Wells Fargo: The First Leak in the Dam?

Ahhh....

There is nothing like the smell of an economic collpase in October. The road to recovery on Wall St hit a pothole today as banking analyst Richard Bove downgraded Wells Fargo 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 bee 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 Well's 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 now sitting 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 Well's 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 blog 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.

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 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 today 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 today. 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.