posterous kontent

Tracking the meltdown 



September 14, 2008

Special Protocol

"If party A to the transaction knows that Lehman is scroomed and doesn't tell party b, and party b settles up the contract, paying party a anything more than a penny, then shame on party b and they get what they deserve."

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September 11, 2008

Commodities Prices --- What's the deal?


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September 11, 2008

Gold price supression


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September 4, 2008

Public Daily message from www.fullermoney.com




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U.S. Must Buy Assets to Prevent 'Tsunami', Gross Says - This article from Bloomberg discusses an influential report which has contributed to today's stock market weakness. Here is the opening:

The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.

``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.

Since financial markets seized up a year ago as the subprime-mortgage market collapsed, the Standard & Poor's 500 Index has fallen 13 percent and home prices are down more than 15 percent. Yields on investment-grade corporate bonds, debt backed by commercial mortgages as well as credit cards reached record highs last month relative to benchmark rates.

`Mom and Pop'

Gross cast a bleaker view for the prospects of the world's financial markets than in previous notes to clients. The fund manager has previously called on lawmakers to support housing with legislation passed in July that allows lenders to forgive some of homeowners' debt and then refinance them into government-insured loans.

Pimco, a unit of Munich-based Allianz SE, is seeking to take advantage of declines in home-loan bonds. The firm is raising as much as $5 billion to buy mortgage-backed debt that has plunged in value, according to two investors with knowledge of the matter. The Distressed Senior Credit Opportunities Fund will invest in securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private.

Paulson Rescue

Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.

My view - This is not a great time to be a central banker or treasury official. Bill Gross wants more bailouts. He is probably right, in the interests of social stability, but they obviously come at a price.

The actual report is posted in the Subscriber's Area.


Email of the day (1) - On CRB Index:

"Thanks for the service, which has lost nothing in all the years we have known each other.

"Ref the old monthly CRB Index included in yesterday's comment do you have charts going back to beginning of 70s? There were 2 big tops in commodities (72 and 73 I think) caused by failure of Russian crops. It might prove interesting to compare with today's topping out process."

My comment - Thank you for your interest and I think it is great that so many of us maintain our enthusiasm for the markets.

We have as much back data in the Chart Library as we can get, and our own system can contain up to 50-years of history, which we fortunately have for the CRB indices. To see this, or maximum back history for any other instrument, just bring up a weekly or monthly chart in the normal fashion, then click on the 'Charting' function (black bar upper left), change the time 'Period' to '50 Years (max)' and then click 'Apply'. You can also save it in your favourites, should you wish to.

For general interest, I have reproduced the Old CRB (CCI) over 50 years, on both an arithmetic and semi-log basis. And for good measure I have included the current CRB Index (CRY), which you can also see on both an arithmetic and semi-log basis. For additional perspective, we also have inflation-adjusted (CPI) charts for CCI on both arithmetic and semi-log scales, and also inflation-adjusted CRB, arithmetic and semi-log.

I could show you far more in terms of customisable indices for commodities or anything else, but that would be showing off and I do not wish to test your patience. So let's cut to the chase - where are we in terms of 'commodity bubbles' or 'supercycles', and what are the parallels with the 1970s, if any?

This item continues in the Subscriber's Area.


Email of the day (2) - On oil and other bubbles:

"My take remains oil's rise and spike along with everything else was part of a crack up boom fueled by excessive credit now coming unwound just as it now explains rising $ as the scramble for liquidity intensifies with the shrinking current account deficit in the US and lenders unwilling to lend in addition. The Fed has destroyed its balance sheet and it is just starting. Between 2002 and 2007, the inverse of $ and virtually every other asset correlated as credit expansion fueled the boom. At the same time, we had growing current account imbalances now also coming unwound and that was equally a pivotal issue in having driven asset prices to extremes not supported the ability to service debts under them. Both the credit bubble and the current account imbalances explain rising asset prices during the bubble period and now falling asset prices that were propped up by credit and these cross border and unsustainable capital flows. Even houses in the Hamptons are down 10-20% as the rot spreads and option ARMS haven't started resetting, a bigger problem than sub primes. Plus, boomer children have 72% more debt than their parents did at the same age so they can't afford to buy homes in any case especially now proper underwriting will be done. Boomers start retiring over the next few years. In their 50's there is one buyer for every seller and by age 70, there are 3 sellers for every buyer and it is 9 to 1 by 80, a perfect storm indeed for continuing housing problems. There are demographic issues that are equally problematic for housing and looming Medicare and Social Security shortfalls. Between 1980 and 2000, there was a 20% increase in the native-born, English speaking, college-educated 25-54 year old group that was part of the fuel in the housing bubble. Between 2000 and 2020, there is no increase in this 25-54 age group with the same demographics so who will pay for the $99 Trillion unfunded liabilities. That is Pete Peterson's number. That gets us back to why M-3 was done away with, but that is another story.

