Camelot Portfolios Talking Points

Downward pressure on Deutsche Bank

Over the past month, Deutsche Bank has been experiencing pressure on multiple fronts pertaining to capital structure and governmental fines. The US Department of Justice proposed a $14 billion fine over the handling of mortgage securities (Strasburg). The bank has said it does not have any intentions of paying this fine of $14 billion, but they are in talks with the justice department on the correct fine amount. Sources within the financial media believe DB have negotiated the settlement lower to $5.4 billion (Strasburg). This speculation has many analysts and pundits predicting the collapse of Deutsche Bank, because of the comparison to Bear Stearns and Lehman Brothers. Credit spreads have started to widen on Deutsche Bank CDS to 2.5% compared to normal spreads around 1-1.25% (Cheng). 

While the negative news has created a stir within European financial markets, Deutsche Bank (DB) should be able to deal with short term liquidity concerns. Regulations in the United States and Europe have created stringent liquidity requirements to mitigate risks by commercial banks. According to 2nd quarter financial statements, DB has €223 billion in short term reserves (Deutsche Bank). Prior to the financial collapse of 08-09, Bear Stearns and Lehman Brothers had limited short term liquidity coupled with major default on long term securities (Cheng). Although some of the data is dated, we believeDeutsche Bank has the ability to weather a storm by the Department of Justice, shareholders, and account holders.

Risks in Higher Education

It has been close to a month since the fallout from ITT Tech shutting its doors. The closure of ITT Tech left over 35,000 students in a bind to finish their education (Nisiripour). For many years, this institute for higher education has given a black eye to this industry because of its lack of accreditation and pressuring tactics for students to enroll (Nisiripour). The Department of Education barred ITT Tech from allowing new students to use federal loans, which made the school unable to support continuing operations (Nisiripour). The business practices by this one educational institute seems to have created a negative opinion on the education industry. 

Along the line of economic ramifications this has in the United States, the arguments on the use of student loans has opened more speculation into an education bubble. Currently, there is roughly $1.26 trillion in student loan debt with the majority held by Sallie May (Elverly). Delinquency rates have started to creep up over time close to 11.6% as of 2016 (Elverly). On average people who attend schools like ITT Tech carry a higher amount of student loans at $39,950 (Elverly). Although student who take on this debt are unable to remove this burden from bankruptcy, it does cause pressure for 43.3 million student debt holders on pursuing other major purchases like housing, health, and automotive (Elverly).  Our team is not proposing any sort of changes within government to move towards an agenda, but students who take on this debt need to know the responsibilities of taking on this debt.

Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Sarah Berndt, Portfolio Manager

Eric Kartman, Research

Drew Steinman, CPA, Trader/Research

Frank Echelmeyer, MBA, CKA®, Advisor Consultant

-for Broker/Dealer and RIA use only-

 

References

Cheng, Evelyn. Deutsche Bank, U.S. DOJ Continue to Discuss Mortgage-Securities Settlement. 29 Sept 2016. 2016.

Deutsche Bank. 2Q16 Fixed Income Investor Conference Call. 28 July 2016. 2016.

Elverly, Joel. Is There a Student Loan Crisis? Not in Payments. 16 May 2016. 2016.

Nisiripour, Shahien. ITT Technical Institutes Shuts Down, Leaving a Hefty Bill. 6 September 2016. 2016.

Strasburg, Jenny. Deutsche Bank, U.S. DOJ Continue to Discuss Mortgage-Securities Settlement. 2 October 2016. 2016.

Disclosure

The materials presented is for use by professional advisors only.  It is not intended as informational and educational, and is not intended to be interpreted as investment advice.  The references to specific investment ideas, be they concepts, trends, sectors or even specific securities, are not recommendations for any advisor to adopt for any of their clients.  No investor or client reading these materials should view them as investment advice.  These materials are to be utilized as a catalyst for thought and discussion regarding the economy, investments, and responsible investing in general.  Past performance is not necessarily indicative of future returns, and there is no guarantee that any information presented herein will contribute to a profitable portfolio.  All facts referenced herein are derived from sources believed to be reliable.  

Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

A274