Yesterday we said:
M2M throws a wrench in estimates for this quarter. The revisions upward across the board have been substantial. Do not be fooled when the banks report better than expected numbers. The EPS figures will be almost entirely fake. Thanks FASB. You just made the black box balance sheets even blacker. The FASB rule change will add about $3B to Q1 earnings, but don’t expect those earnings to stick thru year-end.
The banks could throw a bit of a wrench in the first few weeks of earnings because their figures will appear strong, however, those figures are a bold faced lie and should not be trusted. The addition of the AIG (1.12 ↑3.70%) profits will also give the banks the appearance of strength. Do not buy them unless it is for a trade.
I hate to throw cold water on today’s optimism, but let’s take a realistic view on today’s Wells Fargo news:
1. The upward sloping yield curve is having a positive impact on results.
2. Refi’s are having a huge positive impact.
3. Debt issuance is seeing positive momentum.
1. Housing is still a drag on banking.
2. M2M had a hugely positive impact on this quarter. Well Fargo is NOT marking their book properly.
3. Why didn’t they release profit details? AIG trading likely had a very positive impact on bottom line results.
Personally, I think you have to approach these results with a huge dose of skepticism. The press release discloses no details on how the profits were made so at this point I am still working under the thesis that the AIG trades, M2M and positive yield curve accounted almost the entirety of the profits. I’ll revisit this with more details when WFC actually reports earnings. As always, the devil is in the details and I am quite certain the actual 10-Q will disclose the near fraud that is occurring this quarter.
With that said, it’s almost impossible to imagine that the banks or the overall market will trade substantially lower heading into the first few weeks of earnings. I expect to hear very similar reports from all of the big money center banks. Stay flexible and patient. I am certain that this sort of noise will create an incredible short opportunity in the coming month.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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