Today's Wall Street darling is a little old bank from the left coast, Wells Fargo (WFC).  The transcontinental horse-back messenger service bank, largely expected to begin an arduous write-off period, surprised analysts by beating their ever sage estimates guesses by $.03 (.53 v .50 est).  The stock bounced 30% on the news.  Unfortunately, WFC's earnings are actually a mine field waiting to blow the legs off some unwitting retail investor.

Most notably, Wells Fargo changed its charge-off policy this quarter for home equity mortgages.  Traditionally it recognized losses after 120 days; now it's 180 days.  Oh, and did I mention it did it to protect homeowners?  From page 4 of the 8-K:

With the scrutiny that comes with big money, it is very rare that a big-time money manager can trounce the market year after year, and continue to evade said scrutiny.  There is one man though, that has for the most part achieved this goal, and even the few publications (e.g. FT) that have mentioned him or his firm have been unable, as far as I can tell, to garner any idea as to the size or performance of this manager's operation.  Since the early 80's, one man, and one firm have somehow, in this Internet age, managed to consistently make the market their bitch, all the while flying mostly under the radar of both the media and investor communities.

His name is Seth Klarman.

Last week, the Wall Street Journal had a piece about the IPO of State-owned Telecom Safaricom. Normally, an IPO of any Kenyan company - especially on a local exchange - would simply fly under the radar of international observers. However, there are important lessons that can be learned here, and I'd be remiss if I passed up this opportunity.

The situation is best summed up as mass hysteria.

Lululemon (LULU), maker of sexy, butt-hugging yoga pants (and some other stuff too), trades in the realm of fantasy. I say this because, at the current price and earnings, they're going to have to double earnings over the next say fiscal year (+/-) to bring the valuation even remotely in-line with other high-growth clothiers/retailers.

Of course, they have to do this in a softening economy, with niche products which do not appeal (and more importantly don't FIT) the majority of people (especially) in America. Oh, and their CEO is leaving and they just shuttered their stores in Japan. I link to the Motley Fool article because I think its emblematic of the hysteria surrounding this particular company. Take, the comparison versus far-larger retailers American Eagle Outfitters, Abercrombie & Fitch, Hot Topic, and Aeropostale. Um, hello? Apples to oranges anyone?

The past 30-or-so years or so have seen a massive wave of consolidation among corporate entities (of course one could argue this trend has been alive and well for the past century, plus, but we'll focus here on relatively-recent history). There is virtually no sector where this trend has not been on a tear, everywhere from the creation of the 'Financial Supermarket' championed by the likes of Sandy Weil at Citigroup to integrated Advertising/Marketing firms such as Publicis. The rationale for these tie-ups have been the same forever (obvious exaggeration) - vertical/horizontal/verizontal consolidation, synergies from shared costs, yadda yadda yadda, but empirical studies suggest that such rationale often fail to reach the benefits estimated prior to consummating a merger.

In recent history (lets say past 30 years again) we've seen increased reliance on diversification to rationalize business combinations, as cost savings, 'synergies' and 'cross-selling' have failed to deliver the intended (i.e. hoped for) results. Anyone who's taken Finance 101 knows that diversification alone is not enough rationale for a combination; investors can simply buy shares in the individual companies themselves to achieve the same benefits. Unfortunately (or fortunately, depending on one's perspective), most acquisitions eventually yield some shared cost savings (and/or other benefits besides diversification), so its not exactly a black and white issue.