Broker Stocks Feel the Pain

From an earnings perspective, the second quarter -- which ends next week for Goldman Sachs, Lehman, Morgan Stanley (MS) and Bear Stearns(BSC) -- should be another strong one for Wall Street firms.

In fact, there's been no letup in traditional investment banking work. Corporate dealmaking continues at a rapid clip. In fact, corporate borrowing is near an all-time high, as businesses take on debt to both finance acquisitions and stock buybacks. In the past month, there's been a flurry of IPOs coming to market.

But the big variable, as it always is with Wall Street's big investment firms, is revenue from trading. Over the past several quarters, Goldman Sachs, Lehman Brothers and Bear Stearns have generated outsized profits from trading stocks, bonds and commodities. Wall Street firms churn out big profits from trades made by their customers and their own in-house trading desks.

Analysts say they expect the second quarter to be another solid one on the trading front, but Wall Street firms will have hard time matching the results of the past few quarters. A big concern is what impact the rise in long-term interest rates will have on fixed income trading.

"Fixed-income trading will be the wild card," says Robert Hansen, a Standard & Poor's brokerage analyst. "It's hard to get ahold of. We're expecting results to moderate a bit."

Still, Hansen expects generally strong second-quarter results from the brokers, in particular Goldman Sachs, Lehman and Merrill. He says revenues and commission from stock-related trading should be especially strong in the quarter.

But with investors having gotten used to brokers producing blowout earnings, a good quarter may not be enough to draw them back. That's especially so with the summer almost upon us. As most know, the third quarter traditionally is Wall Street's weakest.

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