What To Do

[arbitragr]

Brox,

 

I think the level of obfuscation on this board and the resistance to this particular idea is particularly surprising.  If you think Wells is going to go down you can hedge out the systemic risk in about 100 ways... It's relative value seems compelling.  Lots of ideas here are thought stupid by some, but few if I can recall are actively resisted to such an extent.

 

I must just not get it.  I clearly understand there are risks, but I just don't get the pushback.  Is there a compelling bear case here?  Who is short if anyone?

 

Ben

 

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.

 

[Guest Broxburnboy]

"I think the level of obfuscation on this board and the resistance to this particular idea is particularly surprising.  If you think Wells is going to go down you can hedge out the systemic risk in about 100 ways... It's relative value seems compelling.  Lots of ideas here are thought stupid by some, but few if I can recall are actively resisted to such an extent.

 

I must just not get it.  I clearly understand there are risks, but I just don't get the pushback.  Is there a compelling bear case here?  Who is short if anyone?

 

Ben"

 

I remember a similar thread on this board a short time ago with regards to WaMu, which was held by some to be a screaming buy based on valuation with then current

company supplied metrics, just prior to its collapse. That rosy forecast was predicated on the belief that California real estate valuations could not get any lower and

the economy was due for a rebound. In my opinion, we are in bear cycle that will not stop until real estate valuations stabilize, which will rely on a robust job creating

economy. All indicators however point to widening unemployment, contracting international trade with an alarming fall off in American exports, falling corporate profits

and rising unsold inventories.

Government intervention in the financial sector is for the express purpose of "bailing out" the banks...they are all interconnected and de facto insolvent!

So far government intervention has included artificially low interest rates for the banks to borrow from the Fed. These rates have not been passed on to the consumers of

credit and represent a subsidy to the financial sector at the expense of the taxpayer. Money has been directly injected, how much more is a matter of conjecture and will

depend on how much more home equity is lost and the willingness of the taxpayer to foot the bill. One thing is clear however, before the bottoming of the real estate bubble, there will be losses and they will be borne first by the lender's common equity holders.

[basl1]

???

To those who bought a lot, are you selling?

 

Personally, I'm in for the long haul.

 

[arbitragr]

 

 

I remember a similar thread on this board a short time ago with regards to WaMu, which was held by some to be a screaming buy based on valuation with then current

company supplied metrics, just prior to its collapse.

 

I too remember that discussion vividly, as I was one of those who were bearish on WaMu. I think it was ... Mr Cigarbutt?? If I remember correctly who was a total bull on it ... and I just offered a second opinion and I got attacked. I couldn't believe how many people were hostile towards me for telling everyone not to invest in it. If Sanjeev can dig up the old threads some how and find the arguments in that, the reasoning there is pretty much the same here ...

[benhacker]

I think part of the issue (maybe it's just me. :)) is that it's frustrating to have a stock thesis refuted by macro.  I *get* why macro can be important, especially for banks, but I'm pretty dang sure there IS a bear case for WFC... and when I hear stuff like "$2T in derivatives" from Brox it just makes me tune out because it's just grand standing.  No credible analyst talks about notional exposure with derivatives.

 

Arb, I remember those Wamu discussions too... I certainly leaned toward the side of the bulls, but I thought the head winds were bad then as well and more importantly, WaMu had bad management.

 

Arb, to your point about trust, I'm of your persuasion their on a certain level.  I beleive their is a level of opaqueness to be expected right now with the banks, and as I mentioned reflexivity may cause them to bend a little into the grey areas these days... I'm comfortable with this given my history with these guys, but I can understand if some aren't.  I appreciate you summarizing your view here.  Given your views, you must be short a lot of banks, how are you playing this if you don't mind sharing?

 

Brox, you summarized what has been summed up here before... My comment on your $2T derivatives went unanswered so I'll move on.

 

Thanks guys, I think I need some time away from here to clear my head.

 

Ben

 

 

[basl1]

There are many differences between Wasmu and WFC.

1. management of wfc is said by buffett to be the absoute best, hardwired not to take unnecessary risks

2. the numbers for wfc are very good - despite those of you who insist you peel back the onion

3. wfc has survived and thrived through every banking problem that has existed - the savings and loan fiasco, the high tech meltdown, etc

and I'm sure the professional investors can name more

[basl1]

(Reuters) - Shares of Wells Fargo & Co(WFC.N), which rose by about a third last week, could head even higher as the bank's acquisition of Wachovia begins to pan out, Barron's said in its April 13 edition.

 

Last week, the San Francisco-based company said it expects to post a record first-quarter profit of $3 billion, up about 50 percent from a year earlier, citing a better-than-expected performance from Wachovia and a solid performance in mortgage lending.

 

Fox-Pitt Kelton analyst Andrew Marquardt said Wells Fargo will continue "to manage through this credit cycle better than most," Barron's reported.

 

On Thursday, Wells Fargo shares closed at $19.61 on the New York Stock Exchange. Marquardt has a target of $38, Barron's said.

