Scotiabank joins growing list of those issuing Real Estate bubble warnings

Well another day and it seems another senior mainstream finance wizard is shouting out warnings of impending doom in the overblown real estate market in our country.

Did all the bear bloggers somehow get outed as bank economists this month?

The latest is Scotiabank CEO Brian Porter who says the Toronto and Vancouver housing markets will have to correct at some point.

"Trees don't grow to the sky and markets will correct at some stage here,'' Porter told analysts Tuesday.

This comes on the heels of Bank of Montreal’s chief economist, Douglas Porter, stating,"Let’s drop the pretense. The Toronto housing market — and the many cities surrounding it — are in a housing bubble” and Sun Life’s Chief Investment Officer Sadiq Adatia who said,"eventually we are going to see this market kind of stop and then come off a cliff, the longer we stay in this run-up, the bigger the downturn is going to be.”

You really can't get much more specific that this for advice on where things are going.

Of course, if you want confirmation that everything's okay and you should 'buy, buy, buy' we turn to the real estate industry and Mark Renzoni, president of global commercial real estate giant CBRE.

Renzoni had just wrapped up a speech at the CBRE's annual Canadian Market Outlook attended by about 1,400 brokers, developers and landlords at the Toronto Convention Centre. Afterwards he gave an interview to the Toronto Star in which he did his Renzoni best Alfred E. Neuman impression and advised us:

Bubble. What bubble? 

Toronto's soaring home prices are in line with the reality of other world cities such as New York, Hong Kong and London, says Mark Renzoni, president of global commercial real estate giant CBRE .

"The market is fairly balanced. It's not being driven by foreign capital. It's being driven by Canadians, moving up, buying for the first time," he told the Star, following a speech at CBRE's annual market forecast event. 

"There's great jobs, there's a sense of optimism, there's confidence in the job market and interest rates are low," said Renzoni, who suggested that concerns about foreign speculation in the Toronto housing market are overblown.

So there you have it. And c'mon... let's face it. Those banking types, they're all closet wearing, tin foil hat sportin' doomers. Right?

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Thur Feb 2nd Post #1: BMO returns to offering cash back to first time home buyers

In the next day or so we will start to see the monthly real estate stats for January 2017 released. Early word is that they are ugly. Real ugly.

Part of that has to do with the brutal frankenumber HPI the industry uses. Critics have denounced the formula as a method to hide any collapse from the public... or at least hide it for a while.  Eventually any long term slide will become very evident and the chatter is that time has come.

Bearing the brunt of the blame has been the 15% Foreign Buyers tax implemented by the government of BC last September. This is now compounded by the recent capital controls announced by the People's Bank of China (PBoC).

With reports that high end developers are panicking and have threatened withholding political donations to the BC Liberal Party (crucial with an election looming in May),  the BC government had announced that starting Jan 16 a program was launched to oan first-time homebuyers some of the cash they need to afford their down payment.

The program provides a government-backed loan of up to $37,500, or five per cent, of the purchase price of a home for qualified buyers. The goal is to match part of a person's down payment to help them afford to buy their first home, as long as they already qualify for a mortgage under federal rules and the home is worth less than $750,000.

This attempt to shovel incentive money to first time buyers is being roundly denounced from all quarters nationwide.

And now we learn banks in BC are climbing back on the free money bandwagon.

Last week the Bank of Montreal (BMO) announced they are chasing first-time home buyers with a cash back mortgage promo. First-time home buyers taking out insured mortgages with terms of at least four years are eligible for $500 cash on mortgages of less than $250,000, and $1,000 on larger loans. Once the mortgage is booked, the cash is credited to the customer’s BMO chequing account.

In a statement, BMO called its new offer a “timely” companion to a new interest-free loan program British Columbia’s provincial government launched to help new buyers cobble together down payments amid soaring housing prices. The federal government recently expanded stress tests aimed at ensuring a home buyer could still afford a mortgage at higher rates, making it harder for some prospective buyers to qualify.

“While the provincial government’s offer is exclusive to B.C., our hope is to support all Canadians who come to us for this important milestone and investment,” said Michael Bonner, BMO’s senior vice-president and regional head for British Columbia and Yukon.

Of course sceptics might say it has less to do with 'supporting' Canadians and more to do with the fact that BMO has acknowledged that its residential mortgage portfolio in Canada, which totalled $103.6-billion in Canada as of Oct. 31, 2016, trails when compared with some key competitors.

Canada’s mortgage market is showing signs of slowing growth. Interest rates have risen from rock-bottom lows, consumers are heavily indebted, the federal government has introduced stricter rules on new mortgages in an effort to cool overheating prices in Toronto and Vancouver, the PBoC is implementing capital controls and the 15% Foreign Buyers tax was working far better than everyone imagined.

Now, it appears, there are massive efforts to plug the exact holes the changes were designed to create.