"A buddy of mine who trades electricity and manages money for quite a few professional golfers was just in Singapore and spent some time with Jim Rogers who now lives there. He noted Rogers was profoundly pessimistic that the credit bubble would continue to implode for years to come with predictably bad consequences. Soros says the same in his new book and in interviews. Even smart guys like Joe Lewis and Sam Zell totally missed what was happening with credit run amok and paid the price with the Bears Stearns debacle with Lewis losing close to $1 Billion and problems at the Tribune respectively with the debt taken on to buy it now selling for cents on the $.

"August 2007 was as seminal as August 1971 when Nixon closed the gold window allowing for credit to expand exponentially until at the denouement it took $6 of credit to generate $1 of US GDP. In 2007, the world started to realize the emperor was naked. The adjustment process in asset prices started and it is global.

"As a PS, the hubris of Putin, Chavez, and Ahmadinejad along with new tall buildings in Moscow and the Middle East were signals crude was in a topping process."

My comment - Thanks for an informative and lucid summary of your thoughts, not least regarding how many of these events are interconnected. I also appreciate your finished copy, so that I all I had to do was copy and paste.

Perhaps I have been lucky to live and invest in an era where neither the US economy nor stock market ever fulfilled my worst fears. However you have knowledgeably detailed concerns which are more than capable of giving me restless nights.

We need to be aware of the risks you mention, as well as more optimist views, not least because combined; they should help us to remain objective when monitoring trends in the markets.


Today's interesting charts - The Library has 'Help' features and tutorials to enable newcomers to navigate over 17,000 customisable instruments more efficiently.


My personal portfolio: Three trading positions closed - Details and charts are in the Subscriber's Area.
USA (30-Year T-Bond futures) - Steadied within recent trend once again; would require close beneath 116.55 to offset current scope for an additional test of previous resistance.

This section continues in the Subscriber's Area.


Please note - Eoin is away until 9th September.


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September 2, 2008

Downunder Daily : The Long 'Long Run'




The trouble with owning stocks for the long run is that sometimes the long run can be very long. For example, the real 10-year return on US equities (S&P 500) is now negative. Even the 10-year total return (which takes account of reinvested dividends) is now negative in real terms (Exhibit 1).

It's very likely that the rolling 10-year return will worsen in the next year or two due to base effects, as the decade-ago starting point ascends to the 2000 equity peak. Assuming no price change from now, the 10-year average real return will be around -3% by 2010.

The wait for a reasonable pay-off for holding a relatively risky asset, such as equities, can be even longer once account is taken of the opportunity cost - the missed returns on holding a 'safe' asset. Exhibit 2 compares the total return on equities relative to the total return on Treasuries, for both the US and the G7. Since 1997, investors have received no extra reward for holding the risky US equity market instead of safe Treasury bonds. That is, the cumulative total returns on equities and Treasuries have been similar over that 11-year span.

Remarkably, an investor who bought a selection of G7 Treasury bonds in 1990 would have performed better over the past 18 years than buying developed-world equities (MSCI). In other words, an investor who preferred equities to bonds in 1990 would still be waiting for 'the long run' to kick in.

Not only have bond returns matched equity returns over the past 11 years in the US, and the past 18 years in the developed markets, but equity investors have had to stomach high volatility over the period. One of the paradoxes of the past 20 years is that the so-called 'great moderation' in macro conditions has not translated into a significant moderation in asset market volatility.

While that may in part be due to investors becoming more short-term-focused, or the rise of non-traditional investors, the root cause is probably that the great moderation has not damped the volatility in reported earnings. Exhibit 3 shows the volatility of reported S&P 500 earnings, as well as the top-down (NIPA) earnings. NIPA earnings were stable by historical standards in the 1990s, but volatility has risen recently. The volatility in S&P 500 earnings, by contrast, remained high through the 1990s and recently increased to the highest volatility seen since the 1930s.

