SharperDingaan

Deutsche Bank’s vast and opaque balance sheet is holding it back; but according to the finance minister & the co-CEO – trust us. Yet the DB co-CEO has to twice come out & say the bank is ‘rock solid’; & no one believes him. And the finance minister Wolfgang Schaeuble ALSO has to come & say that he isn't worried; & no one believes him. http://www.cnbc.com/2016/02/09/deutsche-bank-ceo-says-bank-rock-solid.html http://www.businessinsider.com/wolfgang-schaeuble-on-deutsche-bank-2016-2 http://www.reuters.com/article/us-deutsche-bank-bonds-idUSKCN0VI266 http://blogs.reuters.com/breakingviews/2016/02/10/deutsche-has-enough-capital-but-not-enough-clarity/ http://afr.com/business/banking-and-finance/deutsche-bank-woes-not-an-american-lehman-brothers-moment-20160209-gmpwlc Yet DB continues to execute on its emergency buyback plan of senior bonds, of which it has about 50 billion euros ($56.44 billion) in issue. To most folks, either DB is incredibly tone deaf; or there really is something badly askew. And now DB & Lehman are being compared to each other; cannot happen, trust us – yet the share price & the volatility index say otherwise. Vast and opaque - and deadly. http://www.theguardian.com/business/2008/sep/15/lehmanbrothers.marketturmoil "Like Northern Rock, it mattered less that 80% of its assets were rock solid if 20% were considered toxic. We don't know the exact proportions at Lehman and neither do the bank's trading partners, which is why they refused in growing numbers to do business or buy it once the bank was up for sale." We wish them luck, but they clearly have a problem. They can continue to do business only so long as they retain the confidence of the market, & that confidence appears to be crumbling. SD

It smells a lot like there's such a large loss coming up, that its going to change the risk profiles across the board. Friends of the Bundesbank being bought out of their Senior Bond Holdings with CoCo proceeds - so that they will not experience a loss? SD

The buyer would really have to be an idiot to buy this DB piece of junk, & the seller would need a very well bribed vendor to push it… The buyer takes all the risk, but only gets paid interest IF the Tier 1 does not fall < 5.125, AND the Bundesbank allows it We have the right, in our sole discretion, to cancel all or part of any payment of interest, including (but not limited to) if such cancellation is necessary to prevent our Common Equity Tier 1 capital ratio pursuant to Article 92 (1) (a) CRR or any successor provision, determined on a consolidated basis (which we refer to as our “Common Equity Tier 1 Capital Ratio”) from falling below 5.125 per cent or to meet a requirement imposed by law or our competent supervisory authority The buyer is never getting their principal back, & agrees to lose the entire investment. Accordingly, we are not required to make any repayment of the principal amount of the Notes at any time or under any circumstances, and as a result, you may lose part or all of your investment in the Notes. In addition, you may not receive any interest on any interest payment date or at any other times, and you will have no claims whatsoever in respect of that cancelled or deemed cancelled interest. Upon the occurrence of a Trigger Event, a write-down will be effected pro rata with all other Additional Tier 1 instruments within the meaning of the CRR (Additional Tier 1 capital), the terms of which provide for a write-down (whether permanent or temporary) upon the occurrence of the Trigger Event. For such purpose, the total amount of the write-downs to be allocated pro rata will be equal to the amount required to restore fully our Common Equity Tier 1 Capital Ratio to 5.125 per cent. For which the buyer will earn a spread of just 5%, which CAN BE REDUCED, on future roll-overs. For the period from (and including) the First Call Date a rate which will be the Reference Rate plus an initial credit spread of 5.003% per year. We describe the Reference Rate in “Description of the Notes—Interest Payments on the Notes” below. If I have 1.5B, & am desperate to hold DB, why would I not just buy the preferred? You have to be desperate to try this. It suggests that DB must have at least a 1.5B hit to capital coming, & that the Bundesbank is tightening the rope around their neck. SD

SD: Why not own the Latin subsidiaries of SAN? By the sounds of it that is the part you find attractive. We’ve just being overly conservative. Agreed we could do better if we stayed with just the Latin entities, but we would also take on the volatility as they deal with periodic sovereign defaults. The performance drag is not meaningful. Negative rates. Ordinarily, a corporation will maintain a minimum +ve balance in its account after the end-of-day sweep, & put the balance into the overnight market. Now they model the size of the optimum –ve balance, against the available spread. The bank makes additional spread (small amount) on this new overdraft, but loses spread (large amount) on the loans that the deposit would otherwise have permitted. The banks NIM gets bled, & the higher the leverage – the greater the bleed. The modeling is because the term structure favours a borrower. Buy the banks paper &/or preferred, & use it to secure the overdraft. The banker cannot challenge as to do so is to question their own solvency, and their paper is getting an artificial liquidity boost from the nightly roll-over process. DB We look at Barclays & find it highly unlikely that DB wasn’t doing much the same; the big differences are that DB enjoys Bundesbank protection, & it has been used as a conduit to support various bail-outs. Even if the Sh1t has been contained, the condoms have to be pretty full, & there have to be a lot of them. Assuming the toxics moved to the Bundesbank book, DB is still exposed to much of the MTM; on bail in - the CoCos would ramp up the share count, & the Bundesbank may well match the share ramp us well; to offset the control loss to the CoCo holders. Severe share dilution. Of course, the establishment will swear it cannot happen! The market seems to think around 50% dilution. Pure guess as to who’s right, but carrying an umbrella might be pragmatic. SD

