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.
|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.
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.
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,