Thursday, May 7, 2009

Wells Fargo comments on capital raise

“The main reason the Federal Reserve has required Wells Fargo to hold an extra $13.7 billion in Tier 1 common equity is based on what we believe is their excessively conservative estimate of pre-provision net revenue (PPNR) in the adverse scenario. Since we believe our Company’s earnings and other internally-generated capital will generate enough capital to meet the 4% test by November 9, 2009, in effect the Federal Reserve is asking Wells Fargo to hold a significant capital cushion above 4% for a hypothetical net revenue scenario that is remote and inconsistent with the Company’s strong actual results so far in 2009, strong underlying earnings momentum, and the actions already taken by Wells Fargo to reduce Wachovia’s revenue risk.

Wells is going to raise $6 billion in a stock offering, priced between $20.5 and $22 Friday morning.

This is actually bullish news.

You should be able to buy the May 25 call options for nothing tomorrow morning.

That's you leveraged play on the Wells Fargo capital raise.

There's still easy money to be made!


Anonymous said...

so where do you think C and BAC will end up? is tomorrow morning too late to jump into these stocks? they are up quite a bit in AH...and i'm not sure why..could you please explainthis a little?

Palmoni said...

C and BAC are the largest deposit institutions in the US. Thus they have the most leverage, since the cost of their funding is low.

In this market, the stocks with the most leverage wins.

I think both of them could double from here.

The reason I sold some of the big names, is because I'm buying the regional banks that have been crushed.

Huntington Bancshares HBAN, around 4, Fith Third FITB 5, now up past 6 in afterhours, Suntrust STI 18, which was downgraded by Goldman Sachs today, I like, KeyCorp KEY around 7--that's what I meant by an opportunity cost.

If the big banks can tack on another 20%, these will all double.

Anonymous said...

so when do you see C going to 8 and BAC going to 25?

thanks very insightful

palmoni said...

WFC according to Buffett, has $40 billion of earnings power. What is BAC "normalized" earnings? This idea that banks are valued at 50% of tangible book, was just a scam that Meredith Whitney cooked up.

Banks will now be looked at and valued at normalized earnings. Since Q3 should have 4% growth, and that will become evident fairly soon, then the new norm for valuation of banks will be the estimates for late 2010, and early 2011 earnings. Those numbers, will be hit six months earlier than what the analysts think. So the banks will earn in 2010, what they thought they would earn in 2011.

Why couldn't BAC then easily trade to 37? Thus a double on BAC is a walk in the park.

Anonymous said...

so with normalized earnings, BAC no longer has any exposure to bad assets or Merrill related issues?

Anonymous said...

btw....would FAS still be a good buy at $12-$13?