DB is operating at the pleasure of the Bundesbank, & the Bundesbank will not tolerate a default. DB will do whatever it is told to. It will be a very simple matter to make the CoCo payment out of funds allocated to the bonus pool - and it will not be a discussion. We also expect that once the precedent is set (anywhere in euro-bank land), there will be a strong regulatory push to issue more of these. Primarily as an aggressive & proactive way by which to claw back bonus as/when the bank doesn't meet its targets. Agency can be a bitch! SD

In most cases the bank will have burned through the bulk of its Tier 3 & Tier 2 capital before the AT1 CoCo capital is activated. If the underlying cause is systemic, there will also be multiple DSIBs in similar positions; and the central bank will have imposed capital controls, &/or a temporary closure. A much more harsh & disciplined version of Greece or Cyprus. The decision has already been made to save the DSIB, & the CoCo activation is part of it. The CoCo is attractive as it is anti-dilutive until activation, & comes with an implicit central bank guarantee; your enhanced say (higher % of total ownership) via the dilutive conversion is not going to be challenged. Hence you are willing to accept a lower cash yield. When, & how much CoCo, the bank issues is controlled via the size of the regulatory capital haircut - & market conditions. Issue whenever the after-tax RAROC becomes the cheapest option. A DSIB issuing a CoCo is not a bad thing; any other kind of bank - & it’s a flashing red light. SD

“emerging market default potential and large European exposures to those markets (eg, Spanish banks lending to South American countries)” South American countries routinely default; it is nothing unusual for a Spanish bank - & they have long learned how to deal with it. The same cannot be said for Euro-banks, where there is materially less confidence. SD

CoCo Bonds are not Tier 1 Capital. At best they are Alternative Tier 1 and haircut accordingly; most are low trigger and qualify as Tier 2. www.bis.org/publ/qtrpdf/r_qt1309f.pdf CoCo’s activate at the regulators discretion – not the contractual triggers; and the regulators do not have to explain. Point of non-viability (PONV) triggers allow regulators to trump any lack of timeliness or unreliability of book-value triggers. However, unless the conditions under which regulators will exercise their power to activate the loss absorption mechanism are made clear, such power could create uncertainty about the timing of the activation. (P. 45) Negative interest rates reduce the size of bank deposits, & thereby the amount the bank can lend. Reduce deposits by 10M, & at 20x leverage – you will be forced to either make 200M less in loans, call in 200M of existing loans, or do some combination of both. Nobody pays a banker to keep their money for them (negative interest rate). Companies deliberately put their accounts into overdrafts & invest their cash in liquid short term paper & government treasuries; selling as needed to pay bills as they come due. Individuals do something very similar. Call in enough loans at a loss & the bank goes under; the process accelerates as soon as current losses exceed current net income – further reducing equity. Do the Coco bond conversion before the process goes viral, & maybe – the bank survives? There is a reason so many prominent banks are trading below the crises lows, & nobody is talking about it. We also hold a long position in SAN and have done so for many years. We hold significantly less than we did, & bought at higher prices with a strong $C; net of $C devaluation, we are more or less breakeven. For us it is primarily a diversifying investment into the Spanish speaking world, worth more to us as a largely non correlated - non NA, and non- Euro, asset. SD

Kids are not china plates. Get out of their way, & let the discipline of the school yard work. Bullying is part of life; school yards are where kids learn how to deal with it. Be the bully, duck bullies, form your own gang, fight dirty, fight smart, use fear; all are essential business skills not taught in text books. The natural leaders separate out pretty quickly – legal & illegal. Grow up, & learn how to deliver under pressure. If you cannot handle exam pressure, learn; be a hero – but better be sure you are as good as you think, or feel the loving embrace of a truly evil sergeant major. If you pass the acid test – welcome to higher education! 3 square meals a day, & the structured life. Feed a ghetto kid, & give them structure - & they will thrive; Jesse will heartedly agree! Turn those horrific life experiences into an asset, & give the kids a place to use it. Let each experience the warm touch of basic training, mature at his/her own pace, & give them access to a GI bill to go on to do whatever they wish; it may be school, or opening their own business. Nobody gets to flunk out; it is repeat until you pass, or literally die trying – whichever comes first. You can do extreme weightwatchers, or study hard – your choice. Everybody gets better. The sociopaths & leaders learn their crafts and how to deliver under stress, the obese or the slow become thin or feral, teachers and instructors get students who want to learn. Fear is a wonderful motivator; it saves lives as well as health care costs. A healthy dollop of rough and tumble is not a bad thing. SD

