The Global Perspective (Archive Edition)

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This is the archive version of The Global Perspective.

Please go to the new updated site at www.TheGlobalPerspective.com for constantly updated financial news and analysis.

You can find original material unique to the site there, as well as all my current journalism.

Thanks very much for coming by!

Sunday Night Live

On air: Talking about markets in the week ahead at the CNN studio in New York on Sunday night

Also, here is my weekly Asia markets outlook feature at Forbes.com: Asia Stocks To Twist With U.S. Earnings

CNNi on Sunday

I'll be appearing on CNN International again on Sunday, 8.30 p.m. EST, discussing global markets in the week ahead. With a whole wad of earnings out this coming week, including Caterpillar, Apple, E*Trade, American Express, and Wachovia, it should be an interesting conversation.

As always, tune in!

Asia View: Weekly Column

Every Sunday (Asian Monday morning), I write a column detailing the outlook for the week ahead in Asia. Since this week's column was broader and more in depth than most, and contains what I believe to be key points re: the banking system, I'm making it available to readers of this blog (albeit four days later than originally published). It was also very prophetic regarding Morgan/Mitsubishi.

From Asia View: The New Global Banking System:

What few analysts have noted is that it was really just a matter of time before the changes in the banking system we have experienced in the past few weeks were brought about. Call it creative destruction, or disruptive growth – when inevitable change comes, it’s rarely a smooth process.

Nowhere is this more true than in the banking industry. The reality is, the traditional U.S. investment bank model that many lament the passing of was built to function in the framework of a very different, bilateral era.

The de-politicization of world commodity markets, the rapid global application of technology, and the astonishing growth of emerging markets has ushered in with it a distinctly unilateral model. That’s easy to see in a social context (oil is as much a free-market product as a can of Coke; eight year-olds call friends from New York to Hong Kong on their cell phones; to a kid in Xi’an, China, the word “wireless” means a service connection to download music videos while for her parents it was the radio they never had) but it’s less obvious in a financial one (think mortgage-backed security).

Simply, disruption has been banging on the door of the banking industry for decades: we just haven’t paid any attention.

Download asia_viewthe_new_global_banking_system.pdf

If you want to receive this weekly column, e-mail me at danielmarkharrison (AT) gmail (DOT) com

Dreaming of U.S. October Payrolls

Around 1964, Paul McCartney dreamed the entire melody of the hit song "Yesterday" while sleeping over at his then-girlfriend Jane Asher's Wimpole Street, London apartment.

Sometime last week, I was sleeping over at my girlfriend's apartment just off Amsterdam Avenue, in Manhattan, and I had a dream: about U.S. October payrolls. (I confess, this may seem somewhat sad to the average reader).

I dreamed they were much better than expected, shrinking around 30,000 - 35,000 (that compares with 159,000 job losses in September). I think the exact number was 33,500. I also recall dreaming that the market surged on the announcement, though I can't remember by exactly how much.

Let's see.

Sign Of The Times

Mostly, I'm pro words over pretty pictures. This however, points out well how out of touch the McCain campaign (and Sarah Palin in particular) is with current events:

Understandably, most Americans just don't care about terrorism right now - and neither does the world. (For the record, I do not care for "terror-talk" much, either, but I never have done). They want a leader -- any leader -- who can show some kind of firm grasp on economic affairs.

There are more of these cartoons over at Cagle

CNNi Tonight

I'll be appearing on CNN International at 7.30 pm EST tonight talking about credit markets, investor sentiment, and the current state of the stock market.

Tune in!

Morgan Stanley: When Asian-style rumor mongering comes to Wall Street

After a ban on short-selling was lifted at around midnight last night, Morgan Stanley is off around 16% in late-morning trading Thursday. Rumors are swirling around New York dealing desks, and they range form the most bearish spectrum to the most bullish. One rumor has it that Mitsubishi UFJ may have pulled out of its $9 billion investment in Morgan Stanley (despite official protestations to the contrary by both parties), to the Japanese bank wanting to nab the whole pie at $12 a share.

