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Morgan Stanley Leads Banks Lower After Downgrade

The FOMC has said its "highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."  The committee had previously said it could be appropriate to raise the federal funds target rate when the unemployment rate falls below 6.5%, but Federal Reserve Chairman Ben Bernanke has said the rate target could remain unchanged for some time, even after that milestone is achieved.

"[O]ur bias is that short-term rates won't rise as soon as some expect-possibly until following the 2016 US elections," Deutsche Bank analyst Matt O'Connor wrote in a note to clients on Wednesday.

Morgan Stanley

Morgan Stanley's shares have staged a mighty recovery, rising 59% this year, following a 28% return during 2012.  The shares trade for 1.1 times their reported Sept. 30 tangible book value of $26.96, and for 11.9 times the consensus 2014 earnings estimate of $2.53 a share.  The consensus 2015 EPS estimate is $2.97. 

Please see TheStreet's earnings coverage for Antoine Gara's detailed coverage of the boost to Morgan Stanley's bottom line brought about by the company's assumption of 100% ownership of its former retail brokerage joint venture with Citigroup.

As part of his advice to investors to cut risk in advance of the QE3 tapering, and in light of continued headline risk from regulatory actions such as the finalization of the Volcker Rule expected next week, O'Connor on Wednesday cut his rating on Morgan Stanley to "hold" from "buy," while lowering his price target for the shares to $30 from $31.

O'Connor also cut his rating for Citigroup to "hold" from "buy," while lowering his price target for Citi's shares to $56 from $61.00.

The following chart shows the year-to-date stock performance for Morgan Stanley and Citigroup, as well as the KBW Bank Index and the S&P 500 (^GSPC):

MS Chart
data by YCharts


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Must Read: Banks Lead Market Lower Amid Stream of Positive Economic Data

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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