Analysts often as about "earnings quality". How accurate are quarterly numbers? Are they being "managed" to make a company’s fortunes appear better than they actually are?

The question has come up in relationship to the last quarter reported by Wells Fargo (WFC).

According to The New York Post, "Because of the eroding quality of its loan portfolio, Paul Miller, an analyst for Friedman, Billings, Ramsey & Co., believes Well Fargo will have to add up to $2 billion in provision expenses next quarter – money set aside to cover bad loans."

The thinking here is that Wells Fargo has a substantial portion of its mortgage loan portfolio in geographic areas where housing prices are still falling rapidly and defaults are likely to rise.

If Wells Fargo has been putting lipstick on its pig, the stock could take a sharp fall. Over the last three months, WFC shares are up almost 20%. That contrasts to drops in shares of Citigroup (C), JPMorgan (JPM), and Bank of America (BAC). If, due to an impression that it is doing poorly, Wells Fargo moves down as much at Citi has, its shares would go from their current level of $32 to about $26.

Douglas A. McIntrye

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