Credit worries continue to weigh on the financial sector.
The stock market sold off Wednesday after data showed the housing market continues to swoon. Among the hardest-hit shares were those in the brokerage business, where a credit crunch and exposure to big buyout loans have already hammered stocks.
On Wednesday, shares in
each fell 3%, while rivals
were off between 1% and 2%.
The news comes as analysts have begun paring back their earnings estimates on the big investment banks, amid a sharp slowdown in the credit markets. Bear and Lehman are the two Wall Street firms with the heaviest focus on fixed-income markets.
Wednesday's selloff comes just a day after Citigroup analyst Prashant Bhatia cut earnings estimates on Lehman and Morgan, which ended their fiscal quarters last week. The analyst anticipates lower fixed-income trading results, "driven by markets related to LBO loan commitments and lower fixed income inventory marks with spreads widening significantly."
Bhatia now expects Lehman to earn $1.40 a share for the third quarter, down from his previous $1.95 and below the $1.64-a-share Thomson Financial target.
He cut his estimate on Morgan Stanley by 15 cents to $1.60. Analysts, on average, expect the firm to earn $1.62 a share.
Sanford Bernstein analyst Brad Hintz also lowered his earnings estimates Tuesday on Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley.
He cut his estimate on Bear Stearns by 44 cents to $2.19, on Lehman by 10 cents to $1.50, on Goldman by 12 cents to $3.65 and on Morgan by 5 cents to $1.50.
Hintz had already lowered his forecast for the brokers in early August, but noted that market conditions had worsened.
"Given the challenging equity and bond market environment, this quarter is the most anticipated earnings event for the brokers in the past several years," he wrote in a note on Tuesday.
Bhatia writes that Lehman "has already closed the valuation gap relative to peers and, based on revenue mix, has relatively less exposure to equities, M&A, and asset management, we recommend staying on the sidelines for now." He has a hold rating on the firm.
But he is optimistic about Morgan Stanley. He has a buy rating on the firm.
"Morgan Stanley's more diversified institutional business and overall revenue mix, with meaningful improvement underway in retail brokerage and asset management all point to plenty of upside, with better downside protection than its peers," he adds.
Citi's earnings revisions come one week after Merrill Lynch analyst Guy Moszkowski downgraded Bear Stearns and Lehman to neutral from buy, citing the firms' heavy dependence on the debt markets.
Last week Goldman Sachs analyst William Tanona slashed third-quarter earnings estimates on Bear Stearns, Lehman and Morgan Stanley. He wrote in a note that August "was one of the worst operating environments that we have seen for the investment banks in years."