Uncertainty remains within Brokers Morgan & Goldman

Last of a dying breed? Morgan Stanley (MS) & Goldman Sachs (GS) remain Wall Street's 2 independent brokerage houses, and for that fact, their shares are being sold off heavily day in and day out. Despite the fact that both companies beat reduced earnings expectations for the quarter, they are being lumped into the same selling frenzy as their industry com padres due to their heavy reliance on leveraged investments.

Goldman profit fell 70% year-over year but the company still managed to make ends meat. The yearly comparisons are not pretty considering Goldman's record 2007 financial year. $810Million in profit ($1.81/share) vs. $2.81Billion ($6.13/share) last year. Overall revenue was down also from $12.3Billion to $6.04Billion.

Morgan Stanley, which had its own set of difficulties over the year reported profit that fell 3% year over year, $1.43Billion vs $1.47Billion, which translates into $1.32/share this quarter. With net revenue reaching $8Billion, a 1% year over year increase, Morgan showed it can still deliver results, however the pressure on the company to make a deal with a bank is staggering.

The old leverage issue again, as Investors feel the only way to shore up capital and assure broker survival is to pair up with a bank and the giant vault of deposits that go along with it. When Merrill Lynch (MER) made the deal with Bank Of America (BAC), followed by Lehman Brothers (LEH) bankruptcy, both of which followed JP Morgan Chase (JPM) rescue of Bear Stearns the Street was down to 2 stand-alone investment houses.

The rumor-mill has run wild of late regarding Morgan, with reports of conversations with Citigroup (C), Wachovia (WB) and China Investment Corporation, which if done would leave Goldman Sachs as the sole big name brokerage left on Wall Street. Investor publications have held a positive opinion so far on BAC's deal for Merrill, so for Citigroup or Wachovia picking up Morgan Stanley on the cheap would also feel like a win.

However, in the turbulent times that are continuing, with a financial crisis unseen in most Investors lifetimes, the "Let's make a deal" talks are very cautious to say the least. If Morgan does join with a bank, and signs are pointing more likely recently that they will, Goldman will find itself in a unique position, having its main competitors under the corporate shells of some of the largest financial institutions in the country. The optimist finds that this will allow Goldman to thrive as the economy strengthens and underwriting and M&A advisory work become more prevalent, but the pessimist finds a single brokerage model struggling to survive in these economic tidal waves.

As Markets see-saw between down 400 point and up 400 point days, the successful trade is being on the optimist/pessimist part of the see-saw on the correct day. Lately though, the pessimism has run rampant.





Disclosure: Author owns GS, C

Finance Fails Again! Dow Drops 500 points

Monday started poorly and ended worse for Markets as the weekend turmoil of Lehman Brothers (LEH) and AIG (AIG) weighed heavily on the financial sector and stocks as a whole. As hope for a bailout of Lehman, or at least heavy asset sales dwindled Sunday, leading suitors heading for the exits, the company had no choice but to file for the bankruptcy protection.

Still standing, but sharing the negative spotlight is AIG, the insurance giant, which said that it may need $40Billion to keep moving forward. A remarkable number, when considering the company is reportedly backing nearly $60Billion ($57.8Billion according to Bloomberg) in sub-prime mortgages. AIG is looking to raise about $20Billion in capital and sell off another $20Billion in assets. New York has allowed the company special permission to access $20Billion in an effort to shore up some liquidty. The mathematics are still working heavily against AIG as shares plunged 60%, cutting half of AIG's market cap. Still not as bad as Lehman though, which lost 95% of its value due to its bankruptcy plans.

As Bank Of America (BAC) and Barclays (BCS) walked away from Lehman bailout talks on the weekend, BAC was busy getting another deal done as it agreed to purchase Merrill Lynch (MER) for about $50Billion, valuing the firm at $29/share. While Merrill jumped at the open the market's selling sentiment dragged it down to $17 from a high of $22.

And the rest of the financial doghouse followed:

Citigroup (C): down 13%
Bank Of America: down 21%
Wachovia (WB): down 25%
Washington Mutual (WM): down 26%
JP Morgan Chase (JPM): down 10%
Goldman Sachs (GS): down 12%
Morgan Stanley (MS): down 13%

The markets have seen down days like this before, albeit not to this extent, and many traders start talking themselves into the so-called bargains, but as former Fed chariman Alan Greenspan put it, and I paraphrase, 'This is the worst economic situation I've ever seen'.

