Why Does Steve Eisman Plan to Short the North?

“We’re going to make the big banks hurt,” Mark Baum, The Big Short

If you’ve seen the movie, The Big Short, you know the sort of shenanigans that helped lead to the big financial crisis of 2008. Millions lost their homes, their jobs, their savings in the giant tornado of financial devastation spurred on by the Wall Street scions who hugely profited off that misery in Scrooge-like fashion while rubbing their hands with glee. They watched their bank accounts expand by hundreds of millions of dollars, a figure unimaginable to those left behind sadly carrying their welcome mats to the moving van they could now barely afford. Bah, Humbug! Some might say.

Greed and the quest for power can lead people to do strange things without consequence of what it might mean to the potential victims on the other side. Guess that’s business, some might say. So, let’s take a look at how some of that business may come about.

One of the main characters in the movie, Mark Baum played by actor Steve Carrell, represents a semi-fictionalized Steve Eisman, one of the scions whose portfolio skyrocketed from $700 million to over $1.5 billion, while over a period of 8 months, 84 real estate lenders in the United States went bankrupt with a giant KABOOM![1]

Now, slightly more than a decade later, Eisman has announced that he plans to look to his polite Northern neighbors and short the Canadian banks. That’s right. Some of Canada’s most stalwart institutions have a giant red circle on them, specifically the Royal Bank of Canada (RBC), the Canadian Imperial Bank of Commerce (CIBC) and the Laurentian Bank. In his opinion, bank stocks are set for a 20+% decline as economic conditions worsen and loan losses increase.[2] On top of that, he has to pay the dividends (about 4%) as he has shorted the banks.

Eisman is basing his theory on a faltering housing market and a sluggish economy combined with the fact that credit normalisation has not occurred in Canada for 20 years.[3]

While Eisman acknowledges that he doesn’t see the same drastic gut-wrenching housing crash that the US saw in 2008, in his words, “This is not ‘The Big Short: Canada’ — I’m not calling for a housing collapse,”[4]he clearly sees an opportunity in some form. It seems he has decided to put reality into his semi-fictional character’s words. And it will still hurt the banks and by default individuals when the bandages are ripped off.

He may have a point. While Canada’s housing market has been fairly healthy over the past years, in Toronto and Vancouver houses have become so pricey that on a typical salary many people may not be able to reasonably afford to buy. It is possible that over time this may spread to other cities, causing people to either over-extend themselves or simply not enter the market at all, which may cause further problems in the housing market, leading to further economic issues and so on and so on.

Add to that the steady rise of Canadian household debt that has slowly seeped into a giant waterfall cascading to $2trillion in 2018, with approximately three-quarters of that debt sitting in mortgages[5] and you don’t need to have a degree in economics to figure out that things could go wrong.

Learning by example is a great way to do it, so let’s take a look at how things partly evolved in the US. Household debt was massive. Anybody and their dog were granted mortgages, no matter what the risk. Many homeowners were holding adjustable rate subprime mortgages. When the banks raised the rates, people who were just barely managing to make their mortgage payments found themselves on the phone arranging to rent a moving van. The rate of foreclosure skyrocketed in some States to over 100% with Arizona suffering a 203% rise.[6] House pricings came crashing down. People were now living in homes on which they owed much more than what the home was worth. Too often the only option was to give in to foreclosure. On top of that with the behemoth amount of jobs that were lost, it was the worst financial crisis the US had endured.

While Canada may not suffer to the same degree, Eisman is not the only one counting on the Canadian banks trending downwards in profitability and stock values. Based on financial positions analytics conducted by S3 Partners, bets against Canadian banks have risen 19% in 2019 to worth $12.3 billion.[7]

With the 2008 crash, Eisman apparently starting planning for it in 2004 when a bug entered his ear at a conference in Las Vegas. Over the next 3 years, he identified dubious loans and decided to bet they would fall. He managed to convince Goldman Sachs and Deutsche Bank to issue Credit-Default swaps. Then like a pro poker player stone-facedly guarding his cards, he watched it start in 2007. Mortgage defaults started to pile up and investors pulled out of the real estate market. The US was thrown into an economic crisis. And the millions started rolling in for Eisman and his cronies. While I’ll bet that he had some tense moments wondering if his gamble was going to pay off, in the end, the dealer won.[8]

As far as timing with the Canadian banks, I feel it is more like 2021/22 when things will start to head south, but it will not be near the epic gut-wrenching proportions of 2008. It will be more geo-political as well as some socio-economic. Eisman’s name will likely be tied to it, as it is tied to the 2008 crisis.

