Tuesday, September 7, 2010

Housing Boom is Over: Short Canada

The Bank of Canada will announce interest rates at tomorrow's meeting.

Rosenberg's say that there "based on how the economy and inflation have been moving vis-à-vis the Bank’s latest forecasts, not to mention the heightened uncertainty south of the border, that there is not enough rationale for another tightening".

According to him also, the U.S. inventory cycle played "a minor role in Canada’s economic revival out of recession" and that "close to 100% of the rebound in GDP came via the direct and indirect effects of the housing boom".

know that the housing boom in Canada is over, and "will likely have profound influences over the Canadian economic outlook, especially since export prospects are clouded by the weakening demand trend south of the border".

"Consider that from the nearby peaks, right when the Bank of Canada embarked in its rate-hiking cycle, we have seen...

• Existing home sales decline 36%;
• Single-family housing starts plunge 29% ;
• Residential building permits slide 15% ;
• Home prices drop 5%.

"You don’t have to do much more than study what happened to the U.S. economy three years ago to understand that the housing sector... leads. "

Following this logic, one should short Canada.

Below are straddles for EWC, which allow an investor to profit regardless of direction, as long as the underlying moves the encessary amount:

Computed with StraddlesCalc.

Please do your own due diligence.

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