The World's Most Dangerous Bank Is Crashing
The world's most dangerous bank is crashing... Why Deutsche Bank's bonds are 'dropping like a stone'... Putting Porter's 'Big Trade' to the test... Our biggest event of the year is about to begin...
Editor's note: Porter is tending to a family emergency today, so he is unable to continue the discussion of his new "Big Trade" as promised.
But you'll see the second installment in next Friday's Digest. And if you're joining us in Las Vegas for our annual conference next week, Porter will also be discussing the "Big Trade" live from the main stage.
Germany's biggest (and most troubled) bank is back in the news again...
Regular Digest readers know that Deutsche Bank (DB) has been one of the worst-performing financial firms in the world this year.
When we last reported on the bank this summer, shares had just plunged to fresh 30-year lows following two negative reports from regulators. As we wrote in the June 30 Digest...
Last night, the Federal Reserve released the results of its latest annual "stress tests" for big U.S. banks. The Fed said all but two of 33 institutions passed the tests and were given permission to increase dividends and share buybacks.
The two losers? U.S. banking units of Spanish "bad bank" poster child Banco Santander (SAN)... and German finance giant Deutsche Bank (DB).
Unfortunately, that wasn't even the worst news of the past 24 hours... In a report released this morning, the International Monetary Fund ("IMF") called Deutsche Bank "the most important net contributor to systemic risks." It also warned that the German banking system poses the "highest degree of outward contagion." In other words, if Deutsche Bank fails, it could take down banks around the world.
Today, Deutsche Bank is plunging again...
Shares fell nearly 10% after the U.S. Department of Justice ("DOJ") asked the bank to pay $14 billion to settle its ongoing mortgage-backed securities investigation, dating back to the 2008 financial crisis.
Deutsche – like most of the world's biggest banks – is accused of packaging up lower-quality mortgages and selling them to investors as higher-quality debt.
Several of these banks – including Bank of America (BAC), JPMorgan (JPM), Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS) – have already settled with the DOJ. And all have issued statements acknowledging "improper behavior."
Of course, unless you've been living under a rock for the past eight years, none of this should come as a surprise. But it wasn't the request itself that spooked the market – it was the size of the proposed settlement. As the Wall Street Journal reported this morning...
Privately, Deutsche Bank lawyers have suggested that the bank views between $2 billion and $3 billion as a reasonable cost to close out the Justice Department's mortgage-related probe quickly...
The largest so far has been $16.65 billion paid by Bank of America Corp. in 2014. Goldman Sachs Group Inc. agreed in April to a $5 billion deal that included a $2.4 billion cash penalty plus a pledge of $1.8 billion to help struggling borrowers and communities hard hit by the 2008 collapse in home prices.
Analysts have estimated Deutsche Bank alone might pay between $2 billion and $5 billion, based on previous settlements with banks including Goldman Sachs and Morgan Stanley, and Deutsche Bank's relative size in the pre-crisis market for packaging and selling residential-mortgage-backed securities.
The DOJ often opens settlement talks with higher numbers than it's willing to accept, and it has allowed Deutsche Bank to submit a counterproposal.
But the huge gap between the DOJ's opening proposal and analyst estimates suggests the government may have a much larger number in mind. And that wouldn't be without precedent. The Journal notes previous settlements haven't always been tied directly to business size...
Citigroup, for example, paid a larger penalty than expected based on its size in the market for residential-mortgage securities. Officials said at the time it was commensurate with the strength of evidence against the bank.
Why is this important? The bank reported in June that it had about $5 billion in "provisions" set aside to cover settlements and fines. But according to analysts at JPMorgan, any settlement exceeding $4 billion would now "pose questions about Deutsche Bank's capital positions."
In other words, a larger-than-expected settlement wouldn't just be bad news for shareholders. It could trigger a default... or potentially threaten the bank's survival.
And it appears the credit market agrees. Deutsche's riskiest bonds – known as "additional Tier-1 bonds" (or "AT1s"), plunged today along with its shares. As you can see in the chart below, one of the bank's AT1s with a 6% coupon plummeted nearly 7%...
