As Goldman Sachs Downgrades Morgan Stanley, Downgrades Itself (GS, MS)

This morning came a key analyst downgrade, in the brokerage firm sector itself.  The analyst team at Goldman Sachs Group Inc. (NYSE: GS) downgraded shares of rival Morgan Stanley (NYSE: MS).  The rating was cut to Neutral from Buy. But the reality is that when a bulge bracket brokerage firm, or even a bank holding company with no bank, comes out and downgrades a rival it is almost as though the firm is downgrading itself in the same call.  That is true even when one criticizes the other for not being like itself.

The Goldman downgrade of Morgan Stanley is actually calling for lower earnings estimates for 2009, 2010, and 2011.  For 2009, Goldman now sees Morgan Stanley losing-$0.45 EPS rather than a very small profit and almost double the consensus loss estimates out there.  The old $3.35 target for 2010 has been taken down to $3.00 EPS.

Morgan Stanley has been buying talent, at what some feel is a premium to fair value today.  But the same can be said for Goldman Sachs.  Morgan Stanley was also a mile or two behind Goldman Sachs in its trading gains.  Goldman Sachs has the most intact model compared to the past with probably the least amount of client defections.  It has been the top dog in Wall Street trading in many sectors as well.

This downgrade sounds like Goldman Sachs is becoming almost entirely Goldman-Centric in its views of the financial sector.  We won’t bother making the reminder that while their trading revenues and appetite to take higher risk partly backed by Uncle Sam has worked well for so long, nothing ever lasts forever.  Nothing.  Top talent quits and retires.  Top talent defects to competition.  Top talent even dies sometimes.

Morgan Stanley shares are down 2.7% mid-day at $26.63.  Goldman Sachs is not down as much, but its shares are down 0.8% at $159.20.  When brokerage firms come out and downgrade their competitors, they are in a sense downgrading themselves.  At least that is how shares often act.

JON C. OGG
JULY 29, 2009