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Inside the Market Prominent U.S. hedge fund manager builds short position in Canadian bank stocks

A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

A prominent U.S. hedge fund manager has announced a significant short position on Canadian banks,

“Steve Eisman, a portfolio manager at Neuberger Berman, is among a growing number of short-sellers taking positions in the likes of TD Bank and Royal Bank of Canada,… The moves come after property prices raced ahead of incomes for several years, boosted by loose lending, low interest rates and lax controls on foreign money. But new house prices in Canada slipped year on year in January for the first time since 2009 … “I’m calling for a simple normalisation of credit that hasn’t happened in 20 years,” Mr Eisman told the FT … He said the effects would hurt banks and the real estate sector, but would not be as intense as the financial crisis a decade ago in the US. “

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“The Big Short’s Steve Eisman raises bets against Canadian banks” – Financial Times (paywall)

“@kevinmilligan Guys, we have a structural problem. GDP growth is low. There is no sign of a ‘2-handle’ in forecast [Canadian] growth. I’ve looked through budgets back to the 1980s and it looks to me like 2019 is the first time this has ever happened. Is 2%+ real GDP growth really a thing of the past?” – (table) Twitter

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I have mentioned that high-yield bond spreads were my primary indicator that the post-crisis market rally was ending. High-yield spreads have been a reliable indicator of longer term market peaks, according to Credit Suisse global strategist Andrew Garthwaite.

Nomura research is arguing, however, that in this cycle it BBB-rated corporate bonds – one notch above high yield – where the market risk lies,

“ Whereas BBB bonds accounted for 30% of new corporate bond issuance in the US and 21% in the euro zone in 2000, those ratios had risen to 34% and 48%, respectively … Investment managers who must invest in investment-grade bonds have been focusing their investment in these BBB bonds on issues that offer the highest possible returns. However, if economic conditions deteriorate, many of these BBB-rated corporate bonds could suddenly be downgraded to speculative high-yield junk bonds. If that were to occur, investment managers who are required to invest only in investment-grade bonds would be forced to sell off these bonds and investment trusts holding them, causing a so-called fire sale. This could inflict serious damage on the market.”

BBB spreads can be tracked on the Federal Reserve data site here.

“@SBarlow_ROB Nomura: hidden risk in BBB” – (research excerpt) Twitter

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Fundamentals supporting crude prices continue to improve after a surprisingly large draw on U.S. inventories was announced Wednesday,

"U.S. government data showed that nationwide stockpiles declined by 9.59 million barrels, while analysts had expected an increase … ‘The U.S. oil market is no longer oversupplied,’ said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. ‘Stocks normally increase at this time of the year, which makes the substantial inventory reduction all the more remarkable.’”

“Oil Near $60 as Stockpiles Drop, Saudis Cut Supply” – Bloomberg

“ @Ole_S_Hansen BOOM!! #EIAReport showing big draws across the board. Not least crude #oil which slumped by close to 10m barrels. Net imports dropped by 660k b/d while production was revised back up to 12.1m b/d. Refinery demand also picked up. #WTI trades higher by 1%” – (table) Twitter

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Tweet of the Day

Diversion: “Ten recent low-tech inventions that have changed the world” – M.I.T. Technology

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