Wachovia Corporation (WB) update #4

Some big shoes thudded to earth yesterday as Wachovia (WB), our finance sector short play, announced their 2Q08 results and the extent of the disaster that has essentially sunk this company began to come into view. WB management owned up to a loss of $8.9B, “including a $6.1 billion noncash goodwill impairment charge in commercial-related subsegments reflecting declining market valuations and asset values,” according to the press release.

The loss amounted to a staggering $4.20 of red ink per share. Excluding the $6.1B goodwill impairment and net A.G. Edwards merger-related and restructuring expenses of $128 million, the loss was “only” $2.7 billion, or $1.27 per share. The loss was in line with the preannouncement made 9 July—prior to that, analysts had been expected losses to run around 78 cents a share—but never-the-less, initially the stock sank 12% to levels not seen since the 1990s (low for the day of $11.65).

However, management announced a spate of actions in addition to the write-down—cutting the dividend for the second time in three months, this time 87% to five cents, exiting the wholesale mortgage business, layoffs of over 6,000 employees—and new CEO (as of 9 July) Robert Steel handled himself well in the conference call. Analysts generally seemed satisfied and in the wake of several positive comments, on extremely heavy volume of over 239 million shares, the stock rallied dramatically to finish the day +27% at $16.79. And today, it was up another 5% to $17.65.

Sorry to say, we are very confident this is not the end of the story. We don’t know what the analysts who like the stock here are smoking but there is no way they can know that the measures taken by management—or any additional moves they can make, short of recapitalizing the company with tens of billions of dollars (which would virtually wipe out current shareholders’ equity)—will suffice to rescue Wachovia from the Golden West black hole, let alone return them to profitability. Probably no one outside of Wachovia knows the true extent of the damage—and possibly not even anyone at Wachovia knows for sure—but there are only two chances that this write-down contains the damage: slim and none.

If you are not yet short Wachovia, if you can sell it here at $17.65 or better, you are likely to do well in the next quarter or two.