Mike Larson here with an emergency update. Shares of Deutsche Bank (DB) plunged more than 6.7% after reports circulated that some funds are starting to yank money out of the German bank.
Specifically, Bloomberg reported that several hedge funds that clear derivatives with DB are pulling excess money from the bank and moving it elsewhere. They include names like Millennium Partners, Capula Investment Management, and Rokos Capital Management.
While only about 10 firms out of more than 200 supposedly took the step, the news rattled markets for a very good reason: This is exactly what led to runs at brokers and banks like Bear Stearns and Lehman Brothers! They started when a few customers pulled their money, then rapidly escalated into a crisis of confidence and a bout of contagion selling throughout the financial sector. That, in turn, necessitated massive central bank and government bailouts.
|Will Deutsche Bank go the way of Bear Stearns?|
Will that happen at Deutsche Bank? Spokespeople and officials for the institution have claimed in recent days that it has plenty of capital and liquidity. The German government has denied it will need to bail DB out.
Plus, a DB official was quoted by Bloomberg today saying: “Our trading clients are among the world’s most sophisticated investors … We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.”
But remember what I said earlier this week: The firm is facing billions and billions of dollars in fines from the U.S. Department of Justice. Its core business has been hemorrhaging money and employees for several quarters. And it faces huge margin pressure from the European Central Bank’s ongoing QE efforts.
Plus, DB has $2 trillion in assets. It had $47 trillion in notional derivatives exposure at the end of 2015 (though the bank claims that collateral and netting reduces its exposure to more like $52.8 billion). It’s also the biggest bank in the biggest economy in Europe. That means it’s not some two-bit institution in some distant global backwater.
DB isn’t the only mega-bank that’s struggling mightily in Europe either. The second-largest bank in Germany, Commerzbank (CRZBY), just said today that it would slash 9,600 jobs, scrap its dividend, and restructure its operations further. The moves will cost a whopping $1.2 billion.
I hope to heck you took my advice more than a year ago to get out of European bank stocks. That would’ve saved you a fortune. Now the obvious question is: “What does this mean here in the U.S.?”
The short answer is: “No one knows.” But I will say this: My background is in the credit markets. I have spent the better part of the past two decades following and analyzing mortgages, real estate, banking, bonds, and all kinds of investments related to them.
I have lived through both short-term and long-term credit busts prompted by the failure of Long-Term Capital Management … the implosion of high loan-to-value home equity lenders … the dot-com recession … the biggest housing bust in the U.S. ever … and more.
We are now at the tail end of the biggest easy-credit boom in history, fueled by round after round of global QE and interest-rate cuts. We have already seen cracks around the edges, in industries as diverse as autos and commercial real estate. And we have seen European bank stocks lose chunks of value over the past several quarters.
That’s why events like this have me concerned. If we do get contagion selling in other European banks, as well as U.S. institutions, it is only going to accelerate the nascent tightening in credit that’s already underway. That, in turn, is problematic for the economy, overvalued real estate, or weak stocks.
So my recommendations are straightforward:
Continue to avoid the sickly Euro-bank sector, including all the banks named in this column that trade both there and here.
If you bought into the happy talk about U.S. financials this summer, get out of them. The sector has much less potential than others that don’t come with all the debt and derivatives baggage.
Continue to exercise caution in your investing strategies – something I have been urging since last summer. Or for a portion of your risk funds, consider buying investments that rise in value as vulnerable financial stocks fall. That’s what I’ve been doing in my All Weather Trader service, including Euro-banks such as Deutsche Bank.
Until next time,