Welcome to the world of Asian banking. Largely colorful, and dominated by a constant rumor-flow, share prices can often swing wildly in the space of hours. That's unlike in the U.S., where rumors do exist (obviously), but in a much more toned-down fashion. The problem is that when Asian-style rumors take hold of a U.S.-scale market, the consequences are potentially magnified enormously. And so it is for Morgan Stanley.

Because much of the information coming out of news rooms and dealing floors in New York tends to be pretty accurate by global standards, market participants and financial journalists in the west are unprepared when someone says that, for instance, Mitsubishi has pulled out of buying an ailing U.S. bank. Japan is a long, long way away. If you've ever tried getting through to someone at a bank over there, you'll know how tough it is just getting the right person on the other end of the line, let alone getting any kind of statement. Zip-lock doesn't even describe the banking culture. This makes garnering any meaningful information or comment doubly frustrating.

All the above is having an adverse impact on Morgan Stanley's share price this morning. Instead of buying (or selling, as the case might be) into the current rumor-flow however, investors should think like their Asian counterparts in such situations: with a little dose of critical pragmatism.

First of all, Mitsubishi has taken the extraordinary step of announcing its intention to purchase Morgan Stanley. Again, if you know Japanese banks, you realize just how unusual this is. Secondly, as I've pointed out before, this deal makes a lot of sense for Mitsubishi: there's little reason why they'd want to abandon it (especially at such a late hour).

Finally, the U.S. federal government has announced its intention to potentially buy shares of banks, a la its British counterparts. Presumably, Morgan Stanley qualifies in this respect. That can only be a positive thing for the stock price.

Simply put, short-selling Morgan Stanley right now is not only illogical, it could be really dangerous. This is a bank that too many parties are too heavily vested in right now to see it fail.

Some New Rules For Financial Journalists

As many of you are no doubt aware by now, I'm the Opening Bell Editor at Dealbreaker. As first weeks go, it's been an fun experience writing the column. There are two things in particular I enjoy so much about the experience: the first is being up early again, getting to sift through and summarize all the news. When you're having to actually trawl though it, and comment on it, it puts you in a very up-to-date position almost by default.

The second is getting to interact will all the readers of Dealbreaker, many of whom are market participants themselves. Essentially, it's a front-row seat to the action on Wall Street, much as my former column at TheStreet was a front-row seat to the Asian markets.

The following is an amusing comment by a reader from today's Opening Bell, which I have to say, I agree with in its entirety. Actually, I think it's fair to say the comment is only half tongue-in-cheek. If financial journalists took the following advice, many retail investors would potentially be spared the pain of unnecessary fear over 401K losses.

(As an aside, you can find the Opening Bell column HERE every morning EST).

RULES FOR FINANCIAL JOURNALISTS IN TODAY'S MARKET

In a time of Wall Street greed that needs to be re-regulated, it’s time to also issue some new rules for financial journalists:

1) Stop printing pictures of traders looking stressed. The fact is, the market could be up 10% that day and the trader would still look stressed because he’d just received a call from his wife saying she was leaving him for some young Latin guy.

2) Stop writing stories about stupid people, expecting us to feel sorry for them. Articles about the 63-year-old Bear Stearns secretary who’d worked there for 30 years and put all of her retirement savings into BS stock: that’s a stupid person story, and I don’t feel sorry for her.

3) Stop using the word “recession” when you don’t even know what it means. A recession is defined as two consecutive quarters of negative GDP growth. In other words, we won’t know we’re in a recession until after the fact. And that hasn’t happened yet.

4) Stop saying this is an economic crisis. I’m still getting paid the same, and gas prices have actually gone done. On that note, I got a great deal on a new pair of khakis at GAP last night. 40% off. This is a credit crisis, evidenced by trader Joe next to me paying more for commercial paper.

*UPDATE* For sheer amusement -- Dealbreaker's take, plus more pictures of trading floor mayhem here.

Where is the bottom?

