Looking through the company’s earnings I see nothing that makes me think the crisis has really ended or that credit is even close to expanding or delinquencies are subsiding. They have a very complex balance sheet so picking it a part is not an easy task and who knows what they have in off balance sheet items, I am sure it is pretty ugly whatever is sitting in La-La land in the Caymans.
Here is what I see, lending is down across the board, except for foreign lending. Total commercial lending is $318,886 vs. $333,484 which is clearly down, but not horrible but not good either. On the consumer side it is not much better as we see $450,784 vs. $458,036 which, again, is down and shows the direction of lending. The number is much better than the YoY number, but that is not surprising. However, are these numbers indicative of the rapid recovery that we keep hearing about on CNBC? Not a chance.
The other side of the credit story is the build is reserves for credit losses which look not so bad in WFC’s case of only an additional $1B. This is on top of billions already and the firm has a total of $24B in total loan loss reserves, not a good side. Remember the Pick-a-pay loan? That is the reverse amortization loan Wachovia screwed people over with? Yeah, they are modifying those like crazy, some 900,000+ and counting, but we know those modifications fail within 90 days so look for more defaults in the near future.
Not only that, but total nonperforming assets for 3Q equaled $23.45B for WFC, and CNBC can’t figure out why the stock down ticked on the earnings. Not only that, but those damn Pick-a-pay loans keep coming up and there was a negative change in the balance on these garbage loans, a negative adjustment in the value of $18B in fact. Of course, this did not impact the earnings of WFC because Congress and the FASB allow the company to lie to you. There is also a section in the report where it shows another $18B in loans that are 90 days late, whether this is the same item or not is unclear, but it is likely that it is. Either way, this confirms that the credit quality of all banks across the country is deteriorating.
Would I own WFC? Not a freaking chance, not even with your money. They have $57B in reverse amortization mortgages on the books that they are working like mad to modify, but we know the modifying these things still fail. Not only is the firm keeping $57B in the loans on the books, but the average LTV is 105% and the actual total carrying value out of that $57B is $37B, unreal. We are also seeing WFC take $6.5B in commercial real estate losses, yup that other shoe that is dropping or that we are told is not dropping, but it is dropping. Now, the PCI or nonaccrual PCI data in the WFC earnings do not impact the earnings, but the negative adjustments show what is to come.
Like I said, the WFC balance sheet is incredibly complex and we do not know what is held off balance sheet. However, what is on there, IMHO, is not pretty and even though much has already been written down, it does not look like it is getting much better. In fact, much of the problem assets seem to be getting worse, from what I can see. Piecing together from what other big and small banks have reported, credit is extremely tight and getting tighter and the quality is deteriorating which means more losses to come.
Consumers are still deleveraging their balance sheets and reducing their debts which may cause a shock for retailers this holiday season. Today we saw credit contract in September by $12B compared to estimates of $10B which should be alarming considering all the green shoot talk and all the declarations of the recession being over. On the brighter side of things, the $21B in credit contraction reported in August was reduced to only $19B, but the forecast was still only for $10B in total reduction, so draw your own conclusions. When consumer spending is 70% of GDP and most of that consumption was done on credit, what do you think happens when to said GDP when credit contracts?
If you get rid of government payment transfers and all the funny business from the economic data the government puts out you will be rather shocked that those green shoots are nothing more than sleight of hand magic tricks. One must look beyond the headlines to get to the real numbers to see what I am talking about, like the employment report, I personally get a kick out the birth/death model, which you must go to the website to actually see because they are so proud of it they don’t actually include it in the report, but the numbers impact the unemployment data. In September the BLS created some 34K jobs out of thin air based on this data, which is less than usual actually, but when the employment report was really high the birth/death model was pumping out big time numbers folks.
In fact, the numbers were so skewed that the BLS announced that it inadvertently added some 825K jobs to the plus category that never existed in as of March of 2009. Even though they know they made this error, they will correct it in February 2010 almost a full year later. Let us not forget about the U-6 data which shows a healthy 17% of Americans are unemployed or underemployed, this is the number that they used to use during the Great Depression, just so you know. There are all sorts of little things that you need to look at, but essentially in September some 785,000 people are out of work if you look at the household survey.
There you have it. Data musings from consumer credit to the employment report, all equaling the same thing, no recovery. So far most of the earnings are showing very little to no top line earnings growth, except for those providing value for consumers and, surprisingly, Alcoa which shocked me frankly. I contend that if Yum Brands missed on the top line, even by a little, which is telling in my opinion.
I have not looked at the numbers in detail, but they are light by $1 billion on the revenue and a couple cents short on the EPS. I guess this blows a hole in CNBC’s rosy picture and a surprise to me who thought the number would be better.
This is indeed a blow to the markets and supports my sale of the S&P 500 today.
The firm took a hit in of $219 million in foreign exchange rates which is not encouraging. The firm cut marketing expenses by terminating employees and saved the firm $691 million. This means that they cut costs, had a weaker dollar and missed their expectations. The company is strong, obviously, with $3 billion in net revenue.
This is not good news… American Express was less than stellar as well at .$27/share.
I find it hard to believe anyone is surprised by Goldmans numbers. They are one of a few players left when we had record government bond offerings and a 40% rally in stocks during this quarter. To think they were not going to make a killing would have been just dumb.
The real story is going to be Morgan Stanley and Bank of America. I am willing to bet that their earnings are going to be at the high end of forecasts. In fact, all banks are going to do fairly well and why not, they got rid of mark-to-market requirements. That means no more steep write-offs and all of that crap just will sit until it blows up later in the future.
As soon as they lifted mark-to-market all earnings went through the roof which shows they should have kept the rule in place. Regardless, the big concern with Goldman is the fact that they are taking excessive risk taking with access to the discount window from the fed. Is that really fair? I don’t know, but I do know that this was definitely a tax payer funded free ride for Goldman.
In my opinion, Morgan Stanley and Goldman, perhaps even Bank of America, are the only places I would be in the financial sector right now. Everything else is still troubling and there are issues that have yet to come out yet.
Consumer confidence got pummeled in its last survey. I take all of these numbers with a grain of salt because most are shaped to make things appear better than they are, but if this is how they can shape them to look more favorable then we are in real trouble.
The index fell to 64.6 from 70.8 in June, the index has averaged 89% since 2001. The added pressure of negative market returns, declining home values, unemployment and the prospect of higher taxes is weighing on the US consumer. It was only a matter of time before it all caught up with people.
However, next week I expect financial earnings to be impressive, albeit on the low side, as the SEC basically threw out mark-to-market rules. Essentially, all the bad news that would be coming out is postponed until losses are so bad they cannot be hidden any longer.
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