Goldman Sachs & Morgan Stanley
Interview: Sanford Bernstein---Hintz, Brad---Analyst
>> looking at going going -- goldman sachs and morgan stanley stanley. talk to me here. we’ve had surprises from bear stearns. we’ve had positive surprises and numbers and results from lehman brothers. would we not expect the same for goldman sachs and morgan stanley tomorrow?
>> my guess is that morgan stanley and goldman sachs will beat the consensus estimates. and the reason is because they’re going to have good fixed income. but one of the things they have that both lehman and bear don’t have is the strong commodities trading. if you think of commodities,% commodities tends to do well during periods of war, famine, pestilence and disease and we certainly have had enough geopolitical moves that oil trading will have done very well.
>> in the big scheme of things, can oil trading carry a quarterly result like bond trading or stock trading or equity underwriting?
>> what it will do is add to it. because likely―like lehman and bear, you’ll have fixed income trading. fixed income began slowly in the last four to six weeks of the quarter. what we’ll see in terms of the numbers is excellent commodity trading, excellent equity underwriting, very good fixed income. unfortunately, i think the problem we have is the market is focused on rising interest rates and although they think they’ll post very good earnings, the market will look forward to what’s the next part of the cycle for them to outperform.
>> it’s got―this is the broker/dealer index data. you see the percentage, three months, 26%, 18%. morgan stanley up 14% versus the s&p 500, the percentage underperformance during that period of time. but the reality is, these stocks have been killed for three months.
>> they certainly have. i feel my research has been sent to the electronic trash bin. the market certainly is focusing on the decline of fixed income. but i think one of the problems that the market may have in terms of its analysis is it’s ignoring the fact that european fixed income should continue to perform at least into 2005. it’s unlikely that the european% central bank will raise rates and the european fixed income market is roughly a half the side of the u.s. so in terms of what will happen in the brokerage firms is the decline of u.s. fixed income in the next two quarters and the european fixed income side continues buoyant with rates finally beginning to rise in 2005 so the decline in european fixed income is delayed. what that means is we have time for m&a and i.p.o.’s and the investment banking, the capital market cycle to pick up again. the area where we’ll see softness in brokerage firms is retail. retail brokerage is going through an early summer decline and we probably can’t expect the retail investor to come back until september. i think one of the more interesting things that we have is that we’re seeing the hedge funds pull back. hedge funds, if we look at the amount of equity --
>> what would bring the retail investor back in september. just going to take the summer off?
>> fundamentally, yes. the history of retail brokerage is that when the summer comes, the retail investor tends to go away.
>> as well as the institutional.
>> exactly.
>> let’s talk about the multiples that are at stake here here. is there a price level? you rank these stocks a buy and i assume that the more they fall, the more they become attractive to you.
>> that’s right. goldman sachs has a price point at 1.97. that puts them in its eighth decile. 80% of the time it trades at a higher price to book.
>> why price to book? of all the different fundamental ways to look at a company, why price to book in goldman?
>> we’ve found that major brokerage firms tend to have -- it’s relatively volatile earnings. price to book tends to be a cleaner number. historically the book value tends to be a very good number and brokerage firms don’t trade below bang book. if we look at morgan stanley, it’s trading at its seventh decile, at 2.19 times book. 70% of the time this company will trade above there.
>> good odds for a bet.
>> and what we have is we know that brokerage firms are always always―do not peak in fixed income cycles, but during investment banking and retail and asset management, much later.
>> the advice is to hang in there.
>> absolutely.
>> u.s. securities analyst at sanford bernstien. as commodities prices soar, energy companies are reaping benefits. we’ll hear from the chief executive of quiksilver coming up. quiksilver shares hit an all-time high today.