Just to stir the pot ... Automatic draft at 18 if you don't get enough credits, or high enough credits - to go on to College or University. Little Johnny & Suzie determine their own future, & the military draws from a wider base of population. Scores great on 1,2,4,5,6,9 & 12. Standard practice in many countries of the world. SD

Agreed, but there's really very little difference. The fund pays the fund manager a management fee for services rendered; the customer pays the dentist, plumber, etc. for the same thing. If the dentist, plumber, etc. is not very good the customer either doesn't hire them, or pays less. If the fund manager is not very good, the fund either pays him/her less - or goes out of business. The individual dentist, plumber, fund manager, etc. does what they do - as long as it continues to remain worthwhile. If either of them find something better, they either withdraw their services - or hire someone else to replace them, and keep the business running. Even if the business is a vocation for you, you do not have to be there running it. The takeaway is that being in business is the real wealth maker, not the stock market. SD

Things we may all want to consider…. At best, Joe Blow investor is going to make the index return less costs. Because Joe cannot sit still; in most cases this will be the index trailing 12 month return, less fees. Get over it. The fund manager will make what Joe makes, plus the profit that the fund makes. The real money is from simply being in business; what’s made on the fund itself is little different to variable interest paid on a chequing account. The fund manager is just another business person; no different to every plumber, dentist, lawyer, shop-keeper, captain of industry, etc. in the world. Around the world a large number of private successful business persons, will routinely do as least as well as them; and some better. They don’t need your money. If you want to make more, open your own business. If you just have cash, buy a fund and walk away. If business is not your thing, there is no shame to simply walking away. It will very likely be one of the smartest things you ever did. A man has to know his limitations. SD

Read up on industry commentary on drilling budgets. Everyone is spending within their cash flow; and that cash flow is essentially at break-even. No drilling unless you absolutely have to. No production replacement. Every one of the NA fields is depleting daily, with oil cuts rising as the reservoirs tap out. Most decline rates are > 8-10%/annum; 13-20%+ is common in shale fields. Same dynamics in pretty much every other field in the world except the ME. A simple back of the envelope. Take Dec-2015 daily supply, subtract the ME component; multiply by 10% (conservative). That’s how much daily supply the ME needs to add by Dec-2016, if supply is to remain flat. Take Dec-2015 daily demand; multiply by 5%. That’s how much additional price driven supply the ME needs to add by Dec-2016, if the price is to remain flat. Add the daily supply and demand change the ME needs to make up. They cannot do it without aggressive new drilling and facilities upgrading; the technology to do it is Western. Slow the drilling, and prices must rise. The numbers are understating, by roughly a factor of 3. SD

A significant portion of the CoB population would be better served, were they to just stick to bank mutual funds. Every January, simply put X% of the portfolio into the worst performing sector of the year – and sit on it. There are lots of different flavours to choose from. Play to your strengths, don’t try to become something you are not, and put the ego away. Talking about fund X, versus stock X, on the cocktail circuit is a lot cheaper. SD

Bitcoin is just an application of the underlying technology that runs it; robust token identification and block chain. Applied as a virtual currency, there are strong cases both for and against. Just because we possibly could - does not mean that we should. Success has a thousand fathers, spats along the way are part of the process. In recent years block chain ability has greatly expanded. The better applications now routinely combine token identification with block chain and smart contracts. We are limited only by how we apply them. SD

Thanks for posting. SD

Use the opportunities, sit tight, and take at least a year off from studying to think. When you leave, you will not be coming back. You are about to learn what every actress knows; there are very few movie roles when you're over 30. Most folk reinvent themselves, & end up doing something very different from what they originally thought. They also learn very quickly, that its not just their decision anymore! SD

Apparently taking physical delivery on paper oil at maturity is not possible? - with zero storage cost, and all nicely hidden until maturity. It is also not possible to roll an accumulating paper position month-to-month, to avoid buying all of it at once? And nobody, since Ari Onassis, has ever sold an oil cargo at sea. Agreed the ME has its own issues, & they aren't going away. Ultimately the East & West will supply the weaponry, for oil, and there will be forced regime changes. Great for the weapons & oil businesses; not so much for the civilians - just the way of the world. Obviously, low level conflict is better than a hot war. Take away the hardware, & a lot of the heat goes out of the equation. We sold you the stuff, we also know how to disable it - a routine hazard when selling to despots. SD

