# Big Short's Steve Eisman is now targeting Canadian banks



## newfoundlander61 (Feb 6, 2011)

What is the purpose of a headline such as this. Stocks are shorted all the time. If investors stick to their plan for investing this would to me come under the category of "market noise"? Maybe or maybe not. Opinions welcome, always interested in reading other investors takes on such topics.

Paul


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## off.by.10 (Mar 16, 2014)

Same as most headlines these days: to grab attention and generate viewer traffic. The facts are likely far less interesting. And the truth probably that it's all noise indeed.


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## CPA Candidate (Dec 15, 2013)

G&M has been, for several years now, a short sellers best friend; giving air time to anyone with a negative opinion of the Canadian financial system. This one of the reasons I no longer subscribe.

The short thesis itself has been the same for 5+ years and it hasn't made any money. With mortgage rates coming back down and new budget measures to help 1st time home buyers, the decline in sales volume and prices has probably run its course.


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## Mechanic (Oct 29, 2013)

I put a bid on some more bank stock this morning. I hope it fills, it will come back up and pays a decent div.


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## OptsyEagle (Nov 29, 2009)

I have made so many mistakes in investing it is difficult to count, but while I was doing that I somehow made a boat load of money. When I look back at it I realized that a couple of very lucky mathematical laws somehow compensated for my mistakes.

*Fundamental law #1*. If you own two stocks, equally weighted and one goes up and one goes down, the one going up soon becomes higher weighted in your portfolio and somehow makes up for the losses on the one that went down, which becomes more insignificant in your portfolio, the lower it goes.

*Fundamental law #2* The stock market appears to have an upward bias, so that even a 50:50 record of stock picking success, somehow makes one money.

*Fundamental law #3* You can only lose 100% of the money you put into a stock that goes down, but you can earn 200%, 500%, 1000% on the stocks that go up.

Anyway, there are more fundamental laws that help a "long only" investor overtime, but shorting goes directly against those three laws. Those 3 laws goes directly against the short seller and therefore the short seller has to not only be much more accurate on their investments but cannot stay at the party too long either...or those 3 laws will kill them.

Just my opinion, of course.


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## milhouse (Nov 16, 2016)

It's not really a new headline. After watching the Big Short and then recently reading the book I googled to see what Steve Eisman has been working on, saying/predicting, etc. He has been short Canadian Financials for at least year now and correspondingly talking about concerns about the Canadian housing market for at least a year and a half. And he's not calling for a close to armageddon like scenario similar to what happened in the States but seems to think some Canadian financials will have some problems with a contracting housing market and credit cycle, which has kind of been a common thesis the last few years. Canadian financials just seem continually to defy gravity, though this past quarter's results did show some cracks.


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## humble_pie (Jun 7, 2009)

i remember talking about 6 years ago with the manager of a house hedge fund. By house i mean it was for employees only; but they (it was a financial house) weren't against accepting outside investors' money if they were accredited investors

they had recruited the hedge manager from TD & they were inordinately proud of the fact that he was among those who had called the 2008/09 credit collapse in time to help save the big green from gomorrh, or so they said

my point in all this is that, around 2012, the hedge guru was shorting canadian banks. He was going long US banks & short canadian banks.

i guess it's a timeless one-size-fits-all strategy


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## james4beach (Nov 15, 2012)

Shorts aren't meant to be long term positions, they are trades. A healthy market needs people taking both long and short positions for natural price discovery. It's _less_ healthy when everyone piles on the long side and there aren't any short sellers. One of my concerns it that 10 years of central bank stimulus have eliminated short sellers, because the shorts were effectively trading against the central banks (and lost). The central banks manipulate security prices upward by printing money, but a consequence is that they've eliminated the bearish positions which provide a natural balance to markets.

Canadian banks are one sector with way too much optimism, unanimous bullishness (especially among retail). The stocks are over-owned and over-loved, plus there's denial about how bad their condition was during the crisis years. IMO this is a recipe for disaster if we ever get a RE slowdown. There are some people who post on this forum with stock portfolios that are extremely concentrated in bank shares.

The good news, though, is that if the banks ever encounter big trouble, all the brave bank equity holders -- those brave risk takers -- will recapitalize the banks and protect our deposits, getting wiped out themselves in the process. The banks will not fail. I salute all you brave bank shareholders willing to keep my banks solvent by sacrificing your equity.

