After the dire outlook predicted for Lehman Brothers by its contemporary JPMorgan yesterday, resident Wall Street expert Goldman Sachs has joined the bandwagon by cutting forecasts for many of its broker rivals because it expects more write-downs and losses on mortgages, and warned that the "tides are not changing." (See: Lehman Brothers may go for $4 billion write-down in Q3, feel JPMorgan analysts)
Analysts led by William Tanona reduced third-quarter and full-year forecasts for Citigroup Inc, JPMorgan Chase & Co, Lehman Brothers Holdings Inc, Merrill Lynch & Co and Morgan Stanley.
They were particularly gloomy on the outlook for Lehman Brothers Holding, the smallest of the four major Wall Street broker dealers. Goldman now expects a 2008 loss of almost $10 a share - $7.50 a share wider than its previous estimate. It cut its third-quarter estimate for Lehman to a loss of $2.75 a share from 68 cents profit, and its 2008 loss estimate to $9.65 from $2.10 a share.
For Morgan Stanley, Goldman cut its per-share third-quarter earnings estimate to 85 cents from $1.10, and 2008 profit to $4.45 from $4.80. For JPMorgan Chase & Co., Goldman estimates a profit of 40 cents a share for the third quarter, down from 64 cents, and profit of $2.30 a share for the year, down from $2.60.
For Merrill Lynch, it expects a third-quarter loss of $4.75 a share, compared with $4.40 previously, and a loss of $10.25 a share for the year, compared with $10.10. For Citigroup Inc, the largest US bank by assets, Goldman cut its third-quarter profit target to break-even from 17 cents a share and its 2008 per-share loss estimate to $1.30 from $1.10.
"We assume no or negative earnings for the majority of firms in our universe this quarter, and for some of our firms, the third quarter marks the fourth consecutive quarter of reported losses, clearly an unprecedented streak," Tanona wrote.
"Firms are clearly being more aggressive with asset sales and reducing their balance sheet exposure to troubled assets," the analyst added. "However, we believe a major recovery is still a few quarters away."
Tanona said results would also be affected as Citigroup, JPMorgan, Merrill and Morgan Stanley buy back billions of dollars of illiquid auction-rate securities from clients. Citigroup, JPMorgan and Morgan Stanley have also agreed to regulatory fines over the debt, while Merrill has not. (See: Morgan Stanley joins Citigroup, UBS and Merrill in buying back auction-rate securities and Citigroup to settle with authorities on securities fraud)
Despite his outlook, Tanona still recommends a trade in which investors buy Morgan Stanley shares and sell Citigroup shares short. He said Morgan Stanley is one of the brokers best positioned for a market turnaround, while Citigroup will remain heavily exposed to mortgages and consumer credit issues.