Financial Review

Deutsche Bank Running on Rumors

….. 3Q recap. Deutsche Bank hits lows – and then a rumor of a cheap settlement with DOJ. Euro banks still look ugly and DB is one of the worst. Consumer sentiment up. Consumer spending down. EU approves Paris Climate Accord – it’s a done deal. Yellen says Fed might start buying corporate bonds and stocks (vintage wine and baseball cards?)

Financial Review by Sinclair Noe for 09-30-2016

DOW + 164 = 18,308
SPX + 17 = 2168
NAS  + 42 = 5312
10 Y + .05 = 1.61%
OIL + .16 = 47.99
GOLD – 4.00 = 1316.90


We end the month of September and the end of the third quarter, so let’s start today with a recap of the markets. Dow Industrial Average lost about 0.5% for the month of September; gained 2.1% for the third quarter; up 5% year to date. The S&P 500 is down just a fraction, a couple of points for September; up 3.3% for the third quarter; up 6% year to date. The Nasdaq Composite was up 1.8% for September; up 9.7% for the third quarter (it hit a low around the end of June); and up 4% year to date. Oil prices have been all over the board this year. Light sweet crude started the year around $43 a barrel; dropped into the low $30s; moved above $53 a barrel, and today, not a big change from the start of the year.


OPEC’s oil output is likely to reach its highest in recent history in September. The increase comes despite lower output in top exporter Saudi Arabia and this week’s agreement by the Organization of the Petroleum Exporting Countries in Algeria to limit supply to support prices.  According to a new Reuters survey, Iraq boosted northern exports and Libya reopened some of its main oil terminals.


Deutsche Bank made new lows
this morning. Shares of Deutsche Bank were down about 9% at the open. Deutsche Bank has been a growing concern since US authorities two weeks ago said they are seeking $14 billion from the bank to settle legal claims over its sales of mortgage backed securities. With the German government giving no sign it would be prepared to offer a bailout, and the bank heavily exposed to risky investments, notably in the derivatives markets, investors have grown increasingly jittery. That worry was relieved only temporarily by Deutsche Bank’s move this week to sell an insurance subsidiary for just over $1.1 billion to shore up its capital buffers.


Deutsche Bank CEO John Cryan issued an open letter to employees in which he says the news about the hedge funds is “causing unjustified concerns” and should be seen in the wider context of the bank’s 20 million clients.  Cryan insists the bank is fundamentally strong, is meetings its capital requirements, is profitable and has “an extremely comfortable buffer” when it comes to liquidity. Of course, when a bank executive has to reassure the public that the bank is safe and tries to blame “market forces”, it means the bank has already lost a certain amount of trust.  And as it looked like Deutsche Bank might crater heading into the weekend, came word of a possible settlement with the Justice Department for $5.4 billion, much lower than the initial settlement of $14 billion. After news of the possible settlement, shares jumped – which is not necessarily an indication of market confidence, rather short sellers decided it was time to pocket profits on their short bets.


Deutsche Bank is not publicly commenting on the supposed $5.4-billion figure. The capital market rules say the bank would have to react almost immediately to a report on such a settlement. And the rumor of a settlement does not mean Deutsche Bank is safe. It has set aside a little over $6 billion for litigation, but the rumored settlement would nearly wipe that out. So, it is still among the most thinly capitalized banks in Europe, with tangible equity amounting to less than 3 percent of assets; not nearly enough cushion to deal with a potential setback. Even if Germany genuinely wanted to let Deutsche Bank fail, it couldn’t credibly threaten to do so. The institution is Europe’s most systemically risky, with assets amounting to more than half of Germany’s total annual gross domestic product. Making an example of Deutsche Bank could lead to a devastating contagion. It looks like the Euro-banking sector learned nothing from the financial crisis of 2008. They did not build their capital buffers, opting instead to pay out billions in dividends to shareholders and buy back billions more through share repurchases. By the way, US banks, while much better capitalized than their Euro counterparts, made many of the same mistakes. And it’s not like any of the major banks have learned much of a lesson from the financial crisis.


