Hamilton’s E-Wave Analysis

First a chart of just about every single one of them;

From top to bottom we have RY, which made a new high and then dropped 10% or so, BNS that not only made a new high but stayed up there, CM (CIBC) that seems to be groping in the dark, BMO, middle of the road, NA National, HCG Home Capital Group (see comments elsewhere) the best of the lot and , ironically, the only sub-prime lender, CWB Canadian Western Bank they finance anything that belches diesel smoke and is yellow, the Laurentian Bank and last the TD.

Notice that despite some , sometimes large, deviations most have done more or les the same thing. All had 5 waves up, then a big drop, and then an attempt to a new high. Some failed others did not. The TD is in the middle of the pack with a simple double top.

All are sells! These banks operate as a cartel, with intended or unintended collusion all over the place, with rotating price setting etc. etc. This is the same all over the world but Canada does it best. They have a huge lobby in Ottawa and usually get what they want (with the notable exception of further mergers). If they want private wealth management to stay that way, as opposed to broadening the CPP, they will get that.

There is one big problem with this. Ultimately ,with globalization , the system will have to be opened to competition when Canadians tire of paying twice as much as the next guy. They already have just about everything. In the mid eighties they took over mortgage lending from the trust companies and now control about 80% of that. A few years later they took over all the  major investment dealers and now control much of that. Gradually the independent mutual fund firms are also taken over and now they control the bulk of that. They have made sizeable gains in insurance and are gaining momentum. There is precious little left other than leasing and travel. So where is the growth going to come from?

    At the same time new rules  (Basel 3, Volcker, Capital requirements etc.etc.) and regulations are crimping their ability to move beyond the straight and narrow. Not that they ever did much of that but even so they will be doing less of it in the future.  Soon, hopefully, they will lose the absolutely enormous benefit bestowed upon them by ridiculously low rates. This is a mature industry, and the next 20 years are not likely to resemble the last. The only thing they still have going for them is the perception that they are safe blue chips. Any broker who is not sure what to do buys bank stock and this artificially keeps a bid under the stocks, but from the charts it is abundantly clear that this can change very fast as in 2008, maybe it will again.

   From a buy low sell high standpoint , none of the above banks are a buy today.

BMO, BNS, CM, CWB, HCG. LB, NA, RY, TD

Supposedly in response to calls from the (Canadian) federal government, this according to the Toronto Star, the Bank of Montreal is set to unveil this product today. Described as the first of its kind, this product is designed to give (Canadians) ages 55 and over a guaranteed cash flow, regardless of stock market fluctuations (again according to the Star).

The timing is impeccable for this launch as our finance minister, Mr. Flaherty is spearheading the debate over pension reforms. This same minister, also this morning, unequivocally stated that interest rates were  going to go up (soon) and added weight to that opinion by announcing more restrictive mortgage lending rules (30 years will be the max. amortization period etc. etc.)

So how does this product work? Well you deposit your $100,000 and for ten years you will earn,but not receive , the return from  a  group of mutual funds managed to be sensitive to your life-cycle (i.e more conservative as you get older). This is done in such a way that no taxes are payable during this “accumulation”  period. After that you will get 6% on the original amount for a period of 15 years which income is considered return of capital and therefore not taxable.  After that you continue to receive 6% but now taxable and this goes on forever, that is to when you die. The remainder, if any, will be transferred to your estate and would be taxable.

So why should you NOT buy this? Simple arithmetic. If you wanted a guaranteed cash-flow you could buy a 30 year (more on this later) Gov. of Canada bond yielding 3.69% (the BMO could do this as a base case). As the MER on this instrument is 2.75% you would accumulate 3.69-2.75=0.94% per annum compounded for 10 years that gives you $109,810. From there you will receive 6% (on the original amount of $100,000 ) which is equal to 5.56% on the accumulated amount. As you are still earning 0.94%, but receiving 6% , your fund depletes at 5.06% per annum, which, over 15 years leaves you with $50,394. By now you are 55+10+15=80 years old.

At age 55 your life expectancy as a male is 79.33 years and as a female 82.81. Lets assume that you are not sure anymore what you are at these ages, and use the average of 81,07 and for the sake of simplicity lets just call that 81 years. You may have been worried about growing very old and running out of money, but the BMO does not need to worry about that as this product will be sold to thousands of people and the average of the mortality tables will apply quite precisely.From their perspective you will die in one more year so they will pay another $6000 and earn about $500 in interest leaving roughly 50,394-5500=44894 in the account for your estate.

