Warburg has been taken by surprise by the strength of Morgan Stanley, Merrill and Goldman in M&A underwriting in Europe.
The miss appears to be weakness in the trading portion of the Investment Bank unit, a frequent culprit due to its excessive volatility versus peers.
It basically allows them to internally cross more of their Nasdaq volume. It takes the number of stocks that they can make markets in on the Nasdaq up over 6,000 from 300 or so stocks they do now.
As this problem is unlikely to resolve itself quickly, we remain concerned that 2006 forecasts could be too aggressive.
The recent moves to eliminate the worst-performing 10 percent of brokers and rein in the training program are a good start to improving margins. But these are just the first steps.
The U.S. origination business may be slowing while it is growing in other markets.
They really have built a very impressive investment-banking capability. They won't always be No.1, but they clearly have been effective in merging their investment and commercial banks.
I am not a big proponent of the diversified model. It is extremely hard to manage, and I just think there is a lot of value to be had from focusing on a few things really well. The turnaround process at Morgan Stanley will take some time.
Merrill, relative to its historical valuations at this stage of the cycle, is quite cheap. And (the company) will of course enjoy some recovery probably over the next few weeks as it has in the last week, as worries about the interest rate environment subside.
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