Returning to the Bank Index, Junk Bonds and adding in upticks on TED spread… oh, and Deutsche Bank

First update here (with original included).

Deutsche Bank is facing a stiff period again. Back in Feb they had to activate some of their contingent convertible bonds in order to prop their equity price up. Essentially this works by converting some bond value into equity. More recently, the German stalwart has been embroiled in a very costly litigation battle and is now subject to a $14bn fine due to rule breaking in their US arm and ontop of that, this US arm failed bank stress tests. What a mess.

Currently, DB are trading at EUR 10.5. In Jan 2014 they were trading at almost EUR 40.

Why is this? Well there are many beliefs that they are under-capitalised heavily, yet their Chief Communications Officer said this morning that there was absolutely nothing to worry about and that liquidity was fine. I find that whenever someone as the face of a corporation says that there is nothing to worry about, there generally is – because why would you have to say that there is nothing to worry about? Who are you trying not to panic? I mean investors and the rest of the world can see that you have a gross bond derivative exposure of $74tn (alright the net figure is far less, but still greater than their market cap). Forget the numbers though. The real issue again is lack of transparency – who owns what derivative and what happens to y if x fails? Just like the last crash was caused by structures products and derivatives, this one will be too, but on a bigger scale since there isn’t the same financial capability to support bailouts.

We recently had Wells Fargo opening a load of customer accounts fraudulently. What a lot don’t know is that the so called conservative bank also operates a book of up to $2tn of derivative based investments, called ‘customer accommodations’.. Wells Fargo also hold VIEs – variable interest entities – off book investments… that add up to $1.5tn. Net risk is $60bn… 40% of their capital reserves. But apparently there is a minute risk of failure…

Bank accounting is basically a load of b*llocks.

Take a peak at this chart.

What we see here is that the US bank index is facing a downtrend, $JNK is following the same, however, the TED spread – the difference between the spread on 3 month US Treasuries and 3 month Eurodollar futures (interbank loans) is facing strong upticks week on week. This can be a good sentiment indicator for liquidity/credit risk. Now this is extremely worrying due to the velocity of the increase in the TED spread over the past year and the confirmation that the banking index and high yield debt market are both facing downtrends. With all that has been said above, I reckon there is certainly now strong signalling for a heavy market event.


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