Wednesday, October 21, 2009

Wells Fargo: The First Leak in the Dam?


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.


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.


getyourselfconnected said...

I am working on a post right now, but your article is very solid. I hope anon does not read it, he will say it is more proff you have no idea about the real world. In the real world loan losses are getting better not worse and Dick Bove has a full head of hair.

Jeff said...


That's fine if he does. I don't get fazed by it.

I try to write about the longer term macro effects of what's going on like you do.

Some think on a more shorter term trading basis.
This place was never meant to be a trading blog. Everytime the market bounces the haters start popping up.

Then when everything comes crashing down my viewership triples as the buklls try and figure out what happened.

The market will always ebb and flow. I just try to think about the longer term effects of what we are doing.



Jeff said...



Thanks for your support as always!

getyourselfconnected said...

You will love my post tonight, heavy on the sarcasm about the comments here.

All my best

Anonymous said...

Great post as always.
Even though I am short term bull, I love coming here to check on the reality. Thanks jeff.

btw, didn't bove say the home price has bottom and now is the time to buy this morning? LOL.


CT-Hilltopper said...

Those who do not learn from history are doomed to repeat it.

We are doomed to repeat it in spades.

Well, I'm prepared. I've got mine. I've got it in a safe place. I'm ready.

It's just the waiting that's killing me. Watching them destroy the country that I love day by day.
And no one is angry about it outside of a few of us. That's what really gets me.

I don't think anything else could destroy me as effectively as watching this financial crisis unfold.

Anonymous said...

#1 ARM Reset 2010-2011

#2 "Never a better time to buy"?

#3 Receipts vs Outlays

9 subsequent monts of deficit (any surplus), first time in last 30 years (data since 1980Q4)

deficit 1981-2007: 4,2 trillions
deficit 2008-2009Q3: 1,9 trillions

Jeff said...



Yeah Bove looked pretty stupid today.

I give him kudos for his call later in the day. That took some guts.

I actually have a little more respect for him now.

Nonetheless he looked pretty foolish.

GL with your trades

Jeff said...


You may have a long wait ahead so try and relax.

I share your frustration. I just want an affordable standard of living in this country.

The only way this happens is with a reset. People are starting to crack under the pressure. I see it everyday where I work.

I think once things crack and we really are on the way back to a real recovery our quality of life will improve by leaps and bounds.

It may be several years before we get to this point.

Jeff said...

Anon 2

Love the Japan housing chart!

I may have to use that one if you don't mind.

I knew the nimbers but haven't been able to find a chart that reinforces it.

Great stuff. thanks for sharing.

Anonymous said...

You have to admit it is kinda crazy, not that I want our country to fail but I guess what I'm hoping for is a more rational market that reflects truelly what is going on. Maybe it is if it is simply a short term trade as the economy looks better today then 6 months ago, maybe. People are still loosing jobs as the claims point out, banks are still increasing reserves and until the fed starts to pull back the $ the dollar will continue to descend while oil continues to rise choking off the consumer further. I think this is a larger picture of what happens to an individual who has been fiscally irresponsible only on a grander scale. We have got to start behaving more prudent.

Jeff said...


I totally agree.

Living within our means will be mandatory in order to work our way out of this.

Anonymous said...

Anon with this chart:

#1 ARM Reset 2010-2011

Just so you know, that is a little bit dated. Thanks to the collapse so far, the recasts are getting pushed earlier - so that 2nd wave of option arm resets has shifted heavily to the left:

It looks like we are at the first month of 10 months of the peak of the option arm tsunami.

flipdippy said...


I agree about signs of cracking.

Literally out of nowhere, foreclosures and short sales are appearing in the "good" parts of Baltimore County. Lutherville-Timonium, Monkton, Phoenix, Cockeysville, Reistertown, Towson.

If you want a reason to be optimistic about the future, check out this documentary. Ray's a polarizing figure for sure, but he makes some salient points about our technological progression:

Anonymous said...

Jeff - any thoughts on the administration's plans to restrict bonuses for the big banks?

On the one hand, im pleased to see em stick it to the pigmen. On the other, it looks like many of the guys who caused the collapse are now gone, and they are "sticking it" to those brought in to clean up the mess.

Also, Im a bit worried in that the other banks that have no restrictions surely have to seem tempting now. A sad irony would be if this plan lures some of the "best and brightest" away from the govt owned banks, causing the govt own banks to underperform, further lessening the taxpayers chances of ever getting paid back.

What a mess!!!

Tom Meyer said...

Jeff--I have a blog called Created it after stepping out to say the talk of Happy Days are Here Again was irresponsible from the realtor associations I belong to. Found out when you dare to say "Wait a minute, let's think about this..." we become known as pessimists. I've been called a "Glass half-empty kind of guy" by a broker/owner as a way of discrediting me for going against the party line. I like your insight and will create a link on my site.
Well done.

Anonymous said...

one way or another, "better-than-expected" game goes on ;)

jeff said...

Thanks for the great thoughts all.

Things were hectic today.


Thanks for the thoughts. I will come over and check out your site.


Regarding the bonuses it's a tough situation. If you restrict compensation then the best and brightest will head to Singapore.

Asia will be the next great economy of the world.

The US will become a has been.

jeff said...


I am seeing the same thing in Baltimore.

Especially the condos. Cockeysville/Lutherville has a couple of really ugly situations.

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