Amoss admits he 'made a mistake' on Bank of Montreal

Faithful readers will remember the rumours about Bank of Montreal back in August.

Agora Financial's Dan Amoss made claims that BMO was gaming its books and had been lying about its ability to pay shareholder dividends.

As managing editor of the Strategic Short Report, a pricey Internet-based newsletter that provides 'tips' to subscribers on stocks that may be worth shorting, Amoss had issued an 'alert' about the Bank of Montreal.

Amoss implied that BMO was suffering significant losses from it's loan portfolio and wouldn't be able to maintain it's dividend payments. He predicted that a dividend cut might come as soon as that week's August earnings release, which is after the August options expiration. That cut would start a sequence of events that would drive BMO's share price down significantly.

Amoss recommended to his newsletter subscribers several market plays to take advantage of the situation, and hyped the recommendation in several internet 'teaser' ads.

The hype reached a rumour frenzy and by Sunday August 24th, the story became an honest-to-goodness Internet sensation.

In the options market on Monday the 25th, about 48,000 contracts changed hands, 34 times the usual daily volume.

The turnover included 3,405 calls and volume in the stock's puts outnumbered calls by a ratio of more than 13-to-1. The stock fell 3% during the day and the story caught the attention of the mainstream press as Bloomberg, Reuters, and several Canadian newspapers.

By opening bell on Tuesday the 26th the story washed-out as a non-event. BMO maintained it's dividend, announced it had increased profits; and news organizations found Amoss unavailable for comment.

Agora Financial issued a statement defending Amoss and said, "Of course, there's always a chance Dan’s pick is either too early or wrong. That's the nature of speculation."

Those who followed Amoss' advice were encouraged to hold their positions until December and have faith.

Well... it's now December 2nd. So what happened, you ask?

Amoss has come out and admited he made a mistake on this recommendation he advised his readers to sell their puts.

From his newsletter;

“This was the second quarter in a row that I expected conservative accounting to return to BMO, but this has not happened. It eventually will happen. Next quarter, we could see an earnings miss based upon a re-acceleration in the provision for credit losses.

Two percent of BMO’s entire loan portfolio is in the ‘impaired’ category. According to Blackmont Capital, this is 70% higher than BMO’s peer group of Canadian banks. Furthermore, BMO’s allowance for credit losses covers just 58% of gross impaired loans. This coverage ratio is just half of the coverage ratio of BMO’s peer group.

BMO stock trades at a very high valuation -- one that discounts a V-shaped recovery in the credit quality of its loans. I made a mistake from this recommendation, and have learned from it. The most important take-away from this experience is that banks have a lot more of control over the timing of their credit losses. Also, I’ve come to appreciate just how amazingly complacent Wall Street can be about embedded credit losses at banks.

Our trades depended on management recognizing reality. This has not happened yet. But it eventually will.

I’ll keep following BMO for a potential put option trade in the future. The next earnings report could contain the negative surprise we’ve been waiting for, but let’s wait until we get closer to that point to buy any more puts.”

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Email: village_whisperer@live.ca
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Opportunity Lost: Amoss, Agora and the Bank of Montreal

This past week a tremendous amount of attention was paid to Dan Amoss and his prediction that the Bank of Montreal was going to be forced to cut it's dividend, a development he claimed could trigger the bank's stock to fall dramatically and lead to a possible 'crash' of the bank.

Amoss is a member of Agora Financial of Baltimore Maryland and is managing editor of one of their publications, the Strategic Short Report (SSR). The SSR is a pricy internet-based newsletter that provides 'tips' to subscribers on stocks that may be worth shorting.

Last week, Amoss had the Bank of Montreal in his crosshairs.

Teaser ad's for the newsletter on the internet implied that BMO's dividend cut might come as soon as this week's August earnings release, which is after the August options expiration. Investors could, if they believed Amoss' 'scoop', make several market plays to take advantage of the situation.

Two typical strategies (as I understand it) would be to buy an in-the-money put and hope for a reasonably conservative return. Even if the stock stayed stable, it would give you some chance to preserve your investment.

Or you could buy out-of-the-money puts for a chance of greater leverage to a falling share price. This was probably the most aggressive move. Buying out-of-the-money September puts (you could get a September $40 put for about 70 cents) would have you in a position that, if the dire prediction of a dividend cut came through, or if the shares collapsed by half in short order, you’d be more than tripling your money. If the shares fell to $23, a $40 put is worth $17 at expiration. That means you would see 70 cents to $17 as a return... a huge amount.

Of course, the reason it’s huge is that most people think it’s unlikely — just like any other longshot.

In hyping the newsletter, Amoss proclaimed that one of Canada's major banks was about to crash. Another Agora site, PennySleuth promoted the story with the headline "How to Play the Canadian Banking Crisis for a Quick Double" on August 12th.

Although Amoss didn't reveal the name of the bank in question (you had to subscribe to his pricy newsletter to obtain those details), the assertion caught the internet by storm. Stockgumshoe.com picked up the story and rumours started flashing across social networking sites. Based on the clues provided, it wasn't hard to speculate which of the 5 major Canadian banks Amoss was refering to.

By Friday August 21st the rumour reached us here and an initial post was made. By Sunday even Garth Turner made a post about it.

It became an honest-to-goodness internet sensation.

The result?

