April 9, 2019

As German 10-year bunds were headed towards their first dive into negative territory in 2016, courtesy of the epic Brexit disaster and the overall deflationary environment in the eurozone, the stock of the largest bank in Germany – and one of the largest in the world – was trading with a truly bizarre correlation to the 10-year U.S. Treasury yield. If you think about it, the risk-free interest rate in United States Treasury bonds should have very little to do with the clobbered equity of a large European bank, but the explanation is surprisingly simple. The deflationary black hole that German bund yields sank into is what is ailing Germany’s Deutsche Bank (DB), and that very same black hole is pulling Treasury yields lower.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

On the chart above, you can see that this correlation “broke” in early 2018, courtesy of the Trump tax cuts that pushed U.S. economic performance into overdrive last year. This is the same overdrive phenomenon that caused the Federal Reserve to accelerate the pace of its quantitative tightening, resulting in upward pressure in short-term U.S. interest rates and regrettably sharply rising volatility in the U.S. stock market. The only other time we have had such a sharp contrast between fiscal and monetary policy was in 1987, during the Reagan administration, when the stock market crashed, but without an economic recession.

Last year’s “tax-cut sugar high” in the U.S. economy seems to be abating this year, so the Deutsche Bank 10-year Treasury correlation is being re-established, particularly with the Federal Reserve’s dovish pivot, in which the central bank has moved to the sidelines when it comes to any fed rate hikes and has declared its plans to stop the runoff of bonds from its balance sheet later in 2019.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The question now is: Will German bunds keep pressuring Treasury yields lower and hence maintain that Deutsche bank correlation? The lowest German bund yields have been -0.19% in July 2016, when they pulled the 10-year Treasury yield down to 1.31%. Since 2016, the Treasury-bund spread has kept expanding with better economic performance in the United States and a continued deflationary trend in the eurozone. I suppose with a hard Brexit and continued good economy in the U.S., the German 10-year bund yields can go to a fresh all-time low and the Treasury/bund spread can go over 3%, despite being at multi-decade highs. The way these spreads work is that they tend to revert to the mean in a more normal economic environment, although the situation in the eurozone is anything but normal at the moment.

Deutsche Bank for 22-Cents on the Dollar

Deutsche Bank has a book value per share of 0.22 at present. What that means is that, under a theoretical liquidation, you are paying 22 cents for what would be one dollar of book value in return. In reality, book values are a significantly more nebulous metric for large banks than they are for operating companies.

Comparisons with Lehman Brothers are easy to make, due to the performance of the share price, but Deutsche Bank has been in “Lehman territory” for quite a while. Plus, DB is at least three times larger than Lehman when it comes to the size of its balance sheet and it is literally “too big to fail” when it comes to the German economy. It is no wonder that German regulators have urged Deutsche Bank and Commerzbank to start merger talks. I suppose that the Commerzbank valuation, at 0.33 in book value per dollar, is 50% higher than Deutsche Bank, but that is because it is a more “pure” bank, with a smaller international presence as well as investment banking and capital markets businesses.

(Navellier & Associates does not own Deutsche Bank or Commerzbank in managed accounts or our sub-advised mutual fund. Ivan Martchev does not own Deutsche Bank or Commerzbank personally.)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I am not sure how merging two sick banks will make one healthy bank. In Japan, the Bank of Tokyo-Mitsubishi did merge with UFJ and not much changed for the profitability of the overall operation. The “Japanification” of European financials is rather obvious and with the deflationary backdrop in the eurozone, which is likely to get worse in the case of a hard Brexit, one can expect the combined Deutsche-Commerzbank entity to perform no differently than the Mitsubishi-UFJ Financial group.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I don’t know what will happen with Brexit, but I am by now tired of the soap opera that is playing out in the House of Commons. There is no doubt in my mind that the British shot themselves in the foot by voting to leave the European Union (EU) for fear that Germany was using the EU for its own political and economic interests and was growing too dominant. Didn’t Britons understand that leaving the EU makes Germany even stronger within the EU? Those City of London jobs already leaving for Frankfurt may get more numerous if a hard Brexit end ups being the ultimate result.

In the end, the EU without Britain is a weaker institution. Both Britain and the EU are worse off after this acrimonious divorce and the risk of a breakup of the EU has notably increased, which means a breakup of the euro is no longer a low-probability event. In that regard, financial companies in Europe will trade at depressed valuations for as long as the EU is a malfunctioning confederation – which could be a while.

About The Author

Ivan Martchev

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. *All content of “Global Mail” represents the opinion of Ivan Martchev*


Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives