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Watchful Eyes on Brokerage Earnings

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From Associated Press

The stock market’s obsession with inflation could intensify this week as Wall Street’s major brokerage houses start reporting their first-quarter earnings.

Earnings in the financial sector typically come under pressure in an environment of rising interest rates. When inflation is a concern, the Federal Reserve is particularly aggressive in raising rates to combat rising prices. The Fed has raised the short-term benchmark rate from 1% to 2.5% since last summer.

That tightens the availability of capital, making it more expensive, and that hurts brokerages’ bottom lines as the margins on their own borrowing shrink and the value of their rate-sensitive holdings, such as bonds, decreases.

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Investors will look to earnings from Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos. this week for signs that the Fed’s rate hikes are working and that the brokerages are adjusting their business plans to make up for the shortfalls.

Last week a sharp climb in oil prices and a weaker dollar raised fears of inflation once again, sending the markets sharply off the 3 1/2 -year highs reached the previous week. The Dow Jones industrial average lost 1.52% for the week, while the Standard & Poor’s 500 index fell 1.4% and the Nasdaq composite index dropped 1.8%.

Bear Stearns is expected to earn $2.34 a share, compared with $2.37 a share a year earlier. Bear Stearns’ stock has been a steady performer, rising 34.9% since closing at a 2004 low of $76.62 on May 10. It closed Friday at $103.33.

Morgan Stanley has climbed 25% from its low close of $46.80 on Aug. 6, closing Friday at $58.49. The brokerage is expected to earn $1.14 a share, up from last year’s $1.11 a share. And Goldman Sachs will report its earnings and is expected to post a profit of $2.21 a share, down from $2.50 a share a year earlier. Like rival Morgan Stanley, Goldman Sachs has risen substantially since its August lows, climbing 30.9% from its close of $83.86 on Aug. 12 to close Friday at $109.55.

From Associated Press

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The Week Ahead

Today

* Quarterly earnings to be released by Conseco Inc., Liberty Media International Inc. and OfficeMax Inc.

Tuesday

* Commerce Department reports on retail sales for February and business inventories for January.

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* Federal Reserve Chairman Alan Greenspan testifies about the future of Social Security before the Senate Special Committee on Aging.

* Quarterly earnings due from Albertsons Inc., Beverly Enterprises Inc., El Paso Corp., Ivax Corp., King Pharmaceuticals and Liberty Media Corp.

Wednesday

* Commerce Department reports on current account, fourth quarter and housing starts for February.

* Federal Reserve reports on industrial production for February.

* Quarterly earnings released by Bear Stearns Cos. and Westar Energy Inc.

Thursday

* Labor Department reports on weekly jobless claims.

* Mortgage company Freddie Mac reports on mortgage rates.

* Conference Board issues its monthly index of leading economic indicators.

* Quarterly earnings released by 3Com Corp., Adobe Systems Inc., AnnTaylor Stores Corp., Barnes & Noble Inc., DreamWorks Animation SKG Inc., EchoStar Communications Corp., FedEx Corp., Goldman Sachs Group Inc., Morgan Stanley, Nike Inc., PalmOne Inc., Toys R Us Inc. and Winnebago Industries Inc.

Friday

* Pretrial conference scheduled in federal court over consolidation of patient suits over Merck & Co.’s Vioxx pain reliever.

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