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Trading Revenue is Key for I-Banks

NEW YORK (TheStreet) -- Goldman Sachs (GS) faces significantly more pressure than Morgan Stanley (MS) to turn in a solid first quarter with both banks set to report first-quarter results in the next few weeks.

As always, the only number that matters will be trading revenues. Not only is trading consistently the biggest number these companies put up, it is also nearly impossible to predict.

We know already, for example, that Morgan Stanley will take a big loss on its sale of an Atlantic City casino project known as Revel Entertainment, and we have known for a long time that this was a seriously troubled investment. Roger Freeman of Barclays Capital estimates this sale will result in a $1.1 billion earnings hit.

Other investment banking activities, such as M&A advisory work and equity and debt underwriting, are steadily picking up, but these numbers are easy to track and so aren't going to surprise anyone. Global revenues from these activities were $14.7 billion in the first quarter, according to data provider Dealogic.

That is well off the crisis-driven lows in the fourth quarter of 2008 and the start of 2009, but down from the fourth quarter of 2009, which benefited from massive equity issuance as financials including Wells Fargo (WFC), Citigroup (C)and Bank of America (BAC) shored up their balance sheets.

As for trading, Goldman had a relatively weak fourth quarter, putting up $5.91 billion in revenue for the business. That was by far its weakest quarter of 2009 (see above chart). Goldman's shares got a nice lift last year on April 13, when fears that banks would be nationalized still gripped the markets and the Goldman traders stunned everyone by putting up a robust $8.56 billion in trading revenue in last year's first quarter.

When Morgan Stanley turned in a weak trading revenue number for its year-ago first quarter nine days later, investors pummeled the stock, forcing former CEO John Mack to go out and hire a bunch of traders to get him back in the game. His strategy worked, and trading revenues perked up in the second and third quarters of 2009.

Morgan Stanley also had a weak fourth quarter trading-wise, however, lending credence to the theory that this three-month stretch is almost always weak for traders. According to that theory, traders play it safe at the end of the year for fear a big loss will mean a direct hit to their bonus checks.

Morgan Stanley
Morgan Stanley CEO James Gorman

Wall Street expects new CEO James Gorman (pictured above), just wrapping up his first quarter at the helm, to deliver earnings of 58 cents a share for the March period on total revenue of $8 billion when Morgan Stanley reports on April 21. That compares to a loss of 57 cents a share on revenue of $3 billion in the same quarter a year earlier, and earnings of 29 cents a share on revenue of $6.8 billion in the fourth quarter.

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