Wells Fargo Earnings: First Leak in the Dam? 40 comments
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Ahhh....
There is nothing like the smell of an economic collpase in October. The road to recovery on Wall St. hit a pothole yesterday as banking analyst Richard Bove downgraded Wells Fargo (WFC) to a "SELL":
Oct. 21 (Bloomberg) -- U.S. stocks tumbled in the final hour of trading after analyst Dick Bove downgraded Wells Fargo & Co., erasing an earlier rally spurred by better-than-estimated results at Morgan Stanley and Yahoo! Inc.
Wells Fargo, the largest U.S. home lender this year, slid 5.1 percent after Bove of Rochdale Securities cut the shares to “sell” and said earnings were boosted by mortgage-servicing fees rather than improving business trends.Most Disturbing
Bove said the “most disturbing” thing about Wells Fargo’s results is that loan losses seem to be accelerating. Assets no longer collecting interest climbed 28 percent to $23.5 billion from the second quarter, Wells Fargo said, while the reserve to cover future loan losses grew by $1 billion from the second quarter to $24.5 billion.
“It’s definitely had an effect on the market,” said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. Bove “has a very good following and very long track record of consistency,” he said.
My Take:
All I can do is laugh at the fraudsters on Wall St. The paragraph in bold is all you need to know folks.
The banking system remains basically insolvent as unemployment soars and the economy worsens. People are continuing to walk away from their homes in record numbers as home prices continue to nosedive.
The Wells number proves that the loan losses that the banks have been hit with are STAGGERING! Please note that Richard Bove is a screaming bull when it comes to the major banks in the US. In fact, he was raving about Wells Fargo on CNBC this morning until he got a chance to see Wells' numbers.
The housing problem continues to worsen and Wall St refuses to accept it. They continue to obsess about a recovery when in fact there isn't one.
What scares me most about the housing crisis is no one really knows how many empty homes the banks are now sitting on because they refuse to take the losses. The shadow inventories are still incredibly high. Just think, Wells only admitted to $23 billion of bad loans. Imagine what that number looks like when you include Wells' shadow inventories?
Let's get real here folks: The banks would prefer to let empty houses sit versus forcing the buyer into foreclosure because they would then have to take the loss when the house was sold.
In other words, in this new world of zero mark to market accounting, it's in the banks' best interest to just let the empty homes sit in limbo because they can keep a loan marked at full value versus taking a 40% loss on a sale via foreclosure.
THE SCAM ROLLS ON!
There was lots of chatter about a housing recovery in the comments section in this site over the last few days. I think the data from Wells puts that issue to rest. The ONLY part of the housing market that is moving right now is the low end of the market (under 300k), and the foreclosure markets in the bubble areas that were the hardest hit with losses of 50% plus...Vegas/Florida anyone?
The housing market in general remains a complete disaster.
Chart of the Day
Hmmm....Take a look at this comparison of the bounces post the 1929 and 2008 stock market collapses (click to enlarge).
Quick Take:
Keep in mind this was as of the end of August. The 2008 retracement has pretty much equalled the one seen following 1929.
Like today, Wall St screamed "The worst is behind us!" and "the recovery has begun!" as the market roared back in 1929/1930. Reality hit two years later in 1932 when the economy failed to turn around. The market then once again rolled over and eventually bottomed 90% from the highs in 1929 as the world realized the worst was yet to come.
Will the same thing happen again today? Every collapse is different and each one has its own unique way of playing out so it's difficult to predict. History however does tend to repeat itself.
The Bottom Line
The problem with relief rallies like the one we are seeing today is they are based on zero fundamentals. The profits that are currently being reported in the financial sector are rigged by vague accounting rules in order to keep the game going. This is the same type of thing we saw when the tech bubble crashed.
The banks' recent record profits are a fraud because they aren't taking the losses from the previous housing bust. It's like they are pretending it never happened. The government has totally become an enabler to the banking system and refuses to force them to clean up their act via regulation and accounting standards.
Basically, they are letting the number crunchers on Wall St get away with bloody murder just like they did during the tech bubble.
