Germany Prepares for the Worst-Case Scenario
Germany prepares for the worst-case scenario... OPEC shocks the oil market... Saudi Arabia throws in the towel... The Twitter 'takeover frenzy' is here... Buyer beware... New all-time highs for Amazon... No retailer is safe... More on Porter's 'Big Trade'...
Well, that didn't last long...
Just days after German Chancellor Angela Merkel had reportedly ruled out state assistance for Deutsche Bank (DB), new reports say German financial authorities may already be preparing a rescue plan for the troubled lender.
According to German newspaper Die Zeit, the German government is preparing a two-stage plan for the "worst-case scenario"... where the U.S. Department of Justice sticks to its threatened $14 billion legal settlement, and the bank is unable to raise capital itself. (For reference, Deutsche Bank's current market cap is around $16 billion.)
The first stage of the plan would allow Deutsche Bank to sell parts of its business to other institutions, with the German government guaranteeing against potential losses.
The bank is already selling assets at fire-sale prices... Bloomberg reports that Deutsche Bank agreed yesterday to sell its U.K. insurance unit Abbey Life Assurance for $1.2 billion. The sale is due to new European regulations that force firms with insurance assets to hold more capital.
So while the sale will result in a pretax loss of about $900 million for the bank, it will increase its common equity "Tier 1" ratio by about 10 basis points. (Tier 1 capital is "high quality" core capital that includes equity and disclosed reserves.)
The second stage – in case of an "extreme emergency" – would involve a state-sponsored bailout. According to Die Zeit, the government would take over as much as 25% of the bank.
However, this would likely come with significant political costs for Merkel's party ahead of next fall's election. It may also be little consolation for investors...
Under a new European Union rule, no bank can be bailed out with public money until creditors accounting for at least 8% of its liabilities have contributed toward the bill. In this case, shareholders would likely be wiped out.
In the meantime, it appears Deutsche Bank may not be alone...
This morning, Commerzbank – Germany's second-biggest lender – announced it is cutting more than one-fifth of its workforce (nearly 10,000 jobs) and suspending its dividend. As CEO Martin Zielke explained in a note to employees (courtesy of news service Reuters)...
We simply don't earn enough money to lead the bank sustainably and successfully into the future. And this situation will get worse if we don't do something about it.
As we noted on Monday, we suspect Merkel won't allow Germany's largest (or second-largest) bank to fail outright. But the days of unconditional government bailouts could be over.
In more surprising news, members of the Organization of the Petroleum Exporting Countries ("OPEC") said Wednesday that they had reached an agreement on the need to cut their oil production.
According to the Wall Street Journal, the group proposed cutting its total output to between 32.5 million and 33 million barrels per day, down from August's 33.2 million barrels per day.
Oil jumped nearly 6% higher on the news. West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – closed up 5.3% at $47.05 per barrel.
Now, if you merely read the headlines, you may believe this agreement is incredibly bullish for the price of oil. But there are some important caveats...
First, while OPEC members have technically agreed to make cuts, they won't be meeting to discuss how they'll actually do this until later this year. Officials said they would form a committee to determine how much each country would have to cut and present these figures at the group's next meeting on November 30.
In other words, they haven't actually agreed to any specifics yet... and history suggests these negotiations will be contentious. There's no guarantee this agreement will hold up. As legendary hedge-fund manager Paul Tudor Jones once quipped about OPEC agreements...
My own feeling is that anytime that you try to get 13 people to agree on anything – and I have a chance to take a position on it – well, wild horses can't keep me from betting against them succeeding in that.
Second, even if the agreement holds, the size of the cuts may be too small to have much of an effect on prices in the near term. As the Journal noted last night...
If OPEC cuts its production by 200,000, to 33 million barrels a day, that wouldn't be enough to bring production back in line with demand until the second half of 2017, according to estimates by the International Energy Agency. That timing is roughly in line with what analysts already believed would happen if OPEC took no action.
If OPEC cut output by up to 700,000 barrels a day, the production glut would disappear as soon as the end of this year, according to IEA estimates. The world's inventories could then be drawn down and prices could rise.
Finally, it's important to remember OPEC only accounts for a little more than one-third of global oil production. Even if it can successfully cut output and push prices higher, other major producers may step up their output to take advantage.
For example, as you can see in the chart below, this year's steep decline in U.S. shale-oil production has stabilized. If prices move higher than $50 a barrel due to an OPEC cut, U.S. production could begin to rise again...