As Tomas Kinmonth, a credit strategist at ABN Amro Bank put it to Bloomberg...
They are dropping like a stone... The fine, even if reduced, could surpass all provisions held by the bank.
This is concerning... Remember, the IMF said Deutsche Bank poses a "systemic risk" to the world's banking system. Its troubles could trigger a global panic.
But there's another reason we mention it today...
As we noted at the top of today's Digest, Porter will be sharing the details of his new "Big Trade" next week... a way to profit as the bonds of troubled companies like Deutsche Bank inevitably fall. As he explained in last Friday's Digest...
But 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 ("ETFs"). The right way is a wholly different kind of strategy. It's something you've never seen me recommend before.
We asked Porter's team to run the numbers on Deutsche Bank to see how it would have fared under their new strategy. And while we can't tell you the specifics just yet, we wanted to share the results...
In short, today's 7% plunge in Deutsche Bank's riskiest bonds would have resulted in gains of more than 20% with their strategy. Of course, this is just a single day's return. We believe this strategy will perform even better over longer periods of time... and again, it doesn't have anything to do with shorting bonds or bond funds.
We hope you're as bullish as we are. Be sure to catch Porter's Digest next week to learn more.
Finally, as you may have heard, we're hosting our annual conference next week in Las Vegas.
It's our biggest event of the year. When you hear what we have lined up, you'll want to say you saw the whole thing – something you can easily do with our live webcast of the entire event.
We'll talk business, investing, and other subjects of interest... learn new things... and do it all in first-class style. For example...
Since 2016 is an election year – and a particularly nasty one at that – our good friend and 12-term congressman Dr. Ron Paul will be teaming up on stage with political humorist and Digest contributor P.J. O'Rourke. P.J. spent 20 years writing for Rolling Stone and The Atlantic, where he first came to fame. His book about Washington, Parliament of Whores, and his book about international conflict and crisis, Give War a Chance, both reached No. 1 on the New York Times best-seller list.
P.J. and Dr. Paul will weigh in on the presidential election and America's scorched-earth political climate. In fact, P.J. gave us a sneak peek at what he's going to talk about concerning Trump and Hillary – trust us, you won't want to miss it.
Of course, the primary reason we host these conferences is to allow you to hear from smart, interesting people who get as excited about new ideas as we do.
So we're also bringing in some of the sharpest, most astute investment experts and money managers we know...
You'll hear from our keynote speaker Steve Eisman. He made a fortune betting against the housing bubble... and as a result, he became the main subject of Michael Lewis' best-selling book and Oscar-winning film The Big Short. We're thrilled to have Steve with us... He'll share his experience with identifying and creating opportunity from financial bubbles and chaos.
You'll hear from Cannell Capital hedge-fund founder Carlo Cannell. He started his fund with a $600,000 investment and today manages more than $500 million in assets. If you attended last year's Las Vegas conference, you know he was one of our most popular presenters. Carlo's contrarian views on the "efficient-market hypothesis" form the premise of his investment philosophy. And you'll hear some of his latest recommendations live from the stage.
You'll also hear from Peter Churchouse on his favorite ideas in Asia and China right now... Hollywood film producer Brad Krevoy on how to invest in movies... resource legend Rick Rule on his favorite gold and resource investments... noted short-seller Andrew Left, whom the Wall Street Journal recently called the man "who sank Valeant's stock"... and many, many more.
But it's not all about money and investing, either. We also hope to inspire and motivate you with presenters like Hugh Herr and Robert Edsel...
Herr is the head of MIT's Human Biomechatronics Research Group – and was named the "Leader of the Bionic Age" by Time. He lost both his legs below the knee in a mountain-climbing accident, which eventually lead to his pioneering research in bionics.
Herr presented one of the most popular TED talks on the Internet, with more than 5 million views. When you see him live, he will share his inspirational story... and show us how the field of bionics is changing modern medicine.
Edsel is a fascinating person with an unusual story. He began his career in oil and gas exploration. His company, Gemini Exploration, pioneered the use of horizontal drilling in the early 1990s.