Even the strongest of financials can still go lower from here, but for the ones who can ride it out, show they can stay afloat and show they can stay profitable, bargain basement prices wont be around for that long. That's a big reason why the Street will be looking so closely at Morgan and Goldman earnings.

Disclosure: Author owns C, GS

Lehman Bros losses put it at the edge of Massive Asset sale Cliff (Update)

Less than 24 hours after losing nearly half of its Market Cap, Lehman Brothers (LEH) gave Wall St. another reason to be somber about the future and health of the investing house. The whispers that Lehman was in dire financial straits have been resonating for some time, but as they grew louder so did the negotiations with Korea Development Bank, which eventually halted.

The end of those negotiations was the prologue of Lehman's 40% sell-off on Tuesday, and the announcement of a $3.9Billion quarterly loss is another driving stake into Investors spirits regarding the firm. Write-downs totaled $5.6Billion, causing the massive loss, which was even worse than analysts had expected ($2.2Billion). The company is also trying to shore up capital by auctioning off over half of its asset management group, cutting its dividend and setting up a spin-off of real estate holdings.

While all that looks dire, and Investors are still licking their wounds from the end of talks with KDB, Lehman has bought itself a little time by outlining this strategic plan on the heels of massive losses. Investors are willing right now to give the company a little bit of rope, but the first sign of additional trouble, in the form of further losses, an uneventful auction process or whispers of unattractive sale prices for some of its assets, will see traders and investors alike moving swiftly to other companies and other sectors.

A tough task is facing management these days; as headlines mount clients and employees are more likely to leave, which would make an already unstable liquidity position all that more turbulent. However some deals have already been outlined by Lehman, including a $4Billion formal engagement with BlackRock Inc. to sell UK based residential mortgage holdings and the spin-off of a commercial real estate public company named Real Estate Investments Global in the first quarter of 2009.

Oh and Lehman also slashed the dividend from $0.68 to $0.05, and the market's history with banks cutting their dividends and their correlated market performance over the last year has been well known. But in trying times for the financial industry, drastic measures must be taken to keep liquidity at somewhat reasonable levels.

It wasn't that long ago that with the help of the Fed, Bear Stearns had to be saved, but now it is closer than ever that Lehman stands near that same edge. I think Lehman will be alright as the market rights itself eventually, given it survives the fire sale, but with it being in this sector with these problems it'll still be able to be gotten for cheaper than $8/share.

Update: Sept 11/08 correction to Bear Stearns rescue details.
Disclosure: Author holds no position in LEH

Buyer Beware, Monday belongs to the Bears

Coming off the weekend and looking ahead to the start of school years the the Labor day holiday, Traders were decidedly negative with the markets today, selling off in droves. Once again uncertainty in the Financial sector was the biggest catalyst of downward pressure.

Stocks started the day lower with the major indices hitting bottoms by mid-day, staying around those levels through the rest of the trading session. AIG (AIG) stock was making the most noise after having its price target cut by an analyst at Credit Suisse, following Friday's rumblings of falling ratings against the insurance giant. AIG was down over $1 (around 5.5%) to under $19.

The debate over Financial sector strength has swung negative lately with the rumors of Lehman Brothers (LEH) potentially needing a bailout, or impending partial sale abroad. Coupled with the daily Freddie Mac (FRE)and Fannie Mae (FNM) exploits it makes for a Financial situation in the US as turbulent as any in recent memory. Although both Mac and Mae were up substantially in this session, the bottom dwelling trades have to be timed and even with slight rallies, the only real course of action for both appears to be a government-led bailout effort.

When that kind of talk is on the table not even a 3% jump in Existing Home Sales can rally this market on this day.

Bernanke comments lead to rally in Financials

Comments by Ben Bernanke, Fed Chairman, today lifted markets, especially for those battered companies in the Financial sector. In what could be called a "relief" rally, the worst 3 to 6 month performers in the sector received today the biggest lift in months.

Bernanke's comments sought for the Fed to increase its oversight ability and its power/resources in order to prevent future financial turmoil. In essence Bernanke wants to Fed to have new regulatory responsibilities and supervisory oversight of the Financial markets and Financial companies.

