Analysts Continue Quarterly Brokerage Earnings Slashfest Ritual

Guy Moszkowski of Merrill Lynch downgraded Goldman and Lehman to "underperform" noting that "conditions have deteriorated significantly from July."  Meanwhile, Deutsche Bank analyst Mike Mayo cut his price target and estimates for Lehman Brothers.  He now expects Lehman to post a third-quarter loss of $2.68 a share, revised from a profit of 33 cents a share.  Why do I feel like I am experiencing deja vu?  Oh, that's right, because we go through this every single quarter.  How and why Mr. Mayo decided that today was the day that Lehman was going to go from a profit to a steep loss is only slightly mysterious.  After all, the market has been riddled with rumors of Lehman looking for buyers for its assets ("You need an asset management unit? Level 2?  Level 3?  We've got it all to go.  Just give us a bid.") for months.  If the company was cruising along making money, it wouldn't need more capital in addition to all the capital it has already raised.  Let's be honest, did conditions really deteriorate that much or are banks finally starting to face the music?  I know that spreads have widened back out again in the past month.  But the market price of the CDOs that Merrill Lynch puked for 22 cents did not drop from 40 cents at the end of the quarter to 22 cents two weeks later when Merrill sold them.  Merrill had these assets marked too high.  The same is probably true for some of the assets that Lehman holds in Level 3.  No market exists for these securities unless Lehman is willing to unload them at highly distressed levels and take a large loss.

In any event, I think it is a convenient coincidence that the brokerage analysts cut their estimates right after the SEC's naked short sale ban expired.  It was wise to wait until it was no longer a major inconvenience for hedge funds to short these stocks again.  That way, when various magazines are handing out analyst awards for great calls, analysts can say they had the timing right.  Maybe by then investors will conveniently forget that most analysts were estimating brokerage firm profits for the past three quarters before having to slash those estimates two weeks before the earnings announcements to avoid looking foolish.  The fact that investors still pay attention remains a mystery to me.