Deutsche manages expectations.....but it's still not pretty.

A cynical manipulation of the news flow or an honest miscalculation of windfall revenues? I don’t have an answer, but there was some surprise this morning that Deutsche Bank results were slightly better than the guidance issued just four weeks ago. In the end, pretax profit for the third quarter was 200 million euros ($288 million) better than had been signaled, at 1.4 billion euros. In reality, I don’t think the spin of beating guidance will have distracted the market much from the unpleasantness contained in the divisional breakdown.

Total trading revenues down 71 percent, equity trading sales down 38 percent, investment banking revenues down 52 percent. Ugly. Still, Josef Ackermann, who remains in charge unlike his peer at Merrill Lynch, says the bank will hit its goal of a pretax profit of 8.4 billion euros next year if we have 'normally functioning markets'. It's very similar to the line we got from UBS. That seems like a very bold prediction, sitting where we are today – but let's run with the argument.

Mr. Ackermann isn’t really giving us much here....of course, if markets return to the bull-like conditions we’ve witnessed since 2003, then its a no-brainer. Of course the banks will see reinvigorated earnings growth. If it happens, then the financials look like a steal at these prices – but here’s the kicker. He doesn’t know and I certainly can’t tell you how hot these markets are going to blow. Seasonality says we are in the best part of the year, with the next 4 or 5 months traditionally strong. But this time there is a coda – the market for leveraged debt is still a troubled part of the financial system and banks are still struggling to work out what their existing obligations are worth.

There is a presumption, or maybe just a hope, that nothing has changed and once we get through this small and inconvenient credit issue, the good times are back. Just by repeating it doesn’t make it so. Why is the Fed cutting rates? Why is the industry trying to create its own super-bailout-fund? How much more resizing needs to take place in these companies before they match current market opportunities?

There are structural changes taking place and there are some further dark clouds on the horizon. Just look at the number of reset mortgages which come due in the first quarter of next year. Deutsche bank shareholders will be hoping Mr. Ackermann is better at predicting market activity than he seems to have been at guiding on his own earnings for this quarter.

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