I'm bearish on the banks, but I no longer make speculative trades. I am underweight Canadian banks vs the index.



milhouse said:


> Canadian financials just seem continually to defy gravity, though this past quarter's results did show some cracks.


Like banks in all countries, they defy gravity only as long as the bull market in real estate continues. Banks are a highly leveraged bet on real estate and the broad economy.


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## james4beach (Nov 15, 2012)

If I were to put on my trader's hat for a second, it looks like ones worth shorting may be CIBC, Scotia, Home Capital Group. And even if I did short them, I would only hold the short if the market played out my way. If housing remained strong and banks kept rallying, I would acknowledge that my timing was wrong and abandon the short (which I have in fact done before on RY... covered it long ago).


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## doctrine (Sep 30, 2011)

Steve Eisman shorts the Canadian banks every couple of years since the financial crisis. When the trade isn't working, he puts out news releases and tries to generate panic. The resultant increase in liquidity is typically used as an exit point for the funds to cover the shorts. Listening to them is essentially pointless as you are only hearing what they want to you hear. None of this is based in reality.


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## Pluto (Sep 12, 2013)

I think shorting the banks is a fool's errand. Its a bet, not an investment.

For one thing, timing has to be perfect mainly because the dividends have to be paid by the one going short. If the stock doesn't fall, or fall enough, he loses just on what he has to pay in dividends. 

For another thing, there is a real estate slowdown in terms of a drop off in sales, but the banks are not plunging. The slow down has to be sharp and severe and prolonged for this to work, and although there are headwinds, there is no clear picture of a very serious problem that warrants shorting. If he's so good at this, why didn't he short them last July, and cover his shorts last December? 

I wish him good luck, but I'm not getting spooked out of my bank stock.


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## Just a Guy (Mar 27, 2012)

This is an attempt to manipulate the market...you short the market, you tell everyone who’ll listen that you’ve shorted the market, hope people panic and sell because you’re the expert, and create a self fulfilling prophecy...happens all the time because it can work short term.


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## james4beach (Nov 15, 2012)

CPA Candidate and Just a Guy, why don't you show them who's boss and buy more bank stocks? Teach the bears a lesson.

How dare they speak negatively about the stocks you love... justice will be yours if you tune out the cynics. How dare they ever voice a negative outlook when your outlook is positive for the companies.


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## Eder (Feb 16, 2011)

I'm pretty sure most astute investors here add to their bank holdings every year to make $$, not to prove anything.


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## Just a Guy (Mar 27, 2012)

Actually, I wasn’t even thinking of bank stocks when I responded, I was thinking about this video...

https://youtu.be/VMuEis3byY4

I think it pretty well sums it up.


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## james4beach (Nov 15, 2012)

Eder said:


> I'm pretty sure most astute investors here add to their bank holdings every year to make $$, not to prove anything.


What % of your stock holdings are Canadian banks?


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## timemoveson (Nov 22, 2017)

A couple million dollars worth, which is a measurable percentage of my overall holdings. I'm pretty sure that many investors are perfectly happy holding and/or adding to their Canadian Bank positions, forever, not to prove anything but just continuing to get wealthier.


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## Eder (Feb 16, 2011)

james4beach said:


> What % of your stock holdings are Canadian banks?


I'm at 28% financials if I include my insurance stock. It increased from 24% when TD dropped to the $60's allowing me to get in after the last "end of the world" panic...few months ago I guess. 

The % has been dropping lately due to crazy gains in pipes, utilities & telecom's lately.


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## Just a Guy (Mar 27, 2012)

Personally, I don’t buy stocks based on sector, I buy based on value. That being said, I last bought banks in 2007/8 during the crisis. The stock, at that time paid me a 10% dividend based on purchase price, now around 15%. Needless to point out, after 10 years, my purchase price was returned in dividends alone. Everything I now hold and recieve going forward is pure profits. I can afford a correction I suppose.


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## Argonaut (Dec 7, 2010)

I own and recommend 15-20% Banks in a Canadian equity portfolio. This is a good chunk, but still much less than the 34% Financial weighting in the TSX Composite.


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## hboy54 (Sep 16, 2016)

Argonaut said:


> I own and recommend 15-20% Banks in a Canadian equity portfolio. This is a good chunk, but still much less than the 34% Financial weighting in the TSX Composite.


