arbitragr

Look, it's a good bank with a great deposit branch network. But don't get blindsighted by the brand without looking deeper into the financial details. Peel the onion a bit .... unemployment figures are still on an upward rollercoaster ride heading towards 10% or so. It's not flattening out at all (see the chart I posted prior), we're still in the thick of it, and we're not out of the woods yet. about 80% of their loan book is contingent on that unemployment figure. They've got about 600-700B in loans connected to the unemployment situation (206B residential, 255B commercial, and 231B consumer). If unemployment continues on the path its going, then those provisions and net charge-offs will blow out. This is why management won't return the TARP money, why they under provision and remain ho-hum about raising capital. I am focusing on that provisions figure which goes a long way in dissecting what the company's book value will be. And I'm not being overly macro-economic ... I'm sorry to say, but when you have a bank ... let alone a big bank like WFC ... the economy matters to a certain extent. You can't just look at it in a bottom-up vacuum ... What concerns me, and what disappoints me is ... to what extent can we trust WFC's management? after coming out and making a "preliminary earnings release" like that. They've tried to prop up their stock price before late last year, and if they're doing it again now, then I would seriously question their integrity and credibility. Making an investment on the numbers is one thing, but if I can't trust management, especially a bank's management where the leverage is like 20-to-1, then I would be disinclined to invest at all, regardless of how great the investment looks on paper. for the gentleman who wants a valuation on WFC: If you want to value WFC using DCF, then I would say to you that you should do more research on financials/banking industry valuation, or else keep your money safe. I'm not attacking anyone, but I'm offering a second opinion.

Well then, you are obviously a lot better than me. Because I can't even fathom what their potential loan loss provisions and net charge-offs are going to come out of their interest earning assets. Nor can management. Nor can I understand what some of their securitized assets are. And without that, I have no idea what their pre-provision earnings are going to be, let alone net earnings and thus, the future cash flows ... that will eventually be capitalized. Here's the dilemma we face. Let's take the BAC / ML merger ... BAC acquires ML ... and then a month later ... BANG! ... they reveal that ML has a 15B 4Q loss in 2008, owing predominantly to writedowns on its mortgage assets. Now maybe it's just me, but predicting earnings within that framework is hella hard ... Good luck. Never seen a DCF on financials before. Industry standard is the BS. But what do I know. :)

:D Dude ... not for WFC. It's a bank ... lol

If you went back to when TARP was first "forced" on the strong, Wells Fargo & CO. (WFC) opposed receiving the government's TARP funds perhaps more than any other bank. Six months after the U.S. government forced Wells to accept $25 billion in government aid, however, Atkins is hesitant to give the money back and is mum about raising equity. If you're a fairly well-capitalized bank, you don't want the government looking over your shoulder. As was the case with AIG. Dividend restrictions, public outrage/protests, compensation restrictions, flight of talent. Last week, the House of Representatives passed a bill that would heavily tax bonuses paid to workers at companies that took more than $5 billion in TARP money; a similar Senate bill has been delayed. The big banks © (JPM) (BAC), (GS), (MS) - have signaled they want to get out from under government restrictions that come along with the money. It's a lot easier to run a bank free of government control. Which is why GS is looking to do exactly that in the next few months, ASAP. Now as a bank, if you're so confident that your earnings will increase to such an extent that it will enlarge your capital base, then you should give back those TARP funds, but if you're not confident, that means you either (i) don't expect your earnings to be strong enough to maintain a strong capital position or (ii) you expect further provisions on your loan portfolio. With unemployment where it is, I would err on the side of the latter: http://i163.photobucket.com/albums/t314/ripleyx/Finance/USunemploymentMay2009.gif It just seems vague and confusing the way this WFC "preliminary" earnings announcement has been played out by management. Why now? Or are they just trying to prop up their stock price for a subsequent capital raise?? HSBC have just recently diluted its' shareholders and went for a $17.7B capital raise, while GS is going to raise capital within the next couple of weeks to pay back TARP funds. WFC is in a weaker capital position than both GS and HSBC. Smells fishy to me. Not all black and white, despite their exalted position of being within the BRK stable/collection of companies. My gut feel = possible capital raise.

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=391.0

Yeah, but those margins are contingent upon what sort of provisions they can expect on their pre-provision earnings. My feeling is we're not out of the woods yet. Maybe as we get to the latter parts of 09 ...

Smells fishy to me. That CNBC interview. Atkins didn't equivocally say we don't need to raise capital. And he didn't say that they're in such good shape that they can return the TARP funds back. If things are so rosy they should return the TARP back ASAP. Wells is well known for under-reserving their provisions. Much more so than BAC, JPM ... if things deteriorate more in the real economy, those reserves will go up. And my feeling is they're keeping their toes in both buckets of water, just to be vague on the issue of capital, so that they can keep the market on their rosy outlook. I remember interviews with Jamie Dimon back in Jan/Feb 09 ... he said at a minimum he didn't see a recovery until late 2009 at the earliest.

