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Analyst: Time to ‘Talk to Chuck,’ But Talk Fast

Charles Schwab shares are set to benefit alone as investors try to brave the choppy active trading waters — filled with Flash Crashes and currency collapses — according to FBR Capital Markets.

“We continue to favor the online brokers relative to the asset managers within the investment services space, given the ability of the online brokers to continue to generate stable organic growth and benefit from rising rates and elevated market volatility,” wrote analyst Matt Snowling, in a report entitled 'Now Is the Time to Talk to Chuck.'

Snowling upgraded Charles Schwab to ‘outperform’ and included a chart in his morning report showing that revenue-generating trading activity goes up when market volatility increases.

Schwab shares got a boost today from the upgrade as the rest of the stock market was on hold before tomorrow’s unemployment report. Following an 8 percent drop for the Dow Jones Industrial Average in May, a violent month that included an intraday swing of nearly 1,000 points in one day, investors have pulled money out of stocks en masse.

Investors pulled $17.4 billion out of equity mutual funds for the week ended on May 26, according to data by ICI. This follows a 12-month period where the stock market gains were largely fueled by institutional investors instead of the retail crowd, who sat in bonds.

“While we are not sure if the large outflows this week represent capitulation, we are pretty confident it represents a major negative for the mutual fund business,” wrote Douglas Sipkin, a Ticonderoga Securities analyst, in a note to clients also today. He recommends buying BlackRock as more investors flock to the firm’s iShares ETF franchise to trade their own way.

However, some analysts and commentators doubt that an active trading strategy by small investors is a sustainable long-term force for online brokers and ETF managers. With memories of the housing collapse still fresh, the volatile month of May and the still unsolved Flash Crash may push retail investors farther away from the trading game.

“You mean to tell me that a year after the market’s meltdown, we’re going to tell people to actually take on more risk and trade actively,” said Herb Greenberg, CNBC Senior Stocks Commentator. “You’ve gotta be kidding.”

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