This Sector Is Wilting in the Heat

This summer hasn't been a beach party for many financial companies directly involved in the stock market. Activity is way down on the exchanges, as would-be players keep their hands on their money, waiting for frothier days to invest. No huge upside or downside surprises have occurred on the macro and political level, as everyone waits on the fence to see what the November elections bring. In all, the season has been unusually snooze-worthy. Unfortunately for the financial sector, that collective sleep isn't bringing in much trading revenue.

Ugly headlines
The big stories concerning the stock market in these recent months have generally been negative, if anything. There's the mess that was the Facebook IPO back in May, when the social-media giant's shares listed and promptly tanked. One of the biggest fingers of blame was pointed at lead underwriter Morgan Stanley (NYS: MS) , which (among other questionable moves) neglected to inform many of its clients -- just before the IPO -- that it had cut its forecasts for the company.

And of course there was the scary meltdown of Knight Capital Group (NYS: KCG) thanks to what's being termed a "computer glitch." If that's the real reason, it's one huge error, causing the firm to lose hundreds of millions of dollars in the space of 30 minutes. Knight Capital is still alive, but only thanks to the $400 million lifeline it was thrown by a group of fellow financials such as Blackstone Group (NYS: BX) and TD AMERITRADE. Knight shareholders have been heavily diluted by that wave of new capital.

The macro side has been rather stagnant, with such key indicators as unemployment not moving significantly up or down. A bull would see the dearth of truly market-moving economic developments as a "no news is good news" scenario. But that doesn't get people trading.

August is often a dozy time for the markets; however, the 2012 edition is nearly comatose. Average daily composite volume for equities currently stands at around 5.5 billion shares per day -- nearly half the figure recorded in August 2011.

Scary vs. sleepy
Admittedly, that year-over-year comparison suffers from the fact that August of last year was unusually volatile. In the macro sphere, the debt-ceiling showdown left everyone wondering whether Uncle Sam would be allowed to pay his bills.

As if that wasn't bad enough news, the European crisis deepened. At one point during the month, four countries on the continent even went so far as to enact various types of bans on short selling, fearing that shorts would erode the share prices of already-shaky local banks.

All of these factors drove the markets sharply down, with the Dow losing as much as 634 points on a single trading day. The panicked sell-off was worrying for investors but healthy for exchanges and financials, as of course they take a chunk of every trade, no matter which way the market moves.

Yawning hounds
We should be grateful that this August isn't giving us the heart attacks of the previous year. Still, as far as financial services that make their money from commissions are concerned, the markets need to show a little more life. Light trading is bad for those guys, and they're going to suffer for the skinny volume. Analysts tracking Morgan Stanley, for instance, anticipate that the company will post an EPS of $0.90 per share for fiscal 2012, down sharply from the stock's current trailing-12-month figure of $1.23.

The situation is just as bad, if not worse, for the discount brokerages. After all, they're significantly more exposed to the vagaries of the market than their full-service cousins. E*TRADE (NAS: ETFC) , which has only recently started to turn a profit, is anticipated to produce EPS of $0.42 for the current year; its trailing-year number stands at $0.57.

The bears are even swiping at prominent financials not necessarily involved in direct equity trading, such as derivatives/futures exchange operator (and owner of the Dow Jones indices) CME Group (NAS: CME) . CME is expected to take in only $3.23 a share for this year, quite a comedown from its $4.74 TTM figure.

Will those weakened numbers come to pass? If the markets continue to crawl along, the answer is probably "yes." At the rate things are going, the dog days of August might yawn and stretch their way well into the autumn.

Financials may be in the doghouse, but not all of them are depressed. We've found one sizeable bank in the sector that has the potential to outpace its peers and perform nice tricks for its shareholders. Find out which one that is in our free report "The Only Big Bank Built to Last." The report is available for immediate download.

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