'The Big Short' Eisman Betting On Losses In Canadian Bank Shares

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Includes: BBCA, EWC, EWCS, FCAN, FLCA, HEWC, QCAN
by: Danielle Park, CFA
Summary

Canadian financial shares make up 38% of the market cap of dividend-paying stocks in the broader TSX composite.

Lower credit-cycle exposure in the last two bear markets resulted in 40% and 55% losses (2000-02 and 2008-09) for Canadian bank shares, and the overall market followed them lower in lockstep.

All the yield-seeking people who have moved into Canadian dividend-paying "growth and income" funds and ETFs in recent years are heavily exposed to the credit normalization cycle coming.

Canadian financial shares make up 38% of the market cap of dividend-paying stocks in the broader TSX composite, which most Canadian equity funds, managers and pensions are benchmarking. Lower credit-cycle exposure in the last two bear markets resulted in 40% and 55% losses (2000-02 and 2008-09) for Canadian bank shares, and the overall Canadian market followed them lower in lockstep. All the yield-seeking people who have moved into Canadian dividend-paying "growth and income" funds and ETFs in recent years are heavily exposed to the credit normalization cycle coming. This will be very hard on those at and approaching retirement. Most have no clue of the risk they are holding today. Eisman explains in the segment below.

Moreover, while the current yield on the sector (XFN) is just 3.09% a year at currently elevated price levels, those who are able to buy the shares after a 40% decline would receive an income yield of more than 5% a year on top of any capital growth as the shares recover in the years thereafter. Present holders will still be earning just 3% (less, if any dividends are cut) while waiting years to grow back missing chunks of their capital. History tells us that most will not wait, but will sell near the bottom, lock in losses and not collect dividends during the next recovery. That is the usual investor cycle.

Neuberger Berman’s Steve Eisman, the money manager made famous by the book ‘The Big Short’ and its film adaptation, joins BNN Bloomberg to discuss why he’s short Canadian banks.

Disclosure: No positions.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.