Short the banks?!

RYAN By Guest Blogger Ryan Lewenza

Here we go again! For a number of years now investors have been trying (unsuccessfully) to bet against the Canadian banks by “shorting” them (shorting involves selling shares first with the expectation they will decline in price then buying them back at lower prices). The most recent big player to jump on this trade is US portfolio manager Steve Eisman. Anyone who has seen the movie (or read the great book by Michael Lewis), The Big Short, may recognize this name, as he is famous for calling the US housing market top and made millions by shorting the US banks before the financial crisis. The actor Steve Carell portrayed him in the movie. Well, he’s back at it, this time shorting the Canadian banks, largely based on his concerns around the Canadian housing market. Will he be right again?

The short thesis on our banks is that our 20 year plus housing bubble will inevitably burst, taking the Canadian banks down with it, similar to the US experience during the 2008 financial crisis. I believe this thesis is overly simplistic and misses the mark on a number of fronts.

First, there are a number of differences between US and Canadian mortgages, which I believe make us less vulnerable to a 2008-like US housing crash. In the US most mortgages are “non-recourse”, which means the homeowner can simply walk away from a home that is underwater (outstanding mortgage is higher than the home value), with little additional consequences. In Canada most of our mortgages are recourse loans, which means the lender can go after the homeowner for any shortfall if they default on the mortgage. This could include garnishing future wages, for example. Additionally, most mortgages are insured by the CMHC putting the Federal government, rather than the banks, on the hook for a mortgage default. These two important differences help to reduce risk for our banks.

Second, the Canadian banks are less leveraged to the housing sector and overall Canadian economy than they once were. During the financial crisis our banks were able to take advantage of their relative strength and stability by acquiring large US financial institutions on the cheap. TD Bank, Royal and others made large US acquisitions, which has significantly increased their exposure and revenues to the US markets. Roughly 25% of Canadian bank revenues now come from the US. TD Bank, for example, now has more branches in the US than in Canada!

Third, the banks are trading at attractive valuations making them less vulnerable to significant downside pressure. Currently the Canadian banks are trading at an attractive 10x earnings, which is more than one standard deviation below the long-term average. Shorting Tesla at 60x earnings makes more sense to me than shorting the Canadian banks at 10x earnings.

Canadian Banks Trade at an Attractive 10x Earnings

Source: Bloomberg, Turner Investments

Fourth, current valuations suggest good upside over the next few years. Below is a great chart that overlays 2-year forward returns with bank P/Es. At 10x earnings currently it suggests returns of 20% plus over the next few years based on this historical relationship (Note: the P/Es are inverted to better capture this important relationship).

Attractive Valuations Suggests Good Upside over the Next Few Years

Source: Bloomberg, Turner Investments

Fifth is earnings and I suspect this is where the short sellers believe they are going to make their money. Having worked at one of the big banks for 15 years (the green one), I had first-hand knowledge of their incredible earnings power.

You know how you gripe every month about your banking fees and high credit card charges. You can hit back at them by owning and profiting off them. Speaking about profits, banks make a lot of them. Below I show the total annual bank earnings over the last 25 years. See a trend here? Earnings have grown 13% annually since 1995 and are approaching the $50 billion level in total annual profits. Barring a complete economic meltdown, which we believe is highly unlikely over the next few years, I don’t see this trend ending anytime soon.

Annual Big 6 Bank Earnings

Source: Bloomberg, Turner Investments

Lastly, short sellers need to cover the dividend yield, which is roughly 4% for the Big 6 banks. Add in the margin loan expense in shorting stocks (roughly 5%) and the short seller would need bank stocks to fall 9-10% before they even make a dime!

We’ve written ad nauseam about our concerns over Canadian housing, buy don’t misinterpret these concerns for some deep seated worry around our banks. We don’t foresee a 2008-like US housing crash and, as we’ve laid out in this blog post, we believe the banks remain very strong and should be core holdings for long-term investors. We, of course, get our bank exposure through broad-based ETFs and, in fact, have been adding to beaten up dividend ETFs in client portfolios, which include the banks as top holdings. If my chart above proves correct, we could be looking at decent returns from the banks over the next few years. So Steve Eisman, take that!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

108 comments ↓

#1 Darryl on 02.16.19 at 11:08 am

Early . Give me chance to make coffee Ryan . Got somewhere to go?

#2 Doug in London on 02.16.19 at 11:15 am

I’m not worried about any banks going under, but as I recall saying before should such fears arise and bank stocks go on sale, it will be a good time to scoop up more XFN. I already scooped up some late last year when Boxing Week sales, in an unusual turn of events, actually came before Christmas.

#3 For those about to flop... on 02.16.19 at 11:19 am

Pink Snow falling in Vancouver.

We just saw a heavy loss on a pre-sale condo, these guys who forked out big bucks on a near 30 year old one will be lucky to fair much better.

The details…

1100- 5850 Balsam st, Vancouver.

Paid 3.4 June 2016

Originally asking 3.38

Now Asking 2.99

Assessment 3.38

Even at 3.38 they would have taken a beating on expenses but now 500k could happen in a heartbeat.

These guys are gonna need to chill out and relax.

Can I recommend some balsam…

M44BC

https://www.zolo.ca/vancouver-real-estate/5850-balsam-street/1100

https://www.rew.ca/insights/88762/1100-5850-balsam-street-vancouver-bc

#4 One of the lurkers on 02.16.19 at 11:23 am

Wow! Huge amount of info in this post and much appreciated. Thanks for the clarity on banks vs housing.

#5 For those about to flop... on 02.16.19 at 11:23 am

Pink Snow falling in Burnaby.

These guys that paid top dollar at the detached peak are back on the market trying to restrict the damage after taking a break.

The details…

5988 Walker Ave,Burnaby.

Paid 1.91 April 2016

Originally asking 2.18

Now asking 1.73

Assessment 1.90

So they’ve had it on lower before without any success, could be a 250k hit after expenses.

Might have to sell the car.

Walker could make them a pedestrian…

M44BC

2017-08-01 : $2,188,000
2017-09-11 : $1,998,000
2018-05-18 : $1,680,000

https://www.bcassessment.ca/Property/Info/QTAwMDAzWDExQg==

https://www.zolo.ca/burnaby-real-estate/5988-walker-avenue

https://www.rew.ca/insights/301939/5988-walker-avenue-burnaby-bc

#6 crowdedelevatorfartz on 02.16.19 at 11:34 am

He’s still on the West Coast clock after his visit last week.

#7 Ponzius Pilatus on 02.16.19 at 12:13 pm

The “Eisman” cometh.
As for recourse by the banks.
I was a loan officer during the early 80s.
Some of the underwater home owners just handed in their keys.
We did not waste time to go after them.
No judge would side with the big fat banks, when a poor guy just lost his job and house.

#8 Gold is the Answer on 02.16.19 at 12:33 pm

I’m sympathetic to your arguments Ryan. But when I consider that Canucks are in even worse debt than Americans were in 2008 I am filled with doubt and think that this more than offsets the non-recourse loan difference.

I think in the future when we look back, we will be forced to say that you, too, were just finding a way to repeat the same old bubble fallacy.

“It’s different this time”

#9 Alessio on 02.16.19 at 12:33 pm

Wow! Profit really blasted off after the world bank feds started pumping and printing money into the economy not to mention lowering interest rates drastically. Wonder how profits would really look like had that not happened.

#10 expat on 02.16.19 at 12:56 pm

Lets rile up the Liberals here.

Nothing like a Liberal to not take a joke…..
Since they are right and everyone else needs to know it.

A conservative never gets this entrenched because they know the world is fluid.

Vladimir Putin, Donald Trump, and Justin Trudeau all die and wind up in Hell.

