Don't Buy Us

Brokers unsell themselves

The demands that honesty places on stockbrokers can be excruciating. Over the past decade or so, 15 securities firms have made their own shares available for public purchase. They are forbidden by the New York Stock Exchange to solicit orders for their own stocks, and professional courtesy long kept them from commenting on the shares of competitors But now some brokers are taking a hard look at their business--and warning clients to stay away.

Paine Webber, the fourth largest publicly traded brokerage firm in terms of revenue in 1976, has just issued a review of the 15 securities-firm shares. It rehearses the many troubles of the trade--increasing Government regulation, a cautious attitude on the part of big investors. Further, it finds that brokers have uncomfortably high ratios of debt to capital and argues that the firms' earnings are on "a fragile foundation" because brokers, like their customers, never know what the market is going to do and have no way of forecasting the level of future business. With trading volume low and commissions hurt by rate cutting, the study concludes that not one of the 15 stocks can be recommended now.

Paine Webber did select three stocks--the "best of a bad bunch"--as possible buys "in a more favorable market environment than now exists." A.G. Edwards & Sons, Inc. for its "unique position" at the retail end of the industry; Merrill Lynch for its leadership of the industry and First Boston, Inc. for its strong position on the institutional side. Merrill Lynch is preparing its own report on the industry, and it is likely to be gloomy. The TV ads will continue to proclaim that "Merrill Lynch is bullish on America," but the firm is less than bullish on its own industry and, by implication, itself.

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