Canadian GDP grew by only 0.4% in the 4th quarter, well below analystsâ€™ estimates, with household consumption growth revised down to 2.0% in the first half of 2018 and dropping to 0.7% in the 4th quarter. Residential housing growth has declined and unsold inventories are beginning to stack up, even the turbo-charged markets in Vancouver and Toronto are experiencing slowing demand and price fragility.Â Â With housing numbers continuing to look weak, Canadian banks such as CIBC (CM CN\CM US) and Toronto Dominion (TD CN\TD US) have increased loan loss provisions in anticipation of future mortgage defaults and bankruptcies.
Steve Eisman, fund manager at Neuberger Berman and a major player in The Big Short, has been short U.K. financial institutions ahead of a possible hard Brexit landing and Canadian financial institutions ahead of potential mortgage portfolio losses. Eisman must not be alone in his convictions as short exposure to the Canadian Banking, Thrift and Mortgage Finance sector has grown by almost $2 billion, or 19%, in 2019.
Short selling has been very active in most of the bank stocks, with only three bank stocks having net short covering for the year. The largest amount of net short selling in 2019 occurred in Bank of Nova Scotia (BNS CN\BNS US) with 5.0 million shares shorted ($271 million); CIBC (CM CN\CM US) with 4.3 million shares ($361 million) and Bank of Montreal (BMO CN\BMO US) with 883 thousand shares ($68 million.) While short covering in 2019 occurred in Royal Bank of Canada (RY CN\RY US) with 875 thousand shares covered ($68 million); Laurentian Bank of Canada (LB CN\LRCDF US) with 787 thousand shares covered ($24 million); Canadian Western Bank (CWB CN\CBWBR US) with 309 thousand shares covered ($7 million.)
On the mortgage side, short selling overshadowed short covering. Shorts built up their positions in Genworth MI Canada Inc with 161 thousand shares shorted ($5 million); Home Capital Group with 972 thousand shares shorted ($12 million) and Firm Capital Mortgage NV Corp with 395 thousand shares shorted ($4 million.) Short covering was minimal in three stocks, Mcan Mortgage (MKP CN) with 21 thousand shares covered ($228 thousand); First National Financial (FN CN) with 18 thousand shares covered ($381 thousand) and Atrium Mortgage with 34 thousand shares covered ($331 thousand.)
While short selling increased in the banking sector, the trades were not profitable in 2019. Sector shorts are down $1.18 billion in mark-to-market losses for the year, but their fortunes are turning up as the vast majority of their losses incurred in January and March actually showing a profit.
Weâ€™ve seen active short selling and covering in the bank stocks after their recent earnings reports while the mortgage related companies had virtually no change in their short activity. Post-earnings short selling increased in BNS CN (+1.5 million shares), CM CN (+800 thousand shares), BMO CN (+1.4 million shares), and CWB (+300 thousand shares.) While post-earnings shares shorted decreased in RY CN (-700 thousand shares) and NA CN (-700 thousand shares.) Shares shorted in LB CN remained relatively flat after their earnings announcement.
If we continue to see downward volatility in the Canadian housing market we should continue to see increased short selling and price weakness in the Canadian banking sector.
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Managing Director Predictive Analytics, S3 Partners, LLC
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