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Bubble Talk: Time To Sell Charles Schwab

Mar. 04, 2021 9:49 AM ETThe Charles Schwab Corporation (SCHW)32 Comments
Paul Franke profile picture
Paul Franke
21.96K Followers

Summary

  • Charles Schwab could peak with the online retail trading frenzy of early 2021, propelled by the Federal Reserve's emergency response to fight coronavirus recession.
  • A multi-year stock market bust, following the record S&P 500 rise of 90% over eleven months, could be disastrous for Schwab's stock valuation and business results.
  • Rising interest rates and the possibility of a larger financial transaction tax in 2021 are worrisome developments for the company's AUM business model.

I remember well several decades ago when Charles Schwab (NYSE:SCHW) dropped "self-service" discount trading commissions to a flat $44 rate per transaction on common stocks, when you used an automated phone ordering system (TeleBroker in 1989). Revolutionary at the time vs. full-service firms like Merrill Lynch in the $100-150 range for an expense on the same order, talking directly to your dedicated personal banker/broker. Fast forward to 2020-21. The entire self-directed online trading business is at ZERO for upfront commissions, even at Merrill (although you do pay pennies per share through the current broker bid/ask process behind closed doors, and account minimums may apply). The world has changed, and now Wall Street is closer to a gambling casino on your smart phone than ever before. Ask the GameStop (GME) short squeeze trading crowd how the game has changed, with numerous stories of "rags to riches" and "riches to rags" over a matter of days saturating mainstream media reporting.

And, if you believe we are in a boom or bubble in the U.S. stock market (like many of us old-timers do), when the music stops, you don't want to be left holding the bag (owning any bubble-focused financial services company). How could the next bear market unfold? Possibly soon, the Federal Reserve could be forced to remove the punchbowl of free liquidity to protect the dollar's value.

Believe it or not, the early 2021 brokerage experience of record daily trading activity and popularity in your lifestyle routine may have run its course. From my vantage point trading the 1987 stock market boom and crash, the dotcom tech bubble popping in the year 2000, the Great Recession bear market of 2007-09, and the coronavirus meltdown of 2020, the next bust could be even scarier than its predecessors.

Why is the 2021 stock

This article was written by

Paul Franke profile picture
21.96K Followers
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 37 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SCHW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (32)

u
According to the Schwab website the firm has 25 ETF's.
I'm wondering if this is a significant source of their revenue?🙌
k
@unknown12 , They don't charge a commission selling stocks.
M
Appreciate the article and insights. I was a little shocked however by the institutional inflows to SCHW in 2021 so far. A 2 billion dollar investment from JP Morgan definitely stood out to me from Feb 19 among other large institutions making large purchases. Looking over the institutional buying averages on Marketbeat.com it appears the 2021 1st quarter inflows vs outflows dwarf anything on the 3 year chart Marketbeat provides. Would you care to comment on this at all? I am a fairly new investor and just learning where and how to collect data on these things. This would suggest to me either you or a number of hedge fund managers are very wrong on this stock. Or perhaps the marketbeat data is incomplete or inaccurate. If so would you have any suggestions where to get better data on institutional inflows vs outflows?
Paul Franke profile picture
@Mr. Wub The data you are referring to is SEC reported quarterly, sometimes 2-3 months after a transaction. The stock is higher by 30% the last few months, so yes plenty of large buyers have pushed the quote to an extreme.
QuikThinx_AllStonks profile picture
"Believe it or not, the early 2021 brokerage experience of record daily trading activity and popularity in your lifestyle routine may have run its course."

Yeah, if you think WSB is done, you're off. since 2012, this community only grows. We're not closer to the end of our nonsense, we're closer to the beginning.

We need Schwab/Fidelity/whatever to trade. As long as that remains okay, this train is just getting started.
P
Why pick only on Schwab? Haven't a lot of stocks doubled since they had their haircut March 2020? Doesn't that just mean that we had an over correction in March that was externally driven by an unusual catalyst? And if so, then any 10-15% market downturn today would be more accurately termed a minor correction.
I admit that euphoria and gambling seem to be in vogue for a certain segment of younger investors. Certainly the media loves to sing their songs. But, for the vast majority of investors, I would argue that they are looking at fundamentals and taking measured risks. If I am right, then we will experience our usual yearly correction and it will be business as usual.
That said, I will grant you two points. Paying interest (or being unable to pay) on $28 trillion is not trivial. And the GDP ratios are not comforting metrics. Thus, we may be underestimating the potential for inflationary havoc this time, perhaps even similar to that experienced in other countries who play loose with money. It just feels different this time. Too many economics wannabees playing politics on a very flimsy stage. And the people holding up the stage are themselves retail amateurs who should safely be in the audience, but are being set up to be crushed by the stage. Nope, no encore if the performers are dead.
TTurk profile picture
Great article. Unfortunately, I am old enough to remember the October meltdown of 1987. I managed to avoid it by a recommendation in the Kiplinger financial newsletter to go to cash in either Aug or Sept. I don't exactly remember. I don't even know if the newsletter even exists today. What I do remember is that I really thought I was smart and then didn't participate in the almost immediate rebound and then made a mountain of foolish investment decisions in the following 3-5 yrs.
As for Schwab, I can't argue with your view, but I can think of 25 or even 50 equities that make Schwab look like Ft. Knox. Let's start with Tesla. It is a solid $40/share stock selling for $500+.
FXMT profile picture
@TTurk haha. I wasn't around trading the crash of 1987. I did the same thing in 2008/2009/2010 keeping myself in cash. Luckily I got good few positions that benefitted from stocks melt up last 2 years but I believe cash going forward is the right thing to do till we have clarity on where is growth will come from in the next cycle.