In Charles Dickens’ classic work, A Christmas Carol, Ebenezer Scrooge, a banker of sorts finds himself confronted by three ghosts. “Are these the shadows of the things that Will be, or are they shadows of things that May be, only?” Ebenezer Scrooge to the Ghost of Christmas Yet to Come, who is pointing to a grave bearing his own name.

Well, that’s one way to have your name engraved. Another is to do something so historically meaningful that your name is also etched in another way in memory. Eisman has already managed to achieve that once. Looks like he is going for the second round.

As always, do your due diligence.

Happy Investing!

Dr. Kal Kotecha

TO JOIN OUR FREE NEWSLETTER, PLEASE VISIT WWW.STOCKTRENDSREPORT.COM AND WWW.JUNIORGOLDREPORT.COM

Disclaimer

© 2018 Stock Trends Report/© 2010 Junior Gold Report

Stock Trends Report/Junior Gold Report Newsletter and website: Stock Trends Report Newsletter/Junior Gold Report Newsletter and website is published as a copyright publication of Stock Trends Report/Junior Gold Report (STR). No Guarantee as to Content:Although STR attempts to research thoroughly and present information based on sources we believe to be reliable, there are no guarantees as to the accuracy or completeness of the information contained herein (newsletter and website). Any statements expressed are subject to change without notice. It may contain errors and you should not make any investment decisions based on what you have read on here. STR, its associates, authors, and affiliates are not responsible for errors or omissions. By accessing the site and receiving this email, you accept and agree to be bound by and comply with the terms and conditions as set out herein. If you do not accept and agree to the terms you should not use the Stock Trends Report site or accept this email.Consideration for Services: STR, it’s editor, affiliates, associates, partners, family members, or contractors may have an interest or position in the featured companies, as well as sponsored companies which compensate STR as such our opinions are biased. We may hold options in and trade these stocks of the companies we profile and as such our opinions are biased. STR and its’ owner and affiliates/associates may buy/sell and trade the featured companies from time to time. STR has been paid by the companies. Thus, multiple conflicts of interest exist. Therefore, information provided here within should not be construed as a financial analysis but rather as an advertisement. Conduct your own due diligence: The author’s views and opinions regarding the companies featured in report(s) are his/her own views and are based on information that he/she has researched independently and has received, which the author assumes to be reliable. You should never base any buying/selling/trading decisions off of our emails, newsletter, website, videos or any of our published materials. STR aims to provide information and often stock ideas but are by no means recommendations.The ideas and companies featured are highly speculative and you could lose your entire investment – consult a licensed financial advisor if you are considering investing in any of the featured companies. Subscribers/readers are encouraged to conduct their own research and due diligence. The companies mentioned are high risk and considered penny stocks that contain a high risk of volatility, therefore consult your investment advisor and do your own due diligence before purchasing. Never base any investment decision on information contained from our emails, newsletter, website, videos or any of our published materials. No Offer to Sell Securities: STR is not a registered broker dealer, investment advisor, financial analyst, stock picker, investment banker or other investment professional. STR is intended for informational, educational and research purposes only. It is not to be considered as investment advice. No statement or expression of any opinions contained in this report constitutes an offer to buy or sell the shares of the companies mentioned herein. Links: STR may contain links to related websites for stock quotes, charts, etc. STR is not responsible for the content of or the privacy practices of these sites. Information contained herein was extracted from public filings, profiled company websites, and other publicly available sources deemed reliable. Information in this report was taken on or before writing and dissemination and may not be updated. Do you own due diligence as information and events can and do change. Published reports may reference company websites or link to company websites and we disclaim and responsibility for the content and accuracy of any such information or website. Release of Liability: By reading the newsletter/website and/or watching videos by STR, you agree to hold STR, its associates, sponsors, affiliates, and partners harmless and to completely release them from any and all liabilities due to any and all losses, damages, or injuries (financial or otherwise) that may be incurred.

Forward Looking Statements
Except for statements of historical fact, certain information contained herein constitutes forward-looking statements. Forward looking statements are usually identified by the use of certain terminology, including "will", "believes", "may", "expects", "should", "seeks", "anticipates", "has potential to", or "intends' or by discussions of strategy, forward looking numbers or intentions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Forward-looking statements are statements that are not historical facts, and include but are not limited to, estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to the effectiveness of the Company's business model; future operations, products and services; the impact of regulatory initiatives on the Company's operations; the size of and opportunities related to the market for the Company's products; general industry and macroeconomic growth rates; expectations related to possible joint and/or strategic ventures and statements regarding future performance. Stock Trends Report does not take responsibility for the accuracy of forward looking statements and advises the reader to perform their own due diligence on forward looking numbers or statements.