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Wall Street's 2nd Quarter Mixed as Jefferies Sets Muddled Tone

By Liz Moyer, Christian Berthelsen and Brett Philbin Wall Street's second quarter, marked by a lack of big-deal announcements and pallid trading activity, is expected to yield largely unremarkable results for the biggest U.S. banks. Bond underwriting is on pace to be 40% lower than in the first quarter and 27% lower than one year ago, according to research from Barclays PLC, which cites data from Dealogic. Stock underwriting is estimated to be down 9% from the first quarter and 36% from last year. In other areas, the picture looks less gloomy, especially compared with the first few months of the year. Fixed income trading is expected to fall 6% from the first quarter, while completed merger transactions, which is the point at which advisers collect most of their fees, are expected to increase 21%. Jefferies Group Inc. (JEF), which reports on a fiscal second quarter that ends in May, frequently acts as Wall Street's results harbinger. On Tuesday, it posted fiscal second-quarter bond trading revenue that climbed 31% from a year ago, but fell 14% from the first fiscal quarter. The firm also reported weak equities trading results as the business line's revenue slumped 28% from a year earlier. Analysts say Jefferies' second quarter likely got a boost from solid banking and trading activity in March, and it didn't have a weak June to weigh on second-quarter results. That won't be the case for its bigger rivals, all of which report on a calendar quarter including April, May and June. JMP Securities analyst David Trone said, "If you look at the standard calendar firms, April through June is going be pretty weak." Commenting on more current trends, Jefferies Chairman and Chief Executive Richard Handler told analysts "uncertainty about the future of the Euro translated into lighter global fixed income activity as the quarter progressed." In a recent note, Nomura Securities analyst Glenn Schorr said volatility and volumes were mixed in fixed income, currency and commodities trading. Though investment banking volume improved in May from April, Facebook's (FB) $16 billion initial public offering accounted for the majority of it and "absolute levels remain soft," the note said. Analysts have been cutting estimates for some capital-markets-intensive banks in recent weeks. The average estimate of analysts who follow Goldman Sachs Group Inc. (GS) is for profits of $2.25 a share, down from an estimated $2.63 a share at the beginning of the quarter. For JPMorgan Chase & Co. (JPM), the estimate has been slashed from $1.19 a share to 86 cents. Estimates for other banks haven't varied much from the beginning of the quarter through Friday, according to FactSet. Analysts tracked by Thomson Reuters expect Goldman to report second quarter revenue of $7.4 billion, which would be flat over last year's second quarter. Morgan Stanley (MS) is expected to report revenue of $8.2 billion, which would be lower than the $9.3 billion reported last year. Bank of America Corp.'s (BAC) second-quarter revenue is forecast to be $23.2 billion, nearly double the $13.2 billion reported last year. Citigroup's (C) revenue is expected to be $20 billion, about flat from $20.6 billion last year. J.P. Morgan Chase revenue is estimated at $22.5 billion, down from $27.4 billion last year, according to Thomson. Year-to-date, shares of Goldman are up 6.83%, while shares of Morgan Stanley are down 5.8%. Shares of Bank of America are up 46.5%, Citi is up 8.5%, and J.P. Morgan is up 6.5%. Jefferies shares are down 4% for the year. Bankers have said during recent investor presentations that the business environment for the industry as a whole has been challenging. Less leverage in the system makes for less risk taking, but also diminishes potential gains. As of earlier this month, Wall Street's advisory revenue backlog, which includes potential revenue from deals announced but not yet completed in the last two years, was $5.9 billion, down from last year and close to the low of $5.8 billion posted in 2005, Dealogic said. That is well off its recent peak of $14 billion hit in June 2007. Global merger revenue is at $7.1 billion for the year to date, down from $9.1 billion in the same period last year. Barclays said Citigroup appeared to have gained market share during the quarter in completed deals, while J.P. Morgan and Bank of America have ceded ground. In another barometer of Wall Street's health, initial public offerings withered after Facebook's May 18 glitch-ridden debut, with 14 canceled deals since then. The window has a chance of reopening during the last week of June, when four IPOs are set to price. On the credit side, several leveraged loans have been pulled from the market in the last few weeks because of a shift in investor sentiment, according to Thomson Reuters. They include a $680 million deal for NEP Broadcasting, an $800 million refinancing for Sheridan Production Partners, a $750 million deal for Univar, and a $920 million loan for Husky International. The good news, according to bankers, is times have changed for the better compared to the end of last year, when fears of a European debt meltdown gripped the markets. Bank of America's Chief Financial Officer Bruce Thompson said June 12 that second-quarter trading volumes and investment banking activity "has been a little bit slower" than in the first quarter. But "you think about the last couple of quarters we've gone through...it was clearly much better than what we saw during the second half of last year." Write to Liz Moyer at liz.moyer@dowjones.com

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