Take A Bow Morgan Stanley
Morgan Stanley’s focus on cost cutting, combined with its strong performance in equity trading, helped the Wall Street bank post better-than-expected results. But it’s not for it’s better than average results that the bank deserves faint praise, it’s for the accompanying announcement, in relation to bonus cutting, that the bank deserves congratulations…however muted..
Responding to a difficult environment and public outcry, Morgan Stanley will inform employees that bonuses will drop, with cash payouts capped at $125,000. Top executives will receive nothing, their 2011 payouts deferred until end 2012. The bank will defer any bonus past $125,000 until December 2012 and December 2013. The members of Morgan Stanley’s operating committee will defer their entire bonuses for the year.
Morgan Stanley is likely to cut compensation by 30% to 40% for many of its traders and bankers, especially those focused on fixed income. Stock trading and parts of investment banking will likely be spared pay cuts, but liable to have bonuses deferred. The roughly 40 people on Morgan Stanley’s management committee will see 85% of their bonuses deferred. The average of deferment, for all employees to whom it applies, will rise to about 75% from 65%.
The firm is taking a different approach with more-junior employees, or those without titles such as managing director, executive director or vice president. Those employees, who often use their bonus money for living expenses, will see only 25% or less of their overall bonuses deferred. Those employees who are paid less than $250,000 in overall pay won’t have deferrals applied to their bonuses.
The bank reduced non-interest costs by 6 percent in the quarter, which was more than analysts had estimated. But it still struggled to cut its single largest expense – compensation. Morgan Stanley set aside $16.4 billion, or 51 percent of net revenue, for compensation last year, a higher portion than its Wall Street peers.
The bank had limited ability to reduce pay due to severance costs related to layoffs, deferred obligations that came due in 2011 and higher productivity of financial advisers, which made them eligible for bigger paycheques.
Morgan Stanley Results
Morgan Stanley’s revenue dropped 26 percent in the fourth quarter, to $5.7 billion, compared with a year earlier, the weakest revenue figure for the bank since the second quarter of 2009. The loss was due to a charge of $1.7 billion, or 59 cents per share, related to a bond insurance settlement with MBIA which had been previously announced.
Morgan Stanley’s loss from continuing operations of 14 cents a share was better than the loss of 57 cents a share that Wall Street analysts had expected on average, according to Thomson Reuters.
In equity trading Morgan Stanley’s revenue rose from the same period last year declining far less than its peers from the third quarter onwards, after adjusting for special accounting items. Other big Wall Street banks reported a quarterly decline of 20 percent in equity sales and trading revenue, on average, compared with Morgan Stanley’s 5 percent drop.
Market Overview
U.S. Equities rose for a third day as Bank of America posted a profit and jobless claims slid, European equities and the euro climbed as French and Spanish borrowing costs decreased at auctions.
The Standard & Poor’s 500 Index added 0.5 percent to 1,314.5 at 4 p.m. in New York, its highest closing level since July 26, and the Nasdaq-100 Index reached an almost 11-year high. The Dow Jones Industrial Average increased 45.03 points, or 0.4 percent, to 12,623.98. The euro strengthened 0.8 percent to $1.2967, a two-week high. Treasuries fell, sending the 10- year note’s yield up eight basis points to 1.98 percent. Oil slipped, while nickel and lead rose more than 2 percent.
The S&P 500 has gained 4.5 percent this year, the best start to a year since 1997, as U.S. economic reports and speculation that China will loosen monetary policy outweighed concern that downgrades for European nations would worsen the debt crisis.
Initial jobless claims fell by 50,000 to 352,000 in the week ended Jan. 14, the lowest level since April 2008, Labor Department figures showed. Other reports showed builders began work on fewer houses than forecast in December, while the cost of living in the U.S. was little changed last month for a second month.
Crude oil slipped 0.2 percent to settle at $100.39 a barrel after the Energy Department said gasoline use dropped to 8 million barrels a day last week, the lowest level since September 2001. Stockpiles of the motor fuel climbed 3.72 million barrels to 227.5 million, a 10-month high.
Economic calendar releases that may affect the sentiment in the morning session
09:30 UK – Retail Sales December
A measure of how much sales volumes have changed at retailers throughout the UK. The report also reports the numbers broken down for food stores and predominantly non-food stores. The headline figure is the seasonally adjusted percentage change from the previous month and the previous year. The figure is also adjusted for inflation.
A Bloomberg survey of economists showed a median month-on-month forecast of +0.60%, compared with last month’s figure of -0.40%. A similar Bloomberg survey predicts a year-on-year figure of +2.40%, compared with last month’s +0.70%.
