Bull/Bear Report - Washington Mutual - Nowhere left to go but up?
The market continues to rally and leading the charge is the financial sector. Does this mean we have the all clear to buy financials again?
Possibly, but is this another bear trap?
We have been fooled before with premature calls of the bottom, but this go around may be different.
The banks and mortgage companies have come clean with massive write-downs of assets. In addition many have gone to great lengths to strengthen balance sheets with new capital.
That may be a small consolation for equity holders that own at higher prices and less dilution, but it does go a long way to help brighten the future.
The yield curve is steep and that means financial companies can make big profits. The greater the spread on borrowing costs and lending rates the more money is made.
Of course the one caveat is the economy. We are in or near a recession that may be deeper and last longer than many expect. That means financials may face more write downs or weakness in business beyond what we now see.
Washington Mutual (WM) is at the heart of the storm and a great barometer for the entire group. The company has been decimated by the collapse in credit and housing resulting in a near collapse of its business.
That being said, the company solidified its balance sheet with $7 billion of capital, cut its dividend, and wrote down what it hopes will be the last of asset value reductions.
With many predicting that the current malaise will be short-lived, Washington Mutual may now be poised for huge gains as a potential recovery takes hold. Blink and you might actually miss the turning point.
Bull Case - Robert Castiglione
Every week we are asked our opinion on a certain stock. It's my opinion that this is a more difficult task for the fundamental analyst than the trader who relies on technical analysis. The "fundies" may vary widely for the first but the "techies" basically rely on what they perceive to be interchangeable truths, be it certain indicators, support and resistance lines, etc. It doesn't matter to me whether it's SIRI, TSO or WM, the indicators and the chart will tell me most of what I need to know to make my decisions. That doesn't mean I tune out everything else. In fact, I am especially watchful for earnings dates and mark them in red on the daily sheets I've made up to track my portfolios. Even a great-looking chart can turn to garbage on these dates if earnings expectations or guidance isn't up to snuff and vice-versa. I think the best way to handle earnings announcements is by using options, either a protective put for long positions, a protective call for short positions or a straddle if a huge unpredictable move is anticipated.
A day before SLO2 started my computer crashed. It took a couple of weeks to get it back and it still wasn't right. Finally, I got things back to normal but in the interim I thought about improvements to what I had been doing. My favorite indicator, the parabolic stop and reverse (PSAR) still left a lot to be desired. I was also using the MACD, stochastics, RSI, and momentum indicators but found more redundancy than enlightenment. I was also using the directional movement index (DMI) but more as an afterthought than anything else.
The DMI is made up of three lines. If a stock is in an uptrend, the +DI (green) line will be above the -DI (red) line and the ADX (black) line will denote the strength of whichever is on top. Simple enough. I arranged my chart so that I could watch all these indicators at once but keeping the DMI intact.
See how WaMu's chart comes together and spells buy. Keep reading Musings on the Stock of the Week.
The Bear Case - Russ of RD's Picks
Russ took an in-depth look at all of the fundamentals for WaMu - balance sheet, forecast and recapitalization - and came to the opposite conclusion. He says Washington Mutual is a pretty speculative buy right now...and he'd stay away.
I got most of the information for this post from the company's 15 Apr conference call prepared remarks and the associated credit risk management appendix. IMHO, Washington Mutual has done a pretty decent job of laying their balance sheet cards on the table.
As you probably know, WaMu's assets are dominated by home loans and one of the graphics right at the front of their conference call prepared remarks caught my attention. The Case-Shiller home price index graph. Note that fall-off doesn't appear to be leveling off.
For the first quarter of FY08, Wamu lost $1.1 billion driven by increases in loan loss provisions. They increased their loan loss provisions by about $2.1 billion over the previous quarter.
Balance Sheet:
The balance sheet shows $242.8 billion loans held in portfolio with $4.7 billion for loan loss provisions, or 1.94%. There are an additional $23.6 billion of loan backed securities available-for-sale. I believe the difference is that loans held in portfolio are valued based on the cash flow projections, not the market value of the security. Securities available for sale are listed at market value. Perhaps someone who knows more about accounting will weigh-in and correct me if that's wrong. In normal credit markets, there wouldn't be much difference between those valuations. But, credit markets haven't returned to normal yet.
In other words, we don't really know what the loans held in portfolio are worth - and it doesn't really matter unless they need to liquidate some of them. But, bottom line is we really don't know what Wamu's (or any other financial firm's) true book value would be if everything were listed at market value.
50% of Wamu's loans are in CA and they account for 36% of nonaccruals. 7% of the loans are in FL and they account for 17% of nonaccruals. For the math challenged, that's over half the portfolio in two of the toughest housing markets in the US.
All of this adds up to potential trouble ahead for Washington Mutual. Keep reading Will Shareholders sing the WaMu Blues to find out why.
I can appreciate the potential for more losses on the downside, I am of the opinion that the recession will be relatively short lived. The US economy is very diverse and should be able to withstand this downturn relatively unscathed.
Financial stocks like Washington Mutual should lead the way higher during the next bull run. Management has done a good job of getting in front of the bad news and acting accordingly.
I rate WM as a buy and I think the company is poised to do well in the long term. It may take some time, but the potential gain is worth the wait in my opinion.
Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs
Other bloggers discussing Washington Mutual:
Tom Armistead - WaMu Mighty No More
Don Barrett - WaMu: What's That Smell?
by Hillary Mark | 04/25/08 | Stocks: WM,
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