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posted on 28 September 2016

Will Deutsche Bank Survive?

by Pebblewriter,

We've talked about DB's dangerously leveraged position. From yesterday's Trouble Brewing:

Deutsche reported OTC (not total) derivatives in its 2015 annual report of €41.9 trillion, about $47.3 trillion in USD.


With Tier 1 capital of €48.7 billion, this works out to a multiple of derivatives to Tier 1 capital of 861, or a wipeout ratio of approximately 0.11%. In other words, a minuscule 0.11% decline in the value of DB's OTC derivatives portfolio would wipe out all of its Tier 1 capital.

Like every other bank, they'll tell you the exposure isn't that great, that almost all of their positions are offset by other positions - what they call "netting." Of course, we learned from Lehman, AIG and Bear Stearns that netting out the exposure for balance sheet purposes isn't the same as eliminating the exposure.

For a sense of scale, €41.9 trillion in 100 euro banknotes laid end-to-end would almost reach Mars. So, it's a relatively big number. As I've shown in previous posts, DB isn't exactly an outlier amongst its TBTF peers in this respect [see: Banks' Wipeout Ratios.]

But, I try not to pay too much attention to fundamentals. In fact, in my 35 years of investing, I've never seen a bigger gulf between fundamentals and price action. Let's look instead at DB's charts, which aptly illustrate the importance of the current stock price.

Special thanks to consulting client A.C., which asked me to evaluate DB and authorized me to share these charts very quickly after delivering them.

The close-up daily chart shows support at the bottom of a falling channel (in red) that dates back to Feb 9, about the same time that oil bottomed. Makes me wonder what their oil exposure is...

Click on any chart for larger image.2016-09-27-db-daily-cu-0836

If we pull back a little, we can see a larger falling channel (in purple) that contains the red channel. Its bottom is much lower than current prices. It's not an outstanding fit, except for the fact that we have two good tags on its top and several on its midline - including the last downturn on Sep 9. This is the channel TPTB don't want to see play out.

Click on any chart for larger image.2016-09-27-db-daily-mcu-0838Last: the big picture, which illustrates how critical holding 11.23 is. If this channel dating back to 1998 breaks down, all bets are off. The purple and gray channels take over, and DB goes the way of Lehman. Of course, if that should happen, it won't be the only bank going down the tubes. Lots of counterparties amongst that $47 trillion in derivatives.

Click on any chart for larger image.2016-09-27-db-wkly-0840

So, to answer the question "will Deutsche Bank survive" we have to ask:

  1. Are TPTB paying attention to these charts? Based on the fact that every previous approach to the channel bottom resulted in a bounce, I'd say yes.

  2. Are they willing to do what it takes to allow a bounce here? We got a hint, today, when stocks were slipping toward the May 2015 highs (yes, again) and a well-timed blurb appeared in the financial press stating that the $14 billion fine might be reduced if DB "cooperated." The algos love that kind of stuff.

Fifteen years ago, I took some time off from Wall Street to try my hand at writing and producing film. It might seem thoroughly unrelated from technical analysis, but it's not. I'm firmly convinced that much of what happens in the "markets" these days is scripted.

If you want to know what's going to happen next, it often helps to ponder what you would do if you were charged with propping up the markets - the unwritten mandate about which central bankers care most.

I don't think it's overstating matters to say that Deutsche Bank's failure would create another Great Financial Crisis. I'm pretty sure the Fed, ECB, BoJ, BIS, and SNB know this. And, I'm pretty sure people at each of those organizations have shown charts similar to mine to their respective bosses [if not, might I humbly suggest a subscription?]

So, I'm pretty darn sure TPTB will step in and prevent DB from making new lows. This makes it a "buy" here at 11.78, but with tight stops for obvious reasons. Initial price target: 12.42 (+5.4%), followed by 13.02 (+10.5%) and 13.98 (+18.7%.)

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