I read through Well Fargo’s first and second quarter earning releasing and jog down the hightlights of the report in a comparable list. Hightlights number 24 and 27 to 30 are the focus. I will blog more about them in later post.
Reference: https://www.wellsfargo.com/invest_relations/earnings.
Wells Fargo 2009 Second Quarter Earning Highlights
- 1, Net income: $3.17 Billion
- 2, Net income applicable to common stock: $2.58
- 3, Diluted earnings per common share: $0.57
- 4, $0.7 billion ($0.10/per common share) credit reserve build
- 5, $0.24 billion ($0.03/per common share) merger-related expenses. $0.57 billion ($0.10/per common share) FDIC assessment
- 6, Revenue: 22.5 Billion
- 7, Legacy Wells Fargo revenue 13.6 billion
- 8, Net interest margin 4.30%
- 9, Core deposit: $765.7 billion
- 10, Tangible common equity: 54.9 billion, TCE ratio 5.24%
- 11, Tier 1 capital ratio 9.80%
- 12, –
- 13, Allowance for credit losses to $23.5 billion. 2.86 percent of total loans and 1.5 times nonperforming loans
- 14, $0.04 billion write-down of impairment on debt and equity security
- 15, Pre-tax pre-provision profit: 9.8 billion
- 16, Net interest income: $11.8 billion
- 17, Total loans were $833.9 billion
- 18, Noninterest income of $10.7 billion
- 19, $1 Billion MTM gain. $2.3 billion increase in the fair value of the MSRs offset by a $1.3 billion economic hedge loss in the quarter
- 20, Trust and investment fees of $2.4 billion
- 21, Service charges on deposit accounts of $1.4 billion
- 22, Card and other fees of $1.9 billion
- 23, Trading revenue of $0.75 billion
- 24,
Net unrealized losses on securities available for sale reflected in equity of only $0.4 billion down from losses of $4.7 billion at March 31, 2009. “The net unrealized losses were virtually eliminated as credit spreads narrowed during the quarter and as unrealized gains emerged on new mortgage-backed securities (MBS, purchased during the quarter at the peak in MBS yields)”
- 25, Noninterest expense was $12.7 billion
- 26, $0.57 Billion FDIC assessment. $0.24 billion merger-related expenses
- 27, Wachovia’s total net charge-offs in first quarter were only $0.98 billion
- 28, Second quarter net charge-offs were $4.4 billion
- 29, Total nonperforming assets were $18.3 billion. $15.8 billion of nonaccrual loans (nonperforming loans)
- 30, Loans 90 days or more past due and still accruing totaled $16.7 billion
- 31, –
Wells Fargo 2009 First Quarter Earning Highlights
- 1, Net income: $3.05 billion
- 2, Net income applicable to common stock: $2.38 billion
- 3, Earning per common share: $0.56
- 4, $1.3 billion ($0.19/common share) credit reserve build.
- 5, $0.2 billion ($0.03/common share) merger-related expense. $0.34 billion FDIC assessment
- 6, Revenue: $21 billion
- 7, Legacy Well Fargo revenue: $12.3 billion
- 8, Net interest margin: 4.16%
- 9, Core deposit: $756.2 billion
- 10, Tangible common equity: $41.1 billion. TCE ratio 3.28%
- 11, Tier 1 Capital: $88.9 billion. Tier 1 capital ratio 8.28%
- 12, Credit write downs from the Wachovia acquisition: $40 billion
- 13, Allowance for credit losses: $22.8 Billion. 2.7% of total loans. 2.2 times nonperforming loans
- 14, $0.5 billion write-down of impairment on debt and equity security
- 15, Pre-tax. Pre-provision profit $9.2 billion
- 16, Net interest income: $11.4 billion
- 17, Total loans: $843.6 billion. $119.4 billion of consumer loans
- 18, Noninterest income: $9.6 billion
- 19, $0.88 Billion MTM gain. $2.8 Billion Reduction of (MSRs) mortgage servicing rights and $3.7 billion hedge gain.
- 20, Trust and investment fees of $2.2 billion
- 21, Service charges on deposit accounts of $1.4 billion
- 22, Card and other fees totaling $1.8 billion
- 23, Trading revenue of $0.79 Billion
- 24,
The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.
- 25, Noninterest expense: $11.8 billion
- 26, FDIC assessments: $0.34 billion. $0.12 billion additional insurance reserve. $0.2 billion merger related costs. Total integration expense to be $7.94 billion and will be spread over the integration period
- 27, Wachovia’s total net charge-offs in first quarter were only $0.37 billion after a total of $40 billion of credit write-downs have already been taken through purchase accounting adjustments.
