Morgan Stanley DD

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by Particular-Wedding

All the US investment banks have been on a tear after speculation that their dividends won’t come under pressure after all. A negative catalyst is that stock buybacks are still not available for most banks b/c of a mix of the poor PR image from the last 2009 bailout and cost savings measures.

Another near term catalyst is the annual stress test review that banks undergo. There are 2 parts – DFAST and CCAR. The fundamental difference between DFAST and CCAR is that the Dodd-Frank test uses a standard capital management plan, while CCAR runs its models based on the bank’s actual capital management plan. This is an annual rite that does not mean much in itself this year. but takes on added significance now.

The stress tests were implemented as part of Dodd Frank to make sure that banks are prudential with their money (haha). The stress test results are submitted to the Fed in April and the results are released to the public by June 30. In reality the stress tests are just the govt’s way of feeding the banks the answers the want to hear the way a professor gives mock exam answers to his students. Most banks pass these tests with flying colors with the exception of truly retarded students like DB.

So, why am I harping on these tests so much? B/c the mkt gave them a real life stress test that is still ongoing and so far it believes that they are passing. Statements from rival bank CEO Jamie Dimon that the economy is recovering, mortgage forbearances are only 1/3 of what are actually projected, and most importantly of all that they are keeping their dividends intact. MS Ceo Gorman is expected to speak on June 9 about many of the same subjects but also specifically their deal with Etrade. The bank is expected to keep their dividend but maintain a hold on stock buybacks. Look out for any word on him saying the bank will bring back the stock buybacks.

Big tick up in Money flow in the past few days, MS broke out of its 35-40 channel since April.

3x top breakout confirmation that MS broke out of the rangebound trading in the 35-40 zone.

Negative weights: Impairments on loan books. MS is not a retail bank so you won’t see them weighed down to the same extent as JPM on consumer things like mortgages or auto loans. However, they do have exposure like any bank to at risk economy clients like physical retail, commercial real estate, and emerging market borrowers. Their upcoming operational merger with Etrade could also complicate things. The cultures are not exactly compatible.

But I think there are more positive factors like the CEO speech as a catalyst and also the passing of the stress tests at the end of the month. To be safe I am looking at July 50calls b/c IV remains in the 40% range at the time of this writing. Ambitious? Yes. But that is still under its 2020 high so far.



Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.


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