Still, it's impressive that even this superficial agreement was struck at all. It's a sign of just how troubled Saudi Arabia – OPEC's most influential member – has become.
Its ongoing game of "chicken" with non-OPEC producers has clearly come at a significant cost. Bloomberg reports that Saudi Arabia currently has the largest budget deficit among the world's 20 biggest economies.
This move suggests it is no longer willing (or able) to tolerate lower oil prices. Unfortunately, it may no longer have a choice.
Speaking of trouble, it seems a bidding war over social-media service Twitter (TWTR) may be starting...
According to Bloomberg, interested firms include entertainment giant Walt Disney (DIS) and online business-software company Salesforce (CRM). Alphabet (GOOG) – the parent company of search-engine Google – and software juggernaut Microsoft (MSFT) are also rumored to be considering an offer.
Analysts at Citigroup aren't impressed with what they've heard so far. They see the rumored valuation of $26 per share as "aggressive" relative to Microsoft's recent purchase of social network LinkedIn (LNKD)...
Ultimately, we hear the rumblings of [mergers and acquisitions], but continue to find it difficult to see the rationale behind a Twitter acquisition at these levels given the company's stagnant user growth, deteriorating financials, and elevated valuation.
Longtime readers know we agree. In fact, Porter warned specifically about these problems more than two years ago. As he noted in the June 25, 2014 Digest...
It's hard for me to imagine how Twitter actually has a business model. Users post free messages to the Internet. I don't know how you're ever going to monetize that. I think you could make the case that Twitter's business model is already obsolete, even though people don't realize it yet.
Twitter shares are down more than 40% since Porter's warning. And we suspect any potential suitor may come to regret this purchase.
In the meantime, Barron's reports the Twitter "takeover frenzy" could be spreading...
It notes shares of Yelp (YELP), TripAdvisor (TRIP), Expedia (EXPE), GrubHub (GRUB), and others jumped higher following the news.
Why? In short, it appears folks think they could be acquired, too. Barron's notes that like Twitter, all of these firms are relatively small and could be easily bought by big companies like Disney, Google, and Microsoft.
If this sounds familiar to you, you're not alone... It's reminiscent of what happened during the Internet bubble nearly two decades ago. As Barron's explained...
In the 1990s, stock prices became unhinged from earnings, leading to the "dot-com crash." We're not nearly at that point but the latest Twitter frenzy is pushing us a little closer.
With Twitter drawing a lot of acquisition interest, investors are suddenly excited about a wave of Internet acquisitions. That's making already pricey stocks even more expensive. Buyer beware.
In related news, online-retail juggernaut Amazon (AMZN) hit a new all-time high above $830 per share this morning. The stock is now up 30% for the year and more than 8% this month alone.
The new high follows some incredible recent news about Amazon's growing move into clothing sales. In short, Amazon is now the biggest online clothing retailer in the U.S.
Bloomberg reported last week that the company sold $16.3 billion worth of apparel last year. To put this number in perspective, that's more than the online sales of Macy's, Nordstrom, Kohl's, Gap, and L Brands (which owns Victoria's Secret) combined.
The company is now also second only to Wal-Mart (WMT) in overall apparel market share.
As if that feat weren't impressive enough, Bloomberg notes that Amazon could soon overtake its brick-and-mortar competitors to become the No. 1 clothing retailer, period. Morgan Stanley research estimates the company could nearly triple its share of the market over the next five years, from about 7% today to more than 18% by 2020. From the report...
Amazon's apparel sales still pale in comparison to the $24 billion in U.S. clothing sales at Wal-Mart, America's largest apparel seller.
But it's not too far from Macy's $21 billion in annual apparel sales and TJX Cos. $17 billion. It's already surpassed the Gap, Kohl's, Target, JC Penney, and Nordstrom in 2015 apparel sales.
Incredibly, Amazon's retail dominance is even starting to hurt non-retailers...
According to a recent survey by Internet-marketing firm BloomReach, more than half of online shoppers are turning first to Amazon rather than search engines like Google or Yahoo when searching for products. This is a 25% increase from just last year. Meanwhile, search engines were the starting point for just 28% of those surveyed, down from 34% one year ago.
Who else should be worried? Bloomberg also notes Amazon has been investing heavily in the $1 trillion U.S. grocery market...