The ratings agencies' timing is totally spastic. They downgrade after a massive rally.

It's a very surprising result I must say. I didn't think they would do that well, given the context of unemployment, lower credit card activity and weakening commercial real estate markets. One important piece of information they didn't disclose was asset quality by segment. But Wells has a reputation for propping up the market with "preliminary" good news. They did the same thing with housing last year, saying that the housing market was recovering just prior to Lehman. I don't own any directly, but indirectly through BRK-B.

So how does a guy become a billionaire when the market cap of the company is 96M? 40-50% of Debt obligations are coming due 2009 and 2010. Asset/Liability mismatch. Most likely will have to sell off properties at written down prices. Short, short short !!! :D

valuation depends on the company/industry. many methods.

"In our view, though, investment students need only two well-taught courses—How to Value a Business, and ... How to Think About Market Prices." ~ WEB Simple enough is the former, but it is the latter that Warren has done well with throughout his career, although "on the surface it appears to be a fallacy", it's just an exercise (or tool) to judge the level of those market prices. Same goes with last week's chart of historical P/E ratios adjusted for inflation. In other words, what that chart says to me (and I'm not sure what it says to others, apparently it says "GDP growth") is that now is the time to invest.

While the stock market has rallied nicely since bottoming on March 9th, the economy continues to struggle. For some perspective on the current economic recession, today's chart illustrates the duration of all US recessions since 1900. As today's chart illustrates, the five longest recessions all began prior to 1930. The length of the current recession (now entering its 16th month) is above average and equal to the longest recessions (1973 & 1981) since the Great Depression. http://i163.photobucket.com/albums/t314/ripleyx/Finance/ChartoftheWeek-4thApril.jpg

Financial statements have always had some BS in them. You just have to pick it up. The more experience the better. Same with analysts.

Reflexivity if I do recall ... ?? :-\

? Soros + value investor = oxymoron ???

OMG. been away for a couple of days ... I guess a lot has happened. :) I don't have a clue what is going on. But I'll just go on posting merrily. People ... Play the ball ... not the man. Criticize ideas not one another. I don't know any of you personally, but Eric dude ... it's no big deal whatever happened. Let's just forget about it and move on. Besides ... there are even less civilized boards on the internet ... yahoo boards aren't half as civilized as this. In any event, and what occupies my mind is ... I think there are more important things to think about right now ... like how much money we can make with the markets at such a low point. ;D Cheers all. Let's be friends. :)

Markets have rallied due to economic data suprising on the upside this week - in particular housing sales data and plans from Treasury about the Private Public Investment Program (PIPP). Could this be the start of a longer term rally? There are still some headwinds to surmount, in particular unemployment, however it seems as if long term there might be something to build upon here. The historical valuation numbers certainly suggest so, even after inflation adjusted figures; http://i163.photobucket.com/albums/t314/ripleyx/Finance/ChartoftheWeek-28thMarch2009.jpg

Exactly, which is why I shyed away from making any more investments in them after my experience with them (IR and management calls) late 2008. They bought these assets at par value, and now the market will only pay 30c on the dollar. Prior to this, the market for those toxic assets were completely shut down. The banks aren't willing to offload these assets at unreasonable prices. The Geithner plan seeks to bring in private players who may make a more rational marketplace bid for those assets, but my question is, if they weren't willing to pay 30c on the dollar then, why would they do it now? And even if they get like 70c on the dollar ... that's still going to result in losses which, in all eventuality, will reduce the equity capital.

You'd be suprised how many stocks in this recent crisis that passed my checklist which have almost gone bust. The filter is pretty well refined too, years and years of research through my undergrad years on Buffett/Munger/graham/modern value investors etc combined with my industry experience as an analyst and all. It has been a totally unprecedented decline where lots of fundamentals almost got thrown out the door. I say "almost" because maybe the markets are finally starting to turn now ... but it was a long struggle ... sort of like being an elastic band and having the strength to hold out before finally snapping. The people who snapped are those unfortunate ones like that industrialist in Germany who committed suicide by putting himself on the railroad tracks.

As is expected ... Moody's is always the last to downgrade. :P If BRK is not AAA, then hardly anything in the financial world is. Well, it looks like the rating agencies could not have gotten their timing any better. And ... after the markets have rallied 20-30% in the last week or so. Great timing indeed ... ;)

You forgot about unemployment.

Why not just meet at BRK annual? I'll be there, anyways.