Case in point, Wells Fargo. The rap sheet for Wells Fargo is long; this is just a partial list: rigging interest rates on credit cards, rigging muni bond auctions, improper sales of mutual funds, switching clients mutual funds, mortgage lending discrimination, conflicts of interest between investment banking and research, foreclosure abuses, fraud, misrepresenting mortgage backed securities, violating the Americans with Disabilities Act, a $25 billion settlement for loan servicing and foreclosure abuses, the terms of which the bank later breached, illegal student loan practices, and that is just skimming the  surface. The most recent wrongdoing includes opening a couple of million accounts in the names of real people –without their knowledge or consent – to make their sales numbers look better. So this includes identity theft plus investor fraud. And then we learned yesterday about violations of the Servicemembers Civil Relief Act – a law designed to protect soldiers from having their car repossessed while they are on duty, fighting for America. I guess, after you’ve cheated everybody else, there is little compunction in screwing over the military. Yep, this is the same Wells Fargo that received $25 billion from the federal government’s Troubled Assets Relief Program (TARP) during the meltdown of 2008, which it later repaid. Now, here is a scary thought; Wells Fargo was considered one of the “cleanest” US banks; their rap sheet isn’t nearly as long as Citi, or Bank of America, or JPMorgan Chase, or Goldman Sachs.


I still, perhaps naively, believe that at some point regulators, prosecutors, investors, clients, Boards of Directors.., somebody will finally realize that the banking system is based on a deeply flawed business model.  This does not mean Deutsche Bank or Wells Fargo will implode like Lehman Brothers. Hopefully we have learned how to repeat that mess but we still have a long way to go. Wall Street’s five largest banks (including Wells Fargo) now have about 45 percent of the nation’s banking assets. That’s up from about 25 percent in 2000. This means most bank customers have very little choice. The past couple of weeks have been very interesting; we have seen bipartisan CEO bashing in Washington. The politicians have been indignant about banks behaving badly and pharmaceutical executives’ price gouging. Look for that populist indignation to fade away quickly once we get past the election.


The final reading of the University of Michigan’s consumer sentiment index showed a rise in September to a level of 91.2, up from 89.8 in August. The index started the year at 91.4.


The Commerce Department says consumer spending fell 0.1 percent last month after accounting for inflation. Lower sales of new cars and trucks offset an increase in services such as education and health care. Personal income rose 0.2% in August, the smallest increase in seven months. The pullback in spending and somewhat higher income boosted savings. The savings rate for the typical consumer climbed to 5.7% from 5.6% to mark a three-month high. Inflation as measured by the PCE index rose 0.1% in August. The so-called core rate of inflation that strips out the volatile food and energy categories increased 0.2%. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 1% in the 12 months ended in August. The Atlanta Fed said its forecast of third-quarter real consumer spending growth fell from 3.0 percent to 2.7 percent, in the wake of Friday’s personal income and spending data for August. And their GDP Now forecast model now shows the economy growing at a 2.4% pace in the third quarter, down from an earlier forecast of 2.8%.



Inflation in the Eurozone doubled in September to near two-year highs as the impact of lower oil prices began to fade. Eurostat, the European Union’s statistics agency, said the annual rate of inflation rose to 0.4 percent in September, its highest level since October 2014 – still, well below the European Central Bank’s target of 2 percent.


The European Union’s environment ministers today approved the ratification of the landmark Paris climate change pact, paving the way for the agreement to take effect in November. After years of negotiations, governments agreed in Paris last December to curb emissions of carbon dioxide and other greenhouse gases that are warming the planet. More than 170 world leaders signed the deal, but it won’t take effect until 55 countries, accounting for at least 55 percent of global emissions, have ratified or accepted it through their domestic procedures. Sixty-one parties have already ratified it but they only account for 48 percent of emissions. The EU’s ratification, which is expected to take about a month to complete, would take the Paris Agreement past the 55 percent threshold. The European Parliament is expected to approve it next week.


Speaking by video to a Kansas City Fed conference, Janet Yellen said the Fed – as has happened with some overseas central banks – might find itself hitting a ceiling on the amount of U.S. government paper it could purchase. In that case, the Fed would have to move on to other assets such as corporate bonds and stocks. There would, she cautioned, be both costs and benefits to such an exercise.




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