Trading Wachovia: Very Tight Stops Strongly Suggested

On Fast Money and elsewhere it is being mentioned that Wachovia (WB) is setting up for a good trade. Reasons for the trade include the current write-downs, and the mention of the stock approaching recent lows (the 3 month chart does show $25 providing some short-term support, but the longer-term trend looks less bullish).

As a caveat, it was mentioned that any buy here should have tight stops, very tight stops. In general, it is probably more prudent to wait until one sees a break from the longer-term downtrend, currently at around $28, before stepping in the waters. Granted, you lose that 10% move, which I am sure the $25.50 trade with tight stops is hoping to capture, but the risk in financials in general is a little too steep.

There are also new concerns with dilution, the reduced dividend, and the extra cash that is not needed for current write-downs ($7 billion in new stock offerings and saving $2 billion in reduced dividends to cover $4.1 billion in write-downs and credit loss provisions). Where is the other money going? If future write-downs are expected, and anticipated, then the stock may trade lower. On the other hand, if the extra cash is to sure up the balance sheet, and give Wall Street confidence that the bank can weather any new, "smaller" hiccups, then we may see higher prices. Either way, the recommended tight stops are certainly in order, and prudent, not just for WB, but all financials.

If one really wants to consider any potential bottom move for financials, the Financial Select Sector SPDR (XLF) ETF may be a safer trade. It will help reduce your firm-specific risk, which still seems to frequently pop-up in this sector.

Disclosure: None.

Comments

[WorldTracker]

WB is just beginning to understand how badly they were taken by those wonderful folks at GDW. $25.5 B and it's been straight down ever since. 99% of the loans were ARM's, and record numbers sold in '04,'05, and '06, Jeremy Gitt (former Merrill Lynch Banking analyst) added to GDW Board in early Sept. '05, shortly there after GDW, it's $125 Billion portfolio, and 230 + Branches were acquired by unsuspecting Wachovia ( represented by ??? Merrill Lynch, I do declare) Herb & Marion, converted their 180 million shares, started a foundation, and slipped away. Pres. of GDW Jim Judd was left behind to pull the pin, the rest is history, a lot of WB investors were blindsided. I'm wondering when WB will put all the pieces together and go to court. Judd can't be accounted for, some say he's retired as announced last summer, others stipulate that he's still employed as Sr. Exec. advising the Mortgage Division, ( like asking the Boston Strangler to massage your neck), he never surfaces, and he has all the answers.
Meanwhile the portfolio of loans keeps blowing up, and should it be marked to market would show serious shrinkage. Now investors and unhappy ARM clients are finding their way to Attys. offices, as the word predatory starts to emerge, it is simply a matter of time. One or two classes get certified, and this stock will be a teenager. The Board is rallying behind Thompson, it is folly, Calif. 60% of the loan volume, and a decimated Central Valley are set to explode. Calif. litigation is a little slow to get going, but will make Enron look like a "tea party" once some of the nasty practices are highlighted. Did all the Execs. from GDW keep their stock, or did they let WB take the ride alone??? Herb??? Marion???, Jim???