adiposity

Time to Call Out Wells Fargo's Balance Sheet

Why do those that short banks completely ignore operating cash flow or earnings? Looking at the balance sheet in a vacuum without operating cash flow is a huge flaw in your analysis. If I charge off a loan by $100 but earn $100 in cash from other business, what happens to my balance sheet? ABSOLUTELY NOTHING. WFC is currently producing $39 billion annually in pre-provision pre-tax income (PPPI), a.k.a. cash, that it will use to offset future losses. Using your pessimistic loss numbers that would leave $25 billion to raise ($87 [pessimistic losses] - $23 [current reserve] - $39 [PPPI]), assuming all losses occur in one year. If the losses occur over two years, WFC doesn't need to raise any capital as that $39 billion or some number in its vicinity is recurring. On a $1.3 trillion balance sheet, PPPI is more likely to grow over the next couple of years as WFC resets the cost of Wachovia's liabilities and fee and spread income improves due to the recovery. Which timing scenario is more likely? Why do you ignore actual cash coming in the door and choose to only look at a static balance sheet? This ignores business reality. As a result, your analysis is completely flawed.

Wells Fargo: Risks Outweigh the Benefits

I would retitle your article: 'Shorting WFC is dumb because Risks Outweigh the Benefits'
The risk/reward on your short is not even close to in your favor. That's a crowded trade and should be very painful at some point. WFC is trading at 2x its current pre-tax pre-provision income without including any potential earnings from Wachovia. No one can predict when, but it is inevitable that WFC will start to move up substantially when things improve, even just slightly. This thing is priced for armageddon.