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Tuesday, May 5, 2009

More on Wells Fargo, yesterday's market rally and an update on a previous post

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Faithful readers know that I have beaten up on Wells Fargo in the past because of it's dramatic financial balance sheet turnaround.

Critics have raised concerns that the stunning improvement in their financial situation has more to do with bookkeeping manoeuvres than the fundamental improvements.

Enter the infamous 'stress tests' of the 19 largest financial firms in the US. These 'tests' are a centerpiece of the Obama administration's plan to stabilize the banks. Some critics have decried the process as weak and ineffective, an artificial attempt to instill confidence in America's financial system.

Regulators have said they will not allow any of the 19 firms to fail because it would be too dangerous for the rest of the financial system. Wells Fargo holds billions of dollars in mortgage, construction and credit card loans.

And based on the results of their 'supposedly sound' quartly balance sheet released last month, Fargo stock has almost doubled in value.

Which make the latest leaked results of the 'stress tests' even more disturbing.

Wells Fargo is one of several banks that regulators will force to hold larger buffers to protect them against possible future losses, according to two people familiar with the matter who spoke on condition of anonymity because of the sensitivity of the process.

Apparently regulators have told Wells Fargo to shore up its finances after the stress tests showed the bank would have trouble surviving a deeper recession.

What happened to the outstanding quarterly results that had Wells Fargo on an excellent financial footing?

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In the Markets yesterday...

Yesterday, at about 11:05am, the Canadian Business News Network declared that different conditions were driving the market upward for the day. The BNN host stated that "gains appear to be driven by investors who are jumping into the market for fear of missing out on the rally".

Hmmm...

'Green shoots' that are nothing more than signs the economy is doing less worse, instead of getting better & impulse stock buying because investors fear they are missing out on the rally.

Perhaps you recall yesterday's post about the three stages of a bear market trap?

Don't look now, but I think the canary in that cage over there is dead.
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Update Post

You will recall that on Saturday April 25, 2009 I made the following post titled "Deja Vu - all over again". On that day the phrase that pays was 'corporate-style subprime loans'.

I cautioned that the next big financial disaster looming on the horizon in the United States was commerical mortgages structured just like the subprime housing loans.

Today the Miami Hearld published a story sounding a warning over this exact issue. Quoting the article, "Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching a renewal date. By some estimates, two out of every three will no longer meet the original loan conditions and won't be able to refinance. And with prices for commercial properties expected to plunge, a vicious cycle may unfold much as it has in the nation's housing market.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks."


Hmmm... make that TWO dead canary's in that cage.

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Email: village_whisperer@live.ca

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