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It’s been raining write-downs and credit problems on Wall Street as of late, leaving many investors in search of a warm, dry brokerage to shield them from the storm. According to Sanford C. Bernstein & Co., the safest shelter is Morgan Stanley.

“Morgan Stanley is the best-positioned firm to weather the difficult fixed income market conditions that we expect will continue through the remainder of 2008,” Bernstein said in a note to clients. As a result, the firm rates Morgan Stanley shares at outperform with a $65 price target, the only outperform rating in Bernstein’s large-cap broker coverage.

Senior Bernstein analyst Brad Hintz said Morgan Stanley Chairman John Mack has empowered his management team to shift direction and reposition the firm to weather a prolonged tough credit environment that has plagued the market since August. Hintz noted that unlike Morgan Stanley’s major competitors, the brokerage is reducing its balance sheet exposure, shedding troubled assets and reducing its leverage ratios.

“Based on the normalized business mix of brokers, Morgan Stanley is the right firm to own during this uncertain point in the cycle,” Hintz continued. The analyst said Morgan Stanley is less exposed to fixed income, commodity and currency net revenue than Lehman Brothers and Goldman Sachs and has less capital-intensive revenue than either of the two firms. Bernstein also said Morgan Stanley is more exposed to client asset price net revenue than Lehman or Goldman and less exposed to decline in private equity investment revenue than either Goldman or Merrill Lynch.

“Bernstein believes the diversification of Morgan Stanley - which constrained the firm’s performance during the 2005 to 2006 trading boom - makes Morgan Stanley less exposed to the institutional downturn and market turmoil still ahead,” Hintz said. He noted that Morgan Stanley, along with Merrill Lynch, has the strongest liquidity position among the large-cap brokerage firms, leaving Morgan Stanley well positioned to address any incremental pressures to its funding base and allowing Bernstein to recommend the stock as a “reasonable holding in this difficult and volatile fixed income market environment.”

With the ball in the hands of Team Subprime and the final seconds ticking off the clock, Bear Stearn’s players looked dejected. That is, until JPMorgan came off the Bear Stearns bench, stole the ball and drove the lane to finish with a game-winning lay-up. Punk Ziegel analyst Richard Bove, however, sees JPMorgan pulling up for a difficult 18-foot jump shot, not a sure thing.

“Investors believe that JPMorgan is underbidding for Bear Stearns and getting it at a bargain price,” the analyst said. “I do not. Bear Stearns is a deeply troubled company which would have no value if the Federal Reserve had not stepped in to bail it out.”

Bove is, of course, referring to JPMorgan’s acquisition of the troubled New York-based brokerage, which it announced on March 16 at an original offer of .05473 shares, or roughly $2 per share, of JPMorgan stock for every share of Bear Stearns. On Monday, JPMorgan CEO James Dimon quintupled his bid to roughly $10 per share, or 0.21753 shares of JPMorgan stock, in an attempt to appease angry Bear Stearns shareholders and trading partners who reacted negatively to the original deal. Dimon also agreed to purchase 95 million shares of Bear Stearns by April 8, giving it a 39.5% stake in the company, and to absorb the first $1 billion in losses on Bear Stearns’ portfolio with the Federal Reserve backstopping the next $29 billion (down from $30 billion a week ago).

Even at the increased bid, most of Wall Street felt that JPMorgan had struck quite the lucrative deal for itself. Bove, on the other hand, does not.

“The total cost of the transaction to JPMorgan could be $3.44 billion. Based on Bear Stearns’ original number of shares, the cost works out to be about $23.75 per share. Additionally, JPMorgan will report a 12-month loss of $6 billion to combine the two companies,” Bove said. “Add this to the purchase price and JPMorgan is paying about $65 per original Bear Stearns share.”

The Punk Ziegel analyst called Bear Stearns a “fully integrated mortgage company with a number of other businesses” and said JPMorgan certainly doesn’t need the mortgage operation. Nor does Bove feel that JPMorgan needs Bear’s other businesses either, saying that Morgan has a “much stronger” investment banking business and it is better in transaction processing. Bove also rejected arguments that the deal was valuable to JPMorgan in acquiring Bear Stearns’ lavish Manhattan headquarters, saying it is “just another piece of Manhattan real estate that it must rid itself of.”

Bove said the “key jewel” for JPMorgan is Bear’s prime brokerage business, but his understanding is that the business’ best customers have long since decamped to Goldman Sachs and that JPMorgan is going to have to work hard to get those people back.

Still, the analyst is most disturbed by the fact that JPMorgan used capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that Bove describes as “sclerotic.”

“These same funds could have been used to buy a bank with top management, a solid balance sheet, which was gaining market share, in what is now a sector that is gaining market share,” Bove said.

He said the greatest benefit from the deal that could accrue to JPMorgan is that it may take advantage of accounting techniques that can be used to revalue Bear Stearns assets at par value.

“Finally, expect every aspect of this transaction is likely to be test in the courts with JPMorgan paying the bill all the way,” Bove added. “This is not a ‘lay-up’ at all.”

Bargain-hunting investors everywhere have begun to pick up on the fresh trail of broker stocks, but, according to Sanford C. Bernstein & Co., it’s not the time to jump in just yet.

“The stock prices of large capitalization security firms are testing recent lows and price-to-book valuations are all within the bottom two deciles of their historic trading ranges,” Bernstein said. “Typically, this would represent an excellent entry point for these firms. However, the current environment is anything but typical.”

While its price target for the group implies an average 44% upside over the next six to 12 months, Bernstein recommends investors stay on the sidelines until the credit and liquidity crunch stabilizes, taking into account that these firms rely on the health of the credit markets to finance their heavily leveraged balance sheets.

“The brokers are susceptible to further book value deterioration,” the firm added. “We believe there are several more write-downs to come as the financial leveraging that had benefited the group and the overall financial market during 2004 to the first half of 2007 continues to unravel.”

Bernstein rates Bear Stearns, Goldman Sachs, Lehman Brothers, and Merrill Lynch all at a market perform, and gives its lone outperform rating among the group to Morgan Stanley.

Apparently the bargain hunters were listening, as shares of Bear Stearns, Lehman Brothers, and Merrill Lynch all sank to new 52-week lows in mid-day trading. Bear Stearns was the biggest decliner on the day, tumbling 13% to a five-year low of $60.26.

“The credit markets are experiencing historical levels of turbulence. Problems are emerging in nearly every corner of the market, even those once considered safe (i.e. money market funds, municipal bonds),” Bernstein said. “As you know, it is impossible to forecast the credit markets, so until we begin to see stabilization we would avoid exposure to these names.”

And just when the hunters thought they were closing in for the kill.