Macro Tsimmis

intelligently hedged investment

SELL SHORT Wachovia Corporation (WB)—again!

Posted by intelledgement on Fri, 01 Feb 08

Wow, that was quick.

When we covered our Beazer Homes (BZH) and Wachovia (WB) shorts on 22 January—the day of the Fed’s shock and awe 75 basis point rate cut—we said that we would be back in shorting these stocks again if and when they got back to the levels where we had shorted them originally. What we did was enter good-till-canceled (GTC) short sell orders at $10.99 for BZH and $39.99 for WB.

We believe that both these companies are grievously wounded by the housing bubble burst and related credit crunch…Beazer directly because new home sales are in a steep decline with no end in sight (and because their terrible management did a lot of other things that are bad both ethically and business-wise)…and Wachovia indirectly because the decline in housing stock equity obliterates the value of a lot of the mortgages underlying a large proportion of their portfolio of equities…and the coming consumer credit crunch is going to slam them again. If you want more detail, refer to our original WB sell short rec.

Thus we probably could have just stayed short and ultimately been rewarded. But the Fed’s manic attempts to sweep sand off the beach and back into the sea has (temporarily) persuaded the market that there may be some hope for these companies (and other housing industry and financial industry companies) and both stocks have rallied sharply. So we stepped to the sidelines.

And today, the WB rally hit our price, so we have sold it short again.

The rally in the financials has been fast and furious—WB is up 25% since we covered our short a fortnight ago—and we may have to absorb some short term pain here until the illusion that the Fed can fix a problem caused by too-easy credit by easing credit dissipates. But we are confident we will see a 40% profit on this trade in the fullness of time; at that point we will reevaluate.

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