Tag: HCG

Home Capital (TSX: HCG) and Equitable (TSX: EQB) have been hammered today as a result of fallout of the Ontario Securities Commission allegations that certain Home Capital Group executives have contravened the various regulations. They continue to perform damage control, today announcing their CFO (who was under the OSC investigation) will be stepping down and other various board changes.

Borrowing rates for Home Capital spiked to 26% today. Equitable, which normally has been an inexpensive borrow, had its cost to borrow rise to 2.75%.

Implied volatilities on options for HCG is also very expensive at present, around 110% for near-dated options and around 90% for a couple months out. EQB does not have options trading on their shares.

There has been an avalanche of media coverage (both in print and social media) about Home Capital and their woes. They have been pushed down to about 25% less than tangible book value.

This spill-over has not occurred to Genworth MI (TSX: MIC) at present.

On April 13, three notable companies associated with Canadian housing pricing fell considerably: HCG, EQB and MIC.

There were a bunch of other companies that had issues, but it looks like that the trio above were fairly pronounced in the day’s list of losers:

April 13, 2017 TSX Percentage Losers

Company	Symbol	Volume	Close	% Change
Nthn Dynasty Minerals Ltd	NDM	4,841,027	2.17	-10.3
Intl Road Dynamics Inc	IRD	203,203	2.81	-10.2
China Gold Intl Res Corp	CGG	1,269,594	2.43	-9.3
Home Capital Group Inc	HCG	972,606	21.70	-8.6
Aphria Inc	APH	6,005,793	7.21	-8.3
Equitable Group Inc	EQB	287,512	63.41	-8.3
Fennec Phrmctcls Inc	FRX	12,537	5.50	-8.0
Silvercorp Metals Inc	SVM	1,516,993	4.94	-8.0
Alacer Gold Corp	ASR	1,881,209	2.52	-7.7
Street Capital Group Inc	SCB	28,489	1.40	-6.7
Taseko Mines Ltd	TKO	794,675	1.52	-6.2
Trilogy Energy Corp	TET	182,481	4.95	-6.1
Genworth MI Canada Inc	MIC	221,174	34.63	-6.0
Top 10 Split Trust	TXT.UN	9,863	4.08	-6.0
Guyana Goldfields Inc	GUY	916,012	7.41	-5.4
Golden Star Resources Ltd	GSC	548,268	1.09	-5.2
Continental Gold Inc	CNL	852,825	3.91	-5.1
Arizona Mining Inc	AZ	501,450	1.96	-4.9
Great Panther Silver Ltd	GPR	387,165	2.00	-4.8
Argonaut Gold Inc	AR	1,036,644	2.43	-4.7

I’ve been trying to find what caused this spontaneous meltdown in equity prices.

My 2nd best explanation is that Bank of Canada Governor Stephen Poloz is putting a torpedo to the Toronto housing market by making explicit statements about the 30% year-to-year rise in valuations and about how there is no explanation for it. Specifically, he stated “There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices, and so it’s that gap between what fundamentals could manage to explain and what’s actually happening which suggests that there is a growing role for speculation“, which is a mild way of saying that people are basically trading houses in Toronto like they did with Tulip Bulbs in the Netherlands in 1636.

He also politely stated that if you believe that housing prices are going up 20% year-to-year, it doesn’t matter whether he raises interest rates by a quarter or half point, and he could even raise them 5% and it wouldn’t make a difference (although it would be rather fun to see him try and see all the mathematical financial models predicated on stability go out the window in one massive flash crash).

However, my primary reason why I think the three stocks crashed is a simple announcement:

==========================

Media Advisory
From Department of Finance Canada

April 13, 2017
Minister of Finance Bill Morneau will hold a meeting with Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory to discuss the housing market in the Greater Toronto Area.

A media availability will follow the meeting at approximately 3:30 p.m.

Date and Time
2:30 p.m. (local time)
Tuesday, April 18

Location
Artscape Wychwood Barns
601 Christie Street
Toronto, Ontario

==========================

Being somewhat experienced with the nature of government communications, there is no way you can get a federal and provincial Liberal with a Conservative mayor doing a joint announcement on something without it leaking to the marketplace.

The only question here is how deep they’re going to stick their silver-tipped oak stake into the heart of the Toronto real estate vampire.

There are three companies that come to mind that are directly related to Canadian residential housing financing: Genworth MI (TSX: MIC), Home Capital Group (TSX: HCG), and Equitable Group (TSX: EQB).

I’ve done extensive research on all of them in the past and I am research-current with all three companies. I do own shares of MIC from the summer of 2012.

The first, which should be no surprise to regular readers here, deals with mortgage insurance. The second and third deal with direct financing of home mortgages (both first-line and refinancing). If a mortgage is required to be insured (which is usually the case for higher ratio mortgages and refinancings) then CMHC and Genworth MI get involved and charge a premium in exchange for the lender being able to give out a lower rate of interest.

HCG today announced that its mortgage originations were down from the previous year and its stock price cratered roughly 15% as of the time of this writing.

Genworth MI is down about 4% in sympathy, although Equitable Group is in the “white noise” range for the markets (i.e. relatively unchanged).

A downturn in mortgage originations will materially affect HCG and EQB’s profitability, while this has more of a muted effect on Genworth MI as cash proceeds from mortgage insurance are not accounted for as revenues until they are recognized according to prior experience (net of expected default losses).

The takeaway to this message is that if Genworth MI gets disproportionately trashed in the upcoming days, it is likely unwarranted as the fundamental profitability in Genworth MI is not through volume, but rather the solvency of the lenders in question. Genworth MI also has the advantage of being able to run off its insurance book and still receive a boost in market value as it is trading below book value, while HCG and EQB are trading above book value.

Option implied volatility does suggest that institutional interest suspects further volatility. Tread carefully as always!