Interview: Earnings season for the four biggest brokers
>> news after the bell from morgan stanley. what morgan stanley is saying is that the money management head mitchell maren is leaving the firm. third executive close to tom purcell to leave. mitch maren leaving as head of morgan stanley’s money management unit. in the meantime, more news on the brokerages. tomorrow lehman brothers reporting earnings, kicking off earnings season for the four biggest brokers. the group slated to report what are supposed to be record profits. our margaret popper covers the finance beat at bloomberg tv. she joins us with a preview. margaret?
>> thank you, ellen. in the words of one investment banker, it was a wild summer. third quarter profits for goldman sachs, lehman brothers, bear stearns and morgan stanley are probably going to make new highs for the quarter. it was anything but a quiet summer for lehman brothers and the other large firms. business across the board was booming. analysts are forecasting earnings of $3.2 billion for the four companies. the first two that will be reporting are lehman and bear stearns with lehman’s profit charging ahead by 37%. next week goldman sachs and morgan stanley report with morgan expected to post growth of 33%. what is behind it? merrill lynch’s analyst says solid sales and trading and a better than normal august for underwriting and m&a. lehman brothers is a case in point. analysts say its earnings will jump the most thanks to higher investment banking revenue. lehman completed 148% more mergers than last year. debt underwriting jumped 42% and equity underwriting 24%. cibc world market ‘s analyst ken worthington says lehman will get a boost from mortgage trading. bear stearns’ earnings are out on thursday. boston company asset management’s analyst says strong bond trading was an important driver for bear. deals like alltel’s $5.9 billion takeover of western wireless corp helped bear boost completed mergers by 21%. goldman sachs had an advantage in this environment because of its traditional strength in mergers.
>> i expect goldman to be very well positioned and probably will have the best results given what is going on there, m&a as well as equity underwriting where i.p.o. volume is up significantly this summer.
>> goldman advised on $209 billion of mergers in the third quarter of 2005 versus $97 billion last year. it reports earnings next tuesday. morgan stanley brings up the rear reporting earnings a week from thursday. while it will have the second highest profit gain of the group the turmoil that went with john mack’s hiring as the new c.e.o. may have hurt the firm’s productivity.
>> it’s difficult for us to actually get―or gain insight into the magnitude that that disruption caused, but it’s something that gives us pause when we look at our earnings estimates and kind of quantify our expectations for the quarter.
>> the effects may be showing up in morgan stanley’s market share. it advised on 22% of the m&a assignments during the quarter as compared to goldman’s 32%. morgan stanley’s share of equity underwriting was 6.4% versus goldman’s 9.4% market share. worthington says morgan stanley lost out in m&a because it does not have the close relationships with buyout firms that goldman sachs has. back to you, ellen.
>> ok, margaret. while we have you on set, let’s talk about the news after the bell from morgan stanley with mitch maren leaving as head of asset management. what is the significance of the news?
>> for shareholders it’s probably good news because he was viewed as someone who could not get the performance of the division up to what it should be. whraofrpbt that was because c.e.o. phil purcell was sitting on him and not letting him make his own decisions is not clear. but i think in general the marketplace views maren’s leaving as inevitable and a positive.
>> thank you, margaret. margaret will be here tomorrow to talk about the brokerage earnings. in the meantime a quick break. we come back for the latest world and national headlines.
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Listen Market briefing -- Ellen (slow)
Merck's vioxx trial -- Su (fast)
Oil price -- Mike (fast)
investor concern higher fuel costs will drag consumer confidence and consumer spending. shares of best buy, biggest electronics retailer and newspaper publisher knight-ridder were lower. investors fear we could hear other companies cut profit forecasts. let’s get a look at what happened in the stock market today. the dow losing 85 points, 10,597 -- it was consumer and healthcare along with financials helping lead the drop in the s&p. chip and communications equipment among the small number of rising stock groups in the s&p. today’s declines stall a post-katrina rally for the s&p and dow. a jury has been picked to hear merck’s second vioxx trial. opening arguments hadl be heard tomorrow in the case. playing out in a courtroom in atlantic city, new jersey. su keenan was there during the day and has the latest. su?
>> ellen, attorneys made their selections by noon, seven women, three men, including a book keeper, casino worker and wife of a retired surgeon, among others. the judge said she wanted to make sure jurors did not come to the trial with any agenda and earlier in the day dismissed a man who had walked into the courtroom with a cane and said he had taken vioxx for years and would take it again. the judge is splitting the trial into two parts, the first phase dealing with liability and then, and only if there is determination of liability, the second phase would deal with damages. tomorrow, jurors will hear opening arguments for the attorneys of the 60-year-old postal worker who says vioxx caused his heart attack and they’ll hear from merck’s attorney who argues it did not.
>> this is about presenting the evidence for us and we think the evidence is strong on causation and that merck did the right thing with vioxx every step of the way. the drug was carefully tested, merck disclosed the evidence and acted quickly.
