Deutsche Bank (DB) is bombing … again … and the slump is infecting markets worldwide.
Market Roundup
The German mega-bank’s shares plunged as much as 7% in Europe, sending them to their lowest since they began trading on the Xetra stock exchange in 1992. Meanwhile, its U.S.-traded American Depository Receipts (ADRs) tanked to the lowest since they started trading on the New York Stock Exchange in 2001.
A warning from Germany’s government over the weekend that it won’t lend the bank a helping hand served as the catalyst for the latest meltdown. But the bank was already reeling because of ongoing losses in its core operations, and worries it doesn’t have enough capital to absorb them. The U.S. Department of Justice also piled on a few days ago, saying it wanted Deutsche Bank to cough up $14 billion in penalties for its actions during the mortgage crisis.
Officials at the bank say they expect to pay much less than that once settlement negotiations are concluded. They deny the bank needs to raise more capital. And they claim they never even went to German Chancellor Angela Merkel looking for help.
But investors are obviously concerned, given the ongoing meltdown in DB shares. The cost of insuring DB debt in the credit default swap market is also rising, while the price of its junior bonds is falling. One batch of securities that would be the first to absorb losses if crisis struck trade for only 73 cents on the euro.
So why should you care about Deutsche Bank if you don’t live in Germany, bank at DB, or own its shares? Because it’s one of the largest banks in the world, with $2 trillion in assets as of the second quarter. Because it has one of the largest derivatives portfolios in the world, with $47 trillion in notional exposure at the end of 2015.
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| Problems at one mega-bank can quickly spread throughout the financial system. |
But most importantly, it’s because we learned during the U.S. financial crisis that problems at one mega-bank can quickly spread throughout the financial system. The International Monetary Fund itself warned back in June that Deutsche Bank “appears to be the most important net contributor to systemic risks” of the largest global institutions.
My advice? Continue to avoid these lousy Euro-bank stocks, which I have repeatedly warned about in the last several months. Watch the overall financial sector closely, and see if the Financial Select Sector SPDR Fund (XLF) starts giving up the ghost again. A sharp break down below the $18.50 level would be a significant market negative to me.
Plus, consider going a step further and joining me in my All Weather Trader service. That’s where I recommend specific, targeted investments that rise in value when vulnerable financial stocks fall. My subscribers have had the opportunity to bank handsome double-digit and triple-digit gains on financial names several times in the past 13 months.
So what do you think about the ongoing meltdown in Deutsche Bank shares? Is this a warning sign for the European banking system? What fallout do you expect in U.S. markets, and among U.S. bank stocks? Are you selling them, buying them, or just staying the heck away and focusing on other sectors? Let me hear about it in the comment section.
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While we’re on the subject of banks, several of you weighed in on the ongoing shenanigans at Wells Fargo (WFC). You also shared your opinions on the economy and the markets – and what you expect to see happen next.
Reader Tasmica said there isn’t much room for optimism on the growth outlook: “The data seems to indicate the economy might be able to continue to eke out a very slow recovery for an extended time. But Washington will manage to trigger a recession in 2017 with their inaction and refusal to stimulate the economy and to address essential infrastructure deficiencies.”
Reader Chuck B. warned that excessive valuations could be the market’s downfall: “I read that the CAPE Ratio of the S&P 500 (current price, divided by past 10 years’ earnings, adjusted for inflation) has only been as high as now three times in the past century: 1929, 2000, and 2007. We all know what happened in the years following. How much of those reduced earnings can be attributed to Fed actions? More than they want to admit, I’m sure.”
As for the Wells Fargo imbroglio, Reader H.C.B. said: “Stumpf will not be able to outrun the controversy that is growing and dogging him at work, at home, and in-between. Reminds me of Charles Keating. The outcome will be similar. Constant public pressure, investor boycotts, and customer deflections may force him to step down eventually.”
Lastly, Reader S.B.S. said: “The one sure way to get the attention of the top management of the financial services industry is to put a few of them in prison for a while. The word will get around.”
Thanks for taking the time to weigh in on these important issues. If you want to contribute further to the debate, be sure to hit up the comment section.
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It’s not your imagination. The stock market really is throwing more temper tantrums these days. Deutsche Bank analysts just noted that we’ve seen five volatility surges since 2014 (with surges defined as realized S&P 500 vol jumping from below 10 to above 20 in six weeks or less). That’s as many as we saw in the previous two decades.
Wall Street analysts are well-known for wearing rose-colored glasses. But optimism is rapidly giving way to realism, at least when it comes to third-quarter earnings.
Analysts now expect earnings to fall on a year-over-year basis in Q3 – by around 2.3%. Several weeks ago, they were expecting year-over-year gains. This would be the sixth straight quarter of declines, the longest negative streak since FactSet started tracking in 2008.
