CM

RY, CM

Hamilton

ry feb2011 cm feb 2011

As the head of the largest Quebec based pension fund recently cynically observed, the TSE is one big China play if you take out the banks. Everything goes up 50 points a day for months on end but most of the time the banks do not partake in this feast. The RY has even earned an outright sell rating by one of the better and independent (though ironically affiliated with RY) analyst bureaus , that goes by a name that suggests it is telling the truth, albeit in Latin.

   We have steadfastly maintained that the Royal Bank should trade at around $44 before it does anything else. Despite the fact that it has taken about 4 months longer than originally anticipated nothing has changed that outlook. The first leg down from the all time peak of $63 (and double-top plus a little), was a clear 5-wave move. The correction following that very quickly regained almost 62% but it was only part of a more complex correction. Now the stock is again approaching that level and even though it could go slightly further it is within a few dollars of the target. Then it should drop at least to $44

The Commerce (a longer time frame!) has followed a different path but it is equally clear. The A-B-C from the lows has a very clear (so far at least) wedge formation that is within a single dollar of the upper trend-line. Amazingly the RSI and MACD do not confirm the new highs.

By the way, the CM/RY spread trade would have worked exceptionally well!

The Canadian Banks.

Hamilton

First a chart of just about every single one of them;

RY banks BNS banks

cm banks bmo banks

na banks hcg banks

cwb banks  LB banks

TD 2011

From top to bottom we have RY, which made a new high and then dropped 10% or so, BNS that not only made a new high but stayed up there, CM (CIBC) that seems to be groping in the dark, BMO, middle of the road, NA National, HCG Home Capital Group (see comments elsewhere) the best of the lot and , ironically, the only sub-prime lender, CWB Canadian Western Bank they finance anything that belches diesel smoke and is yellow, the Laurentian Bank and last the TD.

Notice that despite some , sometimes large, deviations most have done more or les the same thing. All had 5 waves up, then a big drop, and then an attempt to a new high. Some failed others did not. The TD is in the middle of the pack with a simple double top.

All are sells! These banks operate as a cartel, with intended or unintended collusion all over the place, with rotating price setting etc. etc. This is the same all over the world but Canada does it best. They have a huge lobby in Ottawa and usually get what they want (with the notable exception of further mergers). If they want private wealth management to stay that way, as opposed to broadening the CPP, they will get that.

There is one big problem with this. Ultimately ,with globalization , the system will have to be opened to competition when Canadians tire of paying twice as much as the next guy. They already have just about everything. In the mid eighties they took over mortgage lending from the trust companies and now control about 80% of that. A few years later they took over all the  major investment dealers and now control much of that. Gradually the independent mutual fund firms are also taken over and now they control the bulk of that. They have made sizeable gains in insurance and are gaining momentum. There is precious little left other than leasing and travel. So where is the growth going to come from?

    At the same time new rules  (Basel 3, Volcker, Capital requirements etc.etc.) and regulations are crimping their ability to move beyond the straight and narrow. Not that they ever did much of that but even so they will be doing less of it in the future.  Soon, hopefully, they will lose the absolutely enormous benefit bestowed upon them by ridiculously low rates. This is a mature industry, and the next 20 years are not likely to resemble the last. The only thing they still have going for them is the perception that they are safe blue chips. Any broker who is not sure what to do buys bank stock and this artificially keeps a bid under the stocks, but from the charts it is abundantly clear that this can change very fast as in 2008, maybe it will again.

   From a buy low sell high standpoint , none of the above banks are a buy today.

CM Feb 2010

Hamilton

We have had our eye on Commerce bank before, usually in the context of a spread trade where you actually by the the one that breaths incompetence and sell short the star performer. The trade worked fabulously but required a certain degree of sophistication. Today the Commerce reported earnings and , of course they outperformed. What many analysts do not seem to know is that banks are not obliged to report like others under GAAP. They have their own rules under the Bank Act which, among other things, allows them , rather arbitrarily, to allocate loan losses over a 5 year period. That is known loan losses, not anticipated ones, which is why most of the loan loss allocation is little more than working the old fashioned cookie-jar. Well today’s euphoria was very much based on that , or perhaps people were simply happy that management did not again give away a few billion unnecessarily as in the case of Enron. Anyway here is the chart;

CM feb 2010

I am not sure how to count the retracement, probable an a-b-c X a-b-c, but that does not matter given the weight of the other evidence. As pointed out a long time ago, you do not want to own this if and when it gets closer to $78, which is roughly the standard  62% retracement. Already momentum as measured by RSI is failing. Same for MACD, not shown.  Remember also that 5-waves, which this one clearly has from the high of $105, NEVER stand alone. The potential for a severe down turn soon is therefore very real and should not be ignored.