(JPM) Archives - Page 28 of 30 - Mad Hedge Fund Trader

The FANGs' Path to Online Banking

Yu'e Bao or "leftover treasure" in English has caught the attention of more than 400 million Chinese investors.

This money market fund has exponentially grown into a $250 billion fund by the end of 2017, and is now the largest money market fund in the world!

This product isn't offered by Bank of China or another giant state-owned bank or financial enterprise, but Alibaba's (BABA) Ant Financial (gotta love those Chinese names).

Assets under management are up 100% YOY and it now accounts for a quarter of China's money-market mutual fund industry in just one fund.

These inflows coincide with the sudden migration into mobile payments. Common folks are comfortable with investing their life savings in these short-term instruments with a too-big-to-fail, larger-than-life firm such as Alibaba.

Yu'e Bao derives its funds from Alipay users, Alibaba's digital third-party platform, that allows consumers to pay for everything in life from theater tickets to utility bills.

Service is unified on a holistic graphic interface. Users can easily divert cash into this fund with a few screen taps on their app. Yu'e Bao's ROI offers a seven-day annualized yield of 4.02%, down from the introductory annualized rate of 6.9% around the launch in 2013.

Yu'e Bao's short-term yield outmuscles the 1.5% interest rate on one-year Chinese bank deposits and the 3.6% yield on 10-year Chinese government debt.

Weak banking regulation has spawned a mammoth FinTech (financial technology) industry in the Middle Kingdom. Only one yuan (16 cents) is enough to create an account and considerable retail flow has rushed in.

China has catapulted ahead of the rest of the world emerging as the leader of global FinTech innovation. The pace, sophistication, and scale of development of China's FinTech have surpassed the level in any other of the developed countries.

The country's digital metamorphosis has enhanced e-commerce, payment systems, and connected logistical services. The Chinese discretionary spender for the past decade has been the deepest and most reliable lever of global growth.

Mobile third-party payments in China, 90% cornered by Tencent's WeChat and Alibaba's Alipay, are estimated to reach a lofty $6 trillion in revenue by 2019, more than 50 times that of the U.S.

These omnipresent payment systems are now deeply embedded into the fabric of Chinese society. It's common to witness homeless people on Shanghai subways waving around a scannable image for WeChat or Alipay money transfers instead of asking for physical cash.

Even in rural farmlands, shabby convenience stores prioritize digital currency and sometimes don't accept paper currency at all. Yes, China is beating the U.S. to a cashless society.

Digitization is changing the competitive balance, and global banks must embrace large-scale disruption caused by big tech platforms.

Banks in China regard these companies as potential collaborators resulting in a net positive long-term infusion of enhanced products and services.

Agreements have been forged between the Bank of China and Tencent, and the China Construction Bank has linked up with Alibaba.

China has incorporated the technical power of A.I. (artificial intelligence) and machine learning into its FinTech platforms at every opportunity. Robo-advisors are also making inroads creating a bespoke financial program for the individual.

This trend has so far failed to go viral in America where individuals still prefer plastic cards or even paper cash. E-commerce clocked in a paltry 9.1% of total U.S. retail sales in the third quarter of 2017.

Even though most of us have our heads buried deep in our smartphone virtual world, Americans are still programmed to whip out debit or credit cards at every opportunity.

Chinese who visit America carp endlessly about America's archaic payment system.

Ultimately, American payment systems are ripe for digital disruption.

The American consumer will ultimately cause severe damage to MasterCard (MA), Visa (V), and American Express (AXP) which are happy with the current status quo.

The lack of innovation in the US FinTech sector is a failure in the otherwise fabulous technological leadership of the US. American smartphones should already be a fertile digital wallet, not just a niche market.

Savvy Jack Dorsey even invented a firm based on this inefficiency exploiting the lack of proficiency in domestic FinTech with Square (SQ).

And a vital reason the stock has gone parabolic this year is because of the brisk execution and the long runway ahead in this industry.

American big tech will gradually utilize China's FinTech model and extrapolate it with "American personality." It is much more of a two-way street now than before with cutting-edge ideas flowing both ways.

The next leg up after digital wallet penetration of FinTech is money market funds on tech platforms. In effect, the Chinese innovation of this industry has allowed more variations of potential financing for the ambitious Chinese, and the same trends will gradually appear on Yankee shores.

