Headlines this week are packing a punch as the Deutsche Bank comes under fire and Samsung’s new phone becomes a safety risk as it spontaneously catches fire. Read more about this red hot news in this edition of Steady Investor’s Week:
All Eyes on Deutsche Bank – Deutsche Bank shares have come under fire after reports the U.S. Department of Justice could potentially seek $14 billion in fines, for its involvement sale of faulty securities tied to mortgage backed securities. The size of DB’s derivatives book and its interconnection with the European banking system have led to headlines suggesting this could be Europe’s Lehman moment. The stories are stacked up against the bank – in Q4 2015 it posted a record loss and in June its U.S. unit failed the Fed’s stress test. Undercapitalization concerns abound. But, a closer look reveals that Deutsche has a €1.7 trillion balance sheet with about €220 billion of liquid reserves as of the end of Q2, and it already has €5.5 billion in reserves set aside for litigation costs. Settling for the DOJ’s proposed $14 billion would hurt, but it does not appear likely to lead to bankruptcy or systemic crisis given the bank’s capital position. And, the actual fine amount is likely to come down considerably as negotiations proceed.
Fed Minutes Released – a review of the Fed minutes found that members were more increasingly divided over the course for interest rates, and it appeared as though this may have been the most difficult of recent decisions. Consensus appears to be that raising rates would be warranted in the December meeting if the U.S. economy continued to strengthen, though more dovish officials are pointing to low inflation as a reason for waiting even longer. The likelihood of a November rate hike is very low, given its proximity to the election.
Samsung is on Fire! Literally, on fire. The company has endured a horrendous and rather embarrassing week, following multiple reports that replacement Galaxy Note 7’s spontaneously caught fire. Samsung made the call to suspend production of the phone after major carriers like AT&T and T-Mobile said they would no longer sell it due to safety concerns. In all this amounts to the largest-ever phone recall, and it could mean Samsung losing sales on close to 20 million devices. That’s estimated to mean $17B in foregone sales, no small sum. Samsung is now shipping “fireproof” kits replete with boxes and protective gloves for customers to return phones. Samsung trades in the Korean market so it is uncommon for U.S. investors to have legitimate stakes in the company, but shares have been slammed.
The British Pound’s Major Slide – just a few years ago you would have had to use around two American dollars to buy one British pound. Now that number is down to ~$1.20, as the pound has slid dramatically in the wake of Brexit. Mentions of the “hard Brexit” – which implies a move to leave the free European market entirely – generally have the worst effect on the pound, as the market may be signaling that to be the least favorable outcome. A recent analysis published by the Financial Times made matters worse however, as the paper revealed that Britain may face up to €20B in payments needed to cover its remaining financial obligations and liabilities with the EU. More than anything, the pound is weakening on the uncertainty of the situation, which very much remains in question.
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