In 1995, Robert sold Gemini to Union Pacific Resources, and a year later, moved to Europe with his family. There, he became fascinated with art and architectural history... leading to his best-selling book The Monuments Men, which later became a movie.
And of course, you'll also have the chance to hear the newest ideas from our top analysts, including Porter, Steve Sjuggerud, "Doc" Eifrig, Dave Lashmet, Matt Badiali, Jeff Clark, and more.
We hope you can see the time and effort we've put into this event. Our goal is for this Stansberry Conference to be the best and most useful conference in the world.
Unfortunately, it's too late for you to attend in person this year... The event kicks off Monday, and tickets sold out weeks ago.
But as we mentioned earlier, you can still see and hear all of our great speakers and presentations for yourself with our live online access pass. Better yet, you can experience it all from the comfort of your own home, and without the expense (and hassle) of travel and lodging.
We hope you'll join us. We guarantee you will not be disappointed... But don't just take our word for it. Have a look at what some of your fellow Stansberry Research subscribers had to say about last year's online stream...
"Viewing the conference by web connection was a great option for me... I really enjoyed hearing all the speakers, and came away with several ideas that ended up making more profit than the cost of the webinar. I enjoyed it so much, that I'll be attending in person this year." – Paid-up subscriber Grant I.
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Again, this year's event kicks off Monday... And it promises to be the best yet. Click here to reserve your online-access pass now.
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New 52-week highs (as of 9/15/16): Black Stone Minerals (BSM) and CME Group (CME).
In today's mailbag, two great subscriber comments on P.J. O'Rourke's latest essay... and loads of feedback on Wednesday night's webinar. We'd love to hear from you... Send your e-mails to feedback@stansberryresearch.com.
"P.J., your timely note on Australia gave me an idea... Instead of a wall, how about 20' crocs in the Rio Grande?" – Paid-up subscriber Joe G.
"Hi Folks, good presentation last night. Got some good insights. Many thanks for that. As an Australian, I greatly enjoyed P.J. O'Rourke's Part II on Australia. I often wonder why I am in the US, even between presidential elections. One of those accidents, I suppose. I do recall a sign somewhere that P.J. should enjoy: 'If [reviled candidate] wins the election, I'm leaving the US and moving to Alaska.' As I'm living in Alaska these days, I suppose I've sort of already left the US. And Vladimir Putin phoned this morning to tell me that the curtains in my living room were just ugly... Thanks and cheers." – Paid-up subscriber Bill H.
"I am glad I attended the seminar. It is exciting to think about my investment future after last nite! Thank you!" – Paid-up subscriber Don H.
"I attended and enjoyed the event... Thanks for keeping it brief and to the point. There is no need to sell me on you guys!" – Paid-up subscriber Jim C.
"Good event. Great information and a good pace!" – Paid-up subscriber John M.
"It was an exceedingly well done webinar. Very informative and amusing... Good job!" – Paid-up subscriber Dick C.
"I enjoyed hearing the report of the investment opportunities... by Dr. Sjuggerud, Porter Stansberry and Brett Eversole. They made it interesting, and there was something for everyone to think about and also one stock to invest in... The chance to ask questions worked out nicely too." – Paid-up subscriber Don B.
"I loved it... Even with Porter interrupting all the time!" – Paid-up subscriber T.D.
"Great presentation last night. Well worth the time spent listening." – Paid-up subscriber Chuck E.
"Last night was fantastic. We loved the information and will proceed accordingly.
Thank you." – Paid-up subscriber Marc D.
"I really enjoyed it. Great and interesting presentation." – Paid-up subscriber Terrence C.
"Appreciate the information provided last evening. Info, presentation, and the audio quality was very good. Thanks." – Paid-up subscriber Jeff
"Very good information... Keep up the good work. Really look forward these events, and learning a lot." – Paid-up subscriber Craig H.
Regards,
Justin Brill
Baltimore, Maryland
September 16, 2016
P.S. If you missed this week's webinar, don't worry... As we mentioned yesterday, you can read all the details on Steve's big announcement right here.
We're also working on a replay and full transcript of the event, and will share it with you as soon as it's available.
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