The street continues to throw some bright red lipstick on this pig in an attempt to keep the game going.
However, like we have learned with every other on Wall St scam, the fraud can't be hidden forever. The truth always comes out and the fundamentals then take over:
The Wells Fargo surprise yesterday allowed you to take a rare peek into the skeletons that sit in Wall St's closet.
After taking that peek we now know one thing for sure: It ain't pretty.
We have a long way to go before this is over folks. Please also take note that the dollar was once again down yesterday. Oil almost hit $81/barrel.
As the dollar continues to drop you need to wonder: Has the world already concluded that we have already destroyed ourselves?
Disclosure: No position long or short in Wells Fargo.
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This article has 40 comments:
But that's all it is, an anonymous rant.
Why don't you look at WFC's financials, do some work, and publish useful commentary under your own name?
The New Great Depression is here and has a long way to go.
That is laughable. The guy was pounding the table on TV to buy Lehman a week before they went to zero. He has been in love with Shittibank sine the $20s. This is your "authority" figure for Wells!
My thought is that Bove's call on WFC is not isolated. The earnings story of WFC relates to many other financials as well.
Since fundamentals have vanished from the investing equation, and the absence of mark-to-market accounting, along with the fraudulently misleading top line and bottom line results, the overriding market catalyst is only liquidity. A sea of money looking for a home. Simply put, we are dealing with a 'house of cards' where the ridiculous stock market is concerned. What is salient is the fact that nothing has changed since DOW 6500. The relevant mantra is 'the trend is your friend'. If you are overthinking the absurdity of the market, you have missed the 40% parabolic move up. The market is gambling. As is the case with casino gambling, when you are in a good cycle, press your bets. Until chickens come home to roost, which they ultimately must,enjoy the ride. It won't last much longer !
stress test loss assumptions.....that ought to take care of some of your shadow inventory//////
of understanding of the economic history of the 1930's....
On Oct 22 07:40 AM greaterdepression wrote:
> Reality did not hit "two years later in 1932", the Crash resumed
> in 1930 and bottomed in 1932.
> The New Great Depression is here and has a long way to go.
I estimate that by the end the two million final stage foreclosures (i.e. when the family is evicted) will end up between four million and six million.
Assets no longer collecting interest are "valued" at face, likely loan losses will be at least 50% of that so say $13 billion.
Rough numbers I'd say double it, so they are about $2 billion short on their loan loss reserves.
RE: Let's get real here folks: The banks would prefer to let empty houses sit versus forcing the buyer into foreclosure because they would then have to take the loss when the house was sold.
EXACTLY!
The good news is that WFC is rather unique and I wouldn't necessarily extrapolate that onto other banks. The bad news is that California is still WAY overpriced in the $500K to $1 million market, which frankly, is still the majority of the homes in the metro and coastal areas.
That's certainly not to say that Wells can't work through the problem, I just don't feel like we've seen them "come clean" on some of those positions yet.
The banks can offset a lot of losses these days if they can manage to borrow plenty of money from the Fed at 0% and buy Treasuries. The government gets its debt monetized and the banks get to paper over their indiscretions of the last several years, so it's a win-win - for now.
Happy Capitalism
This article is spot on balls accurate.
Not only are many TBTF banks delaying the initiation of foreclosure for 90+ days delinquent loans, many are using the modification departments to hide really nasty, never going to perform as written loans.
Why? Because it costs money to foreclose, it costs money to remarket the property, pay the delinquent property taxes, pay any code violations, bring it up to code, pay someone to mow the lawn and change to locks, drain the pipes in cold weather areas, etc., etc. etc.
Almost every bank now realizes that it is better to leave a non-performing loan (person) in the house to take care of it and pay something, anything through a "trial" modification and when the trial ends, set up a new one, even though the loan is never going to perform as written.
Plus, some neighborhoods are "undesirable" and the bank would rather stop paying the property taxes and let the local authorities take the property through tax foreclosure, which usually takes 3 or so years from when the taxes were due, so that buys the bank time to not have to mark the loan for a loss.
