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.
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4 responses so far ↓
1 Allen Taylor // Jul 24, 2008 at 11:34 pm
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
2 ghostofcorcoran // Jul 25, 2008 at 12:15 am
Bogus analyst report? Really? I thought the numbers were straight out of the WM press release (and filed with the SEC). There is a line item on the balance sheet named “Fed funds purchased and commercial paper”, and it did decline from 2BB to 75MM in the past six months.
“Securities sold under agreement to repurchase” is also a line item, that also declined.
What conclusion you can draw from those numbers, I don’t know. But the numbers are straight from the financials. Unless you think the financials are “bogus”. Since they are pre-10Q, they are unaudited.
3 Flash // Jul 25, 2008 at 1:02 am
Yeah disingenuous would have been a better word than bogus - I’ll correct it. Her facts quoted in the release are correct, but I believe her conclusions drawn from the facts seem contrary (even opposite) to what rational non-headline seeking analysts would conclude.
Looking at year over year comparisons it appears WaMu made a conscientious decision to move away from shorter duration commercial paper to the FHLB last year - I assume to stretch out durations on their liabilities to more closely match assets. You give up a little extra NIM income when fed funds goes down, but gain liquidity and security with the longer durations.
I don’t think it’s because they knew CP markets would blow up as much as they have, but in hindsight this was a huge win to not be in that market right now trying to roll over the CP. Go ask Bear Stearns how much fun that is.
So instead of an issue of “CP providers” fleeing the bank I assume WaMu priced themselves out of the CP market (offered lower rates on CP than the market was willing to accept) and if they priced back up could go get as much as the rest of the institutions out there.
It appears to just be a regular strategic decision since WM had plenty of room at the FHLB and still does (almost all assets in portfolio are parked in the bank subsidiary which can trade assets for cash at the FHLB - albeit at a discount).
The real issue - as I hit on in the post - is if the retail deposits deteriorate, and “analyst” stories like this only heighten the depositor sensitivities. That’s why I almost wish WM would come out and say: “Hey, we lost $5B in retail deposits post IndyMac, we still have $143B and now $35B in excess liquidity. We’re still very confident of our liquidity position” … or something like that with whatever the real numbers are. Otherwise it could be a few more months of puckered cheek time for everyone until mid-October and the Q3 release.
4 What the hell is a Wamullian // Jul 25, 2008 at 6:36 am
ghostofcorcoran - true the numbers were ours however, Shanley’s report is a text book example of a fact twisting disinformation campaign. I cannot believe that the lemmings at the A.P. ran this steaming pile of yak dung! Shanley is a bond analyst for BofA and that should have caused the press to be a little more criticle of her story and motives. oh well… shock sells chicken little.
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