Monday, January 18, 2010

Equity Call for the New Year: WFC 1.18.09

Hello Ladies and Gents,

Back in the states and ready for the new year! Apologize for the long period with no publications, but fear not our team is back with a burning motivation like no other.

Though my equity performance is not so hot, I will start out by making a call on WFC (Wells Fargo). Knowing about WFC's management and company culture should be enough reason to short the company at these levels. Though the bad news doesn't end at the latter two points.

Management Issues:

I haven't had time to break down their statements but its clear that their poor retail practices and super tight loaning standards are certainly not in their favor. Considering the nature of Wells Fargo's business I'm sure these management practices filter through to their other commercial and corporate banking arms.

Listening to the front line retail solider at local branches (sales personnel) I learn of a great disparity between high level management and local level management along with retail employees. There is poor communication of the wants of management and and the feasibility of these wants that must be carried out by the sales staff (akin to typical state planner wants and production possibility feasibility problem found in Soviet and Indian economic history). Much of this reminds me of asymmetric literature on financial crises (Particularly Miskin's work on using the asymmetric model across historical financial crises). It would appear that the WFC banking model hasn't improved much since the crises; and perhaps this holds true for other retailers as well.

The above paragraphs outline the management issues. Which does not even begin to discuss the fundamental problems.

Some Fundamental Issues:

At the height of the crises Wachovia bought into lots of bad paper. From what I know (though I am not to familiar) there have been at least 52 billion dollars of write downs from these poor investments. One can be sure that there should be more write downs to come, or at least the downside risk remains high.

Though low quality commercial paper seems to have stabilized, the fact is that it still remains fundamentally poor. Though I will note as long as people hold faith in the Fed this risk factor maybe minimal.

All in all I will call a short at these levels; current close 28.08.


Alexander LĂȘ
Managing Partner
Analyze Capital LLC

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