In the next few weeks, we will hear definitively from the Canadian banks. Make no mistake, this quarter is all about exposure and write downs. Most of it related to the sub-prime mortgage market. 

Not that there is anything new here. Aside from some clarity as to the amount of the exposure. But really, does anyone expect Canadian banks to have anything that looks remotely like the US banks. Well maybe… maybe not!

CIBC (symbol CM, recent price $88.08) is front and center with the preliminary guess as to the exposure coming in somewhere around $400 million. Some have gone so far as to suggest numbers significantly higher. In the $2 billion range, for the most pessimistic observers. 

We’ll know soon enough. CIBC is expected to release quarterly earnings and its dirty laundry on December 6th. And they are not alone. All of the major banks will be reporting over the next three weeks. 

Bank of Montreal (symbol BMO, recent price $56.66) will also bear watching. Especially if management adds a sub prime write down on top of an already weakened balance sheet from the oil and gas trading gaffs. 

Fortunately, or not, depending on whether you are holding the banks, the market is anticipating bad numbers, and has already taken a pound of flesh out of the share prices. To get a handle on this, consider that based on Friday’s closing price, BMO had a dividend yield of 4.59%. CIBC was yielding 4.04%. You would think at these prices the dividend will go a long way to support the stock. Assuming of course that the dividends remain intact, which for the record, I suspect they will.

Longer term, the sell-off while painful, is probably a good thing. At least the market is getting past the uncertainty as to the amount of exposure. Going forward, the real battle will come next year, framed I suspect, by the Christmas retail sales numbers. At issue is how much damage this crisis has done to the US consumer psyche. 

It is a genuine concern when you see the extent of the problem. Some of the numbers related to US foreclosures are staggering. In Las Vegas for example, one in every 41 homes are under power of sale. Similar numbers exist in parts of California and Florida. Those are frightening statistics, and you have to wonder how much buying power will be left. Will consumers stop spending in order to reset their personal balance sheets?

All of which brings us back to US retail sales numbers as Americans head into the post Thanksgiving holiday season. How those numbers play out will tell us how much resilience is in the US consumer. And since consumers represent more than 70% of US GDP, that will assist the market in gauging the likelihood of a recession. 

Certainly a US recession is not priced into the market. Which is a risk, because it will mean less demand for commodities and lower oil prices. If you accept that our currency and market performance has been driven for the most part on the back of oil and gold, then lower values in those sectors, will likely mean a lower dollar. 

At this stage investors have to make an educated guess about the likelihood of a recession. One thing I have learned over many years, the odds are never great when you bet against the US consumer. It never fails to amaze me just how resilient the US consumer is. 

If you buy that view, then you have to believe that the Canadian banks are cheap. By almost any metric. If a recession does not come about, then you also have to think that the banks on both sides of the border, will lead the market higher. Just as they have in past market rallies. And with a 4%+ dividend, and my belief that the dividends will remain in place, there should not be a serious downside risk.