In light of the commentary and an almost $6 drop in Oil Futures, The Financial sector posted a board of green.
Bank Of America (BAC) up 8%
Washington Mutual (WM) up 15%
Citigroup (C) up 5%
Wachovia (WB) up 10%
Lehman Brothers (LEH) up 4.5%
Goldman Sachs (GS) up 3%
JPMorgan Chase (JPM) up 4.5%

While today's rally definitely was a relief for longer term holders of these companies, the industry as a whole, is by no means out of the woods. The Financials will still feel the pressure of the lingering sub-prime and mortgage troubles, and it wont be till the losses and write-downs fully subside can it become business-as-usual for some of America's most recognized corporate names.

Disclosure: Author owns C, GS

On the heels of Lehman losses, Goldman shines again

As the turbulent and tumultuous times that are the Investment Banking earnings season move from just-around-the-corner to in-full-swing, all Wall Street eyes were on the leader of the pack. Goldman Sachs (GS). With the market continuing to see credit losses dragging down the performances of the Financial sector companies, there wasn't much to look forward too, and even less to be optimistic about.

Lehman Brothers (LEH), reported the first quarterly loss in the company's public history, and it was fairly hefty at that, $2.8Billion! Now that the cross-hairs are on Goldman, it was up to the darling of the Investment Banking world to reassure the industry all is not lost. Profits and Revenues were expected to decline at Goldman Sachs, but the company's ability to maneuver through the credit crisis gave it the ability to keep its head more than above water, while rivals continued to stumble.

Goldman's results were better than expected, despite year over year declines, and the executive branch at the head of the organization are singing their own praises. This little ditty from Lloyd Blankfein pretty much sums up the atmosphere around the sector and Goldman itself:

"Given the difficult market conditions, we are particularly pleased to be able to report strong results for the second quarter."

So you know it's party city down at the Goldman camp (Let's hope no one invites Henry Nicholas).

GS delivered profits of $2.09Billion, which equates to $4.58/share, down 11% from last year. On the top line, the drop was only 7.5% to $9.42Billion. Considering analysts were expecting $3.42/share on revenue of $8.74Billion this was indeed a substantial earnings beat. After an initial jump Goldman shares are coming back to the general market and as this company sits in the 180s it's time again to ask, just what the possibilities are for a trade from here?

Granted Goldman's Price to Book ratio has been notoriously higher than its peers at around 1.9, but that doesn't make it expensive. The industry, through this downtrend and the losses is in a time of consolidation and new metrics. In fact, Goldman, on Price to Book is inching closer to the sector near the high 1.7s. Since P/E ratios don't mean much if they're negative, for some other Investment firms, analysts need new ways of valuation. But GS, has always been on a profitable path, and its trailing P/E now stands at 8! In a perfect world this ratio would be at 12 and it's forward number about the same.

An opportunity exists over the next year or so, to truly make a splash with Goldman Sachs! The cream rises to the top as they say, and a year from now, when GS is looking at trailing earnings once again getting $20/share with a trailing multiple near 12, shareholders getting in the company at this $170-$180 stage will inevitably be 30 to 40% to the good.

Disclosure: Author owns GS

Investment Banking Earnings start the Rally, Fed rate cut kicks it into Gear

Markets came out to a flying start this morning as Goldman Sachs (GS) and Lehman Brothers (LEH) showed the Street that in fact all is not dead in the world of Investing. Lehman, which was creeping into talk circles of being the next Bear Stearns, showed just how well it can keep itself going with a better than expected quarter.

More of the same came out of Goldman Sachs, which beat estimates again, providing the guiding light for buyers jumping back into the financial sector. The earnings numbers were sharply lower than a year ago at both firms, but both also registered upside surprises on top of beaten down analyst opinions. Lehman earned almost $500Million of $0.81/share vs. the expected $0.72/share. More importantly the company on the conference call downplayed any cash strapped concerns by announcing that Lehman has a strong balance sheet with $30Billion in cash on hand as well as $64Billion in very liquid assets. A very strong foundation that'll keep it afloat, by any measure!

Shareholders and investors rejoiced at the quarter sending depressed Lehman stock up almost 50%. At the other end of Wall Street, Goldman Sachs shares gained 16% to $175, following a better than expected quarter. Goldman earned $1.51Billion, $3.23/share in profit vs. the expected $2.59. Management gave speeches of confidence in the cash position at Goldman and investors were very impressed at the raw numbers and the ease at which GS seems to maneuver around the economic landscape.

