Chances of a smooth ascent at Morgan Stanley ( MWD) were greatly reduced this week when the company reported problems in both its airline finance unit and credit card operation, an analyst warned.

J.P. Morgan lowered its rating on the brokerage and investment bank to underweight from neutral and cut its earnings estimates for 2003 and 2004, saying "expectations of a smooth passing of the baton from first half of 2003 trading success to a second half of 2003 recovery in M&A and equities was a bit hopeful."

Morgan Stanley reported Wednesday that second-quarter earnings plunged because of a charge to write down the value of its leased-airline portfolio, reflecting weakness in the travel sector. The company also said it wasn't seeing any major reduction in delinquencies in its Discover credit card division.

The company made up for the shortfalls via trading, a less valuable business line than other investment banking services because of the difficulty of consistently repeating exceptional performance.

While J.P. Morgan had hoped for signs other divisions were bouncing back, "trading continued to dominate. Once again, fixed-income, currencies and commodities trading was robust, producing the second-highest quarterly revenue in the firm's history."

"Although equity markets improved in the latter half of the second quarter, equity sales and trading revenue declined 12% month over month to $865 million, 9% light of our estimate," J.P. Morgan wrote. "However, management suggested that activity picked up in its prime brokerage unit," thanks to hedge funds, J.P. Morgan wrote.