I know many here are probably holding financials like WFC. Last year towards the end of 2008, we invested in JPM, WFC, some UK/Euro banks and some commercial property REITS. However a small position only. The investment philosophy was pretty much in similar vein; good franchise value, good management, strong balance sheet and tier 1 ratios, should be able to ride out the crisis and perhaps take market share on the way out. You wouldn't believe how much BS that came out of investor relations and management. When we rang them up, they would always talk up their book value and how much their assets were worth, and how they didn't expect loan-loss ratios to exceed say 6-7%. Low and behold Lehman happens, Bear happens, and a severe recession happens then they suddenly disclose 10-12% loan loss ratios in one day! We ask them for more disclosure in terms of their assets, and they would only say "we're not ready to provide that information" ... Then we ask; "do you think you'll need more capital" ... and they say; "currently our tier 1 ratios are X, and it's double the FDIC required ratio, we're very certain that we won't need any capital". A few months on, the stock price goes down more and more ... housing numbers come out worse than expected, stock price drops more ... in the mean time, executive bonuses are paid out as if we're in a full blown bull market, Citigroup plans to buy a corporate jet! ... and then the next day whaddya know? You wake up the next morning and you hit the email and you see "X Financial company will be proceeding with a capital raising of X Billion dollars" ... out of nowhere!! Remember when BAC acquired Countrywide? They said ... "this is the deal of the century for us" Lewis said ... coming on national TV and all ... and when Bear Stearns was on the brink of collapse? What did Alan Schwartz come out and say? "We're perfectly fine" he said on CNBC ... and over in the UK --> RBS acquiring ABN-Amro ... "this is the deal of the century, we are NOT empire building" ... eventually RBS almost went bust, mainly because of that deal ... WFC is a culprit just as much as anyone ... back in late 2008, they released their Q3 08 earnings results, which were better than expected ... which is fair enough ... and it was mostly b/c of all the depositors from IndyMac and other regional thrifts that were going bust, that got scared and increased their deposits with WFC that was mainly the reason why their results were quite rosy. Then they go out and say "we think the housing market is starting to recover" and the market goes crazy (and I can give you the exact reports and transcript that state that, b/c I have it in my database) ... so the market pops up, like 24% increase in one day ... then what happens? Lehman happens, recession happens and all the carnage that happened on the back end of 2008 ... and WFC stock drops from $30 to like $11 ... What utter BS ... To be honest with you, management are just as clueless as anyone when it comes to the macro ... I mean ... some of these financials ... man ... they were lending out a large portion of their capital in 2007 at like ... 80-100% loan-to-value ratios!!! ... in a full blown bull market ... when interest rates were extremely low, liquidity is extremely high ... and yields are so skinny that you have reach to the fricking moon just to cover your cost of capital. Anyone who's been in the markets long enough knows that in a full blown bull market, with unemployment low, and liquidity high ... knows that you're probably going to get a bust sometime soon, and that you're probably in a bubble ... and here you have managers who have been in the game for 40 years or so lending and making acquisitions with zero-margin of safety with 80%+ LTV ratios and piling on wholesale debt like there's no tomorrow ... silly if you ask me. Since then we've sold out all our positions in financials b/c it's so hard to trust management. B/c it's so hard to analyze the balance sheets. I understand that WFC has a strong position with a great branch network and deposit base, but I wouldn't trust the managements of financial companies after that experience. Over in the UK, RBS was just like WFC ... one of the strongest banks not only in the UK, but in the world with one of the best franchises you could get, even better than WFC I would argue ... it's sad to see the sorry state of RBS now, being 70% government owned ... When we called them, you wouldn't believe how much they would try and prop up their stock price ... the BS they would preach. Half of the financials we called have since gone bust. I would only dip back in again if they would disclose more data, and keep their bloody word.

By the way, that tag line is from Seth Klarman ... not me personally. I got it from reading/listening to one of his recent presentations/letters ... I can't remember which one exactly. Seth is hedging for inflation right now and has some gold holdings. Buffett and our heroes preach bottom up, but you'd be suprised how many market calls they make - WEB in particular. The recent "the time to buy US stocks is now" in the NY Times being one of the most obvious. I sometimes wonder what he's getting at. He's been making top down calls nearly his whole career, from the time he got out of the market in '69, to the calls he made to tell readers in the Omaha World Herald to "buy now" in '74, all the way to today. Read Altucher's "Trade Like Warren Buffett" in that chapter where he talks about Buffett making market calls too. Sometimes I wonder whether Buffett's using his God-like platform to exercise a "do as I say, not as I do" philosophy of investing, just so the mom-and-pop investors who know little about the markets don't follow his high risk investments and hurt themselves ... to protect them from destroying themselves b/c they think they can emulate his returns - hence his advocacy for index funds.