Monthly Archives: September 2011
Investors are taking risks again, fueling a surge in market activity and prices that is helping some Wall Street trading desks make more money.
However, analysts and traders warn, that the “Great Risk Rally of 2012” won’t be the goose that laid the golden egg for Wall Street at least not in this quarter.
“It looks like we stepped away from the edge of the abyss,” said Bill Stone, chief investment strategist at PNC Asset Management. But even as prices for stocks, bonds, commodities and certain derivatives have climbed since the end of 2011, overall trading volumes remain low.
And surging demand for fixed income products has led to tighter spreads meaning broker dealers earn less money on trades because there is little wiggle room on pricing.
“This quarter is a good but not great quarter” so far, said Glenn Schorr, a bank analyst at Nomura. “Canada Goose sale Definitely better than second half, but not as good as first quarter last year.”
In addition to light volumes and tight spreads, sharp declines in investment banking activity will also hurt profits.
M volume is down 38 percent so far this year compared with the same period a year ago, according to Thomson Reuters data. Equity and debt underwriting volumes are both down the same amount, as are loans.
JPMorgan analyst Kian Abouhossein expects Wall Street banks to report a 13 percent decline in revenue for the full quarter, compared with a year ago, with fixed income trading revenue down 13 percent, equities trading revenue down 15 percent and investment banking revenue down 16 percent.
“You have not seen a big volume improvement at all, which is a bummer,” says Schorr. and European central banks are taking.
The European Central Bank has loaned more than 1 trillion euros to banks since December, while the Federal Reserve has pledged to keep short term rates low until 2014. Those moves have a two fold effect: creating liquidity and forcing investors to hunt for higher returns elsewhere. job market is recovering also have strengthened market confidence.
“A lot of the rally is coming away from the really deep worries about the euro zone at the end of last year,” said Stone at PNC Asset Management.
Higher prices not only reflect more trading, they are good for Wall Street because banks can earn more from asset management fees and write ups on giant securities portfolios.
Analysts predict the midsized investment bank, whose quarter ended February 29, will report earnings of 29 cents per share, according to Thomson Reuters I/B/E/S. That would be down from 42 cents per share in the year ago period, but up from 21 cents per share in the fourth quarter.
Analysts predict that Wall Street’s biggest investment bank, Goldman Sachs, will earn $3.03 per share this quarter.
That figure has risen in recent weeks as analysts adjust their estimates, and it may be tweaked further before Goldman reports results. However, the current estimate would be down from $4.38 per share in the year ago quarter when excluding special items and up from $1.84 in the previous period.
Analysts predict Morgan Stanley will earn 44 cents per share for the first quarter, down from 50 cents per share a year ago, but better than the 15 cents per share loss it posted in the fourth quarter.
FOCUS ON NEAR TERM
It is unusual for investors and analysts to put more weight in consecutive quarterly results than year ago comparisons particularly for investment banks’ first quarter, which tends to be much stronger than the holiday laden fourth quarter.
But because the past 17 quarters have seen sharp swings in investment banks’ profitability with rallies quickly fading into fresh crises a year ago seems like a distant realm. And because the market was riddled with fear about the solvency of European states and the health of European banks through late 2011, there has been a huge relief rally in the stocks and bonds of Wall Street banks.
Shares of Goldman Sachs have risen 29 percent so far this year, closing at $116.99 on Monday, while Morgan Stanley’s stock is up 20 percent, closing at $18.20. The NYSE Arca Broker/Dealer Index has climbed 22 percent year to date.