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- Morgan Keegan is out with a decent call on Wachovia (WB-OLD) noting the shares outperformed last week, up 30.9% versus a 6.4% rise in the KBW Bank Index [BKX]. However, this rally followed a period of significant underperformance by WB shares between 07/23-07/25 when shares declined 23%, versus a 12% decline in the BKX.

They believe that last week's rally was mostly driven by short covering ahead of new CEO Bob Steel's meeting with the sell-side later today. The firm would be defensive and take profits ahead of the meeting as the reality is there are no easy fixes near term at Wachovia.

Keegan notes they have seen this same story play out several times before during this current credit cycle where share prices have risen, ahead of fundamentals, following CEO changes. John Thain - Merrill Lynch (MER) and Alan Schwartz - Bear Stearns (NYSE:BSC) are a couple of examples that they have witnessed over the last one year, where shares rallied following the CEO announcement only to retrace back later.

Based on Mr. Steel's comments during the second quarter earnings conference call, they believe it is too early to make the call with regards to whether or not Wachovia will need to raise more common equity given the significant credit challenges ahead.

While the firm believes Mr. Steel is a good-fit to fix Wachovia, they are not sure what he can say to alleviate balance-sheet and credit concerns after less than a month in office when he meets with sell-side analysts later today. While the recent resignations of the Chief Financial Officer - Tom Wurtz and Chief Risk Officer - Don Truslow indicate the urgency with which he is approaching the job, in our view it also risks Wachovia being saddled with a new management team that might require more time in getting familiar with the balance-sheet and the complex issues that currently face the bank, prolonging the fundamental recovery of this franchise. Having said that, they still expect more changes among the executive ranks and line of business heads at Wachovia in the coming months.

Nothing has changed fundamentally. Wachovia has significant exposure to Option-ARM (25% of total loans) and CRE loans (10%) which should continues to drive higher credit losses, requiring additional dilutive capital infusion.

Reiterates Underperform.

Notablecalls: A decent call. Not sure how to trade it, though. Short it right here and risk getting caught in a wave of positive stuff coming out of the conference call. I'd rather sell any rips during the day as I think this offers a better risk/reward. I'm sure others will join.

Source: Wachovia: Unclear How to Play Heading Into Today's CEO/Sell Side Meeting