Oh, No! Goldman Sachs Was Right!

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When Goldman Sachs (NYSE: GS  ) downgraded the discount brokerage industry last week, it seemed like an envious case of sour grapes.

Leave it to Goldman to turn those same grapes into sweet dessert wine. Its shot to the discounters appears to be validated this morning, as Charles Schwab (Nasdaq: SCHW  ) posted disappointing metrics for November.

Client assets have risen by 26% over the past year, but traders took to the sidelines. Daily average revenue trades clocked in 27% lower than the previous November. That makes sense, for anyone who remembers the rounds of panic selling that triggered opportunistic buying in November 2008. However, last month's trading activity also posted an 11% sequential dip from October.

That's not what you want to hear from a company that's successfully adding new accounts.

But wait -- Schwab's story gets worse. Goldman Sachs predicted that margins and fee revenue would come under pressure in a low-interest-rate environment. Now Schwab is crying uncle over management-fee waivers on its proprietary money market funds. It sees a roughly $108 million hit in waived fees alone during the current quarter, during which its profitability per share is expected to be $0.02 to $0.04 lower than in the third quarter. Analysts were expecting the current quarter's net income to match the $0.17 a share Schwab delivered during Q3.

Schwab isn't an island. If low interest rates and waning trading activity are weighing on the brokerage, those factors are probably denting TD AMERITRADE (Nasdaq: AMTD  ) and E*TRADE (Nasdaq: ETFC  ) , too. Goldman Sachs had also lowered its near-term price targets on optionsXpress Holdings (Nasdaq: OXPS  ) and TradeStation (Nasdaq: TRAD  ) last week, but they're not carbon copies of Schwab.

Come back, Schwab traders.

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Charles Schwab and optionsXpress are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990, but he owns no shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

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  • Report this Comment On December 14, 2009, at 8:46 PM, stockguru2014 wrote:

    Schwab's problems are related to the low interest rate environment. The fact that they are still adding assets and accounts means good things are ahead for them once interest rates rise.

  • Report this Comment On December 15, 2009, at 9:31 AM, money4eds wrote:

    Low interest in stocks right now. The average stock holder is doing just that holding. What direction is the market headed?

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