 

Some question whether Wells may need to further boost its loan-loss reserves, which could eat into future profits, Barron's said. But compared with its rivals, these concerns may simply prove to be short-term issues, Barron's said.

 

[Uccmal]

I agree with much of what has been said on Wells both positive and negative herein.  Yes, the balance sheet is difficult to decipher and potentially problematic.  Yes, the company is fairly well run, and is making money, it has a incredible moat, very sticky assets, and has a huge number of healthy mortgage renewals.   

 

There is nothing wrong with coattailing Buffett provided you know he is wrong from time to time.  You also need to respect that Wells is a medium investment in the Berkshire stable, and a non-cash generating asset, excepting the dividend.  I guess I am saying here that its relative importance to Berky is not that great. 

 

Basl, Your reliance on third party analysis is a little disturbing.  Why is a Barron's analyst worthier of qoutation than Ben Hacker.  IMHO Ben probably has a better handle on this company than a journalist/analyst at Barron's. 

 

and I'm sure the professional investors can name more

 

What exactly constitutes a professional investor?  Again, the assumption that someone else knows better than you or Ben is a little disturbing.  Why would anyone else actually know more about WFC, at this point in time?  (except high level insiders).  Most professional investors were taken like pigs to a slaughterhouse in the last two years.  Nearly all professional investors completely missed the nascent credit crisis.

 

My bet is that most "professional" investors will further compound their errors by sitting too long on the sidelines on the way up.   

[Phoenix01]

 

 

My bet is that most "professional" investors will further compound their errors by sitting too long on the sidelines on the way up.

 

That is the real question. Will all of these wonderful companies get pulled down by the market tide, or is the tide heading back? What strategy can be used to hedge the potential drop while maintaining a postion that will rise to reflect the excellence of the companies in question?

[basl1]

My feeling of a professional investor is that Buffett and Prem Watsa are the "wayne gretzkie's" of this profession. Many on this list also constitute professionals, great minds who rely on the "value investing" approach.

 

Yes, everyone can make errors - providing they are not fatal. We should learn as much from the errors as the successes. That's where genius lies.

 

I rely on many sources of info - as do you all.

 

I would not be surprised if shares fall back tomorrow, esp WFC. But this does not bother me in the least. My favorite holding period is "forever" like Buffet

[ExpectedValue]

"Last week, Wells Fargo & Co (WFC: 19.50 -0.56%) pre-announced $3bn in expected profit and growth for the first quarter of 2009, along with growth in a closely-watched earnings ratio known as tangible common equity. The stock soared over 30 percent on the incomplete earnings news, with an official announcement due later this month. Some analysts have questioned the results, as both loan loss reserves and charge-offs came in unexpectedly low, helping the bank boost reported profits.

 

It appears, however, that as much as nearly one-third of the bank's first quarter earnings may be nothing more than the result of an accounting treatment; without such a move, tangible common equity would be 10 bps less than the 3.1 percent the Street expects."

[arbitragr]

Goldman raising equity to pay back TARP as we speak.

 

As I've said, if GS needs to raise capital, then surely WFC has some stress in their loan portfolio, given that they have a high concentration of their loans in the California, Florida markets.

[Uccmal]

arb... WFC has a market cap of 75 B.  If they need to raise 10 B to improve their leverage ratios then that's a dilution of 13%.  The stock would likely rise the 13% on the news as people became more secure with their balance sheet. 

 

By any chance, are you short financials and WFC in particular?

 

It appears the California Real Estate is close to completing a round trip to several years ago on the basis of pricing.  Any new mortgages will be for much less individually and carry less default risk, and the same is likely with renewals at lower interest rates. 

 

Arb, I grant you were right on on Wamu but we each get few freebees in the prediction sweepstakes.  I have never seen anyone consistently predict the markets let alone an individual stock.  Just that fact that Roubini is now in the press each day is an indicator to the contraian in me that the tide has now turned. 

[arbitragr]

By any chance, are you short financials and WFC in particular?

 

I'm not short. I'm waiting for the right data to pop up. I watch the housing market closely. I just don't think we're out of the woods yet. A bull market run isn't going to happen overnight. Bull markets take years to run out.

 

Quite the opposite in fact. I invested in financials in late 2008, WFC included ... got burned b/c of management's bullsh*#t. WFC dropped from 27 to 13 or something. Sold my stake.

Regardless, I am indirectly invested in WFC via BRK-B.

 

When WFC's management comes out and says "everything is rosy" and you have someone like Jamie Dimon coming out and being cautious and not expecting any major improvement until the latter end of 2009, you  know something sounds fishy.

[Uccmal]

Arb, I have definitely handicapped Wells Fargo as a holding which I think I was trying to impart to Basl.  I bought a few Leaps near the bottom and some of the WFC.PR.L around 450 so I am certainly not all in.  Add to that my holding via FFH.  At this price I have no intention of adding to the position in Wells.  For now I think the stock has probably run up as much as it will for a while. 

 

There are many cheaper things out there which perhaps answers Basl's original question. 

[basl1]

how many of you are still buying WFC? How many holding?

[Guest Broxburnboy]

“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010,”

 

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