Direction Alerts Sunday Edition

[Direction Alerts] The Tale Of Two Banks & What They Mean For Your Portfolio Dear Reader, Deutsche Bank and Wells Fargo have dominated the headlines lately, and neither for positive reasons. But these two banks can teach us a lot about investing in a fundamentally good company versus investing in a fundamentally bad one at a point of maximum pessimism. Before diving into that, let’s take a look at the current situation of both banks. Wells Fargo has been reeling after weeks of bashing over millions of fraudulent customer accounts created over the last five years in a scheme to collect fees and meet sales targets. The bank’s CEO was grilled by the House Financial Services Committee this week over the scandal, and it is being fined $185 million—which is the largest fine charged since the Consumer Finance Protection Bureau was created in 2011,—and agreed to pay $5 million in refunds to customers. Wells Fargo was also just sanctioned by the Justice Department over improperly repossessing vehicles owned by military members, with an alleged 413 violations of the Servicemembers Civil Relief Act. But the bank has the highest valuation among any bank in the U.S., with a worth just over $250 billion, and Warren Buffett’s Berkshire Hathaway is the company’s biggest shareholder. Not only that, the stock is up 400% since its low at the beginning of the financial crisis. While customers are fuming, Wells Fargo’s shares are down just 15% this year, sinking below $45 this week, a price it hasn’t hit since February 2014. Wells Fargo has long been thought to be one of the better banks to invest in as it didn’t have as many ties to shady Wall Street practices as other banks have had, but these recent scandals have rightly made many wonder if big banks make sense as an investment in their portfolios. The company isn’t the only U.S.-based bank that has struggled this year. Goldman Sachs, Citigroup, and Bank of America are all down roughly 10% for the year. But these losses are nothing compared to those of the big European banks. Barclays and UBS have sunk more than 30% in 2016, and Credit Suisse is down more than 40% year-to-date. Deutsche Bank’s story is a particularly fascinating case study. It is Europe’s largest investment bank and it has slumped more than 50% in the past year, and fell to a record low on Tuesday over concerns that the bank may lack the capital to pay litigation costs and meet more strict regulatory standards. At the beginning of the month, the bank was hit by a $14 billion claim from the U.S. Department of Justice to settle an alleged fraudulent origination and selling of mortgage-backed securities before the financial crisis. Much of the recent selloff appears to come as a result of German Chancellor Angela Merkel’s statements ruling-out state assistance for the bank. But unlike Wells Fargo, Deutsche Bank’s troubles aren’t new, and in fact the bank has struggled to recover since the financial crisis, so much so that the stock has sunk to a 30-year low. The bank has had a sequence of hard-hitting scandals, unfortunate events, and poor decisions. With a $15.8 billion market capitalization, shares of the 147-year old bank now trade for only 8% of the stock’s peak price in May 2007. In 2009, Deutsche Bank’s then-CEO proclaimed that the company had plenty of capital, and that it was weathering the financial crisis storm better than its competitors. In truth, however, the bank was hiding $12 billion in losses, and much of the money that the bank was able to make during the time was actually a result of their manipulation of Libor rates, which resulted in eventual fines of $2.5 billion. Since then, the bank has gone through multiple CEOs, and under its newest leader is attempting a reinvention and a massive overhaul of its operations resulting in the cutting of 9,000 employees and the ceasing of operations in 10 countries. The chart below from equities.com illustrates the bank’s struggles over the last year alone: [Direction Alerts] The series of events in the last six months have been particularly damaging with headline after headline claiming that the bank’s troubles may be insurmountable. Bottom line, Deutsche Bank is in full-on crisis mode and is a ticking time-bomb. Stepping back in time to the start of the financial crisis, the comparison between Deutsche Bank and Wells Fargo is striking. While both companies crashed along with the rest of the market in 2009, one bank—Wells Fargo—gained to 400% from it’s low, while the other has sunk -50% since it’s 2009 low and looks to continue the downward trend. [Direction Alerts] The chart above shows the dramatic difference between the course of these two banks since the financial crisis. You can see Wells Fargo’s impressive rise in blue, and Deutsche Bank’s steady demise in red. The 2009 low for both stocks correlates to the point of maximum pessimism—a term coined by Sir John Templeton—in the financial crisis when things seemed to be at their