End of Quarter - Markets Under Pressure

***END OF THE 3RD QTR.....GLOBAL MKTS UNDER PRESSURE -
Asian stocks close lower - Japan -1.46% (ytd -13%), Hong Kong - 1.86% (ytd +6.3%), China +0.21% (ytd - 15%) and ASX - 0.65% (ytd +2.6%).

European stocks following suit - coming under pressure as the heat gets turned up on DB (Deutsche Bank).     FTSE -0.97% (YTD +9.7), CAC 40 - 1.35% (YTD -5.48%), DAX - 1.07% (YTD -4.18%) EUROSTOXX - 1.37% (YTD - 9.7%), SPAIN -1.4% (YTD - 9%) and ITALY - 1.39%  (YTD - 24%). 

The headlines say it all:

"Deutsche Bank's Clients Move to Reduce Exposure"

"Deutsche Bank Slips Below 10 Euros as Options Traders Bet on 8"

"Deutsche Bank Shares Sink to New Record Low, Commerzbank Slides 6%"

"Deutsche Bank Bailout Would be Political Suicide for Merkel - Analysts Warn"

"Cryan Says that Deutsche Bank is Strong - 'No Basis For Speculation'"  (Oh boy!)
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“THOSE WHO DO NOT LEARN FROM HISTORY ARE DOOMED TO REPEAT IT” - George Santayana – (1863-1952) was a poet, philosopher, and novelist.   

REWIND:

Does the name Lehman Brothers (LEH) mean anything to anyone?  Allow me to refresh your memory –  LEH – founded in 1850 - was the 4th largest global investment bank in the US before both Hank Paulson* and his sidekick Neel Kashkari* forced them to declare bankruptcy on September 15th 2008 - setting off a tsunami of events  which brought the global financial system to the edge of darkness.......This event only exacerbated the great financial crisis of 2007-2009. 

(Now while the US gov’t will have you believe that the recession which began in December 2007 was over by June of 2009 – I am sure you can find a couple of people that would dispute that – But that’s another story! )

The Great Financial Crisis began with the collapse of the sub-prime mortgage mkt (Think Anthony Mozillo and Countrywide) and then was fueled by the collapse of all of those UNREGULATED derivative products that then FED chair Alan Greenspan turned a blind eye to - products like: ABS’s, CDS’s, CDO’s ABC’s XYZ’s and any other 3 letter acronym you can come up with.  Global exposure to these then unregulated products created the perfect storm - the extent of penetration that LEH (and every other major investment bank had) into the global economy was NOT well understood apparently....and when LEH went belly up the global financial system suffered multiple strokes and then a massive heart attack sending the world into the abyss......

(*Paulson was former CEO of GS and then Secretary of the Treasury, Kashkari was a former investment banker at GS who was then taken to the Treasury by Paulson to be his sidekick and is now the Minnesota FED Pres. (if you can believe that!).    Both of these men - along with so many others - should be held responsible for the damage/devastation that they caused around the globe. But that's another story as well...    You should read:  "BAILOUT - An inside account of how Washington abandoned Main Street while Rescuing Wall St.") 

The US Financial Crisis Inquiry Commission had this to say about the events leading up to the most devastating financial mkts event of the 21st century:

"the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."

FAST FORWARD:

Deutsche Bank (DB) literally translates into ‘German Bank’ and is Europe's largest  banks.  It is a global banking and financial services company and much like LEH - the bank was founded in the late 1800’s and is ABOUT to blow up and possibly create the second Great Financial Crisis of the 21st century unless somebody stands up and takes one for the team. 
CNBC runs with the headline:
 
“Pressure is Building for Germany to Show It’s Ready to Rescue Deutsche Bank”

suggesting that Angie (Merkel) may find herself in the uncomfortable position of having to sell the idea of a big bank rescue to her fellow countrymen. 

Reports that  clients are starting to leave the bank spun around the street like a spider weaving a web....., demanding their money, severing relationships because of what we call ‘counter party risk’.   (Risk that the counter party will be unable to perform – in this case DB).  Once that ball starts rolling – you can forget about it!  

Yesterday we learned that some clients are not going to let the door hit them in the ass…….and so it begins…the stock plunges 7% yesterday but is down 79% off of the January 2014 high and has done nothing but trade lower since that day......All while the global banking system has supposedly gotten stronger and more robust. 

Barry Bausano – Chairman of Deutsche Bank’s Hedge Fund Business had this to say on CNBC –

“While there have been some outflows, there have also been inflows” which he said is "part of the typical ebbs and flows" of the prime brokerage business.   “Our trading clients are amongst the world's most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macro-economic environment, the litigation process in the U.S. and the progress we are making with our strategy"

Right!  That is what LEH said too….(before the bomb went off!)

The WSJ ran with this story last night:

“Deutsche Bank’s Clients Take Steps to CUT Exposure”  Some hedge funds have withdrawn securities or cash or dialed back their trading activities.

“Some Deutsche Bank AG clients, among them several big and influential hedge funds, have moved to pull billions of dollars from the bank amid concerns about its stability and their exposure, said people close to clients and the bank.  The funds have taken steps to withdraw securities or cash from the bank, dial back their trading activities or both, the people said. They include AQR Capital Management LLC, Capula Investment Management LLP, Citadel LLC, Luxor Capital Group LP, Magnetar Capital LLC and Millennium Management LLC.”
 
And so it begins……

The mkt fell by 1% yesterday as the world braces for what feels like another 'LEH moment'……The 3 major indexes plunged under the weight of that ridiculous ‘understanding of oil production caps’ out of Algiers, comedy central’s – John Stumpf – (otherwise known as the WFC CEO), and Germany’s Deutsche Bank – which at one point was down over 9% to an all-time low of $11.19.  The VIX (Fear Index) soared by 13% reflecting real investor concern about what's ahead.....FED speakers only added fuel to the fire by suggesting that the FED should raise rates sooner rather than later....Both Philly's Harker and Kansas City's Esther George continue to beat the drum of higher rates/removal of policy accommodation.  The probability of a December rate hike spiked to 60% and the pressure builds....

US futures are down 3 pts in early trading....eco data today includes Pers Income - exp of +0.2%, Personal Spending of +0.1%, Chicago Purchasing Manager Survey of 52 (anything > 50 is positive).   Expect more discussion surrounding the slaughtering of John Stumpf (WFC CEO) yesterday and speculation about who will step in to 'rescue' DB.   Next week brings us a slew of macro data - but the key read will be Friday's Non Farm Payroll report.....so keep your seatbelt tight around your waist - Turbulence ahead!
 

Piccta Limone (Veal Scaloppini in Lemon Sauce)

Gents - this is simple to make and your spouse will appreciate the fact that you served up such a great dish.  Help yourself out - set the mood, set the table, light the candles, put on some easy listening background music and go for it.....

For this you need:  10 piece of veal scaloppini, pounded thin, flour, olive oil, butter, dry white wine, chicken broth, s&p, and fresh lemon juice. 

Season the veal pieces -then dredge in the flour – shaking off any excess. 

In a large sauté pan – heat up some olive oil and ¼ stick of butter.  Once the butter begins to froth – add in the scaloppini and cook for about 2 mins per side. 

Next add in about 1 cup of dry white wine and allow it to steam off a bit….Now add in 2 cups of chicken broth and the juice of one lemon.   – turn the heat to low and allow the sauce to reduce and thicken.  Remove and serve immediately on warmed plates with your favorite green vegetable.  I love balsamic glazed roasted brussel sprouts – but you make what you like. 
 
Buon Appetito.