Sector Watch: A Broker Rally Just Got Bigger With Rate Cut

A good day for the major broker/dealer stocks just got a heck of a lot better.

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Positive earnings were giving the sector a boost this morning. Once the Federal Reserve surprised the markets and cut interest rates by 50 basis points, the major players in the sector took off.

Lower interest rates typically mean good news for the broker/dealers -- as lending and borrowing rates fall, business picks up. In the wake of the rate cut, the Dow Jones Securities Broker Index shot up from a strong 5.6% gain on the day to a 10.2% gain. The American Stock Exchange Broker/Dealer Index rose 9.3%.

All the major players are reaping big gains today, led by Charles Schwab(SCH), which announced earlier today that it would sell its corporate trust unit of U.S. Trust to Bank of New York(BK). This news alone sent the stock up just over 10%; post-cut, the stock has soared to monster 19.5% gains.

The spotlight was focused on Merrill Lynch(MER) and J.P. Morgan Chase(JPM) earlier, as both came out today with well-received earnings reports. Despite a 21% fall in profits for the first quarter, Merrill beat consensus estimates of 90 cents a share by two pennies. The stock, strongly in the green on that alone, surged higher recently to a 7.9% gain, or $4.79, to $65.39. The stock had been north of 10% earlier.

J.P. Morgan Chase's first-quarter operating profits fell by a greater 28% than competitor Merrill, but still beat its estimates by a higher margin. J.P. Morgan Chase posted EPS of 70 cents per share, topping the consensus estimate of 66 cents. The nation's second-largest U.S. bank holding company rose from 4.4% gains pre-Fed cut to 8.3% gains near midday.

The Dow Jones Specialty Finance Index was up a strong 6% shortly before noon, while the Dow Jones U.S. Bank Index was up 3.3%.

"When the market is getting better, you want to get into (broker/dealer) stocks," said Sam Ginzburg, the senior managing director of equity trading at Gruntal before the rate cut. He cited beaten-down stocks such as Merrill and Goldman Sachs(GS) as examples of companies that investors were jumping into. Goldman was recently up 7.5% to $100.

The rest of the crew is performing strongly also. Morgan Stanley Dean Witter(MWD) was up a solid $7.40 to $66.70, or 12.6%. Bear Stearns(BSC) was trading up $3.84, or 7.9% to $52.39.

Even the online brokers were feeling the good cheer of positive earnings and rate cuts. E*Trade(ET) was up a dollar to $9.20, a huge 12.3% gain. Ameritrade(AMTD) picked up 66 cents to $6.36, an 11.6% rise.

"People are getting back into the stock market," Ginzburg said. "Retail should pick up and the rapidity of trading should pick up."

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