One of the key differences between reported earnings and NIPA earnings - the latter exclude capital write-ups or write-downs - provides a clue to the increasing volatility of reported earnings. Earnings volatility is probably linked to the rising use of leverage in the financial sector. It also hints at a link between asset prices and reported earnings. That leads to a circular volatility cycle: If asset prices remain volatile, that adds volatility to reported earnings, which keeps equity prices volatile.

The meager trailing 10-year returns on equities raise the obvious question of whether the medium-term outlook for returns is a lot brighter. My view is that returns are likely to remain skinny, at least for a while, as equities face up to the headwind of mean-reverting returns. I've shown variations on Exhibit 4 several times before: It shows how returns lead earnings growth (the ROE series is inverted and pushed forward by three years - high returns point to weak earnings growth, and vice versa).

The prospect of declining returns is the flip-side of elevated valuations based on through-the-cycle earnings. Exhibit 5 shows a scatter plot of the S&P 500 Graham-Dodd P/E (a P/E based on inflation-adjusted 10-year trailing earnings) and the subsequent 10-year real total return. At current valuations, the expected 10-year return is around 4% real. As the chart shows, however, there has been a wide dispersion of returns from similar valuation starting points.

I'm off to Morgan Stanley's Australia Investment Conference in London, then heading to the US for marketing. The next DuD will be published on 22 September. GM


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August 31, 2008

Downunder Daily : RoW Rows The Boat



The rest of the world has done its best to keep the US afloat. Net exports (exports minus imports) accounted for 3.1 points of the 3.3% lift in US GDP in the June quarter, and 1.7 points of the 2.2% annual rise. The concern now is what happens if the rest of the world slows, as seems likely.

Exports are the key to the outsized net export contribution. Net exports added more to growth in 1980, but that was in large part due to the collapse in imports (Exhibit 1). The fall in imports reflected the crushing US recession underway at that time.

The size of the export contribution to US growth now reflects three things. The first is the strength in trading partner growth. The second is rising market share (presumably assisted by currency weakness). Third, the rise in exports' share of US GDP means that a given percentage increase in US exports now adds more to US GDP than it has in the past.

Exhibit 2 shows the correlation between trading partner growth and US export volume growth. It suggests that the most important factor behind export volume growth has been trading partner growth, not improvement in market share. In addition, note that export growth, while high, is not at unprecedented levels, while the export contribution to GDP is at all-time highs, a discrepancy explained by the higher share of exports in GDP.

The key point from Exhibit 2, however, is that export growth is likely to slow if - as increasingly seems likely - there is a material slowdown in trading partner growth.

The lop-sided nature of US GDP growth has an even more pronounced counterpart in earnings. The profit measure from the national income and product accounts (NIPA) shows a dramatic wedge between onshore-sourced and offshore-sourced profits. Domestic profits are falling at an annual rate of almost 20% - a four-quarter rate of decline not seen since the early 1980s. On the other hand, foreign-sourced earnings are rising at a double-digit pace (Exhibit 3). The rest of the world is doing as much to keep Wall Street afloat as it has to keep Main Street afloat.

As an aside, it's worth noting that the NIPA profit series does not include asset-value changes: either write-ups or, more to the point now, write-downs. Consequently, this earnings series increased by less than reported earnings through the credit/asset bubble, and is now falling less rapidly.

It may be unclear how much dollar weakness has contributed to export volume growth, but a weaker dollar clearly benefits offshore-sourced earnings, via the translation effect. Exhibit 4 shows the correlation between offshore profit growth and changes in the US dollar (inverted, so the line goes up as the dollar goes down). The prospective turn in the US dollar expected by our FX team would turn that translation tailwind into a headwind for foreign profits.

Finally, domestic profits, while falling sharply, remain above their long-term average relative to GDP. (Note that in Exhibit 3, I show the domestic profits made by US firms, while in Exhibit 5 the 'made in the US' profit series includes profits made by US firms in the US as well as profits made by foreign firms operating in the US.) In other words, despite the marked decline in profits already seen, it seems very likely that there are further significant profit declines in the offing. The earnings bubble hasn't completely deflated.


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END OF RESEARCH ABSTRACT

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The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").
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Important US Regulatory Disclosures on Subject Companies
The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight and Underweight are not the equivalent of Buy, Hold and Sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution
(as of July 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.

