Stock Traders Blog

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.”

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.

I thought about a few trades yesterday and today but as I said in my previous post I lost confidence about my judgment lately so I didn’t make the moves. It turned out that if I made the move I would make good profit. I thought about shorting 2000 shares of Bank of America yesterday after market close at $13.40 but I didn’t do it. I thought about buying 2000 shares of BAC this morning when it dropped to 13.04 a couple times but I didn’t do it.

Now I am thinking about shorting 100 shares of Baidu at $318. As you see Google dropped $14 dollars after market close. It is like selling on the earning report. Baidu usually follow Google or the Chinese market. So I kind of think Baidu will drop and will drop $10 at some point tomorrow. I am still thinking about the move. I will have the chance to short it till 5:00PM

I post the same question on Baidu board. http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_B/threadview?m=tm&bn=22855&tid=273994&mid=273994&tof=6&frt=2. Seems like no one really have the same feel. I let go that thought again.,

There were a lot of companies that have issued common stocks to raise capital lately. Many of them are trading below their offering price right now. I want to list them out here. I just think that in case the market rebounds these issues may be among the ones that will rebound the most.

They are either energy or financial stocks. Let me know if I missed any one that you think is worth to look at.

In my preview post I quoted some Meredith Whitney’s opion. She says she is most comfortable with stock valuations close to tangible book per share levels. So I did a comparison of price and tangible book values for the too-big-to-fail banks and sorted them by the closeness of their price to tangible book value. Citi Group is The closest one followed by FITB and BAC. Is that mean Bank of America is worth to buy? In the group of banks she mentioned Citi group and Bank of America have the lowest price compared to their tangible book values. And she opt out Citi Group as a choice. So seems to me BAC was the one she recommended

Tangible book value and price information is collected from Forbes Public Company Financial Ratios

I came across some of the old articles that talked about Meredith Whitney, Goldman Sachs analyst Richard Ramsden and Second Curve Capitals Analyst Tom Brown’s opinion on Bank of America last August. After reading them I find Meredith Whitney is admirable but Richard Ramsden and Tom Brown are laughable.

Bank Of America (BAC) A-OK, Says Goldman: No Capital Needed

Wachovia (WB) and BOFA (BAC) Have Bottomed; Meredith Whitney Missed Boat

Maybe you will feel the same after reading them. Whoever was able to predict this financial meltdown was basically seen as hero in the financial community. Meredith Whitney was right last year and I tends to believe she is going to be right again because she has more power now and her call will effect the sentiment of the market. She just updated her view on financial sector. I quote some her lines here to remind myself of her opionion.

We believe we are on the onset of changes impacting the mortgage market that could meaningfully influence earnings of the banks over the near to medium term. Accelerations in loan modifications will materially change how loss reserves are measured, which will result in lower loss provisioning and higher earnings over the near term

the U.S. government increased allocated incentives to mortgage companies by a fifth to modify home mortgages, while total incentives to servicers now stand at $18 billion and could climb higher. This is not the only incentive to banks. Modifications “cure” past dues and shift delinquent loans to current loans. As banks’ loss provisions are based upon past due or delinquent loans loss provisions will decline as modifications rise.

The clear risk here is timing as current recidivism rates range 22-46% on modified loans. Banks may take advantage of a timing arbitrage, which could benefit near-term earnings

“As we continue to believe the bank sector faces numerous challenges, we are most comfortable with stock valuations close to tangible book per share levels,” Whitney said. Pointing to Bank of America, JPMorgan Chase, Wells Fargo and Citigroup, she expects future increases in tangible book value, except for Citigroup.

Last night when future was down more then 80 points I was expecting the stock market to drop at least 100 points at close today. So I took profit when I saw opportunity. I sold BEAT and USB at a profit. I traded on FAS but lost a little bit. At market close when I saw the DOW was up 40 some points and some of the hard hit stocks didn’t bounce back I couldn’t withstand the temptation and bought a couple of them. I bought PCX (Patriot Coal) and DRYS (Dry Ship). I think if the DOW tomorrow can remain unchanged or up a little then PCX and DRYS may rebound nicely. I didn’t buy a lot though. I am still bearish on the market with the earning season coming. The following are the transactions today.

Transactions 20090706

My account was up about $100 at closing price. I believe at some point tomorrow I will have the opportunity to sell all my position to make a profit and my account can be up above $30,000 which was my initial capital.

Account Balance 20090706

Today I focus on a couple news related to Bank of America. First is “BofA’s bad loans up 10% in 2Q”. I think this is the news that caused BAC tanked today. Second is “Whitney’s New Take On Modified Loans”. Meredith Whitney thinks that with the held of regulation and government incentive loan modification will soar and that will lower loan loss reserve which will benefit banks in near term. I don’t know how this two factors will play out in Bank of America’s second quarter income. I remain cautionary on Bank stocks. Bank of America ever dropped below $12 this morning and quickly bounce back. I was busy on something else and didn’t get this opportunity.

Account Balance Changes: +$118.29

I read a few news that talked about window dressing at quarter end lately. I didn’t know what window dressing was about so I did some research on it and found the following definition on answer.com.

Window dressing is a strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings.

Another variation of window dressing is investing in stocks that don’t meet the style of the mutual fund. For example, a precious metals fund might invest in stocks that are in a hot sector at the time, disguising the fund’s holdings, so clients really have no idea what they are paying for.

Window dressing may make a fund appear more attractive, but you can’t hide poor performance for long.

http://www.answers.com/topic/window-dressing

So is that Bank of America’s up and Patriot Coal’s down today have something to do with window dressing? Probably. If that is case then BAC may come down a bit and PCX should go up a bit after tomorrow. We will see.

I am holding 2000 shares of Bank of America. Of course I am trying to rally the share holders of BAC and I post the following message on the BAC board on Yahoo.

If the conversion goes well and reach BAC’s capital raising target I believe BAC will run to $14 if data released tomorrow is not out of line. I bet on the data side a bit short of expectation will not affect BAC’s running up because the conversion price is at $12.75 as I remember. If capital raising target is met it will mean prefer share holders are bullish on BAC and it will trigger a big run up tomorrow.

If BAC announce that prefer share holders are not so enthusiastic about the conversion then longs like me will be in trouble. But I believe the investment banks will recommend prefer share holders tendering their prefer shares for conversion and I believe the chance of a successful conversion is high.

I am looking forward to seeing BAC above $14.00

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_B/threadview?m=tm&bn=1903&tid=1046900&mid=1046900&tof=1&frt=2

The follow image has the equity portfolio of Warren Buffett’s company, Berkshire Hathaway Inc. I don’t remember where I got it. I kept information I got from the internet from time to time. I got this before I set up this blog and I think this is good information. This is Buffett Portfolio in 2008. It may have been changed since then.

Buffett portfolio