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How to Play the Canadian banking crisis to a quick double

Everyone thinks they are immune to the current financial crisis.

Nobody thinks they are doomed.

I speak of Canadians, of course.

See, recently I read a lot about the superiority Canadian banking system. And naturally, my contrarian instincts prompted to seek a way for you to make money that Canadian banks are going to low.

Over the last 18 months, my readers have the chance to make 432% when Lehman failed, when 162% Allied Capital come clean, and 220% on PNC Financial … This month they are ready to make money on the next lower bank.

And I'll give you a chance to join.

If you think that Canada escaped the downward trend in the U.S. banking sector, think again. While the country may not have sunk headfirst into subprime mortgages, he plunged heavily on risky derivatives. The leverage he had to have generated impressive returns on equity in good times, but this same leverage is set to erase equity today.

Shareholders in a "safe" Canadian banks will have to rethink their loyalty. His threat of a solvency crisis virtually guarantees a dividend cut. And it is our role as a catalyst for action short play this month – offers a potential chance for 200% profit.

Secrets accountants have not yet erased profits of Canadian banks – as those of U.S. banks – because Canadians have not yet accounted for the tsunami from mortgages, consumer loans, and losses of corporate loans.

Here's how they responsible lending books to a hidden risk.

The basics of banking

Bank shareholders leverage their capital by borrowing money short term, mainly depositors. Your bank account is an asset to you, but a liability to your bank. For each dollar of capital, shareholders of the bank to borrow 15, 20 or even 30 dollars a senior creditors – if they could not afford to have their loan portfolios and securities. Here is the basic problem: Shareholders of the Bank and their agents (bank managers) lend money to others. So the bankers are more flexible for loans if they were lending their own savings.

The process accounting to determine the profits of commercial banks is inherently speculative, as well. Banks book profits ahead of all new loans they make, minus a small "provision" for loan losses – just in case some loans made to go evil. These initial gains are used to disappear when the loans 'season', and to discover how banks Deadbeats owe them a lot of money. In case you are wondering what has struck most of the S & P 500 earnings leak, here's your answer: Banks and brokerages reverse most of the profits they booked on loans and securities purchased at the height of the bubble.

The banks have indicated make good money loans for every borrower. But someone has lied, since they make accusations against these loans and securities oldest vintage left and right. And of industrywide provision for loan losses, which is most important – and unpredictable – The cost of bank income, has risen arrow. Once these allocations to reserves have climbed on the back of delinquent loans, the profit of the banking sector plunged into negative territory.

Add a little more explosive ingredients such as deposit insurance, installation of central bank loans, syndicated loans, and securitization, and we are left with a system for which the volume of sales – not risk management – is priority No. 1.

Those who claim the banking system is well capitalized – including those who designed the de-stressing "stress test" – Keep the pink assumptions about the number of loans will earn and how bad the banks existing loans have a shot at behind their credit losses.

Many bank stocks are in a state fragile. This month, we'll buy options on the Canadian bank closest to falling.

A Primer on options for sale

As you may know, an easy way to play down the stock through put options. A brief overview of their operation …

Options Sales are limited risk, leverage means you make money when stocks drop.

For example – when a stock falls 5% in one day, put options may go up 50%. When big drops occur, is perhaps several hundred percent in hours.

And as they are limited risk, if you're wrong, you'll never lose more than you put in place.

My point is – it no easier, safer and faster way to capture the enormous gains in stocks down as through put options.

That said, let's look at how you can use to make money on Canadian banks. Firstly, the macro perspective "…"

The Canadian banking system has been commended for avoiding direct exposure to the most tempting fruit forbidden: products such as loans subprime mortgages, credit cards, loans acquisition debt and loans to fund purchases of commercial real estate mad.

The financial press likes Canadian banks. On May 19, The Wall Street Journal published a piece suggesting that these banks are a model of sustainability, and they now have the opportunity to acquire American banks on the cheap:

"Not long ago, Canadian banks were regarded as slow-footed, provincial, and too conservative to prosper in the soaring world prices of financial institutions. Now that the U.S. and European banks bear the brunt of losses on loans and face increasing government oversight and property, Canada's six largest banks are seen as a potential model for the battered financial institutions. TD Bank Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada has posted more than C $ 3 billion (2.5 billion dollars) in combined profits in the last quarter. "[ed. Note: Quarter ended April 30, 2009.]

The largest six banks account for more than 85% of assets in the country's banking system. In general, these banks have made an intelligent decision to avoid securitization. Refers to the securitization of loans that banks originate, all together, and sell to pension funds, funds of money market, insurance companies and other institutions.

But this does not mean that Canadian banks have no credit risk. Instead, they have plenty. Mark to market accounting has not cut down the profits of Canadian banks, because Canadians do not still accounted for the impending wave of mortgage loans, consumer loans, and losses of corporate loans.

They will be here the end of 2009. It is impossible to avoid. And just to give a perspective on how quickly lending grew at Canadian banks, the chart below shows that assets in the six largest Canadian banks fell 1.3 trillion dollars in October 1999 to 2.7 trillion dollars in October 2008. Shareholders' equity the six major banks increased in line with assets, the six kept their ratios of assets in common shares at almost constant since 1999.

The asset growth, even if it is accompanied by an increase in equity, is always a risky proposition for banks. When Loans are made, all seems well. Then, when a severe recession arrives, and a dramatic cycle credit loss begins, the market value of portfolio Loans can deteriorate rapidly from 5% or 10%, pushing the banking system to the brink of bankruptcy. Insolvency is when the value of assets is less the value of liabilities. Bank regulators are not like this scenario and pressure weaker banks to raise very expensive equity dilutive to protect more senior creditors, including depositors to suffer losses.

Canada has entered into what finally a series of huge credit losses, and time is finite, Canadian banks could easily lose their reputation intact. Until mid 2008, the Canadian economy was booming. His areas of mining, energy, and manufacturing world class, and all other sectors was drawn along the walk.

But the wheels fell last fall. According to Statistics Canada, unemployment rate rose to 8.4% in May – the highest in 11 years. Ontario, with its heavy industrial base and links with the "Detroit Three" automakers, is particularly affected, Ontario has lost 234,000 jobs, or 14% of its entire force of manufacturing employment since October. Ontario lose even more jobs this summer as GM and Chrysler have drastically reduced car production. Alberta has also slowed considerably. A year ago, Alberta, each worker skilled construction work overtime on oil sands projects. Now, many projects are deferred and workers are laid off. The unemployment rate in Alberta has almost doubled from May 2008 to May 2009, to 6.6% and headed higher.

For Canada, this credit cycle will likely be worse than that of the late 1980s. According to RBC Capital Markets, annualized provision for losses loan for the entire Canadian banking system peaked at 2.88% of all loans in 1988. As of April 2009, the figure was just 0.77%. During the next year or two, the provision for loan losses should easily triple or quadruple, which would cut deeply in profits and capital … sending the worst of Canadian bank stocks down.

So how can you play?

Firstly, I recommends digging in major banks to understand the one with more exposure to unemployment. Then, simply visit Yahoo! Finance, enter their symbol and click on "options" on the upper left, under 'Courses'.

You'll see all the options available on sale this stock. Choose a good, you'll be able to double your money as these stocks decline.

Regards,

Dan Amoss

About the Author

Dan Amoss is the editor of Strategic Short Report and a contributor to The Penny Sleuth, which offers unbiased commentary from expert analysts and authors about penny stocks.

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