Wells Fargo's Record Quarter - Really?

Wells Fargo (WFC) this morning pre-announced a record 1st quarter saying it expects 55 cents in net income - compared to 23 cents expected by analysts. Net interest margins at 4.1%, Wachovia acquisition going great, etc…

Really?

Wells Fargo stock is up 22+%. JP Morgan (JPM) is up 13+%, Bank of America (BAC) 19%, Citi (C) 9%.

Let’s not forget that these donkeys raised their dividend by 10% to 34 cents back on July 16, 2008 resulting in a 33% one day blowout in their stock and other financials. Less than 8 months later (March 6, 2009), they lowered their dividend to 5 cents a share.

This has the feel of a capitulation panic buying session. Could this be the end of the bear market rally?

One other thing in the press release stuck out:

Wells Fargo continued to extend signficant amounts of credit to U.S. taxpayers in the first quarter 2009.

More than $225 billion of credit extended to U.S. taxpayers since early last October, nine times the amount received from U.S. taxpayers through the U.S. Treasury’s Capital Purchase Program investment.

Welcome to the USSA indeed!

Comments

[Stone Fox C...:]

The negativity cracks me up. How can so many people be bearish? Even after the news today on WFC, the contraian play based on this board is to buy more stock. Would be temtped to take profits until I read these responses.

WFC has greatly reduced competition for new loans and incredible margins thanks to the govt. Why is everybody so surprised they made huge profits? By the way, it wasn't due to the MTM changes per the CFO. That benefit was very minor.

Apr 09 06:07 PM

[Mary LaRue:]

There is a quite a difference in being "bearish" and realistic. The truth of the matter is that earnings can easily be manipulated by clever accounting and go undetected, allowing the bank to buy some time and drive up the stock price in the process. If you were to dissect the ratios of these banks and consider the big picture, I think you might agree that these banks are in serious trouble.

The flip side of this is the psychological/emotional aspect of the market which I think will most likely keep "the rally" going for a while, allowing the banks to appear as profitable. It's appalling to see how many people are throwing their money into companies (mostly banks) without any solid knowledge of what they are buying. If people only understood the reality of the banks' balance sheets, I think they would think twice about buying and holding these poorly managed tragedies.

If you are in it to make a quick buck, great! Just be prepared to hit the button when the sudden shoe drops and the market manipulators pull the trigger because it WILL happen.

Apr 09 07:59 PM

[o_k:]

Of course, the banks can lie to world legally now that the government officially allowed them to cheat in their accounting books and report whatever "they feel like makes sense" on estimated losses due to mortgage exposure.

Banks are insolvent, and logically it makes sense to go short, but in reality - the government is going to get them away with this cheating, because the otherwise the democrats are going to loose overwhelming majority during this September's elections.

So, expect more "surprises" and "record earnings reports" from other banks as well.

At this point, it's better to stay away from financial stocks altogether, unless you are employing delta-neutral strategies.

-OK

Apr 09 09:42 PM

[mac123449:]

"They very well may show a record profit for Q1. Their best quarters over the past couple of years have been in the 2 Billion Dollar range. In Q4 of 2008 they lost 2.7 Billion. Some people are concerned about the potential liabilities they assumed with the acquisition of Wachovia...but if you remember, they actually came out smelling like a rose with the potential tax credits they could use and were even able to outbid Citi because Citi's legal and accounting gurus had overlooked the impact of the recently passed tax legislation. Having said this, the real reason that Wells Fargo will have a good Q1 is because of their lucky bet they made on 1/27/09. On that day, they purchased 56 million shares of Rohm & Haas. At the time, it was still unclear as to whether or not Dow Chemical would be required to go through with the purchase of Rohm & Haas at the agreed upon price of $79 per share that was contemplated last year. The issue was being decided in the courts and the odds were 50/50. In the end, the court held in favor of Rohm & Haas. And how much of a gain did Wells Fargo recognize for their bet. Their holding period was two and a half months for a nice tidy 1.3 Billion profit (51%) on pure speculation. That's Billion with a B and represents 50% of what their prior good days quarterly profits were. That amount serves as a nice cushion and launchpad for Q1. Unfortunately, it had nothing to do with their basic banking business and certainly can't be expected to be repeated. Hope this helps."