Coverage Universe
 Investment Banking Clients (IBC)
Stock Rating Category
Count
% of Total
Count
 % of Total IBC
% of Rating Category
Overweight/Buy
909
42%
290
45%
32%
Equal-weight/Hold
913
42%
270
42%
 30%
Underweight/Sell
348
16%
83
13%
24%
Total
2,170
643



Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

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Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.

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Comments [0]

August 31, 2008

Downunder Daily : Financials' Premium



Bruised, battered - and now, it seems, expensive: for the first time ever, American financials are trading at a prospective PE premium to the rest of the market (Exhibit 1).  
There is a longer history of trailing, than forecast, PE ratios. Based on trailing PE ratios, financials are now at a premium for the first time since the mid-1980s (Exhibit 2).

A few comments:

First, it's ironic that the financial sector persistently traded at a PE discount through most of the past 20 years - through what proved to be a super-cycle - while it traded at a premium in the mid-1980s (as the S&L sector was disintegrating). (As an aside, I wonder if the same thing will happen to commodity producers...)

Second, it's worth noting that relative valuation (the simple PE-relative metric) has been an unreliable guide to subsequent relative performance. Exhibit 3 shows the PE premium/discount of financials, and the relative returns (financials versus non-financials) in the US. Relative cheapness sent the correct buy signal in 2000, but that was really a story about the relative over-valuation in TMT, and that sector's subsequent decline. Conversely, the apparent over-valuation in the mid-1980s presaged a period of out-performance by the financial sector. On the other hand, the under-valuation apparent a year ago (47% PE discount at the nadir) has been removed not by financial sector shares out-performing, but by a PE-cutting earnings collapse.

Which leads to a third point: the rise and fall of financials has largely been an earnings story. Exhibit 4 shows earnings in the financial and non-financial sectors in the US (both indexed to 100 in 1990). The two stand-out features are how much financials' earnings out-stripped non-financials', and how - despite the write-down led collapse in earnings over the past year - financial sector 12 month earnings have fallen only to 2003 levels. Who, at the time, thought 2003 was a horror year?

To be fair, earnings per share have fallen further, due to the dilutive impact of equity raising (Exhibit 5). That carries a warning: even if dollar earnings return to their peak level -unlikely on a 5 year horizon, in my view - per share earnings will be significantly lower. The sell-side consensus, in contrast, expects a return to near-peak earnings in 2010.

Fourth, it's not clear that picking the bottom for financials now will be as lucrative as picking the bottom proved to be in the early 1990s. Everything was right in the early 1991. Valu-ation was low, both relative and absolute (prospective PE of 5 then, versus 13frac12 now), interest rates had significantly further to fall and - most importantly - a boom in asset prices and leverage was about to commence. None of those things is true today. The fact that the prospective PE is well above that seen in the early 1990s is evidence that the market still sees the current downturn as largely a (severe) cycle set-back.

Fifth - returning to another of my themes - Exhibit 4 is another way of highlighting the lop-sided nature of the bear market to date. Financial sector earnings are sharply lower, but aggregate non-financial earnings are at cycle highs (at least on a rolling 12 month basis). No wonder that only 3 of the 10 GIC sectors have fallen over the past year.

Finally, note the contrast between what's happened in the US and what's happened elsewhere (Exhibit 6). The decline in financials sector earnings outside the US has been far smaller than inside (as also, was the rise in preceding super-cycle). (To be fair, having just reported, US earnings do capture more of the setback than earnings in other markets.) Non-financial sector earnings are yet to fall, as in the US. If there is a global downturn, non-financial earnings will be affected in the next few quarters.


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END OF RESEARCH ABSTRACT

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The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Gerard Minack.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

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Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important US Regulatory Disclosures on Subject Companies
The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight and Underweight are not the equivalent of Buy, Hold and Sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution
(as of July 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.

Coverage Universe
 Investment Banking Clients (IBC)
Stock Rating Category
Count
% of Total
Count
 % of Total IBC
% of Rating Category
Overweight/Buy
909
42%
290
45%
32%
Equal-weight/Hold
913
42%
270
42%
 30%
Underweight/Sell
348
16%
83
13%
24%
Total
2,170
643



Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

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Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.

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August 27, 2008

Downunder Daily : A Cut-less Recession?





'This time is different' has been proven right a few times in this cycle, but markets are now anticipating a truly different US recession: one without a Fed rate cut. In fact, markets are anticipating remarkable unresponsiveness from many central banks in the face of looming growth downturns.

