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Wells Fargo Stock Analysis: Why I chose Wells “Fraud-go!” Fargo & Company (NYSE: WFC) for analysis? Because, since, last week, Wells Fargo has been buzzing the news alerts. It has been making news for all the bad reasons that there is to think of. Let’s go ahead and take the IDDA approach to see how the Wells Fargo stock could be impacted by the news.

Overview of Wells Fargo Stock

The Federal Reserve imposed shackles on the company. Responding to recent and widespread consumer abuses and other compliance breakdowns by Wells Fargo, the Federal Reserve Board on Friday announced that it would restrict the growth of the firm until it sufficiently improves its governance and controls”

 


 

Wells “Fraud-go!” Fargo & Company (NYSE:WFC) was created into the modern day known mammoth as a result of the Acquisition of Wachovia. On October 3, 2008, Wachovia agreed to be bought by Wells Fargo for about $14.8 billion in an all-stock transaction, a deal mediated by the then Treasury Secretary Henry Paulson and Timothy Geithner with their associates.

Federal Reserve Shackles on Wells “Fraud-go!” Fargo & Company

Federal Reserve site comments “Concurrently with the Board’s action, Wells Fargo will replace three current board members by April and a fourth board member by the end of the year.

In addition to the growth restriction, the Board’s consent ceases and desist order with Wells Fargo requires the firm to improve its governance and risk management processes, including strengthening the effectiveness of oversight by its board of directors. Until the firm makes sufficient improvements, it will be restricted from growing any larger than its total asset size as of the end of 2017. The Board required each current director to sign the cease and desist order.

The then, Chair Janet L. Yellen said “We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again. The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.

Federal Reserve further goes to publicly accuse Wells “Fraud-go!” Fargo & Company (NYSE:WFC) of prioritizing Overall growth over a broad spectrum of risks in the pecking order of its business strategy.

Due to lack of systematic organisational structure to address the problem of escalations regarding breach of compliance and the ability of a sound corporate governance structure bring them to the board of directors.

However, the biggest blow to Wells Fargo was perhaps this statement by Federal Reserve “The Board’s action will restrict Wells Fargo’s growth until its governance and risk management sufficiently improves but will not require the firm to cease current activities, including accepting customer deposits or making consumer loans.

The cherry to this cake is the fact that Federal Reserve Board has sent letters to each current Wells Fargo board member sanctioning that the firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations.

The red tape did not just stop here an explicit sanction was  also sent to former Chairman and Chief Executive Officer John Stumpf and previous lead independent director Stephen Sanger stating that their performance in those roles, in particular, did not meet the Federal Reserve’s expectations.

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Fake accounts Scandal of Wells “Fraud-go!” Fargo & Company

Many of you would be aware that in end of Quarter 3 of FY 2017, it was uncovered that Wells “Fraud-go!” Fargo & Company (NYSE:WFC) was creating fraudulent accounts for its customers.

This sparked massive debate and outrage all across United States of America, and retail clients (individuals) were the victims of this crime who suffered the maximum loss of business, loss of reputation and a loss of flawless credit score.

This issue drew such a strong criticism and outcry from public that the United States house of Senate had to call Timothy Sloan (Wells Fargo, CEO) for a congressional hearing where Senator Elizabeth Warren scrutinized their corporate governance, moral hazard, and other malpractices of misspelling accounts and many times opening accounts by way of deceit by burying it in jargon in the “Terms & Conditions” within the contracts mostly without the knowledge or consent of the clients.

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Sentiment Analysis of Wells “Fraud-go!” Fargo & Company

Investment Professional’s Sentiment

Wells “Fraud-go!” Fargo & Company had opened millions of fake user accounts which was subsequently followed by a subpoena and an indictment in front of US Congress. This followed by a material public action by Federal Reserve on this company on 2 February 2018 has empirically dampened the prospects of achieving any kind of alpha with Wells “Fraud-go!” Fargo & Company shares.

Wells “Fraud-go!” Fargo & Company has not only violated the law of the land. However, Wells Fargo employees that were involved have violated the following CFA rules of Ethics, standards of professional conduct: 

  1. Standard I-A: Knowledge of the Law
  2. Standard I-B: Independence and Objectivity
  3. Standard I-C: Misrepresentation
  4. Standard I-C: Misconduct
  5. Standard II-B: Market Manipulation
  6. Standard III-A: Loyalty, Prudence and care
  7. Standard IV-C: Responsibilities of Supervisors
  8. Standard VII-A: Conduct as Participant in CFA Institute Programs

Thus, Wells “Fraud-go!” Fargo & Company employees who were CFA charter holders and CFA candidates involved in this scandal have violated the sacred Standards of professional conducts for some or all of the eight rules of ethics as set by CFA Institute.

