Wednesday, 30 September 2009 01:00

Wells Fargo 3rd quarter research note

Here is an updated research note on Wells Fargo for subscribers:WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb.

For those that don't subscribe and wonder what is behind the firewall, we have analyzed the CDS exposure that Wells has, or at least that Wells has reported. If you recall, there was a blog story that broke a few weeks ago detailing the CDS exposure that WaMu had to CMBS from writing protection on the risky tranches in a bid to get investors to buy the securities. Wells inherited this alleged problem in their purchase and it seems as if they may not have even been aware of it. Well, we performed a deep dive and came up with the likely capital calls, as well as some other very interesting tidbits...

wfc_cds_collateral_calls_-_adverse1.gif

Although the CDS thing made it across the blogosphere, the more
immediate risk to WFC lay elsewhere, as I have detailed in the research
note above.That is not to say that there is nothing to fear from WFC's CDS exposure, though.

Last modified on Wednesday, 30 September 2009 01:00

9 comments

  • Comment Link shaunsnoll Friday, 02 October 2009 10:45 posted by shaunsnoll

    some of the builder stocks look like interesting shorts, as do some of the railroads and airlines. I can think of few products with a higher income demand elasticity than air travel, couple that with leverage and should the consumer pull back harder we could lose a few more of those airlines.

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  • Comment Link Reggie Middleton Thursday, 01 October 2009 16:51 posted by Reggie Middleton

    Re: the builders. I really wonder why in the world anyone would believe there would be a credible business in making buildings just months after the peak of a real estate bubble where you happen to have more houses, malls, shopping centers and apartments than anyone will ever need - at any price, for at least 3 to 5 years.

    Anyone who does start building now is a fool, plain and simple. There is the exception of those developers who have been obligated to build at the top of the bubble and feel that a finished product would be worth more than litigation plus the raw, undeveloped land.

    This is why it is unwise to blindly follow economists and analysts who simply spout the academic creed.

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  • Comment Link shaunsnoll Thursday, 01 October 2009 15:18 posted by shaunsnoll

    the top-ranked housing analyst's report at First Boston this morning who writes, "Our conversations with national and regional builders over the past week suggest that the slowdown in orders that began in the second half of August has accelerated through September."

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  • Comment Link shaunsnoll Thursday, 01 October 2009 14:26 posted by shaunsnoll

    I think you would really enjoy reading this book Reggie.

    http://www.amazon.com/Holy-Grail-Macroeconomics-Revised-Recession/dp/0470824948/ref=sr_1_1?ie=UTF8&s=books&qid=1254421485&sr=8-1

    It is very very easy reading, i read the first 150 pages in one weekend easily. It is an awesome AWESOME description with charts and data of how and why balance sheet recessions occur as well as how to see when they are about to end. The author is, in my view, without a doubt the most knowledgeable economist on these issues.

    It left me with some very good stuff to think about on the future of the US and how the economy will look and possibly unfold over the next few years. I really couldn't recommend it more.

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  • Comment Link Reggie Middleton Thursday, 01 October 2009 12:41 posted by Reggie Middleton

    I understand, but:

    - there is no basis for these "powerful" earnings.
    - The industry is coming out of a bubble, so earnings momentum is going down, not up.
    - The industry will be (and is) significantly more regulated.
    - They STILL have nearly all of the problems that originally cause them to start dropping like flies, except for liquidity - since they were backstopped by the Fed and treasury.
    - There is significant slack in demand, which I don't see tightening any time soon.
    - Interest rates are currently at ZERO, the only direction they have to go is up and even with ZIRP, banks such as JPM still have dwindling NIM (net interest margins). What happens when the Fed decides to (or is forced to by the spectre of inflation) to raise rates and collapse bank margins/increase funding costs even more?

    I do believe in analyzing the opposing argument to justify my own, but the argument has to hold water to be credible.

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  • Comment Link shaunsnoll Thursday, 01 October 2009 12:16 posted by shaunsnoll

    I definitely agree with you, but my point was just that looking at your investment from the perspective of those that disagree with you could have some value. The bull case seems to lean on the thesis that "normalized" earnings power out a few years could be very powerful so that if you buy now and just wait, the stocks look quite cheap on an earnings basis.

    a historical comparison with the chinese banks of the 90's could be very interesting Reggie. At one point some estimates showed their NPLs to be 20-50% of their total loans! and that was over 10 years ago and that charade is still going on.

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  • Comment Link Reggie Middleton Thursday, 01 October 2009 10:26 posted by Reggie Middleton

    A few points to argue:

    a)Banks have historically been valued as a multiple of book. To ignore book value (which will need to be done to avoid the issues with all of the trash still on their balance sheets) and focus on "normalized" earnings THREE years" into the future is nonsense. It is using a "its different this time around" approach. Much as the dot.com crew wanted you to forget about earnings in tech companies and focus solely on sales and/or "eyeballs".

    b)Even if one were to buy the "normalized earnings" argument, if one had to wait till 2012 to ascertain whether these earnings would actually materialize or not, and take into consideration current earnings, the macro outlook and the risks involved, then the discounting factor that should prudently be applied to those earnings that "may" appear 3 years into the future (coming off of a massive credit, lending and risky asset bubble - you know, the stuff that banks based their entire businesses on) should be prohibitively high. Think about it as if you were spending your own money to acquire these companies in a private transaction. How would you value them in order to clear a profit of net 10% per annum, post tax???

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  • Comment Link shaunsnoll Thursday, 01 October 2009 10:18 posted by shaunsnoll

    I would also be interested to hear this.

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  • Comment Link Ned Wednesday, 30 September 2009 23:25 posted by Ned

    The 'excuse' being cited as the reason why WFC, JPM and others are trading at their current [elevated] valuations are in anticipation of these banks reaching 'normalized earnings' in future years (I think the talk is 2012ish). Do you have an estimate of what WFC and JPM may be capable of earning once some banking normalization is achieved, not withstanding counterparty risks as depicted in your WFC and JPM reviews? Thanks.

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