One of my favorite songs from the classic, "The Sound of Music" is "Maria," as in how do you solve a problem like Maria. Instead we now say: how do you solve a problem like Morgan Stanley (MS)?
Go ahead and hum. You know the tune. It’s catching, and I find myself doing just that as I watch the action in MS.
Seriously what do you do with a stock that is down 70% one week and then up 80% or more in one day thereafter. No wonder acid indigestion medicine sales are on the increase.
The reason for the volatility: questions about survival reared their ugly head. Forget about the credit crisis. Last week investors were spooked that MS would not be able to close on a deal with Mitsubishi of Japan for much needed capital.
Add in the expiration of the short selling ban, and ingredients were in place for huge swings in market value. Gentlemen, place your wagers!
Wagering is exactly what investing in MS is all about. Without any sure way to properly value this complex investment bank, investing is no more than gambling. Why not just put it all on the roulette wheel in Vegas?
It would be the same thing as investing in MS. Actually, gambling in Vegas would be less risky. Wow, I never thought I would ever write such a thing.
Anyway, MS did indeed close its $9 billion capital raise putting investors at ease at least in the short-term. Worries about bankruptcy were clearly overblown. Investor bought MS in droves pushing the price up nearly 100% in one day.
A fantastic rally for certain, but keep in mind that in early September, MS was valued at $40 per share or more. A year ago the price was $70.
Obviously investors believe that MS is a bargain at these current levels, but I am not so sure. There are still plenty obstacles for MS including a consumer led recession that could last longer and be deeper than most are now predicting.
Another fairly basic issue is the future profits at MS. A stocks value is supposedly a discounting of future cash flows. If those cash flows are smaller with less growth potential the attractiveness of the underlying stock is lower.
In the case of MS, we now have an investment bank that is transitioning to a bank holding company. Instead of making money with leverage and fancy derivative securities that paid high fees, MS is switching to a much more conservative model of revenue generating.
In its current state it is entirely impossible to value MS. Your guess is as good as mine. About the only thing we know is once the dust settles the profit potential will not be nearly as exciting as the past.
Maybe that’s a good thing.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