I am in this range too, 4 of big 5 for high teens, HCG, MFC, and POW bring total financials to 27%.

That is 3 of us negatively overweight to the tune of 5 to 10 percentage points. Plus James for 4 of course.


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## james4beach (Nov 15, 2012)

Argonaut said:


> I own and recommend 15-20% Banks in a Canadian equity portfolio.


I'm about the same, slightly less than 20%. I'm underweight vs TSX but this weight is very much a global standard, e.g. S&P 500 has 16% financials.


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## londoncalling (Sep 17, 2011)

I believe I have been underweight the TSX since day 1 of my DIY investing. I currently hold BMO,BNS,RY,TD and CWB. It accounts for 13.5% of equity portfolio. Also own PWF which would push it up to 16% percent of equity. The comparison is not very accurate as I also hold US and International equity. I am not bothered to take a closer look but I would ball park it at 22-25% of equity and closer to 10% of DIY portfolio. I do have a DB and DC pension that likely mimics the TSX weightings for equity so it's tough to tell. I guess in summary, I am not certain if I am over or under but likely under.

Cheers


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## doctrine (Sep 30, 2011)

james4beach said:


> CPA Candidate and Just a Guy, why don't you show them who's boss and buy more bank stocks? Teach the bears a lesson.


This is a strategy that wins nearly all the time, and it is something that many Canadians actually do. Usually we rope a dope the stocks to hedge funds for a while, but buyers come in fast when these stocks come on sale. 

Believe me, you won't hear from Steve Eisman when he covers his short, unless he happens to win big. He and other hedge funds suffer from massive survivorship bias unlike anything you see in mutual funds. Most likely he will not make much money or lose money and the next time you hear from him is in 3 years when he tries to short them again and brings out the same old argument.


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## Just a Guy (Mar 27, 2012)

Problem with hero worship, yes he hit it big with CDOs but his record since....

“In 2012, Eisman founded Emrys Partners with $23 million in seed capital. The fund performed poorly in 2012, returning 3.6% and underperforming the market. It did better in 2013, returning 10.8% but still underperforming the market.[4][5] In July 2014 he announced that he was shutting down the fund, explaining his decision by stating that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy." The fund controlled an estimated $185 million in assets at the time of its dissolution.[4]”

Looks like he’s a one hit wonder.


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## OptsyEagle (Nov 29, 2009)

Remember John Paulson. He was another hedge fund that made a bundle on the US credit crises and became a hot shot. Then 2 years later I remember him making a $900 million dollar investment in Sino Forest, when the first accusations started to say it was a Ponzi scheme only.

Paulson went on record that he disagreed with those claims and made that huge investment. On the announcement of his investment, Sino Forest had a pretty good rally. Most of us probably know the ending to this story. Sino Forest was a scam and always had been. Paulson lost the entire wad. 

Stars come and go. This guy may be right or he may be wrong. All I know is his opinion does not help me in the least, because I have been around long enough to see some stars continue to shine and most fail and disappear from the memory books.


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## james4beach (Nov 15, 2012)

doctrine said:


> Believe me, you won't hear from Steve Eisman when he covers his short, unless he happens to win big. He and other hedge funds suffer from massive survivorship bias unlike anything you see in mutual funds. Most likely he will not make much money or lose money and the next time you hear from him is in 3 years when he tries to short them again and brings out the same old argument.


True, and I absolutely agree that survivorship bias is huge in that space. But it's no different than bullish opinions from investment houses who take speculative long positions. Some hedge fund which is long railroads and has reasons to believe it's going up will also make a big point of it. Whether they're long or short, some hedge funds win and some lose, and the losers quietly disappear.

There's nothing wrong with them sharing their trade and the reason they've made the trade. Over the last year, many firms have been pumping emerging markets. They're long EM and are "talking their book". I haven't seen threads at CMF taking great offence every time a firm has vocally endorsed long EM. Yet for some reason a short bank position makes everyone upset...

This reveals more about the retail investor's emotional relationship with bank stocks than anything notable about the hedge fund's announcement.

An investment firm that's long the stock index will voice their bullish rational as well, and we're exposed to that all the time. They constantly show up on BNN, CNBC, write articles, etc. The fact the speculator has taken a position doesn't invalidate the argument they are making. *All* of these people are talking their book and all of them think (or hope) they're right.

