Wells Fargo

Disclaimer: The following set of links and associated cynical commentary touches on mature subjects and may not be suitable for some investors. Topics covered include: hyperinflation, sovereign default and yes, even investing in Zimbabwe.

Spreads were notably firm today, with HY outperforming IG, as markets gapped tighter at the open, were unable to recover Friday's tights and leaked tighter all day following the risk-on dollar down trend 'trade-du-mois'. A day of little real news but a continued sell USD, buy anything USD-based saw stocks gapping up to almost 2009 highs on almost 2009 low volumes and we suspect credit's rallies were helped by fund unwinds after Friday's loan BWIC.IG has now traded within a 20bps range (115bps to 95bps) since 7/23 (on an adjusted basis) while equities have continued to move higher with 'buy-the-dips' working incessantly on lower and lower volumes.

The concentration of ownership in the financial services industry has resulted in higher bank fees and interest rates that consumers are forced to pay for credit cards, mortgages and other financial products.

No single financial institution should be so large that its failure would cause catastrophic risk to millions of American jobs or to our nation’s economic well-being.

No single financial institution should have holdings so extensive that its failure could send the world economy into crisis.

We believe it is time to break up the banks and insurance companies which are too big to fail.

It turns out that the main reason why Bank of America is unable to find someone willing to jump into Ken Lewis' hot shoes has nothing to do with BofA toxic balance sheet and everything to do with proximity to Carnegie Hall, the Lower East Side and any of a plethora of Daniel Boulud restaurants. Bloomberg reports that as BAC continues its search for a CEO replacement it is now willing to let the fall guy's replacement be domiciled out of New York. Whether that means that the Charlotte, NC-based firm is looking to relocate entirely to the Big Apple, and whether Mel Watt is aware that he no longer needs to be the lap dog of the firm's soon to no longer be landed interests, is yet to be determined.

The most perplexing issue in assessing credit quality for various industries over the next six to eighteen months is determining what is real, what is sustainable. As illustrated in the below graph, the monetary base has exploded over the past couple of years - a manifestation of the FED's effort to pump liquidity into the system to support the financial sector and prop up the broader economy. Other "props" are the step yield curve, FDIC backing for the bonds of the few and chosen, and the continued direct support of the particularly important (politically) and particularly wounded such as GMAC. Will we exit the matrix and if so, when? The short answer is that we will probably exit when we are able. Despite the massive cost of the bailout, the US has the will, and China and the multitude of other buyers of US Treasuries have the means, to continue to support the bailout. However, change is coming; some of it would come even without the great recession. The massive drivers of economic change in the US over the past 40 years, the baby boomers, are changing their ways and will not be making the expenditures they have previously. Forget the regular upgrading of housing (the more likely step is a reduction in housing needs), forget the three year upgrade of vehicles (most will last six years or more), and forget most other huge purchases. Rebuilding savings is likely to be the new norm for many baby boomers, and the other generations are not making enough yet to fill the void. A translation for fixed income investors is that the anointed financial service firms will thrive over the next couple of years as will most money managers. However, the consumer-based, capital intensive industries such as auto, home building, and retailing will lag, especially as the various stimulus programs wear off.

Spreads were broadly wider in the US as all the indices deteriorated (as IG and HY closed at their wides with the former making its largest jump wider since 10/01). IG trades 7.8bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.3s.d.. At 109bps, IG has closed tighter on 63 days so far this year (217 trading days) and we note that the distance to the average is getting close to its largest since this rally began (a critical break over 9-10bps above the average would suggest we are in a new era. Yesterday's crack of IG not being able to break the 50-day average (while technical nonsense) is notable in that we have not seen an upside break and unsuccessful test of the average since the March rally began in credit.

The Mother of All Carry Trades has encompassed the big banks in another one of the Biggest Bubbles of recent history – and very few even know about it. Here’s a few tidbits, Goldman Sachs is the most exposed in terms of tangible equity at risk, while JP Morgan has the most gross exposure.

Surprisingly good earnings, 10%+ rise in share price, declining charge offs and 90 day late paying loans, lower loss provisioning, rosy review from the media and more BUY, BUY, BUY signals from the sell side - what more could one ask from an anointed 19 bank? Well, for starters, we could request that their non-performing assets stop increasing at unprecedented rates. If not that, then we can always ask why reduce loss provisioning in the face of climbing non-performing loans...

Interest by foreign central banks to increase their gold holdings begs a more fundamental question. Have they lost confidence in the dollar? Probably not, at least not yet. As noted above, foreign central banks have purchased $53 billion worth of Treasury securities over the past 12 months. Although the pace of purchases has slowed from its rate of a year or so ago, we think foreign central banks would have become outright net sellers of Treasury securities if they had “lost confidence” in the greenback. Foreign central banks are not dumping dollars, but they appear to be diversifying away from the greenback on a flow basis.

Bank of America is really unable to catch a break. The latest kick in the groin comes courtesy of the Chairman of the House Oversight Committee Edolphus Towns, who has announced he will launch a subpoena into whether Countrywide gave "favored terms to lawmakers and other VIPs." Concurrently, a panel is evaluating predatory lending practices at a variety of different banks. Some of the firms that will be told to provide information include Wells Fargo, JP Morgan, Citigroup, US Bank and GMAC.

No matter where the stock market rises to, no matter what accounting shenanigans are being pulled, and no matter what program traders or momentos are pushing for the moment, sooner or later (usually sooner than many realize) the fundamentals come home to roost. Enter Wells Fargo...

Yet another day where Goldman scored huge once again. Where is Dick Bove today? No doubt, he must be luxuriating in an Opium Den and Massage Parlor somewhere in Chinatown, cavorting with 17-year old Asian Exotica, after receiving a hefty payout from the Prop Desk boys at Goldman..

As Zero Hedge pointed out first, yesterday Dick Bove performed what should be a FINRA or SEC punishable act, by first pumping the stock of Wells Fargo live on pumpathon central CNBC, and subsequently downgrading it, causing a major market selloff. Today, Bove tries to backtrack and explains the foolishness of his actions, while telling all those stupid enough to follow his recommendations that he will no longer be providing "immediate earnings commentary" (whatever the hell that is) on air. If his "less than immediate commentary," such as his Buy call on Lehman weeks before the bank filed for bankruptcy, is any indication, perhaps Mr. Bove should consider dropping the "commentary" business period.

• Asian stocks fall as bank loan-loss speculation raises valuation concerns.
• China's economy expands 8.9% in Q3, fastest pace in a year, on stimulus, lending.
• Euro rises above $1.50 for first time since August '08 on recovery outlook.
• Leading Index in U.S. probably rose for sixth month in sign of expansion.
• Russia warns of reduced access to credit, signalling cut in interest rates.
• Sept's regional, state unemployment rates climbed in 23 states and the District of Columbia.

Can someone please explain why Mr. Bove noted on CNBC that Wells Fargo is proving "itself to be a standout" in the banking industry (2:30 into the clip), that it would help push the market higher, and that is it the big winner in today's earnings derby, a mere nine hours before he ends up downgrading the company to a SELL? Perhaps, the SEC can advise on that particular conundrum.