The broad indices were mixed, while the KBW Banking Index (I:BKX) fwas down 0.2% to 66.62, with all but six of the 24 index components showing declines. The KBW Banking Index has returned 30% this year, outperforming the the S&P 500
A very positive development on Friday was a vote by the House of Representatives on a bipartisan budget deal, setting up an expected approval in the Senate, for the first bipartisan federal budget in four years.
Friday's economic calendar was light. The Bureau of Labor Statistics said the Producer Price Index for November declined 0.1% from October. Economists polled by Reuters on average had expected the PPI to be flat. Core prices for finished goods -- excluding food and energy -- rose 0.1% in November, as expected by economists.
The apparent lack of inflation pressure bodes well for the market, since stock investors fear the rise in long-term interest rates that will follow the inevitable decline in "QE3" securities purchases by the Federal Reserve. The central bank has been making net purchases of $85 billion a month in long-term U.S. Treasury bonds and agency mortgage-backed securities since last September.
The flow of strong economic data last week, including an upward revision in the third-quarter gross domestic product growth estimate to an annual rate of 3.6% from the previous estimate of 2.8%, along with the decline in the unemployment rate to 7% in November from 7.3%, will be among the factors considered by the Federal Open Market Committee when it meets on Dec 17-18.
Many economists expect the FOMC to hold firm on the Fed's bond purchases until its March meeting. This includes Sterne Agee chief economist Lindsey Piegza, who wrote in a client note on Friday that "one of the reasons that the FOMC has been able to extend the tapering timeline and err on the side on caution to ensure the labor market is strong enough to withstand weaker policy accommodation, is the fact that the Fed's second mandate, stable prices, is well under control."
Investors have been expecting the "tapering" of QE3 bond purchases for quite some time, sending the market yield on 10-year U.S. Treasury bonds up to 2.98% from 1.70% at the end of April. MetLife (MET) in its year-end investor presentation on Thursday said it expects the yield on the 10-year bond to increase to 3.36% at the end of 2014 and 4.50% "by the end of 2016." A rising-rate environment may spook stock investors, but for insurance companies that rely much more on investment income than on underwriting revenue, significantly higher long-term interest rates can provide quite a boost to earnings.
Morgan Stanley's shares have returned 64% this year. The shares trade for 1.2 times their reported Sept. 30 tangible book value of $26.96, for 12.3 times the consensus 2014 estimate of $2.53 a share, among analysts polled by Thomson Reuters, and for 10.5 times the consensus 2015 EPS estimate of $2.97.
As part of his advice to investors to cut risk in advance of the QE3 tapering, Deutcshe Bank analyst Matt O'Connor on Dec. 4 cut his rating on Morgan Stanley to "hold" from "buy," while lowering his price target for the shares to $30 from $31.
While writing in a note to clients that Morgan Stanley's management had "delivered on a number of key strategic initiatives around the equities business, wealth mgmt, ibanking, expenses and capital (FICC remains disappointing)," however, he believes those items are already "priced into the stock and additional upside in the near term will be more macro driven."
Please see TheStreet's earnings coverage for Antoine Gara's detailed discussion 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 (C).
Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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