Deutsche Bank Is Stumped: The Broad Market Is Ignoring The Bear Market In Energy, "Something Has To Give"

Tyler Durden's picture

First the BIS came out with the following stunner when discussing markets: "The highly abnormal is becoming uncomfortably normal. Central banks and markets have been pushing benchmark sovereign yields to extraordinary lows - unimaginable just a few years back. There is something vaguely troubling when the unthinkable becomes routine." And now the routine of the unthinkable has forced Deutsche Bank to look at the unprecedented disconnect between the collapse in energy assets and the general market - which continues its hypnotized, low-volume levitation - and conclude that it makes absolutely no sense:  "We find current dislocation between deep distress in Energy assets and marginal reaction in broad market indexes to be inconsistent with each other. Either energy has to rebound noticeably, or it could pull broader market indexes lower. Exceptions to this assessment are rare."

Oh, but under central planning things which are rare, such as a 1400-point, virtually straight-line run up in the S&P, are the new normal.

More on this disconnect from Deutsche's Oleg Melentyev:

One of the most interesting disconnects that we are currently witnessing on the valuation landscape is that broad market indexes – in equities and in credit – have largely ignored a bear market that has hit energy assets. S&P500 energy stocks are down 19% since their late June highs, while overall index is 5.8% higher and at its all time highs. In credit, energy bonds have widened by 50bp in IG and 310bp in HY, whereas non-energy bonds are wider by 20bp and 60bp respectively. Taking into account the fact that energy is the single-largest sector in all of HY, second-largest in IG, and third-largest in S&P500 (on a level 2 industry basis), this strikes us as an unusual outcome.


In fact, when we went back in history to confirm our suspicions, we found that it is indeed a rare occurrence. In HY, looking at top-three weight sectors trading 200bp above the rest of HY, the only instances that fit these criteria going back to 2000 are Financials in 2009, Media and Autos in 2008, Autos in 2005 (F/GM downgrades), Telecoms in 2001/2002, and Materials in 2001. This makes Autos in 2005 the mildest instance, where a large sector went into distress and the broad market widened by "only" 130bp. Autos were 10% of the market and peaked out at 630bp, whereas Energy today is 15% and trades at 710.


A similar exercise in equities – top three sectors down 20% or more – yields hits in Financials in 2010 and 2007 and Technology in 2000 – all instances where a distress in one sector pulled the rest of the market lower. The smallest impact was left by Technology in early 2013, where the sector dropped 25% and S&P 500 responded with just a 7% pullback.


These observations form the base underneath our view that something has to give here. Either the market is too negative on Energy, or it is not diligent enough in thinking about broader implications. The only argument that stands against this view is that the rest of the economy is supposed to benefit from lower oil, which as we have shown earlier, has its own limitations.

Or visually:

And while we eagerly await Deutsche Bank's answer to these rhetorical questions (perhaps just ask the Fed - after all the "market" is now entirely a centrally-planned creation), it is worth noting that no matter what, junk bond defaults are coming: "We believe HY defaults have seen their lows for this cycle at 1.7% in September, and are now heading towards a 3.5% level next year." In other words, a doubling of HY defaults, and that's in DB's optimistic case.

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Alea Iactaest's picture

"That which cannot continue won't".

-- Herb Stein, economic advisor to Richard Nixon

El Oregonian's picture

... And the band played on... on the deck of the USSA Titanic...

SWRichmond's picture

If it was real capital being "invested" in the "markets", then capital expenditure would follow, along with job creation etc.

I guess it's not real capital.

Stuart's picture

DB is stumped??  Central banks are buying the equity markets.  How possibly could DB be stumped?

BringOnTheAsteroid's picture

Because the CB's are saying they are not buying equity markets and financiers are trained to believe whatever their masters tell them. 

847328_3527's picture

They should be worried as we all should be. Several top chemical engineers I know in the O&G field are getting the ax this Christmas … all formerly solid Middle Class wage earners ... now jobless in Barry's Robust Economy.


