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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Monday, January 12, 2015

Shorting Canadian Banks

The financial writer and strategist Jack Ablin once provided a report to the analysts at the Canadian bank where I worked to talk about what really drives Canadian bank stocks, an important metric given the valence of stock prices to compensation.

He'd tested a variety of indicators and found that the USD / CAD exchange rate was the strongest indicator of earnings and stock price performance.

I include below a graph showing the stock prices for the three largest Canadian Banks - BMO, TD and RBC - against the USD/CAD exchange. The graph begins in mid-1996, the first date where I could find historical prices on all three stocks. Exchange rate data comes via the FRB. Stock prices are from Yahoo! and are adjusted for divs and splits.


All three companies have increased their exposures to US customers over the last 10 years, which would decrease some of the volatility seen over previous exchange rate cycles. Also, all the banks report declining direct exposure to commodities and minerals.

But Mining, Quarrying, and Oil and Gas Extraction is about 8% of Canadian GDP. Construction is another 7%, and energy related work drives an export economy's construction load.

Consider the indirect lending related to these two businesses in the forms of mortgages, car loans, credit cards to employees and executives of the companies and it doesn't take a great deal of imagination to anticipate a profitable trade shorting these stocks.

1 comment:

  1. http://www.bankofcanada.ca/2015/01/drilling-down-understanding-oil-prices/

    The positive effect on the world economy and the resulting stronger growth would also be positive for Canada. A buoyant global economy would increase Canada’s non-energy exports, boost confidence and lead to improved business investment.

    However, these gains will be more than reversed over time as lower incomes in the oil patch and along the supply chain spill over to the rest of the economy. The decline in Canada’s terms of trade will also reduce the country’s wealth.

    The lower prices, if they are expected to persist, will significantly discourage investment and exploration in the oil sector. As I mentioned earlier, we are already seeing signs of this.

    Lower oil prices are also typically accompanied by a weaker Canadian dollar, and this time is no exception. The dollar’s depreciation by over 10 per cent against the U.S. dollar in the past six months will help cushion the economy from the impact of lower oil prices.

    Despite the mitigating factors I enumerated, lower oil prices are likely, on the whole, to be bad for Canada. Estimating the magnitude of that overall impact requires carefully analyzing the interplay between the various effects as they work through the economy. That is what we are doing as we prepare next week’s forecast.

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