Thursday, April 09, 2009

Wells Fargo, Walmart and the roses are blooming...

First let's cover this weird pre-announcement from Wells Fargo. My first issue is with their use of the term Record First Quarter Earnings. They added about 40% more assets when they bought Wachovia. Last year Wells Fargo made 60 cents per share, and the have preannounced 55 cents per share, so while it's technically true that the bank may have made a record dollars, it is not a record profit to shareholders.

After quickly reviewing the limited data from Wells Fargo there isn't much that jumps off the page outside of the fact that they appear to have done a TON of refinancing business (make sense as mortgage rates tanked). Refinancing is historically sporadic revenue that is not consistent enough to benefit a company in the long haul, but today it won't matter this stock is going to rocket. Eventually, when the actual data is released in May we might find out that there's a little old man pulling the levers behind the curtain, but today let's all hail the powerful OZ.

I'm still very wary of Wells Fargo because of their exposure to the weakest real estate markets (CA and the Southeast).

I think the powers that be weren't happy that all of their attempts to goose the market weren't working (Uptick rule had virtually no impact), so it's been "leaked" that all 19 banks undergoing stress tests will pass those tests. I'm not a tinfoil hat guy, but the increase frequency of positive stories leaking to the press is disturbing. The Treasury has not set sufficiently high standards and of course the banks are going to pass. Their standard for worst case scenario is much closer to my baseline expectation.

Again, none of this matters today. The market wants to rally and the daytraders are going to be all over it. However, I hope to offer a little clarity in an increasingly cloudy world. The banks want to paint a rosy picture and since the people overseeing the banks now have a vested interest in their success, I don't think we're going to hear the truth for some time......

Walmart painted a rosy picture as well, but noted that sales will be below expectations. They blamed the shift of Easter from March to April --- this has always been a pet peeve of mine. Did it suddenly shock some analyst or the CFO of Walmart that Easter is in April? Of course, not. So they built their models assuming Easter was in April. When sales come in light, they blame the shift of Easter.

Retail sales look very dismal and frankly, this is a much bigger story than the banks playing accounting games, but again it won't matter today.

You can go broke being right.

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