“On Monday the 24th at Noon I’ll reveal the next major Bank Stock set to CRASH.”
That’s the big-letters headline from Dan Amoss in a new teaser ad for his Strategic Short Report — and since this one is getting a lot of attention from my readers, and the Strategic Short Report has been a top-ranked newsletter on the reviews site for quite a while, I thought we ought to give it a gander. Here’s some more of the hyperbole to get you into a nice profit-hungry lather …
“On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years.
“Given the past 21 months of market action — that’s no small claim.
“If recent mainstream headlines make you believe that banks have weathered the storm…
“You better think again.
“Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009.
“He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders. “
Now, this is not really the way I’d like to return from a two-week vacation — I’d much rather be telling you about some top-secret biotech company that’s going to give you 1,000% returns by next Tuesday [even if, of course, it won’t] … but we’ll have to settle for this.
And hey, we can even beat Dan’s subscribers to the plate, since he apparently won’t be revealing this to them until his next newsletter comes out on August 24.
It will probably not be shocking to most of you, given the name of the newsletter and the tone of the headline, but Amoss usually focuses on betting against stocks for his Strategic Short Report — and today is no different. He’s teasing us that he’s picked out a put strategy (that’s an options trade) that will give you a profit of 50% or more … and that he thinks privately, but of course would never promise, that his idea should triple your money. We can look at the mechanics of that in a moment, but first we have to figure out what the stock is … clues, please!
“With a 192 year old history and 37,000 employees, its crash would drop like an A-bomb on unsuspecting shareholders…”
So there’s one clue. Or two, I guess. And we already know their annual dividend tallies up to about $1.5 billion. Some more?
“A major rating agency just cut this bank’s outlook to negative.
“And, in a warning sign I’ve never seen before, this bank’s own employees are speaking up — questioning management about the fudging of numbers on their most recent earnings conference call.”
Perhaps you’d like to hear a bit more about the rationale? Of course you would! And the Gumshoe can cut and paste with the best of ’em:
“Here’s Why Dan Thinks This Bank Will Get Slammed
“It all boils down to a few very simple things.
“This bank made risky loans to people who, unfortunately, are losing their jobs quickly…
“Without jobs, these people won’t be able to pay the bank back…
“The bank management is using accounting tricks to hide these losses from their shareholders, while some of the same executives even appear to be quietly dumping their own shares at peak prices…
“But they can only ‘fake’ it for so long…
“If those loans finally default, it’ll set off a cascading effect of losses… lower earnings… and a draining of cash…
“With no cash, regulators could force this bank to cut their massive dividend. And this dividend cut would force their share price to plummet — maybe as much as 50-75% in a day — as folks race for the exits.”
OK … so, we’ve got a few clues about the company, and we know that Amoss believes they’re essentially cooking the books with their loan losses and such, and that he seems to think that a collapse is imminent. What’s the stock?
From those clues, thrown willy-nilly into the Thinkolator, which is still covered with dust from a long layoff, I can tell you that the stock must be …
BMO Financial Group, usually better known as Bank of Montreal (trades at BMO in both NY and Toronto)
This is one of the venerable Canadian banks — and it is about 192 years old and has more than 37,000 employees. And it did have a Bank of Montreal analyst asking somewhat snippy questions on the last conference call about the expected losses and the accounting thereof. I have no idea if that’s unusual or not, I’m not a habitue of bank conference calls, and I don’t know whether or not analysts who are employed by the bank giving the call typically kowtow to the CEO and CFO or ask tough questions.
BMO has been reporting profits every quarter — but of course, a bank has lots of ways of reporting profits even if they’re not genuinely profitable, as Dan implies, and we have certainly seen plenty of evidence that banks can go from profitable juggernaut to pile of rubble in a matter of weeks if their projections turn out to be overly optimistic. Whether or not Amoss is correct that this will be happening to BMO, I have no idea — analysts are still predicting that they’ll be recording profits for this year and next, and that the shares trade at a forward PE of about 10, which is a lot lower than the valuations of many of the big US banks … but then again, the big US banks fell a lot further, too, and have much more of a “snap back to profitability” investment thesis behind them.
So why Bank of Montreal? Well, it could just be that it didn’t walk on the precipice of disaster the way many of its big cousins south of the border did — they were still profitable and doing reasonably well last Fall when Citigroup and Bank of America were begging for bailouts, so some investors started to think of all of the big Canadian banks as a sort of safe haven in the financial sector … after all, the shares collapsed “only” 50-60% in 2008, not the 95% that many US banks “enjoyed,” and BMO, for one, is actually just about even with where the shares traded a year ago, which is something you can’t say about a lot of big American banks.