The investment professional diaspora are ashamed by lack of ethical actions by our fellow professionals, our supervisors and our subordinates. These kind of actions are inexcusable and not just a mere lack of thinking or markets loss of confidence. These are deliberate actions of wrongdoing, deceit and crime being committed by white collar criminals who fully knew what they were doing and indulging into.

As stated by Standard I-B: Independence and Objectivity of CFA Institute, standards of professional conduct, often the excuse used by employees were that they were just doing what they were being instructed by their supervisors. They violated Standard I-B: Independence and Objectivity of CFA Institute, standards of professional conduct by not having an independent thinking, and when they did find out that wrong doing was happening they failed to adhere to the correctional techniques mentioned in the CFA guidelines.

Retail Investors Sentiment

These individuals failed to adhere to the strictest of the law between CFA Institute code of Ethics, standards of professional conduct and the local Law of the land and thus violated CFA code of Ethics. They also violated United States of America law by not abiding by it.

As far as the sentiment goes for the non-professional investment community I am doubtless that they are ashamed, outrage, angry and hurt by Wells “Fraud-go!” Fargo & Company and such unethical behavior by them. This is evident by the picture above.

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Fundamental Analysis of Wells “Fraud-go!” Fargo & Company

Peer Analysis

Source: Thompson Reuters Eikon

Wells “Fraud-go!” Fargo & Company has a diversified spectrum of peers however, we can successfully chisel it down to a niche of Big 4 competitors which are J.P. Morgan Chase & Company, Bank of America Corporation, Citi Group Inc. and Goldman Sachs.

Earnings per share

Source: Bloomberg L.P.

However, it becomes more and more evident as we delve deeper into our analysis that Wells “Fraud-go!” Fargo & Company will achieve an EPS growth rate of -6.05% where as the industry EPS growth rate will be 14.66%. Bank of America will achieve an EPS growth rate of 18.29%, Citigroup will achieve an EPS growth rate of 5.15% and lastly JP Morgan Chase & Company will achieve an EPS growth rate of 14.38%. 

Source: Bloomberg L.P.

Wells “Fraud-go!” Fargo & Company is the second worst company in terms of EPS growth and Mizuho Financial Group leads the way with a staggering -13.88% whilst Sberbank of Russia PJSC leads on the other side of the aisle with a staggering 138.54% EPS growth rate. Hence, clearly Sberbank of Russia PJSC is an outlier with such an exorbitant EPS Growth rate and So is both Mizuho Financial Group and Wells “Fraud-go!” Fargo & Company.

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 Capital Analysis of Wells “Fraud-go!” Fargo & Company

Stock Beta

Source: Thompson Reuters Eikon

The 5 Year (Monthly) Beta is 1.13 indicating that the Wells “Fraud-go!” Fargo & Company’s Share price is more volatile than the market. In our case since the beta is 1.13 this translates into Wells “Fraud-go!” Fargo & Company being 13% more volatile than the market

Growth or a value stock

Source: Thompson Reuters Eikon

On the one hand, Wells “Fraud-go!” Fargo & Company is a financial institution/bank thus it is positively correlational with the overall economy. This became evident in 2008 subprime housing crisis and 2015-16 Chinese debt bubble scare when the economy went belly up so did Wells “Fraud-go!” Fargo & Company. Thus it would lead any prudent investor to argue that Wells “Fraud-go!” Fargo & Company is a Cyclical Stock as well as growth stock.

However, due to deteriorated fundamentals, shackles on Wells “Fraud-go!” Fargo & Company growth story, and markets and consumers loss of confidence. Wells Fargo may be stuck in a hamster wheel situation where they can neither get out of the situation nor move past the situation. Wells “Fraud-go!” Fargo & Company are facing a Public relations disaster the company is riddled by a curse of bad market sentiment due to its unethical and horrible corporate governance and compliance, regulatory structures.

Source: Thompson Reuters Eikon

When once sees the above graph it does not seem to indicate an inherent underlying fundamental plague amongst the stock and that it is absolutely true. This is because of the effect of TINA (There is no alternative) and irrational exuberance. Even Honourable Alan Greenspan, former Federal Reserve chairman agrees that there is an underlying bubble in both stock and the bond market. I will discuss overall capital market conditions in my concluding sections of this report.

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Technical Analysis of Wells “Fraud-go!” Fargo & Company

Long Term

Source: Tradingview

The following is a Long term technical chart of Wells “Fraud-go!” Fargo & Company. Long term support and resistance are marked with yellow line and the mid support/resistance marked with pink.

