A half-decent advance, spurred in part by the departure of Morgan Stanley ( WMD) CEO Philip Purcell, turned into meager gains for stock proxies Monday, as a spike in oil prices and profit-taking in the financial sector ate into the early gains. The price of crude oil again raced higher, gaining $2.08 to $55.62 per barrel, fast approaching its all-time high of $58.28 touched on April 1. That was enough to shave off some earlier buying enthusiasm, especially ahead of key inflation data due on Tuesday and Wednesday. The Dow Jones Industrial Average ended higher by 9.93 points, or 0.1%, at 10,522.56, after rising to an intraday high of 10,589. The S&P 500 added 2.71 points, or 0.2%, to 1200.82, off a high of 1206. The Nasdaq Composite advanced 5.96 points, or 0.3%, to 2068.56, off a high of 2078. But let's face it, all the drama on Monday was provided by Morgan Stanley, whose board chose to sweeten an otherwise bitter preannouncement of weak second-quarter earnings with Purcell's ousting. The Amex Broker/Dealer index eventually finished in the red, losing 0.21%, on profit-taking of earlier gains. But Morgan Stanley shares remained higher, advancing 2.0% on the day. And fellow brokerage J.P. Morgan ( JPM) (which also issued a profit-warning earlier this month) also gained 0.2%. Interestingly, it was those brokers that haven't warned that took a hit in afternoon trade; Lehman Brothers ( LEH) lost 1.17% and Merrill Lynch ( MER) fell 0.91%.
The news, some believe, can work as a catalyst for buying at the lows after the stock's recent weakness (it's fallen over 15% since late March). "It's good news in the sense that we're getting clarity on management," and its will to reward shareholders, says Owen Fitzpatrick, head of Deutsche Bank's U.S. equity group. And to a large extent, underperformance by the brokers is already well priced in, just as they're expected to report weak second-quarter earnings this week and next. "Given that the bad outlook is already baked in current prices, we could see some more buying on the news," when the brokers report, Owen says. Business has been bad for the brokers since the beginning of the year, especially as the yield curve continued to defy expectations. At the same time, credit derivatives have turned out to be riskier than thought, corporate issuance has remained weak and M&A activity less than inspiring through the second quarter. No surprise then that a lot of the discounting has centered on brokers with a large exposure to the fixed-income arena, such as Morgan Stanley and Goldman Sachs ( GS). Meanwhile, Lehman Brothers and Bear Stearns ( BSC), have diversified well enough into other areas such as mortgage lending (a well-inspired move), and their shares have taken less of a hit in recent months. Still, conditions have been bad, as profit warnings by J.P. Morgan and Morgan Stanley demonstrate. But the performance at Morgan Stanley, it must be said, has been particularly bad and had been going on for longer. As
reported by TheStreet.com's Matthew Goldstein, Morgan's shares have risen just 29% over the past 30 months, while both Merrill and Goldman shares rose 45%. Bear Stearns shares have risen 65% and 74% at Lehman during the same period. Year to date, prior to Monday's advance, Morgan is down 10% vs. losses of between 3% and 7% for Bear, Goldman and Merrill, and a gain of 8% for Lehman.
The weakness was accentuated amid declining business and high-level defections from top Morgan executives, who became ardent critics of Purcell's leadership in recent months. But how quickly Morgan Stanley will turn things around remains a large unknown. Lehman Brothers analyst Mark Constant warns that investors should refrain from overreacting either to the profit warning or to Purcell's departure. On the one hand, the second-quarter results are not as dramatic as some had forecast. On the other hand, "we do not see a savior CEO instantly stabilizing Morgan Stanley," Constant says. Purcell indicated he would stay on until a successor is found, which could be until next March at the latest. Then, there's also the rumors that Morgan could become a takeover target, which may also have provided a floor to the stock's price recently. But while these rumors "appear to remain unfounded," according to Constant, "the stock's sum-of-the-parts discount is still less compelling than those of Merrill or Goldman Sachs."