Ironically enough, Amazon's (AMZN) land grab strategy is more prevalent in China as artificially low financing and juicier scale justify this strategy.

The scaling premium also explains why corporate China's early adopter advantage is so effective because not many countries boast a 1.3-billion-person consumer market.

Soon, Americans will wake up to the reality that American FinTech must advance or foreign firms will rush in.

Mediocrity is not good enough.

iPhones and Android consumers could direct savings into tech money market funds with compounding yield all on a single digital platform.

Tech companies could deploy some of the repatriated cash to invest in some fledgling FinTech expertise to smoothly execute this new endeavor.

Consequently, a successfully created money market fund on a tech platform would enlarge the already substantial cash hoard these firms possess. Not only will the large tech companies flourish, but the big will get absolutely massive.

The determining factor is financial regulation. Capitol Hill has drawn a large swath of mighty Silicon Valley tech titans to testify because they are stepping on too many toes lately.

A scheme to hijack the digital payments market and dominate the mutual fund industry will cause unyielding push back in Washington especially when the Amazon death star continues pillaging select industries of their choosing and eliminating brick-and-mortar jobs by the millions.

J.P. Morgan (JPM) which has the largest institutional money market fund in the country and retail stalwarts such as BlackRock and Vanguard will be sweating profusely too if mega tech starts probing around its turf.

Alibaba is also coming for its bacon with the failed purchase of payment transfer service MoneyGram International (MGI) temporarily shutting out Jack Ma from a foothold in the American payment system industry.

And if the Chinese aren't let in, there will be others sniffing around for the bacon, too.

The momentum for these financial instruments is robust as FinTech integrates deeper into consumer life. The global cash glut from a decade of cheap financing is causing profit-hungry investors to starve for high-yield vehicles.

The stability and clean balance sheets of tech giants give them ample chance to successfully execute. So, why can't they also become banks? Would you buy an Apple, Amazon, or Google money market fund if they offered a 4% to 7% annualized yield?

I believe most Americans would.

October 15, 2018

Diary, Newsletter, Summary

Global Market Comments
October 15, 2018
Fiat Lux

Featured Trade:

(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or OUR HARD LANDING BACK ON EARTH),
(SPY), (QQQ), (TLT), (VIX), (VXX), (MSFT), (JPM), (AAPL),
(DECODING THE GREENBACK),
(DUMPING THE OLD ASSET ALLOCATION RULES)

The Market Outlook for the Week Ahead, or Our Hard Landing Back on Earth

Diary, Newsletter

Truth be told, it’s the really boring, sedentary, go-nowhere markets that drive me nuts, cause me to tear my hair out, and urge me on to an early retirement.

The week started with such promise.

Sunday night I witnessed the first Space X landing of a rocket in California which I could clearly see from the top of Berkeley’s Grizzly Peak some 250 miles away. It was fascinating to see four separate jets steer the spacecraft earthward.

Financial markets had a different landing in mind, the hard kind, if not a crash.

I absolutely love the market we had last week which saw the third biggest down day in history, volatility explode, and $2.6 trillion in stock market capitalization vaporize.

I had to blink when I saw NASDAQ (QQQ) down an incredible 350 points in one day. My Mad Hedge Market Timing Index hit an all-time low at 4.

No wonder insider selling hit $10.3 billion in August, another record. Maybe they know something we don’t.

Chinese Gamer Tencent Postponed their US IPO. It seems they noticed that market conditions had become unfavorable. I know investment bankers hate passing on an opportunity to ring the cash register. I used to be one.

There is no better feeling than being 100% cash going into one of these crashes and then having panicked investors puke their best quality positions to me at a market bottom.

On Thursday, I backed up the truck and issued four perfectly timed Trade Alerts, picking up Microsoft (MSFT), Apple (AAPL), and the S&P 500 (SPY), and covering my short position in the bond market (TLT).

In fact, I believe I had my best week of the year even though I only added modestly to my annual return. Look at the charts below and you’ll see that I suffered a 9% drawdown during the February meltdown. Maybe I’m getting wiser as I get older? One can only hope.

This time, I managed to limit my loss to a modest 2.5% and am nearly unchanged on the month despite the Dow Average at one point nearly giving up all its gains for 2018. This is also against a horrific backdrop of hedge fund performance that is now showing losses for 2018.

