Brokers' Profits Riskier

This blog post originally appeared on RealMoney Silver on Aug. 14 at 8:17 a.m. EDT.

The longs view the brokerage stocks, at roughly nine times earnings and trading at historically modest premiums to book value, as statistically cheap. As I mentioned in Barron's, I disagree with that even more firmly than when I wrote cautionary remarks back in June.

Though the shares are oversold for the short term, both cyclical and secular forces are conspiring to put the brokerage industry's profits in jeopardy. A moderation or contraction in credit products, private equity and hedge fund industry growth, when combined with mark-to-market and prime brokerage liabilities, suggest that the risks of ownership of brokerage stocks outweigh the rewards.

As a result of these conditions, earnings expectations remain far too bold, and company profit warnings are expected to begin posthaste. Last night, UBS (UBS Quote) warned (over there) that second-half profits will disappoint, and its shares have dropped by nearly 4%....