While there, they spy a red phone and ask what the phone is for. The Devil tells them it is for calling back to Earth. Putin calls Russia and talks for 5 minutes. When he was finished the Devil informs him that the cost is a million dollars, so Putin writes him a cheque…

Next Donald Trump calls the U.S. And talks for 30 minutes.When he’s finished the Devil informs him that the cost is 6 million dollars, so Trump writes him a cheque…

Finally Trudeau has his turn and calls Canada for 4 hours. When he’s finished, the Devil informs him that there would be No charge and to feel free to call Canada anytime. Putin and Trump go ballistic and ask the Devil why Trudeau got to call Canada for free. The Devil replied, “Since Justin Trudeau became Prime Minister of Canada, the country has gone to Hell, so it’s a local call!”

#11 expat on 02.16.19 at 12:58 pm

One thing Ryan that most of us would like to know is this. What percentage of mortgages are packaged up as crap bonds that are given AAA ratings.

This was the core of the issue in 08…..

It wrecked many an investor when this toilet paper was sold. No one would buy them – thus many a bagholder was created….

It is rarely dicussed in Canada and few know what potential problem these tranches will be….

#12 Tony on 02.16.19 at 1:09 pm

Shorting virtually anything but gold and silver shares should eventually be an instant double of your money if you can hold out long enough. Barring a complete collapse of the U.S. dollar or helicopter money once the U.S. stock market ponzi collapses the short sellers should in theory almost double their money.

#13 Tony on 02.16.19 at 1:15 pm

Re: #8 Alessio on 02.16.19 at 12:33 pm

Lower interest rates are bad for banks because of the decrease in the spreads. Interest rates in both Canada and America may turn negative in a couple of years.

#14 T2 on 02.16.19 at 1:27 pm

#9 expat – You must have missed the memo in today’s news. Our PM was never a Liberal in the first place, but rather a Neo-Con. He was an actor on stage all this time, and fooled them all into voting for him. Our MSM has him cornered, and the voters are angry for being deceived.

#15 Kenny semotiuk on 02.16.19 at 1:29 pm

DELETED

#16 Where's The Money Greedeau? on 02.16.19 at 1:40 pm

The T2 Liberals are trying to get SNC-Lavalin a Deferred Prosecution Agreement (DPA) so they have a leg to stand on when the other charges in both Montreal’s bridge and hospital scandals go to court.
AFAIC, they’re done, all but the clean up for other firms to vultch what’s left, if there’s anything left after they have no doubt shipped all assets to hiding places across the planet.
Some respectable company(ies) will take over those contracts. Those jobs will still be there. Don’t believe the lies of proven criminals.
If no agreement, there will be a lot of people going to jail when those charges, and convictions if so warranted, wind their way through court.
This is just T2 trying to save his buddies from going to the slammer for a long time.
Which is only right if the charges are proven.
SNC is a bottom feeder that can only get work by bribes since its name is already mud from so many years of proven criminal activity. Quebecers must be tired of getting bent over for the few proven criminals among them.
Where’s the US court system when you need them. BC just convicted a couple child traffickers and pimps to less than 6 years (out in less than 2 years), after selling girls as young as 15, resorting to pointing guns at their heads to do their bidding!.

I know we BCers sure have a hard time sitting down when you look at the pain that’s coming down the pipe for imo, criminal behavior by previous BC Liberals (socreds).

#17 BillyBob on 02.16.19 at 1:46 pm

Eisman did not place his US shorts on a whim but on the basis of his own thorough analysis of the data.

As much as I appreciate the earnest rebuttal, why would one believe that he has not done the same with the Canadian banking/RE landscape?

At the very least I would be a little more hesitant to so casually dismiss someone who has the credibility of actually making a fortune off successful short-selling.

#18 AK on 02.16.19 at 1:47 pm

“Will he be right again?”
=====================================
No, he won’t be right. Main reason will be that the Liberal Party and their status will be turfed on October 21, 2019.

Canada will be a great place to invest going forward, and that was confirmed to a degree with Warren Buffet’s purchase of Suncor the other day.

#19 David Pylyp on 02.16.19 at 1:54 pm

#10 expat

Mortgage backed securities are grouped and sold as a block of CMHC insured investments. Most would have similar rate and maturity.

US loans had Ninja and balloon payment resets that just don’t happen in Canada (ninja no income no job loans)

Canada sues you for power of sale, for the entire mortgage balance , pays taxes, maintenance lawyers and all fees plus interest arrears then principal.

US owner can be upside down on the one house and walk away.

That’s how Canada is full recourse

#20 The Banks Look Good on 02.16.19 at 2:00 pm

Lots of positive news today, and if it holds they could move substantially higher during the coming months and beyond. Scheer just made a live speech, and has completely changed his presentation pattern making him look like a leader. Housefather the Chairman of the meeting the other day has an amazing wiki, and its no wonder why he has the respect of all political parties. He recently had a live interview. He wants Jody to come before his committee, and be allowed to speak because Canadians deserve what she has to say. He is a sitting member of the Liberal Party too.

#21 DON on 02.16.19 at 2:13 pm

#7 Gold is the Answer on 02.16.19 at 12:33 pm

I’m sympathetic to your arguments Ryan. But when I consider that Canucks are in even worse debt than Americans were in 2008 I am filled with doubt and think that this more than offsets the non-recourse loan difference.

*********

Hi Ryan,

I agree with all your points.

But shouldn’t the analysis also take into account the relative health of the seemingly stressed consumer from a domestic and international perspective. Banks rely on customers.

When I first heard the Americans were shorting our Banks I didn’t know what to think. Maybe they need to declare a capital loss for tax reasons. Now that Steve Eisman is in the game. Hmmm the guy has an eye for bankruptcies and interviews the front line consumer.

Could it become necessary or even acceptable for those with large debt loads to declare bankruptcy (especially those with more time to recoup). It may even become socially acceptable to an extent and can be rationalized as being the fault of the ‘Extreme’ Housing bubble and rising costs of living?

Recent observation:

A young couple 20s recently made it known that they had put in an offer on a house ‘older friend of the family’

Hard workers, smart people. Just lacking experience and knowledge at this point in time. I wish the best for them and when I caught wind of this pending purchase (offer in) it was too late. I found out the price tag was $750K. Average neighbourhood older house most likely at least better quality than today’s press board houses.
They are just starting out no trades or uni but entrepreneurs with spirit. I want to see them succeed. Did I mention that the ‘friend’ of the family gave them a deal at $750K for what used to be the boonies. I’m not even sure how they will make the payments unless parents gave a big chunk of cash. Not even sure how the banks would lend that much. Parents must have anti up more. The cost of living is not going down.

Yikes!

#22 TraderX on 02.16.19 at 2:14 pm

Great analysis Ryan. And let me add, to my knowledge there isn’t synthetic “mortgages” being created on our Canadian housing market, like the States had which certainly helped fuel the decline.

#23 @careeraftschool on 02.16.19 at 2:16 pm

It’s all fun and games until a Stripper buys 5 homes and starts giving clients real estate investment advice. I hate HGTV, especially the Property Brothers.

#24 expat on 02.16.19 at 2:17 pm

#18 thanks

My question on CMHC backed tranches then would be this.

If 20% of the population walks away from their property and they get sued then declare bankruptcy – what of the bonds since CMHC would be on the hook to cover the balance of the mortgage since the bankrupt will not have to pay.

CMHC only has so much capital….

Somewhere somehow it is my belief, and tell me I’m wrong, not everyone will made whole…

Oh and by the way, mortgage brokers regularly write crap loans with private money when the client doesn’t qualify elsewhere.

I know several that several brokers are using private capital as mortgages for investment purposes.

It is my intuition that says that somewhere somehow there will be abreak in the system.

#25 TraderX on 02.16.19 at 2:19 pm

PS. Please remind Eisman that “Past performance is not indicative of future results”.

#26 PGer on 02.16.19 at 2:22 pm

The Canadian banks do look good – for now. But I am still going to sell about half my holdings over this year and hold more cash. In fact, I’ll likely go to half posisitons in many of my holdings.