The Volatility Index (VIX) made a move for the ages, at one point kissing the $29 handle, up from $11 two weeks ago. During the 600-point swoosh down on Thursday, I couldn’t get any of my staff on the phone. The entire company was logged into their personal trading accounts, buying puts on the iPath S&P 500 VIX Short-Term Futures ETN (VXX) as fast as they could.

Which leads me to believe that the bottom is near. Earnings and valuation support start kicking in big time at these levels, and the blackout period for company share buybacks started ending with the bank earnings last Friday.

When you take a $1 trillion buyer out of the market, it has a huge effect no matter how strong the fundamentals are. Start buying those dips. Their return is similarly eventful. I’ve already started to invest my 95% cash position.

Further eroding confidence was the president’s statement that the Federal Reserve is crazy. So, now we know the president appoints crazy people to the most important financial positions in the country. White House control of interest rates ahead of elections. Why didn’t I think of that?

Sparking the Friday melt-up was a statement by JP Morgan (JPM) CEO Jamie Diamond saying that a 40-basis point rise in rates is no big deal. The bull market is on. His earnings beat all expectations.

My 2018 year-to-date performance has bounced back to 27.56%, and my trailing one-year return stands at 35.87%. October is almost flat at -0.84%. Most people will take that in these horrific conditions.

My nine-year return appreciated to 304.03%. The average annualized return stands at 34.41%.

This coming week will be pretty sedentary on the data front.

Monday, October 15 at 8:30 AM brings us September Retail Sales.

On Tuesday, October 16 at 9:15 AM, September Industrial Production is announced.

On Wednesday, October 17 at 8:30 AM, September Housing Starts are published.

Thursday, October 18 at 8:30, we get Weekly Jobless Claims. At 10:00 we learne the September Index of Leading Economic Indicators.

On Friday, October 19, at 10:00 AM, the September Housing Starts are out. The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I will spend this week on my Southeastern US roadshow, giving strategy luncheons in Savannah, GA, Atlanta, GA, Miami, FL, and Houston, TX. I love meeting my readers mano a mano who are often a source of my best trading ideas. It looks like I’ll miss Hurricane Michael by three days.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Off to Lunch

September 28, 2018

Diary, Newsletter, Summary

Global Market Comments
September 28, 2018
Fiat Lux

Featured Trade:
(WHAT WILL TRIGGER THE NEXT BEAR MARKET?)
(JPM), (SNE), (TLT), (ELD), (AMZN),
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON
GLOBAL STRATEGY LUNCHEON)

What Will Trigger the Next Bear Market?

Diary, Newsletter, Research

To paraphrase Leo Tolstoy in Anna Karenina, all bull markets are alike; each bear market takes place for its own particular reasons.

Now that the wreckage of the past financial crises is firmly in our rearview mirror, it is time for us to start pondering the causes of the next one. I’ll give you a hint: It will all boil down to excessive debt…again.

Global quantitative easing has been going on for a decade now, keeping interest rates far too low for too long. The unintended consequences will be legion, and the day of atonement may be a lot closer than you think.

The 1991 bear market was prompted by the Savings & Loan Crisis, where too many unsophisticated financial institutions in a newly unregulated world dreadfully mismatched asset and liabilities.

Every time I drive by a former Home Savings and Loan branch, with its unmistakable quilt decorations and accents, I remember those frightful days. Back then, when I looked at buying a home in San Francisco, the seller burst into tears when the price I offered would have generated a negative equity bill due for him.

The 2000 Dotcom crash can easily be explained by the monstrous amounts of debt provided to stock speculators. The 2008 crash was produced by massive, unregulated, and largely unknown lending to the housing sector through complex derivatives that virtually no one understood, especially the buyers.

So, here we are in 2018 nearly a decade out of the last crisis. Potential disasters are lurking everywhere under the surface while blinder constrained investors blithely power ahead. Once they metastasize, they rapidly feed into each other, creating a domino effect. They always do.

Emerging Market Debt

Lacking domestic capital markets with any real depth, companies in emerging economies prefer to borrow in U.S. dollars. When the dollar is weak that’s great because it means liabilities on the balance sheet shrink when brought back into the home currency. When the greenback is strong, the opposite happens. Dollar debt can grow so large that it can wipe out a company’s total equity.

