August 7, 2009 – 3:07 pm
by Teri Buhl for

The smart money has turned bearish on Wells Fargo again.

Yesterday, rapid put volume and big block buys on the September 26 strike price had hedgies buzzing. On Thursday, WFC traded 87,500 calls against 194,000 puts for a 2.20:1 put/call ratio. That type of unusually high volume set off alarm bells, and clients received email alerts to big institutional money turning negative on the stock.

Two well-known bank analysts said they got a rush of calls mid-day from their top hedge fund clients sniffing around for the name of the block buyer. According to traders on the CBOE and sources inside the firm’s trading operation, it was none other than the recently-hailed trading profit leader Goldman Sachs. CBOE trading records show the put buyer traded around 30,000 contracts at the September 26 strike price paying $1.05 and $.1.10 between two big blocks. Word on the exchange floor is this was a naked put and not a hedge.

The meaning: Goldmanites and other smart money are betting Wells’ stock gallop is over and the sharp reversal in bearish activity is a ‘tell’ sign that a downside move is in the near future. Goldman would not comment on its trading positions.

Andrew Wilkinson, market analyst at Interactive Brokers Group said, “This was a very well-researched, well-timed turn on Wells Fargo yesterday.”

Pete Najarian, of, warns to be cautious on Well Fargo, while his Fast Money buddy Guy Adami said on yesterday’s show that he’d ride a full-blown short now. FBR Capital Markets analyst Paul Miller has a current price target of $15 on the stock and recommends to short the heck out of it while it’s so overvalued. Famed short-sellers like Jim Chanos and David Einhorn, who successfully shorted Wells in the past, have likely been ramping up their short positions while the stock is flying at a high.

WFC hit a high for the year today at $29.34. Data Explorers says there has been a rapid increase in the short base this week, rising from 1.5% to 2% of shares outstanding on loan.

Why all the recent souring on the mortgage banking giant, considering they blew analyst EPS estimates out of the water again (by over 40%) for the second quarter? Because once again, it’s believed that Wells Fargo is playing accounting tricks to show paper profits like they did in Q1, this time off of goodwill from their Wachovia purchase.

Wells Fargo — which has a strange practice of never answering analyst calls when they announce earnings — will publish their 10-Q next week, sending data combers to scour through the details to try to find where the core pre-provision earnings really are.

According to Paul Miller’s team, there are a few key data points that just don’t add up. One red flag they present is that mortgage rate movements in the quarter were not enough to justify a billion-dollar write-up in their mortgage servicing rights. Another is the fact the non-performing assets accelerated 45%, with an increase of $5.7bn over last quarter, yet the bank reserved only about half of what it did the quarter before, at $700m for future loan losses. And this isn’t the first time in recent months when analysts have complained bitterly that the bank was playing around with loan loss reserves for the purpose of boosting profits.

Miller — who doesn’t think the bank’s net charge-off or non-performing assets are going to decrease anytime this year, given the lagging job market — continues to warn that they are simply not managing their credit cost. He writes in a note to clients on July 22, “WFC will have to materially increase its provision expense, which will put pressure on earnings and valuations.”

Main street and most of the financial press still seem enamored with the talked-up-by-Buffett Wells; but the institutional money is starting to place its bets — based on extreme skepticism with a firm which has allowed serious questions to fester about how they’re really making their profits.

Disclosure: The author holds no relevant investment positions.