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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BMO on Gold: "The only gold bubble likely to burst is the bubbling ridicule of gold"

In another sign of the changing attitudes on Gold comes this treatsie from BMO Capital Markets

As this blog repeats over and over, the story of this coming decade will be all about sovereign debt and it is sovereign debt that leads Don Coxe of BMO Capital Markets to make this clear cut declaration about Gold:

• There is a new torrent of warnings of a "gold bubble."
• We have been hearing that story from concerned clients, partly in response to George Soros's highly-publicized liquidation of his holdings of the gold ETF: GLD.
• Another factor has been the debate about Barrick's move into copper, which is being partially financed by a large bond issue. Despite Peter Munk's passionate and articulate defense of that strategy at Barrick's annual meeting, many observers seem to wonder whether this is a warning sign from the long-standing pre-eminent gold miner that gold's future is problematic.
• The financial press has been including many sneering observations that gold is a useless speculation on infl ation that is unlikely to occur. Why own an inflation hedge that pays no income?
• We dissent from that tiresome scorn: those trained in Keynesian economics about the "barbarous relic" never bother to reflect that Keynes expressed almost childlike faith that central banks, acting pursuant to the Bretton Woods agreement of which he was a major architect, would always exercise restraint in monetary policies that would make gold passé.
• The Seventies proved him horribly, hopelessly wrong.
• But the Eighties and Nineties made it look as if he would ultimately be proved right.
• However, the history of major monetary policies since then—and particularly since 2007—makes the case for gold appears as cogent as it was in the Seventies. This time, there’s no chance the Fed will drive interest rates to double-digit levels to fi ght infl ation and protect the dollar. It may be that, after years of getting by on Financial Heroin, the economy lacks the energy and élan vital to survive even normal interest rates—let alone Volcker rates.
• As for the most basic argument—that gold is not an investment, because it pays no income—that seeming tautology is, at root, inherently false.
• Gold has always been an alternative currency. It is resuming that role as central banks switch from the sell to the buy side.
• A unit of paper currency pays no income.
• It can be exchanged for bonds, deposits or stocks that pay income, but a holder of a million euros or dollars in a safe deposit box earns no income on the hoard—just as a holder of a million dollars' worth of gold earns no interest.
• The big difference is that the inherent value of the paper euros or dollars will fluctuate in response to the changes in those currencies' values against other forms of paper money, and all currencies must decline in purchasing power inexorably in response to longer-term infl ation. According to our favorite skeptic on Received Wisdom, Stephanie Pomboy of MacroMavens, the S&P's performance since 2000 defl ated by the gold price move in that time is a minus 82%, compared to the more reassuring nominal return.
• Leading central banks now target infl ation at 2%, saying that anything less could lead to defl ation and Depression.
• As Harry Truman, one of the most shrewdest and most candid of Presidents, observed in response to Keynesian demands that the US target an "acceptable" rate of infl ation that would do no harm, but would be economically stimulative.
• "You can't. That's like being a little bit pregnant."
• Gold's market value most certainly fluctuates. But so does the purchasing power of paper money. Its inherent value almost never rises, but its slow decline can seem almost imperceptible. However, if commodity-spawned inflation comes roaring back, paper money’s value will plummet.
• With global money supplies growing at cancerous rates, this would not seem to be a propitious time for sneering Keynesians to dismiss gold's rise as "a bubble." How many of them warned that the Japanese bubble, or tech bubble, or housing bubble would burst with disastrous consequences?
• Why do they argue that there will be no inflation from Fed and Bank of Japan policies—for which there are no precedents, and which make Seventies central bank policies look almost as tight-fisted as Paul Volcker?
• Gold has—for millennia—been the one commodity that can always be used to buy other assets or goods and services.
• It will always have that basic—and completely useful—function.
• The only gold bubble likely to burst is the bubbling ridicule of gold.

And as faithful readers know, this follows BMO strident declarations about the future of Silver, as outlined here.

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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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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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Amoss Update: Comment by Agora Financial

..

BMO UPDATE: Financial Post: Bank Of Montreal's earnings quality a sore point for analysts.

"Despite this quarter’s record revenues ($2.98 billion) and low tax rate (16%), earnings momentum remains flat and profitability remains challenged. BMO's current valuation ignores reduced earnings power due to continued balance sheet de-leveraging, increasing credit losses from the bank’s US commercial mortgages and C&I loan portfolio, and unsustainable trading revenues."

Of the 16 analysts covering Bank of Montreal, five have SELL ratings, seven have HOLD ratings and four analysts recommend the bank as a BUY.

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Agora Financial didn't have much to say about the issue today other than the following comment:

• Dan Amoss' short of a major bank met with some delayed gratification yesterday. At the conference call, Bank of Montreal not only didn't reduce their dividend, they dropped their loan loss provisions.
  
