UBS Securities bank analyst Charles W. Peabody downgraded J.P. Morgan & Co. on Monday to a "hold" from a "buy" rating, citing concerns about the global trading environment.
Shares of the bank dropped with the rest of the bank market, falling 75 cents to $79.325.
The broader Standard & Poor's bank index fell 1.55%, reflecting a combination of profit taking and heightened concern about a cut in interest rates at today's Federal Open Market Committee meeting.
"Capital markets in general will be a difficult place for market makers and proprietary trading operations to be in the next three to six months," said Mr. Peabody. "The markets are getting thinner and more illiquid, which means greater volatility with less customer participation."
Mr. Peabody lowered his earnings estimates for Morgan to $6.35 per share for 1995 from $6.80 previously, and to $8.05 per share for next year from $9.00
The analyst expects a weaker than anticipated fourth quarter because of soft trading results and sluggish top-line revenues.
UBS also removed Morgan's stock from the firm's bank focus list.
"I am pessimistic about the strength of the economy," Mr. Peabody asserted Monday. He said he wanted "a better feel about where earnings are headed and whether the economy is on solid footing."
Mr. Peabody declared that J.P. Morgan was fairly valued in the current market, given its mix of traditional commercial and investment banking business lines.
While shares of two large brokerage firms, Merrill Lynch and Morgan Stanley, have eased 20% and 18%, respectively, from their 1995 highs, J.P. Morgan's shares have come off only 3% from its 1995 high, said Mr. Peabody.
Over time, the analyst said that Morgan may merit a higher multiple than brokerage firms, since its investment-banking franchise is farther along than the commercial-banking enterprises of the brokerage firms.
Donaldson, Lufkin & Jenrette bank analyst Thomas K. Brown upgraded First USA Inc. to an"outperform" rating from "market perform."
Shares of the credit-card bank fell $1.625 to $43.50.
Mr. Brown said that the market misunderstands credit card companies in the short-term, and that the long-term presents strong growth prospects for those companies.
Mr. Brown now recommends three of the four mono-line credit card companies - excluding MBNA Corp. because of its current valuation.
"I am not arguing with the direction of consumer credit quality - it will get worse," said Mr. Brown. "I am arguing with the magnitude and impact that that will have on the earnings results of the four credit-card specialists."
The DLJ analyst said a rise in consumer debt is exagerrated by several factors.
Consumer debt is currently counted according to total credit-card balances at the end of the month, whether or not the debt is paid off, said Mr. Brown.
Additionally, consumer debt gets counted twice, once because of the loans outstanding on a bank's balance sheet, and a second time on the books of the bank that provides the balance transfer.
"There is deterioration with isolated problems like we've seen at Mellon and Norwest," said Mr. Brown. "That doesn't mean you take the market valuation of companies that are getting it right, like credit-card specialists, down by 20%."
A.G. Edwards & Sons analyst Jack Pierce upgraded Mercury Finance Co., subprime auto lender, to "buy" from "hold."
Shares of the Northbrook, Ill.-based company fell 37.5 cents to $12.375.