With the Dow down 700-odd points, at around 9620, and the S&P 500 off 70 points, at 1020, the big question has gotten bigger: where is the bottom in this bear market?

As usual, we may be looking in all the wrong areas.

The answer may not lie with how far down the equity market goes, but rather with how high the greenback and the price of gold can reach, compared with how low oil can fall. In an increasingly globalized financial market, using these three asset classes as a basis for buying into this market may be more sensible than judging how cheap stocks look. This is because of the implications of the movements of all those asset classes.

Perhaps one of the most destabilizing aspects to the global economy has been the myth of "decoupling": specifically, the process of separation in performance between emerging markets and the U.S. market. The decoupling theory, popular in 2007, assumed that whatever happened in the U.S. market no longer really affected markets such as China and India. It's what has contributed to a huge bearish speculation in the dollar, which ultimately led to credit drying up in a now little-talked about unofficial credit market called the "yen carry trade". As the dollar rises, so credit frees up naturally in the Far East, as Japan's hyper-low interest rate lending facilities (comparative with other emerging markets) become a more opportune facility with which to borrow money. That's because the value of the yen relative to dollar-led currencies the world over doesn't wipe out any of the advantageous borrowing margin you get on a carry trade.

Secondly, gold is the ultimate harbinger of "cash ready to move". It's common to think of gold as a bearish commodity, but in reality, this couldn't be further from the truth. Gold is where funds store money when they require some sort of capital growth (while assuming speculative risk), and at the same time want to move it quickly between asset classes in the event of a buying opportunity (in say, equities). It's worth remembering that as cash and equity reserves grew in the last five years, the gold price soared (part of this is due to mark-to-mark accounting, a little-known concept).

Finally, a falling oil price implies that earnings begin to look promising again, and hence companies look comparatively cheaper over the longer term.

Think of it like a traffic light: the red light is the dollar -- once that strengthens, the yellow (get your car in gear) light goes off. That's gold. Once oil prices go into a death spiral, that's the green light -- but only if it's the only light on. Otherwise, like recently, you get a pile-up at the intersection.

Opening Bell Asia: 10.05.08

As of Monday, I become the Opening Bell Editor at DealBreaker, a Wall Street financial blog. The Opening Bell column is the first on the site every morning, summarizing the overnight news from Asia and Europe, and looking forward towards relevant market news in the day ahead.

On Saturday, I published an Opening Bell (Weekend Edition) here at The Global Perspective. Opening Bell Asia is the second "dress rehearsal" for the official column at DealBreaker tomorrow morning. That will appear at around 7 am EST, so make sure you check by the site for it! As for yesterday's, the following column is somewhat abridged (5 links): tomorrow at DealBreaker there will be a fuller, more rounded view of the global markets.

OPENING BELL ASIA: 10.05.08

Taiwan Regulator Says AIG's Units Have Sound Fundamentals (Dow Jones Newswires via CNN Money)
The AIG saga continues, this time in Taipei. AIG has three money management divisions in Taiwan:  AIG Investment, AIG Securities Investment & Trust, and AIG Wealth Management Services Taiwan. For the moment, officials say they are fairly satisfied with what they see in that trinity. All too often, little news items such as this one go overlooked by investors, who are suddenly amazed by a headline five months later that reads something like: "AIG Taiwan's operations show $7.5 billion in fourth-quarter gains in Chinese mainland life insurance sales." It may be worth paying attention here: since the elections early this year, Taiwan has played an increasingly significant role in the life of the Chinese consumer and investor. Added to that, Taiwanese financials are in reasonable shape. Of course, this may just be typical guanxi backscratching -- but it's also the classic sort of spot news that eventually has short-sellers in a goliath like AIG squeezed hard on the way out.