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Bank of Montreal warns about the Boomer Trigger

So a Richmond home has now sold for 33% below assessed value. It's the Boomer Trigger at work. We talked about it back in March 2012:

The majority of the self-indulgent Boomer generation have failed to prepare for their senior years. 

Seven out of 10 Boomers do not have enough money set aside for retirement. And since 2011 marked the beginning of the great Boomer transition into retirement, this financial planning statistic is significant. 

Starting in 1946, the demographic Post-World War II baby boom began. And the Boomers at the front of this wave have benefitted most from seemingly everything. 

After having been raised in the post-war affluence of the 1950s and 1960s, the first wave of boomers entered their mid 20's starting in 1971. As they settled down between 1971 and 1976, these first Boomers bought homes which sold for between $40,000 and $60,000 in suburb communities like Richmond. 

Now, as these Boomers head into retirement without adequate funding to carry them through their golden years, the vast majority have a very simple retirement plan: sell their bubble inflated asset of a house, downsize and live off the proceeds. 

An average house on a large lot bought in 1971-1976 in Richmond for between $40,000 - $60,000 is now 'worth' between $1.5 - $2.5 million dollars. 

Thus the Boomer Trigger... trigger the sale of the one significant asset they have to fund their retirement. At the same time, if the market slows, Boomers can use their original purchase price advantage to under cut other sellers in a collapsing market - a maneuver which has the potential to crash the market if done by a large number of Boomers at the same time.

It remains one of the most viewed posts on this blog and it continues to generate a lot of email.

Most of the email is from indignant readers who either want 'proof' about the idea so many Boomers have failed to adequately plan ahead or they vent about how ridiculous the thesis is.

Well the haters now have a new target to which they can vent their frustrations: The Bank of Montreal.

As the Financial Post noted on Wednesday BMO announced: Boomers are warned using home sale to fund retirement could backfire.

About a third of Baby Boomers plan to sell their home to fund their retirement, according to a study that questions whether buyers will dry up as that massive segment of the population downsizes... 40% of respondents say they are not confident in their ability to save for retirement and 41% say they might just end up using their homes to shore up any shortfall in their golden years.

Bank of Montreal is warning Boomers not to count on that nest egg, while other observers suggest that even if prices don’t plunge, big increases in property values are a thing of the past. 

“They shouldn’t be relying on their homes because there are risks,” says Marlena Pospiech, a retirement strategist at the BMO Retirement Institute. 

The bank suggests the following risky scenario: As Canada’s population ages, more Boomers will be retiring and selling their homes, putting downward pressure on prices. [Boomers] could be in serious financial trouble if they are relying on their home, especially if they are highly leveraged.

Meanwhile the counter-arguments are heating up to assuage and dispelling concerns about this threat. And, as always, we are told it will be wealthy immigrants who are going to pour into the country and be our salvation:

Demographers say a collapse in prices based on Boomer homes flooding the market isn’t reality either. 

“There is going to be continuing demand for housing as long as we bring in 250,000 immigrants a year,” says Doug Norris, chief demographer at Environics Analytics. Given the creation of about 175,000 households each year (based on the latest census data), that’s plenty of demand.

Interestingly there is another twist to the counter-arguments:

Demographer David Foot, author of Boom, Bust and Echo, believes there are enough children of Boomers to soak up the housing supply. 

“The Boomers have been averaging about two kids per family [in the U.S.] and replacing themselves,” says Mr. Foot. 

“It’s a bigger issue in Canada because the Boomers only had about 1.6 or 1.7 kids per family. The echo isn’t quite as big.” 

He predicts the twenty somethings today that have been driving the condo market will at some point buy into single-family detached homes. “There are enough of them to buy the Boomers’ houses.” 

His more pressing worry is for the condominium segment. “It is question of whether they will move out to the suburbs to raise their kids like every other generation has,” says Mr. Foot. 

“My concern is who will buy all the condos when the twenty somethings vacate them.”

It's interesting to noteThe Financial Post offers these viewpoints in order to present a 'balanced' article and offset BMO's warning.

Now... why do you suppose the economists over at BMO didn't give these elements consideration before issuing their warning?

Do you think it's because Boomer kids can't afford their parent's houses at their current valuations?

There may be lots of Boomer kids who would be willing to purchase those homes, but where are they going to get the money to buy them?  

Without a dramatic, surging economy or negative interest rates combined with 50-60 year amortizations... it ain't going to happen.

And without that same surging worldwide economy, HAM simply isn't going to provide the immigrant incomes to save the Boomers.

That's why BMO is warning all and sundry that "as Canada’s population ages, more Boomers will be retiring and selling their homes, putting downward pressure on prices."

Even the banks can see what is coming.

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Canadian price declines called the "Vancouver Manouevre" - Royal Bank declares Vancouver market in a correction

Well it certainly appears the concern about what is going to happen in the Real Estate market this Autumn is ramping up.

