Thursday, June 26, 2008

Brokerage Stocks are Out of Fashion

http://www.marketwatch.com/, reports today:
Brokerage ratings cut
The Goldman analysts said in a research note that fundamentals for the major brokerages continue to deteriorate, adding that any recovery will take longer than originally anticipated.
....
"The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we would have thought," Tanona wrote. "With client activity trends likely to slow down over the next couple of months, we felt a less aggressive stance ... was warranted."
While the USA has finally woken up to the risks associated with owning brokerage stocks, the Indian Investor has not yet become aware of the possible scenario in which brokerage stock prices can come tumbling down like Humpty Dumpty.
As an example, India Infoline is quoted at 550. The stock had started its bull market from 80 in July 2005 to touch 1975 in Janaury 2008. The share price remained above 550 for just 13 months, while it remained below 550 for 26 months - during the period when the bulls were in control. Support for the stock comes at 400, then at 225. Take your pick.
The next two years may well see a big carnage in the brokerage business, with just five major brokerages finally controlling 95% of the business, while many small boutique brokers will share the rest. This has happened in the USA, so it is not soemthing unusual.
Cost cutting, Cost cutting, Cost cutting ...... brokerages which understand this concept may survive to see another bull market.