The market momentum continued throughout the day and once the news hit the wires that the Federal Reserve cut the Interest Rate in the US by .75% the market seemed poised to go nowhere but higher. The day finished at the peak of the session, and the Dow (420 points, 3.5%), the Nasdaq (90 points, 4.2%) and the S&P (54 points, 4.2%) all recorded substantial gains.

Disclosure: Author owns GS

2007 Ends with a Bearish Tone, Dow loses 100 points

The Dow ends the year down 101 points, and while the average is in positive return territory for the year (about 6.5%) the latter part of the year has become increasing volatile and negative. The credit crisis dominated the market headlines over the last few months and Big Finance has endured billions upon billions of losses in their asset valuations.

These bad bets have cost the big banks plenty as the hit list is broad and plentiful. Since Mid Year highs, there have been nothing but bad news from the Financial sector. (Apart from consistent blowout quarters at Goldman Sachs (GS))

• Citigroup (C) is down 48%
• Bank Of America (BAC) down 24%
• Wachovia (WB) down 34%
• Merrill Lynch (MER) down 46%
• JPMorgan Chase (JPM) down 19%
• Morgan Stanley (MS) down 31%
• Lehman Brothers (LEH) down 24%
• Bear Stearns (BSC) down 38%
• Goldman Sachs down 14%

These numbers are staggering and many analysts are painting an even bleaker picture for the Financials in 2008. While I think there's the potential for big rebound gains into the 2nd half of the year for these companies my major worry is that once Dividends start getting cut, more investors will flee to other safe havens. The rumors of Citigroup needing to cut its dividend by 40% certainly have hurt the stock over the past couple of weeks.

There will be opportunities in 2008 for the Investor, as I feel the recession fears are overblown and selling based on those fears is overdone. The selling was done consistently throughout the past couple months, timed with the Federal Reserve Interest rate moves.

2007 will go down as the year of the iPhone from Apple (AAPL), and the popular mobile phone gadget has helped the technology company to another breakout year by more that doubling since the device's unveiling. Look for Apple to extend its reach with iPhone in the coming months (Europe, Asia etc.). Technology and Oil were the leaders for better parts of the year in 2007 and this will likely continue going into 2008. I believe there is tremendous commodity and trader pressure to get and keep oil above the $100 mark. Should this happen it will continue to put pressure on the consumer and big ticket spending (Homes, Cars) will soften still, putting further pressure on the overall market and North American economy.

Luckily though, all metrics the market has gotten lately have pointed to a stable and growing US economy, and consumers seem to be taking high gas prices in stride. All signs point to a strong Christmas season, led broadly by Technology (Gaming & gadgets), and with this the chip makers should see continued strong demand, specifically Intel (INTC).

It's the first end of year trading session for the WC Power Tech Fund Blog and I'd like to thank all the readers throughout the first few months here.

Fear over Financials drags Markets lower Wednesday

North American markets were broadly lower Wednesday as investor fear in the Financials and further credit crisis write-downs caused massive selling. Major indices across America were off between 2 and 3%, with the biggest loser being the S&P 500.

The US Dollar continued to weaken against other major currencies setting a new record low against the Euro. For us Canucks (Canadians, for those not from North of the border), we saw our Loonie hit $1.10 before settling back to $1.07 and change. Great if you're planning a loot shopping session in Buffalo on the weekend, not so nice if you're holding American investments.

The Financials were the biggest victims, whether they deserved it or not. Fear of further write-downs and losses spurred selling that carried throughout the entire day.

The list of victims is as follows:
Citigroup (C) - Down 4.5%
Bank Of America (BAC) - Down 5%
Wachovia (WB) - Down 6.5%
JP Morgan (JPM) - Down 4.25%
Morgan Stanley (MS) - Down 6%
Goldman Sachs (GS) - Down 4%
Lehman Brothers (LEH) - Down 5.75%
Novastar Financial (NFI) - Down 2.75%
Washington Mutual (WM) - Down 17.25%
Countrywide Financial (CFC) - Down 9.25%

Not even high flying Technology could save this session as selling was seen across the board. The amount of trader fear that exists over further credit losses, makes this a scary time as yet to go bargain hunting. If trying to buy on the cheap, do it in blocks and stagger the purchases because this pent up fear carries with it more potential downside.

