When I heard last week that ~10 hedge funds withdrew funds from Deutsche Bank last week, one of my first thoughts was, “OMG!  Those sh*ts probably shorted the stock and then decided to band together to let the press know they withdrew.”  One withdrawal isn’t going to make news.  But ten probably could.  Welcome to the world of financial douchebaggery.  Don’t expect this to be the end.

From the time the news came out, EDZ8 rallied about 4bps.  It’s always hard to figure out how much panic is going to be caused in the markets.  But as a constructive bear, the “small” move was fairly encouraging.  Because at the end of the day, NOTHING “major” is going to happen to DB.  Lehman was not even a top 10 financial institution in the US.  DB is essentially THE German banking system.  No matter how much “tough talk” there is from the government, it’s just all negotiating stance.  You can tell your kid you are not going to save them if they jump into the pool.  But if you see them drowning, you are going to jump in to get them.  Period.

Speaking of negotiating stance, no one can seriously believe the DOJ expected to get $14 billion… or anywhere close.  Previous precedents had been set in settlements with other banks.  But another MAJOR factor has to be the upcoming US elections.  What is the likelihood that the current administration is going to accept ANYTHING that would remotely cause a banking scare?  …with five weeks to go in a tight election?!?  [cue Jeopardy music]  It wouldn’t surprise me if the DOJ got that tap on the shoulder from the White House Friday.  All we got Friday were some rumors of a settlement, so there could be some noise in the news headline.  But don’t be surprised if we get some kind of settlement before the election.  Possibly a few days before, or whatever else is going to look good and “non-suspicious” (eh hem).  Welcome to the world of political douchebaggery.  If there was a Greenspan put on equities a decade ago, I think it’s reasonable to assume there is an Obama put between now and the elections.  Another application of “Whatever it takes.”

161002 FV vs DBI didn’t realize how correlated the five year note yields have been to DB stock.  The green line is a graph of fives and the red line is a graph of DB stock.  If you look, most of the major peaks and valleys in fives have corresponded with DB stock.  It’s as if the legs down in Deutsche are going to cause some recession and/or flight to quality.  It’s almost unbelievable to me the two could have tracked so closely for most of the year.  I’ll leave it up to you to see if one consistently leads the other and there is some kind of trading signal here.  I don’t believe the relationship should be that tight, and the relation seems to have diverged a little post-Brexit, so I’m going to pass.  I think Brexit has caused the two lines to diverge more and you can see more noise in the pattern.  I suppose the Q3 strength in US economic data has also played a factor in the divergence.  But the relationship has been clear.

Since you know that I don’t think DB is a serious concern, I am cautiously bearish.  I suggested last week to halve unbalanced bearish Flip trades in the near-term.  This still holds, but the reasons for bearishness have gotten stronger on the margin.  We get a ton of data next week that could change the perspective.