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DealBook: Morgan Stanley Profit Falls 48%

April 21, 2011 by Leave a Comment

Morgan Stanley, which like its peers is still feeling the aftereffects of the financial crisis, posted first-quarter earnings on Thursday of $736 million, down 48 percent from the period a year earlier, and it recorded a $655 million loss from a Japanese joint venture.

While Morgan Stanley’s quarterly profit of 50 cents a share is down from the first quarter of 2010, when the company earned 99 cents a share, it beat analysts’ expectations of 35 cents, according to Thomson Reuters.

Morgan Stanley’s chief executive, James P. Gorman, said he was “disappointed” with the loss in the Japanese unit, but emphasized in a statement that the company “continued to strengthen our client franchise and delivered solid results across many of our businesses.”

A number of its major units, including global wealth management, experienced a rise in net revenue. In fixed income and commodities sales and trading, however, net revenue fell to $1.8 billion from $2.7 billion in the period a year earlier.

The firm’s return on equity, an important measure of profitability, was 6 percent in the quarter compared with 16 percent in the period a year earlier. This number has fallen sharply across the industry in recent years.

In the aftermath of the financial crisis, Wall Street banks are required by regulators to limit leverage and keep more capital on hand in case of another economic shock — all of which is weighing on profit in a sluggish economic environment.

Morgan Stanley’s results come just two days after Goldman Sachs posted profit of $1.56 a share, which was down 21 percent from the period a year earlier but nearly double analysts’ expectations. Citigroup and JPMorgan Chase have also recently reported earnings, and both lamented a tough economic environment.

Like its rivals, Morgan Stanley has had a difficult time recovering from the financial crisis. Mr. Gorman, who moved into the bank’s top spot in January 2010, has tried to retool the business, with a flurry of management changes and a hiring spree to bolster its trading business. Even so, the company’s stock price is lower than when Mr. Gorman took over.

Morgan’s stock closed at $26.04 on Wednesday. Shares of the investment bank moved up in premarket trading on news of better-than-expected results.

Mr. Gorman has been weighed down by a number of issues, many of which he inherited. Among the biggest: a dividend that the firm must pay to the Mitsubishi UFJ Financial Group of Japan. Morgan Stanley’s relationship with Mitsubishi UFJ was struck during the credit crisis, when Morgan accepted a $9 billion lifeline from the bank. The bank just renegotiated its stake with Mitsubishi, a move that will cuts its $800 million dividend payments, but dilute shareholders.

At the same time, Morgan Stanley set up two joint ventures with Mitsubishi to increase its presence in Japan. One of those initiatives, the one Morgan Stanley does not control, took a loss for the quarter.

The results in fixed income and commodities were clearly a disappointment, too, with net revenue down 33 percent. Morgan said the weak performance reflected a drop in credit products, which was partly offset by a jump in interest rate products. That helped drag down the overall institutional securities group, where revenue fall to $3.59 billion from $5.34 billion in the period a year earlier.

The one bright spot in institutional securities was investment banking, which reported first-quarter revenue of $1.2 billion, up 15 percent from the period a year earlier.

Asset management posted net revenue of $626 million for the period, down 4 percent.

In the global wealth management division, which includes Morgan Stanley Smith Barney, revenue increased to $3.4 billion from $3.1 billion in the period a year earlier.

In the first quarter, the firm set aside $4.3 billion for compensation, 56 percent of its net revenue. This number is widely watched on Wall Street, as Morgan Stanley has come under fire in recent years from shareholders for its compensation levels. In 2010, Morgan Stanley paid 51 percent of its revenue to employees, down from 62 percent in 2009.

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Wall Street Tries to Maintain Momentum

April 21, 2011 by Leave a Comment

Corporate earnings have returned to prominence after a period when investors were focusing on other issues, like Japan’s earthquake and tsunami, Europe’s debt crisis and the unrest in the Arab world.

So far, the earnings reports have been generally positive. General Electric and UnitedHealth were among the large companies whose quarterly results beat analysts’ expectations Thursday morning.

Net income for G.E. was $3.4 billion in the first three months of 2011, or 31 cents a share, compared with $1.9 billion and 17 cents in the quarter a year ago. G.E. shares, however, were 2 percent lower.

UnitedHealth, the country’s second-largest health insurer, said its profit rose 13 percent as more employees signed up for coverage. UnitedHealth rose 8.4 percent. In the financial sector, Morgan Stanley, which like its peers is still feeling the aftereffects of the financial crisis, posted first-quarter earnings on Thursday of $736 million, down 48 percent from the period a year earlier. It also recorded a $655 million loss from a Japanese joint venture. Its shares rose 3 percent.

Apple reported results late Wednesday that beat estimates for both sales and profits. Apple rose 2.6 percent.

