Wall Street braced for backlash of gains

The sign of Wall Street is seen outside the New York Stock Exchange, March 26, 2009.

Credit: Reuters/smart EastBy Knut Engelmann

NEW YORK | Wednesday, July 6, 2011 2 pm EDT

NEW YORK (Reuters) - low economic growth, the capricious commercial customers and regulatory concerns that just Won't go away - in the second quarter has been punishing for top Wall Street investment banks and their shareholders.

With revenues of trade in bonds, currencies and commodities have decreased by a third party or in the first three months of the year more value, analysts have hastened to downgrade their forecasts in the second quarter for companies to large broker/dealer such as Goldman Sachs Group (GS)(N) and Morgan Stanley (MS)(N).

22 Analysts providing quarterly coverage of Goldman Sachs, 15 have reduced their earnings forecasts share since the beginning of June, some by as much as half, according to Thomson Reuters I/B/E/s at the same time, half of 24 analysts covering Morgan Stanley have reduced their forecasts of the EPS.

Average Goldman EPS expectations are $2.89 for the quarter. This is under $4.38 Bank won in the previous quarter, a number which fell to $1.56 after having deducted the cost of bought the shares held by Investor Warren Buffett. A year ago in the second quarter, the Bank reported EPS of $2.75 before non-recurring items that reduce that number to $0.78.

For Morgan Stanley, medium-sized expectations EPS fell 52 cents for the second quarter, compared to 50 cents in the period of three months previous and bottom of 80 cents a year ago.

Goldman Sachs is due to report interim results on 19 July, with Morgan Stanley to follow later in the same week.

"I would not surprised if in the second quarter numbers are on the low," said Chris Mittleman, investment officer head at Mittleman Brothers, which manages 75 millions of dollars in assets of the client. According to him, he stayed clear of the stock of Morgan and Goldman because their incomes are too unstable and too dependent on the ups and down of their businesses.

Trade, to Goldman is usually more than half of its income, was developed by concerns about the pace of recovery in the United States and other large economies, and the sovereign debt crisis in Europe. Restrictions on operations for the bank account has also to keep a lid on revenues.

"There was a lack of commitment, most of it with respect to the increase in winds of macro," said analyst for Barclays Capital Roger Freeman, who has since long a rating of "neutral" on Goldman Sachs and Morgan Stanley, but said that there is value in stocks for investors willing to wait longer for it.

The products which were good for most banks earlier this year, likely lowered earnings in the period April-June. Oil prices fell more than 10% in the quarter.

"We believe commodities trading has been particularly difficult in the second quarter: the sharp and persistent decline in asset prices may have improperly dealers with long inventory positions," Credit Switzerland analyst Howard Chen told clients in a note.

Investment Bank activity was mixed with a strong race of initial public offerings raising tax revenues. Acquisitions and completed mergers were higher than in the prior quarter, but the volume of announced transactions fell starting in the first quarter for the first time in more than a year, data from Thomson Reuters show.

CLOUDS ON WALL STREET

The largest flat on Wall Street remains uncertainty banks and investors on the extent and the effects of major financial reforms being chopped by regulators after the collapse of the global financial system in 2008.

The rules are being drafted, and policy makers have yet to find a way to reduce the excessive risk taking which is widely seen as contributing to the financial crisis. Already, banks such as Morgan Stanley and Goldman have pared back on the negotiating on their own account, on which they staking of large parts of their balance sheets in the past.

New global rules on capital mean that banks will have to keep more large reserves is to guard against trade losses, making even more difficult to win the kind of returns to double-digit equity that investors have come to love.

"Evaluations are quite convincing now, but there are some problems that must be resolved before the values can be unleashed, including the first exclusive commercial,"said Keith Davis, a buyside analyst based in Washington, D.C. firm Farr, Miller & Washington, which manages the 730 million in assets. "

Return of Goldman on equity, a key measure of profitability, fell to 12% by the end of the year last of 23% at the end of 2009. Before the crisis, Goldman reported return on equity as high as 33% in 2006 and 2007.

"People are not convinced that businesses will be able to earn up to a return on equity in moving forward," said Mittleman.

TRAPS EXTRAORDINARILY GOOD MARKETS

Shares of Goldman Sachs, reduction of 20 per cent this year, last week struck a minimum of two years. Morgan Stanley shares were down 15 percent. That contrasts with the Dow Jones Industrial Average.DJI, which is up 8.5% since the beginning of 2011.

"Currently, the financial statements are traps of the value," said Harry Rady Rady Asset Management in San Diego, California, which manages the $ 270 million. Rady says that it is too early to buy Goldman and Morgan Stanley despite their low values "extraordinary."

During this time, the banks are cutting jobs and other costs to boost their bottom lines. Goldman, for example, hopes to slash $ 1 billion in costs to pay over the next 12 months and plans of 230 dismissals in the coming months. The axe is declining elsewhere on Wall Street too.

Still, some analysts believe banks are worth a second look.

"Time to earn money," the often pessimistic Richard Bove, an analyst with Rochdale Securities, said customers last week.

He cited an improvement of the Greek crisis of the sovereign, Bank of America (BAC).(N) to move settling disputes related to the mortgage and a recent rise in prices among the factors that could stimulate a gathering of summer in the stocks of the Bank. Bove rates Morgan Stanley a "buy", but Goldman stock on a rating to "sell".

His conclusion: "stock buying a Bank today."

(Additional reporting by Lauren Tara LaCapra.) (Editing by Robert MacMillan)