A look at the Washington Mutual (NYSE: WM) and Wachovia (NYSE: WB) deals to raise more capital indicates that other banks and brokerages are looking at below-market deals if their Q1 numbers are light. And, that is very, very likely. Reuters quotes one expert as saying "It’s getting to the point where investors are saying, ‘how deep is this hole and, if you keep throwing money into it, how much of a return will you see?"’

Early indicators from companies like Wachovia and General Electric (NYSE: GE) show that the last half of March may have been tougher on banks earnings than Wall St. expects. Bloomberg recently reported that Citigroup (NYSE: C), JP Morgan (NYSE: JPM), and Wells Fargo (NYSE: WFC) could all miss consensus estimates. But, by how much?

A look at the spread of Q1 estimates gives some hint about how far off actual numbers could be compared with investor expectations. At Citigroup, among fifteen analysts polled by First Call the average EPS estimate is a loss of $.95. But, the lowest estimate is a loss of $2.24. At JP Morgan, the average figure from fourteen analysts is $.66, but the worst case is a loss of $.11. For Wells Fargo, twenty-three analysts have an average forecast of Q1 EPS at $.57, but the low number is $.45.

The huge discrepancy among the numbers should be troubling to shareholders because recent information would argue that share prices for most banks and brokerages may still be way too high.

At brokerage firms, there is also a very wide spread among analysts who have earnings estimates for the quarter. The consensus among sixteen analysts following Merrill Lynch (NYSE: MER) is that EPS for Q1 will be a loss of $1.90. But, the worst forecast is for $3. Lehman (NYSE: LEH) is expected to make $1.07, but the low end of estimates is $.43. Morgan Stanley (NYSE: MS) expectations are for EPS of $1.34, but the worst forecast is $.79.

What would substantial misses do to share prices? It would almost certainly put stocks in the sector below their 52-week lows. A look at most stocks in the sector shows that number is about 20% below where they trade now.

Unanticipated bad news took GE down 13%. For companies perceived to be in a much weaker set of circumstances, the drop is going to be worse.

The horrible truth is that at there lows banks may have to bring in more capital due to their extremely poor numbers. The only basis on which they get that money may be to offer common or preferred at a fraction of market costs. With liquidity limited, their choices may be numbered. That, in turn, could take share prices down again.

Douglas A. McIntyre

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