“In the past couple of days, the U.S. earnings season has enabled investors shrug off the euro woes and budget deficit concerns that dogged the early part of the week,” a senior sales trader at IG Index, Yusuf Heusen, said.

But the gains were tempered slightly by a Labor Department report that the number of people who applied for unemployment benefits fell last week to 403,000. Economists had expected a bigger drop, but applications had unexpectedly climbed to a two-month high the previous week.

In midmorning trading, the Dow Jones industrial average was 13.47 points, or 0.1 percent, higher. The broader Standard Poor’s 500-stock index gained 4.96 points, or 0.4 percent. The technology heavy Nasdaq added 11.88 points, or 0.4 percent. Markets will be closed on Friday for the Easter holiday.

Better earnings from the chip maker Intel and other technology companies sent shares higher on Wednesday and drove the Dow Jones industrial average to a new 2011 high. The Nasdaq composite index gained 57 points, its biggest one-day jump in six months.

In Europe, the FTSE 100 in London was down 0.2 percent, while the DAX in Frankfurt rose 0.6 percent. The CAC 40 in Paris was 0.4 percent higher.

Markets have pushed higher since Monday’s retreat when investors were spooked by Standard Poor’s warning that the United States faces a one-in-three chance of having its triple-A credit rating downgraded.

“Monday is a distant memory and markets have shifted from shunning risk into the upcoming holiday period to assuming as much of it as they can,” said Robert Ryan, a foreign exchange strategist at BNP Paribas.

Earlier in Asia, Japan’s Nikkei 225 index closed up 0.8 percent to 9,685.77 while South Korea’s Kospi index rose 1.3 percent to 2,198.54. Hong Kong’s Hang Seng ended 1 percent higher to 24,138.31, and mainland China’s Shanghai Composite Index rose 0.7 percent to 3,026.67.

In the oil markets, the focus remained on the fighting in Libya. Oil prices have increased 20 percent since the beginning of the year as investors anticipated rising global demand while unrest in North Africa and the Middle East threatened oil fields and shipping lanes vital to world supply.

Benchmark crude for June delivery fell 8 cents to $111.37 a barrel in New York trading. The contract rose $3.17 to settle at $111.45 on Wednesday.

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The Budget Debate, Revealed

April 17, 2011 by Leave a Comment

The battle ahead “is the big one, and goes to the very major questions about the role of government,” said G. William Hoagland, a former Republican staff director of the Senate Budget Committee. “This is going to be a very fundamental clash of ideologies.”

The Democratic and Republican Parties have their own internal tensions to address as the debate goes forward in Congress and on the presidential campaign trail. But in its early stages at least, it is liberals who are on the defensive.

The aging of the baby boom generation and the costs of maintaining Medicare and Social Security have put the two pillars of the social welfare system on the table for re-examination. The growing weight of the national debt has given urgency to the question of whether the government has become too big and expensive.

The tepid nature of the current economic recovery, following big stimulus packages, has provided an opening to challenge the effectiveness of Keynesianism as the default policy option for government. And the revived energy of grass-roots conservatives has given electoral clout to the movement’s intellectual and constitutional arguments.

Arthur Brooks, president of the American Enterprise Institute, the conservative research organization, said, “The optimistic view is that we have a confluence of the business cycle, of the demography and of the politics that makes it not just possible to achieve real change, but impossible that we not deal with these things if we want this country to continue on the path envisioned by the founders.” So just two and a half years after a presidential election that was in part a repudiation of conservative governance, and with the nation still smarting from the aftereffects of a financial crisis that grew out of failures of markets and regulation, President Obama finds himself in a somewhat surprising position: forced to articulate and sell a vision of how liberalism and the institutions it built in the 20th century can be updated for the constraints of the 21st. 

The speech he delivered Wednesday at George Washington University in Washington was his most ambitious effort so far to do so. In it, he harnessed the language of both left and right to argue against the extremes on both sides while suggesting that many of their core principles were not mutually exclusive — in other words, that Great Society values can endure in a Tea Party moment.

He defined “patriotism” as a shared sense of responsibility for the vulnerable and less fortunate. Basic standards of security for the elderly and poor and government investment in a more prosperous future, he said, can not only coexist with a tradition of “rugged individualists with a healthy skepticism of too much government,” but are also a vital part of what makes America exceptional.

“We are a better country because of these commitments,” he said. “I’ll go further — we would not be a great country without those commitments.”

Republicans in Congress, he suggested, would shred that tradition under cover of a debate that is only nominally about the budget. “The fact is,” he said, “their vision is less about reducing the deficit than it is about changing the basic social compact in America.”

Conservatives would and did object to his implication of heartlessness, but not necessarily to his assessment of their ambition.

The Republican plan put forward by Representative Paul Ryan of Wisconsin, the chairman of the Budget Committee, and adopted by the House on Friday as its policy blueprint for the next decade contains a substantial dose of deficit reduction but is really a manifesto for limited government.

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