After an abysmal summer and all the negative press, the fall market usually see a resurgence in listings... but will there be buyers?

Judging by the comments of Bank Economists, it appears everyone is bracing for dismal times.

The Financial Post tells us that Canadian home prices are falling steadily.

Much of the decline in the national Canadian average is being blamed on Vancouver.

An economist at BMO Financial Group called it the “Vancouver Manouevre”. Our city's price drops have brought down the national average despite 19 of 26 cities experiencing year-over-year increases.

As we have mentioned here before, Vancouver's average sale price dropped more than 12% year over year and 20% since May 2012.

RBC economist Robert Hogue said:

"We still believe that Vancouver is probably the most stressed market right now because of extremely poor affordability. Plot the resale figures over the last year or so and you see a fairly significant decline in resales, so I think that this does the fit the definition of correction.”

Of course it does. When you have prices collapsing 20%, what other conclusion could you come to?

Naturally the British Columbia Real Estate Association (BCREA) disagrees.

(Surprise!)

BCREA chief economist Cameron Muir says:

“Typically to see a price correction you need to see a macroeconomic shock — recession, very high unemployment, for example — or you need to see interest rates go up very dramatically in a short period of time. Both of those we don’t see on the horizon.”

Cameron claims one-third of our market is first-time buyers and he insists there is no shortage of those 'first time buyers' to keep greasing the wheels of the property ladder:

“As long as we have first-time buyers that can get into the market to buy the homes from the people who are moving up, moving over, moving down, then the market should remain healthy.”

But if tighter mortgage regulations are making more difficult for potential first time buyers - and buyers are watching the market prices fall - when enter the market right now?

Watch for an unprecedented full out media campaign this fall promoting young first time buyers to do the 'smart' thing and get into the market.

In the absence of 'Hot Asian Money', what else will keep the ponzi going?

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"The Sizzle is coming off the Vancouver housing market" - BMO

The Bank of Montreal has a chilling report out that should send shivers down the spines of all speculators out there.  BMO is predicting that Vancouver's housing market could face a bumpy landing.

As reported by News1130 radio, BMO says Vancouver's home prices will fall over the next couple of years.

Year-over-year home re-sales are down by more than 13% in April and sales in the first four months of this year compared to last year are down 20%.

"I can best describe it as a softening of a market," says BMO Mortgage Expert Carolyn Heaney. 

BMO Senior Economist Sal Guatieri says the price of homes in Vancouver and uncertainty over long-term mortgage rates are creating a buyer's market. He also says rich foreign investors who have driven up real-estate prices in Vancouver are now looking at cities that are less expensive.

"The sizzle is coming off the Vancouver housing market," Guateri says.

The report also says condos are being overbuilt in Vancouver and that is curbing demand.

Meanwhile, over at Vancouver Condo Info, regular contributor ZRH2YVR shares some additional inventory facts.

The west side of Vancouver exceeded 1,000 available detached listings on Thursday. Sales are off 17% and listings are up 25%.

In addition to single family houses, a serious flood of apartments is going up for sale on the west side – current pace is for 1,230 of attached units (Apartment/townhouse combined).

Meanwhile Richmond will likely have a 'months-of-inventory' total which is over 12 months by the end of May. More significantly the vast majority of transactions are now for less than the tax-assessed value of the properties. Sales are plummeting by 47%.

Interesting times.

Also... don't forget about out 20,000 listings prediction competition. Put in a comment and let us know when you think Vancouver will hit 20,000 available properties for sale.

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I can see clearly now...

There is an old saying that goes "hope clouds observation."

A wise saying to remember as events heat up on the real estate front.

As the 2008 Financial Crisis took hold in early 2009, real estate watchers in Vancouver eagerly anticipated a housing implosion.

But ultra low interest rates and the on-going expansion of CMHC's balance sheet resuscitated a real estate dependant economy.

The anticipated collapse morphed into a small correction.

And it was not by chance.  Our government purposefully intervened to make it so.

It was a huge gamble for our federal government. The Conservatives gambled that if Canadians could be nursed through the worldwide recession (which normally last 4-5 years, at most), then economic growth would mitigate the huge surge in debt that the government stimulus would create.

One small problem.

Not only has this not been your garden variety recession.  It isn't contained to being a severe recession (on the world stage - the efforts have rendered the worldwide recession a curiosity in Canada).

The worldwide situation is turning out to be a once-in-a-multigenerational downturn that may well last 10-15 years (if not turn out to be something worse).

But this turn of worldwide events has transformed what had been an 'economic plan' into a quandary.

As bears sit on pins and needles waiting for a condition that defies economic sense to collapse upon itself, the Canadian federal government now shifts their focus from blowing up the housing bubble to now trying to engineer a 'soft landing' without triggering a housing crash.

From Carney (the Bank of Canada governor) and Flaherty (the Minister of Finance) we have endless jawboning about the hazards of the massive household debt they were responsible for creating.