- 28, Net charge-offs for the combined Company were $3.3 billion
- 29, Total nonperforming assets: $12.6 billion. $10.5 billion of nonperforming loans
- 30, Loans 90 days or more past due and still accruing totaled $15.1 billion
- 31,
“We have built reserves for six consecutive quarters, dating back to fourth quarter 2007 when credit deterioration became evident,” said Atkins. “These reserve builds have strengthened the balance sheet and position us for the future. We view a considerable portion of the $23 billion allowance to be essentially like capital since we won’t draw on this reserve until the credit crisis ends and loan losses decline. Current accounting policies will then require us to reduce the allowance, increasing profit and increasing capital ratios at that time.”
If you followed my blog you know that I was betting on the wrong site of the market for a while. I closed all position I was holding today and I am currently down 10% from my initial investment. In order to recover my investment I need to earn more than 10% now. 
I am not going to be trading as often as I did going forward because I think I made too many stupid mistakes trading in and out. Just a few days ago I shorted 1000 shares of HIG (Hartford Financial Service) at $14.18 and cover it at $15.83 yesterday.
One past experience told me not to take the short side so easily but another one (I Can’t Help Thinking About my Big Short Trades) told me if I could hold on to my short position I would eventually see profit. I shorted HIG not without reason backing it. HIG is one of the insurer that needs TRAP money. If HIG were able to return to profit so easily it wouldn’t need TRAP money in the first place. Because of this and the later experience I shorted HIG without carefully evaluating the news that bumped HIG (U.S. insurers to get 2nd-quarter investment boost). I might be right and I might be able to see profit if I hold on to the short HIG position till tomorrow. I might be able to see profit on my puts on Starbucks Coffee and US Bank if I hold on to them. But somehow I feel it doesn’t worth to take the risk. Risk on the short side is much bigger but return doesn’t seem to be better. So going forward I will not take the short side any more.
One last thing I want to remind myself again and again: Trading is 90% Mental and Momentum.. It is news driven. My blog’s commentator also reminded me that. I have got to take it seriously.
I don’t feel like to post my trades until I break my losing streak. I guess that is understandable. The more I want to guess bank earning right the more I want to understand what all the financial terms means. I almost read through Wells Fargo’s first quarter financial report. Wells Fargo Earns Record $3.05 Billion, $0.56 EPS. I found it was daunting to understand all the information there as I didn’t remember the meanings of all the financial terms in the report. So I am going to understand it bit by bit and understand it a few terms at a time.
TCE Ratio
It stands for Tangible common equity ratio. It equals total tangible common equity divided by total tangible assets.
Tangible Common Equity
Tangible common equity is the amount of tangible asset that common shareholders would receive if the company were closed. So it doesn’t include intangible asset
Intangible Asset
Assets that do not have a definite existence are called intangible assets. They have neither a physical form nor give their owner definite financial rights. Deferred tax assets, good will, patents and copyrights and capitalized R & D, trade names and franchises are intangible assets.
Intangible Asset
Assets that have a physical existence, or give the holders definite set of financial rights. Land, machinery, bank deposits and investments security are tangible assets.
Tier 1 Capital Ratio
The Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets (Source: Wikipedia). Risk-weighted assets are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Regulator. Assets like cash and coins usually have zero risk weight, while debentures (also called note or unsecured corporate bond) might have a risk weight of 100%. Core equity capital consists primarily common stock and retained earnings. Tier 1 capital ratio is seen as a metric of a bank’s ability to sustain future losses.
I don’t know what is deferred tax asset but it shouldn’t affect me to understand Wells Fargo’s financial report
Well Fargo released earning and exceeded earning expectation today. I thought it wasn’t able to do so. I think analyst will still need time to look at its earning component to decide whether it worth to buy going forward. In fact it was to my surprise that Wells Fargo was able to exceed expectation. It was to my surprise too that it stock price went down. Will see what analyst have to say on its earning report.
I brought some puts on Star Bug Coffe and US Bank. I am betting they will go down and I am at lost again.
