Dennis Gartman: Next Great Trade Is Canadian Banks

Dennis Gartman says the next great trade is to own Canadian banks stocks. The author of the popular Gartman Letter said this strategy should be coupled with being short of U.S. banks.

Mr. Gartman says he was looking at charts over the weekend and something stuck his interest: “the weakness of Canada’s bank shares even as those banks are not suffering the same egregious dilemmas that their American counter parts are suffering.”

He noted that Canada’s Big Six banks (Royal, TD, CIBC, BMO, Scotia and National) have nowhere near the levels of toxic waste on their balance sheets, nor shall they. Nonetheless, as U.S. banks have sold off, Canadian banks have followed.

“This is illogical, and in most instances this is nonsense,” Mr. Gartman added.

Comments

[Chezfrederick:]

Thanks for your comment on Canadian Banks. I have studied these for a long time, and cannot believe how cheap their stocks have become in light of the strength of their balance sheet and profitability.

I have imputed the dropping prices to the market's herd mentality and fear which wallops everthing equally without any rationale. I have started doubling up on my positions in RY, and TD with significant drops in the market. These are very profitable and solid organizations which I estimate will be announcing CAD$900 to 1.0 billion profit for the quarter in the coming week and reconfirm their divdends yielding +/- 7.5% with an unlikely prospect for a cut. Not bad, when everything else around is burning.

The only worry I have, is that the bank executives themselves have been silent in not defending thei value of their stock at a time when shareholders need some reassurance now more than ever. Let's see what excuses they will give at their upcoming analyst conference calls and annual meeting.

Any other pockets of wisdom in these awful times??? Greatly apreciated and thanks.

Feb 24 06:23 AM

[Marcap:]

"He noted that Canada’s Big Six banks (Royal, TD, CIBC, BMO, Scotia and National) have nowhere near the levels of toxic waste on their balance sheets, nor shall they."

I would not be so sure about that. From what I can tell, some Canadian banks are just a guilty as their US counterparts when it come to inaccurate Balance Sheet reporting.

Here are some examples:

TD - $15.8B in Goodwill and Other Intangibles

Royal Bank - $9.1B in Goodwill and Other Intangibles

CIBC - $2.1B in Goodwill and Other Intangibles

Scotiabank - $2.1B in Goodwill and Other Intangibles

BMO - $1.5B in Goodwill and Other Intangibles

Now while this total Balance Sheet fluff amounts to just over $30.6B, considering that Canada has only approximately 11% of the population of the USA (33 million vs 301 million), this $30.6B would be the equivalent of $278.2B in the USA, if looked at from a per capital basis.

As for actual toxic assets, such as the realization of bad mortgages, loans, credit card debts, and so on, I think that Canada does lag behind the USA somewhat in that respect. Considering that many companies in Canada do have US Parents, it sometimes takes a while before company closures and downsizing in the USA have an impact on their Canadian counterparts, resulting in layoffs, etc. In short, what happens in the US more often than not, does eventually trickle down into Canada. Albeit Canada has far more Natural resources than does the USA, but natural resources alone do not sustain growth...only manufacturing does. But unfortunately both Countries lack considerably in that area.

Feb 24 07:11 AM

[SJMDESIGN LTD:]

I think Dennis Gartman is dead right about canadian bank.
My fav are TDand RY.
When smoke has cleared theses darlings will double or triple in short time.
In the mean time keep collecting the huge divident and buy back share at these over sold position.
Enjoy the party later take the pain now.

Feb 24 08:59 AM

[GoldMoney:]

Canada is just lagging. There is a massive housing bubble in Western Canada that won't really start to pop until after the Vancouver Olympics. People there are just as convinced that real estate can only go up. That being said, Canadian banks are in much better shape than US banks. I'd just wait until I saw a definite trend in the stock price. It might cost me a little upside, but the downside protection is worth the cost.

Feb 24 11:08 AM

[forest:]

The P/B and P/E ratios on all these Canadian banks are MUCH higher than their US counterparts. They have declined, yes, but the valuation gap is not to the extent that Gartman is leading you to believe.

Most of the P/B ratios here are over 1X while the same ratios at US banks are <0.5X. None of these Canadian banks look like screaming buys to me.

Feb 24 01:15 PM

[forest:]

Rather, the valuation parity is not to the extent that he implies.

Feb 24 01:16 PM

[RAPROX:]

Any write-down of Goodwill is non-cash --sure it reflects paying too much for M&A in the past but it has zero impact on on-going operations.


