So much for the holding pattern

So much for the holding pattern.   While 84 bps on the SPX felt worse than it probably should have, given how accustomed markets have become to monetary anesthesia, the real nexus of pain was of course in Europe, where Deutsche Bank is coming perilously close to the "vortex of destruction"- the move to a single digit share price that spelled doom for many a US bank in 2008.

To put it in perspective, consider that Monte dei Paschi (current price: 19 cents) was trading higher than the current DB price in May of last year (and at the equivalent of 10000 nine years ago.)   While the German behemoth's woes are not exactly new news (OK, the DOJ fine was new news, but not the lousy earnings power and black hole on the balance sheet), one does wonder what the poor buggers who bid up the infamous DB coco a few weeks ago must be thinking now.


If this is going to be the next edition of "flog the SX7E down to new lows", obviously DB breaking into single digits would be an obvious psychological catalyst.  Macro Man has yet to hear any of the 2008-style "x is no longer trading with y" rumours vis-a-vis DB, though in fairness he is not particularly well placed around that particular campfire at the moment.   Given that DB concerns are putting some slight upward pressure on German sovereign CDS, one does wonder yet again what the attraction of owning 10 year BTPs at a yield of 1.18 might be.


Speaking of Italy, a mea culpa: Macro Man cannot understand how he got it into his head that the referendum was this weekend, but he did, and he was wrong.  it was announced for December 4 yesterday; conveniently, the weekend before the December ECB meeting.

Finally, it's perhaps worth updating the CFETS basket in China given the ongoing interest there; while the monolithic decline has ended, the basket is still pretty darned close to its lows; one needn't have to vivid an imagination to see that falling to fresh lows in the near future.


Macro Man is now (at the time of writing) off to watch his first live US presidential debate since 1988.   He has seen some estimates that 100 million people will tune in to watch; to put that in perspective, the first Obama/Romney debate only garnered 2/3 that number of viewers, and it was the most watched first debate since 1980.   The real question, however, is how many viewers can stomach watching the whole thing.  Macro Man estimates his own odds as vanishingly slim....


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checkmate
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September 27, 2016 at 8:21 AM ×

While the US debate appears to have been taken as a positive personally I think that's a bit less of an issue to DB and associated blowback in the financials. Certainly when it comes to the UK you can't get positive risk Ftse IF you are not also positive regarding either one of two sectors , banks or mining/oil (comms). For upside you really need one of this lot to be bid. Banks speak for themselves right now because until DB get's resolution it's tarred by association. Comms will correlated to the way you think the US$ will go and between European banks and UK Article 50 uncertainty I'm not tempted to see the US$ weakening. A good set of NFP and away we might go. In fact at the moment re $/Oil I'm eyeballing US$/Can$ which unless it breaks down quickly might well be on the verge of a breakout north of 1.32 which for me is legit basing breakout until proven otherwise. If valid the chart gives you tempting upside targets with good R/R. Hat tip to LB for putting that on radar awhile ago.

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amplitudeinthehouse
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September 27, 2016 at 9:30 AM ×

Who cares about the wannabe investors. Let them go back to subprime real estate. There is a bigger issue of concern here dear Macro Man. Its called modern portfolio theory! You actually pay off a student loan to know this. It's the net present value of safety in 30 years from now our tesla driveless highways. You have got to be kidding. Sorry, Macro Man...the sharpe ratio's on the premier league book need updating.

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Anonymous
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September 27, 2016 at 9:53 AM ×

Markets are back to summer liquidity. Dire.

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abee crombie
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September 27, 2016 at 10:58 AM ×

Db seems to be in a vortex of its own. Im watching to seee if cs follows, which is rhen more of a systemic problem. So far cs is holding ok. Yes db is screwed and yes financials will selll off, but not sure you throw the baby out on this one.

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Mr. T
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September 27, 2016 at 12:34 PM ×

The DOJ settlement is just one more layer of trouble - while I bet the stock would rally on a <=3b settlement the real underlying problems remain - serious headwinds to the traditional business, too much leverage and a culture that extracts its cost in legal fees. Given that they have had YEARS to deleverage and now instead they seem pretty quick to look to states to back them up it feels awfully like grabbing a hostage.

Rather than wait for "not dealing with DB" rumors/news, I believe (for people with access to the data) that locate utilization rates will be an early tell.

And oh god that debate was just hard to watch. I work with some dudes who communicate like Trump. Policy issues aside, his interpersonal behavior is inappropriate.

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checkmate
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September 27, 2016 at 1:05 PM ×

I readily admit I hate risk on at this time of the year. September and October as months go have delivered 3 of the worst risk off market slides in modern market history. Talking of course about '87; '01 and '08. '87 I was hardly involved. In '01 I was briefly in a hole so deep I didn't think I would ever see daylight again and holding out to get out even was probably the single worst market experience of my life. '08 I was virtually all in gilts and feeling really smug at being able to swap ot into high yield bonds. Nonetheless as hard as i try these two months always get me feeling 'gunshy'. Knowing it is really all in the mind actually doesn't help to change that mindset so physician heal thyself is dead in the water as the way to go.
So, as Clint Eastwood is reputed to have said "do you fell lucky punk?" ...er no not really.

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Anonymous
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September 27, 2016 at 2:44 PM ×

Let's not forget that DB is the German government just like BP is the British government. The relationships are seamless.

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Anonymous
admin
September 27, 2016 at 3:07 PM ×

Checkmate, I left a thank you in yesterday's comments section.