I think in the next year or two we’re likely to be in, or going into, a recession and can buy back at much reduced prices (like I did in 2008 when absolutely no one liked the Cdn banks). I don’t generally try to time the markets, but sometimes being a little more cautious pays off.

#27 Penny Henny on 02.16.19 at 2:23 pm

#102 Shawn Allen on 02.16.19 at 10:47 am
No comparison to the cost in Ontario where many heat with electricity city. Could be roughly 10 times higher at times. What is natural gas selling for in Ontario?

//////////////////////

13.0656 cents / cubic metre

my last bill
customer charge – $20.00
delivery to me – $52.72
transportation to enbridge- $23.11
gas supply charge – $66.29
cost adjustment – $8.68
hst- $22.20
total- $193.00

#28 Penny Henny on 02.16.19 at 2:40 pm

Ryan you make some excellent points on why shorting the banks would appear to be a bad bet, a view that I share.
But you have assume this Eisman guy has already heard all these same arguments and still he is short.
So if you had to try and think like Eisman why would he still make that bet?

#29 akashic record on 02.16.19 at 2:40 pm

All of this information against shorting Canadian banks is fully available to Steve Eisman and it is hard to imagine that he did not carefully considered it before making his bet.

What’s most puzzling is, how the same information in the head of very intelligent, experienced professionals in the same industry, creates the exact opposite conclusion, so strongly, that it becomes conviction, solid enough to bet money on it.

Observing the bank short/long debate feels like watching the pictures of people on this web site, linked below.

Every time you refresh the browser, a new face comes up. Except none of them is a photograph of a real person, each of them is AI generated image, created on the fly. You just wouldn’t be able to tell, if your life depended on it.

https://thispersondoesnotexist.com/

Is money any different?

Is this why the same information generates different conclusion, just as the same algo renders a different face?

#30 AK on 02.16.19 at 2:40 pm

#12 Tony on 02.16.19 at 1:15 pm
” Interest rates in both Canada and America may turn negative in a couple of years.”
====================================
LOL… No, they will not.

#31 Ryan Lewenza on 02.16.19 at 2:47 pm

BillyBob “Eisman did not place his US shorts on a whim but on the basis of his own thorough analysis of the data.”

I’m sure Mr Eisman based his call on thorough research. He’s very smart and well respected. I just don’t agree with his call and I presented the bull case on the banks. We’ll see in a year or two who’s correct. – Ryan L

#32 DON on 02.16.19 at 3:07 pm

Could be Fake News but if true. Yikes?

“Soaring car-loan debt in the US is a disturbing sign for the economy, showing that the middle class is in “serious economic trouble” as people sacrifice their basic necessities, Professor of Economics Richard Wolff believes…

“The folks at the top have been doing very, very well; but the mass of people – even if they get a job finally – [they] get a job with lower income, less security, fewer benefits and you’re seeing the results,” he said.

“If it were just the unpaid car loans, it would be one thing, but we’re seeing it everywhere,” Wolff told host Bart Chilton. He added that most people “are in very serious economic trouble and the slightest downturn is going to take us over the edge.”

I guess time will time.

#33 Long-Time Lurker on 02.16.19 at 3:12 pm

>I’m filling in for Jess, today.

https://www.bbc.com/news/science-environment-47267081

AAAS: Machine learning ‘causing science crisis’
By Pallab Ghosh
Science correspondent, BBC News, Washington

Machine-learning techniques used by thousands of scientists to analyse data are producing results that are misleading and often completely wrong.

Dr Genevera Allen from Rice University in Houston said that the increased use of such systems was contributing to a “crisis in science”.

She warned scientists that if they didn’t improve their techniques they would be wasting both time and money. Her research was presented at the American Association for the Advancement of Science in Washington.

A growing amount of scientific research involves using machine learning software to analyse data that has already been collected. This happens across many subject areas ranging from biomedical research to astronomy. The data sets are very large and expensive.

‘Reproducibility crisis’
But, according to Dr Allen, the answers they come up with are likely to be inaccurate or wrong because the software is identifying patterns that exist only in that data set and not the real world.

“Often these studies are not found out to be inaccurate until there’s another real big dataset that someone applies these techniques to and says ‘oh my goodness, the results of these two studies don’t overlap‘,” she said.

“There is general recognition of a reproducibility crisis in science right now. I would venture to argue that a huge part of that does come from the use of machine learning techniques in science.”

The “reproducibility crisis” in science refers to the alarming number of research results that are not repeated when another group of scientists tries the same experiment. It means that the initial results were wrong. One analysis suggested that up to 85% of all biomedical research carried out in the world is wasted effort….

#34 Long-Time Lurker on 02.16.19 at 3:13 pm

https://www.bloomberg.com/graphics/2019-venezuela-key-events/

The Rise and Fall of Chavismo in Venezuela
By Peter Millard, Cindy Hoffman, Marisa Gertz and Jeremy C.F. Lin
February 16, 2019

Venezuela’s economic fortunes have been tethered to the price of oil for most of the country’s modern history, a dependency that only worsened after a charismatic former paratrooper named Hugo Chavez took office in 1999. Chavez, who came to power in the wake of an oil crash that decimated Venezuela’s traditional parties, ramped up political patronage to a degree the country had never seen when crude prices suddenly began to soar again. The windfall temporarily masked the economic devastation caused by his version of socialism —a toxic mix of expropriations, subsidies, and currency and price controls.

By Chavez’s final years, Venezuela’s economy was starting to buckle, even with prices north of $100 a barrel, and then they crashed. His chosen successor, Nicolas Maduro, replaced patronage with repression and persecution. Maduro’s iron-fisted rule has allowed him to remain in charge of what’s become a failed state. His days may be numbered….

#35 Tim on 02.16.19 at 3:15 pm

Thanks for putting the data together, Ryan. Those are illuminating charts.

#36 Long-Time Lurker on 02.16.19 at 3:17 pm

>This might be too long but I did try to keep it concise. Scroll past if it bothers you.

https://dailyreckoning.com/youve-been-bamboozled/

Brian Maher
BY BRIAN MAHER
POSTED
FEBRUARY 8, 2019
You’ve Been Bamboozled

“From time immemorial proverbial wisdom has taught the virtues of saving,” wrote Henry Hazlitt, “and warned against the consequences of prodigality and waste.”

Hazlitt authored his masterly primer on economics, Economics in One Lesson, in 1946. Yet he etched it in the rock of ages with its insights timeless.

“But there have always been squanderers, and there have apparently always been theorists to rationalize their squandering.”

Today these theorists invade us, batter us and torture us ceaselessly… like a thousand alarm clocks joined in hellacious chorus.

Yesterday we alerted you to the latest assault upon savings — negative interest rates.

During economic stress, negative interest rates would crack open the piggy bank… and spill its contents into the productive economy…

…But there can be no investment without savings, say the old economists… as there can be no bread without grain.

Explained the late economist Murray Rothbard:

Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings… In order to invest resources in the future, he must first restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.

The more accumulated savings in the economy… the more potential investment.

…We must therefore conclude:

Negative interest rates and the war against savings are essentially wars upon the future.

Debunking the “Paradox of Thrift”…

…Returning to Hazlitt:

The artificial reduction of interest rates discourages normal thrift, saving and investment. It reduces the accumulation of capital. It slows down that increase in productivity, that “economic growth” that “progressives” profess to be so eager to promote.

…The “paradox of thrift,” they call it.

Explains arch-Keynesian Dr. Paul Krugman:

The story behind the paradox of thrift goes like this. Suppose a large group of people decides to save more. You might think that this would necessarily mean a rise in national savings. But if falling consumption causes the economy to fall into a recession, incomes will fall, and so will savings…

The government must therefore race in to supply the demand that individual savers will not.

Its role must be “the spender of last resort.”

But there is no paradox, say the old economists, with their starched collars, pursed lips… and straight laces.

What applies to the individual applies to society at large, they insist.