On Feb 24 07:11 AM Marcap wrote:

> "He noted that Canada’s Big Six banks (Royal, TD, CIBC, BMO, Scotia
> and National) have nowhere near the levels of toxic waste on their
> balance sheets, nor shall they."
>
> I would not be so sure about that. From what I can tell, some Canadian
> banks are just a guilty as their US counterparts when it come to
> inaccurate Balance Sheet reporting.
>
> Here are some examples:
>
> TD - $15.8B in Goodwill and Other Intangibles
>
> Royal Bank - $9.1B in Goodwill and Other Intangibles
>
> CIBC - $2.1B in Goodwill and Other Intangibles
>
> Scotiabank - $2.1B in Goodwill and Other Intangibles
>
> BMO - $1.5B in Goodwill and Other Intangibles
>
> Now while this total Balance Sheet fluff amounts to just over $30.6B,
> considering that Canada has only approximately 11% of the population
> of the USA (33 million vs 301 million), this $30.6B would be the
> equivalent of $278.2B in the USA, if looked at from a per capital
> basis.
>
> As for actual toxic assets, such as the realization of bad mortgages,
> loans, credit card debts, and so on, I think that Canada does lag
> behind the USA somewhat in that respect. Considering that many companies
> in Canada do have US Parents, it sometimes takes a while before company
> closures and downsizing in the USA have an impact on their Canadian
> counterparts, resulting in layoffs, etc. In short, what happens in
> the US more often than not, does eventually trickle down into Canada.
> Albeit Canada has far more Natural resources than does the USA, but
> natural resources alone do not sustain growth...only manufacturing
> does. But unfortunately both Countries lack considerably in that
> area.

Feb 24 05:16 PM

[Chezfrederick:]

Wether Canada is Lagging or not, it is still internationally acknowledged as having the best banking system in the world, with the best oversight and safegards of any market. It has not followed blindly and in the footsteps of it's US counterparts by piling up leverage and loading up on toxic assets... They have mostly stuck to their knitting and remained mostly retail banks, maintaining strong deposit based balance sheets.

I see no basis of comparision (P/E, P/B...etc) with other developed world banks. More importantly, such ratios are predicated on overstretched valuations of rotten assets in most banks and therefore a higher than warranted forward looking P/E.

Feb 25 06:16 AM

[User 364267:]

The Canadian govt/Boc has injected Billions of liquidity into the banks in the past year or so. Are these injections not considered as bailout of our banks? Has the BoC not intervened to offload the bad mortgages off the banks? By the way, if the Canadian banks are so soild, why are they continue to raise capital via the issue of preferreds? Just some food for thought.


On Feb 25 09:47 AM Amish Rake Fighter wrote:

> Canada has the only banking system in the G7 that didn't need a bailout.
>
>
> That should tell you something

Feb 25 02:07 PM

[valueinvest...:]

Problem is there is no Canadian banking ETF and I really don't feel like purchasing small stakes in 5 different banks.

Feb 25 03:47 PM

[irasil:]

Given lack of canadian bank etf, is EWC the best way to play this issue?

Feb 25 04:08 PM

[valueinvest...:]

Yes, but the EWC only has an 18.79% weighting in banks. I guess if I am really interested in this idea, I will do some research and pick 1-2 banks.

Feb 25 04:15 PM

[Seen All It...:]

You may want to consider these factors:
1. Canadian Bank systems are not as sophisticated at US Banks ie: RBC uses Dexia's systems for institutional and wealthy clients. Bank Systems located in US are separate from Canada operations.
2. Canada taxes all the revenue earned by its citizens no matter where the source, unlike US tax laws. Canadian banks pay taxes on income earned in the US to the Canadian Revenue Agency.
3. Canada does not require US GAAP accounting. Are you comparing apples to apples? US regulators require Canadian Banks to follow it for banks operated in the US. (How well do the US banks follow GAAP accounting?)
4. Canadian Tax Law is changing concerning the treatement of Unit Trusts, which typically hold natural resource assets and make up a material portion of the TSX and PKA.

Feb 25 11:11 PM

[Chezfrederick:]

Their results announced this week were ahead of analyst's expectations by some margin... Well worth a look for a long term holding compared with BOA and C.

Feb 27 07:51 AM

[grouphero:]

Most of the time, the market sentiments dominated the stock price, not the company fundamental. Rational analysis will not be useful and one cannot fight the market sentiment otherwise you will get burnt. The market sentiment is bearish and both good and bad stocks fall together. The above analysis are all known to the market and every rational buyers know about that. But why the stocks keep on falling. You have to trust the sentiment and put aside the rational analysis. You have to short the banks, including the Canadian banks until there is a turn of market sentiment.

Mar 01 10:45 PM

[Roam:]

It is apparent most individuals responding have a good understanding of the Economics, Banking in general and specifically the Canadian Banking system.

The one exception is User 364267.

Amish Rake Fighter was correct. The G of C DID NOT BAIL OUT THE CANADIAN BANK, but rather purchased UP-TO-DATE INSURED morgages as a means to free up capital for reinvestment in new loans to individuals and businesses.

Their position was, if you the Banks made bad loans (morgages or credit card debt) you deal with it. We, the Gov't only want good quality morgages that will provide a reasonable investment return for the Gov't.

This is the exact opposite to the situation with the US Banks

Mar 04 05:03 PM