Can Goldman Sachs & Morgan Stanley Earnings Save Financials? (GS, MS)

This week seems to be unprecedented for the financial powerhouses and bulge bracket brokerage firms.  While Merrill Lynch had to throw in the towel and become a Bank of America subsidiary, Lehman Brothers is essentially chopped liver.  Now, we have two crucial earnings reports coming from Goldman Sachs Group (NYSE: GS) on Tuesday and Morgan Stanley (NYSE: MS) on Wednesday.

Be advised, those numbers may be lower and today’s turmoil makesall of these estimates questionable at best.  To prove the point,Goldman Sachs is down 15% at $131.00 and Morgan Stanley has fallenalmost 15% at $31.81.  That is a 52-week low for GoldmanSachs.  Morgan Stanley’s stock is still a few percentage points above its 52-weeklow.  Estimates have already come down substantially for thequarter, so this is anyone’s guess.  You might even expect a new type of non-GAAP earnings in the financial services sector: "EWOEMD"…..ex-write-offs and ex-mark-downs.

It looks like analysts are looking for about a 70%earnings drop from Goldman Sachs with earnings of  $1.73 and $6.23 billion in revenue.  Brokerage firms do not giveguidance and are always too dependent upon internalfactors going their way. For next quarter, analysts are looking for earnings of $4.09 onrevenue of $8.31 billion. 

Morgan Stanley is expected to post earnings of $0.77 on $6.28 billion inrevenue.  Again, don’t expect guidance.  Analysts expect earnings of$1.10 and $7.42 billion in revenue next quarter.

Now, there are reports that one or both of these firms are being asked by the government to lead a credit lending facility to keep the insurance sector and AIG afloat. While it may save AIG, it might hurt their credit quality.

There are some real issues here regardless of how well these firmssay they are doing or regardless of how poor they see the environment.  These firms do well in some quarters and not in others.  There isalso not believed to be a new undisclosed meltdown that has occurredwhere Goldman Sachs was able to profit in the billions as it did during late 2007.  The other issue isthat despite these firms falling in share prices with the sector, theyare better run and haven’t stayed as grossly leveraged as others did.  Even if these two say all iswell, it might not be worth a can of beans to the banking, brokerage,insurance, and other financial firms in trouble.

Jon C. Ogg
September 15, 2008