When society saves in lean times, it is not eliminating consumption — merely delaying it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Today’s savings are therefore tomorrow’s spending, tomorrow’s consumption…

#37 not 1st on 02.16.19 at 3:30 pm

Most US banks operate in the US as well so that’s a pretty big buffer against a housing crash here. Canadian banks make money on endless fees not signing up people who are not credit worthy although many could be if the T2 rot continues.

#38 Figmund Sreud on 02.16.19 at 3:47 pm

Ah, … “The Banksters!”, … on a quarterly parade once again!

The Big-Six are scheduled to report first quarter of 2019 results starting Feb. 22 (RY), … ending Feb. 28 (TD). Will they disappoint? Popcorn time, …

Anyway, … earnings growth – year over year – for last year – calculates to about 4%, on average (TD and RY are showing 6%, CM -5%). Will this average be matched, or exceeded in 2019? I suspect not, … the street geniuses on tee-vee, too, keep mouthing away these days that, “… the single most important driver of the decline in earnings growth is capital markets revenue” – for Canadian banksters … and they are predicting a decline as well.

Still, I predict that all six will continue to raise dividends at their regular pace, however.

Cheers!

F.S. – Calgary, Alberta.

Will they turnout to be right? I have no idea.

#39 JSS on 02.16.19 at 3:54 pm

I love Canadian banks and can’t get enough of them.
I’ve always been overweight Canadian banks for over a decade.

Starting next week Friday, banks will begin announcing dividend increases starting with RBC.

If you don’t want separate bank stocks, there’s an ETF called “ZEB”. It works well too.

Rub tummy!

#40 -=jwk=- on 02.16.19 at 4:07 pm

Mortgage backed securities are grouped and sold as a block of CMHC insured investments. Most would have similar rate and maturity.

CDO’s under a different name


US loans had Ninja and balloon payment resets that just don’t happen in Canada (ninja no income no job loans)

wrong on both counts, but especially on the rate reset. All Canadian mortgges are rate reset!! Americans got into trouble when they gave up their ‘locked on for 25 years’ mortgages for an insane ‘we only guarantee the rate for 5 years, after that you get the new market rate’. That mortgage, the insane 5 year rate reset is by far the most popular mortgage in Canada…


Canada sues you for power of sale, for the entire mortgage balance , pays taxes, maintenance lawyers and all fees plus interest arrears then principal.

US owner can be upside down on the one house and walk away.

Wrong again, more of the US population is under recourse than non. But as far as the bank is concerned, its the defaults that matter. And the default rates between recourse and non-recourse states were the same. So, totally irrevelvant. The bank either gets nothing but a house no one wants, or they get to launch 1000’s of lawsuits to try and recover something.

That’s how Canada is full recourse.

Same as America, pretty much. The only difference is that home loans don’t make such a huge part of the banks portfolio’s. the ones that failed bet big on mortgages and were overleveraged.

My conclusion: Canada and America will experience identical, painful downturns but the Canadian banks are better positioned to survive, not thrive. I would short them if I could as well.

#41 The Fish Always rots From The Head Down on 02.16.19 at 4:14 pm

Watch the Globalists Run… Run Globalists Run….

#42 mike from mtl on 02.16.19 at 4:27 pm

#11 expat on 02.16.19 at 12:58 pm
One thing Ryan that most of us would like to know is this. What percentage of mortgages are packaged up as crap bonds that are given AAA ratings.
////////////////////////////////////////////////////////////////

Have a look at some bond ETFs example VSB, they contain some HCG toxic waste. Also beware of Oaken, they’re associated with HCG.

#43 For those about to flop... on 02.16.19 at 4:29 pm

Recent sale report.

This one is not probably the most important information I have ever traded but I took a pair of listings and followed them just to see what happened in that particular situation.

What I did is follow two Vancouver Specials bordering both sides of a East Van to see if much premium or discount was being paid or to be had.

I think it pretty much ended up a wash, but I will pass the details on, and as always you can decide for yourself.

Stage one was this one on Main st that sold on Feb 7th.

https://www.zolo.ca/vancouver-real-estate/5945-main-street

They had it on for 990k and a couple of people wrote me about it but it went for 1.3 in the end.

Assessment was 1.39

Well, now a week later this one on Boundary Road just sold.

Had a similar outcome.

Was on for 1.09 but went for 1.17.

https://www.zolo.ca/burnaby-real-estate/4250-boundary-road

So both on busy streets on opposite sides of East Vancouver but because they were in decent condition they both went well over a million.

Have seen a few go for less than a million, mainly earlier ones and ones not maintained to a reasonable standard.

Both of these Vancouver Specials were both roughly 30 years old.

So that gives you some idea what is happening with this ubiquitous style of housing in the city.

I warned you guys this report wasn’t going to be that Special…

M44BC

#44 Victoria Real Estate Update on 02.16.19 at 4:55 pm

# 103 Vampire studies (from yesterday)

Again the following quotes show you (# 52 Vampire) referencing (which infers that you are in agreement with) an earlier comment from # 32 Howard.

# 32 Howard: “In 2000… the market there (in Montreal) would have been severely depressed. So it’s a tripling (of house prices) but it’s a tripling from extremely artificially low levels (in 2000).”

# 52 Vampire: “Also 32 Howard notes the low market there in 2000.”

You’ve repeatedly denied that you referenced (which infers you agreed with) # 32 Howard’s claim that house prices in Montreal were at “extremely artificially low levels (in 2000).”

However, as I’ve shown, this is 100% verifiable. You need to take responsibility for the obvious and own it.

Perhaps you don’t understand that you are left with even less credibility every time you try to worm your way out of owning it.

Do you have any data / verifiable facts from a credible source to substantiate Howard’s claim (that you referenced) that house prices in Montreal were at “extremely artificially low levels (in 2000)”?

So far you’ve failed to produce anything to back your claim. Yet you go on and on about it. It’s comical. And I’m sure this has annoyed Garth.

Overall, here’s your basic premise:
* House prices in Montreal were at “extremely artificially low levels (in 2000)”. However you’ve failed to produce any verifiable data from a reliable source to back this claim.
* You acknowledge that house prices in Montreal have tripled since 2000, but you claim that tripling of house prices was necessary to counter Montreal’s (1990s) price decline that took prices down to “extremely artificially low levels (by 2000). “
* Your basic conclusion: Montreal’s housing market is not overvalued. House prices are where they should be after Montreal’s 1990s price decline that took prices down to “extremely artificially low levels (by 2000).”

It’s also comical that you repeatedly reference Demographia which is low on credibility. Again, have you noticed Garth referencing it? That should tell you something. Not everything you read on the internet is true.

This chart (with data from CMHC) shows that Montreal’s average home price increased 12% from 1990 to 2000. (If several charts show up you’ll find Montreal’s chart in the 4th row)

Note that this chart only shows data until 2013. Prices in Montreal have obviously increased since then.

Montreal’s housing market didn’t go through any appreciable price decline during the 1990s. And house prices in Montreal certainly were not at “extremely artificially low levels (by 2000)” as claimed by # 32 Howard (a claim you referenced which infers you agreed with it).

#45 TRUMP 2020 on 02.16.19 at 5:32 pm

A RISING tide lifts all boats.

And a sinking ship takes everyone onboard down with it.

Steve Eisman is betting on the news….

#46 Shawn allen on 02.16.19 at 5:42 pm

Eisman?

When you are good with a hammer everything looks like a nail.

To some extent Eisman has a solution and goes looking for a problem. Canada may not be a heat place to look but time will tell.

Meanwhile JSS has been documenting his dividend belly rubbing on this blog for I think about four years. Bankish even longer although he has gone quiet.