Daily Market Commentary by FXCC - IMF Slashes Its Global Growth Forecast For 2012
A member of the bank of England’s monetary policy committee has gone ‘on record’ as stating that the BoE is not necessarily wedded to a policy of quantitative easing. Ben Broadbent is dismissive of the belief that the MPC has been biding time until it completes the current round of asset purchases before launching the next round of QE in February;
If we had wanted to vote for more QE, as measured by the stock, and that is how we tend to understand its effects, then I would have done that in October and, indeed, the committee could have done it again in November or December. In October I voted for £75 bn of QE because I thought £75 was right. It is clear that the [UK] economy is broadly flat and therefore growing less than its potential rate.
If someone had said we can do it in two weeks, or someone had said we can do it in six months, it wouldn’t have had any bearing on what I voted for. We are dealing in coarse, rather than fine-tuning, because it is probably, at the margin, harder to say what the impact of any policy change in the instrument [QE] is, because we are less familiar with the instrument.
The troika of EU, IMF and ECB officials return to Athens in order to discuss the terms of a second bailout, whilst talks between the Greek government and bondholders continue. The troika gave Ireland a favourable progress report yesterday, having stuck to its austerity package it will be in receipt it’s next bailout tranche.
Greece needs to finalise a deal with bondholders in order to secure its next tranche of bailout money before €14.5bn of bonds fall due in March, the two sides appeared to be inching closer to a deal last night. Perhaps the news that bondholders may not be insured in the event of a default is concentrating the mind..
A large chunk of the bond swap must be agreed by noon today and formalised before Monday’s meeting of eurozone finance ministers. Greek finance minister Evangelos Venizelos said after Thursday’s round of talks in Athens with Charles Dallara, head of the Institute of International Finance representing bondholders;
The atmosphere was good, progress was made and we will continue tomorrow afternoon. Now is the crucial moment in the final battle for the debt swap and the crucial moment in the final and definitive battle for the new bailout. Now, now! Now is the time to negotiate for the sake of the country.
The International Monetary Fund’s latest forecasts have been leaked ahead of official publication next week. The IMF has slashed its global growth forecast for this year, blaming the eurozone debt crisis. The eurozone as a whole will shrink by 0.5% this year, compared with the IMF’s last forecast of 1.1% growth in September.
It predicts that the world economy will grow by 3.3% versus the 4% predicted previously. Italy to shrink by 2.2% and Spain’s by 1.7%, austerity measures and weak bank lending will plunge the countries into a two years of recession.
The IMF states, (according to a leaked draft of its World Economic Outlook);
The global recovery is threatened by the growing tensions in the euro area. The most immediate political challenge is to re-establish confidence and put an end to the euro area crisis, supporting growth.
Market Overview
European equities dropped from a five month high whilst the euro weakened as talks between Greek officials and private creditors entered a third day. U.S. index futures have retreated and natural gas fell for a 10th day. The Stoxx Europe 600 Index lost 0.4 percent at 9:00 a.m. in London, Standard & Poor’s 500 Index futures slipped 0.3 percent. Natural gas fell 0.3 percent, the longest losing streak since August 2009. The euro depreciated 0.3 percent to $1.2930, while the Dollar Index added 0.3 percent to 80.29.
The euro was little changed at 99.87 yen, while the dollar climbed 0.2 percent to 88.24 yen. The Swedish krona weakened 0.6 percent to 6.7889 per dollar, snapping a four-day gain. The dollar advanced versus all but one of 16 major peers tracked by Bloomberg.
Natural gas fell as much as 1.7 percent to $2.283 per million British thermal units, the lowest price for a most- active contract since February 2002. Copper dropped 0.6 percent to $8,317 a metric ton and oil in New York declined 0.6 percent to $99.82 a barrel.
Market snapshot at 10:00 am GMT (UK time)
Asian/Pacific markets enjoyed a very positive session capping a very good weak and start to the year. The Nikkei closed up 1.47%, the Hang Seng closed up 0.84%, the CSI closed up 1.45%. The ASX 200 closed up 0.59%. European bourses indices have fallen back from their recent five month high, the STOXX 50 is down 0.45%, the FTSE is down 0.23%, the CAC is down 0.43% and the DAX is down 0.5%. ICE Brent crude is down $0.58 per barrel, Comex gold is down $6.70 per ounce. The SPX equity index future is down 0.31%.
Economic calendar data releases to be mindful of in the afternoon session
15:00 US – Existing Home Sales December
This reports sales of previously owned homes in the US. The headline figure is the total value of properties sold. Analysts surveyed by Bloomberg predict a month-on-month figure of +5.20%. The previous reading showed a month-on-month rise of +4.00%.
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