Schwab and Ameritrade Offer Market Insights

by Lawrence Meyers | January 24, 2012 11:52 am

Most of the time, investors confine their analysis of a given company’s earnings to the company itself. In some cases, however, earnings from one company can tell us a lot about the sector it resides in, the overall economy, or the stock market as a whole.

Charles Schwab (NASDAQ:SCHW[1]) is one of those companies. Because it deals with both institutional and retail investors, Schwab provides a nice broad overview of what people with money are doing with their money. In fact, Schwab kindly offers a downloadable spreadsheet that lays out a lot of this data.

The company’s trading revenue went up 13% year over year, on a 8% rise in average daily trade volume. This tells us that people are not hoarding cash but continue to either churn or invest new money in the market. In order to tell which, we can look at Schwab’s asset base. Client assets are up 7%, and the company added 1.1 million new brokerage accounts, so at least part of that increased trading was from new accounts.

Now, we can’t rely on only this data to form firm conclusions, but we can tease out some theories.

First, people are not afraid of the market the way they were during the financial crisis. Investment has returned, but nervousness  remains. We know this because Schwab had 10 straight months where mutual funds had net outflows, but bonds, specialized and hybrid investments saw inflows.

It also means that there is still a lot of retail investor money on the sidelines that is slowly returning to the market. That might also foretell higher prices overall for the market ahead since that money has to be put somewhere. With bond yields almost as low as they can go, that means stocks are all that’s left.

One other interesting thing specific to Schwab¬† is that it started its own bank recently — and added accounts to the tune of a 13% increase. The Schwab brand name, which is associated with stability and professionalism, is in stark contrast with America’s current hatred of big-name banks. Schwab is wisely taking advantage of this distaste. Indeed, while the mega-banks seem unwilling to lend to anybody, Schwab originated $951 million in mortgages this past year.

TD Ameritrade (NASDAQ:AMTD[2]) reported numbers that seem to confirm Schwab’s. Net new client assets increased $10.2 billion — that’s 11% annualized growth — which continues Ameritrade’s double-digit growth trend from FY 2009. Both retail and institutional contributed to this increase.

One notable difference from Schwab is trading volume: Ameritrade’s was flat year over year. CEO Fred Tomczyk said: “Clients continue to hesitate in their trading and investing in the face of all of the uncertainty in the markets right now. They do remain engaged with their portfolios as logins continue to grow, but they are reticent to move into the market.”

Consider also that Schwab caters to a more upscale clientele, which suggests that those with more assets are more engaged in trading and willing to swallow more risk as a result. This is consistent with earnings results from upscale product retailers. Folks with more assets are spending, while those with less are being more cautious. Interestingly, Ameritrade’s Tomczyk also noted an increase in options trading, suggesting that these folks are hedging their bets as well.

Keep an eye out as the other brokers report. Note where they fall in terms of clientele, and you’ll deepen your perspective on the markets.

Lawrence Meyers does not own shares of any company mentioned.

Endnotes:
  1. SCHW: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCHW
  2. AMTD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMTD

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