Cisco Systems (CSCO) reported after the bell, a strong profit quarter, in line with forecasts but their guidance and words sparked further after hours selling. The US Bank debacle has starting to creep into the technology sector according to Cisco, as orders for networking equipment from the Financials were much weaker and comments form Cisco management only stroked further fears. Shares were off 4% in trading and another 9% in after-hours trading, leading major tech futures lower going into tomorrow's trading session.

Disclosure: Author owns and has covered calls in C, BAC, WB, GS

Markets Advance ahead of Fed Meeting, Oil hits New Record

Overall trading tones were positive on Monday and stocks advanced on both sides of the North American border. Canada's TSX advanced almost 1% while Major American indices were up about half a percent. Oil prices continued to climb near $94 a barrel.

Markets are almost already fully pricing in a 25 basis point rate cut by the Federal Reserve as American currency slided lower again. The US Dollar is facing tremendous pressures as global economies become stronger and the anticipation of a rate cut further drives the benchmark currency lower. The strong Euro is worth almost $1.45 US and the strong Canadian economy is pushing the Canadian Dollar further past parity and is now worth about $1.05 US. Multi-national US firms are reaping the benefits every quarterly earnings report that the US Dollar slides while International Investors in US companies are feeling the pinch as their holdings absorb the conversion rate loses.

While a rate cut is what the market expects, there has to be a balance here and the Fed knows it. Economy stability and Inflation/Currency issues have to be at the forefront of the Fed policy discussions, as I'm sure they will be. The last time the Fed met and cut rates the market on the whole rallied and this party, with few hiccups, has continued into late October. The market expects more now and a stand by the Fed will likely be met by selling so a cautious stance will be taken by traders in the days leading up to an announcement.

Major financials are holding seemingly steady now awaiting the Fed but the solid Investment Banks are seeing Money flow back in. Goldman Sachs (GS) hit a new high today over $244/share, and Lehman Brothers (LEH) advanced also, both stocks showing gains of over 3%.

Oil continued its upward trek hitting near $94 a barrel. An incredible run so far that has seemingly been pushed by fear of conflicts or worldwide production slowdowns every other week. Even with a milder Fall, than historically seen, in most regions, Oil prices continue to remain high pushing the likes of Exxon Mobil (XOM) closer to new highs.

Goldman Rules the Street again, Earnings top Expectations

Goldman Sachs (GS), the biggest of the Investment Banks, reported earnings on the heels of a Lehman Brothers (LEH) beat and a Morgan Stanley (MS) fall, and did it ever show who rules Wall Street. Goldman reported earnings of $6.13/share versus the average estimate of $4.35 and a high estimate of $5.08. Now that's an earnings beat!

Goldman was all over the headlines during the sub-prime meltdown for its flagship Alpha Fund and its negative performance, but the trading giant turned around those losses and made a killing betting against mortgages. The results, net income of $2.85Billion, a 79% increase, revenue of $12.3Billion, a 63% increase, and the undoubted respect of Wall Street.

Bear Stearns (BSC) did not fare as well, seeing earnings slide 61% year over year. Morgan Stanley saw declines also. Goldman showcased its ability to react to trouble and create investment opportunities out of volatility and panic, particularly in this quarter. Shares have been rising since lows around $170 and shot up to $210 as the numbers were announced. However profit taking and general market trends dragged Goldman back down to $203.

I previously wrote a couple things about Goldman Sachs with the latest being an August 9th article (Link) regarding the Alpha Fund losses. Within this piece I weighed the negatives and the potential positives, stating that in fact I think Goldman Sachs had found a bottom. Additionally, I outlined that this earnings number would be crucial in sending GS in the right direction and I ended by suggesting that "the plan that Goldman has in motion should lead it to calmer seas well ahead"

As for those losses. Goldman did book about $1.7Billion in credit losses but more than made up for that in other trading and underwriting business. In fact equity trading revenue more than doubled to $3.1Billion. In asset-management, even though a couple big funds lost more than 20%, Goldman was able to compensate by increasing management fees by up to 40%. When you can increase your fees by almost half when you're doing poorly, you've got what's called Business Clout! Something that simply can not be challenged by every other Investment Bank on the street.

It appears that Goldman has found these calmer seas even quicker than I would have anticipated and now I don't think that all time highs during the holiday run up are out of the question. A company this effective at profiting from market turmoil, slowdown fears and general economic panic, is something worth owning. At around $200 it may just be a very handsome Christmas steal also.

