InsideWaMu

I was always a Times reader myself, clearly I’ve been loyal to the wrong paper!  Sorry lovable Hearst Corp I plan to switch over my subscription tomorrow morning.

I’m also sorry to disappoint you readers (both the loyal oldies and the newcomers), but this influx of traffic is having me rethink the whole blogging about my employer thing. I know most bloggers would give their left nut to be mentioned in the real media, and I know my blogging about WaMu is not quite as risky as blogging about Tibet while living in China, but there are ramifications that I need to more fully think through before I take this to the next level. I was OK with this as long as the audience was relatively small but the enormous rampup in hits from Sunday evening when the P-I posted their story online is giving me second thoughts.

So I have temporarily moved the earlier blog posts offline.  I still have them on my server and can turn them back on in a flash if I decide to.  I hope to make up my mind about what to do in the next day or two.  On the bright side, this does confirm that there’s a pretty sizable market in WaMu talk!

Until then, feel free to read that infamous elevator post below.  And for the love of god please be more considerate riding the WaMu Center elevators.

Since the earnings call when the bong-hitting analysts blew it and failed to ask Kerry or Tom about post-IndyMac deposit runoff, I’ve been begging WaMu on the blog to publicly disclose just how much deposit runoff they’ve seen so we can assess WaMu liquidity.  I’m sure my miniscule blog had nothing to do with it but fortunately yesterday WaMu did the right thing and announced a very strong $50B in excess liquidity as of Friday.

To refresh everyone: as of June 30, WaMu had $40B in excess liquidity.  With expectations of ~$5B in deposit runoff in wake of IndyMac we would have expected WM to now have $35B in excess liquidity.  That would have been somewhat tight especially in this nervous environment, but as I explored in my previous post, not yet enough to cause alarm.  Still though every day WaMu did not address its liqudity position, more rumors and bogus “analyst” reports sprung up causing uncertainty in the market.  And as we all learned from Benjamin Graham, Mr. Market does not like uncertainty.  This has played out with the enormous volatility in WM stock the past two weeks.

This latest news on $50B is fantastic because in my mind this means liquidity is simply not a problem in the near term.  And from the recent earnings release, we also know capital is not a near-term problem.  To refresh: WaMu currently has an $8.5B reserve plus $7B in excess capital (current tangible ratio is 7.79% vs target of 5.50%) + $1.1B in excess capital they will get by shrinking the balance sheet $20B by 12/31/08 (freeing up that 5.50% capital minimum x $20B) + ~$3B in operating cash flow that they will earn over last two quarters of the year.  That gets me to $19.6B WaMu could conceivably chargeoff in Q3 and Q4 2008 and still meet the bare-minimum of being well-capitalized as of December 31.

Compare that $19.6B in potential vs the $2.2B in actual chargeoffs in Q2 2008.  That number will surely rise in Q3 and Q4, but it’s almost inconceivable that WaMu will run out of capital near term.  Now that we also know WaMu will not have a liquidity problem in the next few months, the near-term survival of WaMu should no longer be in question.  It will survive. 

The real focus now should be on our long-term prospects.  Once the mega-provisions stop and WaMu starts trading on P/E again instead of tangible book value the stock will rise significantly.  Not to $46/share again - remember they diluted half the shareholder base with recent capital raises - but its conceivable stock could be back in the high-teens within 18-36 months.  The underlying earnings stream of the last few years (varying between $0.6B - $1B a quarter) is still there.  If the provision ever slows down, that earnings stream translates to a $29 - $48B market cap company at a 12x P/E.  Divided by roughly 2 billion shares (still haven’t seen official post-TPG share count) that equates to a $15 to $24 stock.  Not $46/share, but if you buy now at $4 who wouldn’t appreciate that kind of return over an 18-36 month period?

The only other real question remaining is: if WaMu “should” have been down to ~$35B in excess liquidity by now, and that included moving all unpledged assets for cash at Fed/FHLB/whoever else would swap assets for cash, where did the excess ~$15B in liquidity come from?  Who provided it, and what sort of usurious terms did WaMu have to agree to to get that funding?

One of the interesting things I’m finding out about blogging is the reams of data available to track how I’m doing, who my readers are, where they’re coming from, what searches are sending them to me, how many pages they’re reading, etc.  It’s really pretty cool.  You register with Google Analytics, paste a little code at the bottom of your main page and every night at midnight they load in the data from the prior day - and it’s all free.  

