Freaky Friday reversal: Deutsche Bank recovers, stocks soar

DOJ penalty vs. Deutsche Bank for alleged pre-2008 mortgage lending transgressions rumored much lower than estimates. Oil trading flat, Nutanix IPO a rousing success.

Nutanix splash screen on opening day for its IPO. (Screen capture, Nutanix web site)

WASHINGTON, September 30, 2016 – Like that old song goes, “What a Difference a Day Makes.” Thursday’s markets took another one of their periodic Wile E. Coyote cliff dives, as rumors trumpeting the imminent demise of Germany’s Deutsche Bank (U.S. ADR symbol: DB) scared the bejeebers out of investors who still vividly remember the U.S. banking and real estate loan debacle of 2008-2009. Yep, another Lehman Bros.-style collapse was at hand for sure, and OMG, we’re all gonna die! SELL!

But Friday’s markets were singing a much happier tune, like the one just noted. Rumors flowed fast and thick this morning that the U.S. Department of Justice (DOJ) case against Deutsche for its alleged role in contributing to the root cause of the Great Recession might only incur a fraction of the massive penalty DOJ had been contemplating according to CNBC.

“Shares of Deutsche Bank jumped 14 percent Friday in New York after AFP [Agence France-Presse], citing a source, reported that the bank may be near a $5.4 billion settlement with the U.S. Department of Justice. CNBC has not independently confirmed the report, but if accurate, that settlement would be well below the reported $14 billion opening bid by the DOJ in its talks with Deutsche….

“Germany’s biggest bank fell under fresh scrutiny two weeks ago when it surfaced that the Department of Justice was demanding $14 billion to settle the bank’s mortgage lending activities during the housing bubble, before the recession.”

Deutsche Bank wouldn’t comment, but we’d put money on an outcome similar to this one, re: the U.S. case. It’s likely that transatlantic phone calls were made Thursday, and TPTB (The Powers That Be) struck some kind of deal with the U.S. that helped take some pressure off DB, which does have other problems.

This unconfirmed but likely-true rumor kick-started positive Friday morning trading, which was aided and abetted by the runaway success of Nutanix’ IPO. This Silicon Valley Unicorn—a purveyor of innovative business cloud computing and storage capabilities for business—succeeded in putting the juice back into this peculiar genre of high tech offerings: frequently overpriced niche companies that have never made a profit.

These “unicorns” fell from favor earlier this year as a skeptical market wondered why investors would buy such overpriced but unproven shares at inflated prices. Subsequently, successive unicorn IPOs began to fail rather than soar.

Nutanix, an unprofitable company whose sales are on a tear, seems to have broken the negative mold. Nutanix was not only priced at $16 per share, a buck above an estimated $13-15 (often an indication of increased IPO demand). After it’s late morning opening, Nutanix (NTNX) shares took off like a rocket.

As of 1 p.m. Friday EDT, the shares traded at approximately $34.50, up an unbelievable 116 percent.

Between (among?) the apparent Deutsche Bank break cut with the DOJ, relatively stable crude oil prices for both WTI and Brent and the Nutanix IPO moon shot, bulls took over the trading action from Thursday’s Bad News Bears, blasting all three major averages up close to 1 percent, largely negating Thursday’s cliff dive.

Hopefully, most of today’s gains will hold, closing out the last trading day of a very bizarre September.

Trading diary

Because oil has been so goofy, we reluctantly peeled off our modest position in French oil giant Total (TOT). We already captured TOT’s current (and very nice) quarterly dividend by picking up the shares prior to the ex-dividend date, and wouldn’t mind buying them back again later at a lower price. But in this fall’s yo-yo election-year market, oil’s just too slippery for the moment. We already have enough problems with our position in Teekay Tankers (TNK). So lightening up a bit makes sense here, lowering our percentage exposure to the oil patch. For now.

Our Allergan preferred A (AGN/PRA) shares are still under pressure as well, tracking as they do—inexplicably—with the common shares (AGN). But we’re still hanging in there for the swell dividend of 6 percent, more or less, depending on the day, as well as it’s deep discount to its redemption price of $1,000 per share, which will happen on March 1, 2018. Even in today’s volatile markets, patience is still occasionally rewarded, and we think it will be for us in this attractive holding.

Happily, however, as this miserable month for the Maven’s portfolios draws to a close, we do find we have cause for great rejoicing. Quite unexpectedly, the Maven did get a small allotment of shares in the Nutanix IPO we duly noted above.

Like the slayer of the Jabberwock—so vividly portrayed by Lewis Carrol—the Maven felt like shouting “O frabjous day! Callooh! Callay!” but thought better of it. Such boastful rejoicing would be clear evidence of that dreaded always-to-be-avoided trader hubris, an outburst of overweening pride that is to be avoided at all costs lest the market gods extract their customarily brutal revenge.

On the positive side, we can’t recall having ever garnered a 116 percent profit for the scant 5 minutes of work it took to input our NTNX IPO request Thursday night. In addition, we didn’t get all the shares we requested. But we did get some, which we regard as a gift. As we’ve said in this column many times before the Big Boyz always get most of the shares of a hot IPO. This time, at least, we got lucky, though we don’t know why.

Ah, but here’s the catch in this potentially glorious IPO victory, due to something we’ve mentioned here before. For a variety of irritating (but perfectly logical) reasons, our discount brokerage house kind of, sort of requires that investors like the Maven hold IPO shares for at least 31 days after the IPO comes public. In other words, none of us lucky enough to get any shares at all of Nutanix from our discount broker can “flip” them for an astounding less-than-one-day profit like the Big Boyz almost always do. (As opposed to most institutions that are in on the deal.)

If we do flip these shares today, which we can indeed do, that’s just fine. Except that our brokerage will then suspend our ability to bid for IPOs for a calendar quarter. That’s the stick that lies behind this carrot.

Thus, the Maven will have to endure 31 days of trading sturm und drang, during which that current 116 percent gain will be whittled away to an unknown extent. In the past, the Maven has, on occasion, ended up getting out of an initially successful IPO for a loss after the holding period.

However, unless current NTNX management was fibbing about something, we figure odds are at least even that we’ll retain something like a better-than-average profit on these shares once 31 days is up. (On occasion, if the IPO’s business looks really sound, we’ll just keep on holding it for a time.)

Bottom line: we feel pretty good about this one. Today at least. We’ll report back to you in 31 days on our lucky buy of NTNX and tell you how this current IPO story ends.

Meanwhile, once the Maven has wrapped up today’s writing and editorial duties, he intends to kick back and enjoy his first nip of single malt scotch this fall as a damp, windy, early autumn chill settles in on the nation’s capital region.

See you on Monday.

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