Wells is Well

“One of the concerns for the banking sector and especially Wells Fargo is their exposure to the Oil & Gas industry. As oil prices fall, bad debts are on the rise. At the end of the quarter Wells Fargo had $947.3 billion in loans of that 1.9% was to the Oil & Gas industry, so just short of $18 billion in loans. The number itself is huge but in the grand scheme of things not so significant.”


 

To market to market to buy a fat pig Markets yesterday went sideways, the S&P 500 was up 0.02% meaning if it went any more sideways it would have ‘flat lined’. Our market was down 0.2% with the Gold stocks performing the worst, ending the day down 3.4%. Steinhoff finished the day down 3% yesterday on the news that the company has raised EUR 1 billion in convertible bonds, with a maximum interest rate of 1.25% (I wish I could borrow at these rates), the cash will probably be used for their Darty purchase later this year. Why the drop in the stock price? Convertible bonds mean that at a future date debt holders can swap their debt for Steinhoff stock, meaning that current shareholders will get diluted. Convertible bonds allows the company to get low interest rates on the bonds, which makes sense because who wouldn’t want to have a bond that pays you a fixed interest rate for a couple of years and then when the share price has doubled you convert your bonds into shares and make a nice profit on the shares without taking too much risk.

On the data front, the US had another strong initial jobless claims number, coming in at 253 000. This brings the number of weeks of initial jobless claims below 300 000 to 58, the longest streak since 1973. Not bad for an economy that needs to be ‘made great again’. Moving on to the US CPI number, YoY CPI was 0.9% slightly lower than forecasts and still well below the 2% goal of the FED. The core inflation number which strips out the more volatile food and fuel prices was at 2.2% showing that inflation is moving higher but thanks to the drop in the oil price, fuel has been cheaper. Thanks to Al Nino the US has had more rain than usual, so their crop yields have been better than average bringing food prices down as well. All in all the numbers don’t suggest any interest rate hike from the FED anytime soon.


 

Company corner

Consumers are punishing VW for lying, well mostly only in the German market as most other markets don’t seem to be impacted much. Volkswagen Europe Market Share Hits Five-Year Low Amid Scandal. They are still selling thousands of cars, maybe people do not care enough about being lied to.


 

As promised here is some commentary on Wells Fargo’s 1Q numbers which came out yesterday before the market opened. The numbers beat expectations but were lower than last year this time, the end result on the stock price was a 0.5% decline. A quick run down of the important numbers, Revenues were $22.2 billion, resulting in a profit of $5.46 billion and a diluted earnings per share of 99c (last year they were $1.03 per share). Part of the reason for the drop in profits is due to an increase in credit loss provisions from $608 million to $1.09 billion and the $1.2 billion fine we spoke about on Monday.

One of the concerns for the banking sector and especially Wells Fargo is their exposure to the Oil & Gas industry. As oil prices fall, bad debts are on the rise. At the end of the quarter Wells Fargo had $947.3 billion in loans of that 1.9% was to the Oil & Gas industry, so just short of $18 billion in loans. The number itself is huge but in the grand scheme of things not so significant, the company also has set aside provisions for around 10% of the loans. Nothing to be alarmed about on this front yet.

Some interesting figures from the results are, they have $1.4 trillion sitting in retail brokerage accounts and credit card volumes increased by 13% to $17.5 billion, so good news for the likes of Visa. They have $1.2 trillion in deposits, up 4%. The scale of this company is mind boggling, especially if you consider that the total money spent in South Africa in a year is around $350 billion.

The stock is down 10% YTD, mostly thanks to interest rate hikes not coming around as soon as hoped for. As interest rates go up, banks make more money because the interest that they pay for deposits normally remains flat but the interest they get on loans goes up. Even though interest rates are going up slower than expected, I would still own this company. Their prospects are closely linked to the US economy which is strong and looks to be strong for the foreseeable future. Don’t expect this stock to shoot the lights out but will continue to show steady growth and a good payout of net income to shareholders, in the last quarter the company returned $3 billion in the form of dividends and buy-backs. Buy if you are looking for a good old fashioned blue-chip.


 

Linkfest, lap it up

Not so long ago, when oil prices were north of $100 a barrel there was chatter about how well the Venezuelan socialist model was working. Now they have more problems than they know how to deal with, this is the next stop gap measure to try fix things – Maduro Orders Time Zone Change to Battle Venezuela Power Crisis.

Here is how the media can warp our perceptions of the world. Generally bad news makes the media outlets more money, so that is what is reported on – Visualizing Data: How the Media Blows Things Out of Proportion. The graph clearly shows how the media takes things out of perspective and then we fall into the trap of fearing things that are not worth worrying about.


 

Home again, home again, jiggety-jog. Our market is down a smidgen, gold having another tough day. The Rand is again making headway, trading in the R/$ 14.40’s now. The big news for the weekend will be the outcome of the oil producers meeting on Sunday. I saw a news report calling it the biggest meeting for the oil industry in years, not sure I would go that far. Oil price is down 1.5% currently.


Sent to you by Sasha and Michael on behalf of team Vestact.

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