Trade of the Day: Deutsche Bank (DB)

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To me, the most important event of the past week came with the release of the gross domestic product (GDP) report last Friday, which showed that the U.S. economy grew just 0.7% in the fourth quarter. While this data point hasn’t received much attention by the media or politicians, the fact that the last quarter of 2015 generated hardly any growth at all is significant to me.

The second data point that remains in my sights — which also happens to be the most reliable indicator of recession I know of — is that tax receipts as a percentage of GDP are over 18%. Because this capital is essentially being drained from the economy, I believe the result will be a market decline that ultimately leads to another recession.

Another headwind to be mindful of in this market is the debt situation, which is very dramatic. The national debt when President Obama was sworn into office in 2009 was approximately $10 trillion. Today, the national debt is over $19 trillion. If the United States wasn’t (theoretically) bankrupt back then, it is now — we just don’t know it.

If that bubble bursts, we could experience another event like the 2008 financial crisis, during which the global financial system almost failed. The subsequent outcome of such an event would be recession. We should still be able to work through this, but we would be facing a sustained period absent of any economic growth. This is another story that is not getting much attention from the Presidential candidates, at least not the ones who are still in the race.

You can see this in interest rates. Japan is at negative interest rates, as is Europe. They’re trying to pump everything they can into assets, so it’s creating more of a bubble.

The financial market is in real trouble, especially European banks. The great decline in oil prices has caused a lot of trouble for energy companies, and many will go under as a result. The residual victims are, of course, the employees of those firms, but also the banks who gave these firms loans. We already saw this as Credit Suisse Group AG (ADR) (CS) posted a huge loss in the fourth quarter.

Europe will get hit hardest because its financial institutions don’t have the reserves that U.S. banks do. Additionally, the European banks are heavily invested in Asian debt, a huge problem, and they have a lot of derivative exposure.

In fact, the trade I’m recommending today falls right along those lines: Deutsche Bank AG (USA) (DB).

Buy to open the DB Apr. 15th $16 Puts (DB160415P00016000) at $1.05 or lower.

After entry, take profits if Deutsche Bank stock hits $14.90 or the option price hits $2.00. Exit if the stock price closes above $18.

If after three days you still have not gotten the position filled, cancel the order, as the profit probabilities may no longer be valid.

Additionally, if an option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/trade-of-the-day-deutsche-bank-db/.

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