 Account Blance 2009/07/22 |
Account Balance Changes: -$254.98
I read many articles that talk about loan loss reserve, loan loss provision and net chargeoffs. I don’t really understand what they mean and all of a sudden I want to spend sometime to dig into their meanings. One thing I am clear is that loan loss provision, is like cost of good sold on income statement, should be subtracted from revenue to calculate net income. I did some research and find the following from A Loan Loss Reserve Primer: Beyond Simplistic Ratios
The loan loss reserve (or allowance for loan losses) is a contra-asset account on a bank’s balance sheet that is netted against gross loans. Each quarter the loan loss reserve rises by the amount of the loan loss provision (an expense item;) and reduced by the level of net chargeoffs.
I still remember this general accounting principle: Asset = Liability + Owner’s Equity. So loan loss reserve can be viewed as negative asset sitting on the asset side. The increase of loan loss reserve will decrease the total asset value. And this loss of asset value is reported on income statement as loan loss provision. Loan loss reserve on the balance sheet is similar to the stocks a company holds. Its value can fluctuate from time to time. But the stocks a company holds is normal asset type and the increase of stock price creates a gain item on income statement whereas the decrease of stock price creates a loss item on income statement. Loan loss preserve may go down and when it happen it will create negative loan loss provision and bring up net profit. It can happen when the management decides that they are over reserved for loan loss. It was the number 4 arguing point of the quote in this post The Reasoning Behind Bank of America’s Upgrade. I think he really means BOA has over 100 billion loan loss reserve(not provision) and at some point in the future when the economic turns around Bank of America may find it is over reserved. We can see loan loss preserve is a pretty flexible item where every banks can make its own decision to increase it or decrease it base on its own view on its own loan portfolio although some general guidelines apply
Net chargeoffs are loan amounts considered absolutely not collectible. It shouldn’t change the total value of asset as far as my understanding. People can look at net chargeoffs to evaluate whether loan loss is over or under reserved.
I shorted BAC again and made a small profit. In my previous post I was asked why I dump BAC with such a small change in price. The question really make me think a lot whether it worth while to trade in and out so often. I don’t know. I don’t find I am comfortable to hold anything.
I didn’t think it worth while to hold long position on BAC. The market is already up a lot. After this earning season I think we will see profit taking. I don’t see much excuse for the market to pump BAC with its unclear earning picture. In other words I feel BAC will have more bad news coming then good ones. How about the short side? Hold a shorted BAC position for a couple of weeks. I don’t want to hold short position either because I feel uneasy holding a short position especially after I missed a better short entry point above $13. But my reasoning keeps telling me that I may see BAC touching $11 soon. Please convince me if you think I am wrong.
It was like I traded this few days for blogging purpose so that I had somthing to talk about here. It should’ve been the other way around. I blog for better trading. I am searching for some kind of confidence that I had before and I still didn’t find it back. I have no confidence in holding anything.
Anyway Wells Fargo is going to report earning tomorrow before market open. It will be the focus of the financial sector tomorrow.
 Account Balance 2009/07/21 |
 Transaction 2009/07/21 |
Account Balance Changes: +89.80
I lost again all because I didn’t trust my own analysis. In a previous post, “Baidu is Holding up Well Today”, I mentioned that BAC’s earning was not good in fact. Because of general market sentiment I didn’t take the short side today and I bought into BAC today at $12.32. I thought it was low enough to expect a same day rebound. It didn’t happen. I lost again. Bank of America dropped big time today all because its earning potential. I guess BAC will make no profit for the rest of the year so did many analysts. Earning Potential is ultimate driving force of stock price and that is why BAC dropped. I guess BAC will see profit only when loan loss preserve start to decline. With rising unemployment it probably won’t happen still next year. $13 is probably the CAP for BAC in the coming months. I am very disappointed as I haven’t seen a decent green amount on my account for a long while.
 Account Balance 2009/07/20 |
 Transaction 2009/07/20 |
Account Balance Changes: -$160.30
In a previous post Systematic Way of Trading - Stock Board Advice I quoted an advice post on yahoo stock board by a trader. It mentioned a term called “Kelly Criterion” which I never heard of before. I did some research and found this is a term from probability theory. I studied probability theory in my MBA classes before but I didn’t recall this term. I guess MBA classes didn’t cover probability theory that deep. The following is an explanation on Wikipedia.com about Kelly criterion
The Kelly criterion, or Kelly strategy or Kelly formula, or Kelly bet, is a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any essentially different strategy in the long run.
For simple bets with two outcomes, one involving losing the entire amount bet, and the other involving winning the bet amount multiplied by the payoff odds, the Kelly bet is:
f* = (bp - q)/b.
where
- f* is the fraction of the current bankroll to wager;
- b is the net odds received on the wager (that is, odds are usually quoted as “b to 1″)
- p is the probability of winning;
- q is the probability of losing, which is 1 − p.
