Wall Street's boom: how much longer?

By Joseph A. Giannone

NEW YORK (Reuters) - Wall Street is heading into the final weeks of 2006 riding a wave of surging takeover and trading activity with no end in sight.

Investment banks are on track for a third consecutive year of record profits with every business running at full steam. The industry is well on pace to break M&A records, demand for new debt and stock is strong and trading profits appear impervious to interest rate moves.

Skeptics have predicted the end of Wall Street's current boom almost since it began, but analysts forecast a continuing rise in earnings.

"From a fundamental standpoint, the operating environment is great and these guys were really capitalizing on it," said Sandler O'Neill & Partners analyst Jeff Harte. "The wildcard is how much better can that environment get?"

"If you put a gun to my head, I'd suggest the operating environment has the potential to get a lot better before it gets a lot worse," he added.

How much longer the good times can last will be discussed at the Reuters Investment Banking Summit in New York and London November 13-16.

Historically, Wall Street shares have soared in good times only to plunge during bear markets. Profit from trading especially followed cycles, with shares of brokerages tumbling whenever interest rates rose.

Investors bailed out of Wall Street stocks this summer, when a slowdown in the markets convinced many that business had finally peaked. Instead, most of the big banks reported surprisingly solid third-quarter results and told investors the fourth quarter is off to a very strong start.

Even fixed income trading has proven more resilient than expected, as derivatives, emerging markets and commodities bolster any weakness in traditional bonds and mortgages.

Mergers and Acquisitions meanwhile is on a tear. Dealogic says Wall Street is on pace to post a record in M&A with $3.24 trillion worth of deals announced globally through November 6, 2006, compared with $3.33 trillion for the peak year of 2000 and $2.96 trillion over same year-to-date period in 2000.

On November 6 alone, companies worldwide announced 52 deals worth $25 billion in transaction value, Dealogic said.

Two weeks ago veteran dealmaker Roger Altman of Evercore Partners told investors "we're in the early stage of the M&A up-cycle." Prior M&A booms in the 1980s and 1990s lasted seven and eight years, respectively, but M&A activity has been on the rise this time around only since 2003, he said.

LOFTY STOCKS

That said, Wall Street stocks already reflect that optimism, with the Amex Securities Broker-Dealer Index closing in on its all-time high set in April and up 21 percent this year. On average the largest investment banks trade at 2.3 times book, a premium to its 10-year average of 2.2 times.

Analysts say the industry eventually will return to normal after years of standout performance, but that hasn't stopped them from raising profit and stock price forecasts. The party, it would seem, isn't over quite yet.  Continued...