I enjoyed reading your comment.
Ellenindc profile picture
What another great piece, @Paul Franke. But this time, I am not inclined to agree with your thesis. Schwab’s business is moving to managed money and, from experience, I know that is lucrative. Plus, I don’t know how they do it, but Schwab’s staff is infinitely better than any broker on the Street. It’s highly compliant and, since so much is done for account holders, very addictive. Existing accounts stay. It’s sorta like the Nike of the white shoe gang. No, I will hold my positions indefinitely yet still like your writing very much.
Paul Franke profile picture
@Ellenindc Thanks for the comment.
Nick Cox profile picture
@Ellenindc
Actually I agree with you on Schwab's customer service.
I have been using them for years and their staff are ultra efficient and knowledegable and their software trading platform is easy to use.
I had to get some 8 year old financial information for tax purposes recently, and I got the detail from Schwab with just a click of the button.In contrast HSBC made it very difficult and charged me something like $20 a page to produce the information from my account.
Andrew Sather profile picture
You can't compare old Schwab to today's Schwab because their revenue mix is much different now. Today they make most of their revenue from net interest income (NII) rather than commissions from trades. Many of their long term investments mature soon, meaning the company is likely to benefit greatly from higher rates leading to higher NII.

I'll be contributing my own analysis soon too. Not to say I necessarily think it's a buy, but I think it might be a mistake short.
Paul Franke profile picture
@Andrew Sather If bonds and stocks tank, net assets decline, negating the rise in interest rates on the whole pie of dollars?

What if we get another recession and investors pull money out of accounts to live on?

I agree the risks are different, but still heavily tied to a bull market.
Andrew Sather profile picture
@Paul Franke More investors also tend go to cash when stocks tank, which could mitigate those that pull the cash out. Albeit yes, they'll have less assets to sell for cash.

Also agree with you that there are definite risks, it will be interesting to see how Schwab can react to the next inevitable bear market.
@Andrew Sather I agree with you about the revenue mix. As of January, they had 12.2% of client money tied up in cash. A big market decline will only increase that cash percentage, and with rising rates, their interest revenues should more than offset declines in customer total assets.

So as of January, they had about $800 billion in clients cash on the books. That brings in a lot of interest income.
Buyandhold 2012 profile picture
If I owned Schwab, I wouldn't sell it.

Because I never sell anything.

However, I never invested in Schwab because it has been a lackluster performer over the years.

So I view Schwab as a hold.
t
@Buyandhold 2012 I own SCHW since 1992 @45c shr. @ one time had 23k shrs,sold 8k am holding the rest for a while for tax reasons!
t
@Buyandhold 2012 I've owned SCHW since early 90's @ 45c shr , so i disagree with you!
B
Interesting Read. Thanks.
R
Yes, time to sell!
k
The NASDAQ dropped 80% 2000-2002 and the Dow dropped 90% 1929-1932. Batten down the hatches on Schwab.
Paul Franke profile picture
@kimbillro The FED will pick hyperinflation over an Uncle Sam hard default scenario. If stocks fall 30-40%, money printing will ramp even higher and the dollar will collapse. That's my working theory at the moment.
g
@Paul Franke The prevailing theory seems to be that if we do get U.S. hyperinflation then the $ price of gold will go up because its international buying power remains relatively constant (and my guess is the same for bitcoin, since supply is also limited). I have noticed that in a crash gold price at first follows the market down (perhaps as investors cash in to cover margin calls and need cash to buy puts and back shorts) but then rebounds faster than the market as foreign investors dump their overseas dollars for gold (and gold stocks rise even faster because leveraged to gold price). I have read that estimates of overseas dollars to total dollars in circulation runs 39% to 60%.

If this is a correct analysis, does it follow that gold/gold stocks are a predictable way to hedge against the scenario you propose in your comment? If so, it seems that this is a good time to sell both high-risk equities and bonds and go heavy into precious metals and related stocks.
Paul Franke profile picture
@goldiger

Yes, I own plenty of gold/silver/platinum.

Mark Hulbert on Marketwatch just wrote a story today on the incredible bearishness regarding gold by the advisors/traders he tracks. More pessimism about gold's future currently, than the March 2020 bottom and even the lows of 2018.

Sharply higher precious metals may be one of the shocking/unexpected developments of 2021.
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