The Ineluctable Course of History (DB)

Many ask the question whether a country can be turned around and made to fly right after it got the trajectory and drive all wrong in the first place.

 

Hmm…

 

There are optimists who claim that with the proper will and hard work anything can be accomplished.

 

There are others who are less sanguine, who say that we’ll have to face some very difficult – even excruciating – times first, and only then, can the ship of state can be righted (or re-created), once again permitting us to sail off in the proper direction.

 

Finally, there are those who claim that there’s nothing wrong, steady as she goes, hang on and we’ll get there so long as everyone just believes and puts their trust in our sagacious leaders, those with the requisite vision, experience and education to get things done.

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Thanks, Art.

 

Truth be known, there’s going to be some pain, and there will also be period in which our wonderful leaders attempt unsuccessfully to deal with it.  How long it lasts is entirely dependent on the amount of intervention the dictocrats in Washington choose to administer.  The greater the role government plays in attempting to ‘ease the burden’ of the electorate, the greater and longer the pain will be.  The less they intervene in trying to save failing institutions and businesses, the faster we’ll emerge from the storm and drop anchor on the white sandy beaches of Tahiti.

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We would guess that Ms. Clinton would be on the side of greater intervention and hence bring upon us slightly more pain, but Donald-man would no doubt  like to see a second term if he’s elected, and nobody has accomplished that to date with a laissez-posture in the face of a true financial crisis.

 

We should also add that historically speaking, there is no nation that we or our colleagues can recall that has brought itself back from the brink, changed course mid-stream, as it were, and triumphed against an imminent financial or social upheaval without first experiencing a national trauma that erased the old order and left the nation scarred as it transitioned into a new regime.

 

By that, we’re referring to war, depression or some other, grand-mal-seizure variation thereof that beleaguers the population for an extended period.

 

And so it will be here, too.

 

We only pray that the pain you and your loved ones experience is kept to a minimum.

 

The Trend is Your Friend

 

What’s in store, therefore, looks exactly like what’s come before: a Government and all its agencies and institutions in cahoots with large swaths of corporate America and union bosses to maintain the status quo until it’s well nigh impossible to do anything but watch the whole thing detonate Aleppo-like on live-stream mobile.

 

The chart below illustrates exactly how that works –

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Instead of letting the country enter into a stiff, sharp contraction that would clean out the fat of the system and put it back on a course for recovery, the United States Government has decided to take a three-pronged approach to avoid the inevitability of cyclical economic weakness.

 

  1. It has lowered lending rates to zero (red line, above). This was done to encourage borrowing and spending on a massive scale in both the corporate and private sector.
  2. At the same time, it has engaged in a massive bond-buying program (in green) that has kept the price of fixed income securities artificially high (and interest rates low) and added tremendous liquidity to a system already bloated with money.
  3. Both of the above have in turn contributed to a higher stock market, where dividend yields and average annual returns have consistently outperformed those on the Treasury market (in red).

 

All told, the effort has been to absolutely drench folks with money or the means to acquire it and get them to spend, spend, spend.

 

And this is the path down which you can expect things to continue.

 

TO WIT…

 

In a recent meeting with the House Financial Services Committee, Fed Chair Janet Yellen said that with the proper legislation, the central bank would consider outright stock purchases to keep the market buoyed and investors confident, in the same way that the Banks of Japan and Switzerland currently do.

 

Everything – absolutely everything – will be done to goose the market higher, friends.

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And that means our approach has to be both bullish and cautious.  Because the rock bottom truth is, no one knows when this thing’s gonna blow.

 

The Woes of Europe… Yet Again

 

In the meantime, the trade we’re sizing up is based on the same principles we’ve elucidated above, though the focus is not on a sovereign nation, but rather a bank.  A European bank.  A very large European bank.

 

Deutsche Bank (NYSE:DB).

 

Anyone following the financial press is well aware of the difficulties plaguing not only Deutsche Bank, but all European financial institutions – they’re having a rat’s scratch of a time making money.

 

As one of the largest financial institutions on the continent, DB is also one of the most unwieldy and therefore most difficult to refashion for the sake of its own survival.

 

We’re also dealing with bankers here.  Not exactly out-of-the-box thinkers.

 

Anyway, have a look at how DB stacks up against the broad financial sector as represented by the Russell 1000 Financial Services Index.

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Over the last three years, DB has lost three quarters of its value, while the broader group is up 15%.

 

A whale of a difference.

 

But has the gap reached its limit?

 

We would argue that the sheer volume of ink being spilled on Deutsche Bank’s fat old carcass is indicative of a nadir for the stock.

 

The chart below also supports that contention.  Have a look –

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This is a weekly chart for DB for the same time period as above.  And while price is being chased lower by all her moving averages, we note the extreme turnover in shares over the last four months, a sign of potential accumulation.

 

RSI and MACD are also exhibiting positive divergence against price for a full eight months now, a very bullish sign.

 

And one that’s moving us toward the following trade –

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Many happy returns,

 

Matt McAbby

See what people are saying...

  1. John B. Schroeder

    I’d jump on this, but I have my own plan. I’m into 3X inverse stocks that go up 3 times what the market drops. The one targeting the financials topped out at over $100,000/share back on 10-17-2008!!! I have only 36 of these since if I sell out at only 80,000/sh, I’ll have well over $2,000,000!! After that , I think I’ll play with your option thing.

  2. Jim Milord

    Thanks. You guys are doing great. I can’t do options, especially the corkscrew double negatives like selling puts which are just too ethereal for my terrestrial mind. But I get the gist gentlemen, I do get the meat that you are serving up.

  3. Michael David Rubin

    Yikes – just re-read my previous last paragraph.
    Permit me to plug in the following (still could use an editor 🙂 , but at least the grammar’s right?):

    One hope is that American society, unlike all others, being originally rights-based, still does have strong threads of rights-consciousness (my awkward phrase) woven into our public discourse.
    It really would only take a slight shift of feeling, a bit of positive emotion, through broad swaths of our population to generate even cautious confidence & optimism – not based on government handouts – in the reward of jobs & work, to reactivate the massive wealth-creating potential of the American economy, its skills, resources & very old fashioned work ethic.
    We can otherwise hope, perhaps preach a bit, & prepare, as you recommend, to protect ourselves & loved ones, to the extent possible.
    And, Ja! Deutsche Bank – may very well be the trigger to shoot big holes in this global house of cards cobbled up by central banking…

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