updated 10/18/2005 6:10:29 PM ET 2005-10-18T22:10:29

Wall Street brokerage Merrill Lynch & Co. reported a 49 percent jump in its third-quarter earnings Tuesday, citing strong returns on its investments in both stocks and bonds. Its shares rose in early trading.

For the quarter ended Sept. 30, Merrill Lynch earned a record $1.38 billion, or $1.40 per share, compared to $922 million, or 93 cents per share, in the third quarter of 2004. Revenue climbed 38 percent to $6.69 billion from $4.83 billion last year.

Analysts surveyed by Thomson Financial had expected earnings of $1.18 per share on revenues of $6.17 billion.

Merrill shares rose 12 cents to close at $61.21 Tuesday on the New York Stock Exchange.

The company’s revenues from principal transactions — Merrill Lynch’s own trading activites — more than doubled from the year-ago quarter, boosted by a strong stock market in the quarter as well as debt, commodity and credit trading. Energy trading, in particular, doubled in revenue from the second quarter alone.

Revenues from asset management and portfolio service fees climbed 25 percent, while commission revenues rose 33 percent, the company said.

Despite the good news, Chief Financial Officer Jeff Edwards warned that the fourth quarter could be tougher for investing given the sharp drop the market saw in October, and that trading is usually slow heading into the holidays.

Revenues from asset management and portfolio service fees climbed 25 percent, while commission revenues rose 33 percent, the company said.

In investment banking, Merrill Lynch’s corporate bond underwriting revenues rose 55 percent for the quarter, while stock underwriting fees increased 11 percent. However, the company’s stock underwriting and merger advisory units saw less business in the latest quarter than in the second quarter as merger and acquisition activity cooled and fewer companies went public.

Edwards said Merrill Lynch’s pipeline of still-pending equity underwriting was up substantially from the second quarter of 2005, a boon for future investment banking revenues.

Merrill Lynch’s retail brokerage arm saw a 16 percent increase in sales due to record transaction fee income and interest profits. Total assets under management climbed 8 percent to $1.4 trillion.

The firm’s mutual fund arm, Merrill Lynch Investment Managers, posted a 22 percent jump in revenues.

Compensation and benefits expenses, the heart of Wall Street’s people-centric balance sheets, climbed to $3.3 billion, or 48.7 percent of net revenues, compared to 47.1 percent of net revenues in the third quarter of 2004. Edwards expected a compensation-to-revenue ratio off 49 percent, or “perhaps a bit lower,” for the full year.

Non-compensation expenses rose 11 percent to $1.49 billion as the company invested in technology upgrades and more advertising.

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