Friday, September 30, 2016

The Morning Call---Deutschebank on the brink?

The Morning Call

9/30/16

The Market
         
    Technical

The indices (DJIA 18143, S&P 2151) sold off yesterday.  Volume was flat and breadth deteriorated.  The VIX jumped 13%, but still closed below its 100 day moving average and in a short term downtrend---which remains supportive of stocks.  Nonetheless, it is still in a very short term uptrend. 

The Dow ended [a]  above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {18096-19830}, [c] in an intermediate term uptrend {11420-24247} and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2131-2367}, [d] in an intermediate uptrend {1946-2548} and [e] in a long term uptrend {862-2400}. 

The long Treasury rebounded, again on volume, closing above its 100 day moving average and well within very short term, intermediate term and long term uptrends.  It remains in a very upbeat two week run in prices---suggesting that the odds of a December rate hike are shrinking and/or investors are looking for a safety trade.

GLD fell, finishing below its 100 day moving average and within a short term trading range.  It has now made a fourth lower high---not a plus for our GDX holding,
               
Bottom line: the Averages are back staring at their 100 day moving averages and the lower boundaries of their short term uptrend.  However, until they break below those levels, nothing is happening, technically speaking, to suggest a loss of upside momentum.    Key levels to watch:  support exists at their 100 day moving averages and the lower boundaries of their short term uptrends, resistance at their recent highs (18668/2194).
           
    Fundamental

       Headlines

            More less negative economic news was released yesterday, including weekly jobless claims and the August trade deficit.  Other data: second quarter GDP was slightly ahead of expectations while August pending home sales were below.  Still the GDP number was the most important and it showed a modicum of progress.

            Overseas, EU economic sentiment improved but German unemployment rose.

            ***overnight, September Japanese inflation fell, unemployment rose and household spending fell; the September Chinese Markit manufacturing PMI was flat (50.1); September  EU inflation rose 0.4%, in line while unemployment was reported at 10.1%, also in line; second quarter UK economy grew 0.7%; and last but certainly not least, in a Fed conference, Yellen stated that the Fed is close to hitting a ceiling on US government bond purchases and may have to resort to corporate bonds and stocks (does that sound like an interest rate hike is coming in December?).

            Elsewhere, the cognitive dissonance is gathering steam on the proposed OPEC production cut.

            More importantly, some large hedge funds have starting pulling money out of Deutschebank.  This is exactly what occurred at Bear, Lehman and AIG.  Remember insolvency occurs not because of lack of profitability or assets but lack of liquidity.  To be fair, the derivatives market (where the real risk and volatility shows up) was fairly calm, meaning that while some institutions withdrew funds no one was attempting to reduce counterparty risk---which would be the real sign of panic.   That doesn’t mean that it won’t happen; but in its absence the downside in stock prices is likely limited.

            Is Deutschebank the next Lehman (medium)?

            Deutschebank’s options (medium and a must read):

Bottom line: the economic data continued to improve yesterday, but also continued the trend where the positive news has been that things weren’t as negative as expected.  I am not saying that this is not a plus; but being less negative is different from more positive.

More important, Wednesday’s chorus of Deutschebank deniers was met yesterday by a number of hedge funds pulling funds out of their prime broker accounts.  That does not bode well for the bank’s liquidity or solvency; though as I noted above, trading in their derivatives portfolio remained calm as opposed to the Market performance.  At the moment, this news could quickly turn into a horror story.  But just as quickly it could dissipate; after all, the history of the current Market has been to either ignore bad news or to reinterpret as good news.

That said, I continue to believe that the Market is giving investors a great opportunity to shift their asset allocation to a more conservative stance (like more cash).

            My thought for the day:  One of investors’ biggest problems is believing that they are less biased than they really are.  If you question that statement, then odds are it is true in your case.  We all suffer from biases, some more so than others; but we all do it.  Coming to grip with that is the best thing you can do towards becoming a better investor.

    News on Stocks in Our Portfolios
 
McDonald's (NYSE:MCD) declares $0.94/share quarterly dividend, 5.6% increase from prior dividend of $0.89.

Accenture (NYSE:ACN): FQ4 EPS of $1.31 beats by $0.01.
Revenue of $8.49B (+7.6% Y/Y) beats by $60M

Economics

   This Week’s Data

            August pending home sales fell 2.4% versus expectations of a 0.5% increase.

            August personal income rose 0.2%, in line; spending was flat versus estimates of a 0.2% increase.

   Other

            Imprison bad bankers (medium):

Politics

  Domestic

Saudi Arabia reacts to 9/11 vote (medium):

  International War Against Radical Islam

            France’s new sharia police (medium):

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