This is already happening in a major way in Turkey, where the lira has plunged 50% in the past year, effectively doubling their debt. And once it starts, a global contagion kicks in as all emerging companies become suspect. This is not a small problem. Emerging market debt has rocketed from 55% to 105% of GDP since 2008.

The Rise of Junk Borrowers

In recent years there has been a massive expansion in borrowing by marginal credits. This is taking place because fixed income investors are willing to accept a large increase in the amount of risk for only a small marginal rise in interest rates.

There is now $1.4 trillion in low grade BBB bonds outstanding, with one-third of this one downgrade away from junk. There has also been a dramatic rise in “covenant lite” issuance, which minimizes the rights of bond holders in the event of default. When the next round of trouble arrives, you can expect this market to shut down completely, as it did in 2008.

Student Loans

These have been the sharpest rising form of borrowing over the past decade, doubling to $1.5 trillion. Some 10% are now in default. This acts as a major drag on the economy as heavily indebted students don’t borrow, buy homes or cars, or really participate in the economy in any way, banned by lowly FICO scores. This is why millennials in general have been slow to enter the housing market for the first time.

Shadow Banking

Would you like to know today’s equivalent of subprime the lending that took the financial system down in 2008? That would be shadow banking, or off the books, unreported lending by hedge funds, private equity funds, and mortgage companies. Again, this is all in pursuit of high interest rates in a low interest rate world.

Yes, liars’ loans are back, just not to the extent we saw 10 years ago…yet. I’m waiting for my cleaning lady to get offered a great refi package again, just as she was in the run-up to the last crisis. How many of these loans are out there? No one has any idea, especially the Fed. As a result, nearly 50% of all mortgage lending is now from unregulated nonbank sources.

The Outlier

Remember when Sony (SNE) was almost put out of business by a hack attack from North Korea? What if they had done this to JP Morgan (JPM)? That would have created a chain reaction of defaults throughout the financial system that would have been impossible to stop. When this happened in 2008, it took the Fed three months to reopen markets such as commercial paper. If big bankers need a reason to lie awake at night, this is it.

I’m not saying that markets can’t go higher before they go lower. In fact, I dove back into Amazon (AMZN) only this morning.

However, as an Australian farmer told me on my last trip down under, “Be careful when you cross the field, mate. Deadly snakes abound.” Add up all the above and it will turn into a giant headache for investors everywhere.

September 6, 2018

Tech Letter

Mad Hedge Technology Letter
September 6, 2018
Fiat Lux

Featured Trade:
(THE SMART PLAYS IN FINTECH),
(SQ), (PYPL), (JPM), (COF), (WFC), (BAC),
(MGI), (GRUB), (BABA), (NFLX)

The Smart Plays in Fintech

Tech Letter

Fintech is all the rage now, and it’s time for investors to grab a piece of the action.

The tech sectors’ stellar performance in 2018 is a little taste of things to come as every industry forcibly pushes toward software and artificial intelligence to enhance products and services.

Bull markets don’t die of old age and some of these tech stalwarts are truly defying gravity.

The fintech sector is no exception.

Square (SQ) led by tech visionary Jack Dorsey has been a favorite of the Mad Hedge Technology Letter practically from the newsletter’s inception.

But another company has caught my eye that most of you already know about – PayPal (PYPL).

PayPal, a digital payments company, has extraordinary core drivers and a splendid growth trajectory.

Its arsenal of services includes digital wallets, money transfers, P2P payments, and credit cards.

It also has Venmo.

Venmo, a digital payment app, is the strongest growth lever in PayPal’s umbrella of assets right now, and was the first meaningful digital payment app in America.

It was established by Andrew Kortina and Iqram Magdon-Ismail, who were roommates at the University of Pennsylvania, and the company was bought out by PayPal for $800 million in 2014, marking a new chapter in PayPal’s evolution.

Funny enough, Venmo’s original use was to buy mp3 formatted songs via email in 2009.

Venmo is wildly popular with tech savvy millennials. A brief survey conducted illustrates how fashionable Venmo is by recording higher user statistics than Apple Pay.

The app is commonly used for ordering pizza through Uber Eats or Grubhub (GRUB), or even shelling out for monthly rent.

If you want to stir up your imagination even more, Venmo has a prominent social feed where users can view other Venmo users’ purchases.

