Brokerage Stocks Reignite Wall Street Tug-of-War

Salomon Smith Barney's Guy Moszkowski is the latest to join a growing queue of analysts saying 2002 won't be as good for the brokerage companies as originally thought. But so far the market is paying little heed.

Moszkowski on Friday trimmed estimates for Bear Stearns (BSC Quote), Goldman Sachs (GS Quote), Lehman Brothers (LEH Quote), Merrill Lynch (MER Quote) and Morgan Stanley Dean Witter (MWD Quote). He downgraded his ratings on Bear and Goldman to neutral from outperform, and dropped Lehman, Merrill and Morgan Stanley to outperform from strong buy. (Solly has done underwriting for all those brokers, save Merrill.)

Last week, Credit Suisse First Boston's Joan Solotar, who has been among the more cautious analysts on brokerage earnings, took her earnings estimates down some more for Goldman and Lehman. (She raised estimates for Bear and Merrill, but remains well below the consensus on those names.) Robertson Stephens' Justin Hughes pulled in his 2002 estimates for the brokers, as did ABN Amro's Robert Napoli.

During those two weeks of estimate-trimming, however, the Amex Broker Dealer Index jumped 16%. Maybe it's just that the factors that prompted the analysts to lower expectations were so readily apparent for anybody that was looking. It doesn't take a Magic 8-Ball, after all, to recognize that trading volume's been thin this year, merger and acquisition activity has been nearly nonexistent, and initial public offerings worth talking about have been scarce. By the time the analysts started pulling in estimates, the brokerage stocks had already fallen hard.

Moreover, never mind what's past -- the rebound in the market and recent signs the economy is well on its way to recovery suggest a better future for the brokers. Trading volume has been good this past week, and there are early murmurings that the underwriting cycle has begun to pick up. With good news abounding, companies soon ask firms to start playing matchmaker again.

"Until there really is a move to increase rates by the Fed, the brokers shouldn't get hurt," says Todd Clark, managing director of listed trading at Wells Fargo Securities.

The downside is that just as quickly as the market's perked up, it could come down again. Brokerages are so heavily dependent on the market's fortunes, particularly at turning points, that their stocks exaggerate the moves that stocks in general are making. Investors looking to buy brokers now had better be confident that the market's recent good news isn't going to go away.