We annihilated some Middle Class folks.

kliguy38's picture

you can fool mother nature some of the time but you can't fool her all of the time. and when she decides she's had enough of the CB bullshit  she'll close down the casino and YOU wont be exiting until they drag you out by your boots.

armageddon addahere's picture

It's almost as if the markets are manipulated.

roadhazard's picture

I on the other hand love $2.00 a gal. gas.

noben's picture
noben (not verified) Stuart Dec 10, 2014 1:10 AM

DB is like the rest of Germany:  They are not leaders. but followers; followers of the US "fiat-doctrine-de-jour."

And followers are easily stumped.  Puzzle solved.

Babaloo's picture

"That which cannot continue won't"."

-- Herb Stein, economic advisor to Richard Nixon

max2205's picture

Duh, it's because the Spy is manipulated by the Fed

Come on it's been 6 years. Get with the program!

buzzsaw99's picture

DB, the great communist bank, is going to sit there and tell us that they don't know that sovereign yields and energy prices are set in accordance with the marxist credo: From each according to his ability, to each according to his need ?? That was a remarkable tale comrade, tell me another.

kaiserhoff's picture

I don't get it.  Last October world grain prices got cut in half, and no one ran around with his hair on fire.

No one commodity is that big a deal.  Now when McMansions take a 50% hair cut, that will at least be entertaining.

buzzsaw99's picture

That's just the point. After the manufacturing and real estate busts they were counting on the energy business to add a bunch of usa jobs and investment. From back in 2012:

sun tzu's picture

Then you don't understand oil. It is the lifeblood of the economy. When oil demand drops, the economy is dropping. On top of that, you have hundreds of billions, possibly over a trillion worldwide, of debt borrowed for energy related projects. You don't have the same issues in the metals and ag industries. You're talking about entire countries being taken down by oil prices. Nigeria, Venezuela, Mexico, Russia, Norway, North Afria, Middles East etc

Even more balanced economies like the US, Canada, UK, and Australia are dependent on oil prices over $80

If the price of copper, gold, cotton, corn, or silver drops, there is almost no effect on the world economies. Cheaper inputs, that's about it. No countries are so dependent on any other commodities prices than oil.

kaiserhoff's picture

Humbug.  It's an input price.  One of thousands.  It's gone up and down for a hundred years.  Lots of substitution.

This too shall pass.

Rainman's picture

Oh goody .... double up HY defaults and they gonna be some rectal rehydration Lehman-style .

ebworthen's picture

So what pin drops next?  We've got rates at historical lows, along with employment and incomes, and now - gasp - oil price dropping of all things!

If the World economies are in recovery, populations growing, and all of them using oil in one form or another - how could oil prices possibly be collapsing!?!?

It couldn't be that the economy sucks ass, and that central bank monetary hijinks has mis-allocated and mis-priced every single fucking thing on the planet, could it!?!?

Why yes, it is: possible, probable, and true.

Death to the money-changers!

silverer's picture

It's amazing isn't it? Buy stock in that company that added that chemical to the water that made people stop thinking.

NoDebt's picture

It's tempting to believe that oil dropping will be the thing that finally makes the CBs fess up and start telling the truth- that the economy has sucked ass for a long time, everything was supported by their massive liquidity injections and now, finally, the tide goes out and reveals all the naked swimmers.

Sit back, have a little patience and watch it NOT happen like that.


Miss Expectations's picture

Yeah, sure...they'll fess up like that Gruber fella...what a pathetic display that was.

silverer's picture

Nobody pays much attention while that $ press is running. Kind of like US sheeple. Everything is fine until the TV stops working.

winchester's picture
winchester (not verified) silverer Dec 9, 2014 5:44 PM

as they call 911 when facebook down more than 15 min...

Skateboarder's picture

I would be interested to know if that really happened somewhere. Intuition tells me it has.

Alea Iactaest's picture

August 1, 2014

LOS ANGELES – Facebook was down for about 30 minutes Friday morning and officials said the 911 calls flooded their lines.

The Los Angeles County Sheriff’s office even tweeted about the incident, reminding the public the Facebook outage was not a public safety issue.



kaiserhoff's picture

Leave Brittany Alone!    Whaaaaa!