Hillary Clinton and Donald Trump will face off in the first presidential debate tonight in Hempstead, New York at Hofstra University. It will be a 90-minute affair that begins at 9 p.m. ET, and moderated by NBC News anchor Lester Holt. Polling suggests there is a significant chunk of undecided voters still up for grabs, making the results of the debate particularly meaningful.
So what do you think about this new regime, where tantrums seem to erupt out of the blue with much more frequency? How about the slump in earnings expectations? How should that impact stock prices? Let me hear about it in the comment section. And if you have any thoughts in the wake of tonight’s debate, feel free to add those, too.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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A question, please. In regards the US DOJ’s action, who’s the plaintiff? Should Deutsche Bank be found guilty, who gets paid the award?
You mean the US DOJ had an action. Or was it just gas.
We keep propping up failing criminal banks so the economy will avoid crashing. Each time we avoid a crash, the problems get bigger and the crash will probably be far worse. Why can’t we let things crash and let the market straighten things out while we suffer for our past mistakes before things get even worse?
“Why can’t we let things crash and let the market straighten things out”
We tried that in 1932. That’s the point of breaking up the TBTF banks. Each is armed with an economic hand grenade and we’re standing next to them.
Mike, this week is qa very scary week for the financial markets. however, there are two schools of thought I keep reading about. one is kinda buy gold/silver miners and buillon. the other is deflation and sell everything or buy inverse 2x,3x etc. so. where do u stand? when might something big happen and what shorts are you recommending. I am a subscriber tx ronnie
I would think the European Central Bank would step in and provide funding the moment DB faced s potential ‘run’ on its deposit base – however, stock and bond holders should brace for losses unless DB can show the markets that it’s capitalization could withstand a $14b s shock.
Let’s not forget about the geopolitical issues that we all face with Russia, China the Middle East and Ukraine. Should war break out that goes nuclear, I am afraid none of these financial issues will matter one bit.
Just a sham ploy by the bank to get leverage against the US penalties. They should be garnishing executive salaries and bonuses.
A financial tsunami is headed across the ocean.Go on,take the money and run. I bet that you don’t know that the banks legally own your money deposited in them.
DB has dealings with every major US bank. We’ve known this for a long time. The only question was when would the Fed let go. It was their timetable.
Angie might not want to bail them out if the unthinkable happens, but Auntie Janet will be there with the FED backstop. Back in 2008-09, the FED pumped $bilions into Euro banks to help avoid a total meltdown of the banking system. They will do it again.
It costs us $400 Billion each year to figure our taxes. That cost is part of the bottom line cost of our exports so we get fewer orders. Total cost of having the IRS is $1 Trilion per year. Those savings are available. There is hope. I sent that to Trump. Let’s see if he reads his mail.
The Trumpster reads everybodys emails including his own tweets. As for global warming ijn the banking sectors, remember that after WWII interest rates were extremely low. Greater demand for consumer goods as well as building materials caused a boom of sorts which then translated into governments spending beyond their incomes. Maybe there is a lesson in how effective the Trumpster has been as a measure of negativity. The only way to eliminate this is to work our way through the valley of the shadow of banking. the banks also have to reduce their returns on equity from the stellar values of the recent past to more normal levels. Haircuts 25 cents!!!
You say Deutsche bank, with total assets of 2 trillion has derivatives of 47 trillion. How in hell can this happen? What do these derivatives consist of and what exactly are they?
virtually all banks including US banks are sitting on trillions in derivitives. when they fail, it will be the biggest meltdown in history. it will dwarf the stock market crash.
Clinton v Trump,Lets face we cannot keep going the same route forever,Trump will change that hopefully?????Look at BO.he has been a disaster and will go down in history,Whoever gets the job,disaster is just round the corner,WHO would want the job at this time in history,not me.Only a nutter would take up the reins at present.It will take a generation to fix this mess,if possible,Whoever wins after 5 years it will not look good on his C.V.
When either candidate becomes President, I do not see things getting better, actually worst; because of to much division and resistance on all fronts resulting in same old actions. However, one candidate is better then the other as to issues of trust; let you guess which candidate is better.
I see a plan by a present administration that has gone some what awry, the same email scandal that is plaguing Clinton was used by the person in office, hence the meeting on the tarmac, was a nice way to say if the wife goes down for this so will the current CaC and when he goes the DOJ will be soon to follow. Funny how no body sees a convicted felon wanted in two countries in a photo with BO who has his arms around him laughing as a problem.
