Have you seen the movie The Big Short? It’s a great film even if you have little interest in the financial markets. It’s akin to Bohemian Rhapsody being a great film even if you are not a fan of Queen or Freddie Mercury,
The Big Short centers around the US financial crisis that took down the stock markets of the world in 2008 and through to early 2009. Stock markets typically fell in the area of 45-65%. It was nasty. The financial crisis was caused by the US mortgage market and the proliferation of essentially worthless mortgages. In the US at the time you could show up at a bank and get a mortgage – no need to have any monies or even prove that you have a job. Just sign here. Those loans were bundled up and repackaged and sold again, and again and again as ‘Investments’ in safe mortgages. And those investments were rated of the highest quality. Of course it all came tumbling down as a house of cards. But surprisingly, very few financial folks recognized that the mortgages woudl be worthless as soon as any cracks appeared in the real estate market. Crack it did.
One financial guy who saw it all coming was Steve Eisman. He found a way to short the mortgage market and he and his firm profited handsomely. The Big Short is the story of Mr. Eisman and the financial crisis. And I have a part in that film as well, I’m an extra – a background ‘actor’. The film makes mention of all of the collateral damage – the employees within the financial industry who would lose their jobs. That was me. I was working almost exclusively on a US bank – ING Direct US. Now being the sensible good guys and gals ING Direct, now Tangerine in Canada, did not partake in any of the shady mortgage business, but the mothership ING Group in The Netherlands held a lot of those bundled loans (CDOs) and it essentially bankrupted the massive financial company. There were many layoffs and budget cuts. I was working for their ad agency at the time.
Mr. Eisman is now calling for the The Little Short on Canadian banks.
He’s not calling for a major collapse. But he does call for a stock price decline of 20% or more. He feels a few of the Canadian banks are ill prepared for a correction in the Canadian real estate market. He also see weakness in the Canadian economy.
Here’s the entertaining video with Mr. Eisman on BNN Bloomberg, Canada’s Bank CEO’s are ‘extremely ill prepared’ for credit cycle.
In that interview Mr. Eisman makes some ‘mistakes’ and even some outrageous observations or claims. He even states that the Canadian bank CEOs are not emotionally prepared for the any market correction or credit cycle. I won’t add much more here, but I did write on the subject on Seeking Alpha. Here’s Will Steve Eisman’s Big Short on the Canadian Banks Become The Big Hurt?
And for a closer look at the financial thesis put forth by Mr. Eisman The Dividend Guy offers up The Big Short on Canadian Banks. The author, Mike Heroux, is a former advisor with a big Canadian bank. He now operates The Dividend Guy blog and Dividend Stocks Rock. He knows the numbers well and you’ll see that he ‘softly’ agrees with Steve Eisman on a couple of issues.
The good news is – you can ignore Mr. Eisman
You can ignore Mr. Eisman. It does not matter if he turns out to be right or wrong. If he’s right and the bank stocks fall, they go on sale. You can buy more shares if you own the individual stocks. If you are a self-directed investor and you create your own ETF portfolio it’s likely any weakness in the Canadian banking sector will bring down your portfolio, modestly. You’ll likely experience the same event if you hold that ETF portfolio by way of one of The Canadian Robo Advisors. Once again, the shares go on sale. We’re in it for the longer term, right? Sometimes our stocks go down – it’s normal and expected. We simply add monies on a regular schedule and we wait for the market recovery and the recovery in the Canadian financial sector.
Focus on what you can control
You can control your fees. You can control your asset allocation. You can control your behaviour.
You can’t control the stock and bond markets. You can’t control the interest rates. You can’t control politicians or trade wars or Brexit. You can’t control Steve Eisman.
Buy. Hold. Add. It’s that simple. Successful investing is really boring.
More Weekend Reads
I offered Why pay your bank or advisor when they are not offering any advice. It’s not a good idea to pay for stuff that we do not receive.
That article made mention of the class action lawsuit against two of the Canadian banks for allegedly index skimming and charging high fees.
And more on index skimming, on The Hub Using arithmetic to crush closet indexing.
On MoneySense Dan Bortolotti offers up a refresher on income distributions in ETFs and mutual funds.
Jason Heath offers an easy guide for income splitting for seniors.
Here’s some common sense stuff from Martin Pelletier on how Spring cleaning your portfolio can do more harm than good.
Patient investors were rewarded handsomely.
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