Market Overview

Citigroup Looking Better than Wells, Really?


Wells Fargo is a name I have mentioned favorably in various forums here and there in 2012, most recently in the weeks leading up to the third quarter earnings report. Obviously, Wells Fargo snags high grades in how thoughtfully it operates (post-recession), taking care not to be as adventuresome in terms of risk-taking as other mega banks, and is playing its role in feeding the housing recovery. These are all things drilled into our head in a roundabout way by Warren Buffett, Mr. Buy With No Exit Date, and any fund manager that views JP Morgan's (JPM) 10-Q as too littered with unknowns as to even open it. Still, there was a series of oddities to what Wells Fargo produced in the third quarter, not anything that will cause the government to come a knockin', but little items that I believe will smack the weak hand bulls in the rear. Where those bulls will gallop? JP Morgan or a regional bank, provided they have grown comfy with this housing recovery being sustainable thesis and the notion of capital deployment to shareholders is alive and safe.

Keep in mind that the soft underbelly of what Wells Fargo issued combines with sector downgrades on homebuilders (due to valuation concerns in the context of slightly slowing order rates) and the aforementioned bullishness on the stock.

Here are the points of pain to this interested fella:

•Fee income was lower.
•Originations only rose slightly sequentially (overall better trends at JP Morgan), was looking for more given the housing numbers we have digested.
•Lower mortgage no revenue (commercial bank segment).
•Applications lower (sequentially).
•Application pipeline lower (sequentially).
•Auto originations down sequentially (better trends at JP Morgan), not a positive in the sense auto sales have continued to be strong.
•Wells Fargo continued to manage its expenses well, but I think the Street was expecting a trimmer percentage as a percentage of revenue.

In an odd twist, suddenly Citigroup has emerged as the name to own if one believes the market will course correct going into year end…to the upside. Why is that the case? In my view, Citigroup's third quarter was much easier on the eyes of the bulls, which badly want to play housing and improved numbers on league tables and are looking for “cheap” ways to make that happen.


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