Financial models suggest Venmo could contribute $300 million to the PayPal top line in 2021. If Venmo executes perfectly, revenue could surpass the $1 billion mark in 2021, with much higher operating margins than PayPal’s core products.

Even though management declines to speak specifically about Venmo, the dialogue in the earnings call usually provides some color into what is going on underneath the hood.

Xoom, a digital remittance distributor app with offices in San Francisco and Guatemala City owned by PayPal, along with Venmo grew payment volume by 50% YOY, surging to $33 billion annually.

Of that $33 billion in volume, $19 billion was contributed by Venmo and Xoom chipped in with $14 billion.

More than 60,000 new merchants joined PayPal’s array of platforms, adding up to more than 19.5 million total merchants.

All in all, PayPal locked in $3.86 billion of sales last quarter, which was a 23% YOY jump in revenue, at a time where widespread acceptance of fintech platforms is brisk.

PayPal raised its end-of-year forecast and rewarded shareholders with authorization of a $10 billion buyback.

Upward margin expansion, expanding market share, multiple revenue stream, and untapped pricing power is the recipe to PayPal’s meteoric rise.

PayPal’s share price has climbed higher from a base of $73 at the beginning of the year to an all-time high of more than $90.

Offering more proof fintech is alive and kicking is Jack Dorsey’s Square’s dizzying rise of more than 200% YOY in its share price.

The company is exceeding all revenue growth expectations and is poised to ramp up subscription revenue.

As with the Venmo app, Square’s Cash app has unrealized potential and will be one of the outperforming profit drivers going forward.

Square hopes to be the one-stop-shop for all types of digital payment needs including consumer finance, equity purchases, possibly international transfers, and cryptocurrency.

All of this is happening amid a robust secular story that could have seen traditional banks swept into the dustbin of history.

Rewind a few years ago, perusing the data about the movement to digital payments must have frightened the living daylights out of the executives from major Wall Street mainstays.

Digital wallets assertive migration into mainstream money payment services could have detached traditional banks’ core businesses.

Slogging your way to a physical bank to put in a wire transfer was not appealing.

Archaic methods of business are painful to see, and traditional banks were still operating this way as of 2015.

Time is money and technology has crashed the traditional waiting time to almost zero.

The way these tech companies operate is simple.

They compete to hire a hoard of advanced computer developers or shortcut the process using the time-honored tradition of poaching the competition’s best talent.

Then snatch market share at all costs and grow like crazy.

Banks badly needed introducing some functions to their array of services such as linking with third-party payment APIs to facilitate online payments and enabling cross-platform digital payments.

Other functions such as establishing modern peer-to-peer payment systems or adopting QR code technology that are wildly popular in East Asia could enhance optionality as well.

These are several instruments they could have amalgamated into their arsenal of fintech technology that could have freshened up these dinosaur institutions.

Harmonizing banking tasks with mobile functionality was fast coming and would be the standard.

Anyone not on board would sink like the Titanic.

Ultimately, banking institutions needed to up their game and acquire one of these digital wallet processors or watch from the sidelines.

They chose the former when a consortium called Early Warning Services (EWS) jointly created by behemoth American banks, including JPMorgan Chase & Co. (JPM), Capital One (COF), Bank of America (BAC), and Wells Fargo (WFC) to “prevent fraud and reduce detection risk” made a game-changing decision.

(EWS) acquired digital payment app Zelle in 2016, and this was its aggressive response to Square Cash and PayPal’s Venmo.

Results have been nothing short of breathtaking.

Leveraging the embedded base of existing banking relationships, Zelle took off like a scalded chimp and never looked back.

In a blink of an eye, Zelle had already signed up more than 30 banks and over 100 financial institutions to its platform.

Banks couldn’t bear being left out of the fintech party.

With hearty conviction, Zelle is signing up users at a pace of 100,000 per day, and the volume of payments in 2017 eclipsed $75 billion.

Zelle projects to expand more than 73% in 2018, integrating 27.4 million new accounts in the U.S., head and shoulders above Venmo’s 22.9 million and Square Cash due to add 9.5 million more users.

Make no bones about it, Zelle was in prime position to convert existing relationships into digital converts. The banks that do not have an interest in Zelle have an uphill climb to stay relevant.

The United States is rather late to this secular growth story. That being said, already 57% of Americans have used a mobile wallet at least once in their lives.

