Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.
Avoid Wells Fargo
Originally published Sept. 15 at 8:43 a.m. EDT
"Everything we do is built on trust. It doesn't happen with one transaction, in one day on the job or in one quarter. It's earned relationship by relationship."
--Wells Fargo's Visions and Values
The later will be a subject of a coming post that will include my reaction to CEO John Stumpf's weak defense on Jim "El Capitan" Cramer's "Mad Money" show. (Hint: The responsible members of senior management and of the board of directors should be forced out of the bank, post haste).
Let me distill my view on WFC stock into one word: avoid.
Wells Fargo's premium valuation is likely to be impaired over a period of time from the discovery of nearly two million fraudulent accounts.
I have never really understood the premium valuation of the bank. To be sure, Wells Fargo has a vast and dominant franchise and deposit base. It is involved in one out of every three mortgages in the U.S. But, given that over the last five years the company's pretax income (before loan loss provisions) has made no progress, others may now question that premium valuation.
Importantly, given the broad involvement of more than 5,000 employees, I would not be surprised if more untoward transactions were uncovered in discovery in the next several months, which would provide a further case for a contraction in the bank's valuation.
And here is a contrary thought.
Given the size of Berkshire Hathaway's(BRK.B) - Get Report Wells Fargo holdings (10% of the shares outstanding) and Buffett's previous comments over more than two decades regarding his confidence in the bank and its management, most believe that The Oracle will publicly support Stumpf and the management team sometime over the next few days/weeks.
I don't agree.
While I don't think Buffett will provide any indication that he will sell his stock (it's not his "style"), I do expect an uncommon and strong reprimand. I suspect that privately he is furious and, in the time ahead. I don't think Buffett will buy more or sell his WFC holdings. He will likely stand pat. (The sins of Salomon still likely lie in Warren's mind and thoughts.)
One final thought.
As I have clearly detailed in the last three years, it remains my view that Warren Buffett has lost his way in his investment portfolio as many of Berkshire's largest investment portfolio positions are moatless, "old economy" companies -- such as IBM(IBM) - Get Report , American Express(AXP) - Get Report and Coca-Cola(KO) - Get Report -- that have been consistent market underperformers.
From my perch, Wells Fargo is yet another one of the aforementioned old-economy company, as the now heavily regulated banking industry moves ever closer toward delivering a commoditized and non-differentiated product ... and lower returns on invested capital.
Position: Short BRK.B small, KO.
My Takeaways and Observations
Originally published Sept. 14 at 6:02 p.m. EDT
I met with three companies this morning; alas, all uninteresting from a research standpoint.
It was an indecisive and drama-less market. There was some selling in futures after the close.
I wouldn't look too much into today's action and I wouldn't jump to too many conclusions. The close was a function of the last program standing.
- The U.S. dollar retreated.
- The price of crude oil got schmeissed for the second day in a row, down by $1.22 to $43.68.
- Gold was up$2.20. I still look for a technical break under current support of $1,300 to $1,310.
- Agricultural commodities: wheat +2, corn +2 and soybeans flat after this week's schmeissing.
- No change for lumber.
- Bonds rallied a bit after recent weakness. I wouldn't be surprised if the small rally continues, but I stand on my "generational bottom in yIelds" thesis, as 1.60% on the 10-year remains support now
- The 10-year U.S. note yield (1.70%) dropped by four basis points and the long bond by two basis points.
- The 2s/10s spread dropped by one basis points to 93 basis points.
- Municipals and junk bonds moved little.
- Banks continued to weaken as the Wells Fargo(WFC) - Get Report news worsens. I covered my Financial Select Sector SPDR ETF(XLF) - Get Report short yesterday.
- Insurance and brokerages showed little in either direction.
- REITS continue to trade poorly -- a fractional gain after being manhandled over the last week. iShares U.S. Real Estate ETF(IYR) - Get Report has broken down.
- Energy stocks fell for the second day in a row -- good for myU.S. Oil Fund(USO) - Get Report , Exxon Mobil(XOM) - Get Report and Schlumberger(SLB) - Get Report shorts. I'm sticking with them.
- Biotech strengthened on the heels of Allergan (AGN) - Get Report . A former member of my Biotech Basket, Aerie Pharmaceuticals(AERI) - Get Report , is up nearly 64% after hours on positive drug news. Paradise lost!
- Autos stalled.
- Retail rallied small. Dead-cat bounces in Dollar Tree(DLTR) - Get Report , Dollar General(DG) - Get Report and Home Depot(HD) - Get Report , me thinkst.
- Agricultural equipment was mixed. My short, Caterpillar(CAT) - Get Report , rose. Deere(DE) - Get Report "Prudence" fell.
- Entertainment was slightly lower. Popular Disney(DIS) - Get Report continues to be a great short.
- Staples were lower. My core short, Coca-Cola(KO) - Get Report , made a new 2016 low.
- (T)FANG traded as flat as my Grandma Koufax's potato pancakes.
- In individual stocks, Radian Group(RDN) - Get Report and DuPont(DD) - Get Report were catching their collective breath. Twitter was better on some new product news.
Here are some great value-added contributions on our site:
Jim "El Capitan" Cramer says demand is down but not out.
Divine Ms M made another great call.
"Cousin" Gary Morrow doesn't like Ford's technicals. And i don't like the company's fundamentals!
Rev hates the macro monkeys.
Tim "Not Judy or Phil" Collins on a balanced view.
Position: Long DD, RDN, TWTR, CMG small, HIG; short SPY small, TLT, NFLX small, GM, F, DIS small, CAT small, K
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long WFC, C, AAPL, SLB and AGN.
At the time of publication, Kass and/or his funds were long/short XXX, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.