Investment Contrarians

How This Stock Actually Benefits from More Regulations

By for Investment Contrarians |

Stock Actually Benefits from More RegulationsWhen it comes to new regulations, many investors should rightfully worry about how this will affect them. At the same time, there might be an investment opportunity in the making. While some firms will certainly have lower corporate profits with increased regulation, there are some companies that can take this investment opportunity and generate greater returns over the long run.

New rules are being designed for the swaps market, to avoid a situation similar to what happened in 2008. Swaps are a huge market, and since the deals are conducted over-the-counter (OTC), the financial system had problems when a counter-party couldn’t pay for their trades. Having swaps trade on exchanges that are guaranteed by a central clearinghouse will eliminate this risk and lower the chances of any financial crisis erupting from counter-party risk in the future.

The problem is that, because margin requirements are tougher, corporate profits will be lower for some companies, as a firm can only take on lower levels of positions. Also, the banks were the main intermediaries for OTC trades and a center for large corporate profits for many years. These trades will now be transferred to the stock exchanges, giving them a great investment opportunity to generate higher corporate profits from additional products that are now traded on their venue.

One company that should benefit over the long run is CME Group Inc. (NASDAQ/CME). This group encompasses the widest range of futures and options traded in America and, as we see more products going through exchanges, we should see higher volume levels for this firm. The shifting of OTC trades from the banks to the exchanges is a great investment opportunity for CME and should drive corporate profits for many years.

CME isn’t waiting for this regulatory change to look for more possibilities to drive corporate profits. One avenue is further geographical diversification. CME recently announced that it is about to launch a new offshore Chinese yuan currency futures product. While the CME does have a current yuan futures product that is cash-settled, this further product offering shows that the firm is ambitious, looking for any investment opportunity to generate corporate profits—exactly what an investor wants from a company.

CME also announced another Chinese-based product: the Chinese Steel Rebar HRB400 (Mysteel) Swap Futures. While China is slowing, it is apparent that the nation will be a strong force in the global economy for many decades. I applaud CME for being proactive in providing firms with the ability to hedge their risk with these new products. This investment opportunity appears to be quite logical and should help the firm drive corporate profits.

CME Group Chart

Chart courtesy of www.StockCharts.com

The stock has had a strong run, with the Relative Strength Index (RSI) indicating that it needs a pause. However, the stock is above a key support level. If the stock were to begin moving up, I would think many traders would be using the latest support level as their benchmark stop area.

It appears that there are many who see the positives for CME in terms of an investment opportunity. It will take some time for these new products to gain enough volume to generate higher corporate profits, but the main take-away point is that CME is moving in the right direction.

One possible negative impact is that, through possible higher levels of margin requirements, less trading volume will be conducted. We won’t know the full impact for some time, but the key fact to note is that the regulatory environment will have an impact on the financial industry; one needs to be cognizant of that fact and look for any investment opportunity that presents itself.

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