Merrill Lynch's Good Q1 (MER)

Merrill Lynch (NYSE: MER) recently issued its first-quarter earnings report, making it the last of the leading investment banks to report. It's Merrill Lynch's report that is the most important and informative of the group because, unlike the other banks, its report takes into account the big sell-off at the end of February.

Merrill Lynch withstood this downfall in the market, triggered by the speculations on the Chinese market and the subprime-loan crisis. This may bode well for the other big investment banks in the sector such as Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Lehman Brothers (NYSE: LEH) and Bear Stearns (NYSE: BSC).

How the Growth was Achieved
This major aggregate growth resulted from the 50% increase in profits from stock trading. This speaks about the bank's ability to profit from both growing and falling markets. A significant contribution was made by the profit from investment banking which has grown by 47%. Traditionally, this is caused by increased activity on the capital and merger market during the first quarter.

The revenues at Merrill's global wealth management business jumped 16%. At the same time, despite the problems with subprime loans, the proceeds from non-equities trading rose 36%. According to Merrill Lynch, this is comes from the share of the profits from the non-prime, U.S.-mortgage activities in the bank's aggregate income.

The Rest of the Investment Banking Sector
Thanks to the Merrill Lynch report, we can see a complete picture of the situation in the investment banking sector. There were dire predictions for the industry following the downfall of the Chinese market, and, especially, after the subprime-mortgages crisis. Those predictions have since turned out to be exaggerated. The investment banks have found enough weapons in their arsenal to resist the crisis and even strengthen their financial standing.

A more serious problem for investment banks may be the slump in the economy against a backdrop of the insignificant increase in the prices. Under these conditions, the Fed is unlikely to go for a reduction of the high Federal Funds Rate before the end of the year. Besides, the first quarter is more favorable for the investment banks because of the high-level of activity on the merger and capital markets. However, under the high interest rates and expensive loans, the number of those willing to attract funds on the stock market will keep decreasing, so too will the number of those investors who are willing to invest their money in company shares and bonds. Therefore, there are still problems ahead for investment banks.


Share Rate Paradoxes
Finally, there needs to be a discussion of the odd behavior of Merrill Lynch's stock on the day its report was published. Despite the excellent results, the bank's shares fell by 55 cents down to $90.11.

There are two reasons for this: first, there were more surprises from China related to excessive GDP growth and growth of inflation; Second, Merrill Lynch quotes had risen three days previously, following the publication of the Citigroup (NYSE: C) report. The report said profits from the group's investment activity had grown considerably. Because Citigroup does the same kind of business as Merrill Lynch, investors immediately added the profit growth to the rate of the Merrill Lynch shares, without waiting for its report to be published. This situation once again proves the importance of inter-market analysis.


Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!