Friday, October 23, 2009

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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