Disclosure: Author is long GS

Buyers flock into the Markets as Fed Cuts Rates by 50 Basis Points

The moment the markets were waiting for arrived at last. The Federal Reserve Interest Rate decision. A decision that swung markets heavily into Bullish territory as Interest Rates were cut by a full half percentage point. The Dow finished higher by 336 points while the Nasdaq and S&P were higher by 70 and 43 points respectively. All accounting for gains of over 2.5%.

The morning was highlighted by positive earnings and guidance from Electronics Retailer Best Buy (BBY) and Investment Bank Lehman Brothers (LEH). Best Buy posted earnings of $0.50/share versus the expected $0.44/share and beat the top line Revenue expectations of $8.45Billion by posting a monster number of $8.75Billion. Best buy even strengthened and tightened its outlook for the full year giving the market something to cheer about.

Lehman Brothers admitted that losses from Mortgaged related investments hit earnings but it compensated by posting dramatic tradings gains which more than offset those losses. As such Lehman lifted the entire banking and investment banking industries pushing stock higher broadly, and lifting its own shares 10% in the process. With the Fed's announcement of the 50 basis point rate cut, stocks immediately flew higher and continued to rally towards the end of the day. The biggest investment banks, which report earnings in the near future used the Lehman numbers to push even higher.

Goldman Sachs (GS) made back $13 to break the $200 share price barrier, a gain of almost 7%, while Morgan Stanley (MS) gained almost 6%. Financials came back strong on the news as not only did the Fed cut the interest rate by .5% but also cut the discount rate by another .5%. This was seen as a tremendous positive on the financial sector and investors piled back into these stocks.

Apple (AAPL) made it official this morning that the iPhone was coming to the UK. It announced a partnership with O2 to be the exclusive carrier of iPhone in Britain. Shares were up slightly on the news but drifted with the market before taking off following the rate cut announcement.

While investors were cautious approaching the Fed meeting, there's reason to cheer and smile now! However, the drastic 50 basis point cut should be viewed with still some caution, as once the news sinks in will investors be reading too much into the actions of the Fed and their long term economic effects? Its hard to say at this juncture because the main goal here was to alleviate the pressure from the credit collapse and get people talking economic strength again and not recession. I for one think that having a 50 basis point cut splashed across front page newspapers all across the US will spur optimism and a renewed faith in economic well-being. This is the best thing the Fed could hope for, and its a lot better for the average Joe to be discussing strength rather than a possible oncoming recession.

With the Fed pointing the market in the right direction its time to look at Technology for the holidays and the upcoming earnings seasons. October will be a month worth watching as major names in Tech report earnings and give guidance for their holiday expectations. The guidance game will be one to watch intensely and if Best Buy has given any indication today its that it'll be a holiday filled with shoppers.

Disclosure: Author is long AAPL, BBY, GS

Consumer Confidence Slips, Market Tumbles from Uncertainty

A second straight day of falling economic metrics gives way to a second straight day of losses for the markets. Fresh off the heels of Monday's Housing report, in which housing sales fell to a 5 year low, came this morning's Consumer Confidence metrics. The Consumer Confidence Index fell from previous month high levels of 111 to around 105 and further economic fears clouded American Markets.

Federal Reserve minutes came out also and pulled markets down further as talk centralized on the possibility of the housing slump being more prolonged than initially thought. Investors took this sentiment from the Fed as a sign to head for the door leaving the Majors (Dow, Nasdaq and S&P) down across the board about 2%.

Will this mean that the Fed will need to provide the market with the needed September interest rate cut? Investors seem to be hoping that the rate cut will come and the markets will more than likely continue in this drifting pattern till the interest rate policy is known. The Financials led the sell off today as earnings estimates are being trimmed left and right for the Investment Banks and Major Financials. Goldman Sachs (GS), Morgan Stanley (MS), Bear Stearns (BSC) and Merrill Lynch (MER) all were sold off substantially today with Lehman Brothers (LEH) being the biggest victim of the selling. Citigroup (C), Bank of America (BAC) and Wachovia (WB) were also sold heavily showing that the dip in the financial sector was widespread.

The selling was broad across North American markets with all sectors seeing red. The Fed revealed that it had hoped the market would, in essence, fix itself but that clearly has not been the case. Now although the American economy is still in good shape, to create market stability here the Fed has really no choice but to interject again and produce an Interest Rate cut soon.

