Schwab's monthly activity report issued this morning has, despite its gentle insinuations of future lay-offs, caused a ruckus in the financial services world. While Schwab's predicament as a firm is independently newsworthy and of significant import to the mutual fund industry, the firm has also delivered a broader message: things aren't getting better any time soon.

"We've been very methodical and careful in making sure that we're not responding to a short-term fluctuation in the market," said Glen Mathison, a Schwab spokesperson. "Even now, we're trying to be very careful about how we approach this, because we want to make sure we're not taking actions that hamper our ability to adapt when business picks up."

Schwab has been holding its finger in the air and has determined that the current market environment is not a gust but storm. Said Mathison, "It feels like more than a moment in time."

While the firm avoids publically airing dire economic predictions, certain facts about Schwab's belt-tightening don't necessarily add up. Trading is down across the board (total client daily average trades were down 31 percent since last February and 13 percent since last month; daily average OneSource trades were down 27 percent from last February and seven percent from last month), but Mathison saw potential for future upshift in funds as more people recognize the importance of asset allocation and diversification.

"That's genrally going to lead people to a greater flow into mutual funds, index funds, and other diversified investments like that, rather than individual equities," he said.

Furthermore, Mathison said that Schwab's balance sheets have not yet turned red. "Our company has strong fundamental financials," he asserted. "We're making money, we have very strong cash flow. Everything is fine; we're just not seeing customers trade as much."

The firm has the objective of delivering performance to its shareholders, with the difficult duty of increasing revenue in the face of a down cycle in a cyclical business. Mathison denied that this has factored into Schwab's recent actions.

"For many years, we've made it our long-term objective to earn a certain level of revenue increase, a certain level of profit margin," he said. "We really are focused on the long-term, we have long-term objectives, and we've delivered on those."

A firm with a positive but declining balance sheet that has already instituted a flurry of cost-cutting measures seems an unlikely candidate to break a decades-long trend of avoiding lay-offs. But Schwab is looking at doing just that.

In its report, Schwab mentions that is has "reduced full-time equivalent employees by over 850 during the last two months." Furthermore, lay-offs or other staff reduction measures will come but have not yet been determined. At present, Schwab is assessing the areas that are the most padded with fat and has shears at the ready.

"Based on the level of trading, there are a variety of different areas that we can look at that may have more capacity than we need," said Glen Mathison, a Schwab spokesperson. "There may be other areas that are growing. That's being done very much on an enterprise-by-enterprise level."

Schwab has also announced that spending on advertising and new projects will drop to "levels comparable to last year." Mathison was unable to specify advertising, products, or services targeted in the cut-backs.

So, what does this all mean?

Schwab's ultimate strategy is still unclear. Staffing cuts are soon to come, although in what form, and where, can only be guessed at. OneSource fees are safe for now. Before boosting revenues, Schwab is focusing on keeping a tight rein on expenses.

"We're growing well and we're in the midst of a market environment that hasn't been seen in over a decade, so we just have to adjust to that environment," warned Mathison. "These periods of time are difficult when you're in them, but we have remarkable experience getting through them."

If Schwab is the canary in the coalmine, pay attention when our feathered friend starts gasping for breath. Unlike the proverbial canary, however, this one has demonstrated a knack for knowing when to put on a gas mask. 

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