>> now, the attorney for the plaintiff, was unable to talk to us. the attorney for the plaintiff was unable to talk to us earlier this afternoon. he did catch up with us off camera to tell us he believes the jury selected is balanced and will result in a fair trial, maintaining all along that he’ll be able to prove vioxx was the cause of the heart attack in this case. plaintiff’s attorneys say another victory and there are 2500 cases filed in this courtroom alone, could force merck to settle, a costly settlement. for merck, a victory is key after losing in texas where jurors decided to award the widow of robert ernst $253 million. in the city of casinos, it is a bit of a gamble which of the jurors selected today will decide the case. all 10 will hear the evidence. at the end of the trial, the judge will pick just six to deliberate and of those six, five must agree to reach a verdict. that’s the story from here in atlantic city, i’m su keenan. back to you.
>> thanks so much. much more to come from atlantic city. in the meantime, bloomberg has learned that carlos ghosn who led nissan motor from losses to profits rejected an overture to join ford motor as an executive. the second time in three years ghosn has rebuffed ford. people familiar with the situation say he turned down an offer to be a top executive last month because the ford family controls 40% of voting shares and could limit his influence. ghosn runs renault and the nissan affiliate. as for ford bonds today, a 7% note maturing in october 2013 fell .5%. sorry, that 94.5 cents on the dollar, according to trace, the bond price reporting system of the nasd. the yield rose to 7.94% from 7.85%. a quick look at the bond reaction there. the economy of the united arab emirates thriving due to historically high oil prices but what will happen in the region when and if prices begin to decline? let’s get more on the story from michael mckee. hi, mike.
>> thank you. the united nations meeting this week, bringing a lot of international visitors to new york, one of them, sheikha lubna al qasimi and she is minister of economy and planning for the united arab emirates, attending the 60th session of the general assembly. we welcome her to the bloomberg studios. storm you very much―thank you very much for joining us. oil is on everyone’s mind. polls of americans show resentment over high oil prices to oil-producing countries. is that unfair?
>> i think we’re all paying for that price. i don’t think it has to do with u.s. citizens. the same thing is going on with the consumers in the united arab emirates. there is a lot more demand for oil. u.a.e. has gone on full production with oil at the moment but i think due to circumstances of the oil pricing and demand placed right now, that is pretty much going to drive prices more and more because of the circumstances taking place right now.
>> let me ask you the question ellen posed, the united arab emirates’s economy is booming because of oil prices but turned to bust in 1993 after oil prices collapsed. if that happened now, would the same thing happen?
>> i think it would not happen and the reason for that, united arab emirates is one of the very few countries in the middle east that reinvested from oil 15 years ago. u.a.e. today depends more on diversified economy, not just oil, but we have tourism, production of alminium. u.a.e. is considered the third largest transport center in the world after singapore and hong kong so the diversity itself would make survival of the country. in addition, only recently, in the last three years, we have seen more money influx into the country primarily for development of real estate and the financial markets . >> that raises another good quempt you’ve been working to produce a new company law to attract more foreign investment. first question, on that law, are you going to open up the economy entirely to foreign investment, get rid of the free zones and remove the need for local joint venture partners?
>> in the previous time, the free zones pretty much had given quite a lot of incentives to the foreign companies coming over. what will happen right now, because of the drive of the w.t.o. and bilateral agreements taking place right now, the laws are changing. companies would own a lot more in terms of within the country itself rather than just the free zone. free zone has another advantage in the fact that it’s adjacent to the transportation and logistics so companies with large production and distribution would probably need more to be in the free zone. what happened, similar to other countries, there will be a variation of how much opening take place. there will be particular sectors where it’s sensitive to the country and others will be open 100%.
>> what sectors would people be able to get into above 50%?
>> in terms of services, we had put an offer even for the w.t.o. up to 75% opening, almost in all areas with services. so within that part, i think there’s a lot more leniency in terms of companies’ positioning within the emirates. they would be―i think almost all the services, part of the -- and the goods. once we revamp the agency law and reconsider the structure of that, too.
>> what about i.p.o.’s? will you reduce the percentage that has to be floated? right now it’s 55%.
>> yes, they will be. that’s part of the law that will be launched. with a lot more accommodation, actually, for foreign ownership and foreign investment.
>> how about taxes? i.m.f. recommending a vat tax or an income tax?
>> there will be an income tax. there will be a v.a.t. but probably related just to particular sectors, not all and when it is introduced, it will not take place on all products, it may take up on tobacco or liquor and start building up towards more v.a.t.’s.
>> when is day one for this law?
>> i’m not sure. i think that will probably take time to introduce. that’s much more related to customs clearance and has to fall within the jurisdiction of the j.c.c. countries and corporation amongst them.
>> thank you very much, sheikha lubna al qasimi, my guest on bloomberg. thank you very much. back to you, ellen.
>> mike, thanks so much. with that, we’ll head into a quick break. when we return, we’ll speak with robert doll, president, chief investment officer at merrill lynch investment managers.
