised SPY trading report. In what could be turning point for the "second derivative" of after hours weirdness, today Morgan Stanley advertised "only" two 10 million blocks at 6:41pm, unlike the 30 million SPYs traded by MS day after day. Could this be i) the end of the deleveraging of PDT, ii) the end of deleveraging of (insert favorite Quant here), iii) the decline in ETF creation or iv) who the hell knows...

Regardless, there might have been a significant disturbance in the force today. We shall see if it persists.

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