Ping An abandons Fortis deal (Finance Asia)
Why does it feel like the insurance names are going to be dominating the space in all the end-of-day market wraps today? Apparently Ping An, China's second largest insurer, has "scuppered" an agreement to buy 50% of Fortis for $3.3 billion. According to Ping An, the agreement to terminate the contract -- agreed in March -- was "mutual ... given current turbulent  market circumstances." That's a bit hard to believe: much more likely, Ping An threw its weight around with the help of some key Chinese policymakers, who essentially said to Fortis and its European politico equivalents: "Trash this deal or face the consequences of a hostile shareholder." (Ping An means "Peace" in Chinese). Even JP Morgan, who arranged the deal, reckons it pays off to Ping An's favor. Curiously however, JP Morgan also expects Ping An to go fishing around for foreign assets to bolster its international presence soon ... AIG's latest fire-sale, perhaps?

China says new tests show milk free from melamine (AP)
China's food safety regulators must be thanking their lucky stars that the global banking fallout came when it did, since this story has gone largely unnoticed as a result. After 54,000 infants were infected with toxic doses of melamine, China's officials are saying that the latest tests of 129 batches of baby milk powder and 212 batches of other sorts of milk substitutes, are safe. Well ... believe it when you see it: especially since Hong Kong's considerably more reliable food safety squad reported on Sunday that two kinds of Cadbury's bars were infected with higher-than-allowed doses of the chemical. If this continues after the headlines of the financial crisis dies down, expect some heavy scattergun selling activity across shares of Asian food producers.

Top Lots Shunned in Post-Lehman Art Sale at Sotheby's Hong Kong (Bloomberg)
This story is hardly surprising: after all, if people aren't buying banks right now, they're unlikely to be paying millions of dollars for Indonesian sketches of superheroes. However, it says something interesting about the amount of money actually swirling around in Asia right now -- namely, that it's probably not as abundant as we all first thought. With sales of $11.6 million, and the highest lot going for just HK$6.6. million ($849,000), 20 percent of lots remained unsold. The article quotes a buyer saying that people can't "justify" paying high sums for art right now ... the other possibility is that people just don't have that kind of cash on hand right now.

Dubai aims to top its own world's tallest tower (International Herald Tribune)
Just when everyone is scaling back, Dubai is building a new tower soaring two-thirds of a mile. Depending on your preferred frame of reference, that's three Chrysler Buildings, or more than ten football fields. Apparently, in Dubai "demand outstrips supply" according to Chris O'Donnell, the project's chief executive. The project is expected to take 10 years to complete, but still, it's hard to imagine that in a world of falling oil prices, a global credit crunch, and a hemorrhaging international real estate market that there would be the kind of funds on hand to prop up such a project. Either way, the announcement of the new tower will be a plus for scrap commodities!

Opening Bell (Weekend Edition): 10/04/08 - 10/05/08

As of Monday, I become the Opening Bell Editor at DealBreaker, a Wall Street financial blog. The Opening Bell column is the first on the site every morning, summarizing the overnight news from Asia and Europe, and looking forward towards relevant market news in the day ahead.

I've said before that The Global Perspective is the "work in progress" part of the journalistic equation - an attempt to construct the material that ultimately ends up in print in a raw, basic fashion. This post is a great example of that; a dress rehearsal, if you like, of the Opening Bell segment at DealBreaker. Sunday at around 7 pm you can check back for "Opening Bell Asia", which, if popular, I may continue on a more regular-ish basis over here at The Global Perspective.

OPENING BELL (WEEKEND EDITION)

Editor's Note: The weekend edition is somewhat more abridged than the daily version, since, well ... it's the weekend, and apart from companies trading on markets operating under Sharia Law, there aren't that many corporate announcements made on the weekend.

Below 11,000, Japan's Nikkei loses 8% for the week (MarketWatch)
Asian markets tumbled in the last week on fears of a pending U.S. and Japanese recession. The Nikkei is as its lowest level since May 2005, while Hong Kong is off 5.4%. The article notes that Asian bourses may see a “bounce” on the bailout’s approval. This is putting it mildly. If U.S. markets have seemed a little like a rollercoaster in recent weeks, that’s nothing on the giant swings Asian investors feel every morning.   

