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WFC Q1 Results


dcollon

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As I've written so many times in so many places...

 

WATSA VS. BUFFETT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

Such a stupid thing to read from authors who are desparate, simply damn desparate, for attention.  I can only guess that these type of people have some strange belief, or they haven't read any history of business and investing, that in the past Buffett must have sold every business he owned just prior, and I mean just right before, it had any type of downturn.... because "old daddy" just is "over-the-hill" if any of the stocks or businesses he owns founder for even just a moment.

 

Yep, it won't be too long until the same journalists are cracking the whip on Mr. Watsa again for missing the (even if it is temporary) upturn possibly?

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The most impressive piece is the pre loan loss earnings of $9.2b compared to just $7b in Q4.  If you normalize the credit losses this would imply $3.50+ of run-rate earnings power.  Also, the TCE ratio is up 30 basis points sequentially so they are rebuilding capital very quickly.

I bought the stock at <$9 and the L preferred at <$350 and feeling stupid for beeing too timid on position size...

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Guest dealraker

I too bought gradually all the way down to $8 and something and a little on the way back up.  But I too will likely look back and say to myself, "Coward!"

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We bought a ton!  We were so overweighted in financial stocks, that we sold our WFC shares at $17 after an 80% gain in two weeks...but we've still got our options.  We bought heavily into financials through the end of February and the beginning of March.  Cheers!

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so seriously... how can the l series preferred still trade at just 56 cents when the j series trades at 70 cents and the citi's preferreds trade at 70 cents???  the l has a 1.9% greater yield. 

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Guest dealraker

My guess is Wells will have large equity offering and dilute us but the stock will still be an excellent investment.

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The beauty of this is that the rising tide raised all boats, especially in the financials.  I have a small number of options on WFC, and some PR.L (thanks board members).  Everything else I had went up today except my SPY puts.  I even sold a small number of SPY calls. 

 

This could be the 40% move Buffett talks about in the "cheery consensus" article.  Now a 40% move in FFH would make my year. 

 

 

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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.

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My guess is Wells will have large equity offering and dilute us but the stock will still be an excellent investment.

Not unless they want a huge lawsuit the CEO was asked the financing question twice this am on CNBC it actually made me a little naseous watching David Faber with his cheat sheet provided by some hedgie pointing out all of the headwinds WFC is facing the answer to the equity financing was an unequivical no.
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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.

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Wells won't have any problems right now.  The spreads are just too wide when paying deposits and lending funds.  That spread will narrow over time, and then you may see some headwinds.  But at the moment, they are at historic margins and banks will do very well this year.  Cheers!

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Wells won't have any problems right now.  The spreads are just too wide when paying deposits and lending funds.  That spread will narrow over time, and then you may see some headwinds.  But at the moment, they are at historic margins and banks will do very well this year.  Cheers!

 

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 ... 

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"If things are so rosy they should return the TARP back ASAP."

 

TARP is cheap capital, no?

 

Ben

 

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.

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Why now? Or are they just trying to prop up their stock price for a subsequent capital raise??

 

It could be a possibility.  Since you're so all about reflexivity, I don't see the issue with Wells doing this if that is indeed their motive... I tend to figure that these are crazy times, and if you can front load your positive results (a bit) and back load the bad news, it's probably good for you.

 

I don't think a capital raise is in the cards... however, regarding TARP you make good points, but if I was under the shoe of the government here is what I would do (situation dependent):

 

1) Pay back TARP immediately while cursing the governments intervention

2) Plan to pay back TARP right when the government words become deeds, in the mean time I would say nothing bad about TARP to make the G-men angry

3) Relalize I can't pay back TARP so I'd just grin and bear it.

 

Given that the legislation has stalled, and the G-men appear to be revisiting their lynch mob uprising... and the fact that it's COUNTERPRODUCTIVE for the government to get it's TARP capital paid back early, I see these risks decreasing.

 

If I'm Wells, I hold the capital until the last minute, because life would be uncomfortable without it.... would I SAY THAT ON CNBC??? No fuc$#@in way.

 

As you say, perception is reality in some times... banks need to guard their words these days, and speak vaguely.

 

I think Wells is doing what they need to do... they likely won't need capital assuming they are allowed to play out their hand, but if the rules change like they seem to be doing lately, Wells would be foolish to repay TARP *now*.

 

Given Wells Fargo preferred trade for a 10-15% yield today, TARP *is* cheap capital... and that is my main point.  All that Government bullshit is just that... it's a risk... if you're Goldman, the risk might be bigger than Wells, or maybe their business is better hedged to the apocalypse, but I don't think the TARP decision is the same for everyone.

 

My 2 cents...

 

Ben

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What are the risks of buying WFC-L now ?

In terms of the dividend getting suspended, what are the probabilities ?

 

With yesterdays closing of about 575, the yield is still about 13%.

 

It still looks good with a possible appreciation of the face value

 

(hold some wfc-l bought at 500, wish bought more)

 

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@ Bookie,

 

Yeah, the Preferred comes withs warrants, my comment was that paying back *early* would not be optimal.  Definately the goal for these companies is to do a capital raise (if needed) to repay.  If not just pay back out of retained E.

 

Will be interesting to see how it all plays out.

 

Ben

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