You can always count on the banks to screw things up royally. Today with oil up, a benign set of economic numbers and three big earnings surprises, you would have expected a scorcher of a session.
Instead, the market got scorched because of concerns over the solvency of Deutsche Bank (DB) , the largest bank in Germany, concerns that had ripple effects around the world.
Now let me say from the outset that when it comes to the solvency of any bank, there is always going to be negative pin action. If a bank like Deutsche Bank is "in trouble," several things will play out.
First, people will fear that this gigantic bank's problems will spill over to others as banks are always lending each other money and there's a presumption that you shouldn't be lending any money to Deutsche Bank. If you go back to our own bank collapses, they occurred not because there were runs at the banks but because their credit was cut off.
We heard that was happening today. In fact, the market's sudden plummet occurred when stories spread about credit lines being cut by other lenders to Deutsche Bank, not that there were lines around the bank from depositors anxious to get their money.
Of course, these stories become very self-fulfilling and those banks and institutions that are indeed lending to Deutsche Bank hear these stories -- they aren't idiots -- and then pull back their credit lines and the institution can quickly wither and fail.
So scenario one, credit lines get pulled and Deutsche Bank crumples, taking other banks in Europe with it. That's the systemic-risk disaster scenario that some people are taking indiscriminant action on. It can truly hurt the European continent's banking system because of Deutsche Bank's size. It will cause multiple days of decline in stock markets all over the world if the bank doesn't survive. While this situation could occur, it is not the odds-on scenario because I believe the government of Germany would not allow it to happen. Until we know that, though, you can expect pressure on all stocks until systemic risk is taken off the table. We know that anyone who assures you Deutsche Bank is safe could be ridiculed if events turn negative, even if they only mean that it is safe as a depositor!
Scenario two is that Deutsche Bank needs to raise capital fast to meet demands, something that's bad for current Deutsche Bank shareholders but is not catastrophic for the system. This is stock-specific risk and until the money is raised it will cast a pall on the bank and other banks in Europe. This can push our stocks down initially, and then they bounce back when the situation gets resolved one way or another, typically with shareholders coming in with new capital or the government taking a stake in the institution in return for the money it needs to get out of trouble. In other words, a backstop that eliminates the bank's demise.
I think this is a more likely scenario because the principal risk facing Deutsche Bank right now is a huge tussle with the U.S. Justice Department where our government claims that Deutsche Bank owes $14 billion for mortgage indiscretions from the Great Recession and Deutsche Bank only has reserves between $5 and $6 billion.
The German government understands this dilemma and I think stands at the ready to offer Deutsche Bank the credit it needs in return for equity or for a promise to pay back the money over time if it turns out the Justice Department settles for a much lower fine. I do not think German Chancellor Angela Merkel wants to see the country's largest bank go down. All governments and central banks know how to save banks. They are all schooled in the ways of 2008-09. So I am thinking that given the Justice Department is the trigger event, the German government comes to Deutsche Bank's aid.
Scenario three is something in between where Germany dilly-dallies and we have multiple days of pressure on the European banks because many of them are so weakly capitalized. Recall that the European banks never had to raise capital the way our banks did. They were never forced to take the medicine. We have watched as the Italian banks flirt with insolvency and despite their large size relative to a small country we haven't been all that perturbed here about the issue. Deutsche Bank is more visible so it will first hurt all our stocks with the banks hit hardest as they will all be suspected to be linked with troubled European banks in a negative way. That's today and perhaps tomorrow or even the rest of the week until we get clarity.
Of course, it doesn't help that one of our largest banks, Wells Fargo (WFC) , was badly tarnished by the second congressional grilling of Chairman and CEO John Stumpf in two weeks over the firm's cross-selling transgressions. But until today Wells' trouble stayed with Wells. Deutsche Bank's narrative and the vitriolic way that Congress dealt with Stumpf made the whole group roll over, but it didn't take down the entire market until we heard about Deutsche Bank's bout with lenders.
But let's not confuse Wells' troubles with Deutsche Bank's. The former is reputational and I am sure that if the board of directors lets John Stumpf go because it needs to preserve the institution at all costs, this issue goes away.
The problems of Deutsche Bank aren't going away that easily.
Under scenario three, the likely scenario, we let the market come down and then we pick at stocks of companies that are doing but have been dragged down by the morass of Deutsche Bank's creation. In other words, that's business as usual once the Deutsche Bank situation is resolved.
Now I know these things don't resolve themselves all that quickly, so there is no rush to put money to work. And I don't want to be too glib here, but you know the truth is that most stocks that are going down today and could go down tomorrow have nothing to do with Deutsche Bank in particular or Germany in general.
That said, let's deal with today's action. First, the oil stocks are up big because of the potential OPEC agreement to cut back production in November. I think the OPEC deal smacks of desperation, but as long as crude goes higher, the oil stocks will go higher. I think you can hold on to the oils. I don't expect oil to go down hard after this deal. The short-sellers who constantly push oil down will be afraid to do so. But I don't expect a big move up in oil because there are too many U.S. producers who will pump like mad if oil goes above $50 a barrel.
Three stocks reported great numbers this morning: PepsiCo (PEP) , ConAgra (CAG) and Accenture (ACN) . The latter soared five points. No bargain. ConAgra jumped three points, again not much of an opportunity. (Wells Fargo and PepsiCo are part of TheStreet's Action Alerts PLUS portfolio.)
But PepsiCo, a very large-capitalization stock, got pushed down by the overall market, which got pushed down by Deutsche Bank. That's the kind of opportunity I want you to buy if it is down tomorrow. It's got incredibly fast growth, much better than any other stock in its category, and I think would have been up much more if it weren't for the totally extraneous -- at least to its own business -- Deutsche Bank story.
Now I don't have the time to list all the stocks that I talk about that I like if there is a marketwide selloff. But under all three scenarios I listed about Deutsche Bank, there's going to be another marketwide hit or two, so there is no hurry.
So my suggestion is to stick with what we know just did well, stick with some PepsiCo, as we did for my charitable trust which you can follow along at Action Alerts PLUS. If it goes down tomorrow, I would buy it.
Otherwise, I would then wait for more bargains as the days go on and the Deutsche Bank situation -- which, again, I will say is most disconcerting the longer it goes on -- one way or another gets resolved.