Markets Rise Despite 7% Drop In Earnings for Morgan Stanley
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While the markets yesterday rode the wave of Tuesday’s Federal Reserve Bank rate cut, the optimistic outlook for investment banks was tempered as Morgan Stanley’s third-quarter earnings report failed to meet Wall Street expectations.
The country’s second largest investment bank reported a 7% drop in its income from continuing operations to $1.47 billion, compared with $1.59 million during the same period last year.
“The credit market deteriorated significantly during this quarter,” Morgan Stanley’s chairman and CEO, John Mack, said during a conference call with analysts. “This credit environment significantly impacted our leveraged lending, credit sales, and trading.” Morgan Stanley stock slid 2.2% to $67.03 at the end of the day. The rest of the market, however, saw an upswing buoyed by the Fed’s decision the day before to cut its key rate by half a point, to 4.75%.
By the closing bell, the Dow had added 76.17 points, or 0.6%, to rise to 13,815.56. With the Dow’s 2.5% increase on Tuesday following the Fed’s decision, it was the highest two-day advance for the index in five years. The S&P 500 was up 9.25 points, or 0.6%, to 1,529.03. The Nasdaq gained 14.82, or 0.6%, to improve to 2,666.48.
Morgan Stanley’s numbers were not surprising “considering the state of the credit market,” a senior economist with Moody’s Economy.com, Marisa DiNatale, said. “Given what the Fed did yesterday, the worst is probably over.”
An infusion of liquidity in the market could improve credit woes stemming from the subprime mortgage crisis, she added.
The Fed is betting that its rate cut will lower interest rates for customers taking out loans, thereby increasing funds in the market and pulling up the economy.
Morgan Stanley was one in a series of large New York-based investment banks releasing a quarterly report this week. Lehman Brothers Holdings Inc. started the series on a rosy note Tuesday when it posted better-than-expected quarterly earnings. Today, Goldman Sachs Group Inc. and Bear Stearns Cos. are scheduled to publish their earnings.
Both Lehman Brothers and Morgan Stanley are highly invested in leveraged buyout loans and took major hits to their numbers. Lehman Brothers took a $1.06 billion hit in its loan commitments to private equity firms and mortgage-related assets, while Morgan Stanley lost more than $700 million in similar ventures. Unlike Morgan Stanley, Lehman Brothers was able to offset much of its losses by big gains in other sectors, exceeding Wall Street’s expectations.