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Moody’s issues shot across the bow for Canadian bank stock investors

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

Moody's issued a shot across the bow for Canadian investors by downgrading the long term credit outlook for domestic banks. This can be disconcerting for investors unaccustomed to questioning the financial health of our apparent-bulletproof bank stocks.

I still don't see anything that would put a significant dent in bank balance sheets, but this view is distinct from the income statement. In other words, if Canadian households begin the deleveraging process by consistently paying down more debt than they assume, bank profits could be scarce.

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It is also the case that bank earnings are far more pro-cyclical (sensitive to market conditions) then during the last stressful period in the early 1990s. Large brokerage and wealth management operations weren't there and profits were less dependent on capital market activity. This isn't to say this revenue is going to collapse when the credit cycle rolls over, only that it's market-dependent.

Importantly, attempting to adjust portfolios for credit deleveraging is a type of timing the market which is always a waste of time. Investors should wait for evidence of slower profit growth before reacting and besides, the dividend yield will still be there.

"Six Canadian Banks Cut by Moody's on Consumers' Debt Burden" – Bloomberg
"Moody's cuts Canada's banks, warns of fat consumer debt, frothy home prices" – Report on Business

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A huge draw on U.S. oil inventories caused a rally in the commodity price Wednesday but the short term outlook in the sector is so fraught with confident, conflicting opinions that investors are going to have to attempt to look through the current noise and decide on a mid-term outlook. Personally, I remain constructive on energy stocks in the id term as long as global demand forecasts are met or exceeded.

"@tracyalloway BofAML cutting its oil forecast on 'crude realities.' #OOTT" – (research excerpt) Twitter
"Oil Producers Have Consensus to Extend Cuts, 2 OPEC Members Say" – Bloomberg
"For Some, There's Never Been a Better Time to Buy Oil" – Bloomberg
"Vitol executive says oil market not seeing expected destocking" – Reuters

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Industrial metals prices and mining stocks have been really, really weak of late and China's attempt to curb credit growth is the problem. Some analysts, however, have not given up hope,

"Optimism over base metals, which had been gathering strength since the end of last year, is now facing jitters over Chinese consumption and rising stockpiles, and a drop in steel prices that's fueling negative sentiment across industrial commodities. The world's biggest consumer is embarking on a financial deleveraging campaign that's threatening demand for raw materials. While it's shaking short-term sentiment, it needn't jeopardize the bigger picture, according to the chief executive officer for China at consultant CRU Group."

"China Metals Bulls Aren't Panicking Just Yet as Rally Fades" – Bloomberg
"Closer Look: As China's Growth Cools, Wealth Management Products Boom" – Caixing

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Tweet of the day: "@tracyalloway Emerging market kill joys. P/E poopers. MSCI-ingrates. Wet-yield blankets. bloomberg.com/news/articles/… " – Twitter

Diversion: A remarkable helicopter tour of fourth century AD ancient Rome – Youtube

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