It is happening in every village, town and city in every state to varying degrees. It’s not just the $200k 3 bedroom house, it’s also the $750k 6 bedroom McMansion as well. And guess what segment of the real estate is slow go? Jumbos, that segment is slowing still as no one can “move up” and lots of folks are worried about their job, assuming they still have one.
Even pro-market magazines are more skeptical and more cautious in their outlook for the future. No one knows where the future is headed or what will happen and when. The new mantra is the 'New Economy' because historicals have proven inaccurate and more and more people are finally waking up to the fact that the USA is heading into a different time and place, especially as a result of the rise of the East namely China.
In all the years I have been reading economic magazines I have never seen such confusion.
The only reason the markets are going up is because no one wants to miss the 'gravy train' and are throwing money back into the markets, despite an uncertain future. Caution is out and the wild west is in. Economic data doesn't support the huge rise in the markets but where do you put your money to make money - sustainable money, not just fleeting money?
What's even worse is that the economic data being spun by far too many companies/banks is illusionary and wishful thinking as evidenced by the WF report.
The more I read the more I am confused but my gut is telling me to be careful and my gut has never been wrong.
On Oct 22 08:33 AM Pops40 wrote:
> To all you young "doomsters"- the market will continue to overcome
> in spite of your inexperience and analytical inabilities. 40 years
> of investing tell me its so....Pops
"No one betrays himself by silence"
2 things that are different now then in 1929/1930. First, an expansive federal reserve - the dollar floats free and is not tied to gold. Second, we have yet to see a major protectionist move, much less a Smoot-Hawley type economy wrecker.
Now it would not surprise me if we see some less than desirable economic policy come down the pike in late 2010/2011. The sunseting of the Bush tax cuts will put a damper on economic activity all by itself in 2011. But for now, the economy and the stock market are in recovery mode until something fundamental changes.
On Oct 22 08:33 AM Pops40 wrote:
> To all you young "doomsters"- the market will continue to overcome
> in spite of your inexperience and analytical inabilities. 40 years
> of investing tell me its so....Pops
On Oct 22 09:25 AM enigmaman wrote:
> Housing market will not stabilize until their is more demand then
> supply, not likely for many years to come, consider there are an
> expected 8 million additional foreclosures coming in the next 4 years,
> estimated 700 billion in additional losses to banks, mortgage modifications
> will only help est. 10% by any measure a total failure as currently
> confirmed by current mod stats, then you have the shadow inventory,
> inflated values as long as not brought to market which inflates the
> banks bottom line. The enormity of the housing mortgage debacle and
> its market ramifications cannot be imagined, and thats why you do
> not hear much from Obama anymore about it, no new initiatives, no
> more talk about reducing mortgage balances, the silence is deafening,
> "they see the train a coming, its rolling down the tracks" the best
> the Obama can hope for is that it doesnt run him over because he
> knows he can do nothing to stop it so he is getting out of the way,
> stays silent and hopes the economy miraculously rights itself so
> that the foreclosures never happen, but in the mean time he has declared
> war on Fox news because in his eyes this is what really matters,
> this is something he feels he can have some control over, so very
> very sad for America
> "No one betrays himself by silence"
Read the last sentence folks-our friends on the Wall , in DC and the WH have destroyed us. All that's good and left in the US is this rally in the stock markets. I Expect this to continue til the last man is standing.
I hate to say it, but this is the only way the Goons in power can think of...By creating wealth and preventing financial panic.
The days of free markets are over! We are a welfare country. And remember, our housing and auto (sales/production)markets fall in the fall.
Get your shovel ready! The real war hasn't started yet.
On Oct 22 09:54 AM Kevin Spires wrote:
> Quick question for enigmaman - what is the normal annual demand for
> single family homes? It is not 600k - which is what is currently
> being built. Home construction will double over the next 5 years
> as the oversupply gets worked off and we return to a normal housing
> market. Of course, this doubling will only leave us at 60% of the
> peak bubble activity, but it shows just how far activity has ALREADY
> fallen. Activity levels are at low, low, way overshot levels. Housing
> has already bottomed and will grow at double digit rates (on average)
> for the next five years.