Job Losses Pushing U.S. Economy Into `Significant' Recession (Bloomberg)
The latest Labor Department data showed that payrolls fell by 159,000 during September, which is the biggest reduction in jobs in 5 years. That apparently means we’re headed for the worst recession in 25 years. It’s probably best not to hold your breath for this one. Jobs data has been consistently volatile in the past six years, with little direct correlation (if any) to GDP data. In January, you will remember, payroll data was also the weakest in 5 years … and the economy grew that quarter by 2.8%. Still, with every release of negative economic data, journalists everywhere scramble to write the first “worst recession ever” story. Here's today's.

AIG Decides Its Too Big To Succeed (Forbes.com)
Aside from missing the apostrophe "s" in the headline [It's], Forbes.com reports that Standard & Poor’s has revised its rating on AIG to “negative” from “developing”, while the U.S.-government owned insurance giant has burnt through most of it’s bailout cash in less than a month, around $61 billion (of a total $85 billion). The latest plan is to fill the capital hole with the sale of even more assets. The question is, whose going to buy these? There have been “inquiries” into the mortgage insurance unit, though no buyers as of yet, according to AIG’s chairman Edward Liddy. What’s the betting those “inquiries” have been from either Chinese-owned Ping An (which lost a pile of money on the Dutch investment bank Fortis recently), or yes … China state-owned China Life Insurance?

Coming Week: Focus on Fundamentals (TheStreet.com)
Next week is bargain-hunting time for investors, according to TheStreet.com’s Lauren Tara LaCapra, since banks will in theory be able to do business with each other after the bailout plan was approved Friday. "In theory" is the key phrase here. While there may be some short-term momentum behind stocks, it’s worth remembering that this is still a market that is dominated by volatility, rather than upward price surges. If financials surge on the bailout plan Monday, they are just as likely to plunge Tuesday on the back of comments by some random chief executive about how the bailout wasn’t actually big enough.

CNN's Citizen Journalism Goes `Awry' With False Report on Jobs (Bloomberg)
Reports on CNN’s iReport.com by a citizen journalist that Steve Jobs had a heart attack Friday sent shares of Apple spiraling 5.4%. It’s still unclear what Apple or the SEC intends to do about the bogus report. This news may serve Apple stock well in the next quarter or so, however. In the last few months, Apple stock has taken a hit because – among other reasons – of false reports about Job’s resurging pancreatic cancer. Now, when any rumor starts circulating about Job’s health, it’s going to need to be doubly backed-up in order to have any real impact.

iBank 2.0

If you could get front-row seats to see anything south of Houston Street, one of the top picks would have to be watching equity salesman on Wall Street come up with new, devious ways to sell debt-ridden investment banks. After all, it can't be easy getting the slimy paper of Lehman's or Merrill Lynch or even the more reputable stuff like Morgan Stanley or Goldman Sachs off your books. If only the federal government could come up with some kind of repackaging scheme -- such as the way developing countries did 20 years ago, by re-branding themselves "emerging markets."

Welcome to iBank 2.0! iBank 2.0 is my suggested re-branding method for all investment-oriented banks (let's get real: "bank holding company" somehow doesn't sound quite so sexy when you're trying to offload multi-million share packages of your stock to anyone but a lone billionaire value investor or your government).

If you're an equity salesperson looking to unload stock of perilous investment banks, here's a quick Q&A which you should feel free to copy and paste as you like:

Q: What is an iBank 2.0? It sounds kind of like the same thing as before, but with a cutesy software-package sounding name?

A: On the contrary. We know the name sounds sexy, but it's much more than that! iBank 2.0's are the next generation of investment banks, with added features. These features include:

Government Ownership: While you may have heard a lot of bad press recently about investment banks being "bailed out" by sleepy government officials, we fully expect iBank 2.0's to benefit hugely from the new, aggressive interest of international governments in this next generation of banking! Imagine all the kinds of Carlyle Group-style defense deals the iBank 2.0 is now exposed to, compared with before, just by being so close to the federal government. Also, governments have consistently shown themselves to be long-term holders of stock, meaning there's extra protection to the extent of your downside. This is a pure upside play!

