When I was managing a growth portfolio In 2007 I was already bearish and starting to position the fund for the downturn. In September of that year John Mendelson from ISI walked into my office to go over some charts. John is old school and has seen everything. The first thing he said is: “These financials especially the money center banks and AIG look awful. I have not seen charts like this in a long time. When I look across the market there is something terribly wrong in this space. One of these guys is holding the Old Maid.” As it turned out many were holding the Old Maid but especially AIG. AIG were the brilliant guys who sold all the CDS on the Sub Prime debt. Classic example of a company management that had zero idea how the guys that ran the CDS department made their money and the actual risk that the firm was taking onto its balance sheet.
Lets fast forward 7 years. Today we don’t have a real estate crisis but we have a looming sovereign debt crisis. I have stated before that the CB’s will start to lose control when currency volatility picks up and when the Dollar starts to rise. The dollars strength is not due to our economic strength but due to global deflation. I just read that it is estimated that $7 trillion of emerging market debt is denominated in dollars. Besides the levered speculators doing the carry trade that stand to get wiped out who else might not want to see a strong dollar? I think the chart of Deutsche Bank (DB) is telling us that they may be holding the Old Maid.
The company’s bonds are not showing any distress yet but the long term stock chart is alarming. The stock is close to taking out its 2012 low and the low from October. This bank has the largest derivatives book in the world. I think its safe to say the have been helping clients get short the dollar the last 14 years and my guess they have been along for that ride as well. Since all banks are black boxes its hard to tell what is going on, but I suspect that the management of this bank has no clue either. I can see traders getting paid millions to do all sorts of complicated derivative trades that looked profitable at the time but effectively made the bank very short dollars over time. I don’t know if this is true but my gut tells me I am right. Another case of traders pulling the wool over on the management figure heads. Additionally it is in the public record that DB has awful systems and controls. The Fed came out earlier this year and gave DB a failing grade in those two departments.
This stock is also only 8.5 points away from its 2009 lows. If it breaks $28 I think we could see some quick downside. Clearly it is not healthy for such a systemically large bank to have its equity performing like this and it could have broader implications. I think DB could have this cycles Old Maid. I will be looking to short this very soon.
In my opinion a strong dollar is very bad for risk assets and I would tread cautiously as this CB induced rally stalls out.
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Interesting! The rot must be in Germany. CRZBY (Commerzbank AG) looks almost equally bad chart-wise.
Really interesting. Will certainly keep an eye on this. Thanks for the ongoing commentary.
“Who else might not want a strong dollar?”
Every single American? Last I checked we’re all triple leveraged with mortgages, student debt, and credit cards.
I was long DB a few months back than dropped it was it broke support on the daily. Although I am bullish on Europe the monthly chart on DB is very alarming. My intention was to add back shares on a final flush out to the 2009 levels. I am also watching for USD weakness into year end but this move in the dollar today caught me off guard. I am going to have to dig deeper into this during the weekend. Great post!
Thank you again for taking the time to write and share your analysis here. Like many on iBC, I don’t think you need to be posting here for career reasons, but you do it just the same.
Nice fade in USD today.
Thanks Blue, probably worth adding that the Euro banks were never re-capitalized like here in the US…lots of tinder there waiting for a spark. DB appears to be one of the most levered large Euro banks.
Good work as always. Thanks.
Strong dollar cause they are getting weaker not cause were getting stronger.
Foundations may be weakening a little
Also a terrific post.
Thanks for sharing your insight.
Mr. Cain Thaler.
That is why I am debt free.
thanks. The Dollar is due for a pull back. Longer term it is going much higher.
I do this for fun and trying to spread good Karma. Mostly I want to warn people so they don’t get screwed. A shit storm is on the horizon.
DB scares the crap out of me.
My DB PT = $0 They carry huge tail risks on their balance sheet.
Cain or Bluestar, I have a 30 year mortgage but no other debt, Why does a strong dollar hurt me?
are you considering amzn puts
I am short AMZN cash.
Strong dollar is worse for foreigners, eventually affects you in the form of a recession and eventual debt deflation. If your job is secure then fine you are ok. Deflation makes it harder to pay back debt. Salaries and bonuses are cut and the stock market goes down.
BlueStar, isn’t that a domestic supply side view though? What if dollar is strong because globally US attracts capital at record rates and goes into a bubble and demand skyrockets while supply concentrates into US?
Very possible. That’s what happened in 1929. Question is where are we? 1927 or 1929.
If the American economy is improving
the short thesis does not work. You can
play around with valuations in individual
companies but the macro short is out.