Sprott Bets Against Canadian Banking Stocks, Sees Depression

Date: Friday, December 19, 2008
Author: Frederic Tomesco, Bloomberg.com

Eric Sprott, the investor whose flagship $900 million fund has beaten 89 percent of Canadian rivals since 2003, said he’s betting against domestic bank shares because he expects loan losses to soar as the global economy heads into a depression.

“There are so many job cuts and output cutbacks it’s shocking,” Sprott said yesterday in an interview. “That’s not a recession, that’s a depression. I look at the data points and they just scream at me that we are off the cliff.”

The 64-year-old Sprott, whose Toronto-based firm Sprott Inc. managed C$5.6 billion ($4.6 billion) as of Sept. 30, said he’s been selling short shares of the country’s six biggest lenders for four months. By selling short, Sprott profits if shares of Royal Bank of Canada, Toronto-Dominion Bank and other lenders decline.

“We are shorting the Canadian banks,” Sprott said in his Toronto office. “Look at their assets: Subprime, credit cards, asset-backed commercial paper, there is hardly one asset class that hasn’t gone down 10 percent. The equity is skinny.”

Sprott’s bet against Canadian banks reflects his bearish view of stocks and the global economy.

Sprott, whose stock has fallen more than 60 percent since the firm went public in May, said he sees “little hope” of a rebound in global stocks next year as consumption and economic activity grind to a halt.

2009 Declines

Canada’s Standard & Poor’s/TSX Composite Index, which derives about three-quarters of its value from banking, energy and mining stocks, may plunge again in 2009, Sprott said. The index has dropped about 39 percent this year.

“We could easily see a similar decline in Canada next year,” Sprott said. “I don’t think the outlook for stocks in any country of the world is very good for 2009. You have to stop this negative vortex, but there has been no stoppage yet.”

Sprott said Canadian banks, ranked No. 1 by the World Economic Forum, aren’t immune to the selloff.

“I don’t believe the Canadian banks are in that much better shape” than U.S. or European banks, he said. “We’ve just been oblivious to what’s going on in the world.”

Canadian banks and insurers including Bank of Montreal and Manulife Financial Corp. have announced stock sales worth about C$7 billion in the past month to boost capital amid a worldwide financial crisis.

“The support is cracked,” Sprott said. “They have to keep doing these issues.”

Strong Enough

Not everyone is as negative on the Canadian lenders.

“There is a distinct possibility that valuations for Canadian bank stocks could go materially lower next year,” said John Aiken, a bank analyst with Dundee Securities in Toronto. “Still, the capital and the core operations of the banks are strong enough to see them through.”

Sprott’s Canadian Equity Fund has been selling bank shares short, as have the C$526 million Sprott Hedge Fund and the C$556 billion Sprott Hedge Fund II, he said. U.S. financial stocks represent the firm’s biggest short position, Sprott said.

Sprott has been buying gold and silver bullion on expectation that investors will flock to the metals as havens. Precious metals represent about 40 percent of the firm’s assets, he said, while some of his funds have as much as 40 percent of their assets in cash.

In the past three months, Sprott said he sold copper, lead, zinc and nickel producers because he expected demand for the metals to fall. He plans to avoid adding to oil stocks until energy prices start rising.

Hoard Cash

“We have a lot of cash in all our accounts,” he said. “With oil at $40 a barrel, I’m not a buyer of oil stocks today. I need to see energy turn.”

Sprott also said his firm may add gold stocks next year. Gold may climb to $1,000 an ounce within three months, he said. Gold futures for February delivery yesterday fell $7.90 to $860.60 an ounce on the New York Mercantile Exchange’s Comex division.

“We will try to raise our weighting in gold stocks,” Sprott said. “When people worry about where they have their money, they will want to own gold and silver.”

To contact the reporter on this story: Frederic Tomesco in Toronto at tomesco@bloomberg.net.