Since the traffic has really picked up in the last few days I thought I’d share with you some of the data that I see, so you can get a better appreciation of who your fellow loyal readers are.  I love this stuff and find it really interesting.  You on the other hand may just find it creepy that I can know so much about you guys.

Note: I made a formatting change that goofed the tracking code for all day on July 21 - that’s why there’s no data

So from July 11 when I started to July 25, there have been 2,587 page views in 905 visits by 662 unique visitors.  Note that the huge majority has come from the last two days (averaging 300 visits and 800 page views each day)

Taking a step further, here is the breakdown of what sites you guys are reaching me from:

Check out the huge inflow from Yahoo finance message boards, especially how “sticky” they are, checking out 2.7 pages per visit and spending nearly 4 minutes a visit.  Upon further review, looks like this particular post by arenas341 on the message board is driving all the traffic.  So whoever you are arenas341 at yahoo, thank you.  You clearly know good websites when you see them.

The next cool thing is drilling in on the clicks from search to see which search terms in google and yahoo are sending you my way.  Here’s the full list, note that 97 of the 185 visits are some variant on wamu bank run.  Whoo Hoo!

The next level is - from which cities are you visiting me? 

Who knew the blog was so big on the eastern shore of Australia??  G’day you guys!  If you throw another shrimp on the barbie and set aside some ice cold XXXX or Toohey’s New I may just have to go visit. 

Also weird that there’s so much traffic from San Jose - 187 visitors - vs just 92 in Seattle.  And last but certainly not least, the visits by server/network.

So surprisingly “only” 214 visits and 648 page views from the WaMu network.  I’d have thought more, but that’s still not bad, and does represent 16 hours and 20 minutes of “work time” spent here.  Anyone willing to take bets on how long before I’m blocked from the WaMu network?  I don’t suspect there will be a mass uprising when that happens, unlike when they tried to shut off ESPN.com a year or two ago.  That lasted maybe a day or two and was when we found out just how much the guys on 31-33 floors read ESPN.com.

Also interesting: #19 TBWA Chiat/Day.  Not sure what a marketing firm is doing checking out my blog (probably didn’t like my shot at marketing on a prior post), but they appear to like the blog as a whole spending almost ten minutes per visit and checking out five and a half pages.

And how about #132 Lucasfilms. Maybe the blog can be incorporated in the next Star Wars movie if they ever get around to making #7, #8 and #9?

Among WaMu competitors I see BofA at #35 (though all bounces, meaning they closed website or didn’t further click links).  Chase is at #42 with a couple of extended visits (feel free to post guys, especially if you want to comment about this article) UBS at #59 and stopping by for one visit Astoria Federal at #72 and Puget Sound Bank at #182.

So if I want to drive more traffic I should evidently blog more about bank runs and/or post links to my website on Yahoo Finance - I guess that’s where the current critical mass of WaMu readers read. 

I really don’t intend for this to become an investing/WaMu stock blog.  That’s what Yahoo! Finance message boards are for.  But with the recent decline in the stock I’ll make a one-off exception, particularly as the $3 to $6 stock rise two weeks ago is still such a hot topic in the hallways of the WaMu Center.  

Everyone not under the “insider” restrictions thought about buying back then and although most passed on it we’re all jealous of those who bellied up and doubled their money in five trading days - at least those that got out at $6 - we’re pointing and laughing at you greedy bastards for whom doubling your money in a week wasn’t good enough!  As WaMu plummets again to under $4 ($3.97 right now in after-hours trading) we know what will be the main discussion topic tomorrow.

So what has materially changed from July 9th when stock closed at $6 to July 14 when stock touched the $3.03 a share low; to yesterday when stock was trading above $6.25; to now as stock drops under $4?  Very little.  Let’s take a look at the big items:

