The Most Important Chart From Goldman's Big defence Of Morgan Stanley

As WSJ reported this morning, Goldman’s derivatives team is out with a bullish call on Morgan Stanley, saying fears of contagion are overblown, and that you should sell short-dated CDS, and buy calls into earnings.

We’ve seen the report, and it basically comes down to this chart: The bank’s CDS are way out of whack with its equity.

chart

Photo: Goldman Sachs

As for what to expect when it comes out with earnings:

We think investor focus will be on MS’s European sovereign debt exposures and liquidity levels when it presents 3Q earnings. We expect management to discuss global exposures and its stable and strengthened liquidity profile, highlighting the strength of its cash position, hedging and collateral, as well as recent progress in reaching its strategic goals. In particular, we think management is likely to discuss the bank’s (1) high core capital levels, (2) improved core excess liquidity pool, (3) manageable debt maturities (with high TLGP maturities relative to unsecured debt), (4) options available for active balance sheet management, and (5) improved diversification from the MSSB operations. As of 2Q, MS had disclosed gross funded exposure of $5 bn to Greece, Spain, Portugal, Italy, and Ireland, and this falls to $2 bn net of hedges; its gross exposure to France represented 3% of total corporate lending and OTC derivatives as of 2Q2011.

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