Spanked

Scotia, Commerce and the green bank did just fine. Royal raised its divvy again and said it would buy back a gazillion shares. And then there was poor BeeMo. As all the other kids were announcing their quarterly results this week, the blue guy got pummeled by investors worried about what higher rates are doing to the financials. As it set aside half a billion to cover potential bum loans, BeeMo stock was hammered on Wednesday by 8.7%. It was an astonishing drop. Weird, too.

(Things actually got worse for the bank when most of its online customer services went dark overnight. The reasons: a false fire alarm in one of its data centres. And really, really bad timing…)

“An unheard of move,” says analyst Ed Pennock. “It was due to Loan Loss Provisioning. LLP’s. The market took all the other banks but National down 2% to 3%. TD was down a tad more but their pain is only starting… For Canada, it would seem to mean that it’s far closer to a recession than anyone has said. The Bank of Canada needs to start cutting rates ASAP. Our channel checks show a consumer pulling their horns. A lot.”

And this notable comment: “The tragedy is that the Canadian banks are the country’s major wealth managers. they’ve stuffed their clients full of Canadian bank Stocks. An 8% decline in one day has a huge impact.”

You bet. Two lessons to be gleaned here.

First, individual stock pickers will always suffer more volatility than those of us who believe in ETFs. This bank is a great example – a well-run, profitable, expanding and stable business that was eviscerated merely because Mr. Market feels like it after a single quarterly earnings report. Investing through exchange-traded funds smooths the waves through diversification and still passes on dividend income.

Today RBC’s happy news propelled its shares higher and rescued the market, while BeeMo stayed spanked. Some bank investors made money. Some lost. Meanwhile those with an ETF pacing the entire TSX (of which a third is the banks) did just peachy. So don’t be a cowboy. Buy the market.

Second, as Pennock says, higher-for-longer rates are biting. Yesterday we showed you what they’re doing to the new-housing and construction business. Now you can see it graphically in the bad loan provisions of the banks and the worries investors have that CBs will be too tough for too long.

Will the CB listen?

One economist says no. Tiff will hold the line next Wednesday, according to Capital Economics’ Stephen Brown. Says he: “While it will be a very close call, the recent resilience of GDP and employment growth leads us to think that the bank will err on the side of caution by waiting until July.”

While inflation is indeed being tamed (the forecasters say it could topple to just 2% by August), the economy is still growing and the labour market robust enough to keep the Bank of Canada on the sidelines for another month. As we’ve reported here on this dodgy blog, that’s not a consensus view – with most Bay Street wags forecasting a 25-beep plop in the policy rate on June 5th.

What does the market in general expect?

A cut. 100%. The banks need it. Investors want it. The real estate cartel craves it. The mortgage lenders are desperate for it. Chrystia is betting on it.

Even if the CB waits a few weeks longer to bring out the snips, Capital Economics says, the policy rate will be reduced four times by Christmas. Ultimately the cost of debt will drop a full 2.5% before stabilizing – or a dramatic fall of 50% from its current level.

The chartered bank prime would be back to just over 4.5%. Mortgages would cost 3%. More houses would be bought, sold and built. Real estate would stay crazy. And we’d all stop talking about Tiff Macklem.

It’s that, or it’s recession. For these are the days of extremes.

About the picture: “This is Quinn the Great Pyrenees,” writes Corey, “who is polite enough to steal a dish towel to trade for a treat instead of just stealing them right off the counter, which she is definitely tall enough to just reach up and grab.”

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