Merrill Lynch

gored the brokerage community on Wednesday morning, telling investors the bottom could fall out on first-quarter earnings as investors shy away from trading.

"Upcoming broker-dealer earnings results look set to disappoint versus current Street estimates," wrote analyst Judah Kraushaar in the opening of his note to investors, fittingly called "Crunch Time." "Consensus first-quarter and 2001 forecasts may fall near term."

He reduced his earnings estimates on a handful of companies and named three near-term challenges as major factors in the revision. The first is that retail investors have stopped trading, leading to a downturn in revenue from trading-related fees. Also, private-equity and mergers-and-acquisitions operations face potential losses in a hostile market environment.

Kraushaar cut his first-quarter earnings estimate for

Goldman Sachs

(GS) - Get Report

to $1.18 per share from $1.24, while the full-year 2001 forecast was dropped to $6 from $6.15. Wall Street currently expects Goldie to make $1.39 a share in the first quarter and $6.29 a share in 2001, according to

First Call/Thomson Financial

.

He boosted his first-quarter forecast for

Morgan Stanley Dean Witter

( MWD) to 88 cents a share, leaving it 15% below Wall Street's forecast $1.02 a share. Kraushaar said private-equity losses and weak commissions would hurt Morgan Stanley, but he hoped that fixed-income markets could help alleviate the pain. He trimmed his 2001 estimate to $4.40 from $4.45 a share.

Lehman Brothers

( LEH) received the lightest slap, with only its first-quarter earnings estimate getting scaled back. Kraushaar dropped the estimate to $1.39 a share from $1.46, lower than the consensus $1.50 a share consensus forecast. "Nonetheless, we think that Lehman may be unusually well-positioned for leveraging the revival in fixed-income markets as 2001 unfolds," wrote the analyst, who raised his 2001 estimate for Lehman to $6.20 a share from $6.05 a share.

Once those nasty earnings problems begin to alleviate, Kraushaar advised investors to take the opportunity to pick up shares of

Citigroup

(C) - Get Report

and

J.P. Morgan Chase

(JPM) - Get Report

, two companies that have expanded their securities businesses by making purchases in recent weeks.

"We are optimistic that first-quarter earnings results may mark a cyclical bottom, and we see positive year-to-year comparisons reemerging in the third quarter," Kraushaar wrote, expressing some long-term optimism despite the near-term weakness. "We see a reasonably speedy stabilization/revival in earnings given rebounded liquidity in fixed income markets."

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