LUK Leucadia National Corp.

   (FROM THE WALL STREET JOURNAL 3/16/16) 
   By Justin Baer 

The calendar may say Wall Street's busy season is well under way, but for bank traders, it still feels like a chilly December.

"We're clearly not seeing that normal seasonality," Jonathan Pruzan, Morgan Stanley's finance chief, said to explain the lack of the usual first-quarter bump during an investor conference in London.

In other words, another senior bank executive said: "It's grim."

As the forecasts roll in, the reasons for the downbeat attitude are clear enough. The first quarter is typically the most active on Wall Street trading desks, asbig investors like hedge funds put their money to work.

Instead, it is shaping up to be a lot more like the disappointing final months of 2015, when concerns over economic growth and commodities prices left trading activity and revenue slumping for major banks.

Two big Wall Street firms -- Morgan Stanley and Jefferies Group LLC -- gave new details on the depths of the first-quarter problems Tuesday.

Jefferies, a unit of Leucadia National Corp., swung to a loss during its first quarter ended Feb. 29, as trading revenue tumbled and the firm took two unusual hits to its normally solid equities-trading business.

Morgan Stanley, meanwhile, said that first-quarter revenue this year was tracking closer to the fourth quarter of last year's, normally a much weaker quarter for bank trading revenue than the first quarter, in various markets.

On Tuesday, Morgan Stanley shares fell 1.9%, while Leucadia's dropped 5.7%

Analysts from Credit Suisse Group AG predicted that the five biggest Wall Street banks would report trading revenue of $19.1 billion for the first quarter, down 16% from a year earlier. Analysts at UBS Group AG said this year is shaping up to be the worst first quarter in trading revenue in at least seven years.

Last year, the first quarter proved to be a high-water mark for 2015. Among large banks, trading revenue of $23.7 billion in the first quarter made up about 32% of the year's annual trading revenue of $73.1 billion, said UBS analyst Brennan Hawken. By the end of last year, sentiment on trading had soured to the point that Morgan Stanley moved to lay off 25% of its debt traders and salespeople in December.

Volatile markets prompted corporate clients to postpone stock offerings early this year, crimping Wall Street's investment-banking business as well. That makes a quarterly rebound even less likely.

Jefferies executives said Tuesday that trading conditions improved in March, after the close of the bank's Feb. 29 quarter.

"While we are early in the quarter and one can never predict the future, it appears markets have not only stabilized, but aggressively snapped back," Chief Executive Rich Handler and executive committee Chairman Brian Friedman wrote, pointing to improved conditions recently in bank stocks, junk-bond-fund inflows and energy prices.

Last week, Citigroup Chief Financial Officer John Gerspach said revenue from equities and fixed-income trading likely fell 15% in the first quarter.

On Tuesday, Mr. Pruzan said Morgan Stanley has set its sights on a less-ambitious goal for its trading businesses than equaling the $3.4 billion in trading revenue from the first quarter of 2015. Instead, he said the firm, run by Chief Executive James Gorman, was focused on beating the $2.37 billion in trading revenue Morgan Stanley produced in the fourth quarter. Banks usually benchmark their trading businesses against the year-earlier period.

Jefferies executives said they were "humbled" by the firm's quarterly loss. It reported a net loss of $166.8 million for the quarter that ended in February, compared with a profit of $12.9 million a year earlier. Revenue fell 49% to $299 million.

Trading revenue plunged 82% to $58.8 million. Fixed-income revenue fell to $56.8 million from $126 million. Stock trading dropped to $1.7 million from $203.5 million, largely on the markdown of two equity block trades.

One of the write-downs stemmed from the firm's stake in KCG Holdings Inc. Jefferies had acquired a stake in Knight Capital Group in 2012 following Knight's near-fatal software glitch. The securities firm had helped rescue Knight, which later merged with Getco LLC to form KCG Holdings.

Jefferies owned about 15.9 million KCG shares as of December, almost 18% of its stock outstanding, according to S&P Global Market Intelligence. Jefferies wrote down the value of the KCG stake by $37 million during the quarter. The firm didn't disclose its second block position, which it reduced by 38% during the period.

(END) Dow Jones Newswires

March 16, 2016 02:48 ET (06:48 GMT)

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