Wall Street Ready to Count Its IPO Riches

Four brokerages should report stellar quarters this week.
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The weather wasn't the only thing that was hot in August. The IPO market also scorched.

August normally is one of the quietest months of the year for initial public offerings, as Wall Street bankers head to the Hamptons to escape the heat. But that wasn't the case this year.

In fact, this past August was the best month ever for IPOs in terms of dollars raised, according to Thomson Financial. In all, Wall Street investment banks brought 32 deals to market, raising $6.4 billion and raking in $355 million in fees.

A year ago, Wall Street raised $5.3 billion, with most of that coming from

Google's

(GOOG) - Get Report

mammoth $4 billion stock offering.

"For the industry, it was a very good month," says Richard Peterson, a Thomson analyst. "And the pipeline is good. There are still over 100

stock deals in registration."

The red-hot performance of the IPO market is one reason many on Wall Street are expecting big third-quarter earnings from

Lehman Brothers

(LEH)

,

Bear Stearns

(BSC)

,

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MWD)

, which begin reporting their numbers this week. Analysts are expecting the investment banks, whose quarters ended on Aug. 31, all to report strong, double-digit profit gains.

Merrill Lynch brokerage analyst Guy Moszkowski, in upping his estimates for the four Wall Street firms, said the "unusually strong August investment banking calendar" should help offset the lackluster environment for stock trading in the quarter.

Lehman, the first of the big brokers to announce earnings, is expected to be one of the best performers of the group. Analysts are predicting Lehman, which ranked fourth in bringing IPOs to market during the fiscal quarter ended Aug. 31, will report a 33% gain in earnings on Wednesday.

Meanwhile, Bear Stearns, which reports the following day, is expected to be the laggard. Earnings at the bond powerhouse are expected to rise a more modest 16%, in part because Bear historically is a small player in the IPO market.

Profits at Goldman are expected to rise 25%, while Morgan Stanley is likely to announce a 31% earnings gain.

In anticipation of the good news, brokerage stocks have been on fire. For the year, the Amex Broker Dealer Index is up 14%, with all of those gains coming since the third week in June.

The surge in brokerage stocks comes at a time that the broader market has been largely spinning its wheels. The

S&P 500

is up about 2% on the year. In contrast to the brokerage sector, bank stocks have been some of the market's bigger dogs this year. The KBW Bank Index, despite rallying the past few weeks, is down about 5% for the year.

But brokerages may soon run out of gas.

For starters, earnings expectations for the fourth quarter are far more modest. Analysts are expecting the big four Wall Street firms to post earnings gains of roughly 10%. Earnings at Bear Stearns actually could decline slightly compared with a year ago in the fourth quarter.

However, most analysts have not revised their fourth-quarter estimates in the aftermath of the devastation caused by Hurricane Katrina to New Orleans and the rest of the Gulf Coast. There's a good chance they'll come down further after the brokers hold their conference calls following the earnings' announcements.

Over the long haul, some experts predict Katrina could ultimately boost the fortunes of investment banks, as financial firms are called on to finance the massive reconstruction effort. But in the near term, Katrina is likely to dampen the prospects of brokers, especially if consumer confidence takes a tumble.

Already, economists are predicting Katrina will slow economic growth and lead to a jump in unemployment because hundreds of thousands of workers have been displaced. Consumer confidence could take a hit in the coming months because of the added surge in gas prices in the wake of Katrina, which wreaked havoc with the energy industry's Gulf Coast distribution channel.

But it's not just $3-a-gallon gas that's causing some on Wall Street to fret. Some brokers see a far bigger threat to consumer spending and consumer confidence in an expected surge in home-heating costs this winter. The federal government is predicting the damage caused by Katrina could result in a 71% jump in natural gas prices and a 30% hike in home-heating oil prices.

If consumers start to tighten their grips on their wallets in the coming months, expect brokerage stocks to take a hit.