Updated from 11:25 a.m. EDT:

Illustrating the dangerous unreliability of brokerages' earnings,

Morgan Stanley Dean Witter


, one of Wall Street's top firms, reported fiscal third-quarter earnings Thursday that fell well short of analysts' expectations.

Tailing Off
Morgan Stanley fading after long runup

Morgan Stanley reported net income of $1.15 billion, or $1.09 per share, in the third quarter ended Aug. 31, which is 7% below the $1.17 expected by analysts surveyed by

First Call/Thomson Financial

. The third-quarter per-share earnings are 13% below the $1.26 posted in 2000's second quarter, but are 31% ahead of 83 cents in the year-ago period.

The culprit? Weakness in trading and investment banking revenues, a phenomenon


warned about recently. Morgan Stanley shares slid $9.25, or 9.6%, to $86.69 at midmorning.

Rude Awakening

The disappointing results should be a rude awakening to investors who have bid up Morgan Stanley's stock to new highs recently and thereby awarding it, somewhat improbably, the second largest market-capitalization of any financial firm in the U.S., after

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. The enthusiasm was based on the view that Morgan Stanley could continue to reap huge profits from the bull market.

At an analysts' conference call scheduled for 11 a.m. EDT Thursday, Morgan Stanley will likely be pelted with questions from confused analysts, who have pushed this stock mercilessly. These soft results are particularly embarrassing for Morgan because they come in a week when

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report


Lehman Brothers


posted earnings that wafted past analysts' forecasts, although both banks depended inordinately on trading.

This, of course, raises the question: Were Morgan Stanley's subpar trading results the result of trading losses in the quarter? Robert Scott, the firm's finance chief, denied that the firm's traders had made losses when betting with the firm's own capital. He blamed trading weakness, instead, on lower equity market volatility and slower income from commodities trading. Morgan Stanley can make good profits in volatile markets by selling derivatives, financial instruments that can help clients manage volatility. In response to an analyst question, the executive also claimed that the big trading drop wasn't due to marking down the value of stock in any one company.

The Numbers

Third-quarter trading revenue of $1.63 billion was 35% below the prior quarter's figure, but was a hefty 43% ahead of the year-ago number. Trading at Lehman, by contrast, registered a 118% jump from a year ago and a 23% advance from the previous quarter.

Just as depressing, Morgan Stanley's third-quarter investment banking revenue of $1.17 billion was 14% below the level in the year-ago and 3% short of the previous quarter's number. Meanwhile, Lehman in its fiscal third quarter posted a 17% increase from a year ago and a 21% rise from the prior period.

Total net revenue growth at Morgan Stanley also paled next to its rivals. Net revenue of $6.29 billion were 18% above the year-ago period, compared with 51% growth at Lehman and 33% at Goldman, Morgan Stanley's closest rival.