(Of course, the Fed has lowered the funds target to 2%. That was largely aimed at improving financial system liquidity, not driven by cycle management concerns. More to the point, the lower funds rate seems to have had no impact on the cycle. No indicator, aside from the funds rate itself, suggests that monetary policy is loose in the US. Every important private sector rate is higher now than a year ago - such as mortgage rates, in Exhibit 1. In addition, lending standards are tighter and credit growth is slowing. In other words, I think the US is entering a downturn with financial conditions getting more, not less, restrictive, notwithstanding the cut in the funds target to 2%.)

To be fair, markets have tempered their view on the outlook for central bank policy over the past month or two. Futures markets had been pricing in a succession of Fed rate increases two months ago; now they expect flat rates until mid-2009 (Exhibit 2). Likewise, the ECB had been expected to make little or no change to its official rate; now the market is thinking that the ECB may cut once by mid-2009 (Exhibit 3, which shows the euribor futures).

Even so, it's taken a run of bearish growth data - particularly in Europe - to bring markets around to the view that rate hikes will be delayed. Weak data haven't led to markets pricing in significantly easier policy, notwithstanding the obvious downside risks to the cycle (as highlighted, in a European context, by Elga Bartsch after this week's very weak IFO report - see The IFO Takes Another Plunge, 26 August).

The reason, of course, is the rhetoric coming from central bankers themselves. As Richard Berner noted in his report from the Jackson Hole conference: "All [central bankers] welcome the disinflationary promise of the slowdown, but it remains a promise. As a result, the near-term policy implications still vary: inflation-way central banks, like those in Latin America, are still inclined to tighten or, like the ECB, to stay firmly on hold." (The Message From Jackson Hole, 25 August. ECB hawkishness was underscored by overnight comments from the Bundesbank head, Axel Weber.

There are a few points to note about this. First, to the extent the current focus on inflation delays (or rules out) monetary policy easing, the downside risks to growth are commensurately increased. This supports my view that the most important reason to expect a global slowdown is because most central bankers still want growth to slow.

Second, this is a specific example of a bigger picture point: to the extent that western world's decade-long disinflation phase is over - and, as a result, the growth-inflation trade-off will be worse going forward compared to the past decade - the impact on investment markets will depend on only one thing: how central banks respond. If, as the ECB now seems to be making clear, it will stick to its inflation target despite the cost to growth, then the result of the worse growth-inflation trade-off will not be higher trend inflation, it will be lower trend growth. This says that the way to play the deteriorating inflation-growth trade-off will not be to buy inflation calls, but to buy growth puts. Of course, if you don't trust central banks, then it works the other way...

Third, if growth does slow far enough to lower inflation then the impediment to rate cuts presumably disappears. Timing, of course, is an issue. But the simple point is that neither short rate markets in the US or Europe are pricing in significant easing in this cycle (one in Europe, none in the US). My view (not shared by my colleagues) is that if there is a (technical) recession in the US or Europe, and if that leads to significantly lower inflation, then I can't see why rates shouldn't come down.

Fourth, if we do see weaker growth/lower inflation, some central banks will react sooner than others. Stephen Jen thinks that the central bankers who will most quickly change from targeting inflation to targeting growth will be in Asia (see My Thoughts On the Currencies, 26 August). That's an important reason why he is looking for the US$ to keep rising against the Asian currencies.

If we do see a quick about-face by Asian policy makers, and if that has a material impact on commodity markets, then that would likely have a bearing on the prospect for easier policy elsewhere. Imported (commodity) inflation is clearly a key to the reluctance of developed-economy central bankers to ease policy as growth slows. The implication is that in a world with relatively little excess capacity, if Asia goes for growth then policy makers elsewhere may have to accept lower growth.

That, however, is not my base case. We seem to be on the brink of a (technical) OECD recession, and leading indicators are now flagging a slowdown in important developing economies. This should open up enough excess capacity globally so that policy makers in most economies will eventually be able to ease policy settings. Moreover, with debt levels in western world very high, rates could be eased to reduce the risk of a debt-driven deflationary outcome.

