UPDATE 3-Analyst Bove cuts Goldman, Lehman, Merrill to 'sell'

jueves 22 de mayo de 2008 16:43 CEST

 (For more on analysts' outlook for U.S. financial
institutions, double-click on [ID:nBNG327142])
 (Adds Fox-Pitt analyst's comments, updates share prices)
 By Tenzin Pema
 BANGALORE, May 22 (Reuters) - Analyst Richard Bove
downgraded Goldman Sachs Group Inc (GS.N: Cotización), Lehman Brothers
Holdings Inc LEH.N and Merrill Lynch & Co MER.N to "sell"
from "neutral," saying the largest U.S. investment banks may
perform poorly this summer.
 Bove, an analyst at Ladenburg Thalmann & Co, also cut his
2008 outlook for the banks, as well as that of Morgan Stanley
(MS.N: Cotización), which he still rates "neutral."
 The downgrades reflect expectations that brokerage stocks
"will do poorly this summer for three reasons ... weak
earnings, clouded secular outlooks, and the seasonal weakness
that seems to impact these issues," Bove wrote.
 Bove was one of the first banking analysts to recommend
selling financial stocks as credit market problems began nearly
a year ago. On July 18, Bove recommended selling shares of Bear
Stearns Cos Inc BSC.N, Goldman, Lehman, Merrill and Morgan
Stanley, saying the financial system was growing at a pace that
could not be sustained by economic growth.
 The pressures on the brokerage industry have risen because
of continued pressure on the economy, lower opportunity for
investment banking activity and risk mismanagement, said Bove.
 "In the current quarter, it appears that the brokers have
not judged risk appropriately once again," Bove said, adding
that brokers have been shorting the popular financial indexes
against real world cash holdings. "The hedge is not working."
 Brokers have benefited in the past few years from several
developments including the growth of hedge funds as well as the
expansion of the mortgage markets, but "as I see it none of
these factors are present at the moment and none of them will
be robust for the next few years," Bove said.
 He expects that the mortgage markets may take five to six
years to recover, and said that hedge funds do not want to
borrow aggressively in down markets while most lenders are
unwilling to provide as much money as in the past.
 Bove, the latest in a string of Wall Street analysts to
forecast that investment banks will incur losses from
ineffective hedging, said cash-market values of many financial
instruments have diverged notably from those of indexes meant
to mirror cash.
 "The indexes have moved up slightly while the cash market
has not. This causes losses to develop on hedges," he said,
adding that Goldman, Lehman and Merrill may not have avoided
 Bove forecast a 2008 loss for Merrill and slashed earnings
estimates for Goldman, Lehman and Morgan Stanley.
 In a separate note dated May 22, Fox-Pitt Kelton analyst
David Trone forecast a second-quarter loss of 34 cents a share
for Lehman. He earlier expected Lehman to post a profit of
$1.48 a share for the period.
 "For the first time since the credit bust began, Lehman may
post a loss in the second quarter, as it gives back a bit of
its huge hedging gains from the last few quarters, as certain
key indices rallied," Trone said.
 Trone rates Lehman "outperform" and has a $62 price target
on the stock.
 At midmorning on the New York Stock Exchange, shares of
Goldman were up 0.3 percent at $179.15, Lehman was up 0.5
percent at $39.78, Merrill rose 0.2 percent to $45.08, and
Morgan Stanley shares were up 1.6 percent at $43.60.
 The Amex Securities Broker-Dealer Index , which was
trading up 1.2 percent Thursday, has fallen 20.7 percent this
year as the effects of the subprime mortgage crisis, credit
crunch and housing slump reverberate.
 Following are Bove's ratings, price targets and estimate
changes for the Wall Street investment banks:
 COMPANY           RATING         PRICE TARGET   2008 SHR VIEW
               Current Prior   Current Prior  Current Prior
Current Prior
 Goldman Sachs    Sell    Neutral $151    $203   $13.96  $14.39
$20.50  $20.58
 Lehman Brothers  Sell    Neutral $35     $38    $2.07   $2.36
$3.50   $3.48
 Merrill Lynch    Sell    Neutral $39     $49   -$0.11   $1.37
$3.44   $3.68
 Morgan Stanley   Neutral Neutral $41     $53    $4.77   $5.98
$5.24   $6.30
 (Editing by Neha Singh and Mike Miller)