Posted Oct 3, 2016 by Martin Armstrong
Chancellor Merkel cannot afford to bailout Deutsche Bank from the point of view of a conflict perspective within the EU since she has taken such and intolerable hard line in the Italian bank rescue not to mention Greece. Merkel fails to understand that the very pretense of government was to protect the people. Taking their savings to bail-in banks is really insane. Just because she got away with it in Cyprus, and has demanded that same result in Greece and Italy when they have no right to vote her out of office, is a very insane and dangerous position for the EU as a whole. What Merkel has done to Germany’s image in the Southern EU is very damaging. It has revived the old wounds and cast Germany as a dictator that people have no right to change in any possible democratic process.
On the other hand, Deutsche Bank is different since it is the primary clearing bank in Europe. Any bail-in is more likely to take place by wiping out its bonds called CoCos, which have no maturity date. Indeed, investors may never get their money back. Under the terms, the bank can redeem them, usually after five years if it wants to. The annual coupon payments are contingent on the bank’s ability to keep its capital above certain critical threshold levels. If the bank’s capital falls below that threshold, the bank won’t make the coupon payment. Investors cannot call a default on these bonds, and that sets them up for a bail-in. Investors are simply sitting on bonds that they bought because they had a 6% coupon. However, there is not maturity and no guarantee of redemption and if capital falls below the threshold they plunged in value and pay no coupon. Consequently, if regulators deem that the bank is failing, then these CoCos will be bailed-in by either being converted into declining values in shares or could be just canceled.
These 6% CoCo notes have traded as high as 104 cents on the euro in early 2014 shortly after they’d been issued, and plunged to about 70 cents and are trading in the 77 level in this latest crisis. Therefore, the CoCos are a good indication of public confidence for if investors believe those thresholds are approaching, the bank will not pay the coupon and the risk of being converted to shares rises. Of course, converting to shares at any value could be a blessing in disguise since shares can be sold.
When we look at Deutsche Bank, we elected a Yearly Bearish Reversal at the close of 2015. Support lies at 8.55 and this is really important. We have reached 11.19 so far and resistance overhead will stand at 15.50. The primary target for a major turning point still appears to be 2017 whereas 2016 could produce the lowest yearly closing.
Whatever we get in 2017, should be followed by the opposite direction into 2019. This means a rally into 2017 without making a new low under 2016 levels, would most likely result in a Knee Jerk reaction high (one time unit). This becomes possible only if we exceed the 15.50 level. Even that is minor for the Monthly Bullish Reversal really caps this stock standing at 17.90 warning it is not over just yet.
The timing Array in Deutsche Bank has been targeting September all along. There are back-to-back Directional Changes for September October and the next main target for a turning point is November. The Panic Cycle played out on time for September as well. This all warns that if last week’s low holds, a bounce into November becomes possible.