Is Deutsche Bank Holding The Old Maid?

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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