Limits on short-selling: Because of the government vested interest scheme described above, we fully expect iBank 2.0's to benefit from official intervention in market trading if greedy short-sellers decide to pound your stock! Another limit on your downside!

iBank 2.0's take deposits!: One of the most frustrating things about the traditional investment banking model was that it was constrained from taking deposits, meaning less money for high-risk bets that earn you as an equity holder big gains. Now that's all changed! The iBank 2.0 can take as many consumer deposits as it wants, thus giving it extra ammunition in the increasingly competitive global investment arena. However, because of this feature, your deposits may not actually be as safe as they previously were (just like pre-Glass Steagall). Therefore we recommend getting any spare cash you have sitting on a stable interest-paying deposit account and instead loading up for maximum advantage in iBank 2.0 stock.

Asian bank ownership: With the growth of China and India, it's increasingly important these days to be close to the ground in the booming Asian region! That's why iBank 2.0's are nearly all at least 5% owned by a major Chinese or Japanese bank.

Q: Sounds good. But I've heard that these new entities are going to suffer a slower growth rate than the old investment banks, because of increased regulatory oversight.

A: First of all, they're not just "entities," they're iBank 2.0's! But let us explain. Whenever an industry is in transition, there's always talk of more regulation leading to slower growth. However, in practice this never really happens at all. Instead companies find all sorts of creative ways to take the high-risk stuff offshore, away from the wandering eyes of those regulators! In the case of iBank 2.0's, the offshore location is the crazy, debauched city of Tokyo! That's the very reason why Asian bank ownership is an in-built feature of the iBank 2.0 -- that way, the high risk stuff can all be offshored to these semi-parent entities.

Q: OK, I see. But then there is the question of management. I've heard that the most important aspect of a company is its management. Is the lousy management that ran traditional investment banks going to remain the same in these iBank 2.0's?

A: No! The best part is that they've all been fired, and that the government is putting up roadblocks on the ironclad severance packages they had previously negotiated, meaning iBank 2.0's should probably not have to pay for the previous generation of investment banks' mistakes!

Q: I like the sound of these iBank 2.0's, and I'm becoming convinced, but I have one last question. When I look at the balance sheets of these things, they still look like ailing investment banks that have been bailed out in a recessive and vulnerable economy. That's not where I want to put my money, is it?

A: A balance sheet is at best a snapshot of a company last quarter. Because iBank 2.0's are SO NEW (i.e. created in the last few days) you can't accurately see them yet on a balance sheet. That's why it's crucial to get in now, before all the other investors see the above. But there's also the issue of creative destruction at play here. Creative destruction was a theory developed by Harvard economist Joseph Schumpeter. Creative destruction is the process whereby an industry is overhauled as a result of new, improved product (and operational) performance of competitors. What we are witnessing now is the "creative destruction" of the investment banking industry, whereby the new iBank 2.0's will prevail as the global winners in the investment arena.

U.S. Financial Crisis May Serve Japan's Banks Well

For global investors, a glint of hope in the recent U.S. financial sector crisis may come in the form of a long-awaited boon for Japan’s “megabanks”.

For many years, banks such as Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui Financial have been stuck in a stagnant domestic growth cycle that has limited the extent to which they have been able to compete at the aggressive level of their U.S. counterparts. Many employees at Japan’s Nomura talk of a stifling, hierarchical culture that has so far led to a disproportionate number of that investment bank’s biggest rainmakers seeking out jobs at higher-paying hedge funds.

Thanks to the financial sector crisis in the U.S., some of those problems may be about to change. What’s more, investors willing to take the risks may be able to get in what amounts to the ground floor of the next boom in the Japanese investment banking industry.

In recent years, growth has been sluggish at Japan’s megabanks. At around $8, ADRs in Mitsui UFJ are going for the same price they were back in the summer of 2004; Mizuho is trading around half its 2004 valuation; after a brief lift-off, ADRs in Nomura are back at 5-year lows.

