Wall Street results in focus this week

Three of the nation's top brokerages are set to report fourth-quarter results - and for two of them at least, the news is not likely to be good.

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By David Ellis, CNNMoney.com staff writer

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Analysts are betting that some of the nation's biggest brokers, including Morgan Stanley, will suffer steep quarterly losses.
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NEW YORK (CNNMoney.com) -- When the nation's biggest brokerage firms reported disappointing quarterly earnings in October, many on Wall Street were hoping that the darkest days of the credit crisis were behind them.

Now, with as the next earnings season heats up, analysts and investors are betting that this quarter's results could be just as bleak.

"I expect the numbers to be terrible," said Matt Kelmon, president and portfolio manager at the Kelmoore Strategy Funds, whose firm owns shares of a number of Wall Street firms.

Since the last quarter, few encouraging signs have emerged about the health of brokerage firms. Meanwhile, stock investors have remained on edge, the credit markets frozen shut and the nation's economic picture uncertain.

As a result, Wall Street analysts have been slashing their earnings estimates on firms like Morgan Stanley (MS, Fortune 500) and Bear Stearns (BSC, Fortune 500), both of which are expected to post steep losses this week after warning last month they would take multi-billion dollar writedowns this quarter.

Morgan Stanley is scheduled to report results on Wednesday and Bear Stearns on Thursday.

Also set to report this week is outlier Goldman Sachs (GS, Fortune 500), which is expected on Tuesday to post a profit for the quarter.

Last week, Lehman Brothers (LEH, Fortune 500) reported that net income fell 12 percent, or $1.54 a share, down from $1.72 a share a year earlier. Those results nonetheless exceeded Wall Street's expectations.

Merrill Lynch (MER, Fortune 500), the nation's largest brokerage, will not report results until January. To date, Merrill has been among the hardest hit by the credit crunch. It suffered an $8 billion loss on mortgage securities last quarter, which prompted the exit of Chief Executive Stanley O'Neal.

For now, much focus will be paid on Morgan Stanley and Bear Stearns.

Last month, Morgan Stanley became the latest firm to reveal massive losses, saying it would take a $3.7 billion hit in the fourth quarter because of its subprime mortgage exposure. One week later, Bear Stearns said it would take a $1.2 billion writedown due to its subprime assets and collateralized debt obligations.

Investors will again be paying close attention to how they value these so-called "level three" assets like mortgage-backed securities, which aren't highly liquid, said Lehman Brothers analyst Roger Freeman.

So far this year, banks have booked or announced more than $36 billion in writedowns as they try to value these securities.

"Just as in the third quarter, the markdowns will be very closely watched," said Freeman. "The question is are those marks going to be worse, the same or better."

During the month of November, a number of ABX indexes, which serve as a benchmark for securities backed by home loans issued to borrowers with weak credit, suffered declines suggesting that some of these securities could be worth even less than originally anticipated.

In addition, investment banks are no longer enjoying the type of dealmaking activity of recent years. The credit crisis has virtually stamped out debt and equity underwriting.

Buried within these troubling results, however, will be some good news, analysts argue. Some of the fourth quarter's weakness will be offset by growth in firms' rapidly expanding overseas businesses and results in their trading divisions.

"Despite the recent challenges in the mortgage and credit businesses, trading volume was robust," J.P. Morgan Chase analyst Kenneth Worthington wrote in a recent research note.

Analysts and investors will scrutinize the outlook these firms give as they enter fiscal year 2008. Most analysts are leaving the door open to the possibility of more writedowns, warning it will take some time before brokerages return to the days of record-setting profits.

"It will take some time for these companies to recover and re-establish their record results," Punk, Ziegel & Co.'s Richard Bove wrote in a recent research note. "There will be earnings disappointments and inability to regain record profits for what may be 12 to 18 months." To top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.