Trump supporters (of which I am sort of one): all is not quite lost after that excruciating "debate." I recently learned that next week about fifty million
Americans will be notified that their medical insurance rates will increase by 30 to 60 percent in 2017.

Rossmorguy

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12yo HFM
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September 27, 2016 at 3:17 PM ×

Fam, JBTDBD (Just Buy The DB Dip).

If Europe collapses in a DB-driven banking crisis, everyone will run to US equities in a flight-for-safety. If Germany nationalizes DB, everyone will buy all equities in a frenzied mania, reminiscent of the tulip-bubble. Thus we remain long US indexes, esp Nasdaq. Even if Armageddon comes, the world will always need iPhones. Peace.

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checkmate
admin
September 27, 2016 at 4:07 PM ×

"If Europe collapses in a DB-driven banking crisis, everyone will run to US equities in a flight-for-safety."
Really? Your faith is touching. So, let's see what really happens to investor behaviour. In 2011 Europe went through a moment of crisis. At that juncture the Dax probably the most resilient of European bourses dropped 33% over a few summer/Autumnal weeks. The SP500 dropped 18/19% and the Nas dropped 15%. They all recovered of course because at that time the central banks still had plenty of room to manover and Europe was still in bailing out. None of the latter facors exist so clearly anymore. Cyprus set down precedents for how TBTF banks should be handled and that's now an issue that haunts both Merkel and Renzi. I'm sure Renzi would love to bail out ,but Merkel has spit on that. By way of reciprocation how can Merkel adopt any other stance ,but hands off to DB without appearing totally amoral on policy and crushing any semblance of an even playing field across European bank regulation? Merkel and Renzi are at an impasse.
Has for the old the world will always need A,B,C I can tell you from experience when your P&L has passed 20 and the % just keeps endlessly rolling and you are having multiple trips to the toilet about the last thing you will have on your mind is how wonderfully 'moated' your position is. Double all of that if you really are 100% long BTFD. You'll be leaving in the back of an ambulance with an oxygen mask. :)

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12yo HFM
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September 27, 2016 at 4:43 PM ×

@checkmate, We are not 100% long. We have gearing and are long twice that #FTW obvs ;)
Peace out.


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EuropeanBull
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September 27, 2016 at 5:13 PM ×

The market can go down for various reasons but I find it hard to construct a chain of events that is triggered by DB.

Together with Volkswagen DB is the worst run listed company in germany and has been as a fundraiser party for generations of MDs!

However, it is not systemic! Can its equity be diluted to the moon? Sure.
Will it default on its counterparty obligations and take everyone else down with them? No!
Will it slowly bleed out? Probably!

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12yo HFM
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September 27, 2016 at 5:39 PM ×

Dow up nearly 1% since my BTFD comment, above. $STUDY (lol)

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Anonymous
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September 27, 2016 at 5:57 PM ×

@EuropeanBull

I knew little on DB and EU banks as the whole, do you expect Germany gov or ECB step in soon to bail out DB?

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checkmate
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September 27, 2016 at 6:21 PM ×

European Bull,
In the first instance let us dismiss the VW commentary. It isn't relevant. It's position within the system is never going to be as damaging as a major bank. Regarding DB I think you are right. Option A you wipe out equity holders and fudge around bond holders to whatever degree necessary then it should work IF we think we really understand the real exent of it's book. I do not know the latter ,but it would be helpful if anyone could shed some light on it. Until the latter is clear how do we make any meaningful statement about counterparty risk? Except with hindsight did anyone here understand the position of Lehman or Bear S ? Unfortunately, I think it's really been the case with a lot of banks that their position is intentionally opaque. If everything you really needed to known could actually be known then arguably we wouldn't travel so far into these moments of crisis to begin with. One would hope that the risk door would have slammed shut long before we reached crisis point. For me I think the balance of probability leans your way ,but the jury is still how on how this all gets resolved.

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Anonymous
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September 27, 2016 at 6:45 PM ×

Anybody seen Nico?!

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Hotairmail
admin
September 27, 2016 at 6:58 PM ×

@checkmate. A guess. It goes too far. Ends with a deeply discounted capital raising and maybe even expensive preferred stock. That allows them to kick the can down the road....but doesn't resolve their issues. Always, too little too late, multiple times.

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Mr. T
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September 27, 2016 at 7:16 PM ×

DB or not, ted spreads are at post-gfc highs. (well they were yesterday at least)

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Unknown
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September 27, 2016 at 8:53 PM ×

Ted spreads are irrelevant bc one leg is no longer market indicative...use fra-ois instead

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washedup
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September 27, 2016 at 9:42 PM ×

@unknown how would you explain the fact that AA non financial vs financial CP is at its wides as well? I am willing to believe whatever funding issues out are small and perhaps relegated to a small subset of financials, but I am skeptical that the oft cited regulation narrative fully explains the move.

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Anonymous
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September 27, 2016 at 10:16 PM ×

They had to stop the free fall so they started yapping:

Deutsche shares stop plunging in US as DOJ official was interpreted as mild positive for DB’s RMBS settlement talks.

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Anonymous
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September 28, 2016 at 12:59 AM ×

Deutsche Bank Chief Executive John Cryan today ruled out the need for a capital increase, saying Germany's biggest bank had "fewer risks in the book than before" and was "comfortably equipped with free liquidity."

http://www.reuters.com/article/deutsche-bank-mortgages-idUSL8N1C35WB

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AW
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September 28, 2016 at 3:20 AM ×

CoCo buyers just turn up the volume and close your eyes:

https://www.youtube.com/watch?v=6vYnas6q3Sg

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