So what is the score? You the client gets 16 years at $6000 a year plus $44,894 to your estate for a total of $140,894. The BMO gets 2.75% MER per annum  (assuming on the original amount) for 26 years, or $71,500. What is there not to like?

I have used the 30-year Gov . bond as a proxy for the riskless investment nearest to the time frame we are looking at. Of course our client could do much better if the funds were very well invested etc. etc. but we are looking at the base case, ie what the BMO could do not to run any risk, which might well be the position they would want to gravitate to as much as possible being a bank.

Buying an annuity (last-to die for couples) would, if things stay the same,  pay about $520/month or $6240 a year. If a proscribed annuity is used ( the funds for the BMO product should come from non-tax deferred sources anyway!) the tax treatment overall may be better. And if Mr. Flaherty is correct, rates will be much higher 10 years from now. Furthermore annuity payments are considered the equivalent of a pension and are consequently eligible for both income splitting and the $2000 tax credit per person. It is not clear that this product offers the same advantages.

BMO, Life Time Cash Flow.

As always there are different ways of counting this one, for instance a big triangle could be inserted right in the middle as wave 4. However , no matter how you slice it the low of wave 4 is at about $21 and that is where you normally return to. (1) The “box”as Gartman refers to it is at 50-60% retracement. At $21 we would have 71% retracement. (2) The drop from 72 to 24 could be a 5 wave structure that is much larger than ever seen before. (3)

The diagonal, or in English the clear wedge formation is near perfect and promises a rapid and violent return to its base (which I do not believe but there you go). (4) The wave 4 triangle in this structure measures to about $23 , about where we are (5) and the low is situated pretty well perpendicularly under the apex (6). Any time the RSI, relative strength indicator drops below 30 their is a turn-around of $5-$15; we are there again (7), same thing for the OBV, on balance volume which has never been lower and cannot go lower without going off the page (8). The stock pays an 11+% dividend and has a P/E of about 6 which I think is Benjamin Graham land (9) Last but not least this , on a risk/reward basis, has to be a buy relative to the other Canadian banks based on the relative size of the correction to date (10). Target $37.5 minimum.

BMO

Here is the “model” diagonal. It is what happens at the end of a big move, it goes too far too fast that is why the rebound is so large. The big picture suggested about $21 as a low, the trend-line here runs at about $23, lets leave the church in the middle and call it $22

BMO

Another look at the banks can be informative. First I have made it rather well known that I was VERY bearish on the banks, way too early perhaps as I have held this view for at least 3 years now, if not longer. Here is why;

First of all the stock is up in (arguable) 5-waves, increasing the tangent with each new leg up suggesting a bubble of sorts  that would require a large correction any time. Normally to the 4th wave of previous degree that could be at $23 to $14. This move, as with all the banks does not correlate to the growth in population or any other metric that would justify it. Also it far exceeds all the “other” stocks as shown in the lower chart overlaying the TSX, which itself did pretty well but was outperformed by about 1500% from the base in ‘74.

Looking at BMO things are a little clearer as the position of the 4th wave is less ambiguous.

The target here is $21, if we go that far.

BMO, RY

Speaking of banks, BMO has about the best ratio between high and present price, Commerce is not far behind both at about 33/34% . RY is at 50% so on that metric less attractive if you assume all will some day again trade at the same price, which is true today with 3 of them at about $26.  I think we are at a point where missing the boat is a greater risk than not getting on board. All of these have the potential to rise $20 or so in the next few months so a little nibling is probably a good idea. GE is also a bank!

BMO, CM

I was wrong the other day when I mentioned the falling IQs of  bankers as soon as they see  one of their own. Here is the proof. We are all familiar (there are exceptions) with concepts like prime-rate, bank-rate, LIBOR. TIBOR, cost of  funds etc.etc. But did you know that if you juggle them you can have your cake and eat it too? Yes , this time they dropped prime one for one with the Bank of Canada’s 50 beeps but before you get carried away into sentimental admiration, read this. By the way, I cannot figure why the interest is $9.88 a instead of $10 (semi-annual?).

BMO