Skateboarder's picture

Thanks for sharing that. Big cities are gonna tear themselves a new one when unexpected power outages >2-3days go down.

BandGap's picture

Wait till the EBT cards go silent. That's when the real fireworks start.

Cognitive Dissonance's picture

Facebook going down for 30 minutes may not be a public safety issue, but it is a national security issue.

Tinky's picture

300 "Likes" added to everyone's accounts and all is well.

winchester's picture
winchester (not verified) Skateboarder Dec 10, 2014 7:26 AM



sudden off grid for 5 days = 5000.BC

crasy psychos will kill for phone battery.

Bighorn_100b's picture

When you get a draft notice in the mail. That's when I ..............

The Fonz...before shark jump's picture

Manipulated data
Suppressed pricing
HFT scalping
Fake broader market.........broken broader market......a fantasy broader market

How the fuck are you stumped douche bank? You know exactly whats going on....

Remember in Nuremberg I was only following orders really didn't cut it as a defense then and it won't cut it for you scum bag bankers and regulators etc NOW

eatthebanksters's picture

In 2007 everything told me the mortgage market was fucked up and the real estate market was a disaster waiting to happen.  But, after five years of the same shit and loan agents telling me this was the 'new normal', I made the mistake of buying in.  In 2008 I got my ass kicked in for accepting the new normal.  Anyone who can't see what is going on is either stupid or greedy and playing with someone elses money.  I fear this could get real fugly before its all over.  'New normal' is only used to justify a situation that's fucked up and out of control.  If the markets were operating 'normally' TPTB would not need words like 'new normal'.

SmittyinLA's picture

nature abhors a surplus, any excess oil will be consumed shortly, a glut of energy is a good thing, the Japs are celebrating their good fortune and can turn on a few more mothballed robots that print Hondas and Mazdas and Toyotas like yen. 

Traianus Augustus's picture

When the CB printer is running through all markets....does anybody hear the screams of their victims (non bank participants, of course)???

Wahooo's picture

Mr. Market is telling you crude prices are going higher.

jcaz's picture

Uh, yeah, that's what Mr Market was saying when he took crude from $80 to $65 in a week.......

sandhillexit's picture

I think there is a much simpler explanation than "efficient markets"  jcaz.  Goldman used to end their financial year Nov 30th.  That made the thin markets of December a stomping ground for creating good entry points for the new year's positions.  This involves grinding your counterparties' positions into the dirt. Driving prices down in thin markets is a piece of cake, especially when you are herding junior traders at other financial institutions.  Remember, the boss at every bank is on holiday.  ("quote and cover.") Then leg into the positions you really want between Xmas and New Year's Day.  High-fives all around.  Think I'm kidding?  Look at the yield on Treasuries on the Wed bet Xmas and New Year's last year.  Tell me that getting long T's wasn't the trade to have in 2014.  

From all indications we are going to war again, and you can't do that without oil...lots of it.  Making my list, checking it twice...I'm looking at Monday, Dec 29th....

geno-econ's picture

Oleg just scsred the crap out of Putin who was praying for a rebound in energy prices.  Sad reality is we are all in the same boat sailing ever closer to global debt  default .  Reserve currency, petrodollar and military bullying will not save us  this time around.  

Bighorn_100b's picture

Don't big fish eat little fish? Next year when all the little players get gobbled up, oil, gas, gold, silver, will be at record prices. Or WWIII. Pick one or the other or maybe both.

Frank N. Beans's picture

"We find current dislocation between deep distress in Energy assets and marginal reaction in broad market indexes to be inconsistent with each other."

Somebody at DB is a genius!!

buzzsaw99's picture

Ladies and gentlemen, I am not making any sense! None of this makes sense! [/chewbacca defense]

silverer's picture

I wonder if the ancient Romans were tripping all over themselves with similar issues trying to keep their Ponzi's going? But of course, Ponzi wasn't around yet, but he was the one to give the concept a name. The practice may have been in place before he came along.

Cognitive Dissonance's picture

Runing a government Ponzi is the first oldest profession. Nothing even comes close to second.

Berspankme's picture

It's all okay. Ben Yellin has this.  Fuck you Bernanke