Both men huff that the number one risk to the Canadian economy continues to be household debt  - which currently stands at a record 153% of disposable annual income.

The dilemma, of course, is that interest rates must be kept low to try and stimulate business spending and give businesses a break on their borrowing. But it's the consumer who continues to do all of the borrowing and the money is funnelled into the housing bubble - aided and abetted by a banking industry addicted and dependant on the revenue generated from these mortgages.

So jawboning moves to small steps to 'engineer' the soft landing.

The 0% down/40 year mortgage conditions were eliminated.

And it's replacement, the 5% down/35 year amortizations, were subsequently axed as well.

Now the 5% down/30 year amortizations are supposed to be doing the job.

But still no soft landing. Rumours now swirl that we will have 5% down/25 year amortizations at the end of the month... or perhaps even 10% down.

Meanwhile a tight rope is walked trying to prevent participants in the housing bubble from panicking.

Bank economists issue reports and forecasts attempting to ensure public confidence doesn't collapse and trigger a wave of sellers without buyers.

Each bank echo's statements like this one from Bank of Montreal's chief economist Sherry Cooper and senior economist Sal Guatieri who said last month that there is no housing crash coming, rather Canadians should......

“Expect the housing boom to cool rather than crash… While the housing boom is unlikely to continue unless mortgage rates drop much further, neither is it likely to bust… In our view, the national housing market is more like a balloon than a bubble… While bubbles always burst, a balloon often deflates slowly in the absence of a pin.”

But a curious dynamic is developing,  the 'soft landing' is quickly morphing into signs of a collapse. It's difficult to see outright, because statistics skew what is happening.

 Sales are plummeting but what little sales that are occurring are at the high end of the market and the numbers distort the averages.

Witness what we are seeing in Greater Vancouver right now.

March sales throughout the Lower Mainland region are on track to collapsed 30% from March of 2011. Sales of detached homes in Richmond are off 55%. On the west side of Vancouver (HAM central) sales are down by 50%.

In Burnaby sales are on pace to be off by 40%.

In the midst of this carnage there have been 5 sales this week of properties which changed hands for over $7 million, including 2 for over $10 million.  This will trigger a record average price for a single week of real estate sales.

See what I mean... the statistics are going to be royally skewed.

But the mortgage divisions of the various banks are not fooled... they can clearly see through the aberrant  numbers... and they are concerned.

Bank of Montreal (BMO) has suddenly brought back its 2.99% special mortgage, a half point drop off it's five year term. 

BMO has also slashed their 10-year mortgage to just 3.99%.  This is the first time a major lender has ever offered such a low rate for a 10 year term.  What was it BMO's Sherry Cooper said about the "housing boom being unlikely to continue unless mortgage rates drop further?"

On Thursday afternoon TD Canada Trust matched BMO's 2.99%, but for a four-year loan. Other banks are sure to follow in a desperate attempt to stimulate the market and match the competition.

Which brings us back to where we started this post.

"Hope clouds observation."

Many bears are all hyped up in anticipation that the crash has started. As Sean Connery said in the movie, The Untouchables:

"Don't wait for it to happen. Don't even want it to happen. Just watch what does happen."

There are still many twists ahead. 

But if you are a bear, take heart by this recent quote from BMO chief economist Sherry Cooper. 

Cooper - who told us that unless rates dropped further, the housing market would deflate rather than burst - has suddenly had a change of heart (not too surprising since it is her own bank that has launched a new mortgage war with the lowest rates in Canadian history):

“We’ve always said the market remains vulnerable to a correction in the face of a shock. It could also 'pop' in the absence of a shock should current frothy trends persist.

The next few weeks will, no doubt, generate significant 'froth.' Watch what happens, don't be disappointed, don't be surprised.

Just watch what does happen... and allow events to play out.  Don't let hope cloud your vision.

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Bank of Montreal declares "A New Paradigm for Silver"

Silver investing is going mainstream.

BMO Capital Markets has come out with a report that declares that there is a New Paradigm for Silver. 

The report states:

• Demand is expected to outstrip production growth. BMO Research analysis indicates silver demand & supply fundamentals should remain positive to the end of 2012E.
• The prospects of further quantitative easing combined with sovereign debt concerns, competitive ‘fiat’ currency devaluation in western economies, and the return of inflation could result in investment demand exceeding BMO Research’s projections and extending the supply deficit through 2014E.
• This shift in the supply/demand dynamic lies in contrast to the broader investment perception for silver, which is rooted in the 1990’s when the metal was in abundance, driven by the demise of the photographic industry and Chinese selling.
• The paradigm shift for silver suggests that the traditional benchmarks for silver, such as the long-term historical ratio with gold, are no longer valid.
• Accordingly, the markets are searching for a new set of criteria against which to benchmark the price of silver, with a bias to the upside.