bleakest. If we look at Deutsche Bank, after this low, things seemed promising and the stock price rose into 2010 before continuing its descent. In hindsight, this correction as we can now see it, marked the beginning of the end for the multi-national bank and was the start of scandal after scandal, and crisis after crisis. If we look at Wells Fargo in comparison, after the 2009 low, the price rose a remarkable 400%, and is only now experiencing a short-term decline on its continued ascent. So what’s the difference between the two and how could investors have picked the better stock at the bottom in 2009? It really comes down to fundamentals. Despite Wells Fargo’s recent turmoil, the company’s fundamentals are solid. Wells Fargo’s management is quality and the company has maintained consistent dividend payments. And, not only that, but the company has maintained profitable growth, which is a big plus as profitability plays a big role in maneuverability in returning capital to shareholders. In the midst of the financial crisis, Wells Fargo cut its dividend payment to just 0.7%. This dividend cut, while painful, saved roughly $5 billion per year for the company which helped it navigate the toxic mortgage crisis. It wasn’t until 2011 that their dividend moved north of 1%, but it has now risen to 3.4%. While it’s impossible to know if Wells Fargo can maintain a dividend yield in the face of the next major crisis—be it the impact of the slowing global economy, a debt crisis, or possible deflation—it’s likely that the company’s management has learned from 2009 and has a plan in place for the next major economic crisis. Deutsche Bank on the other hand, as discussed above, has gone through multiple CEOs since 2009 and has attempted multiple reinventions in an effort to turn the ship around. And as already mentioned, the bank hid $12 billion in losses in the aftermath of the financial crisis. While if you had invested in Deutsche Bank at the 2009 bottom and ridden it until its top in 2010, you would have seen a nice return, had you stuck with the stock after that high you would have lost -50%. On the other hand, If you had invested in Wells Fargo at the same 2009 bottom, you would have seen incredible returns. Only this year would you have started to see a decline. Now, considering Wells Fargo’s recent scandals, you’re likely thinking you’d be crazy to buy the stock, and right now, you might be correct. The stock has once again fallen to the $44.50 level, a price that marked the intra-day low in both February and June of this year. By connecting these two lows we can establish a support level from which to work. On Thursday, the price closed at $44.37. As I write this today (Friday), it appears as though Wells Fargo’s share price has rallied a bit, but I believe it will make a second consecutive close below $44.50. [Direction Alerts] In true technical fashion, if on Monday we see a third consecutive close below $44.50, I would be confident in declaring a breach of this important support level. I would then be looking for the stock to continue to decline in the coming months, ultimately finding new support around $34-35, a price that marked peaks in 2010, 2011, and 2012, before breaking out to new highs. One caveat to reaching this level is the 2007 pre-crisis high around $38. This is a level buyers will want to watch closely, as if the stock does find support at $38 and then resumes the uptrend, waiting until it hits $35 would mean missing the entry opportunity. As I’m watching the stock price this morning (Friday), the stock has rallied slightly, which may mean that the $44.50 level might hold, though that does not mean the level won’t be broken later. Ultimately, the bottom line is that $44.50 to $35 represents a good to great buying opportunity. In order to buy at a price point within this range, investors may want to sell put options with a strike price of $43 or lower with the hope of the stock price dropping and being assigned shares while also collecting some additional income. Should the stock price reach around $35, which I expect it will, I believe it would present investors with a great buying opportunity to get a fantastic company at a good value, so keep an eye on Wells’ chart in the coming months. As for Deutsche Bank, if you still own it, cut your losses now before it runs itself down to penny stock territory. Trade Smart, Kristina Keene Marketing Director, Investiv The Direction Alerts service is owned and provided to you by [Investiv, LLC.] --------------------------------------------------------------- If you are having trouble reading this email, you may [view the online version] This email was sent to {EMAIL} by Investiv, LLC 3400 North Ashton Blvd. | Suite 170 | Lehi | UT | 84043 [Forward to a friend] | [Unsubscribe] Disclaimers Investing is Inherently Risky There are risks inherent in all investments, which may make such investments unsuitable for certain persons. 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