#47 NoCash on 02.16.19 at 5:53 pm

In the U.S couples filing jointly may deduct interest on up to $750,000 of qualified home loans, down from $1 million in 2017. For married taxpayers filing separate returns, the cap is $375,000; it was previously $500,000. This adds another major difference between Canada and the US.
Yes Canadian banks have a recourse on mortgages and many insured by the government. This will soften the blow of a real estate collapse for banks but I don’t understand how it will reduce the risk of an event happening?
Many real estate projects here in Vancouver are built with fake collateral from China. Do the banks mind? Well, since the new buildings here aren’t going anywhere, I guess there is no need to worry?
My question is what banks have the most exposure to the real estate market? With demand low, overbuilding, and many projects still incomplete, can’t be good for real estate prices.
Too many Canadians are stressed out and maxed out on credit. If the SHTF boom!

#48 Re., Tony on 02.16.19 at 6:39 pm

Shorting the market a sure double ?

Lol . You’re broke bro. The last decade for Au has turned you into a bitter chap . Stay the course to the very end :)

#49 Freddy on 02.16.19 at 6:48 pm

Excellent post Ryan, nothing like backing you opinion with good hard mathematical facts

#50 Remembrancer on 02.16.19 at 6:55 pm

#29 akashic record on 02.16.19 at 2:40 pm
Is this why the same information generates different conclusion, just as the same algo renders a different face?
————————————————————-
Apples and Oranges – if the same inputs result in different outputs then how is the intervening black box wired?

Bazinga! Bank long guy and bank short guy are using different models to analyze the same information and arriving at different conclusions. One wins and eats large and one loses his client’s money, takes the management fees and still eats.

The face generation algo is just math applied over and over again by GPUs that don’t need to eat. Monkeys typing on typewriters level stuff just applied in an organized manner over and over, really fast…

#51 Ryan Lewenza on 02.16.19 at 7:10 pm

NoCash “My question is what banks have the most exposure to the real estate market? With demand low, overbuilding, and many projects still incomplete, can’t be good for real estate prices.”

CIBC has the largest mortgage exposure as a percentage of their loans/assets. – Ryan L

#52 Game Over on 02.16.19 at 7:15 pm

The fact that most mortgages are back stopped by CMHC, I doubt there would be a banking crisis. There might be a government debt crisis though! I think banks would sell off regardless from the same belief, but I think that would be a great time to buy..

I know we are all big on a housing correction but the lower end 905 is on fire. Lower end of the market is selling verryy quickly and some over asking. No signs of a correction here.

Having said that, just got a letter from Rogers saying they are increasing the monthly late interest rate from 2-3%. Quite a big increase. Since I am waiting for the leafs to start and i am having some beers, I checked rogers’ balance sheet and sure enough, account receivables have literally doubled in the last year and have been trending higher for the last few years. Are people having cash flow issues?

#53 P/E on 02.16.19 at 7:20 pm

Good post.

Yet, P/E is a pretty useless comparison:

Corporation A has share price $100, and earnings p share of 1c.

Corporation B has share price $100, and earnings p share of 2c.

A has a P/E of 10,000.
B has a P/E of 5,000.

Yet, both are in almost the exact same financial state, if you assume they have the same revenue: just two corps running break-even.

Not to speak of corps with negative earnings of course. Big revenues and small negative earnings still make for a valuable company.

I would rather use a price to revenue ratio.

#54 VICTORIA TEA PARTY on 02.16.19 at 7:31 pm

OUR BIG BANKS: OUR “OPEC”

ALSO, Canada’s big six banks trade on both the Canadian and US stock markets. They have a bunch of heavy-duty types running them.

RBC has been designated as TBTF.

So Mr. Eisman should please just get stuffed.

Pick on someone your own size, pal, like some small dusty-town regional in Nebraska, Iowa, or somesuch, provided one of our’s hasn’t already plucked it up and stuffed it into a back pocket somewhere to make it even more loot.

The Mideast has its OPECers, we have our banking oligopoly a fusion of private enterprise on a world-class scale along with federal government involvement in everything from banking regulations, CMHC, to the “old” way of doing things, whatever those may be. But they definitely work, don’t they?

I like our banks, especially RBC.

And the bank ETFs are also good.

We’re all banking on that, Mr. E, of Smouldering Shorts Inc.

#55 Asterix1 on 02.16.19 at 7:55 pm

Canadian reporting at its best!

From: Toronto Star
Title: Mortgage stress test will leave home buyers cold
By: Dave Wilkies BILD President & CEO

What a great working relationship these two have! BILD pays Toronto Star handsomely with ad revenue.

And Toronto Star pays BILD to be one of their main sponsors! Lovely..

https://www.bildgta.ca/whoweare/corporatesponsors

#56 JSS on 02.16.19 at 8:28 pm

#40 Shawn Allen

Hello, I’m at comment #40 today.
I love Canadian banks and their dividends.
During good times and bad times, I will forever buy. I am slowly recouping my mortgage interest with every dividend.
DRIP, DRIP, DRIP.

It’s a beautiful thing.

#57 Christopher Mewhort, EA on 02.16.19 at 8:39 pm

#48 NoCash
In the U.S couples filing jointly may deduct interest on up to $750,000 of qualified home loans, down from $1 million in 2017. For married taxpayers filing separate returns, the cap is $375,000; it was previously $500,000.

Sigh. The $500,000/@250,000 limits still apply to loans taken out before Dec 15, 2017 or to refinanced loans for that period. But more importantly the mortgage interest deduction would only benefit the couple if their itemized deductions were more than $24,000. Why pay more tax than necessary?

Christopher Mewhort, EA
808-261-5005

#58 Terry on 02.16.19 at 8:48 pm

Wow! Great analysis Ryan! I’m impressed!

Canadian recourse vs U.S. non-recourse NINJA sub-prime loans I think is the key factor differentiating why the Canadian housing market will NOT bust like the U.S. market did in 08/09. Garth has it correct predicting a slow motion melt in Real Estate prices here taking years.

#59 D C on 02.16.19 at 9:03 pm

@flop: [I warned you guys this report wasn’t going to be that Special…]

Keep up your hobby Flop. 50/50 I scroll past, but you do a good service with your snapshots. :)

#60 tccontrarian on 02.16.19 at 9:14 pm

@29 akashic record on 02.16.19 at 2:40 pm

“All of this information against shorting Canadian banks is fully available to Steve Eisman and it is hard to imagine that he did not carefully considered it before making his bet.

What’s most puzzling is, how the same information in the head of very intelligent, experienced professionals in the same industry, creates the exact opposite conclusion, so strongly, that it becomes conviction, solid enough to bet money on it.”
—–

I guess you could say that it precisely for this reason we even have markets! For every buyer there’s a seller – in everything!

We’ll see who’s right on this. Personally, I don’t view ‘shorting’ as a strategy that always seeks profit – as it’s also a hedging strategy in order to establish larger long positions in other assets. I was reading some interview with a famous shorter (Spanos, I believe) who stated this as his main goal.

TCC

#61 Shawn allen on 02.16.19 at 9:22 pm

U.S. housing crisis bubble cause

That crisis was triggered and may have been caused largely by mortgages given by commision-based brokers giving mortgages to people who could not possibly afford the payments even if there was no decline in their income. No income no documentation loans. Mandated loans to low income neighbourhoods so as-not to discriminate. Those loans immediately went bad and caused the various securitized mortgage investments to go bad. Fear swept the market and a huge crash ensued.

How much of that crisis can actually be traced to a house price bubble?

It’s a cliche to say it is never different. Actually a moment’s reflection would conclude no two bubbles are ever exactly the same.

#62 Deane Beltram on 02.16.19 at 9:39 pm

Ryan,
Of all the investment options out there, this is the best Steve Eisman can do? He must really believe in his thesis. And could he offer 6 counter points to yours? Also, Buffet is long Suncor again. TIME TO BACK-UP THE TRUCK!

#63 Paul on 02.16.19 at 9:39 pm

Non -recourse mortgages? When people walk they are broke blood from a stone doesn’t happen?

