Wells Fargo Pick-A-Pay Portfolio: Presented without Comment*

Some of you have may have noticed the ongoing debate regarding the Pick-a-Pay portfolio of Warren Buffett’s beloved Wells Fargo (NYSE: WFC). In order to put this horse to pasture, I present the following with no pejorative words and only a few minor comments.

10 Things Wells Fargo Wants You to Ignore

It has been well documented that Warren Buffett is Wells Fargo’s biggest fan – and largest shareholder (through Berkshire Hathaway). In fact, in his annual letter to shareholders he states that WFC is likely to increase its dividend the most among his common stock holdings. Given that WFC cut its dividend after taking TARP money, his prediction should not come as a surprise.

Another interesting comment from the Oracle of Omaha was his take on Black-Scholes. He writes that the model “produces WILDLY inappropriate values when applied to long-dated options” (emphasis mine). Then he wryly states that he “would rather be approximately right than precisely wrong.”

Why the Wells Fargo CFO Quit and Pick-A-Pay Games

What, exactly, would cause a highly paid executive to abruptly quit his job? The executive in question is Howard Atkins, former CFO of Wells Fargo (NYSE: WFC). In 2009, Mr. Atkins’ total compensation was $11.6 million. That was up from $4.9 million in 2009 and $5.7 million 2007 – that’s not bad living by any standard. It’s no secret that I have often been critical of WFC and their financial reporting. It’s not that I have a vendetta against the company – as a New Yorker, I don’t run across them in my every day life. I don’t own the company’s stock or options nor do I have a short position. So, why do I continue to shine a light on the company? Quite frankly, I believe the company does not receive the same level of scrutiny that its peers receive. I believe this is likely due to the fact that Berkshire Hathaway (NYSE: BRK.A) is their largest shareholder. As many of you know, investment banking is driven largely by fees received from capital raising and Mergers & Acquisitions. Buffett’s empire of portfolio companies crosses numerous sectors. Those companies, from time to time, find it necessary to utilize the services investment banks. Those services typically result in hefty fees. Why upset uncle Warren? Just a thought, but I like conspiracy theories.

Why Berkshire Hathaway should be Broken Up: time for conglomerates to go the way of the Dodo

Warren Buffett’s house needs remodeling. Barron’s made a bullish case for Berkshire Hathaway (NYSE: BRK.A) this weekend touting Mr. Buffett’s sizeable, and growing, war chest. The article, quite frankly, is missing the point. BRK.A is an ugly conglomerate in need of restructuring.

The primary rationale behind the conglomerate structure is that the company will benefit from diversification. Thus, it should be better able to withstand the ups and downs of the market cycle. In addition, they should have a financing advantage over more focused but smaller firms. However, with the company’s triple-A rating now gone, some of the relative funding advantage has been lost. Recall, American International Group (NYSE: AIG) and General Electric (NYSE:GE) both had this advantage which allowed their financial subsidiaries to become market leaders – which ultimately inflicted significant pain on shareholders. Perhaps an unintended consequence of the conglomerate structure?

Over the past 10 years, BRK.A has grown at a compound annual rate of approximately 5%. This compares to purchasing a 10 year bond yielding 5.43% in January of 2001. I know the cheerleaders will say that BRK.A outperformed the S&P whose compound annual return was less than 1% over that same period, but is it the right metric of comparison?

The Truth about Bank Lending

The rhetoric from D.C. is deafening, but is it true that banks still aren’t lending? These accusations seems counterintuitive given that we are in the perfect storm for lenders – record low short term rates and a relatively steep yield curve.

By all accounts banks, like the Fed, should be “printing” money to the delight of their shareholders. Are they?

All You Need to Know about Round Two of the Roundtable

I got up early and read the paper so you don’t have to. The following is the “Cliff Notes” version of round two of Barron’s Roundtable:

Felix Zulaf – we’re in a trading range, get long volatility. There is a growing world middle-class so put some agriculture in your portfolio.  While you’re at it, add some uranium exposure because energy demand is going to rise too. Greece is in a deflationary spiral and will cause the Euro to decline eventually hurting Germany. Finally, gold – it could fall short-term but it has “unlimited” upside, buy the dip!

Archie MacAllaster – moderately bullish and has a penchant for dividend paying stocks (with prospects for hikes). He likes a couple of large-cap life insurers because they are cheap relative to earnings, which are on the uptick but still well below peak levels. He also continues to like Wells Fargo (NYSE: WFC) for the long term. His speculative play is Delta Air Lines  (NYSE: DAL) because it is part of the quasi-monopoly that is the airline industry.