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	Discussion Board Charles Schwab

By Mike Renshaw (TMF Rimpy)

The difference in opinion between Chris and me boils down to this statement that he made in his opening argument: "These troubles are likely to prove temporary." I strongly disagree. The troubles are not temporary; it was the manic level of trading in the late 1990s that was temporary. The "trouble" to which Chris refers is a return to a more normal state of affairs for the stock market.

From 1997 to 2000, average daily volume on the NYSE and the Nasdaq more than doubled. Anyone who thinks that this represents any sort of long-term trend will be sorely disappointed. It was a temporary phenomenon closely tied to the bubble in the market. I think Chris may be having trouble connecting all the dots, so let me make it easy: bubble inflates, volume goes up; bubble pops, volume goes down.

Chris remarks that Schwab has a diversified revenue stream, and it is now less dependent on trading commissions. Chris points out that only 37% of Schwab's revenue comes from trading commissions. This may be much lower than in the past, but trading commissions still represent by far Schwab's biggest source of revenue.

In addition to trading commissions, Chris points out that 30% of Schwab's revenue is derived from asset fees. These are highly dependent on the overall value of assets under Schwab's management. As asset values come back down from their inflated values, the fees that Schwab's earns by managing these assets will likely go down as well.

Another 23% of Schwab's revenue is based on interest revenue. Over half of this interest revenue comes from interest on margin loans. My bullish opponent is essentially arguing that if revenue from trading commissions goes down, Schwab will be able to instead rely on things like interest from margin loans. The problem is that these sources of revenue are highly correlated. Schwab may have diversified revenue streams by name, but they are all tied to the bull market in one way or another.

Chris also points out that Schwab has solid financials. This is a point that I conceded in my opening, so I'm not going to argue with him on this one. But as I also noted in my opening, solid financials aren't going to be enough to counteract the effects of declining revenues and profits in the brokerage industry.

Schwab may have a strong position in its industry, but unfortunately it's in an industry that's going to be facing some very difficult times. While some of this has already been priced into the stock in recent weeks, growth expectations are still too high even at these prices.

Mike Renshaw is not a bull in bear's clothing just for this debate. He believes in the bear case enough to have a short position in Charles Schwab when this article was written. Additionally, he currently has a short position in several other stocks not mentioned in this article, which are duly noted in his profile in accordance with the Fool's disclosure policy.

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