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Tickers in this Article: LEH, MER, MS, JPM, BAC, WB
Standard & Poor's delivered another body blow to U.S. brokers on Monday when it released a sector-wide downgrade. The downgrades were based on continuing concerns related to subprime and credit markets. Here were the actions:

Broker Change in Rating
Lehman Brothers
A+ to A
Merrill Lynch(NYSE:MER) A+/A-1 to A/A-1
Bank of America
Revised outlook to "Negative."
JPMorgan Chase
Revised outlook to "Negative."
Placed on "CreditWatch Negative."
Placed on "CreditWatch Negative."

With Standard & Poor's actions, virtually every broker slid across the board. If ever there were a coup de grâce to U.S. markets, Standard & Poor's blanket broker downgrade would be it.

According to the Associated Press, subprime losses have now hit over $350 billion globally. Investors are likely wondering whether Monday's news is the last stop for brokers, before the bottom completely falls out. (For more on the subprime crisis, read our related articles How Will The Subprime Mess Impact You?, and Who Is To Blame For The Subprime Crisis?)

Analysts are Contrarian Indicators
On the trading floor, we used to joke that when analysts come out with a downgrade a year (or two) after a debacle hits the market, it was a signal to move in the opposite direction. Case in point: Standard & Poor's sweeping downgrades within brokers comes only about 18-months after subprime write-downs first started to show. (For more on analyst recommendations, check out Analyst Forecasts Spell Disaster For Some Stocks.)

We should all be asking, if Standard & Poor's is so good, why didn't it see subprime coming and downgrade the sector two years ago? Clearly, the company is slow and reactionary, something investors will want to keep in mind while the sector loses ground post-downgrades.

Yes, it's true that revenue growth within brokers and banks stinks right now, as seen in Citigroup's -67% quarter over quarter "growth". However, we have to keep in mind most of these companies are scrambling to pull things back together while also ensuring a beefed up bottom line in the years to come. Moreover, even though Citigroup has much to worry about in the coming quarters, the company is paying a 5.8% dividend yield right now. What investors will eventually begin to recognize is that every time these stocks drop, the higher the dividend yield climbs.

When we look at Lehman Brothers, yes, the company is certainly struggling in the present environment; however, the forward PE still sits at a low 5.67, while the company is sitting $660 billion in cash. The dividend yield in unappealing at 0.68%; however, as Lehman Brothers recovers, the board will likely increase the yield to attract investors.

Finally, looking at JPMorgan, the company is trading with an amazingly low price to sales of 2.5, while the stock is down just over 17% in the past 52-weeks.

Bottom Line
When we look at the overall picture within brokers, the present snapshot is certainly gloomy, especially with Standard & Poor's most recent actions. However, brokers are good at making money, and the stocks within the section will likely recover in the months to come.

For more on taking the contrarian stance, read Finding Profit In Troubled Stocks.

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