Let's face it, what touched a nerve here at CMF resulting in two threads about Eisman is that the "short banks" trade bothered bank investors, emotionally. I think something is wrong if you get an emotional reaction when someone simply voices their trade thesis.

If a guy shows up on TV and says he's short XGD, would you feel upset about that? How about if the guy on TV says he's long natural gas? Coming on TV and saying you're short XFN is no different.


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## Eder (Feb 16, 2011)

Well among the largest short position drops on the TSX Is Royal Bank & BMO. He's covering already?


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## Just a Guy (Mar 27, 2012)

James, I don’t really see your “emotional reaction” other than people warning that a talking head isn’t god. The fact that your trying to promote a one hit wonder as an expert I think deserves people pointing out that he’s no more an expert than anyone other person with an opinion. The fact that you care what he says is probably a mistake for investment purposes. That’s not “hitting a nerve” that’s warning lazy people not to be sucked in to basically useless information.


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## james4beach (Nov 15, 2012)

Eisman was on BNN again recently. He says the banks are now showing a deterioration in corporate credit quality. This isn't exactly what he had forecasted earlier (he was expecting consumer/mortgage weakness), but nevertheless, it's the kind of deterioration in credit that he was expecting to happen eventually:
https://www.youtube.com/watch?v=OkfpTEVIcM8

This stuff resonates with me because I was watching US banks closely back in 2006-2007, and there was a similar pattern there as many banks refused to boost loan loss provisions, not acknowledging the deterioration in their credit. This led to downside surprises for shareholders as the banks had to, eventually, take big hits to earnings and boost capital. But they delayed it as long as possible.

Eisman points out that this is just part of how banks are run; they tend to not be very conservative, until the loan books reach the point that forces them to account for the losses. Eisman believes that the regulator should, at this point, be requiring the banks to acknowledge the deterioration. He's surprised the regulator isn't doing it.

There are two ways this could play out:

(A) If weakness in Canadian corporate credit portfolios is a one-shot temporary problem, then it might resolve itself and things could return to normal. This is what the banks are hoping will happen. By not increasing their loan loss provisions, the banks are then able to maximize earnings throughout this period with no hiccup whatsoever.

(B) However, if the credit weakness persists, or gets worse, then eventually the banks will be forced to raise loss provisions. Their earnings will take a (surprise) hit downward, contrary to both executive guidance and the analyst estimates. Their share prices would fall.

My view on this is that banks are _not_ in the game of conservative accounting. They are highly leveraged and aggressive institutions which bet it all on expansion and credit growth. So it's natural for banks to bet on (A) because that's the whole nature of leveraged banking... that's how you got over 10% CAGR over the last decade. Scenario (B) is the inevitable risk that comes along with this business, which is the danger of the "surprise" drop in earnings and share crash.


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## lonewolf :) (Sep 13, 2016)

It is probably best to play your own method in this game. Sometimes a guru trader/investor will put on a market position based on their method. Then shortly after their method tells them to reverse & go the other direction.


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## james4beach (Nov 15, 2012)

It's true lonewolf that someone should never follow the trades of any of these 'experts' in the media. Everyone needs their own approach and own plan.

In my own case, having been concerned about the banks for some time, I've designed my Canadian stock portfolio to be lighter in banks than the index. I also have a lower % equity allocation in general.

I'm long Canadian banks, as part of my asset allocation. Last time I checked, Canadian financial equities are just 4.7% of my overall investments... it's very small because I have much larger allocations to bonds. So even if Canadian banks were to perform terribly, my vulnerability is limited -- which is the point of diversification.


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## lonewolf :) (Sep 13, 2016)

OptsyEagle said:


> *Fundamental law #3* You can only lose 100% of the money you put into a stock that goes down, but you can earn 200%, 500%, 1000% on the stocks that go up.
> 
> .


 A lot of money can be made when stocks go down. After seeing Arch Crawford on TV & hearing about how he made money hand over fist shorting the market during the 1987 crash I wanted to do the same. Arch did it again in 08 & if memory correct turned 2500 into 500,000 shorting the market using options. In 08 I did a number of trades shorting spy & spx that returned aprox 30 fold.


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