#64 bankish on 02.16.19 at 9:55 pm

#487 Shawn Allen
Thanks for remembering me and I am still long Canadian Banks with100% of my portfolio. Dividends of almost $50,000 a year with a growth factor of over 7% annually.
I don’t know why Eiseman chose to short Canadian Banks but the landscape is littered with bodies of those who have tried before.

#65 PastThePeak on 02.16.19 at 9:55 pm

Thanks Ryan as always.

Well, I know I don’t know enough about shorting to comment on that.

I can’t see how any big 5 Cad bank could fail, agreeing with all of Ryan’s information. Doesn’t mean their shares won’t drop in a housing fall though. Heck, their shares were almost 20% lower 6 weeks ago, going down with the general market. A 30% drop from here isn’t anything far fetched. And would be a good buying opportunity.

The average Cad consumer is very stretched. I posted a few days ago a stat about 30% of vehicle trade-ins in Canada have negative equity, with an average of $7k more owed than black book value. Yet another over extended data point.

Hard to see how all of this living on ever more debt doesn’t result in a consumer crisis. Banks will survive no problem though.

#66 Re: Flop on 02.16.19 at 10:25 pm

#3 flop

Do you happen to know what 6460 Ontario st went for?
I am curious to know what they got for it.
It was bought in ’01 for $295k. I think list was 1.8M?

https://www.zolo.ca/vancouver-real-estate/6460-ontario-street

#67 Ponzius Pilatus on 02.16.19 at 10:26 pm

Shortly before every bank failure in history, the bank issued glorious financial statements.
And the suckers just gobbled it up.

#68 Ponzius Pilatus on 02.16.19 at 10:39 pm

Anyone who really wants to know what’s going on should read this:
https://www.news.com.au/finance/work/leaders/donald-trump-wins-little-applause-during-munich-security-conference/news-story/35f7d940cbae36a9e7861c87b3f70571

#69 Vampire studies on 02.16.19 at 10:54 pm

45 VREU We have to remember what constitutes a
bubble, or more generally housing “affordability”. It is not just price. The house price to income ratio is, in my
opinion, a strongly indicative metric. We can certainly
debate exactly what that ratio should be.

Perhaps you have done some of research already but
will you please provide this ratio for Montreal for the last 20 years or longer. Now the areas for both sets of data must be the same (Montreal proper or Greater Montreal etc), and the figures should not be normalized so that an accurate ratio can be obtained for the year
at that point in time. This may prove difficult as income
tables are often normalized so that the wage gains that
appear are “real”. And of course, reference the sources.

Please get back to us when ready. And remember, don’t spend time fixating on me or Howard,
concentrate on gathering the information, and
compiling the data.

If you do not believe that household income should be
considered, simply state your position, and we can put
this all to rest. Thank you.

#70 For those about to flop... on 02.16.19 at 11:02 pm

#68 Re: Flop on 02.16.19 at 10:25 pm
#3 flop

Do you happen to know what 6460 Ontario st went for?
I am curious to know what they got for it.
It was bought in ’01 for $295k. I think list was 1.8M?

https://www.zolo.ca/vancouver-real-estate/6460-ontario-street

////////////////////////////

Here’s what I was able to find out for you.

It went on the market for 1.79 in October 2018

It was then lowered to 1.69 roughly a month later.

The sale was marked on Zealty for 1.58 on January 3rd 2019

Assessment 1.78

For those about to flop…serving Vancouverites since January 2017…

M44BC
M64WI

2018-10-17 : $1,799,000
2018-11-20 : $1,699,000

https://www.zolo.ca/vancouver-real-estate/6460-ontario-street

#71 Fish on 02.16.19 at 11:10 pm

Budget cuts 19,000 public service jobs About a third of cuts to be in National Capital Region CBC News · Posted: Mar 29, 2012 4:15 PM ET | Last Updated: March 29, 2012

https://www.cbc.ca/news/politics/budget-cuts-19-000-public-service-jobs-1.1170727

*******

Ford government aiming to slash size of public service through voluntary departures

Move comes as part of plan to address ‘fiscal challenges,’ says memo obtained by CBC News CBC

News · Posted: Dec 12, 2018 7:26 PM ET | Last Updated: December 12, 2018

https://www.cbc.ca/news/canada/toronto/public-service-voluntary-departures-ontario-1.4943754

#72 NoCash on 02.16.19 at 11:27 pm

# 52 CIBC has the largest mortgage exposure as a percentage of their loans/assets. – Ryan L

Good to know… Thanks!
The Canadian economy will not be the engine it was. The earnings momentum going forward will be linked to the Canadian economy.

#73 Bottoms_Up on 02.16.19 at 11:35 pm

sorry, a comment on The Fraud.

No doubt with the TREB legal loss the boards now have to clean up their act including revising historical data. It is only a matter of time before keen amateurs bring us reliable stats, and what a contrast that will be with the historical fudged data from the boards.

#74 Stan Brooks on 02.17.19 at 5:44 am

This article on the banks is just wishful thinning, politically correct interpretation of reality that significantly deviates from the truth.

1. The ‘stable’ banks were bailed out during the financial crisis of 2008.

https://www.macleans.ca/economy/business/the-real-canadian-bank-bailout/

Denying it is an attempt to manipulate the facts.

2. The banks excessive profits are based on the fact that the risk for their ‘prudent’ loans is backed by the taxpayers through the ‘mortgage insurance program’.

If not for it 80 % of the loans in the last 10 years would have not been underwritten.
Are these subprime? Of course, otherwise they won’t need an ‘insurance’.

3. The banks have historically high price to book value ratio that can surely be cut in half and it won’t surprise anyone.

4. Steve Eisman is not a lightweight prognosticator.

Your believe that his assessment is overly simplistic is just that, a believe (yours).

Non recourse mortgages, risk falling to the taxpayers…
it does not matter as both are broke and have no ability to back that giant debt on the bans’s balance sheets that is the base of their profits.

Will the credit cancer and the moral hazard problem bankrupt the nation? It already is bankrupt.

In the attempt to back banks profits we are left with nothing else in terms of economy.

The bank valuations in USD or Euro are going down, we do not have an economy in order to support such massive credit monsters.

Of course they won’t fail. In attempt to protect their insane profits we are failing as a nation.

And as a ‘thank you’ we are rewarded with 0 % rates on deposits and insane banking fees, including on currency conversion spreads, ridiculous house prices that erode the ability of people to have kids, making them slaves for life, who live to work.

#75 Stan Brooks on 02.17.19 at 6:02 am

#47 Shawn allen on 02.16.19 at 5:42 pm

It is awkward to see a ‘highly competent’ (in his opinion) second grade (at best) financial annalist (self proclaimed) is taking on wall street shorting legend worth 1.5 billions (USD) with a strange and baseless superiority complex.

Who (the 4 letter word goes here) are you in order to criticize him? What is your net worth?
Now unfreeze that brain and think logically. Not emotionally.

Articles as this are just meant to justify the bank profits and redirect the blame somewhere else, now that the damage from the excessive credit boom is done.

The ability of the sheeple and the government to back such insane profits on consistent and continuous bases is non existent.

What would be the bank profits if all ‘insured’ mortgages were not made (as the banks won’t assume the risk for it)?

Probably 25-3- % from current profits, calculate P/E bases on that and come back here with your big mouth.

If you believe that this (credit over-saturation) can go for a little while longer, you are insane.

#76 Stan Brooks on 02.17.19 at 6:03 am

Of course the above was directed at:

#47 Shawn allen on 02.16.19 at 5:42 pm

#77 Stan Brooks on 02.17.19 at 7:06 am

https://ca.news.yahoo.com/trudeau-says-wilson-raybould-asked-172500220.html

That was fun to read.

Remind me here, did T2 refund the money for his billionaire island vacation? Of course not. He lied about it.

Did the french villa guy, daddy’s boy donate the profits from his ethically challenged (no conflict of interest here, sure) problem with failing to transfer his funds to a third party for management to charity? It was around 5-6 millions. Of course not. He lied.

