It is fairly obvious by looking at the graph of Genworth MI (TSX: MIC) that institutions are dumping stock in fears that mortgage default rates are going to spike up as a result of economic calamity in Alberta. The CEO of Genworth talking about “heightened vigilance” isn’t helping matters any.
While this might be true, it appears that other real estate metrics are relatively in tune. My cursory scans of the REIT market (e.g. Riocan, H&R, Calloway, all apartment trusts, etc.) doesn’t show any erosion in that marketplace. Banks (e.g. BMO, BNS, etc.) are showing some equity erosion since the middle of 2014, but I’d suspect this is more due to yield curve compression and partially due to the solvency risk posed by syndicate loans to various oil and gas companies.
Other direct lenders, mainly Equitable and Home Capital, have both seen erosion but it is not significant to the point where one would think there is going to be a complete and utter collapse in the fundamentals.
Genworth MI appears to be the whipping boy in the real estate industry. If such fears are warranted, then one would think that REITs and other related stocks would also get proportionately taken down.
So the question now is whether the market is wrong about REITs or wrong about Genworth. Assuming the negative momentum for Genworth MI continues, one would guess that looking at the financial metrics and historical charts (and then-fundamentals of the company at that time) that it is conceivable the stock can get down to about $22-23/share as a floor. This is based on the discount assigned to the stock during the mid 2012-2013 period and the fundamentals of the company at the time.
Today is a little different in that the company has less shares outstanding and has more equity on the balance sheet.
Assuming the Canadian real estate market does not completely nose dive, an investor would still be looking at around 20% downside on existing technical momentum, but fundamentally there is still significant value as the firm is trading deeply below book value at present (right now at a 20% discount). It is like purchasing a leveraged bond fund at a significant discount.
The combined ratio (this is the loss ratio plus the expense ratio) during the depths of the 2008-2009 economic meltdown, did not go above 62%. Delinquency rates never got above 0.30%. Today, it is 39% and 0.10%, respectively. Yes, these numbers will increase as people start defaulting on their Alberta homes, but I simply do not see at present those numbers getting worse than it was in the 2008-2009 era.
I am watching this carefully and may choose to add to my position.
Hi Peter,
Just a word of warning – things are quite bad here in Alberta. Several independent sources have confirmed my suspicion that “traffic is lighter” everywhere in Calgary.
Several members of our fencing team have been laid off. I was laid off back in December when our engineering company shut their doors. Most of my remaining friends have taken 10-20% pay cuts. Luckily the wife is a neurologist at Alberta Health Services, so if things get difficult for her we’ll likely end up in California.
In the 2008-2009 era oil prices rebounded very quickly . This oil supply glut could last considerably longer and could usher in a ru-run of the 1990’s. Alberta also needs $90+ oil to justify spending on oilsands expansion. If oil rebounds back to $65 and just stays there (due to shale production coming back online) most of the existing projects will still chug along but capital expansion will not come back. Note that a completed SAGD operation doesn’t require all that many people to run.
The Southern Pacific CCAA sale should be concluding this week. If there are no bids for the assets, then the oilsands are in real trouble!
http://www.pwc.com/car-stp.
Thanks for the on-the-ground notes. Here in BC, we never had an economy to begin with, so I guess I can anecdotally state that nothing has changed.
There are several companies out there on the TSX that have direct and significant exposure to property in Alberta which are also trading at equivalent discounts to book value. I guess the question is how much maintenance CapEx are going to keep people employed.
Genworth MI has 17% of its insurance in force in Alberta.
As for STP’s project, at best a call option on when oil gets above $150/barrel, they have been bleeding red ink almost from day zero.