Some of this is due to perceived hostility to foreign investment among Japanese companies, at the same time as China’s big banks have opened the floodgates to American and European fund managers looking to get a slice of the Asian growth equation.

That may be about to change. In recent days Japanese banks have shown uncharacteristic savvy and aggression in competing for the U.S. assets of their market counterparties. Making the headlines was Mitsubishi UFJ’s $8.4 billion acquisition of around 20% of Morgan Stanley. That makes Mitsubishi look decidedly savvier than China’s private sovereign fund (earlier in the year, China Investment Corporation, a $200 billion acquisition giant, snapped up 10% of the bank for around $5.5 billion).

Nomura is picking at slices of Lehman Brothers, days after Barclays looked like it was the only international investment bank in the bidding, with a $1.75 billion offer for the U.S. business. Sumitomo Mitsui Financial, which invested $901 million in Barclays in July, is also said to be sniffing around the Lehman carcass.

Mizuho Financial is strengthening ties with the new Merrill-BoA conglomerate, after having invested $1.2 billion in Merrill in January this year.

SPREADING YOUR RISK IN JAPAN

A basket of four or five Japanese banks – at valuations close to, or at 5-year lows – looks like a savvy buy right now, for this may be the only safe and effective way for U.S. financial institutions to get a spread of risk in an ultra high-growth regional economy.

Japanese banks have benefited from increasing synergy with their U.S. competitors, while they arguably understand the risk management side of the business better than anyone else today.

With the last two U.S. investment banks, Morgan Stanley and Goldman Sachs, now wrapped up in increasing regulation as a result of becoming bank holding companies, Japanese counterparty banks may be the ideal proxy in which U.S. banks can get a footing in the higher risk-reward return environment that has traditionally provided for the huge bonuses that keep them competitive on the global stage.

The Future of The House Of Morgan

"There's no reason a Goldman Sachs or a Morgan Stanley should be forced to sell themselves in a shotgun wedding if they've got economic models that work, and they do." - David Katz, Matrix Asset Advisors

The 4% rise in shares of Morgan Stanley at Thursday's market close will come as small consolation to the shareholders who have so far lost close to 60% of their money in the blue-blooded investment bank this year. But for all the talk of a potential buy-out, the investment arm of the House of Morgan may just remain independent. And despite speculation to the contrary, a buy-out by a purely commercial bank such as Wachovia is more unlikely than it appears.

Partly this is thanks to  federal policymakers, who are waking up to the fact that much of Morgan Stanley's -- and by extension the market's -- woes are due to short speculators rather than any sort of genuine liquidation. That's a situation which stands in stark contrast to around this time last year, when funds were unloading shares in order to repay subprime-spurred losses on defaults of mortgage-back securities.

But it's also that the math doesn't add up. Morgan Stanley's valuation, at around $25 billion, is less than the value of the total assets the bank manages. That's much more of an investment banking style trade than it is one a commercial bank understands, or pursues. In other words, if anyone snaps up Morgan Stanley, it's much more likely to be Citigroup than Wachovia.

Stephen Grocer at the Wall Street Journal adds:

That aside, Salmon has reservations about the deal, among them whether Wachovia is big enough to save Morgan Stanley.

Indeed, what may keep Morgan Stanley from being swallowed up at all is the bidding likely to ensue for the firm, which in turn, would result in a temporary run on its stock. Already this morning there was speculation than China investment Corporation, a $200 billion acquisition giant which owns a 9% stake in the bank, may snap up a larger slice.

It's worth remembering too that Morgan Stanley -- like its nemesis Goldman Sachs -- has not been without its share of problems in the past. The difference between Morgan Stanley and Goldman Sachs however (which investors are ignoring right now) is that Morgan Stanley has weathered it's woes as a public company before, whereas the latter has not.

Whatever the outcome, it's certainly worth buying into any dips in Morgan Stanley over the next couple days, because the chase to acquire it will be much more aggressive than for smaller siblings Lehman Brothers and Merrill Lynch. And if Morgan Stanley manages to remain independent, it's a long-term win-win for everyone.