Broker Stocks Feel the Pain
By Matthew Goldstein
Senior Writer
5/22/2006 2:19 PM EDT
URL: thestreet.com
The laws of gravity do apply to brokerage stocks.
Over the past month, as the market has taken a fierce beating, the air has rushed out of the minibubble that had developed in brokerage shares. Since setting an all-time high in mid-April, the Amex Broker-Dealer Index has fallen 14%.
Some of the brokerage stocks hit hardest this past month include Ameritrade (AMTD:Nasdaq) , Goldman Sachs (GS:NYSE) , Lehman Brothers (LEH:NYSE) and Merrill Lynch (MER:NYSE) .
Before investors pulled the plug on the brokerage sector, the Broker Dealer Index was up 23% for the year. In the wake of the selloff, though, the index is now up just 6%.
If the selling in brokerage stocks has outpaced the decline in the broader market, brokerage stocks had been one of the market's top performing sectors -- so a stronger selloff is not all that surprising.
Analysts who follow the brokerage sector aren't surprised. They say the rally had gotten ahead of itself and stock prices had gotten too frothy.
"The brokerage stocks were looking a bit overvalued, so I believe this is an overdue correction," says David Trone, a Fox-Pitt Kelton analyst.
Historically, brokerage stocks are particularly volatile. When the broader market is performing well, brokerage stocks tend to outperform. Likewise, when stocks slump, shares of brokerages tend to get hit harder.
The current wave of selling on Wall Street is being precipitated by concern about a resurgence in inflation. Traders and investors fear the Federal Reserve will now be less likely to hold the rein on further interest rate hikes, something that's never good for stocks. Earlier this year, stocks rallied strongly on the belief that Fed was ready to put the kibosh on further interest rate increases.
What's not clear is whether investors will return to the brokerage sector once the broader market stabilizes, or if the fast money crowd will look elsewhere now for fat returns.
From an earnings perspective, the second quarter -- which ends next week for Goldman Sachs, Lehman, Morgan Stanley (MS:NYSE) and Bear Stearns (BSC:NYSE) -- should be another strong one for Wall Street firms.
In fact, there's been no letup in traditional investment banking work. Corporate dealmaking continues at a rapid clip. In fact, corporate borrowing is near an all-time high, as businesses take on debt to both finance acquisitions and stock buybacks. In the past month, there's been a flurry of IPOs coming to market.
But the big variable, as it always is with Wall Street's big investment firms, is revenue from trading. Over the past several quarters, Goldman Sachs, Lehman Brothers and Bear Stearns have generated outsized profits from trading stocks, bonds and commodities. Wall Street firms churn out big profits from trades made by their customers and their own in-house trading desks.
Analysts say they expect the second quarter to be another solid one on the trading front, but Wall Street firms will have hard time matching the results of the past few quarters. A big concern is what impact the rise in long-term interest rates will have on fixed income trading.
"Fixed-income trading will be the wild card," says Robert Hansen, a Standard & Poor's brokerage analyst. "It's hard to get ahold of. We're expecting results to moderate a bit."
Still, Hansen expects generally strong second-quarter results from the brokers, in particular Goldman Sachs, Lehman and Merrill. He says revenues and commission from stock-related trading should be especially strong in the quarter.
But with investors having gotten used to brokers producing blowout earnings, a good quarter may not be enough to draw them back. That's especially so with the summer almost upon us. As most know, the third quarter traditionally is Wall Street's weakest. |