It is guaranteed, things will get worse economically, beginning with a new presidency. It always does because the current office holder makes certain of it by setting it up that way before leaving office. Current office holders do everything possible to hold off the disasters of their ineptitude and treachery while in office until they can slip away and stick the next president with the fall-out. In particular, If you are a Democrat leaving the office to a Republican, it is good form to try to sink the next administration before they have any chance to do anything the public might like. It is a historical precedent. You do not have to guess about it. Do you remember how Bill and Hillary Clinton trashed the White House, tried to steal the valuable antique furniture and ripped the keys G, W and B out of the computer keyboards just prior to George Bush taking occupancy? If Hillary wins, do you suppose that she might be interested in Pay-back to her detractors? You bet. Better watch your back you “Basket of Deplorables”.
Meltdown? You ain’t seen nuthin’ yet. Let ’em fail.
Governments, or their designated central banks, can’t control any economy, local or global. You would think they might know that by now. But they continue blowing hot air into bubbles to see how long they last. Duh!
Well, Nafta is a fail for American Jobs, Graham, Leach & Bliley Act of 2000 signed into law by Bill Clinton caused the financial collapse in the housing/financial sectors Fail.
Hillary the Hillbilly Hag lies about everything Rose Law Firm, Clinton Foundation, Against gay marriage then says she always supported it. Says she’s going to regulate the banks and is taking millions from them for speeches, Benghazi the list is immense the woman is a lying crook.
lots saying sell everything its time get it done and we can start on a new highim praying that it wont hurt too many too deep i havent thought of a reverse mortgage yet. hope everyone wanting to wrk has a job.
Hey, what are the voters not decided on? I can not imagine. Here there are but two candidates? One candidate saying ‘ I’ll dish up plenty of the ame as you had the past 36 years or more. The other candidate saying ‘ Together we will make America Great Again. I will bring back the jobs to America. I will certainly get jobs for our home land Americans once again. Together, let’s make America Great Again.’ I guess I hear as well as the next voter. I guess that also I can visualize that America becoming great again. Wasn’t America a great place when jobs were plentiful? Not everyone can be a construction worker, after all, and help rebuild infrastructure. So, what is the debate? Where is the question of who to vote for? Hands down, there is only one true candidate that has spoken a real plan for American people. Let’s be sure to get to the polls. Let’s get there and let’s vote. Every vote will speak volumes for the new leader, and for America.
Looks to me like China is back to accumulating gold; unless someone else can come up with an explanation as to why the price of gold keeps getting hammered lately as soon as the Hong Kong market opens. Unless someone has a better explanation, dumping small amounts in Hong Kong while the west is asleep (pun intended) followed by buying larger amounts from western markets makes sense to me. Any follow up, one way or other, would be appreciated.
A Trump win should bring the wrath of Satan down upon the markets as he quickly fires Janet Yellen and brings in a Fed Chair who immediately raises rates. The Don doesn’t like Bubbles, but he’s exactly what we need to prick them all.. Go Trump!
Hi Jean,and I thought this was a2 horse race,now Satan is involved,how many more wants to join the party,just joking
Media spin. I had just finished reading that new home sales had dropped 8.6% which in my estimation was terrible and low and behold I turn on the TV and there across the bottom of the picture the news states that new home sales are hold up well. What??? It seems as usual economists set the bar so low that it was almost impossible to slip under it. Thus even though sales were bad according to economist they were OK. This kind of BS media should be punished and hard for deceiving people including clueless investors.
The Golden Greed Award goes to Lotte. A very large Asian conglomerate established 1948 with headquarters in Japan and Korea. Seems like the police are seeking an arrest warrant for the CEO. Another great corporation to buy for your retirement fund.
Not a comment, but a question: A few months back, one of you folk at moneyandmarkets.com published an article about “New Money”, which is supposed to kick in between 27/09/216-30/09/2016, i.e now. Where does this stand? And can it work if major financial institutions like Deutsch Bank and the like are in trouble? Put differently, the dollar as an international trading currency was (once!) backed by the strength of the US economy; what is there to back “New Money”?
So, the old pro/politician, beat the upstart last night by staying cool. His reality show experience was forgotten in the heat of the moment. No rehearsals allowed. The only question is: how did these two post-war babies, who should be thinking about retirement, become the choice we have to lead us? Which will be the one likely to drop dead in office if they happen to win? We should be looking at their veep choices, who will be the successors.
Talk is cheap —Trump lives on phony ideas to let people hear what he knows they want to hear. But among that phony baloney he revealed something interesting about his attitude. He said “Obama is unable to CONTROL the people protesting in the streets. I will and “What I want is a strong well trained and equipped military” A Military Dictatorship??? The world has tried that (Hitler) and it hasn’t worked. Dump Trump!!
I went short on DB a few months back. DB will be the first domino.
Great move ;-)
if you take a deck of cards and start building a house of cards eventually you will have a skyscraper of cards. Derivatives are like a house of cards, they are built on various future demands for goods based on historical facts. If all derivatives were let to run their course and no new ones to replace them the world would collapse on itself.