As we have mentioned before, investment in Silver by the general public hasn't even begun. And once capital starts flowing in, the price of the metal has the potential to go parabolic.

You can read the full report here.

Silver is the investment opportunity of the next decade.

Now... the mainstream is starting to take notice.

A new paradigm indeed!

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BMO: Go To Cash... Now!

How bad is the evolving debt crisis in Europe?

Well... Bank of Montreal has some simple investment advice for it's clients.

Get out of equities and go to cash!

Ummm... can't get much more straightforward than that.

In fact that's the title of the report from BMO's Quant/Tech desk.

From the Report:

"We advocate switching out of equity positions and going to cash. The European sovereign debt crisis appears to be nowhere near over. The global credit environment is worsening. Cost of capital is going up and availability is going down. There are large gaps between where the credit market prices risk and where the equity market is priced. Equity is lagging the deterioration in credit conditions. Moves in currency, equity and commodity markets are mirroring the moves in the credit market. Global growth, in a credit-constrained environment, will slow. Profits will be squeezed by the higher cost of capital... We advocate a zero weight toward equity, and that investors convert their equity positions to cash."

The global credit environment is worsening and the cost of credit is going up. That's been my message for months now and we welcome BMO to the doomsayer bandwagon.

And when it starts to go up, it's going to go waaaay up.

It's not rocket science folks. That's why a major real estate purchaase you plan to hold, purchased over the last three years, has been the absolute worst move of your financial life.

For those who so desire, the BMO report is below.

Go To Cash

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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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Et Tu Bank of Montreal?

It's Bank Failure Friday again in America and today has the possibility to be a milestone day. Year-to-date failures are up to 99 and we await word from the FDIC on who will be lucky #100.

Speaking of bank issues, remember the rumours about Bank of Montreal trouble back in August? On the 22nd we made this post asking 'Is the Bank of Montreal in financial difficulty?'

Those questions are being raised again, this time by Moody's, the credit rating agency.

As you will recall back in August, Agora Financial's Dan Amoss claimed 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 said, "Mark to market accounting has not yet cut down Canadian bank earnings, because the Canadians have not yet accounted for the impending wave of mortgage, consumer loan, and corporate loan losses. They will by the end of 2009."

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 readers of his newsletter, several market plays to take advantage of the situation.

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 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.

We posted our disappointment in Amoss' disappearing act. It seemed like such a tremendous opportunity wasted by Amoss and Agora. Here you had a ton of attention focused by the mainstream press on Amoss. This is the type of situation tailor-made to create a market oracle.

One blog dog agreed with me and commented that "I think they were just trying to play hysteria on the Internet and create a self-fulfilling prophecy. That's why Amoss wouldn't meet with the press. He didn't have a real case. If he did, he would have done exactly what you suggested."

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."

Did the jury of public opinion pass judgement on Amoss prematurely?

Renown credit rating agency Moody's Investors Service has placed BMO debt on review and says it may downgrade the bank's debt due to weaknesses in its U.S. operations

The recent period of financial and economic stress has revealed weaknesses in the bank's U.S. business, Moody's said. BMO's U.S. operations have had two consecutive years of losses, and in all likelihood 2009 will mark the third, it said.

“BMO's review for possible downgrade comes at a time when the bank has persistently reported lower risk-adjusted profitability, relative to similarly rated peers due to net losses in its US businesses,” said Moody's senior vice-president Peter Routledge. “Furthermore, a prolonged period of above average credit costs could intensify pressure on BMO's profitability.”

The U.S. accounts for nearly one-quarter of BMO's loans. The bank has about $41-billion in U.S. loans, compared to $124-billion in Canada.

Maybe Amoss wasn't quite the flake so many wrote him off to be. The next quarterly earnings reports could be interesting.

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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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Burying our heads in the sand... (merp!)

I have some comments to make about Amoss and the Bank of Montreal, but I am going to sit on if for a bit.

It's easy to write Amoss off but as we saw yesterday, with the update I added from the Financial Post, many analysts still have problems with BMO. And where there is smoke, there just might be some fire.

In the meantime, let's turn our attention back to Real Estate in Vancouver.

Could the market really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse?

We don’t see it as remotely possible, but yet... there for everyone to see... are countless happy headlines and breathless exhortations that the worst is behind us.

July has been a record breaking month for sales. Here is a chart of the Teranet Historic Index Values for Vancouver and we are on an uptick again. And this is before the July stats have been factored in.

And the frenzy is having it's effect.

A work colleague has, just this week, committed to a home purchase in Surrey. With a mortgage at over a half million dollars, it is a significant move.

When asked if he could make things work if interest rates bump up to 6 or 8%, the responsive is chilling. "Sometimes you just have to take a risk."

(Merp!)

Another work colleague has constructed a dream home costing in excess of $1 million, is plunging headlong into a new business that will require another 1/3 of a million and halting concedes it's all highly leveraged.

When asked about it, he tells me that "you can't always just sit back".