Innovative ideas bring supporters galore and even more adoptees.

That is why the strong pivot into technological enhanced ideas bear unlimited fruit.

Using a mobile platform to just open an app then send funds within a split second with minimal costs is appealing for the Netflix (NFLX) crazed generation that can hardly get off the couch.

Ironically, it’s those in the emerging parts of the world leading this fintech revolution by skipping the traditional banking experience completely and downloading digital wallet apps on their mobile devices.

It’s entirely realistic that some fresh-faced youth have never been present at a physical banking branch before in India or China.

Download an app and your fiscal life commences. Period.

The volume of funds passing through the arteries of Chinese digital wallet apps surpassed $15 trillion in 2017.

And by 2021, 79.3% of the Chinese population are projected to use digital wallets as their main source of splurging Chinese yuan.

America lags a country mile behind China, but the Chinese progress has offered American tech companies a crystal-clear blueprint to springboard digital payment initiatives.

Chinese state banks are already starting to become marginalized, and the Wall Street banks are not immune to the same fate.

Devoid of a digital strategy will be a death knell to certain banking institutions.

Compare the pace of adoption and some must question why American adoption is tardy to a fault.

Highlighting the lackadaisical pace of American fintech integration was Alibaba’s (BABA) smash-and-grab attempt at MoneyGram International Inc. (MGI), as it sought to gain a foothold into the American fintech market.

The attempt was rebuffed by the federal government.

The nascent state of the digital payment world in America must alarm Silicon Valley experts. And the run-up in Square and PayPal includes calculated bets that these two standouts will leapfrog into the future with guns blazing along with Zelle.

The parabolic nature of Square’s mystifying gap up means that a moderate pullback is warranted to put capital to work in this name.

Investors should wait for a timely entry point into PayPal as well.

These two stocks have overextended themselves.

As the fintech pie extrapolates, there will be multiple victors, and these victors are already taking shape in the form of Zelle, PayPal, and Square.

________________________________________________________________________________________________

Quote of the Day

“In the not-too-distant future, commerce is just going to be commerce. It won't be online commerce or offline commerce. It's just going to be commerce. And that will happen because of the phone,” – said CEO of PayPal Dan Schulman.

August 23, 2018

Tech Letter

Mad Hedge Technology Letter
August 23, 2018
Fiat Lux

Featured Trade:
(THE RACE TO ZERO FOR BROKERAGE COMMISSIONS)
(JPM), (WFC), (ETFC), (SCHW), (AMTD)

The Race to Zero for Brokerage Commissions

Tech Letter

The other shoe has dropped.

No more waiting for it as it was only a matter of time, but it was going to happen soon enough.

The acceleration of the race down to zero for brokerage commissions has moved into full throttle.

In a bid to engage new customers, especially millennials, J.P. Morgan (JPM) will offer its customers 100 free stock or ETF trades for one year.

The new service will be available on Chase’s mobile banking app called “You Invest” and also does not require a minimum balance as do so many of the competitors.

Last year, J.P. Morgan was still charging customers a horrific $24.95 per trade, a ridiculous sum in an age of brokerages slashing fees left and right.

Recently, I chronicled the start-up fin-tech brokerage Robinhood, which rolled out the zero-commission model to the chagrin of the traditional brokerages on the verge of major disruption.

Well, Wall Street has stood up and taken notice. There is no way back from this new normal.

The catalyst for J.P. Morgan to change direction was its lack of competitiveness in the digital brokerage space and a free model of luring in business is seen as a quick recipe to correct its ills.

J.P. Morgan has pumped in $300 million in the past two years into digital initiatives but still lacks the volume it was hoping for. This could help capture fresh accounts that could eventually turn into a meaningful business.

Freemium models made popular in Silicon Valley are catching fire in other parts of the economy as potential customers can dabble with the service first before committing their hard-earned money.

This is dreadful news for the fin-tech brokerage industry as it indicates a whole new level of acute pressure on margins and revenue.

The brokerage business has been under fire the past few years after regulators discovered Wells Fargo (WFC) was cunningly ushering clients into higher fee trading vehicles, taking a larger cut of commissions.

Wells Fargo did everything it could to rack up costs for high net worth clients. The atrocious behavior was a huge black eye for the entire industry.

Technology has forced down the cost of executing a trade and each additional trade is almost nil after fixed costs because of software and hardware carrying out these functions.

