I'll be honest with you - I don't know whether to be happy or sad about the latest sanction from FINRA, the body that pretty much oversees the securities market in the U.S. On the one hand it's good to know they're doing something to restore complete credibility to the equities market. On the flipside, they keep finding so much crazy, somewhat fruitless, and completely avoidable stuff, I just can't help but wonder what some of these people were thinking.
I've got the details/rant below, but first I want to do something I always mean to do more of for you, but just don't get enough time to do it - talk about the next great industry trend.
The Next Great Industry Trade Is...
We talk about it from time to time, but bluntly, we still don't do it enough. What's that? Study individual industries.
We all have a willingness to look at individual stocks, but that's hyper-focused and tends to ignore important external factors. We all also have the willingness dissect economic data, but that's awfully 'bigger-picture', and not very timely. It's the 'in-between' tide and details that seem to be the toughest for all of us to get into, which is kind of ironic really, 'cause (in my opinion) it's also where the bulk of your trading money can be made or saved.
If any of you are fans/followers of Bill O'Neil's CANSLIM strategy, you'll already know what I'm talking about. If you're not part of the O'Neil cult, I can sum up one aspect of the strategy real simply... picking the right industry is (literally) almost half the battle in picking stocks.
The estimated numbers vary slightly. In his books O'Neil says 30% to a 40% of a stock's net movement is the result of its industry peers pushing or pulling it along - a herd movement. This FRED Report explanation actually implies the sector/industry relationship makes up almost half of a stock's net movement.
Either way the message is clear... we often focus on fruitless ideas, and ignore the fruit-bearing ones. That's why I'll sometimes just point out budding industry trends for you, without even pointing out any specific stocks; the industry is the important part of the pick. With that said....
I've got a new industry idea for you today. It's the investment bank/brokerage group.
And no, I'm not just saying it because Goldman Sachs (GS), Morgan Stanley (MS), and Schwab (SCHW) are all flying today. It helps, but it's not the bulk of the reason. I'm saying it mostly because the group was one of the worst performers for 2011... until October 4th, when it became one of the best. There's still a ton of ground to regain though, for all the time lost over the past couple of years. [I'm also not a big fan of chasing yesteryear's winners, knowing they rarely post repeat rallies. There's generally more meat on the bone with last year's laggards.]
While the knee-jerk reaction may be to flock to a Goldman or a Charles Schwab, both of which are well-known as well as up big-time today, I still contend you're better off hunting for the off-the-radar stuff... something like Ladenburg Thalmann Financial Services Inc. (LTS). This is the small cap investment bank and broker I told you about back on August 26th when it was trading around $1.60. Now it's at $1.80, up 12% for the two-month span, and still going strong.
Other off-the-radar names that aren't over-watched or over-traded include GFI Group (GFIG) or MarketAxess Holdings Inc. (MKTX). The former has topped estimates in its last two quarters, and is on pace to grow its bottom line by 34% in 2012, while the latter has managed to keep on growing its top and bottom line like clockwork every quarter since 2008, sailing through 2011's turbulence as if it wasn't happening. MKTX is still a little frothy at 22.6 times its forward-looking earnings, but the growth may be worth it. GFIG is trading at only 11.2 times its forecasted earnings.
Like I said to you above, however, the point here isn't the individual stocks. I'm just pointing out how a long-beaten-down investment bank and brokerage industry finally looks ready to recover, especially in light of Q3's GDP rebound... a bounce nobody expected.
UBS Blows It.... Again
If you thought the $2 billion loss inflicted by a rogue UBS trader last month was an isolated supervisory problem for the Swiss bank, guess again. As it turns out, the Financial Industry Regulatory Authority (or just 'FINRA' to most of us) just slapped a $12 million punitive fine on UBS for a long-standing string of mis-marked and possibly-deceptive short trades its trading branch had executed. What they were doing is the kind of thing that effectively facilitated naked short selling.
And to be clear, it wasn't just a few mistakes. It was a systemic problem of (ultimately) nobody giving a crap and simply choosing to look the other way so they could claim plausible deniability... in my opinion.
Against the backdrop of the rogue trader - another 'failure to supervise' fiasco - and in the shadow of 2009's problems stemming the bank's efforts to help U.S. investors circumvent taxes, UBS is now facing a real credibility problem. The most ridiculous part of all, however, is how the upside of these bad decisions was nowhere near as big as the ultimate downside,
My response to how the company got there in the first place is a big fat proverbial "Really?"
Stuff happens. I get it. But, should this much stuff be happening back to back to back at the same company? This doesn't appear to be a mere couple of loose cannons anymore. This is now appearing to be part of the corporate culture... a much tougher cancer to kill.
Here's the cool part though - the regulators are now all over this stuff. FINRA got UBS for $12 million, the rogue trader was arrested by British authorities, and the IRS finally got UBS to do what it should have done in the first place. It's a start.
In some of these and other cases the crime is probably over-prosecuted. Better to over-do it than under-do it, however.
I still think it's going to take years to weed this kind of nonsense out of the system. And, that ultimately means weeding certain people out of the system. After all, in the end it's still always about individual character. It's exciting to see it happen though, because it will ultimately restore credibility and sanity back into the marketplace and put everyone back on a level playing field. When that happens, it's actually going to become easier for you to make some real money in this game.
In the meantime, way to go FINRA.