In the options market on Monday, about 48,000 contracts changed hands, 34 times the usual daily volume, according to option analytics firm Trade Alert. The turnover included 3,405 calls. Volume in the stock's puts outnumbered calls by a ratio of more than 13-to-1. The stock fell 3% and the story caught the attention of the mainstream press. Organizations such as Bloomberg, Reuters, and several Canadian newspapers began making enquires.

By opening bell on Tuesday morning the story washed-out as a non-event. BMO maintained it's dividend, announced it had increased profits; and news organizations found Amoss unavailable for comment.

Curiously, on Wednesday, the Financial Post published a story in which a large number of analysts took issue with Bank of Montreal's earnings reports. Since Amoss had raised questions about the bookkeeping used by BMO, we were genuinely surprised not to hear more from him.

Yesterday Agora posted this statement on it's daily commentary page, the 5 Minute Forecast:

• A reader writes of Dan Amoss’ much-ballyhooed put that we released on Monday. “Your hype has to be controlled. One would have thought that based on your information Bank of Montreal would have announced results much worse than estimated. Instead, it beat estimates. This just makes me mad, and I lost a lot of bucks on this trade, and I am not willing to risk waiting around for the next quarterly report. Who would, with the relatively positive news that BMO released yesterday? Just disgusting! Shame on you.”
  
  The 5: The cat is out of the bag on Bank of Montreal. We tried to keep a lid on the story for paying subscribers, but details ended up being spread all over the Internet, including a blog at The Globe & Mail, Stock Gumshoe and short bits reported in Bloomberg and Reuters.
  
  But if you’re waiting for us to issue a “mea culpa” and hang Dan out to dry -- that's not going to happen. We think his analysis is first-class, and the nature of this speculation still gives investors time to profit. It's only over if you sold in a panic.
  
  Of course, there's always a chance Dan’s pick is either too early or wrong. That's the nature of speculation. If you can’t stomach trading swings and a potential loss, buy Treasury bonds. (Heh, even that might not pan out.) There are quite a few people who appreciate Dan's efforts, yours truly included.
  
  If, on the other hand, you're actually interested in a thorough and clearheaded exploration of BMO’s latest earnings report -- including questions Dan has regarding loan loss provisions and "tier one capital" -- see your latest Strategic Short Report alert.
  
  By the way, Dan's on a plane right now. But by e-mail this morning, he said he's got his eye on anther bank -- this one a smaller American bank. He'll be sending his recommended put soon…from the frying pan into the fire.

It seems like such a tremendous opportunity wasted by Amoss and Agora.

Here you had a ton of attention focused on the issue with the mainstream press eagarly awaiting comment. This is the type of situation tailor-made to create a market oracle.

It's how people like Peter Schiff established themselves.

In the face of doubt, Amoss could have been profiled in the mainstream press, detailed his concerns, outlined his case, and stuck to his convictions about the state of the Bank of Montreal.

Would he have been ridiculed and put down? Without a doubt. Would it have been information passed on to non-subscribers of the newsletter... absolutely.

But down the road, if the assertions proved correct, Amoss and Agora would have been catapulted to cult status in the same manner as Peter Schiff and Euro Pacific Captial.

Instead they opted to shun the media and shill a new bank play as part of an effort to hock more sales of their newsletter.

We think they missed the opportunity of a lifetime.

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.

An International Perspective.

There is a annual worldwide investment symposium that has chosen Vancouver as the site of their convention this year. Coincidently they are in town just as the Bank of Canada has declared the recession over.

Care to guess how that declaration is being greeted?

Ian Mathias, managing director of Agora Financial, reported from the symposium on his website yesterday...

"07/24/09 Vancouver, British Columbia. 'The Recession Is Over,' reads the headline of The Globe and Mail today. The staff leaves the paper in front of our rooms here at that Fairmont Vancouver. When we cracked the door open to retrieve the rag, the headline caught our eye… and we thought of just tossing it back in the hallway. If there is any one single theme of this year’s Investment Symposium, it’s that despite the warm feelings and 'green shoots' of summer, this contraction is far from over.

'I think this is really serious, and it’s just beginning,' Doug Casey said during his presentation yesterday. 'Forget about the green shoots. They are weeds. This is the biggest thing since the Industrial Revolution. Stocks will be a good value when dividend yields are around 10%'.

'Real estate? Way too early. Bonds? The bond market is much bigger than the stock market. Interest rates are being artificially depressed. They have to go back up to higher levels to encourage people to save and get out of debt. When interest rates assert themselves, the bond market will collapse, which isn’t good for the stock market, or real estate, either.'

So what’s Doug doing? Going long precious metals, shorting U.S. Treasuries and buying real estate in Thailand and Argentina.

'We are looking for eight signs before we get bullish again,' added Eric Roseman in his presentation:

1) Unemployment must stabilize
2) Home prices must stabilize
3) Domestic consumption must rise
4) Bank lending must grow
5) Toxic assets and bank balance sheets must be fixed
6) Auto sales must stabilize
7) Credit spreads must narrow
8) The dollar has to decline

'Only the last two have occurred. That gives us a very bearish outlook going forward.'

By the way, what did the G&M mean in their 'recession is over' headline? Heh, the Canadian central bank predicted that the economy would grow 1% in the current quarter. Forgive us, but our faith in central bank forecasts ran out a long time ago."

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