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Coverage Universe
 Investment Banking Clients (IBC)
Stock Rating Category
Count
% of Total
Count
 % of Total IBC
% of Rating Category
Overweight/Buy
909
42%
290
45%
32%
Equal-weight/Hold
913
42%
270
42%
 30%
Underweight/Sell
348
16%
83
13%
24%
Total
2,170
643



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August 26, 2008

Downunder Daily : UnCommercial Real Estate





Residential mortgages are likely to be only the first wave of credit loss in the current cycle. Markets are priced for significant losses in commercial real estate, and hence in commercial-backed mortgage securities (CMBS).

There's a notable difference between CMBS and their residential counterparts: While losses on RMBS typically decline as the loans age (or 'season'), that's not necessarily true for CMBS. Residential delinquencies are now very high by historical standards. But within this bleak picture, older mortgages have proven more resilient than recently written mortgages. That presumably is because older RMBS are backed by properties that were 'deeper in the money' when the housing cycle turned. That has reduced defaults (and ultimately should improve recovery rates).

In contrast, losses on CMBS are largely driven by tenants' ability to pay rent, and that can be undermined at any stage by a deteriorating economic cycle. In short, CMBS carry a long tail risk.

Exhibit 1 shows the cumulative defaults on CMBS securities in the lead up to the 1990-91 recession. The default on 1986 collateral was actually higher than on the 1989 cohort.

We are now seeing CMBS delinquencies rise, although to be fair, delinquencies have been led by multi-family projects (hence, this is linked to the residential property market). But the slow rise in defaults in other CMBS sectors is no reason for comfort (Exhibit 2). Exhibit 3 shows that historically the peak default period for commercial real estate loans is at seven years.

Our credit team has estimated likely loan losses in the current cycle, based on three scenarios (see Andy Day, Wherefore Art Thou, Losses, 27 July, and Seasoning Reasoning, 8 August). The team expects aggregate cumulative losses (on CMBX-referenced loans) to be 6.5-8.0%. That's near the upper end of the historical range for fixed-rate commercial real estate loans, but less than the peak seen for the 1986 vintage loans (which was 8.1%).

A 6.5% loss would cause full write-downs on the most-recent-vintage BBB-rated CMBS. Losses of 8% would cause significant write-downs on A-rated CMBS.

Of course, the prospect of commercial real estate losses is widely recognized. The CMBX indices have seen sharp price declines through the past year. Exhibit 4 translates the underlying loss projections made by our team into losses for CMBX indexes. Andy recommends several trades to take advantage of the discrepancy between his forecast losses and current market pricing (please refer to the notes mentioned above for details).

The potential losses matter even for investors who may not be directly interested in the US commercial property market. The prospect of material commercial property losses is part of the looming story of loan provisioning and write-downs likely to affect the banking system. According to colleague Vishwanath Tirupattur, only 23% of commercial real estate debt was securitized in 2006, versus 76% of residential mortgage debt. This means that more of the commercial real estate losses (when they come) will be reflected in lender provisions, rather than taken as write-downs of securities (as is likely to be the case with the residential mortgage market). It is partly because a relatively small share of the outstanding loans has been securitized that indices, such as CMBX, have been used to hedge exposures. Exhibit 5 provides an estimate of CMBS exposure for a selection of US financial companies.




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Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight and Underweight are not the equivalent of Buy, Hold and Sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution
(as of July 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.

Coverage Universe
 Investment Banking Clients (IBC)
Stock Rating Category
Count
% of Total
Count
 % of Total IBC
% of Rating Category
Overweight/Buy
909
42%
290
45%
32%
Equal-weight/Hold
913
42%
270
42%
 30%
Underweight/Sell
348
16%
83
13%
24%
Total
2,170
643



Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months.
More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.

Other Important Disclosures
Morgan Stanley produces a research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in this or other research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks.
Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.
Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons
Morgan Stanley and its affiliate companies do business that relates to companies/instruments covered in Morgan Stanley Research, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis.
With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
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The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Unless otherwise stated, the cover page provides the closing price on the primary exchange for the subject company's securities/instruments.
To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.
To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives.
Certain information in Morgan Stanley Research was sourced by employees of the Shanghai Representative Office of Morgan Stanley Asia Limited for the use of Morgan Stanley Asia Limited.
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As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.
The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.
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Morgan Stanley Research, or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.
Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form.

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Comments [0]

August 26, 2008

Downunder Daily : Hockey Sticked



The second-quarter reporting season highlighted the lop-sided pressure on US earnings. Most sectors beat forecasts. This is a warning that corporates have not yet faced recession. Meanwhile, the sell-side consensus continues to run with a hockey-stick forecast: Near-term downgrades are offset by strong growth in out-years.

