Renewed Weakness In Financial Sector

The financial sectors has been one of strength in recent quarters. Now, it is one of weakness again. Is this an omen of things to come?

by Nathan Vardi at Forbes:

Wall Street is heading into a tumultuous third-quarter earnings season that could seriously bloody the financial sector and leave it shaken.
All indications are the one-two punch of macro-economic events and the Dodd-Frank Wall Street Reform and Consumer Protection Act has negatively impacted Wall Street and left banks reeling. The trading profits that have been so crucial to the big banks in recent years appear to have been hit as the September stock-market rally was built on relatively low trading volume and trading spreads have narrowed.
Investment banks have been unable to mitigate the effect of the trading-profits drop by generating fees in other business lines. Companies continue to line up for initial public offerings, but few companies have been able to actually pull them off and produce revenue for Wall Street firms. Big companies are sitting on tremendous amounts of cash, but they have so far been relatively reluctant to deploy those reserves in Wall Street fee-generating mergers and acquisitions.
At the same time, commercial banking profits are also weakening due to anemic lending and tightening lending margins. There is also a tremendous amount of uncertainty about how financial reform with impact the various products banks peddle. And the recent foreclosure controversy will not help matters.
Deutsche Bank analyst Michael Carrier expects Morgan Stanley to earn a paltry 15 cents per share in the third quarter. Richard Ramsden at Goldman Sachs also sees Morgan Stanley coming in at 15 cents. Morgan Stanley has already reportedly frozen hiring.
Indeed, the weak performance will likely lead to job losses. In recent days D.E. Shaw, the big hedge fund firm, is said to have axed a big chunk of its staff. Trading firm Knight Capital is believed to be shedding 8% of its employees. Analyst Meredith Whitney is predicting 80,000 people in the financial services sector are set to lose their jobs.
Wall Street watchers will be paying close attention to JPMorgan Chase & Co. when it reports on Wednesday. If the nation’s second-biggest bank disappoints things could really get ugly. Goldman Sachs will also be an important barometer and some analysts have already slashed their earnings estimate for Goldman in the days leading up to its earnings release.
Wall Street has been the comeback kid in the last two years, bouncing back quicker from the credit crisis (thanks to the feds) and the regulatory crack-down than most could have imagined. It seemed that Wall Street had regained much of its swagger. The next three weeks may be humbling.