September 18, 2008
Where Is The Panic?

If there really was widespread ‘panic’ on Wall Street stocks would be indiscriminately pushed lower by forced selling (i.e. shares would ‘crash’ lower as investors rush to the exits). As ugly as the carnage in financials has been, no such crash has transpired. As a quick example, here are four quality U.S. companies, and not a single one is trading at a yearly low today. Are we to believe that the worst market meltdown since the great depression has come to town and these four stocks are not going to see a major price correction???



The reality is that the ‘forced selling’ has been largely localized to financial issues, with exception of untransparent behemoth GE and some highly cyclical issues. For the investor looking to buy the most transparent and well run U.S. companies on the cheap, these isolated bouts of panic have been disappointing

Perhaps the one are worth monitoring at the moment is utilities. Depending on your outlook for interest rates and the U.S. dollar, this area of the marketplace, which has been beaten down of late, could currently be offering attractive yields with respectable risk. Some of the companies covered before that we are taking a closer look at include GXP, YORW, CMS, and NFG, although we do not have a position in any of these issues at the moment.




September 18, 2008
Why Don’t The Anti-Shorts Laugh All The Way To Bank?

Morgan Stanley CEO, John Mack, sent the following email firmwide yesterday.

September 17, 2008

To: All Employees

From: John Mack

I know all of you are watching our stock price today, and so am I. After the strong earnings and $179 billion in liquidity we announced yesterday - which virtually every equity analyst highlighted in their notes this morning - there is no rational basis for the movements in our stock or credit default spreads.

What’s happening out there? It’s very clear to me - we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down. You should know that the Management Committee and I are taking every step possible to stop this irresponsible action in the market. We have talked to Secretary Paulson and the Treasury. We have talked to Chairman Cox and the SEC. We also are communicating aggressively with our long-term shareholders, our counterparties and our clients. I would encourage all of you to communicate with your clients as well - and make sure they know about our strong performance and strong capital position.

I’ll be hosting a town hall tomorrow morning at 8:30 a.m. EDT to address any questions that you have, and would encourage all of you to participate in that discussion. Viewing details are available on Morgan Stanley Today.

Whether or not short sellers gang up on specific stocks from time to time is not really in question (of course they do). Rather, why John Mack and others (including management at Bear Stearns and Lehman as their stock prices collapsed) openly attack short sellers is.  Does Mr. Mack believe that his words and actions will help bring about regulatory changes that stifle short selling?  Does he fret that his falling stock price represents a lost bargaining chip and/or source of funding?  Does he really believe Morgan Stanley is so clearly undervalued that the shorts are making an irrational choice by beating share lower?

While the answers to the first two questions are plausibly ‘yes’, the answer to the last question is definitely not.  After all, Mack, who already owns nearly 3-million shares of Morgan, would undoubtedly purchase more shares if the value of his company were not in question.


Actions Speak Louder Than Words

Every time a John Mack starts blaming the shorts just imagine shares of Berkshire Hathaway being beaten down to levels well book. Would Warren and Charlie start blaming the shorts and make asses of themselves? Of course not. Instead they would happily be purchasing beaten down shares and profiting over the long-term.

In short, some investors are selling (and short selling) investment banks because the model is exiting a period of unbridled prosperity and entering an age of uncertainty. Mr. Mack and Morgan Stanley insiders could easily repel/ignore these sellers simply by purchasing a significant amount of undervalued MS shares.  That they instead choose to expend energy blaming short sellers further places in question the viability of their businesses.

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