Bank earnings recap

Another earnings season for Canadian banks has come and gone, and the credit crisis picture doesn't appear to be getting any clearer.

Results were a bit of a mixed bag. Scotia, Royal, BMO, TD and National Bank all saw their profits dip a little, while CIBC squatted down and unloaded yet another $1-billion loss for the quarter. The bank that I own, BMO, didn't exactly knock my socks off, but based on analyst and shareholder reaction, the news was not quite as bad as it could have been (or indeed has been in recent quarters) so I took their numbers as muted good news.

All in all, though, we're not out of the woods yet. When a bank like Royal, which has so far managed to keep its hands pretty clean in the subprime mess, starts announcing hundreds of millions of dollars worth of writedowns, it's clear this isn't over.

Banks are as good a proxy for the economy as a whole as anything, so today's news that the Canadian economy actually contracted during the first quarter shouldn't be much of a surprise.

I have no idea how all of these credit problems are going to play out, but it's clear they haven't worked their way through the system yet.

The BMO Yo-Yo

I wasn't expecting good tidings when my RSS reader stomach-punched me with the headline "BMO earnings drop 35%" earlier this week, but such is the craziness of the stock market at the moment that it was actually received as good news.

The stock is up more than 10% since they posted their results.

The theory, I gather, is that everyone is relieved that BMO has laid their cards on the table so they can see how bad the damage is, and the results weren't as bad as anticipated (they actually beat analyst expectations) if you don't count the one-time writedowns.

So now it's onward and upward, and everyone just keeps piling back into bank stocks despite the fact that their underlying business is in the exact same condition it was this time last week, when people were running for the exits. Apparently that's what you call an efficient market.

Me? I'm standing pat. I don't have any more RRSP room for the year, and I'm in the red from my initial purchase price of $71 for BMO in April. If it's at that level or lower in March when I'll have cash and fresh contribution room, I'll throw some more in. If not, no big deal -- I'm in it for the long haul.

I can't claim to be as zen-like as Mr. Cheap is when his margin-bought dividend payers are in the red, but I'll survive.

Net worth update

You just never know. After a few months of mediocre progress, my net worth jumped an impressive 4% last month, and I barely noticed.

Just goes to show what an automatic savings program and a little luck in the stock markets can do for you.

I'm now at more than $36,500, a little bit off my ambitious end-of-year goal of $40,000 by the end of 2007. I didn't think I had a hope of making it, but two more months like this past one and I just might. if I don't, I was swinging for the fences anyway.

I'll be making my second (and final) RRSP purchase of the year in the next few days. I had planned on diversifying more into U.S. equities, but given the worsening subprime crisis down there, coupled by the undeserved hammering Canadian banks have taken of late, as of this moment I'm leaning toward doubling down on BMO when the cash clears into my account. I'm sure my mind will change in 20 minutes though.

I'll keep you posted.

Going against the flow

Considering their impressive track record as profit-making, dividend-paying machines, it's rare to hear people bearish on Canadian bank stocks (especially during the multi-year run they've been on of late) but there's an interesting contrarian view in the Toronto Star this week.

Consider that shares in all five major Canadian banks are worth less today than they were at the start of the year -- some by double-digits. When was the last time we were able to say that?

An eye-opening excerpt from the selected article:

David Tiley, who works with a team of value seekers at Mackenzie Cundill Investment Management in Vancouver, said this week “we don’t own Canadian banks, and have not for a couple of years.” “It’s related first and foremost to valuation,” said Tiley. “Earnings are closer to a peak than a trough, so you are taking a risk.

I always like analysis that throws "conventional wisdom" out the window. Food for thought.

(DISCLOSURE: I own shares of BMO)

The bear [market] necessities

Need a little context for the stock market carnage we've been living through for the last little while?

The money I set aside every month from every paycheque hasn't even come close to offsetting the losses I've undergone in my portfolio. It's gotten so bad that my net worth actually dropped this month for the first time since I started keeping track of it. My non-registered account has taken such a beating that it's on the cusp of going below the threshold value where I don't have to pay any administrative fees. I might have to put some cash into it just to keep it over...

When Finance Minister Jim Flaherty dropped his nuclear bomb on trusts back in October, conventional wisdom had it that income-hungry investors would flock to dividend equities, but would have a hard time getting the yields they were used to. That appears to be changing as there are now plenty of TSX companies yielding more than 5% after the recent sell-off (RUS and ROC to name but two off the top of my head.) Most astonishingly of all? Biovail is now yielding more than 8%. (Full disclosure -- I own Biovail)

So what does it all mean? From where I sit it's looking like bad companies are getting knocked back to where they belong, and good companies are on sale. The one sector I currently don't have any exposure to and am champing at the bit to get into is emerging markets, but I'm still not prepared to jump in at these prices. Definitely on the watch list, though. Two stocks I am contemplating getting into are increasing my stake in BMO, and taking a position in Brookfield. I really like what they're doing in infrastructure and the company's management overall.

What about you? What's in your shopping cart at the moment? You're not being a bad little investor and heading for the hills, are you? Are you afraid of a little old bear?

Pot Pourri

The Market Guy has made his long-overdue return to financial blogging with a new column. Welcome back. You were missed. Even better from my perspective, he's spotlighted two of my holdings, BMO and Artis REIT -- calling the latter the "the consensus discount candidate in the REIT space."

Speaking of BMO, after the run of bad news they've had, it's refreshing to read some bad news for a bank that's someone other than them.

Updated my net worth on NetworthIQ and as predicted, while the line is still headed in the right direction, my growth is slowing down. Should be a temporary thing as funds that would normally be directed towards investing are being put to other uses during the summer. Back on the horse in the fall, hopefully.

BMO throws another curve

Earnings season begins again for banks, and first up on the docket is the one I own. Bank of Montreal.

You remember BMO, don't you? They're the bank that announced, at the end of April, they expected to lose $450-million thanks to some dodgy natural gas trades. The stock got hammered. Then it turned into $680-million. The stock got hammered further still.

Today's number? $671-million. Only, that's not a commodities loss. That's a quarterly profit.

It seems the bank's other divisions did so well that they were more than able to shoulder BMO Capital Markets' loss, and actually increase quarterly profit by 17% overall.

The net result? BMO's stock goes from about $72 before the fiasco to under $70 today, despite the fact that quarterly profits turned out to be higher than they were when everyone thought they were a quiet, boring little risk-averse bank.

BMO essentially created their own headache, cleaned it up and took the hit in public perception, despite the fact that they actually ended up looking better, on paper, than they were before. There's a lesson in there somewhere about how efficient our market really is. But I'm not sure what.