Amazon controls less than 1% of a fragmented U.S. grocery business. American consumers are buying groceries online, but haven't changed their food-buying habits as quickly as they have for, say, buying shoes or electronics. But if the U.K. market is any indication – government statistics show 5% of grocery shopping is done online there – then the shift is coming.
Amazon has made it clear it intends to go after grocery the same way it took on books and electronics. Its Amazon Fresh grocery service, which promises grocery delivery within 24 hours, has recently expanded to new locations, including Boston and London.
Finally, a quick heads-up to close today's Digest...
Porter will be revealing all the details on his new "Big Trade" tomorrow.
If you haven't been following along, this is a brand-new strategy he and his team have been working on for the past several months... a totally different way to profit from the coming credit-default cycle.
As Porter explained in the September 9 Digest, where he introduced this idea, there are two ways to profit from credit-market troubles.
You can search for the "needles in the haystack"... those relatively rare distressed bonds that are mispriced relative to their chance of default. This is what our Stansberry's Credit Opportunities service is designed to do.
But you can also profit from the other side... by shorting the expensive bonds that are likely to default. And as he explained, this strategy may make more sense for many folks...
What about regular investors? What about folks without the capital or the sophistication or the patience to deal in the bond market, where getting a position filled can take months and dozens of phone calls? And... why only trade this mania from the long side? Why bother with finding the needles in the haystack? Why not simply do what Templeton did and sell short the bonds you know will fail?
That's a great question. And I've spent a year thinking about the right and safe way to make gains that are big enough to cover the risks involved. The answer isn't trying to short individual bonds. Or even bond exchange-traded funds. The right way is a wholly different kind of strategy.
Porter will lay it all out for you tomorrow... Make sure you don't miss it.
New 52-week highs (as of 9/28/16): Anheuser-Busch InBev (BUD), BlackRock Floating Rate Income Strategies Fund (FRA), Nuveen Floating Rate Income Opportunity Fund (JRO), Procter & Gamble (PG), and iShares MSCI Global Metals & Mining Producers Fund (PICK).
In today's mailbag, one reader sends kudos on yesterday's issue, another fires back at subscriber Don T., and a longtime Stansberry Alliance member writes in for the first time. We'd love to hear from you. Send your notes to feedback@stansberryresearch.com.
"I don't usually comment on the Stansberry Digest, but wanted to quickly say that I really enjoyed this one, especially P.J. O'Rourke's essay. He perfectly assessed the mood of the electorate. Instant Classic, indeed!" – Paid-up subscriber Eric W.
"Don T. is so full of it! He made an 'observation' about the lack of diversity on stage at the conference for a reason and he knows it, even if he won't admit it. Now that he and his daughter's 'observations' have been completely rejected, they were also shown to be sexist and racist for even bringing up and making the 'observation' in the first place. They apparently believe we (minorities) need Don and his daughter to protect us poor helpless fools and ensure that we are always represented in every situation...
"To the crowd who says we should be color blind and gender blind, why is it YOU are the ones who always bring the subject up with your 'observations' at every opportunity? Don T., either stand up for your position/observation, or admit that you made a mistake and use this opportunity to do some real soul searching about your own lack of color/sex blindness that led YOU to make the 'observation' in the first place.
"Either will have my respect, but saying you were just making an innocuous 'observation' with no intent is complete cognitive dissonance on your part and loses what little respect I had for you and your 'observations.' Keep searching for the best talent to help little ol' me Porter! The diversity of quality money making investment ideas is what I'm looking for." – Paid-up subscriber John P.
"Thank you for an excellent three days of thought provoking learning experiences in Las Vegas. The conference was first rate and the speakers were outstanding. I came home with many ideas, several of which I have already put into action. Porter's investment idea alone is already up more than the cost of the trip. So, that idea alone paid for my trip...
"I look back over the years as a Stansberry reader and I am amazed at how diversified my investment portfolio has become. At the beginning I was almost exclusively long equities and suffering the vagaries of that lack of diversification. I now am so much more balanced in my investments, using options for income, options and short trades for hedging, buying bonds on healthy companies at significantly below par, real estate investments that produce income and owning physical gold and silver in addition to investing in solid companies priced in with a margin of safety. I have learned something important from every single editor, without exception. I have never written before, but just wanted to say thanks." – Paid-up Stansberry Alliance subscriber Joe G.
Regards,
Justin Brill
Baltimore, Maryland
September 29, 2016
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