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Financial services stocks are usually among the first sectors to climb during a market rebound that is fueled by interest-rate cuts. Does that rule of thumb hold true when big firms start cutting jobs?

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Amid reports that




JP Morgan Chase



Morgan Stanley Dean Witter


, as well as many mutual fund companies, are laying off thousands of employees as the stock market continues to slide, today's Daily Interview chatted up a man who watches this sector for a living.

Ken Worthington, an equity analyst with

CIBC World Markets

, discusses how the layoffs could be a good or bad thing, and what effect -- if any -- they'll have on the sector's stocks.

TSC: What do these layoffs mean for financial stocks?

The near-term implications are that their revenue lines are going down. Half of the costs that the brokers have is in compensation expense. So, if revenues are going down, one of the ways for them is to reduce compensation expense. And part of the way you can do that is through layoffs. So in the near term, they are trying to more closely align costs with revenues and it shouldn't have a big effect on the stock price.

Longer term, it's typically bad for the brokers to do layoffs because they lose market share. If a broker is the only one to lay off people and the market rebounds, typically with the loss of those people comes market share, in some capacity or another.

It's OK as long as everyone is doing it.

TSC: Are you expecting more layoffs?

All have talked about it. There have been rumors going around on just about every brokerage firm at least laying off at least some people. Most of the brokers have announced cost-cutting initiatives in one form or another. Morgan has denied that it is going to fire its brokers. They are saying that they are reducing costs and are going to reduce headcount, but they are not going to fire 1,000 brokers. That is not correct.

TSC: Does this mean that brokerage firms are unlikely to cut their salespeople, and who, then, is being laid off?

What the brokers try to do is refrain from laying off big producers. Those kinds of layoffs don't make sense. This is why the article in

The Wall Street Journal

about Morgan Stanley laying off 1,000 brokers spooked investors and was wrong. It doesn't make any sense.

Instead, they'll try to lay off people who are not producing, or because they are not line personnel. Or because they are under-performing. But when brokers under-produce, they quit themselves because they are not producing a living.

The areas that have been overbuilt recently are investment banking, especially in many of the tech-specific sectors. Probably some weeding out of research personnel. And historically the most exposed are those in the back office, those who are not actually revenue producers.

I don't look at the layoffs as a big negative because the layoffs have been small thus far. Typically the firms are firing the personnel that are nonessential. They have been building up so quickly for the last three or four years that they have a lot of overhead that they don't necessarily need. So it's cutting back where they have over hired, and those that are not producing. So, in that sense, it's a positive that they have the excuse to trim headcount.