Rational Advisor

Thanks to the US’s sub-prime and credit issues, we are feeling the chill in Canadian Banks.

As a whole Canadian Banks make up a significant part of most mutual fund holdings and the index.

The Canadian Banks are a lot more stronger than their US and International counterparts. Especially since they have a near monopoly in Canada.

Here’s a quick look at some of the bank impacts

Largest Lender

Royal Bank, the nation’s largest lender by assets, Royal Bank is one of five Canadian banks that announced combined writedowns of about C$1.9 billion last month as the value of debt they own fell amid a global credit crunch.

Toronto-Dominion Bank is the only one among the nation’s six biggest banks to have avoided making a writedown during the fiscal fourth quarter.

Canadian Imperial Bank of Commerce expectations are that it may take additional writedowns of about $2 billion on its U.S. subprime investments. The credit rating of bond insurer ACA Capital Holdings Inc., which is the insurer for about a third of CIBC’s $9.9 billion in hedged derivatives contracts tied to U.S. subprime mortgages, was cut by Standard & Poor’s yesterday.

According to the ScotiaMcLeod Analyst “A sustainable rally in Canadian bank stocks in the next few months seems unlikely, Credit issues are here for good few months yet.”

National Bank of Canada, the country’s sixth-biggest bank reported its first quarterly loss in 15 years last month because of a writedown on its asset-backed commercial paper investments.

Now for things to watch out down South that could have an affect on Chilly Canada.

I find it very interesting that these “new” vehicles called Sovereign Trusts are investing in US Financials. All these Sovereign Trusts are basically countries that made a killing based on high commodity prices, wanting to diversify themselves away from commodities. They are aware that commodites can come down, so they pick the investment that offers the next best thing - Financials. Abu Dhabi (Yabba Dabba Doo) did it with Citigroup - go back in History and you will see that the last time Citi was in major trouble was in 1989-91 (see crash stories below), then an Arab prince came in and bought a large stake in them at a price adjusted for splits of around $2 (folks it’s $29 now). So this pessimism and purchases by Sovereigns could be a good sign.

And now you the world’s biggest brokerage firm Merril Lynch receiving a cash infusion of as much as $5 billion from Singapore’s state-owned Temasek Holdings Pte. Tis just after the York-based firm, announced its biggest loss in its 93-year history.

We’ve also had these Sovereigns investing in UBS and Morgan Stanley

what is the commonality of this Sovereign Funds investing - FINANCIALS.

Maybe, as according to Yogi Bear, they are smarter than the average bear!

which leads to

Bear Stearns, the second-biggest underwriter of U.S. mortgage bonds, reported a fourth-quarter loss of $854 million, almost four times wider than analysts estimated.

This four times wider is a key number, we can expect any numbers to be four times worse and factor that into any calculations of valuations.

MBIA, the largest bond insurer, lost more than one-fifth of its value in New York Stock Exchange trading after it said that it insured $8.1 billion of a complex security linked to subprime mortgages, raising the risk that it may default on its debt.

Bond insurers are those guys that cover for Bond issuers if they can’t make the payments. They are the last resort - well actually, the government is. But if they default it is the end of the whole story, and then the government has to step in, ans set up new laws - laws such as “Loan to assets for Reinsurers should be lower” etc. New laws will be put into place and this will close the sub-prime chapter in the markets.

This is the same thing that happens during every US bubble

After the 1929 Crash the government passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.

After the Act a bull market followed

After the S&L crisis in 1989 - led US Congress to act, passing the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) and set up the Resolution Trust Corporation to liquidate assets of failed Savings and Loans; the losses created by the sales were to be amortized over the life of the loan and any losses could also be offset against taxes paid over the preceding ten years.

After the 2000 technology crash - New Rules for Daytraders. Under the new rules that were introduced, investors need at least $25,000 in their account to actively trade the markets. In addition, new restrictions were also placed on the marketing methods daytrading firms are allowed to use; Sarbanes-Oxley Act - CEO and CFO Accountability. Under the new regulations, CEOs and CFOs are required to sign-off on their statements (balance sheets). In addition, fraud prosecution was stepped up, resulting in significantly higher penalties; Accounting Reforms. Reforms include better disclosure of corporate balance sheet information. Items such as stock options and offshore investments are to be disclosed so that investors may better judge if a company is actually profitable;4. Separation between Investment Banking and Brokerage Research. A major reform was introduced to avoid conflicts of interest in the financial services industry. A clear split between the research and investment banking arms of brokerage houses was mandated.

So, as you can see all we are waiting for is for Congress to Act and create a new law to say “don’t do this again…”

when that happens we will see all of this over.

However, when that will happen is tougher - remember this is a US election year - the outgoing party (The Republicans - Yes, I know I made a prediction) wants it to happen on their watch - that way they get the credit. The incoming party (The Democrats) want it on their watch.

So, its a tug of war - but no matter what it will happen. And the after affects will be worth watching

If you look at any of the crashes if you had invested before, during or after you would have been a lot better five years from that point - So, get off your butts and instead of moping about the markets get excited. We can’t predict an exact bottom, but you do know five years from now, you will be grateful you invested somewhere here.

Santa’s about to give you a new Act!

And all of this helps Canadian Financials five years in the future

Hope this helps in seeing clearly through the mud

Rational

Benny and Mark were at the bar chatting about how much their wives
thought of them. Mark said, “My wife, she thinks so much of me that she
won’t let me do any work around the house. It’s great!” Not to be out
done, Benny said, “That’s nothing. My wife simply worships me…”

Confused Mark asked, “She worships you? What makes you say that?”

“Easy. Every night she places a burnt offering before me.”

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