This is simply a traders market with money to be made if you are willing to run the risk. Until some sort of clearer direction is received from DC, corporates will largely operate in the "uncertainty" range and the market will reflect that uncertainty. Once something more solid comes out of DC, corporates will have a little more confidence to commit and markets will slowly revert to operating on a more fundamental basis.
Banks are sitting on a pile of questionable assets. If they can hold on to these without marking them down until the related markets somewhat recover, there is no real loss. Unfortunately, they will have to take many of the loans to non-accrual giving the public a glimpse at the exposure levels.
On Oct 22 09:22 AM Mike from NYC wrote:
> If you're so smart, then why is it that almost every economic magazine
> and newspaper I read is somewhat confused by what is going on in
> the markets and the fate of the economy, not just in the USA but
> worldwide?
>
> Even pro-market magazines are more skeptical and more cautious in
> their outlook for the future. No one knows where the future is headed
> or what will happen and when. The new mantra is the 'New Economy'
> because historicals have proven inaccurate and more and more people
> are finally waking up to the fact that the USA is heading into a
> different time and place, especially as a result of the rise of the
> East namely China.
>
> In all the years I have been reading economic magazines I have never
> seen such confusion.
>
> The only reason the markets are going up is because no one wants
> to miss the 'gravy train' and are throwing money back into the markets,
> despite an uncertain future. Caution is out and the wild west is
> in. Economic data doesn't support the huge rise in the markets but
> where do you put your money to make money - sustainable money, not
> just fleeting money?
>
> What's even worse is that the economic data being spun by far too
> many companies/banks is illusionary and wishful thinking as evidenced
> by the WF report.
>
> The more I read the more I am confused but my gut is telling me to
> be careful and my gut has never been wrong.
>
> On Oct 22 08:33 AM Pops40 wrote:
To advise someone to invest in a business that will be propped up by the government because it is systemically risky or too big to fail is foolhardy. Do you believe that these too big to fail institutions have a right to hold a gun to your head, your wallet and your country? It is clearly wrong. How about withholding your investment in them and your deposits in them on the basis of principle? A deposit in your local community bank will do more for the real economy. These banks may be propped up for a time but the American people are going to someday soon, demand that they be broken up and no longer pose a threat to the real US and global economy. Imagine if you could invest in a free market with nearly unlimited funds (with federal gov't and federal reserve support) and have no consequences of loss. This is a formula for wealth beyond your wildest dreams. Multiply that by about 19 (the largest banks in the country). No one, I mean no one can trade against that. It's very clear to me that the equity and debt markets are false and disconnected from the Real economy. Good luck with your investment strategy. If you play with fire you'll get burned. At least you did acknowledge that the Gov't is playing a dangerous game of keeping the banks "propped up." But you didn't acknowledge, "at what cost?"
On Oct 22 09:21 AM retfldoc wrote:
> So Bove looked at the numbers and came to the "startling" conclusion
> that things weren't all that good in the US banking industry and
> in US real estate. If he just figured this out then I wouldn't take
> his advice on buying lunch let alone investing. The deal is in and
> the Fed/Treasury will not let the major banks such as WFC fail. The
> decision to invest in WFC should be based on systemic risk ultimately.
> WFC will do well as long as the government is solvent and can continue
> to support them. Whether the government/Fed can continue this dangerous
> game of propping up real estate and the major banks is the central
> question.
If these tests were performed again today, would we see the same result? Doubt it.
On Oct 22 07:55 AM bbro wrote:
> While I agree Wells is underreserved and under capitalized compared
> to the other big three did you know it is 9 billion dollars ahead
> of the
> stress test loss assumptions.....that ought to take care of some
> of your shadow inventory//////
My understanding is that the 1930s was a period of protracted economic stagnation and decline characterized by high unemployment, high private and public debt, deficit spending and intrusion of government into the private sector. How is this so different from today?