E-brokerages are set for a rude awakening and their cash cows are about to be disrupted big time.

Charles Schwab (SCHW) has 11.2 million brokerage accounts, and no doubt clients will get on the ringer and ask why Schwab charges an arm and a leg to execute trades.

Schwab might as well start charging clients for emails, too.

The cut in commissions has already started to affect margins with Schwab revenue per trade sliding from $7.96 in 2017 to $7.30 in the most recent quarter.

TD Ameritrade (AMTD) is experiencing the same issues with revenue per trade of $7.83 last year dropping to $7.30 last quarter.

The beginning of the year provided e-brokers with respite after euphoric trading sentiment pushed many first-time equity buyers into the markets, making up for the deceleration in revenue per trade.

However, that one-off spike in volume will vanish and margins are about to get punctured by fin-tech start-ups such as Robinhood.

J.P. Morgan’s move to initiate free trades is a huge vote of confidence for upstart Robinhood, which charges zero commission for ETFs, option trades, and equities.

I recently wrote a story on the phenomenon of Robinhood, and the new developments mean the shakeout will happen a lot faster than first anticipated.

TD Ameritrade, E-Trade (ETFC), Fidelity, and Charles Schwab could face a deeply disturbing future if Silicon Valley penetrates under the skin of this industry and flushes it out just like Uber did to the global taxi business.

E-Trade shares have experienced a healthy uptrend and it is now time to pull the rip cord with the rest of these brokerages.

It will only get worse from here.

Investors should be spooked and avoiding this industry would be the right move at least for the short term.

The golden age of trading commissions is officially over.

Turning this industry into a dollar store variety is not what investors want to hear or hope for.

The decimation of commission fees has coincided with the rise of passive investing.

Only 10% of trades now are performed by active traders.

Brokerages earn demonstrably less with passive investing as the volume of trading commission dries up with this buy-and-hold-forever strategy.

Index funds have been all the rage and quite successful as the market has returned 400% during the nine-year bull market.

When the market stops going up, the situation could get dicey.

The real litmus test is when a sustained bear market vies to implode these ETFs and what will happen with a massive unwinding of these positions.

A prolonged bear market would also scare off retail investors from executing trades on these e-brokerages.

Many will take profits at the speed of light not to be seen or heard again until the next sustained bull market.

Moreover, it is certain the global trade war is scaring off retail investors from their trading platforms as the uncertainty weighing on the markets has thrown a spanner into the works.

Tech has been the savior to the overall market with the top dogs dragging up the rest, but for how long can this continue?

Other industries are experiencing minimal earnings growth and tech cannot go up forever.

Regulations are starting to bite back at the once infallible tech narrative.

Chinese tech is also having its own headaches where Tencent has been perpetually stymied by local regulators blocking access to gaming licenses needed to monetize blockbuster video games.

Tencent missed badly on its earnings report and there is no end in sight to the delay.

Social media has been torn apart as of late and the weaponization of its platforms is accelerating with government operations moving onto them to fight against each other.

Interest rate revenues are the saving grace for these brokerages that account for 50% or more of revenue.

As interest rates rise, there will be a bump in interest rate revenues. However, as competition heats up and commission falls to zero, will these clients stick around for the e-brokers to reap the interest rate revenues or not?

Millennials are hard-charging into Silicon Valley start-ups such as Robinhood, and the traditional brokers’ clientele are mainly directed on the lucrative middle-age cohort.

The next development for e-brokers is who can best harness artificial intelligence to best enhance their customer experience and products.

If the Charles Schwab’s of the world must compete with nimble Silicon Valley start-ups in technology, then they will find a hard slog of it.

One of these big e-brokers is likely to implode setting off another round of consolidation.

The race down to zero is fierce, and I would avoid this whole industry for now.

There are better secular stories in technology such as the e-gaming phenomenon capturing the hearts and minds of global youth.

________________________________________________________________________________________________

Quote of the Day

“Expect the unexpected. And whenever possible, be the unexpected,” – said Twitter and Square cofounder and CEO Jack Dorsey.

August 14, 2018

Diary, Newsletter, Summary

Global Market Comments
August 14, 2018
Fiat Lux

Featured Trade:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
(JPM), (C), (GS), (SCHW), (WFC),
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA)

Tag Archive for: (JPM)

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