Mayo's Mistake?

Earlier this week, Mike Mayo, analyst for Calyon Securities, downgraded several banks, including Wells Fargo. This had a profound effect on the outlook of the banking sector, and investors experienced a significant drop in the US stock market. Mayo expects loan losses at the banks to be as bad as the Great Depression by 2010.


But will he be right in this assessment? Well, maybe it didn't take long to find out!

Later in the week, Wells Fargo surprised us with an earning pre-announcement. They said they made about $3 billion in the 1st quarter. They declared that their buy-out of Wachovia was a success.


Wells Fargo went on to say that the low cost of money combined with a strong demand for mortgage loan financing was the elixir they needed for success.


It makes we wonder if we will receive other favorable reports from the banking sector over the coming two weeks of "earnings season." Recall that the US stock market began to rally in early March after an internal memo from Citigroup's Vikram Pandit said they were enjoying a couple good months.

He wrote in addition to our strong capital position, I am most encouraged with the strength of our business so far in 2009. In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion.

Then on top of that the FASB accounting group revised the mark-to-market rule (for more on this, see my March 19 article) in a way that provides a much fairer means of valuing stressed assets. Instead of being forced to use fire-sale accounting, a more reasonable cash flow basis will now be used for the 1st quarter to value assets that are otherwise performing on a long-term basis.

From time to time I truly wonder about the value of commentary made by experts. I even wonder about their integrity--wondering if sometimes dire pronouncements are made in order for immediate gain for their own company--at the expense of many investors and even employees at these banks.

I don't have any way of knowing about this--I'm just wondering--but as for me, the next time I'm offered Mayo, I am going to pass--and use the butter instead!!!