Apr 10 02:30 AM

[Alan von Al...:]

Today was historic. On the basis of an impossibility, Wells Fargo was suddenly worth 25% more. Shrewd players saw it coming. Unless it's reversed next week by traders' profit taking, there could be a sustained rally in financial stocks. If that happens, there will be an explosion of such magnitude that it will take down the entire banking system later this year.

Apr 10 03:06 AM

[User 305589:]

just another useless article in which the author just expresses his dissatisfaction that wells posted a big profit. he doesn't bother with facts, of course. the dividend cut was clearly a precautionary step as it became clear that the govt was all of a sudden looking at tangible equity as a major factor in their infamous 'stress tests'. but wait, wells' mgmt. should have foreseen all the events that unfolded 9 months ago, no? I mean, who did not?
go figure

Apr 10 04:13 AM

[JackRuby:]

I worked for Norwest/Well Fargo for 21 years. It is simply the best managed bank in the world....bar none!!! This will be a $75 stock by the end of 2011. Buy and hold. Once the TARP money is repaid, we will see good dividends again. By the way....WFC was FORCED to take the TARP money by the Fed....they didn't ask for it.

Apr 10 09:05 AM

[captmanning:]

I have a 30-year relationship with my broker. We agree anyone who makes a flat statement about the future of the market is a fool.

We use traditional measures readily available, read 10Ks, quarterly profit announcements, etc. We have done well together and see no reason to change our pattern now. This seems on the face of it to be good news and consistent with what management has been saying all along. Wells is loaning because that's what bank do, and what the Feds have asked them to do, etc. Hopefully they will continue to make money at it, by avoiding the mistakes of the go-go MBAs who discovered a new pot-of-gold.

During the Internet bubble, CFPs were dime-a-dozen and cab drivers were offering stock tips and making trades on their mobile phones. "Top Gun Financial Planning?" Capitulation panic buying session? This is great comic book stuff.

Apr 10 10:21 AM

[guitoon:]

WFC is a great company til they bought Wachovia...fasb was sure a boost..everybody expected charges off about 5B they announced 3B...
that is not the 20% fasb boost looks like more 40% boost
I am not expert but looks like accounting tricks or expert need to retire

Apr 10 10:23 AM

[TLAWLER:]

From LEHC, 4/9/09

Wells: Pulling the TARP Over Folks’ Eyes

In a “pre-announcement” in which it said it expects record earnings in Q1/09, Wells Fargo used slights of hand (and FHA and the GSEs!) to attempt to show it was “using” its TARP money received from taxpayers to extend credit in a leveraged fashion to taxpayers. Here is what they said they’ve done.

