By Justin Spittler, editor, Casey Daily Dispatch

Last Wednesday, its stock plummeted as much as 66%.

The next day, it fell another 20%.

Home Capital Group (HCG.TO) is now down more than 78% since the start of the year. And it's trading at its lowest price ever.

That's a staggering decline for such a short period. But some analysts think the stock’s headed even lower.

Others are wondering if Home Capital will trigger a full-blown financial crisis in Canada.

In a minute, I'll show why this could happen sooner than you think.

But first, you need to understand why Canada’s biggest non-bank mortgage lender is in free fall.

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• Last week, securities regulators accused the company of misleading investors…

When customers got wind of the news, they started frantically pulling money out of Home Capital.

They withdrew $472 million last Wednesday alone. They pulled out another $290 million on Thursday.

By Friday, the bank had just $521 million in its high-interest-rate savings accounts. That’s down from $1.4 billion as of last Monday.

• There’s no reason to think Home Capital will stop bleeding cash, either…

After all, Standard & Poor’s just downgraded the company’s credit rating to “junk” status. This means the company is at high risk of defaulting on its loans. That’s the last thing any investor or depositor wants to know.

Plus, the company's director just resigned due to a “conflict of interest.”

These are major red flags. You usually only see this stuff happen right before a company collapses.

• Home Capital is now in survival mode…

Last Wednesday, it secured a C$2 billion line of credit from an unnamed source.

The company hopes this cash infusion will stop the bleeding. But, at best, it will only buy the company time.

That’s because Home Capital will have to pay 22.5% in interest on the first billion dollars of its credit line. If it uses anything above that, it will have to pay a 15% interest rate.

Those are sky-high rates. They could end up suffocating the company instead of saving it.

Home Capital isn’t the only Canadian lender in serious trouble, either…

• Equitable Group (EQB.TO) is also bleeding cash…

Equitable Group is another mortgage lender in Toronto.

Between last Wednesday and Friday, customers pulled C$225 million out of the company’s accounts.

This led the company to secure its own $2 billion credit line on Monday. It did this even though management called the outflows “elevated but manageable.”

Now, I'm not a banker. But I do know that companies don't take out multibillion-dollar emergency lines of credit when everything is fine. They do this when they have big problems.

In short, Equitable Group is likely in far more danger than its investors realize.

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• Panic is now spreading across Canada’s financial system…

And that’s the last thing Canada can afford right now.

After all, the country’s real estate market is a house of cards. If you've been reading the Dispatch, you know exactly what I'm talking about.

If you're just tuning in, here's a quick recap:

Housing prices have surged so much in Canada's biggest cities that it's becoming impossible for everyday people to buy property there.

Just look at what’s happening in Toronto. There, new detached homes are fetching an average price of C$1.78 million. That’s almost 70% higher than a year ago.

• Canada’s housing market is now one big bubble…

And like all bubbles before it, this one will end in disaster. And that crisis could arrive much sooner than people think.

Just look at the chart below. It shows the performance of Canada’s five largest banks—Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), and Canadian Imperial Bank of Commerce (CM)—since February.

You can see that they’re all down at least 5% over the last three months.

This tells us that the pillars of Canada’s financial system could be in trouble.

• Barring a miracle, Canada will soon have a major crisis on its hands…

We could even see a nationwide bank run.

That’s when everyone tries to pull their money out of banks at once. If enough people do it, the entire system can collapse.

Some people will call me an alarmist for saying this. But remember, there have already been runs on two of Canada’s largest non-bank mortgage lenders.

If you haven’t already, get out of Canadian lender and bank stocks now. The more confidence people lose in Canada's housing market, the harder these companies are going to get hit.

You might want to also consider shorting (betting against) Canadian banks. Here are five Canadian banks that U.S. investors could short. They all trade on the New York Stock Exchange.

  • Royal Bank of Canada (RY)

  • Toronto-Dominion Bank (TD)

  • Bank of Nova Scotia (BNS)

  • Bank of Montreal (BMO)

  • Canadian Imperial Bank of Commerce (CM)

Keep in mind, shorting is highly speculative. So only risk money that you can afford to lose.


Justin Spittler
Delray Beach, Florida
May 3, 2017

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