The US June quarter reporting season is 97% complete. Earnings have fallen significantly short of forecasts: The likely outcome (operating income of US$18.55 per share) is around 8% below the forecast at the start of the reporting season, and almost 30% below the forecast at the start of the year. Looking back to the growth forecast a year ago, the sell-side consensus got the number right, but got the sign wrong: Earnings have fallen by 7.6% on a trailing 12-month basis, versus +7.4% expected (Exhibit 1). Remember, the sell-side consensus has never forecast an outright decline in market-wide earnings.

The earnings picture remains lop-sided. Exhibit 2 shows the actual versus forecast operating earnings by sector. Most sectors surprised on the upside (which is usual), while two sectors saw significant shortfalls: Financials and Consumer Discretionary. This repeats the pattern of the past couple of reporting seasons. 
 
 
This underlines an important point: The market continues to mirror the economy. So far, the earnings decline - as with the economic slowdown - has been concentrated in finance and Consumer Discretionary. If, however, the US faces broad-based economic weakness, the prospect is for earnings disappointments to become broad-based as well.

For now, consensus earnings forecasts reflect the lop-sided pattern of reported earnings. Exhibit 3 shows the collapse in financial-sector earnings. The downgrade to the initial calendar 2008 financial sector EPS estimate is now approaching the 75% downgrade made to information technology earnings in the disaster year of 2002. The consensus expects a rebound in earnings, but this is now being scaled back (although the percentage pop will be remarkable as the base is lowered).

Other earnings forecasts have been far more resilient. Exhibit 4 shows the consensus forecasts for the market excluding Financials and Energy (energy-sector earnings have been revised higher, in line with the oil price, through most of the past year). While there have been moderate downgrades, the consensus expects double-digit growth in 2009.

Jason Todd from our US strategy team notes that consensus forecasts now imply a strong rebound in earnings in the second half of 2008. Consensus forecasts imply second half market-wide EPS of $48 versus $37 in the first half. This would be an all-time record jump between the half-years. The implied rebound is expected to occur as global growth weakens, the US$ firms, and the US heads into recession. Jason thinks that that's a stretch.

Our US strategy team is not even particularly excited about earnings in 2009, although they should be higher than in 2008. The team expects CY2009 earnings of $84 per share, versus $78 for 2008. (See Abhijit Chakrabortti, The Final Cut: Downgrading EPS Estimates and Target, 24 August.)

The key issue for investors in the US, and elsewhere, is not whether earnings will miss forecasts - everyone (except sell-side analysts) takes a miss as a given - but the extent of the miss and how much of a miss is in the price. Our US and European strategy teams continue to emphasize that they expect very large earnings downgrades, relative to forecasts. Abhijit's 2009 S&P 500 EPS forecast of $84.1 is 21% below the current consensus. Our European team thinks that 2009 forecasts are 29% too high in its market (see Teun Draaisma, Peering Over the Edge of the Cliff: 2009 Earnings Growth Rate 29% Too High, 4 August.) Markets continue to react badly to incoming earnings news - stocks that disappoint get thumped - suggesting that the looming downgrades will have an impact, despite the ubiquitous skepticism about current earnings forecasts.

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END OF RESEARCH ABSTRACT

Disclosure Section
The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").
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Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Gerard Minack.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Global Research Conflict Management Policy
Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important US Regulatory Disclosures on Subject Companies
The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight and Underweight are not the equivalent of Buy, Hold and Sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution
(as of July 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.

Coverage Universe
 Investment Banking Clients (IBC)
Stock Rating Category
Count
% of Total
Count
 % of Total IBC
% of Rating Category
Overweight/Buy
909
42%
290
45%
32%
Equal-weight/Hold
913
42%
270
42%
 30%
Underweight/Sell
348
16%
83
13%
24%
Total
2,170
643



Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months.
More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.

Other Important Disclosures
Morgan Stanley produces a research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in this or other research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks.
Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.
Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons
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As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.
The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.
Morgan Stanley has based its projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on publicly available information. MSCI has not reviewed, approved or endorsed the projections, opinions, forecasts and trading strategies contained herein. Morgan Stanley has no influence on or control over MSCI's index compilation decisions.
Morgan Stanley Research, or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.
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