Oppenheimer is slashing its 1Q08 estimates on the brokers by 40% on average to reflect a sudden and material decline in levered loan valuations. Firm estimates that the banks and brokers under their coverage have a combined carrying value of levered loan commitments of close to $200 billion, and that such will lead to $10 and $14 billion of negative corresponding marks or write-downs to the banks and brokers under coverage.
Third quarter 2007 broker earnings were dismal due largely to sizable write-downs on leverage loan inventories after the market seized up in July/August and values declined materially. Even worse fourth quarter 2007 earnings saw few write-downs related to levered loan commitments but staggering write-downs related to CDO values. Firm believes 1Q08 earnings will be impacted by both but materially by another round of write-downs to carrying valued of levered loan commitments.
1st quarter 2008 results will likely be worse than those seen in well over a decade and will surely be worse than even the lowest of the existing current estimates.
Downgrades Morgan Stanley (NYSE:MS) to Peer Perform from Outperform; Other names mentioned include: LEH, GS, BSC, MER.
Notablecalls: I heard some rumors yesterday saying Lehman (NYSE:LEH) will pre-announce soon. Not sure if this was due to the negative call made by BofA yesterday (cut LEH target to $60 from $65) or because LEH is really going to pre-announce. Must say the source of the rumor has a good track.
I know I was positive on MER the other day but it's sure starting to look like I was too early. I would not be surprised to see another round of selling in the brokerage space.
Not sure people want to bottom fish here given the possibility of a large pre-announce and Oppenheimer cutting Q1 estimates by 40%.