Zone A

This comprises of price movements between October 1996 and May 2013. This range tells us the long term growth story of Wells “Fraud-go!” Fargo & Company. It depicts the solid foundation on which Wells “Fraud-go!” Fargo & Company was built and how it became what it is today.

Situation “A”

Source: Tradingview

However, it is intriguing how we run interference with Situation “A”. It is here that we evidence that in September 2008 (Monthly candle stick) that we have broken through the resistance. However, this was met with a rude awakening. Considering that Lehman Brothers filed for bankruptcy on 15 September 2008. It is no surprise that the entire financials institutional groups started tethering and thus began their downward momentum. Hence, without any doubt Wells “Fraud-go!” Fargo & Company followed status quo and began its downward momentum.

Situation “B”

Source: Tradingview

In May of 2013, the upward momentum continued to be stronger than ever, and thus with the blessings of market momentum and the positive market sentiment Wells “Fraud-go!” Fargo & Company began its rally. Once, it finally broke this resistance. This resistance had now become its support and thus the market entered its next bull phase, which would be referred to as “Zone B”.

Medium Term

Zone B

Source: Tradingview

With markets presence of confidence at a rapidly accelerating pace and recovery from phenomenon such as Taper Tantrum, investors started flocking to Wells “Fraud-go!” Fargo & Company like scalpers to widened spread. This Pushed prices up until the point that it reached Situation “C”

Situation “C”

Source: Tradingview

Situation “C” is an intriguing situation as the market just reached a significant resistance. On just 2015 the candlestick made a leap of faith with acandlestickk hammer. However, lo and behold on 24th August 2015, Chinese stock market started faltering, shock waves were sent all across the globe and jitters were felt coming of resonating feeling reminding the market participants that their hangover of 2008 crisis has still not worn off. At this delicate moment on 15th-16th December 2015 Federal Open Market Committee headed by the then chairwomen Janet Yellen raised interest rates by 25 basis points. Sending a rude awakening to an extremely hungover global economy that was drunk on Fed Alcohol Stimulated by cheap money, low interest rates and quantitative easing.

Situation “D”

Source: Tradingview

Situation “D” is extremely delicate situation as the investors and traders were filibustering and flirting with the resistance and even though the candlestick for the month of March 2017 was philandering with resistance it failed to break. Thus, subsequently following the downward trajectory that the path with had been chosen for the price momentum.

Kindly also note that in October 2016, November, 2016 and September 2017 the candle sticks had a very close encounter, up close and personal where the stock nearly missed a cardiac arrest and avoided its fatality. This brings us to our Situation “E”

Situation “E”

Source: Tradingview

Situation “E” is the current dilemma which investors are scratching their heads about. It is this rapid movement which is keeping investors and traders with a vested interest in the stock price up at night. The stock is sending mixed signals. This might be a sign of a divergence or a trend reversal.

Truth be told, there are enough naysayers on both sides of the aisle who disregard each other’s notion.

There is one notion that argues that due to massive fundamental deteriorations by Federal Reserve under Jerome Powell’s Fed such lacklustre will not be tolerated and thus Wells “Fraud-go!” Fargo & Company is deemed to plummet and translate into a deeper market’s loss of confidence.

On the other hand, the alternative hypothesis argues that die to this massive fundamental change Wells “Fraud-go!” Fargo & Company will be incentivised to change its practices of corporate governance and this is primarily a structural break and thus this drop in share prices provides a buying opportunity.

Zone C

Source: Tradingview

The following is a 4 hour chart of Wells “Fraud-go!” Fargo & Company.

Situation “F”

Source: Tradingview

It we see Situation “F” we notice that triple whammy confirmation of the bullish momentum. The candle stick breached the Bollinger bands, the candlestick breached the long term resistance which effective became a resistance.

Situation “G”

Source: Tradingview

Situation “G” really shakes us up with a massive turbulence the candlesticks representing the red decline was Friday, 2 February 2018 and the massive structural break which opened below the support now resistance took place on Monday, 5 February 2018. This indeed again has a triple whammy confirmation of a bearish momentum. The Candlesticks have breached the Bollinger Bands, the  tenkan sen has crossed the Kijun sen from above whilst the candlesticks were below the Kumo clouds and lastly the candlesticks breached the support which in effect means that this support has now become the resistance

 

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Tanmaya Sharma

Tanmaya Sharma

A professional in the investment management industry. Tanmaya Sharma has an MSc. In Investment Management from Coventry University. Former employee of a Fortune 500 Financial Services company. BMC certified, Thompson Reuters Eikon cerrtified. www.linkedin.com/in/tanmaya-sharma

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