(Merp!)

Meanwhile acquaintances in the neighbourhood are struggling with only one income as the husband languishes unemployed since January (construction industry). They sought relief in March by tapping out the equity in their family home. Having exhausted that funding, they have just drawn on the remaining equity in a second home they own as an investment property. Who says use of the Home ATM is dead?

Have the lessons of the last year been completely lost on these people?

We are nearing the day of reckoning here on the wet coast and the signs are everywhere.

The BC goverment, who have been in denial about the severity and state of the world economy, are being forced to pull their heads out of the clouds. Back in May people predicted the government would be in serious financial trouble. The provincial goverment steadfastly denied there was a problem looming.

Now?

The B.C. Liberals warn of impending cuts to government grants, possible layoffs and public-sector wage freezes. The cash-strapped politicians shriek that "the fiscal cupboard is bare and hangs on a wall of deficit spending." The Finance Minister declares that the "downturn is far beyond what we previously had anticipated."

In the United States, the White House warned this week that the economy is in worse shape than expected. Strategist's advise that we shouldn't count on consumers to fuel any economic rebound.

And the US national debt, the sale of whose treasuries controls the setting of mortgage interest rates, will nearly double over the next 10 years - virtually guaranteeing a dramatic increase in interest rates as the US struggles to fund that debt.

Coming back to Vancouver, we seem oblivious to it all.

We are clearly the most bubbly city in North America right now and Vancouverites seem to be in a total state of delusion as they dive headlong into mountains of debt anchored by real estate.

All it will take is a catalyst to trigger catastrophe.

Maybe that's why the Bank of Montreal rumours we covered in detail set off such an avalanche of hits to this site (over 15,000 in 24 hours).

Maybe, just maybe, EVERYONE doesn't have their heads in the sand.

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Waiting for Dan...

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Was the BMO story a non-event?

The issue caught our eye, we highlighted it and attempted to fill in the details.

Judging by the exponential increase in hits to this site the last couple of days... a great many of you were clearly interested as well.

Soon the mainstream media (Bloomberg, the Globe & Mail newspaper and the Toronto Star newspaper) picked up on it as well.

We expect Dan Amoss will comment on the topic today and, if he does, we will bring it to you. Check back throughout the day.

We believe you will see Amoss key on the same 'weaknesses' that he outlined on August 12th. He will probably stress that he 'suspected that the dividend cut might come as soon as with this August earnings release', but it was not a guarentee. He will probably predict those problems will now be revealed in the Q4 earnings report.

We have our thoughts, but we are going to save them for the moment. Let's see what Amoss has to say first.

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Bank of Montreal reports today

BMO UPDATE (15:23 EDT): Comments from 3Q Conference Call
BMO UPDATE (14:50 EDT): Globe & Mail - BMO defies newsletter naysayers
BMO UPDATE (14:35 EDT):Agora Financial: Amoss to digest earnings report and BMO conference call, will comment tomorrow
BMO UPDATE (14:26 EDT): Bank of Montreal defies bearish bettors - Stock up $3.43 (7%)
BMO UPDATE (07:51 EDT): Financial Post - BMO Profit rises 6.9%
BMO UPDATE (07:46 EDT): Globe & Mail - BMO Profit rises to $557 million
BMO UPDATE (07:36 EDT): CNW Group - BMO Financial Group Declares Dividend (unchanged from last quarter)
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The Bank of Montreal is scheduled to report earnings today and everyone is watching keenly for the results.

Will BMO cut it's dividend now, in the next earnings report or not at all? Will this initiate a collapse in the stock price?

Bloomberg reported the Amoss speculation yesterday and quoted John Aiken, an analyst at Dundee Securities Corp. in Toronto, as saying that "the speculation may have contributed to Bank of Montreal’s decline. Aiken's believes the bank’s dividend is safe. Bank of Montreal spokesman Paul Deegan declined to comment."

Google Finance has cited the Bloomberg report on it's BMO stock quote page, so the speculation has now entered the mainstream media.

Management will release results before the bell Tuesday, and hold a conference call at 2pm eastern time. BMO is up 25% since reporting better-than-expected profit and announcing 1,100 job cuts on May 26. Overall options activity in BMO was more than 12 times average, with puts outnumbering calls by 20 to 1.

We will keep tabs on this as it plays out over the next few months.

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What Dan Amoss is expected to say about BMO...

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BMO UPDATE: Bloomberg on Amoss: Bank of Montreal Falls After Newsletter Predicts Dividend Cut
BMO UPDATE: Reuters: Option bears eye Bank of Montreal puts before results (puts outpace calls by factor of 13.23)
BMO UPDATE: BMO closes on TSE down $1.85 (-3.64%), biggest drop since May 27
BMO UPDATE: Globe and Mail blog: More BMO nail-biting - BMO down $1.60
BMO UPDATE: Bloomberg: Canadian Stocks Fall for First Day in Five, Led by Financials - BMO down $1.36

Blogs are abuzz with news that Bank of Montreal is in financial trouble. Sparked by the claims made by Dan Amoss, rumours are running rampant.

