With the end of the third quarter just three weeks away, preliminary data on capital markets activity paints a grim picture for equity underwriting and mergers, while showing an increase in fixed-income underwriting.

But even as Wall Street prepares for the first round of earnings reports from companies with fiscal quarters that ended Aug. 31, some analysts are using terms like "trough" to describe the traditionally slow summer months and are focusing on what they say could be an improved fourth quarter and a better 2002.

Anyone scrutinizing the data for July and August is sure to hope they're right.

Proceeds for domestic equity underwriting, mergers and acquisitions, and syndicated lending plummeted those two months to levels lower than a year earlier, when volatility was already gaining a foothold in the capital markets.

Capital generated from U.S. global common stock offerings between July 1 and August 28 fell 43.3% from the same period last year, to $15.1 billion, while M&A activity plunged 38.3%, to $190.3 billion, according to Thomson Financial Securities Data. Proceeds from syndicated lending slipped 14.3%, to $163.9 billion, while fixed income, an exception to the downward trend, rose 20.2%, to $334.8 billion.

And the future is not looking bright, according to observers.

"Things are pretty weak right now, and there's no sign that that's going to change in the short term," said Richard Strauss, an analyst at Goldman Sachs Group Inc.

A drought of deals has forced Wall Street banks to learn how to share, Mr. Strauss wrote in a research note issued last week. "Competition is so fierce for the remaining deals that, in addition to certain brokers committing more capital to be anointed lead manager, three-way lead positions on transactions have begun to surface," a rarer sight in the good old days.

Sprint PCS, for example, tapped three companies - J.P. Morgan Chase & Co., Merrill Lynch & Co., and UBS Warburg - to each take a lead managing role in last month's $1.8 billion convertible offering, Mr. Strauss wrote. The three banking companies split the economics evenly, he said.

Despite the additional competition, Merrill Lynch took the top spot on both the debt and equity league tables for the third quarter at the end of August.

With 27.2% of the market and $4.1 billion of proceeds, Merrill far exceeded the competition in equity underwriting, Securities Data said. Just a year earlier, Merrill ranked fifth with only a 4.9% market share.

Goldman Sachs and Credit Suisse First Boston Corp., were No. 1 and No. 2 at the same stage last year, with market shares of 36% and 24.5%, respectively. This year both Goldman and CS First Boston have slipped a notch so far this quarter, and each thus far holds about a 15% market share.

"The breadth of the business is key to us this year," said Jeff Edwards, a global co-head of equity capital markets at Merrill Lynch. "We focus our business around many industrial sectors, and this becomes more important this year" when the markets are down, he said. "We've always maintained a full circle, and that's coming back to benefit us now."

Another reason the company is thriving in the down market is that "in more challenging environments, which this clearly is, our distribution platform becomes more important than in strong markets, where transactions are moving out the door," Mr. Edwards said. "Here, there's much more of a selling process."

But even though many blame the summer doldrums for making a tough situation even harder, at least one banker believes that September will be just as hard for everyone.

"There's such a lead time in that business, that to expect some dramatic improvement in the next three months would be a stretch," said Tom Tracy, chief executive officer of SunTrust Banks Inc.'s Robinson Humphrey equity capital markets unit. However, "we are fairly optimistic that conditions will improve before yearend.

Some analysts see an upside to all this. Diane Glossman, an analyst at UBS Warburg, raised her ratings for Lehman Brothers, Goldman, Merrill, and Morgan Stanley Dean Witter & Co. to "buy" from "hold" on Wednesday because the dismal capital markets conditions will be fully reflected in the third-quarter results. She also reduced her earnings estimates for the four companies. Lehman, Goldman, and Morgan Stanley closed their third quarters on Aug. 31.

"We believe that 3Q01 will likely be the trough in EPS and we expect to see improvement in underlying activity levels beginning in 4Q01 and into the first half of 2002," Ms. Glossman wrote. That, combined with the retrenchment in stock prices, led her to "believe the group is poised for a rebound."

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