RY, Royal Bank of Canada.

On previous occasions I have pointed out the dangers of double tops and also emphasized the only rule that has to be followed at all times – buy low, sell high. Therefore I assume you do not own the Royal Bank or did you fall for the myth that somehow the Canadian banks and the government are better? Here are the charts.

RY June 2010 ry june 2010 2

As is clear from the long-term chart , the Royal essentially double topped recently, one of the few to do so and quite an accomplishment. But since then it has lost ,give or take, 20% of its value and has done so , perhaps, in 5 waves the last of which is not yet complete. This is not a particularly good sign, in fact it is quite POSSIBLE  that the stock will revisit its lows of a year and a half ago. Why, if this is the cream of the crop, the best of the Canadians that are the best in the world ?

    Glass-Steagall was formally taken off the books in 2004 (by Rubin among others) to accommodate the otherwise illegal creation of Citigroup. In Canada we began to dismantle the “four pillar” concept a lot earlier (1987) allowing the (reverse)takeover of our investment dealers by the banks fulfilling a long time dream of combining pure capitalism with the socialist backstop of government deposit insurance. Not to mention the million different ways that competition was effectively killed and the banks themselves given exceptional powers under the Bank Act (which is why a homeowner cannot simple give the bank the house keys and walk). So not much difference there.    Back in ‘98 when the banks wanted to merge our government disallowed it to happen not because they did not agree with the banks’ position that they needed to grow in order to compete in the big world, but because they feared job losses. Now , of course, the word is that they presciently avoided the too big to fail situation. By the way, we have our own Fannies by way of the CMHC, a crown corporation that guarantees all non regular mortgages, it does not have reserves worth mentioning so it is entirely dependent on the Federal government.

   Our banks did not receive the bailouts that were made available in the States, according to our minister of finance, conveniently forgetting that 75bln worth of mortgages were shifted to the Bank of Canada (proportional to the US situation). Furthermore the biggest bailout provided by the government comes from the artificially low rates and the steepness of our yield-curve, all this courtesy of pension funds and retirees that have seen their returns decimated. This transfer of income is comparable to that in the US.

   I can go on and on but the point really is that the myth of the Canadian banks being sort of impervious to what is happening in the world is simple wrong. Once the rules with regard to proprietary trading and all sorts of other issues revert back to the good old days the Canadian banks will be just as vulnerable.