Equity markets around the world are trading lower today on the back of rising Omicron case counts. Depending on the geography, we're seeing cases doubling between 1.5-3 days. In addition, Goldman Sachs cuts its GDP forecast for 2022 after learning on Sunday that Democratic Senator Joe Manchin from WV will kill the Biden administration's "Build Back Better" plan. The reaction to the Covid-case rise is a "shoot first, ask questions later" mindset that's hitting virtually every single sector of the US stock market. However, as we've said multiple times before, in times of near-term extreme volatility, we've found that the more helpful approach is to focus on the medium to longer-term. With hindsight being 20-20, we can look back at the February - April 2020, and July - September 2021 periods as examples of how that approach has been successful. 

Applying our usual approach today, we continue to see one sector that's really dislocated from our 6-12 month worldview and that is the financial sector. We have the 10-year treasury yield below 1.4% today, a number really suggesting that we're going to enter a recession. Long story short, we're not entering a recession, therefore investors need to bid that this yield is going up. The lowering of the yield has been hitting financial stocks, and for our portfolio, that means Morgan Stanley (MS) down 3%, Wells Fargo (WFC) down 3% and JPMorgan Chase (JPM) down 7% from our cost basis (they're down more than 2% today). 

We're using the sell-off to pick up even more shares of Morgan Stanley (MS). This brings the weighting of this position to 9% in our portfolio, 1% higher than what we allocate this position to be. We're willing to be aggressive on this name for a couple reasons. First, we continue to see the dislocation between the 10-year treasury yield and the economic outlook. Again, the 10-YT yield being below 1.4% is a number that you see during recessions, and that's definitely not what we're currently having or what we will have. Covid cases will peak and will go away, just like Delta variant in the summer of this year and multiple waves during last years. What's better now is that we have booster vaccines, we have pill treatments and they will continue to be more accessible throughout the world.

Second, we continue to see a dislocation between what Morgan Stanley (MS) does and how it trades, that dislocation being the coupling between Morgan Stanley stock and the interest rates (10-YT yield). As we've said multiple times before, Morgan Stanley is NOT an interest-rate sensitive bank. Morgan Stanley has transformed its business model to fee-based and recurring revenue streams from capital market trading and wealth management. Investors like fee-based and recurring revenues because they are predictable and forecastable. Wall Street puts a high value on recurring revenues, yet at today's prices, Morgan Stanley (MS) is trading at the same 2022 forward multiple as Wells Fargo and JPMorgan (between 12.5 - 13x). We'd like to see Morgan Stanley trade to 15x forward numbers, and given the 2022 EPS at 7.50$, our price target for MS is $113.

Third, even though we're long-term here, we're also betting that MS will see a bounce in the near future. Shares are at the 200-day moving average here, which is always a very big support for stocks. We're betting that cash on the sidelines will see the dislocations that we've laid out, and will pick up shares of MS. Our plan is that once we see a temporary bounce to above 100$, we'll likely take some shares off the table to reduce the position to our allocated weighting of 8%.