No criminal prosecution for them, of course. They are the elite, no laws apply to them, it was made for the obedient sheeple.

#78 David Driven on 02.17.19 at 7:58 am

TD Bank is now more a US bank than Canadian with more branches in the US than Canada. They report in USD because more that 50% of revenue is in the USA. Go ahead, short TD….. the news is making me money.

#79 Tony on 02.17.19 at 9:09 am

Re: #66 PastThePeak on 02.16.19 at 9:55 pm

1873, 1929, 2019 that’s how.

#80 crowdedelevatorfartz on 02.17.19 at 9:23 am

@#72 Flop
“It went on the market for 1.79 in October 2018
It was then lowered to 1.69 roughly a month later.
The sale was marked on Zealty for 1.58 on January 3rd 2019.
++++++

It never ceases to amaze me that Greaterfools are STILL buying in an obviously falling market………..

Catching a falling knife has nothing on these people.

#81 crowdedelevatorfartz on 02.17.19 at 10:11 am

@#76 Bottoms Up
“It is only a matter of time before keen amateurs bring us reliable stats, and what a contrast that will be with the historical fudged data from the boards.”

+++++

You mean like our resident keener….Flop?

#82 crowdedelevatorfartz on 02.17.19 at 10:35 am

@#42 The fish always rots…..
“run globalists run….”

+++++

Like this globalist?

https://bnn-news.com/estonian-president-runs-in-new-york-city-marathon-193366

#83 Shawn Allen on 02.17.19 at 10:44 am

Condolences to Stan

For whatever trauma and bad treatment and bad luck Stan has been subject to which caused him to be so cynical and rude, I am sorry. What he endured must must have been truly awful.

At 78 Stan ascribes (and then criticizes) a bunch of views to me that I never stated (no quotes used) and includes some personal insults. Sad.

Did I criticize Eisman at 47? Note, I ended with “time will tell”

#84 Shawn on 02.17.19 at 11:02 am

I agree.

The TSX is a screaming buy as are developed global equities.

I think there is a big catch up trade to US equities in the coming years.

Look at the TSX technology index (XIT). New all time highs.

#85 PBrasseur on 02.17.19 at 11:46 am

To put it succinctly, in Canada banks bailout has already occurred and/or is impeded into the system.

The banks will survive but the country is screwed. Can’t short the country but you can certainly invest your money elsewhere…

#86 joblo on 02.17.19 at 12:19 pm

No short Banks Ryan agreed, whatabout SNC?

#87 Steven Rowlandson on 02.17.19 at 12:26 pm

Why not short the world financial and political system by buying gold or silver paid in full and taking delivery?

No cute stuff.

#88 Smithx on 02.17.19 at 12:30 pm

I doubt Eisman is shorting all the banks. More likely just CIBC and Roysl.
I’ve heard the argument that full recourse loans and CMHC insurance are reasons not to short Canadian banks.
The earnings graphs above are predicated on prodigious loan growth. If you superimposed a graph of household indebtedness you would see the correlation between bank earnings and household debt. It wouldn’t take a bank collapse like the US for CIBC to decline 50%. Furthermore CIBC has been loaning to foreign buyers like there is no tomorrow . I doubt those are full recourse. TD are the king of HELOCs which now account for 14% of GDP.

With respect I think there are arguments in favor of shorting the certain big 6 banks. I would not short BMO. But CIBCs residential mortgage exposure is off the charts .
Looks like earnings did decline in 2008. It doesnt take a meltdown for banks to drop 50-80%.

I am personally not short the Canadian banks, but I dont think their price to book or their prospects for earnings growth merit an investment in CIBC or Royal. Maybe BMO. PE is not the only metric. It’s not out of the question for a bank to hit 6 or 7 times earnings. Their loan loss provisions were laughable until recent accounting changes and any uptick in mortgage losses would show up immediately.

Btw CIBC missed earnings in November and laurentian bank (outside the big 6) reported a 13pct reduction in net income. Let’s see what the housing market chill does going forward. I’m certainly very surprised by the bullish stance of the author at this stage of the cycle in Canada.

It’s time to be cautious. The banks aren’t cheap given the prospects going forward

#89 Dissident on 02.17.19 at 12:50 pm

#8 Gold is the Answer on 02.16.19 at 12:33 pm

Yeah, but you’re missing the fact that Canadian banks/products are different from the US banks/products that were faulty and could not sustain the leverage, or were fraudulent.

Sure, Canadians may be indebted like Americans were, but our banks are not managing it with the same flimsy instruments as the US banks were, which facilitated the financial meltdown of ’08.

Maybe I’m wrong, but that seems to be the point.

#90 Fish on 02.17.19 at 12:52 pm

Ontario business bankruptcies up 39 per cent   Numbers show 64 businesses filed for bankruptcy in November

2018, up from 46 in November 2017 Jackie Sharkey · CBC News · Posted: Jan 09, 2019 1:19 PM ET | Last Updated: January 14

https://www.cbc.ca/news/canada/kitchener-waterloo/bankrupt-insolvency-ontario-business-1.4971552

#91 Stan Brooks on 02.17.19 at 1:19 pm

DELETED (excess posts)

#92 Steven Rowlandson on 02.17.19 at 1:20 pm

“Roughly 25% of Canadian bank revenues now come from the US. TD Bank, for example, now has more branches in the US than in Canada!”

I would not be comfortable with such a situation unless the US state and federal governments were making a credible effort to pay down their debt. When was the last time they did so?

#93 Vampire studies on 02.17.19 at 1:33 pm

86 Shawn – stan’s a little gruff but at least he didn’t accuse you of being a realtor!

Woohoo! Sunshine!……oh..wait…..

#94 technical analysis?? on 02.17.19 at 1:41 pm

its irrelevant what you think. only price matters. late 2014- early 2016 most canadian banks lost 40-50% in USD… you have no idea what positions Eisman holds at any given time. he was shorting them back then too.

#95 TurnerNation on 02.17.19 at 1:45 pm

#53 Game Over , Canadian tire bank news :
————–
Globe says Veritas questions Canadian Tire accounting
2019-02-11 08:44 ET – In the News

The Globe and Mail reports in its Monday, Feb. 11, edition that Veritas Investment rates Canadian Tire “sell.” The Globe’s David Milstead writes that Veritas has flagged several earnings-boosting accounting decisions Canadian Tire has made in the last year. The biggest is the implementation of a new accounting standard, IFRS 9, which is typically heard in the context of Canadian bank earnings. The new accounting rule requires lenders to make new estimates of expected losses in their credit portfolios. Canadian Tire said it ***would move its allowance rate for losses in its credit-card portfolio from 2 per cent to a range of 11.5 per cent to 13.5 per cent. By comparison, Veritas notes that Canadian Tire’s write-off rate hit a financial-crisis peak of 7.8 per cent in 2009.***
….
© 2019 Canjex Publishing Ltd. All rights reserved.

#96 TurnerNation on 02.17.19 at 1:49 pm

#74 Fish – no matter. What King Ford does locally will be propped up by the Federal Govt hiring to meet the jobs numbers kwotas? ??

A game of Govt Whack-a-mole with tax payers monies

#97 AK on 02.17.19 at 1:52 pm

“#81 David Driven on 02.17.19 at 7:58 am
TD Bank is now more a US bank than Canadian with more branches in the US than Canada. They report in USD because more that 50% of revenue is in the USA.”
====================================

You are spreading Fake News. TD does not derive more than 50% of their revenues in the USA, nor do they report in US $$.

#98 Ace Goodheart on 02.17.19 at 2:09 pm

Eisman is a one race pony. He won’t win again. CDN banks have however gotten themselves into some hot water in other ways. We are going to see a lot of lawsuits coming out of the fringe market insurance industry that seems to have infiltrated Canada’s banking sector. Mortgage insurance, credit card insurance, contracts pushed on people who had no idea what they were signing.

