I’m not banking on the banks

Canadian banks look to be near a significant level of overhead resistance. While we still hold some exposure to them in our ValueTrend Income Platform – entirely for their high dividend yields – we have no exposure to the group within our ValueTrend Equity Platform. We can’t see much upside from a technical perspective. Moreover, we’re a bit concerned about Canadian individual household debt – along with a potentially bubble-ish real estate environment. These factors may have a negative impact on future bank profitability.

Below is a chart of the BMO Equal Wt. Bank ETF. You can see that this index ETF is pretty close to its technical topping range – its sitting at $29, with a technical target of $30 – $30.50. Not much upside for the new investor here.

Meanwhile, some of the larger banks out there are actually much closer to their technical targets than the BMO ETF might imply. For example, Royal Bank (RY-T) is within spitting distance of its target.

Keith on BNN Tuesday March 19th at noon

Keith appears regularly on BNN Bloomberg MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management. (Note: Times and Dates may be subject to change)

If you have questions about the technical analysis of stock trends for individual stocks, be sure to phone in with your questions for Keith during the show. Call Toll-Free 1-855-326-6266.

Or email your questions ahead of time (specify they are for Keith) to [email protected]

Some bank fundamentals

Some readers might be interested in the more in-depth research by Larry McDonald in his “BearTraps” research report. Below is his commentary on the Canadian banks. Here is the link to Larry’s company for those interested: https://www.thebeartrapsreport.com/

From BearTraps:

The BoC just can’t be hawkish. Housing is just such a massive part of the economy, multiples of the US in 07. They know they let house price appreciation run too hot from 2013-18 and they now have to attempt a soft landing. Time will tell but it’s not a particularly good backdrop for the banks right now who are trading near all-time high valuations. Even long time bullish bank analysts (who are employed by Canadian Banks) are downgrading the group, unheard of in Canada.

BoC, big shift last week

While the ECB stole the show last week, the BoC statement last week was also quite important. The BoC made a fundamental shift in their policy stance as the data outside of some employment readings has been quite weak. The BoC was quite dovish last week and the shift can be seen as the few bps of implied hikes priced by the market have been removed in favor cuts. Now the market is pricing a better than 50% chance the BoC will cut by year-end. A very big shift, especially from late last year when it appeared the BoC was on a beeline to neutral, which in their mind is between 2.5% and 3.5%. That has obviously changed, and now in a similar position to the Fed, the market has to price a bigger skew towards cuts.

It’s 2007 in Canada and Australia, they are the global epicenters for mortgage credit risk. Australia has the highest mortgage/assets ratio among regionally-grouped global banks. This means mortgages are a significant portion of these bank’s overall business. In Canada, the largest banks are slightly less exposed to the mortgage market, (keep in mind mortgage shops like EQB Equitable Group are not on the list) but are significantly levered. Although, the Canadian Banks have the lowest equity/assets ratio meaning the highest LTV (loan to value). 


USD/CAD spikes to session tops, around mid-1.3300s amid a sharp turnaround in oil prices, housing data. Meanwhile, debt data in Canada out was a nasty miss. Toronto households are some of the most indebted in the country, with the average family owing more than twice the amount they bring in. (It’s 2007 in Canada)

Cdn non-financial sector debt y/y: +$288B
Cdn nominal GDP y/y: +$45B

Canada existing home sales were weak, Canadian 3 year note breaks Fed Effective Rate.

BIS Canada:

The BIS considers 10% to be the “critical threshold” above which a banking crisis could happen in short order. As recently as a few years ago, Canada was well above that threshold, with the credit-to-GDP gap peaking around 16 per cent. For several years, the country ranked as one of the top three or four places most at risk of a debt crisis. But in the latest data, Canada’s gap dropped to 4.7 per cent, and the country has fallen to ninth place among the places most exposed to a debt crisis. Canadian debt levels are returning to their long-term trends.

Canadian households debt to income 174%

Does this look like Canada indebtedness is receding? The big mistake BIS makes is looking at private sector credit rather than household indebtedness. What worries you more, if Enbridge or Canadian National Railway leverage the balance sheet, or if bunch of households in Toronto and Vancouver have debt 174% of their disposable income (in the US this ratio is 99%)?

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