GS or MS: Battle Of The Banks

In the truest sense of the old-school type Battle of the Bands, where local Garage hopefuls filled stages to compete for the attention of, and possible employment from a single club or record label owner, I present a Battle of the Investment Banks.

With Bear Sterns (BSC) being the latest to fall like a 100 year old Redwood doing battle with the sub-prime market. Reports have surfaced over the last week that a couple big hedge funds inside the firm that were heavily invested in this industry are now virtually worthless. Does the investment banking investor have any hope out there?

Well, there are choices aplenty in this space such as Goldman Sachs (GS), Morgan Stanley (MS), Lehman Brothers (LEH) or Merrill Lynch (MER), along with several smaller firms all fighting for business and your investment dollar. Not to mention that the big brick-and-mortar banks are expanding heavily into the investment sector.

Taking the stage here and now surely wont be a local teenager with a new birthday present electric guitar, as we're looking at and comparing the cream of the crop in the investment banking world. Goldman Sachs and Morgan Stanley are the two biggest firms by market cap and for good reason, both companies are very good at what they do, and that's attract big clients, charge huge fees, and make money off every kind of investment imaginable. Have you ever heard of Weather Derivatives? It's where people in the marketplace can place bets on how many days it'll be higher or lower than the average temperature in a given month. You've never invested in something like this? Didn't think so, but guess what, these firms do!

So which one is better now and years from now? First to the stage Goldman Sachs. (Come on, you're telling me that wouldn't make a great band name)
The stock has fallen from a peak of $234 to $205 as it's been sideswiped, like everything else in the sector by this risky-mortgage mess. More often than not it is credited as being the best investment bank in the world and it sits with a trailing P/E of 9.5! A single digit P/E for a company that's earning and growing like Goldman Sachs. This rock star sports a healthy estimated Price to growth ratio of 0.7.

Goldman is so good at what it does but seemingly analysts are confounded at exactly what it does and how it goes about doing it. Yes Goldman has booked tremendous gains over the last year in some early Chinese investments but it's investing in these kinds of things all the time and people are surprised by the success. The nature of some of Goldman's trading operations make it seem like that part of the business is being run like one large hedge that can crash and burn on a bad bet or two but I think professionals that cover this company are missing the point. These are the smartest market people on the planet and they have backup plans that have backup plans. There's risk taking and then there's too much of a good thing, that's bound to crumble, just ask those Bear Sterns funds.

Goldman appears to be masterful at managing its internal risks but they have yet to fully be rewarded for it. The run up of the stock from the 150s to the 220s last year and early into this year should've only been the beginning however a wall was hit and the shares are tumbling back to the 200s. Opportunity? I think so!

Let's look at the other company. Morgan Stanley. If you thought Goldman's fundamentals were impressive how about Morgan sporting a P/E of 7.7 and a Price to growth of 0.6. Now Morgan Stanley notoriously went through step after step of cost-cutting and re-tinkering over the last 12 months in order to boost it's shareholder value and it seemed to have spark a turnaround in the business as well. But it also was hit hard falling from a high of 76 to it's current levels around $67/share. As far as businesses go, Morgan Stanley would seem more transparent to the average investor as they have clearly drawn lines for its business units and even are a player in the credit card world with their Discover brand. However, that has been an area of contention for the company as many feel selling that business unit would ultimately lead to more value long term and as such the company announced June 30th as the day it would in fact spin off the Discover business resulting in a $14/share payout to shareholders.

Is there an opportunity here also? Yes, however here is why I believe Goldman Sachs is the better play now and for the longer term.
Both companies brought in revenues of around $39Billion over the last year, however Goldman earned a Billion more ($10B v $9B). Goldman clearly is able to more efficiently turn a profit at a slightly higher margin rate. Here's the kicker though, Morgan Stanley employs 55,000 people, while only 30,000 work for Goldman Sachs.

Not only is Goldman earning more from the same amount of revenue, they are doing it almost half the personnel! So is it likely that in the years going forward Morgan Stanley is going to go through a massive layoff spree to bring it's personnel down so it can compete with Goldman in terms of profitability? No. What does seem more likely though, is that as both firms grow Goldman should have more room to expand and hence earn more money running it's top notch trading operations and hence have more opportunities to lure business away from other firms.

Both firms look prime for a rebound later in the year however I think you'll find Goldman's songs at the top of charts more consistently than Morgan's.

Disclosure: Author is long GS and holds no position in MS