BUY TO COVER Beazer Homes (BZH) & Wachovia (WB)
Posted by intelledgement on Tue, 22 Jan 08
OK, while we still think the USA economy is headed for a big fall, we can’t fight city hall here. Today’s emergency 75-basis point cut by the Fed illustrates that Ben Bernanke is finally taking calls—or at least cues—from Jim Cramer. Apparently the Fed is willing to do whatever it takes to keep the fig leaf from falling off and revealing the true state of the USA economy. Consequently, while in the long run, this maneuver probably seals the doom of both Beazer and Wachovia and many other real estate and financial concerns, in the short run, the prospect of easy money and easy credit will make it appear as if their chances of survival have increased.
This is a bad move by the Fed, strategically speaking. It puts more pressure on the already weak dollar and goodness know how anyone can think that a problem engendered by too much easy credit and deficit spending can be solved by more of the same. We are just digging ourselves a deeper hole here, in the long run.
But tactically, the pressure on the Fed to act now is overwhelming. Politically the Republicans prefer avoiding a meltdown here to losing the election 1932-style. And were there a collapse here, Democrats when they came to power would hardly be in a grateful mood vis a vis the Fed leadership. Financially, there are major players in very deep trouble (UBS, Lehman, Bear Stearns, Citibank, Bank of America, and others in addition to Wachovia). If one or two of companies such as those started rolling over, it could likely precipitate a panic akin to 1929 or 1987. While in the long run, a purge is what we need, in the short run lots of influential and powerful people would be seriously hurt (along with most everyone else) and so they yammer at Bernanke to save them…even if it is only a temporary reprieve. Who knows? If we can just hold on for another six months or a year, maybe aliens will land and sell fusion technology to a cabal of big energy companies relieving pressure on the environment, making power much cheaper for everyone, and stopping the transfer of wealth to OPEC, all without upsetting too many shareholders.
Thus, we expect the Fed to keep cutting rates here, and keep injecting liquidity into the system…and the market to anticipate the presumed future effect of these cuts: that the economy will respond by revving up a quarter or two down the road. Accordingly, we expect the prices of real estate companies and financials in general—and BZH and WB in particular—to climb back up to where they were when we sold them short, or higher.
And we will be looking to short them again by then, because in reality, the consumer is tapped out, and inflation will be worse, so we don’t think there will be any recovery to speak of; indeed we expect that post-election, things will get significantly worse. Indeed, in the case of Wachovia Corporation, things are already significantly worse: they reported their 4Q07 results today, and by any account, these were extremely disappointing. The company earned $51MM in the quarter, a 98% decline from the $2.3B of earnings booked a year ago. This amounted to three cents/share; analysts had been expecting 33 cents. For the full year, earnings declined 19% to $6.3B from the $7.9B earned in 2006.
“The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth quarter results substantially,” stated Wachovia CEO Ken Thompson. Reflecting the deteriorating situation, the bank included a $1.5B provision for losses, 50% higher than the provision they had stated they expected to take just last month…which itself was 100% higher than the estimate they had originally published in November of last year.
WB’s negative surprise, however, was trumped by the positive surprise of today’s “shock-and-awe” emergency rate cut by the Fed. Never mind that it was easy credit pumping air into the real estate bubble that got us into this mess in the first place; for now the market consensus appears to be that more easy credit can get us out of it by rescuing the banks with gift profits that may offset their losses enough to allow them to survive. As we write, WB shares are up sharply on the day.
So for now, we are stepping aside. The day when we toss the moneychangers out of the temple is coming, but it isn’t here yet.