“Two large securities firms that cater to small investors reported sharp profit drops, a further sign that many individuals continue to avoid the stock market,” writes Charles Gasparino in today’s Wall Street Journal.

“Merrill Lynch & Co., the nation’s largest full-service brokerage firm, said net income for the second quarter ended June 29 slid 41%, to $541 million. Charles Schwab Corp., the largest online-brokerage firm, said net sank 26% to $102 million. Schwab’s earnings of seven cents a share fell a penny below analysts’ consensus, while Merrill’s per-share earnings of 56 cents beat the Wall Street consensus by two cents.”

” ‘The small investor is frozen,’ says Amy Butte, a securities-industry analyst at Bear Stearns Cos. ‘And if the [small] investor doesn’t come back, there will be continued earnings pressure’ for both of these firms, Ms. Butte says.”

“Despite the results, Schwab’s stock climbed 7.2%, up $1.04, to $15.49 as of 4 p.m. in New York Stock Exchange composite trading Tuesday; Merrill’s shares were down as much as 4% at one point during the day, but recovered to trade down only 45 cents at $52.70, also on the Big Board.”

“The business environment has been particularly difficult for Merrill. Net revenue, or total revenue minus interest, at Merrill declined 19% in the period to $5.57 billion from a year earlier. Maybe most significant: The firm attracted just $1 billion in net new money from clients in the U.S., down sharply from $24 billion during the first quarter of the year.”

“There are several reasons for Merrill’s poor showing. Since the bond-market collapse of 1998, Merrill no longer makes big bets trading in many fixed-income securities. As a result, the firm hasn’t been able to make money off higher bond prices as the Federal Reserve Board slashed interest rates this year.”

“Meanwhile, Chief Executive David Komansky has set a goal for the firm to have a 24% pretax profit margin by 2003. (Merrill had a 15.3% pretax profit margin in the second quarter and a 21.3% margin in 2000, according to Bear Stearns.) Mr. Komansky’s goal will be difficult to achieve, analysts say, without deep cuts into the firm’s work force. So far this year, Merrill has trimmed about 5% of its payroll of 72,000; if the market doesn’t improve, analysts say, the reductions could total from 10% to 15% by year end.”