Morgan Stanley: Financial Winner
The broad indices all saw 1% gains following two days of declines, driven by the positive reaction to Hewlett-Packard's(HP) better-than-expected fourth-quarter results . HP's shares were up over 12% to close at $19.20.
There were no major economic releases Friday. Market-research firm FactSet said in a press release that large publicly traded companies were continuing to beat expectations. "Of the 429 S&P 500 companies that have reported earnings to date for the fourth quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 69% recorded over the past four quarters."
What really has set the fourth-quarter results apart is that 66% of reporting S&P 500 companies have beaten consensus revenue estimates. "This percentage is well above the average of 50% recorded over the past four quarters," according to FactSet.
The KBW Bank Index (I:BKX) was up over 1% to close at 54.50, with all 24 index components rising for the session.
Warning From a Federal Reserve Governor
Federal Reserve Board Governor Jerome Powell said at a monetary-policy conference in New York on Friday that the federal government's large increase in debt "to around 75% at the end of this fiscal year" was "consistent with other increases in sovereign debt for advanced economies after severe financial crises during the post-World War II period."
Powell went on to say that "history and common sense suggest that the federal government should again run primary surpluses sufficient over time to reduce debt to pre-crisis levels of perhaps 35% to 40% of GDP. That would leave fiscal space to address the coming wave of health and pension costs, as well as unexpected new shocks."
Unfortunately, even if the if recent federal tax increases and spending cuts are not reversed, it would be "reasonable" to project that "the ratio of debt to GDP will be roughly stable at around 75% through about 2020," according to Powell. "After that, under current policy, health-care costs and, to a much lesser extent, pension costs will produce a sharp, sustained increase in the ratio of debt to GDP."
Shares of Morgan Stanley have returned 24% this year, following a 28% return during 2012. The shares trade for 0.9 times their reported Dec. 31 tangible book value of $26.81, and for 9.3 times the consensus 2014 earnings estimate of $2.53, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.10.
Investors' increased comfort with Morgan Stanley is perfectly illustrated by the decline in the company's bond rate spreads. The company on Wednesday issued a 10-year bond paying 3.75%, which was 178 basis points above the yield on 10-year U.S. Treasury bonds. In July 2011, Morgan Stanley issued a 10-year bond with a coupon of 5.50%, which was 250 basis points over the 10-year Treasury yield. That bond traded wider to a spread of about 500 basis points in June of last year, according to Bloomberg.