This was posted on Stockgumshoe.com:

"On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years. Given the past 21 months of market action — that’s no small claim. If recent mainstream headlines make you believe that banks have weathered the storm. You better think again. Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009. He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders."

These allegations have the internet in a tither about possible financial problems with the Bank of Montreal.

So what is Mr. Amoss going to announce today?

According Joe Schriefer, Publisher of Amoss's Strategic Short Report newsletter, Mr. Amoss will assert that shareholders are being mislead by BMO.

In a promotional piece to plug subscriptions for the newsletter, Schriefer states that Mr. Amoss will claim that BMO is in denial about the level of potential losses the bank faces. If jobless numbers continue to spike — as he believes they will — BMO will be on tenuous ground. Amoss will cite stats about:

• personal debt levels in Canada hitting an all time high,
• survey's showing 21% of all respondents admitting that they’re at a level where they can’t “manage their debt”, and
• reports from David Wolf, a Merrill Lynch economist, saying he’s worried that Ontario has been running “a larger financial deficit” than the most heavily indebted economies.
  

Amoss will claim that Ontario accounts for over $85 billion of BMO's outstanding lonas (more than 60% of their entire loan book) and that since more than 1 in every 7 people have jobs tied to the auto industry in that Province, and since unemployment in this specific area just hit an all time high - with some reports coming in at 14% unemployment — that the potential default rate is far, far higher than the Bank of Montreal has budgeted for.

The next claim Amoss will make is that BMO is using accounting tricks to hide bad loans by grading their loan books 50% BETTER in this recession than they have in previous recessions.

Amoss will assert that if BMO is finally forced to admit to a massive wave of loan defaults — which he believes they’ll be forced to do as early as August 25th — they’ll have a huge hole in their balance sheet… and they’ll have no choice but to cut their dividend to survive.

Since no major bank like this one has cut their dividend in 64 years, Amoss believes if BMO is forced to cut, their share price will crash.

Finally, Schriefer says, Amoss will assert that BMO is lying about how much money they have.

Amoss will point to Lehman Brothers and their 3rd quarter conference call on September 10, 2008. Lehman Brothers touted to their shareholders that they were “well capitalized”. Five days later they filed for the largest bankruptcy in history.

Lehman's was able to make this false assertion, as Amoss says, because Lehman's used an accounting trick called the “Tier 1 Capital Ratio.”

Lehman's claimed that the higher the “Tier 1 Capital Ratio,” the more money they had. And the more bad loans they would be able to withstand.

Specifically, Lehman bragged about something called an “11% capital ratio” and told shareholders that this was among the strongest in the business.

Amoss will assert that he identified this diversionary tactic with Lehman's and called their collapse as a result.

Amoss will insist the “Tier 1 Capital Ratio” is NOT the way to measure the true value of a financial stock.

He will also point out that Citigroup did the same thing. In their third quarter 2008 conference call, Citigroup said, “our Tier 1 ratio was 8.2% and our liquidity position remains strong.”

Less than 45 days later, the taxpayers bailed out Citigroup with a $20 billion capital infusion.

Amoss will assert that BMO is now doing the same thing that Lehman's and Citigroup did by claiming a “10.4% capital ratio” as proof of their financial health.

Amoss will say that’s a lower capital ratio than Lehman was touting just five days before bankruptcy. Amoss will assert that BMO is in no better position to withstand losses than Bank of America, SunTrust or First Third, all of who had to cut their dividend to survive and all of whom have tanked over the last year.

Amoss's argument will be that the deadly combination of being in denial about the big picture, grading their loans better than they are, and lying about how much money they have should all culminate in one outcome... a dividend cut followed by a sudden drop in share price.

Amoss will claim that despite the accounting tricks, BMO's first quarter earnings barely covered half of the dividend they promised shareholders.

To keep up their front of a healthy company, Amoss will say BMO paid out dividends as normal, forcing them to burn through $167 million in cash they stocked away for a rainy day.

And even though the second quarter earnings fell short of the cash they needed to pay that dividend, Amoss will say BMO dipped into their reserves and paid that one, too... draining them of another $50 million.

Why would BMO continue to pay the dividend?

Schriefer says Amoss will assert it’s all an attempt to keep the BMO share price high for long enough so BMO can dump their own stock for major profits.

Amoss will assert that after years of buying their own stock, the tides have turned in the past three months and that BMO's sell transactions have outnumbered the buys. Amoss will also assert that BMO's Chief Financial Officer of the bank’s trading arm sold $760,000 of his stock since their last conference call.

And in a telling sign less than two months ago, Amoss will claim that a message left at stockhouse.com claims that insiders sold a whopping $2.8 million worth of their own stock in a single day.