As an example, if a gamble has a 60% chance of winning (p = 0.60, q = 0.40), but the gambler receives 1-to-1 odds on a winning bet (b = 1), then the gambler should bet 20% of the bankroll at each opportunity (f* = 0.20), in order to maximize the long-run growth rate of the bankroll. If the gambler has zero edge, i.e. if b = q/p, then the criterion will usually recommend the gambler bets nothing
It might be daunting to understand for someone never get trained on probability theory. I seem to understand it well. I presented similar concept in an early post stock trading vs gambling . But to apply this theory on stock trading a very complex mathematical model is needed to accurately determine the probability of wining and losing. I believe hedge fund and trading firm would hire a troop of Phds to work on mathematical model that calculates the probability. Believe it or not a colleague of mine is recently interviewing with a company doing such research. For general investor like me without using any proprietary software the only way is to take a guess.
Having said that it reminds me a period of time when I didn’t watch the market closely and just set up a limit order to buy or sale. Actually that was before I started this blog. I remember I was able to grow my balance from $30,000 to $40,000 within a month. Maybe a programmed trading is better then manual trading. I found my emotions always take control of my buy and sale decision when I watch the market closely.
Yesterday I thought about shorting Baidu at $318. I am glad I didn’t do so. Baidu is holding up above that price and didn’t follow Google dropping. I guess traders are waiting for its earning report on Jul 23rd.
I traded again today I was tire of watching. And I lost again. I short Bank of America at $13.30. It went up to $13.47 after that. I covered it when it fell back to $13.33. It kept falling after I covered it. I shorted it because its earning was not a good one basically. It reported profit only because the big gain on selling stake in China Construction Bank. The gain was more than 5 billions instead of 2 billions that I guessed in this post “Bank of America Earning Forecast and Financial Statement Analysis”. If the gain was 2 billions then Bank of America will show 1 billion lost as I was expecting.
Seems to me Bank of America will report no profit or will report loss for the coming quarters. I kind of think Bank of America will keep falling starting from here. But again I don’t trust my judgment.
Here is the trade today and balance.
 Transaction 2009/07/17 |
 Account Balance 2009/07/17 |
Account Balance Changes: -$50.33
After I post the question Should I Short Baidu at $318 on yahoo stock board I got an advice on the board that I think is an honest opinion and worth to think about. It is from a trader with screen name jlin303. I wish the answer can be post on this bog so I quote the advice here. And once again I am grateful for the advice.
Well, I certainly wish you the best of luck. Just one last piece of advice.. I’m sure there are day traders here who make money by day trading their instincts and feelings but I, for one, am a system trader. I’ve spent many hours researching various technical and fundamental indicators, programmed a system, and then spent many more hours back testing and refining the system until I felt comfortable with the win rate, draw downs, and many other factors. I use a Kelly Criterion approach to size my trades and it’s been working well for me.
Here’s the thing: after reading through your blog, I don’t think you can honestly say you’re a long-term winning trader, in part because you’ve lost so much, and also partially because you just don’t have a long enough history to say confidently that it’s not because of variance. I suggest you look long and hard at a systematic way to trade, whether it’s through automation or manual trading. You need very specific (and proven) sets of rules and then you need to stick to them. Asking people on the boards is not the ticket. “I want to short BIDU because I FEEL it’s gone up too much” isn’t a specific proven set of rules. If you put on this trade, do you know what your chances of making money and losing money is? How much should you risk (stop-loss)? What is your exit strategy if you make money? etc.
My answer would be something like “I’m shorting BIDU because the price fell below the 5-day and 10-day EMA today on heavy volume. My research has shown that in the last 5 years, when this has happened, it goes down 10% on average about 70% of the time and it goes up 3% and average of 30% of the time. My bankroll is XXX so based on the Kelly Criterion, I’ll risk YYYY to make ZZZZ dollars. Once the price crosses the 5-day average again (moving up), I’ll be out the trade. I expect to make TTTT amount of money in the long run by putting on this trade, based on historical results.”
You seem very genuine in your quest for knowledge so I broke my silence to talk to you. Usually, I would just browse the boards for a light chuckle at those pumpers and bashers who make ridiculous farcical comments and then try to substantiate their positions by making outlandish claims about the size of their trading accounts and how much they’ve made.
This is my last post on the subject so good luck and never stop learning.
