NEW YORK (DOW JONES)--Morgan Stanley's (MS) gamble to reinvent itself amid the worst financial crisis since the 1930s is garnering support among investors.

The nation's second-largest securities firm, which in autumn barely survived a bruising run on the bank by hedge funds, is now the most sought-after financial stock of 2009: Its shares, at $21.34 in midday trading, have risen nearly 33% in January.

Morgan Stanley shares are still down more than 50% in the past year. But the revival of the stock, however tentative, stems from growing confidence in its push into retail brokerage and banking; new capital and financing options; and a lowering of fear among investors that the financial crisis will upend the firm.

Chief Executive John Mack has stepped up efforts to reach out to big institutional investors, one person inside the bank said.

He and other top executives have ramped up the number of meetings with major money managers to sell them on Morgan Stanley's new retail-focused strategy, people familiar with the bank said. The blueprint hangs on a $2.7 billion deal to take control of Citigroup Inc.'s (C) Smith Barney brokerage unit, and plans to build a retail banking operation from scratch.

Morgan Stanley's leadership - which Bank of America Merrill Lynch analyst Guy Moszkowski said has been "noticeably more upbeat" - appears to be getting a hearing from investors. In contrast to Morgan Stanley's surging stock in January, shares of Goldman Sachs Group Inc. (GS) have edged down about 1%, while there have been sharper declines at JPMorgan Chase & Co. (JPM), down nearly 16%, and Bank of America Corp. (BAC), down more than 50%.

"John Mack has a reputation as a very hands-on guy that presses the flesh and makes phone calls, he knows how to work the Rolodex," said Anthony Sabino, a professor of law and business at St. John's University. "People are regaining faith they will do the right thing."

Even more striking is that the turnaround comes despite continued pressure from the short-sellers that Mack railed against in a memo for "creating a market controlled by fear and rumors." The stock has rallied even though short contracts surged to 60 million as of Jan. 15, up from about 18 million at the height of the credit crisis in October, according to data from the New York Stock Exchange.

"This shows us that despite all the headwinds against this stock, there are a lot of buyers who are able to absorb the short selling," said Nick Perry, an equities analyst at Cincinnati-based Schaeffer's Investment Research. "That just shows you how much demand there is for Morgan Stanley right now."

Analysts said Morgan Stanley has outlined a number of steps in the past four months to assuage nervous investors. The firm closed out 2008 trying to ensure it does not follow the failure of Lehman Brothers Holdings Inc., or lose independence like Bear Stearns and Merrill Lynch & Co.

Morgan Stanley first raised $9 billion by selling Japan's Mitsubishi UFJ Financial Group (MTU) a 21% stake in the firm. It then received $10 billion from the Treasury Department as part of the government's $125 billion plan to inject capital into the nation's nine biggest banks.

But the company really caught the attention of Wall Street this month.

The company's wealth-management business will be transformed once it is combined with Smith Barney later this year. The joint venture, of which Morgan Stanley will control a 51% stake, will become the nation's largest brokerage with 20,386 financial advisers. The stock has risen more than 20% from before word of the combination leaked out earlier in January.

Morgan Stanley became a bank holding company last September, and it plans to build retail deposits to have access to another source of funding. It has lured top executives from Wachovia Corp. to craft the firm's retail vision. Ben Jenkins, who was previously vice chairman of Wachovia before the Charlotte-based bank was acquired by Wells Fargo & Co., joined Morgan Stanley earlier this month.

Speaking at a financial-services conference in New York Wednesday, Chief Financial Officer Colm Kelleher said the bank's institutional securities unit will remain a core business. He told an audience packed with investors that the company is well positioned, and "has successfully evolved and withstood some difficult times."

That doesn't mean Morgan Stanley's problems are behind it. The financial-services sector remains volatile as major banks are starved for additional capital. There still remains uncertainty about more bank failures.

"Just because you survived the nuclear blast isn't something to cheer about if you're a shareholder," said Joe Battipaglia, a market strategist for Stifel Nicolaus. "The banks still face another trillion dollars of losses and a massive need for capital."

He said the financial sector will likely face steep losses this year from areas like residential and commercial mortgages, and other high-yield investments. He also said Morgan Stanley and other banks will find it harder to operate with increased government scrutiny.

Major U.S. banks have sold preferred stock to the government to boost capital, and financing by banks remains under strain. And, in the coming weeks, the Obama administration is expected to broaden the government's Troubled Asset Relief Program, setting up a "bad bank" to buy some troubled assets, and insuring other assets still on banks' books.

"We've crossed the Rubicon and there's no going back," Battipaglia said about the government's role in the banking industry. "This is a transformational time for Morgan Stanley and everyone else."

-By Joe Bel Bruno, Dow Jones Newswires; 201-938-4047; joe.belbruno@dowjones.com

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