Morgan Stanley (MS) will purchase E*TRADE Financial Corporation (ETFC) for round $13 billion in inventory, including over 5.2 million accounts to the corporate’s buyer base of three million. The agency will now deal with belongings of over $three trillion whereas gaining publicity to a much less prosperous retail demographic. Morgan Stanley CEO James Gorman crowed concerning the deal, telling CNBC it was “ridiculous” that E*TRADE inventory was buying and selling below e-book worth throughout the summer time of 2019.
Despite his enthusiasm, the information has unnerved shareholders, who’ve watched Morgan Stanley underperform Wall Street rivals because the 2008 financial collapse. Many bought the information aggressively on Thursday, dropping the inventory almost 5%. It is buying and selling even decrease in Friday’s pre-market, testing the 50-day exponential shifting common (EMA) for the primary time in a month. More ominously, the decline has unfolded at a 20-year outdated trendline of decrease highs, elevating the percentages that the inventory has topped out for this financial cycle.
Two headwinds could also be contributing to post-news promoting stress. First, the all-stock transaction will dilute present shares, forcing the corporate to search out economies of scale to offset the decrease worth of every share. Second and extra importantly, E*TRADE inventory plummeted with different low cost brokers in October 2019, pressured to match The Charles Schwab Corporation’s (SCHW) zero fee initiative. Many analysts imagine that low cost brokers could have a tricky time reserving earnings going ahead.
The timing of the acquisition additionally poses dangers as a result of monetary transactions are inclined to rise in bull markets and sink in bear markets. The present financial growth has now entered its tenth yr, effectively past a typical four- or five-year cycle. Morgan Stanley hopes to capitalize on on-line banking in addition to brokerage transactions within the coming years, however as shareholders found in 2002 and 2008, this sector is extremely weak to an financial downturn.
MS Long-Term Chart (1994 – 2020) (Log Scale)
The inventory entered a robust uptrend after breaking out above resistance close to $10 in 1995, lifting to an all-time excessive at $91.31 within the fourth quarter of 2000. Committed bears then took management of the ticker tape, producing a steep and protracted downtrend that discovered assist within the mid-$20s in October 2002. The subsequent bounce posted wholesome features throughout the mid-decade bull market, reversing on the .786 Fibonacci sell-off retracement degree within the mid-$70s in 2007.
A garden-variety correction accelerated right into a near-death spiral within the second half of 2008, breaking 2002 assist earlier than ending simply 17 cents above the 1994 low. The restoration unfolded in three broad waves, reversing inside three factors of the .786 retracement of the 2008 to 2009 bear market decline in March 2018. A sell-off by mid-year discovered assist within the higher $30s, yielding a restoration wave that has now reversed inside two factors of the 2018 peak.
This logarithmic-scale chart reveals a declining highs trendline going all the way in which again to the 2000 excessive, with rallies into 2007 and 2018 reversing proper at this formidable barrier. The bounce into 2020 has now added a fourth level to this harmful line, warning buyers that the inventory might have topped out for this financial cycle. Given the sample’s monumental measurement, it is smart for sidelined buyers to keep away from this inventory just like the plague till there is a breakout into the mid-$60s.
The month-to-month stochastic oscillator can also be flashing a warning signal, lifting into essentially the most excessive overbought studying in three years and crossing right into a downturn that may set off a serious promote sign when the blue line drops by the 80% degree. However, this indicator is not helpful for short-term timing, so present shareholders might want to keep positions so long as value motion holds above the rising highs trendline in place since 2008.
The Bottom Line
Morgan Stanley’s E*TRADE acquisition might sign a long-term high for shares of the old-school monetary establishment.
Disclosure: The writer held no positions within the aforementioned securities on the time of publication.