Amoss believes the frantic insider selling since their last quarterly report suggests one thing: As soon as their next earnings call — scheduled for Tuesday the 25th of August— they could announce a dividend cut.

And he believes that BMO's share price will collapse as a result.

We shall see.

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BMO Extra Post

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The rumour mill on the Bank of Montreal issue is reaching a fever pitch.

I am told that several local ATM's have had literal 'runs' on withdrawls due to fears of a possible 'bank holiday' during the week. One ATM I visited was 'closed for maintenance'.

Clearly some are concerned that it might be important to have cash on hand for Monday just in case.

As we have covered in the preceeding two posts, there is speculation on a number of US financial blogs that BMO will be unable to fulfill a fat dividend payment of $1.5 billion. The speculation is that, should this come to pass, it will trigger a massive selling of stock and a cascade of withdrawls from the bank.

This is significant because BMO basically has deposit liabilities of $397 billion and cash assets of $21 billion - not uncommon for a bank but deadly if confidence in the bank was questioned. Let's face it, BMO would have to shut it's doors if 8% of it's customers attempted to withdraw thier money.

Which is why people are paying signficant attention to the claims being made by Dan Amoss. This was posted on Stockgumshoe.com:

"On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years. Given the past 21 months of market action — that’s no small claim. If recent mainstream headlines make you believe that banks have weathered the storm. You better think again. Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009. He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders."

Amoss has also been cited on Pennysleuth.com as saying:

"If you think Canada escaped the downward trend in U.S. banking, think again. While the country may not have plunged headfirst into subprime mortgages, it did dip heavily into risky derivatives. The leverage it took on generated impressive returns on equity in good times, but that same leverage is set to wipe out equity today.

Shareholders in one 'safe' Canadian bank will have to rethink their loyalty. Its looming solvency crisis practically guarantees a dividend cut. And that’s our catalyst for this month’s short play action – offering us a chance for 200% profit potential.

Accounting secrets have not yet obliterated Canadian bank earnings – like those of U.S. banks – because the Canadians have not yet accounted for the coming tsunami of mortgage, consumer loan, and corporate loan losses. Here’s how they loaded those loan books with hidden risk."

These warnings have triggered a virtual frenzy on the internet this weekend. It is possible that this 'buzz' could even trigger a sell-off of BMO stock in the US tomorrow morning?

Quick internet research confirms BMO is under stress. Quarterly results are down a massive $284 million from the same period a year earlier. The money it had to set aside for bad loans has jumped by over $220 million to $372 million.

And since that quarterly report, the situation has worsened.

However the reality is that BMO still earned a pre-tax return of half a billion in the last reporting period. It seems difficult to believe that BMO could actually crumble.

But the stock market is not rational. People are not rational.

And it will be interesting to see what develops overnight and tomorrow prior to Amoss's report at 12:00.

We do live in interesting times.

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More BMO and Sunday Funnies August 23, 2009

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BMO UPDATE: Credit Suisse - Expectations too bullish, BMO downgraded
BMO UPDATE: Reuters - Recession may start wearing on Canada's banks
BMO UPDATE: Canadian Press - Canadian bank earnings to hit bottom on commercial real estate loan losses

A bit more on the rumours from Dan Amoss posted yesterday about BMO's financial difficulties and potential failure (see Is the Bank of Montreal in financial trouble).

Interesting policy and regulation ruling from the Ontario Securities Commission I came across that was issued on February 23, 2009.

The OSC exempted the BMO Trust from continuous disclosure requirements.

The BMO Trust is a trust "which was established for the purpose of effecting offerings of trust securities in order to provide the bank with a cost-effective means of raising capital for Canadian bank regulatory purposes."

Not sure it it's an important tidbit in light of the rumours surrounding the Dan Amoss's announcement or not, but I am sure the average investor would be concerned anytime an organization is 'exempted' from making the regular disclosures legally required.

BMO has sought to revise two of its commercial-paper funds to avert a C$495 million writedown.

The writedowns had the potential to force BMO to withdraw support for a plan to restructure about C$33 billion in non-bank commercial paper that hadn't traded since August, 2008.

DBRS, the Canadian credit-ratings service, had downgraded notes of the Apex and Sitka trusts to junk just the day before. BMO provided about C$38.5 billion in these so-called 'backstop liquidity' credit lines for its own commercial paper funds and third-party trusts as of Oct. 31, according to its annual report.

Bloomberg, in it's article, cited that Bank of Montreal was the worst performing bank stock in Canada this year. In february the stock had fallen C$2.65, or 5.1%, the biggest decline since Oct. 29, 2001.

Finally there was this post earlier this year regarding BMO's woes by Mish's Global Economic Trend Analysis when Bank of Montreal missed some margin calls.

We look forward to the week ahead to see if Amoss's BMO rumours are substantiated.

Sunday Funnies

(click on image to enlarge)

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