• WM had earnings call.  Earnings were -$6.58/share vs the expected -$1.05/share but if you really look at what happened, $3.24 of the miss was an accounting hit due to TPG capital infusion, there were some sizable restructuring charges and rest of miss was due to an acceleration of the provision taken this quarter NOT (at least for now) a resizing of expected provision.  The single most important thing to come from the earnings call is that the top end range on the $190B mortgage portfolio is still $19B in losses.  That didn’t change with the larger Q2 provision. 
• We also know WaMu will not have a capital problem for the forseeable future with tangible ratio of 7.79%, tier 1 risk-weighted of 8.44%, a hefty $8.5B reserve on the balance sheet, and a strategy to shrink the balance sheet another $20B or so by year end freeing up an additional $1.1B in capital.  (damn, the WM treasurer needs a raise, he’s kicking ass for us!) So capital’s good.  How about a liquidity problem?
• IndyMac collapsed.  This may or may not play into the stock drop, but we don’t know since the moron analysts didn’t ask about WaMu’s deposit runoff post-IndyMac on the recent earnings call.  We know liquidity wasn’t even close to being a problem on June 30, and there hasn’t been an IndyMac, Northern Rock style run on WaMu since IndyMac collapse.  But even in this evening’s press release (commenting on a bogus analyst report) the media is quoting the June 30 liquidity number of $40B.  It’d be a lot nicer to know publicly what the liquidity number is as of mid/late July.
• WaMu ratings were reduced by S&P, DBRS and put on watch by Moody’s.  This certainly isn’t a good thing, but it’s not the bad thing it’s made out to be.  Providing the deposits hold, WaMu isn’t hard up for liquidity and so wouldn’t need to issue new debt.  So the ratings cut impact should be fairly limited.  Additionally (and I may be talking out of my ass here, but think I’m right) the ratings drops appear to be at holding company level not bank level, so collateral increases on assets pledged due to a ratings decrease shouldn’t be major since most assets are held in the bank.  (feel free to chime in if anyone knows more about this)

So if you agree with me that major fundamentals (credit, capital, liquidity) don’t appear to have changed (certainly not by factors of 50% and 200% driving the 50%/200% stock swing) then it would appear to be random stock market volatility swinging WaMu between $3 and $6 a share.  Which means buying at $4 isn’t necessarily a bad idea at all.  Provided you can stay liquid odds are WM will be back up at $6 sooner or later, and you can earn 50% on your money.  As Seattle’s favorite Oklahoman would say that’s a “sweet flip”.

If your time horizon is longer (18-36 months), try buying XLF the financial sector ETF.  It has all the upside of WaMu (holds many similar far oversold/beaten down financial stocks that will rebound) but comes without the company-specific risk of buying WaMu or any other single stock that may implode.  And if you really want to go nuts try RFL which tracks a similar financial index but leveraged to return 2x the index.

Just keep in mind stock investing is risky, WM right now is even riskier, and please try not to sue me if you buy at $4 and WM does go under or sells at a Bear-esque price to someone.  I’m no stock picking expert, nor did I stay at a Holiday Inn Express last night; I just post on a blog.

#1: Elevator Etiquette

Come on, be honest.  Is there anything that pisses you off more day-to-day than being stuck in the WaMu center elevator lobby bank at one of the busy periods - you know the times, when you can’t even get past the security gates to get into the elevator lobby.  Listening for five to ten minutes of people bitching about how long the elevators take, how it’s wasting “their time”, how they don’t understand why it takes so long, why can’t WaMu be more efficient,  etc, etc - and then watching those same people get on your elevator and hit the button for floor 19 when floors 20 and 21 are already hit (I’m using Marketing floors as an example because I can’t stand the way they spell whoo hoo in our ads, but this applies to all the three-floor internal-stair bundles and all the elevator banks).  Do these people not connect the dots that stopping on Every. Single. Floor. on the way up is directly correlated to the length of the wait in the lobby?  Do they seriously place more value on themselves not walking down/up a flight of internal stairs vs wasting 20 seconds of the lives everyone in that elevator and everyone down in the lobby?  Or are they completely oblivious to this?  Either way if these people constitute the employee pool at WaMu - are the recent earnings really that shocking? 

I even have no sympathy for instances where you’re going to floor 21 and the floor 19 button is hit and you now need to walk up two flights of internal stairs.  Seriously if you’re not on crutches, how hard is it to walk up or down some stairs?  And to be frank more than half of these people could use a little light cardio anyways.  Hell it’d probably even reduce our health insurance liability ever so slightly and be accretive to earnings.

Since it’s too late to rebuild the elevator banks and run them efficiently like the EET (or whatever that building on 3rd ave is called where you punch in your floor, and the system tells you which elevator to wait for) could someone in corporate property services PLEASE reprogram the elevators to only stop once every three-floor bundle.   So say if 20 is hit, someone wants to go to 21, the 20 becomes unlit and anyone trying to get off on those three floors would just have to walk down from 21.  This would free up a little incremental time for each and every person, get us all a little more in shape, and kill the dead time in the lobby.  And since we are a fair, caring, human and unprofitable institution we could even set aside one elevator per bank for the people who are unable to use the stairs, and that elevator could stop at Every. Single. Floor. on the way up.

If just one person reads this and decides to change their elevator habits, I will consider this entire blog venture a success.