• More than $225 billion of credit extended to U.S. taxpayers since early last October, nine times the amount received from U.S. taxpayers through the U.S. Treasury’s Capital Purchase Program investment.
It also noted the following for Q1.
• Funded over $100 billion in mortgage loans, helping over 450,000 homeowners either purchase a home or lower their payments through refinancing;
While I don’t know what the “over’s” are, those numbers suggest an average loan size of around $222,222, and obviously the vast bulk are conventional conforming eligible to be delivered to Fannie/Freddie, or FHA loans.
As I’ve noticed numerous times, while Wells has been decently aggressive on pricing conventional conforming loans eligible for delivery to the GSEs, or on FHA loans, it has posted extremely un-aggressive rates on jumbo mortgage loans – including those where borrowers put down 20%. This behavior suggested that Wells wasn’t keen on expanding mortgage lending if it was taking on mortgage credit risk, but it was “happy as a clam” to make mortgages, send ‘em to a government or government-sponsored enterprise, and pocket a fee.
Now for loans that it originates but plans to deliver to the GSEs or be insured by FHA, Wells isn’t “using” TARP money to make loans. It doesn’t NEED TARP money to make such loans! So these mortgage loans shouldn’t count in their estimate of credit extended since “early October.”
Wells originated about $50 billion in mortgages in Q4/08, and the vast bulk of those originations appear to have been eligible for GSE/FHA delivery. And, as noted above, Wells funded “over $100 billion” of mortgages in Q1/09, and based on its behavior I’m pretty sure the vast bulk of THOSE mortgages were GSE/FHA eligible.
Ex mortgages, Wells $225 billion of “credit extended” since early October falls to around $75 billion – and surely not all of that was “net” credit extended!
Of course, tying “credit extended” to TARP money is sorta silly; after all much of the TARP money was to re-capitalize banks. But throwing in silly statements to a press release in order to “show” that the TARP money is being “put to work” is simply BS, and on this issue Wells Fargo went too far.

Apr 10 11:37 AM

[Mary LaRue:]

I understand that you have worked for WFC for 21 years but your post begs the following question:

For how many years have you been in the actual stock market, assuming you are in the market now? Your approach to buying and holding WFC is questionable, all things considered.
Despite the financial rally, the stock market, as a whole, isn't advantageous for a "buy and hold" investor, no matter how positive all seems on the surface. There are an abundance of companies in other sectors that already pay high dividends and have solid fundamentals but their stock prices aren't reflective of that, comparatively, in the existing market.
Does it really matter if WFC will hit $75 by 2011 when, in the meantime, the existing stock price will continue to go up and down, depending on the daily headlines? WFC could easily tank to $9/share next week, depending on the biggest catalyst is the market... the media.The name of the game now is to trade on a short term basis, even if this means the traditional "buy and hold" investor must alter the way he/she thinks or adapts to change and learn how to roll with the punches. One month ago, we were hearing and reading that our economy was heading for a "dust bowl depression." We were told to "sell sell sell." Now we are hearing that the banks are making profits (yeah right) and we are hearing on the news "Money is just pouring into this market." Do your own research; you will find that the abundance of money that's rushing into this market now is coming from the sophisticated traders who have mastered the game of manipulating the market in their favor to make tons of profits at the expense of ignorant investors. The same ones who are creating the rally are the exact sames ones who will bring it down just as quickly, and I don't think this money making scheme will cease any time soon; hence, buying and holding WFC at this stage would be nonsensical. I think the stock market can be a wealth creator but it can also be a wealth destroyer if you don't understand the way the market works.


On Apr 10 09:05 AM JackRuby wrote:

> I worked for Norwest/Well Fargo for 21 years. It is simply the best
> managed bank in the world....bar none!!! This will be a $75 stock
> by the end of 2011. Buy and hold. Once the TARP money is repaid,
> we will see good dividends again. By the way....WFC was FORCED to
> take the TARP money by the Fed....they didn't ask for it.
>
> This dude is as dumb as Meredith Whitney....only fatter...and uglier.

Apr 10 12:13 PM

[StkInvestor68:]

WFC earnings are completely smoke and mirrors.

Last qtr they reserved losses at $17 Billion ($6 Billion WFC + $11 Billion WB). This qtr they reserved a grand total of $3 Billion.

No way did the real estate market suddenly improve between 4Q and 1Q. $17 Billion vs $3 Billion....Total BS.

They sandbagged last quarter and moved a ton of stuff to Level 3 asset catagory this qrt.

Apr 10 06:24 PM

[E Nuff Sed:]

Ha Ha Ha. The acrid smell of burnt shorts .....

Folks, now that mark to market is dead these banks are going make so much it will make your head spin. Watch out now for USB, BBT, JPM and even BAC and C.

Apr 10 10:09 PM

[Hmm?!:]

I know that Warren Buffet is considered a guru and very ethical. And Warren has invested heavily in Wells Fargo......but.....this is just not making sense!