With Iran we think its more "give us the quota we used to have prior to sanctions, or we flood". To bring the negotiation to a head, Iran dumps an additional 2.5M bbl/day from existing/accessible land/floating inventory - in addition to their 500K of production/day. Ultimately we go back to what market share used to look like prior to the Gulf Wars, ISIS gets its funding cut off, Assad gets replaced, & ME tension de-escalates. SD

Not even close. They intend to go to 3M bbl/day from the existing 500K, which was already being supplied. SD

And so it begins .... http://www.telegraph.co.uk/finance/oilprices/12104064/Iran-sanctions-Middle-East-stock-markets-crash-as-Tehran-enters-oil-war.html The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively. The Islamic Republic has vowed to return its oil production to pre-sanction levels that stood above 3m barrels a day. “The oil ministry, by ordering companies to boost production and oil terminals to be ready, kicked off today the plan to increase Iran’s crude exports by 500,000 barrels,” SD

Short answer is speculators. Expectation that producers either don’t shut-in (meet from physical sold at a cheap spot), or that the speculator 1) can buy-in the paper oil at below their sale price, or 2) deliver physical from private inventory. This is their business. Very different in the WCSB. It’s a small world, producers have much more sway, and the provinces have much more control. Put the collective mind to it, and the spring is way more effective. Ultimately the WCSB needs to permanently remove the discount via a high capacity pipeline to the Pacific - pumping cleaner crude. The quickest way is to shut-in/repurpose the worst offenders, blend with lighter crude, and construct a 2nd high capacity line in the existing TCP corridor. Obviously not a quick fix, & perhaps not this exact fix - but something not that far off. SD

Nobody wants to make money this way; once a producer closes, there is a very high chance they aren’t coming back. A producing well is just a hole in the ground; easy to price its production out of the collection networks. Assume you produce 10,000 bbl/day of heavy oil at a cash cost of $28/bbl. To avoid shut-down you sell the entire 10,000 bbl/day 6 months forward at $30/bbl. 20K/day (30-28)*10000 profit to cover overhead and interest, and 6 months for markets to get better. Survival. Price falls to $5/bbl. Local industry recognizes they have to change practices. The firm shuts down for 6 months; employees collect unemployment insurance, & hopefully most return when it is over. It buys a physical 10,000 bbl/day of heavy oil out of the market to meet its hedge, & uses the CF to repay debt. 250K/day profit (30-5)*10000, a 20,000 bbl/day drain on inventory, and EI paying its employees - forces the local price back up. Lots of ways to do it – and the more participants, the more certain it becomes. To ensure re-opening, the heavy-oil producer is incentivized to buy 10,000 bbl/day of local light crude for delivery starting in 6 months. When they re-open in 6 months they can either resell the light crude directly, or blend it with their own production to ensure they can sell it at a profit. So what? Right now, a secure and significant supply of local light oil is extremely valuable to a heavy oil producer - It could even be the difference between life and death. You get it via 1) forwards, 2) royalty, or 3) the buyout of a light oil producer. Most would argue that in Alberta - light oil is now a strategic resource, and highly likely to enjoy government protection. Deals will get done (at higher prices), there will be farm-ins (for future consideration), & there will be sweetheart drilling rates (to keep crews). Ya dance with the one that brung ya, and ya all work it out. Ya all don’t have to come back. SD

Couple of things to keep in mind. For a firm to keep pumping - the net sale price has to exceed the cash lifting + transport costs. When it doesn't - the firm shuts in ALL production, & buys oil out of the market to meet its existing hedge obligations. If the local price does not change; the result is reduced supply & additional demand met from storage. We know that shut-ins are occurring, and the rate is accelerating. We are experiencing the largest mass migration of refugees since WWII, simultaneous to a war in the ME - yet prices are at record lows, & reflecting no risk premium? We know from both Gulf War conflicts that prices should rise. It is very hard to see how the EIA numbers, and mass pablum over the ME, can be anything but deliberate manipulation. We put it to you that the market actually has a rapidly growing excess demand, that so far - has been met by producers pumping flat out. We don't think producers have enough left to cover the new shut-ins and forced hedge covering; and the ability to hide it - is rapidly declining. SD

Assume that today the price is USD 100/bbl, CAD/USD FX rate is 1.3700. Today’s price is CAD 137/bbl (USD100/bbl x1.37). Tomorrow it is still CAD 137/bbl, but the CAD/USD FX rate is now 1.4200 – because the USD has appreciated. That CAD 137/bbl now costs USD 96.47/bbl (137/1.42). To foreign eyes - USD appreciation lowers the USD price of a barrel. SD