We Could See A Major Selloff On Wall Street Tomorrow (Fri.) As The Fate Of Deutsche Bank May Hang In The Balance; Is This Germany’s ‘Lehman Moment? Does This Have A Ripple Effect On U.S. Banks, Stocks?
Stock began selling off late morning/mid-day today, after Bloomberg News reported that “approximately 10 hedge funds were reducing their exposure to the embattled bank (Deutsche Bank).” This news sparked fears of contagion, and a Berlin ‘Lehman Moment,’ — referencing the collapse of one of the stalwarts of Wall Street at the beginning of the 2008 U.S. mortgage implosion and financial crisis. Earlier this month, the U.S. Justice Department announced it was fining Deutsche Bank $14 billion to settle claims over its issuance of mortgage-backed securities related to the 2008 financial crisis, Since that announcement about two weeks ago, shares of Deutsche Bank have been steadily falling; but, the selling accelerated today after the Bloomberg report. CNBC reported that Deutsche Bank U.S.-listed shares dropped 9 percent to an all-time intra-day low of $11.19 before recovering a little — down 7 percent.
Deutsche Bank has publicly stated that it has “about $6 billion set aside for litigation and settlement,” with respect to this fine; and, says it has not intent of paying the full amount and expects to negotiate a lower penalty. Nonetheless, the scars and fear that haunted Wall Street and the stock market for an extended period of time after the collapse of Lehman Brothers and Bear Sterns. Deutsche Bank’s total capitalization is generally understood to be below the $14 billion fine that the U.S. Justice Department has levied. That is just absurd and in my opinion naive and clueless — two traits that have plagued this White House for the past eight years IMO. . If Deutsche Bank was a person and applying for a loan or a mortgage — they would not qualify because they owe as much as their net worth. My bet is the Justice Department fine will ultimately end up somewhere below $5 billion; but, how much panic’ we might see before we get to that point is anyone’s guess. Hopefully, the U.S. Justice Department will act to reduce this fine sooner, rather than later — or, we could see more substantial selling tomorrow (Friday), heading into a weekend,
So, we have a financial fire that needs to be carefully watched and managed, or, we could witness somewhat of a repeat of 2008 — European-style if we aren’t careful. One also has to wonder why the U.S. Justice Department levied such a large fine/penalty — to the extent it could put Deutsche Bank’s survival at risk. If these concerns and fears grow — we could see a more meaningful selloff on Wall Street as well. If you have the flexibility to put in stops on your equity positions, you should do so — in order to protect any gains you have had to this point in 2016. I got stopped out of half my total portfolio today and now have a substantial cash position (50 percent) heading into tomorrow (Fri.). “I think we’re in a very fragile situation when it comes to the market,” said Peter Cardillo, Chief Market Analyst at First Standard Financial. “These waves of selling, tend to cause technical erosion.”
The pressure on Angela Merkel’s government to provide some kind of bailout, or backstop to Deutsche Bank (something she has previously said she wouldn’t do) will certainly grow exponentially — if this situation is left to fester. There are a lot of money managers coming on various networks now, advising people not to panic, and that this situation is not as bad as it appears. But, everyone is guessing; and, fear can be both contagious, and damaging to investor psychology. Deutsche Bank is too big to fail; and, a rescue by Merkel may be the right thing; but, prove fatal to her government. The populist movement across Europe is palpable, and is certainly gaining steam in Germany.
Jeffrey Gundlach, CEO of DoubleLine Capital advised investors to “tread carefully when trading Deutsche Bank shares, because a government bailout is not out of the question. I would just stay away, it’s un-analyzable,’ Gundlach told Reuters News this afternoon. “One day, Deutsche Bank shares will go up 40 percent; and, it will be the day the government bails them out. That jump will happen in a minute,” Mr. Gundlach said
I think we need Germany’s DAX to hold serve tomorrow — going into the weekend If it does, and we’ll know by 11:00 am EDT if it is…..then buying this dip will have been the right call. I have stops in on all my positions and will be selective in buying tomorrow. But, I don’t intend to be a hero either; and, I want to see how Asia reacts over night, how Europe trades, and how we’re looking here mid-day. If we do get a selloff, then I will be buying shares in those companies i believe will shine afterwards — such as: FaceBook, Nvidia, Twilo, Alibaba, Sarepta Theraputics, and Acadia Pharmaceuticals, among others.
If we get a selloff — then an ETF such as the GDX is in play. V/R, RCP