TD Ameritrade FY 2Q15 Earnings Call Notes

Probably not going to get higher rates in 2H

“the tailwinds with higher rates that we were expecting in the latter half of the year appear to have been delayed. At the beginning of the year, the expectation from economists was that the Fed would begin raising rates in June of 2015. Today, it appears unlikely that that increase will take place within our fiscal year.”

Going to have to take down guidance

“The yield curve has also flattened. The forecast at the start of 2015 was for the seven-year swap rate in March to be 256 basis points; instead, it’s at 179 basis points. If these new revised macroeconomic expectations hold true over the next six months, we would expect earnings per share to come in within the lower half of our guidance range for the year.”

Clients remain invested. Cash at 13.6%

“Cash as a percentage of total client assets ended at 13.6% for the quarter as our clients remained invested in the markets. ”

Entering a historically slow trading period

“we are now entering the time of year where historically trading has tended to slow. So, we will see how this year shapes up.”

We set an algorithm for share buybacks each quarter

“At the beginning of each quarter, we set an algorithm. Bill and I sit down and decide what that is. And then, the shares either get bought or they don’t. And in the past quarter when we set it – I forget what the stock was, but it was obviously lower, and just the algorithm didn’t go off this quarter. As we come into the third quarter, the June quarter here, we’ll revisit that algorithm for the June quarter.”

Liquidity is more important than collateral

“all the clearing organizations, the central clearing organizations are starting to put in what I would call more pro-cyclical liquidity and collateral call provisions. And so, we just want to make sure we’ve got plenty of liquidity. I think when financial institutions have issues, usually if you have capital shortage you can get through it provided you can get through the short-term liquidity is the important thing.”

We’re planning for next year. The plan is to invest in technology

“where we are as a management team at this point will go into its planning cycle now for next year. And we’ve been pretty consistent that any of our investments all go into – basically it’s going to be technology initiatives, because we do believe the world’s changing, basically due to cloud computing, mobile computing, social media, data and analytics and we’re investing into all – three of those four trends. The cloud we’re not using as much, but the other three we’re using heavily, and developing things to use them heavily.”

Other option is to invest in sales and marketing

“second, has been either marketing and/or salespeople, and we will look at both of those. And we continue to see good opportunities.”

International is an opportunity, but a lot of people have failed at it

“We continue right now, as we work through our strategy, look for what we call dealing with our opportunities. We see International as an opportunity, but there’s a lot of people that have failed at it. So, we want to make sure we’ve thought it through and we see it and we take baby steps before we take any major steps.’

Which way is the yield curve going to flatten long end down or short end up

“The hard part with this is which way the yield curve going to flatten, is the short end coming up or is the long end coming down, and worst of those two is the long end coming down. We certainly are more sensitive to the shorter end of the yield curve. So, worst-case scenario, longer end comes down, yeah, that’s going to be difficul”

Everybody’s in right now

“we’re at six-and-a-half years of an up market. You’re seeing margin balances at record levels. You’re seeing lots of net buying activity. You’re seeing client cash as a percentage of assets down. You’ve seen the IMX basically arise. It’s a little softer right now. It’s just we’ve never had seven years of up markets. It has been my personal opinion, it’s much more – it’s just everybody’s in right now. We’ve got a lot of monetary stimulus in the system. Everybody is in the equity markets. And I just hope as this all comes out, I’ve said this is going to be volatile and it’s going to be choppy and we’ll see how this plays out. But it’s a little bit mixed, but it’s more just, because we’re low points on both retail and institutional in terms cash as a percentage of clients assets, it’s mix a bit, but it’s both channels are the same. They’re at lows we haven’t seen for a long time.”

A correction plus increased rates is a great environment for us

“the best scenario right here would be to see a modest correction and some volatility with interest rates rising. Would be – if you had a 5% or 10% correction and then basically the markets were choppy because the Fed was going to change the Fed funds and it did, in fact, after six-and-a-half years increase Fed funds, with a generally underlying bullish trend, like if it went down and then started to come back up, that’s a perfect environment for us.”

We’re in the latter stages of a very strong bull market

“We haven’t seen client cash as a percentage of assets at these levels in a long time. As I said, I think this is more just we’re at the end of a six-and-a-half year up market. Margin loans are at records, client cash is at low levels. Net buying activity is at levels we haven’t seen. And so, you just – I think you’re in the latter stages of a very strong bull market here from after a pretty severe financial crisis. So, it is what it is here and you’ve got a lot of monetary stimulus in the system. I think most investors don’t know where to go right now, but they’re going into U.S. equities, viewed as the best risk/reward right now. One day that’ll change. Anybody that can predict that when that is, let me know.”