(from Mortgage du jour by Credit Suisse)
in 2006 Wells Fargo was #1 with 13% of the total sub prime market. The next closest were at 8%.

in 2006 Wells Fargo was #3 with a 10% market share in Alt-A (one cut above subprime). In addition a staggering 81% of all Alt-A originations in 2006 were "liar loans".

Help me out here? How do these numbers disappear all of a sudden? A pretty amazing worst to first?

Apr 11 03:58 AM

[Big Al45:]

To those commenters who are so enthusiastic about bank stocks, consider that:

At cob Thursday, Cape Fear (CAPE) bank stock was up 25% on 2.5 times the average volume.

And in FDIC receivership at cob Friday.

Fierman may have a point re "capitulation buying."

Apr 11 10:46 AM

[Mary LaRue:]

Warren Buffet is behind the times and has always been a long term investor. Simply put:

Mr. Buffet has always been a "rhyme or reason" investor. His style is that of a traditional investor whose investing has always been based upon logic and fundamentals. Today's market is irrational and doesn't trade on fundamentals. For that reason alone, I place very little "stock" in Mr. Buffet's view(s) and regard him as obsolete. Perhaps that is the reason he has lost so much of his net worth this past year.


On Apr 10 03:10 PM dividendgrowthinvestor wrote:

> Warren Buffett likes the CEO of Wells Fargo and hardly feels hes
> a donkey. Mr Buffett has made close to 200 billion for he and his
> investors so his opinion should have some meaning.

Apr 11 08:09 PM

[chleoku:]

yes it's funny to see how the financial earning earning expectation does not match the unemployment rate trend:

www.wealthalchemist.co.../

Apr 11 11:14 PM

[Minlita:]

1 Q 2009 financial results may vary significantly from those announced.
WFC will provide additional discussion and analysis and other important information about its first quarter 2009 financial results and condition when it reports actual results on April 22, 2009.
Analysts said the bank was eager to report good news partly because it could help fend off legislators who want to force more changes for the industry and add more rules (WFC accepted a $25 billion loan from the government's TARP)

These are my concerns
- If unemployment rises, WFC will increase losses on home-equity loans, slowing deposit growth, losses on credit cards and other consumer loans
- What kind of mortgage market share WFC will end up with this year? The bank is still facing loan losses as customers fall behind on repaying loans during the recession
- WFC as billions in option-arms. At some point they will be a problem, whenever they decide to charge them off. Moratoriums don’t last forever.
- Credit downgrades can be an isue (WFC lost more than $2.7 billion to prepare for the Wachovia purchase) also higher credit costs and lower levels of mortgage/home equity loan growth are in the picture for this year
- WFC didn't mention commercial real estate mortgages on the report, analysts are expexting big losses for the banking industry this year in commercial mortgages.
- WFC didn't provide details about first-quarter deposit growth

Notice:
The CEO of wells fargo admitted on CNBC that:
- The reason they beat earnings is because they wrote down 5 billion dl of losses when purchased wachovia (without the writedown WFC wouldn't have anywhere near record earnings).
- Since they cut their dividend by 90% two months ago that earnings were up 70 percent on that fact alone

Apr 12 04:56 PM

[Dr. O:]

I talked to someone who works for a company that does the legal work for Well's Fargo's foreclosures in Michigan. Was curious if foreclosures were slowing, leveling, or increasing. He said that things slowed down after the Fannie/Freddie moratorium, then the Obama moratorium, but, with the expiration of the moritoria, foreclosures are accelerating, and business is very brisk.

No signs of a housing bottom from his point of view. Wells will be owning a lot more houses in Michigan in the months to come.

Apr 12 08:35 PM

[Mary LaRue:]

Wow. Has anyone taken a look at the recent downgrades this morning? WFC has now been downgraded to "underperform." Somehow I am not surprised.

Apr 13 09:28 AM