Smoke & Mirrors at Wells Fargo

Wells Fargo pre-announced much better then expected earnings this morning, igniting a surge in stock index futures by about 3%. The stock which closed at $14.89 yesterday, rocketed past 20 bucks in premarket trading. Why the 33% move in Wells? The analysts had estimated only .26 a share, while Wells guide do .55 cents a share. Blowing away the estimates. But these earnings figures are still down year over year. The stock has given back a good portion of its gains as this type of move is very much unwarranted in my opinion.

First of all, The analyst community is completely lost with regards to publishing earnings estimates for the financials. These are guesses at best. The estimate range for Wells before their announcement was anywhere from .06 cents to .40 cents. Wells indeed guided above the street highs, but most if not all of the upside comes from adjustments to marks coming from the recent FASB change. So if the FASB hadn't ruled for leniency with regards to market to market accounting, they largely would have come in much below what the analysts were expecting. Also contributing to the upside was a lower reserve build up figure of $4.6 Billion, which was much lower then what the market was expecting. With Credit Quality getting worse across the board and getting much worse, Wells will feel the pressure to post more reserves for staggering future losses in their HELOC and Mortgage portfolio. Wells didn't speak in dept about credit quality or loan quality....What happened to non-performing loans? Plus what are the trends in Wells Option ARM portfolio? Have they broken down Level 3 asset accounting? These are the time bombs that have frightened investors.

There are strong buyers in the financials this morning as short covering has dominated the action in that sector.

Like I said, Wells has traded off since the opening primarily because there has been scrutiny through out the morning to really figure out what's going on at Wells, because we've seen pretty significant discrepancies for actual earnings versus analysts estimates throughout this whole credit crisis so there's obviously stuff going on there that the bank analysts weren't aware of.

This is not a buy signal for Wells at all because they have a considerable portfolio of loans on their books that are somewhat disturbing. They have got a huge portfolio of home equity loans as well that is concerning at the very least. These loan types are not getting the attention that they deserve at the moment. Give them credit, they had a decent quarter, but with that huge portfolio of home equity loans and still a lot of mortgage loans on the books and sub prime mortgages from the Wachovia buy to digest. We still got housing prices that are declining in many parts of the country, and that makes all of those loans problematic and difficult to manage. The rise in the financials today is just an example where the pain has been alleviated for the short time being.