After slowing the previous week, the primary market turned hostile last week, with just $12.3 billion in paper priced. Better quality credits stuck to the short-end of the curve, issuing paper 5 years and in. Credits with any noise around their stories had a tougher go of it. Eastman Kodak, for example, postponed a 5Y deal when one of its key customers filed for bankruptcy protection. A2/A+ Kodak was talked in the +160 bp area before the deal was postponed; it came the next day at +175 bp, wide to most single-A paper including European Telecom paper. Despite the increased scrutiny each deal came under, there was still a relatively robust junk calendar, with $3.6 billion of below investment-grade paper done. The average deal size for the week was $275 million, the lowest recorded level for 2001. Average ratings were still around the A- level although on a duration-weighted basis credit quality was much lower. The primary market should remain slower this week as participants look ahead to the June 27 FOMC meeting.
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Morgan Stanley: 2Q Reverses Tide -Beats Street By 2 cents
Morgan Stanley's results reflected the bearish conditions in Wall Street's high-margin businesses of M&A and equities. Yet, its other significant non-securities businesses were not very "cash cow" visible so as to partly offset the securities weakness. As a "AA"-rated comparison, Citigroup, in times of securities markets weakness, has witnessed more resiliency from its card and insurance units.
Bear Stearns: 2Q Exceeds by a Nickel - Fixed Income Driven
Bear Stearns reported EPS of $1.18, a nickel better than street consensus. Earnings increased by $10 mil to $169.5 mil on a sequential quarterly basis. This stronger than expected performance was driven by fixed income which offset some of the rising compensation expense and revenues weakness in both wealth management, and clearing services. Bear's gross operating margin was down to 19.5%, from 20.8% as net revenue growth fell short of expense growth.
Goldman Sachs Group: 2Q In-line but core earnings under pressure
Goldman reported EPS of $1.06, in-line with the street consensus. We estimate core EPS of $0.98, reflecting extreme pressure on revenues in its primary business segment offset by some opportunistic real estate sales. Global capital markets was down $822 mil. on a linked quarter basis. Advisory and trading across-the-board was pummeled by the weak markets characterized by low volatility. This lower performance was slightly offset by higher equity underwriting, real estate gains, and an increase in commissions. Goldman's gross operating margin dropped to 24% from 27%, as costs could not decelerate as fast as revenues.
Lehman Brothers: 2Q EPS surprises by almost a quarter
Lehman reported EPS of $1.38, which was $0.24 above the street consensus of $1.14. We estimate core EPS of $1.30 which still exceeds consensus by $0.16, Earnings of $430 mil. were up 44% annually from the prior quarter. Strong business segment revenues included investment banking (+68%), capital markets (+22%), softened by client services (-14%).
We would be opportunistic buyers of debt on continued weakness for the company and the industry for the rest of the year.
The Royal Bank of Scotland: Spreading Itself to Thin?
While we acknowledge Royal's successful integration with NatWest to date and its success in direct marketing of auto insurance in the U.K., we believe that the bank may be spreading itself thin. In the last year, the merger has been a prime distraction for management while at the same time credit quality was deteriorating.
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