I am still away on Holiday in Mexico but have been checking the news and was not surprised to learn about the recent Wells Fargo announcement. I am coming off the fence here and looking for a bullish outcome on financial services.
The bank said profit will be $3bn in the first quarter, thanks to better-than-expected results at newly-acquired lender Wachovia.
Wells Fargo bought Wachovia, which was the fourth-largest US bank, after it almost collapsed last year.
“Wachovia’s outstanding franchise has proven to be everything we thought it would,” the bank said.
Despite obvious problems with the bailout packages provided by the U.S. government and a huge amount of writedowns still coming due, I now fully anticipate that 2009 will surprise to the upside in financial services. As I am still away I cannot post in detail.
However, I see financial services companies shedding troubled assets, not marking other assets to market and having an enormous margin spread due to ridiculously low interest rates. To me, this is a huge buy signal. Last week, I thought a small position in out-of-the-money calls on BofA or Wells was a good idea before Wells gapped up this morning (I still think Citi is dead money). This is now less of a good risk-reward opportunity. But, don’t think Wells is alone in expecting a monster quarter here. Could we see the same at JPM or BAC? BAC has a huge tax dodge from its Countrywide acquisition so unless they haven’t finished with monster surprise writedowns, I expect a good number there as well and that looks like the best play in the space right now (despite a 20% rally today).
Remember Warren Buffet’s call about Wells back in March?
Warren Buffett answers questions from viewers on CNBC. He talks about his investment philosophy and recent stock picking performance. He bought ConocoPhillips at the top. And he made poor investments in Irish banks. About Wells Fargo, he says “the spreads are enormous.” And he still likes US Bancorp and defends his S&P 500 derivatives bet.
Ultimately, the Wells profit announcement should make one believe that this rally is for real and, despite a potential decline due to an overbought position, can continue through to the Fall after a pullback.
To be clear, I think this is a cyclical rebound a.k.a fake recovery and it is also a massive transfer of wealth from U.S. taxpayers to banks. But it is a rebound nonetheless and financials will benefit.
Wells Fargo expects record profit– BBC News