About 3/4 of people who have credit cards pay monthly balance insurance they have no idea they are paying. Same goes for people who have mortgages. Look at your statements. You will see small amounts of money coming off every month, being paid out to private insurance companies. Some people I have worked with, have had 10 or more of these insurance payments coming off of the same credit card (once one of them gets you, you get put on the frequent flier list and they keep calling you and pitching more insurance, so you end up with a lot of it).

This stuff is toxic and is making our banks look really bad. Most of it is un collectable in the case of job loss or illness due to very rigorous qualification requirements. So it is a waste of money. Yet if you apply for a mortgage or a credit card, you have to actually go through everything you are signing, and individually opt out of all of the “optional” insurance that you are being tricked into paying (I had one person tell me that they were actually told by their banker that if they didn’t accept the “mortgage insurance” policies that were being included in their mortgage loan, they might not qualify for the mortgage – it is actually illegal to do that).

What crashed the US market is something known as the “collateralized debt obligation” “credit default swap”.

This is a cool little financial instrument that lets a person who wants to loan money, but who does not want to be responsible if the money is not paid back, sell that responsibility to someone else.

AIG, “arrogance, ignorance and greed”, bought all of these obligations, and made a ton of money off of them until the bottom fell out. Then the US govt headed by “George the butcher” bailed them out, their executives paid themselves bonuses with the bail out money, and the road was set for “The Donald” to take over US politics with fake “foreigners are attacking us – by sending women and children over the border as refugees” type policies and isolating the USA by pretending their domestic problems are actually international problems (they’re not).

If the USA decides to invade another foreign country that is not attacking them, in order to protect themselves and ensure their “freedom” (Venezuela) then you might see the makings of another US housing bubble (the run up to their weird “foreigners are attacking us and we need to wage a war on terror” thing was based on their relentless need to invade countries that had nothing against them, but whose economies they needed to control).

If they turn isolationalist, then housing bubbles as a whole are finished for the time being (except in India’s Peshawar region, where all bets are off).

Oh, and about winter……….it is still possible to fly down to Cuba, for about $500 for air fare, and first week at the resort, and then live down there for up to six months for about $200.00 per week.

For everyone who is like, I want to buy a condo in Florida, for retirement, think about this. All you can drink, all you can eat, for $200.00 a week. That is less than a month’s rent in Toronto. And Cuba has some of the world’s best doctors and an amazing health care system (old folks take note).

#99 AGuyInVancouver on 02.17.19 at 2:51 pm

#72 For those about to flop… on 02.16.19 at 11:02 pm
#68 Re: Flop on 02.16.19 at 10:25 pm
#3 flop

Do you happen to know what 6460 Ontario st went for?
I am curious to know what they got for it.
It was bought in ’01 for $295k. I think list was 1.8M?

https://www.zolo.ca/vancouver-real-estate/6460-ontario-street

////////////////////////////

Here’s what I was able to find out for you.

It went on the market for 1.79 in October 2018

It was then lowered to 1.69 roughly a month later.

The sale was marked on Zealty for 1.58 on January 3rd 2019..
_ _ _
So from $295k in 2001 to $1.58 mil eighteen years later in 2019. Could someone calculate the average yearly return on that investment?

#100 Where's The Money Greedeau? on 02.17.19 at 2:55 pm

All that is lost in this debate is what about my thoughts on how MY taxpayer money should be spent, instead of a company that will lose jobs whose track record is akin to a mob.
Do I want MY taxpayer money being spent on BRIBES, FRAUD, and CORRUPTION so people like Greedo-Guido Campbell can buy himself a nice pied-a-terre worth millions on the west coast via my pocketbook?
Also, isn’t this all the preface to skirt prosecution in the upcoming trial(s) of corruption-bribery of Montreal’s Jacques Cartier Bridge and MUHC Superhospital, using the long ago past of Libya etc. to say they have changed. It’s obvious they haven’t. And this is in our country, not some far away place that I would never visit. Aren’t we a better country than this. I don’t think we should LOWER ourselves to the corrupto-province that is Quebec so that some may lose their jobs. The 10X+ jobs being lost in Alberta and Ontario proferred barely a peep from T2.
What private company would deal with this company with their history. All they can get are jobs where they can influence peddle.
By having one more cent of MY taxes going to SNC shows I accept these conditions.
I don’t want another single dollar of MY taxpayer dollars going to this crime family, period! Andrew Coyne wrote a great piece in the National Post the other day: https://leaderpost.com/opinion/andrew-coyne-the-frightened-liberal-rabbits-shut-down-investigation-into-snc-lavalin-affair/wcm/e04bd04d-e44b-4285-a09d-68963eed418b
I watched that Justice Committee farce and couldn’t believe the self-important smirking of Chairperson Horsefeather through the whole debate and non-vote.
I was disgusted. Brought me back to the cheshire cat grins of both BC Liberals Campbell and Crusty Clark when they were in power here. I’m so glad they are gone, good luck to the provinces of Ontario and Alberta with their dismantling of their laws and scrutiny.
Another note, we are closing in on the deadline for charges to be laid in the Mount Polley disaster in BC, the biggest in Canada in over 50 years! Will the ruling BC NDP do anything about this or will we see the same white-wash as BC’s criminal predecessors?

#101 Stan Brooks on 02.17.19 at 3:21 pm

DELETED (excess posts)

#102 NoName on 02.17.19 at 3:21 pm

Gold is the Answer

Gold is the NOT an answer it can be sensitized, dude did it in some time in 80s.

https://escholarship.org/content/qt7pk4c5xt/qt7pk4c5xt.pdf

#103 Yanniel on 02.17.19 at 3:43 pm

“the short seller would need bank stocks to fall 9-10% before they even make a dime!”.

Ryan, please, open your fancy Bloomberg terminal and look up RY.TO from Oct-Dec 2018. And that was just a business as usual correction.

#104 'nother guy in Vancouver on 02.17.19 at 3:50 pm

#102 AGuyInVancouver on 02.17.19 at 2:51 pm
“So from $295k in 2001 to $1.58 mil eighteen years later in 2019. Could someone calculate the average yearly return on that investment?”

e^(ln(1.58/.295)/18)-1 = 0.097718

So 9.77 % compounded annually.

#105 MF on 02.17.19 at 3:55 pm

#99 TurnerNation on 02.17.19 at 1:49

Elected officials \= government workers.

A close family member of mine works with the public in the federal public service. Salary is about 55k/year and is contract…like all public service jobs since 1995.

Her motives: helping people, maybe eking out a living at the same time.

For sure her 55k/year is what is bankrupting the government….

And Nice of you to call their livelihood a game of “whack a mole”. Disgusting actually.

MF

#106 TurnerNation on 02.17.19 at 9:48 pm

MF that was a play on this scandal

https://www.cbc.ca/news/canada/toronto/mp-adam-vaughan-tweet-whack-doug-ford-1.5003920

#107 RW_ZM on 02.18.19 at 6:45 am

Ten years ago, you came to Garth’s blog in a tizzy after reading Realtors say that housing prices would never go down because of things like non-recourse mortgages and other stuff.

Today, you come to Garth’s blog to read a guest writer reiterating the Realtor’s points. Also house prices are up about 250%.

#108 Matt on 02.18.19 at 12:44 pm

While mortgages are full recourse loans in practice they aren’t. Once the house is disposed of it is no longer an asset and the amount owed can be included in bankruptcy.

Scott Terrio over at Hoyes, Michalos has written about this
“Therefore, you can essentially walk away from your home in Canada, no matter the amount of the shortfall, if you file a bankruptcy or a proposal with a Licensed Insolvency Trustee. The estimated shortfall gets included as a normal unsecured debt for which the lender files a proof of claim, and it is discharged. No other recourse is available in the courts to the lender.

In my experience, this is a very little-known fact, even among those who are quite financially sophisticated.”

https://www.macleans.ca/economy/realestateeconomy/heres-how-canadians-could-walk-away-from-their-homes-if-house-prices-fall/