  That’s good news for day traders, but “a recipe for disaster” for the long haul, Dan tells us. “I still expect a big surge in provision expenses, likely as soon as the quarter ending in October. If you don't believe that the Canadian and U.S. economies are going to come roaring back, which I don't, this is still an attractive short sale.” We think this story is in the early chapters.

Still waiting to see if Amoss will come out with a more detailed statement.

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Waiting for Dan...

.
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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New for Monday evening: Amoss, in his own words, on Bank of Montreal...

.

Here, in Dan Amoss's own words, are some of his thoughts on the Canadian banking system.

They were written by Amoss on August 12th, 2009.

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Everyone thinks they’re safe from the current financial crisis.

No one thinks they’re doomed.

I’m talking about the Canadians, of course.

See, lately, I’ve read a lot about the superiority of the Canadian banking system. And naturally, my contrarian instincts took over.

The Canadian banking system has won accolades for avoiding direct exposure to the most tempting forbidden fruit: products like subprime mortgages, credit cards, leveraged buyout loans, and loans to finance insane commercial real estate purchases.

The financial press loves Canadian banks. On May 19, The Wall Street Journal ran a piece suggesting that these banks are a model of sustainability, and now have the opportunity to acquire U.S. banks on the cheap:

• “Not long ago, Canadian banks were considered slow footed, provincial, and too conservative to flourish in the global boom for financial institutions. Now that banks in the U.S. and Europe are reeling from loan losses and face growing government scrutiny and ownership, Canada’s six major banks are seen as a potential model for battered financial institutions. TD Bank, Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada posted more than C$3 billion (US$2.5 billion) in combined profit in the latest quarter.” [Ed. note: quarter ending April 30, 2009.]
  
  

Canada’s biggest six banks account for more than 85% of the assets in the country’s banking system. By and large, these banks made a smart decision to avoid securitization. Securitization refers to loans that banks originate, bundle together, and sell off to pension funds, money market funds, insurance companies, and other institutions.

But this doesn’t mean that Canadian banks have no credit risk. On the contrary, they have plenty. 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. It’s impossible to avoid. And just to give a perspective on how quickly lending grew at the Canadian banks, the chart below shows that assets at the top six Canadian banks grew from C$1.3 trillion in October 1999 to C$2.7 trillion in October 2008. Equity at these top six banks grew in line with assets; all six kept their ratios of assets to common equity fairly constant since 1999.

Growth in assets, even if accompanied by growth in equity, is always a risky proposition for banks. At the time the loans are made, everything seems fine. Then, when a serious recession arrives, and a dramatic credit loss cycle begins, the market value of loan portfolios can rapidly decline by 5% or 10%, pushing the banking system to the edge of insolvency. Insolvency is when the value of assets is less than the value of liabilities. Bank regulators don’t like this scenario and pressure weaker banks to raise very expensive, dilutive equity capital in order to protect more senior lenders, including depositors, from suffering losses.

Canada has just entered what will ultimately be an enormous credit loss cycle, and by the time it’s over, the Canadian banks could easily lose their pristine reputations. Until the middle of 2008, Canada’s economy was booming. Its mining, energy, and manufacturing sectors are world-class, and every other sector was pulled along for the ride.

But the wheels fell off last fall. According to Statistics Canada, the unemployment rate rose to 8.4% in May — the highest in 11 years. Ontario, with its heavy manufacturing base and ties to the “Detroit Three” auto companies, is especially hard hit; Ontario lost 234,000 jobs, or 14% of its entire manufacturing work force, since last October. Ontario will lose even more jobs this summer as GM and Chrysler dramatically cut auto production. Alberta has slowed dramatically too. Just a year ago in Alberta, every skilled construction worker was working overtime on oil sands projects. Now many projects are postponed and workers are getting laid off. The unemployment rate in Alberta nearly doubled from May 2008 to May 2009, to 6.6%, and is heading higher.

For Canada, this credit cycle will probably be worse than the one in the late 1980s. According to RBC Capital Markets, annualized loan loss provisions for the entire Canadian banking system peaked at 2.88% of all loans in 1988. As of April 2009, this figure was just 0.77%. Over the next year or two, loan loss provisions should easily triple or quadruple, which would cut deeply into profits and capital…sending the worst of the Canadian bank stocks down.

So how do you play it?

I recommend you dig in to the major banks to figure out the one with the most exposure to unemployment rates.

Dan Amoss - August 12, 2009

----------------------------------------------------

And guess which bank that is?

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Email: village_whisperer@live.ca
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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.

==================

Email: village_whisperer@live.ca
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Is the Bank of Montreal in financial trouble?

A number of US-based finance blogs are abuzz with rumours about the Bank of Montreal.

