- An overview of the current short attack on the Canadian banks.
- Why the current and potential upcoming short attack is overblown.
- A short-term strategy for profiteering off of the swings.
In the past months, a number of foul macroeconomic items have taken a toll on Canadian banks which has created a perfect storm for short sellers. The underlying fundamental issues associated to the Canadian economy include an overall slowdown in the Canadian economy, a devastating drop in oil prices, the plunging Canadian dollar, and the possibility of a housing implosion. It is in my opinion that none of these are significant direct threats for the large 6 Canadian banks which include: Canadian Imperial Bank of Commerce (NYSE:CM), Toronto-Dominion Bank of Canada (NYSE:TD), Bank of Nova Scotia (NYSE:BNS), Bank of Montreal (NYSE:BMO), Royal Bank of Canada (NYSE:RY) and National Bank of Canada (OTCPK:NTIOF). Secondary Canadian banks focused on commercial lending include Canadian Western Bank and Laurentian Bank of Canada (OTCPK:LRCDF).
First, the Canadian banks have been heavily tied to oil prices which have obviously plunged in recent months. Sure, lower oil prices will not be good for western Canada but I fail to see the correlation between the Canadian banks and oil prices. Further, the Canadian banks are highly unlikely to finance junior oil and gas plays beyond smaller credit lines which would collectively amount to nothing, considering the debt books that the banks carry. In Canada, junior oil and gas plays are financing through public vehicles on the Toronto Stock Exchange. A review of the Toronto Stock Exchange and the Toronto Venture Exchange will show that a vast number of public companies are financed through bonds and share issuances. At what point did the chartered banks start financing the oil and gas sector? Do investors actually believe that property owners will suddenly lose their properties and that it will dramatically impact the balance sheets of the Canadian banks? Have investors lost sight into how financially stable the Canadian banks are? It is so obvious that there are few correlations between the two sectors. I simply do not see the economic ramifications of a temporary pullback in crude prices, as it is highly unlikely that crude prices will remain depressed for an extended period of time.