Thursday, January 15, 2015

Verdmont Capital makes a ballsy and/or crazy call, hard to tell

Verdmont Capital - hey ho, RBC is a short.


I don't know the guys at Verdmont, so I don't know if they're Canadian or not. But given the assumption that RBC's position is weak because oil is collapsing, I have to shake my head.

In Canada, for those of you not in the know, we essentially have 5 national banks (RBC, TD/Canada Trust, BMO, CIBC and Bank of Nova Scotia - I wouldn't count National or Caisse). They've always made money, and it's because they essentially control the government. We've always put up with it.

Far as I'm concerned, if the tar sands are dead, the banks will move on to something else. Did you guys call a short on RBC when mining collapsed? How'd that work out?

And then they say this:

It is very difficult to measure the indirect impact that natural resources has on the Canadian economy. Think of all the auxiliary business that results from activity associated with natural resource development, production and transportation. This would feed through to many different sectors of the economy like trucking and transport, various industrials, engineering companies, construction companies, law firms, housing and financial service companies; to name only a few.

Guys, did you try Wikipedia?

The Canadian economy in 2012, composed of the industries below, had a relative weighting by value of GDP:

12.34 Real estate and rental and leasing
10.86 Manufacturing
07.96 Mining quarrying and oil or gas extraction
07.03 Health care and social assistance
06.90 Public administration
06.55 Finance and insurance
05.41 Wholesale trade
05.41 Retail trade
05.38 Educational services
05.21 Professional scientific and technical services
04.20 Transportation and warehousing
03.31 Information and cultural industries
02.58 Administrative and support, waste management and remediation services
02.46 Utilities
02.10 Accommodation and food services
02.04 Other services (except public administration)
01.59 Agriculture forestry fishing and hunting
00.76 Management of companies and enterprises
00.75 Arts entertainment and recreation

Tar sands is only a small slice of "mining quarrying and oil or gas extraction". And when you look at where oil is in the country, that'll give you an idea as to its impact on our economy. Answer: fuck Alberta anyway.

Canada's seen collapses in the resource industry before. Have a look at the entire 1990s, for example. The banks have always gone up.

Now I'd agree (and hope) the collapse in oil is going to destroy Alberta: as already noted, with oil at $30-$40, I'd expect Alberta to run a $15 billion deficit, which will literally destroy the province. That's mainly because it's run by fruitcake right-wingers who have already cut tax revenue to the bone because of the past resource windfall and, now faced with a deficit, will know of no way to deal with it except to cut services.

How do you cut $15 billion in spending out of a $38 billion budget? You don't, they're fucked, end of story.

But as for the rest of Canada, that 8% in "mining, quarrying and oil or gas extraction" happens to a large extent in parts of the country that are quite used to having depressed economies, and which (sorry, guys) nobody else in the country gives a shit about. Go visit Kirkland Lake or Timmins and ask the people there about hard times. It's not going to hit urban central Canada, whose manufacturing industry (that 10.86% up there) is going to be laughing with reduced input costs.

Plus lower fuel costs will help the consumer: not as much as you'd hope cos of our high gas tax, but it's still being noticed.

Guys, Canadian manufacturing and central Canada have been suffering for a decade now, as the tar sands hollowed out the national economy with the help of an Alberta-loving Toronto-hating federal government. Yet the banks have still made money; factor that into your analysis before you short RBC.

As for your real estate argument, that might have some heft to it. There'll certainly be a real estate crash in Alberta (thank god) - we're hearing rumblings already. Certainly the Newfies will all be moving back home, happier and richer. But I don't see how that can possibly affect real estate in Toronto or Vancouver or Montreal. We'll see: certainly a cooling of those markets is a positive.

It'll be interesting btw to see what happens to wages in the broader (not oil, they do other things too) Alberta economy. You'd think service wages would go down, except that's where you find most of the migrants and they might all be leaving now.

And your rate argument is swell, but it applies to US banks as well, and you might be over-reacting to a short and recent move in rates that shouldn't necessarily be expected over the longer term. Rates change.

And then there's this:

Have a walk down Bay Street in Toronto one morning. People are absolutely miserable after their 3 hour commute to their very quiet trading floors. Were it not for their gallon sized cups of Starbucks coffee, these people appear as if they might fall over or be swept away by a stiff breeze.

OK, so you have been to Canada then? Look, people who work on Bay Street might look miserable, but it's because they're fucking hateful cunts it's been a nasty winter. Um... and they're all underground, you won't be seeing them or anyone else walking down Bay Street. The last they see of sunlight in their day is at Union Station.

Hey, you guys are the investment people and I just write a blog. Maybe your call will be a good one. But frankly, I think if you're looking for a good short in the Canadian market right now, there are much better places to look than the banking sector.

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