Maybe Amoss is arguing that this safe haven allure has blinded us to the fact that many of the banks have the same kind of asset-writedown problems coming as do our banks here in the States. Not sure, that’s just a guess — certainly Canada’s economy is weak thanks to their close ties to the US, even with the relative boost they get from being a big natural resources exporter, but BMO and its Canadian counterparts are global banks, so they’re getting a taste of the global slowdown.
The teaser ad goes on to tell us that the bank is in trouble because of their exposure to the oil and automobile industries and to the communities impacted by unemployment in those industries, and because they have not been earning enough to cover the dividend (a dividend cut at BMO, one of the “big five” Canadian banks, would, in Amoss’ opinion, cause the shares to crash).
If you’d like to learn a bit more about this interest in Canadian banks that swept through Wall Street as US banks were teetering on the brink (and may still be), there was a good article in Barrons back in February that highlighted Bank of Nova Scotia but also touched on BMO and a few others.
So … if you believe Dan will be correct and that this stock will fall after they cut their dividend (which is a healthy 5%+ at the moment), how would you do it?
Well, if it’s all about faltering earnings reports or lowering dividends, you’d probably expect it to happen along with the quarterly reports. BMO reports next on August 25, the day after Dan Amoss is scheduled to release his report, and we’ll probably hear from BMO again in mid-November, and then in early March.
BMO doesn’t have LEAP options trading right now, so the choices for buying puts are expirations in September, December, or March — I don’t know what Amoss typically looks for in a recommendation, but two typical strategies would be to buy an in-the-money put and hope for a reasonably conservative return and, if the stock stays stable, some chance to preserve your investment, or buy out-of-the-money puts for a chance of greater leverage to a falling share price.
In the money would mean that you’re buying puts that are actually worth something today — buying a put option gives you the right (but not the obligation) to sell a given stock at a set price before the option expiration date, so a put with a strike price above today’s share price is in the money, one with a strike price below the share price is out of the money.
BMO shares are right around $46.50 right now, so a $50 put would be “in the money” because it’s actually worth something now — you could sell it today for at least a $3.50 profit (per share, so $350 per options contract since each contract represents 100 shares), effectively buying shares at $46.50 and selling them for $50. Out of the money would be, for example, buying a put contract at a $40 strike price, spending a lot less money but hoping that if the shares fall below $40 (so down by 15% or more) the option price would move much more dramatically.
The teaser ad implies that this dividend cut might come as soon as the August earnings release, which is after the August options expiration, so probably the most aggressive play on that would be buying out of the money September puts — you could get a September $40 put for about 70 cents, and if the dire prediction of a dividend cut comes through, or if the shares collapse in half in short order, you’d do far better than tripling your money (if the shares fall to $23, a $40 put is worth $17 at expiration, so 70 cents to $17 is a huge return). Of course, the reason it’s huge is that most people think it’s unlikely — just like any other longshot. If you believe in the thesis but think the timing might be slower, you could do the same for March, for example — a $40 put with a March expiration would cost you more like $3.50, but would give you more time to be right.
Will that work? Beats me — I am perfectly content to believe that banks fudge their earnings like crazy, as evidence abounds to that effect, but I get weary eyes reading bank balance sheets, and, to be frank, I rarely understand them very well. I can see that BMO’s dividend is a bit aggressive for their current earnings level, but that doesn’t mean they’ll necessarily be slashing it anytime soon — or that their earnings will necessarily fall. I’m sure Amoss has read their filings much more carefully than I have, and he did pretty well for a lot of my readers during the market downturn, so perhaps it’s worth your time to look into it.
If you’ve got an opinion, let us know if you’re excited about Bank of Montreal, or the other Canadian banks, whether for their good or their bad prospects. That’s why the lil’ ol’ comment box down below is calling your name.
If you want to read up more on BMO, you could start with the last conference call transcript here (including the questions from the Bank of Montreal analyst, Ian DeVerteuil). Or you could sit through the next earnings release in a couple weeks, see if Amoss’ recommendation moves the stock (or causes a spike in the price of the put options) and then wait to buy in after it has settled down a bit … if it does. Or who knows, it could certainly be a terrible idea … it’s your money, so it is, of course, your call.
Great to be back with you after a little break, relaxed and rested and really far behind on email — hopefully the daily publishing will hold this week as I get back in gear, I can’t wait to see what schemes, scams, touts and teases I’ve missed …
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