While I agree that it is a little bit of a reach to just overlay the 2009 and 1930 recessionary market recoveries as evidence of future economic stagnation, ignoring macroeconomic similarities between these two eras also stretches credulity.
While the Fed has kept markets awash in liquidity, that does not address the prevailing debt levels which will take time to reduce. At some point, debts become so burdensome that no money is left to purchase goods or invest in job growth. It is my opinion that over the ten years from (1996-2006) we reached that level, and it will take the next ten years (2006-2016) to dig ourselves out.
The other difference in government response is that we have yet to see a tariff war. Once the congress passed, and Hoover signed, the Smoot-Hawley Tariff Act in 1929, global trade decreased by 34%.
We also have yet to see the government confiscate all of the gold in the us at $20 an oz. and then raise it to $35 an oz. as occurred in the 1930s.
We also don't have the problems with bank failures because we don't have unit banking laws anymore, and we have the FDIC (while they remain solvent, or borrow on their $100B credit line from the US Treasury).
What is interesting to me is that with all of this government spending we have yet to see inflation. Well, they never saw inflation in the 1930s, either. Why is that?
Could be that government spending is only one component of GDP. The others are net investment, consumer spending, and exports-imports. If the others are dropping faster than government spending is increasing, then overall economic activity is down.
Point is that while the government response may be somewhat different today then in the 1930s (the treatment), the underlying debt crisis remains the same (the disease).
On Oct 22 07:56 AM bbro wrote:
> The 30's comparision is not grounded in fact and shows a lack<br/>of
> understanding of the economic history of the 1930's....
WFC loan losses have been accelerating, but so has the loss reserve build. One bright spot - loans 90 days past due but still accruing decreased qtr over qtr. Time will tell if that actually leads to a reduction in losses.
There are serious issues with bank balance sheets and I don't think the current share prices reflect all those risks. But not all the news is doom and gloom.
Long WFC, but underweight.
On Oct 22 10:30 AM mkttrdr wrote:
> We are a welfare country.
Doom and gloomers - there are 2 ways to end up with poor long run investment returns: Stick in cash when the market goes up and be way long when the market crashes.
On Oct 22 10:38 AM enigmaman wrote:
> So you believe we will return to the double digit growth rates that
> were an anomaly for the past five years, regression to the mean has
> so far corrected this but there are still 8 million foreclosed homes
> yet to hit the market at depressed prices, but in site of this you
> believe prices will rise at double digits, that the surplus of distressed
> properties will have no negative affect on holding prices down, that
> difficulties to secure financing and appraisals that have further
> depressed values oh and then we also have the addition of the news
> homes being built and sold at losses to just turn money over, pay
> expenses and remain in business, yes that also helps drive prices
> higher. As a home owner who has seen both his property values collapse
> I really really want to believe everything you believe and say but
> I cant because its not based on either reality or the facts
We are teetering on the edge of a debt cliff. Our government shills continue to attempt to keep us from falling over the edge by increasing the incline - what our friend Mr. Geithner calls "maintaining confidence." You can only parade the emperor around so many times before people realize he has not a stitch on.
What will trigger the realization?
No one knows.
It could be the announcement of the rescue of another TBTF entity.
It could be oil's delinking from the dollar. Worldwide demand for the dollar is artificially high because oil can only be bought with dollars. Our currency has been trashed and it is only a matter of time until it will be delinked from oil. Once oil is delinked, worldwide demand for dollars will drop, dollar holdings will be sold off, and our currency will tank. That is when inflation will soar. To paraphrase Mr. Rogers, "Can you say Weimar Germany? I knew you could!"
It could be civil unrest. There are lots of really, really mad folks, many of whom have been unemployed or underemployed for a long time. Unemployment will continue to rise.
Or - my personal favorite - it could be an international incident that draws us into a big war. I believe the incident will be staged expressly for this purpose. I think this is why Obama is dragging his feet on the Afghanistan issue - it's not a big enough war.
Once reality hits, life in America will not be pretty. It will look like the city of Detroit.
Or "RoboCop."
Both of these are pretty good pictures of what lies in store for us and the next generation. This is the real issue - not the market.