Dan Amoss is the Managing Editor of Strategic Investment, a highly respected US newsletter. According to Amoss – who is famous for calling the crash of Lehman Bros, Bear Sterns and other giants before they failed – a major bank is lying about its ability to pay shareholder dividends, has been gaming its books, and is about to crash.

Amoss doesn’t say which bank he’s talking about, but gives the following hint:

"[It has] a 192 year old history and 37,000 employees..."

A quick Google search reveals that this can only be the Bank of Montreal, also known as BMO Financial Group.

Stock Gum Shoe – a website devoted to guessing at the companies hinted at in stock tips - confirms that Amoss was talking about Bank of Montreal.

US financial blogs are all agog about this bit of news because Canadian banks have widely been seen as the world’s safest and most stable banks. Indeed, the Bank of Montreal was listed as the 33rd safest bank in the world by Global Finance.

Amoss says this bank won’t be able to pay the promised $1.5 billion dividend scheduled later this year, which will precipitate a crash in BMO’s stock by December.

The following is from www.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."

The newsletter that Amoss writes is called Strategic Short Report and it promises to release details about this soon-to-fail bank in it's August 24th issue.

As a teaser, Amoss has given the following clues to this bombshell:

We already know their annual dividend tallies up to about $1.5 billion.

“With a 192 year old history and 37,000 employees, its crash would drop like an A-bomb on unsuspecting shareholders...”

“A major rating agency just cut this bank’s outlook to negative."

“And, in a warning sign I’ve never seen before, this bank’s own employees are speaking up — questioning management about the fudging of numbers on their most recent earnings conference call.”

www.stockgumshoe.com also offered the following:

“Here’s why Dan thinks this Bank will get slammed. It all boils down to a few very simple things. This bank made risky loans to people who, unfortunately, are losing their jobs quickly. Without jobs, these people won’t be able to pay the bank back. The bank management is using accounting tricks to hide these losses from their shareholders, while some of the same executives even appear to be quietly dumping their own shares at peak prices. But they can only ‘fake’ it for so long. If those loans finally default, it’ll set off a cascading effect of losses... lower earnings… and a draining of cash. With no cash, regulators could force this bank to cut their massive dividend. And this dividend cut would force their share price to plummet — maybe as much as 50-75% in a day — as folks race for the exits.”

Amoss believes BMO is essentially cooking the books with their loan losses and such, and that he seems to think that a collapse is imminent.

Right now it's all rumour and innuendo.

However there are several reports on the web that do indicate that a Bank of Montreal analyst was asking somewhat snippy questions on the last conference call about the expected losses and the accounting thereof.

I have no idea if that’s unusual or not, I’m not a habitue of bank conference calls, and I don’t know whether or not analysts who are employed by the bank giving the call typically kowtow to the CEO and CFO or ask tough questions.

BMO has been reporting profits every quarter — but of course, a bank has lots of ways of reporting profits even if they’re not genuinely profitable, as Dan implies, and we have certainly seen plenty of evidence that banks can go from profitable juggernaut to pile of rubble in a matter of weeks if their projections turn out to be overly optimistic. Whether or not Amoss is correct that this will be happening to BMO, I have no idea — analysts are still predicting that they’ll be recording profits for this year and next, and that the shares trade at a forward PE of about 10, which is a lot lower than the valuations of many of the big US banks … but then again, the big US banks fell a lot further, too, and have much more of a “snap back to profitability” investment thesis behind them.

The issue is drawing keen US interest because last Fall, when Citigroup and Bank of America were begging for bailouts, many investors started to think of all of the big Canadian banks as a sort of safe haven in the financial sector … after all, the shares collapsed “only” 50-60% in 2008, not the 95% that many US banks suffered through.

BMO, for one, is actually just about even with where the shares traded a year ago, which is something you can’t say about a lot of big American banks.

Amoss is expected to suggest that this safe haven allure has blinded investors to the fact that many of the Canadian banks have the same kind of asset-writedown problems coming as do the banks in the United States.

That’s just a guess, but let's face it... Canada’s economy is weak thanks to our close ties to the US. BMO and our other Canadian banks are global banks now, so they’re getting a taste of the global slowdown.

Amoss claims BMO is in trouble because of their exposure to the oil and automobile industries and to the communities impacted by unemployment in those industries, and because they have not been earning enough to cover the dividend (a dividend cut at BMO would, in Amoss’ opinion, cause the shares to crash).

Interestingly BMO's next quarterly report is due on August 25, the day after Dan Amoss is scheduled to release his report. Amoss also implies that the dividend cut might come as soon as with this August earnings release.

Right now it's all rumour.

But next week has the potential to put Canada on the world stage, front and centre.

We shall see.

==================

Email: village_whisperer@live.ca
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