Making Sense of Wachovia's 27% Bounce Amid Record Losses

It seems curious at first when a bank reports losses of $9B, as Wachovia (NYSE:WB) did Tuesday, and its stock price isn’t punished.  It’s even more counter-intuitive when the company’s stock price goes up, as it did after Wachovia said it lost $8.9B in the second quarter of 2008.  Despite the sour news, Wachovia was up over 27% yesterday on the New York Stock Exchange.  Why are investors rewarding the beat-up bank with a share price boost?  A closer look at Wachovia’s recent history helps solve the WB mystery and explains why its investors are still riding high. [Read Wachovia's latest Conference Call Transcript]

The struggles of the financial services industry in 2008 have been well documented.  Banks that invested heavily in the mortgage business got burned when home values began declining in 2007 and one subprime loan after another went bust.  While everyone was hit hard, even the biggest names like Bank of America (NYSE:BAC) and Citigroup (NYSE:C), many analysts expected smaller, regional banks like Wachovia and Washington Mutual (NYSE:WM) to be hit the hardest.

Wachovia’s stock was punished in the first half of 2008, falling 75% from its highest point on February 1 to a low of just over $9 a share on July 15.   That low point followed the company’s announcement earlier in the month that it would lose up to $2.8B in the second quarter 2008.  That number corresponded with the bank’s earnings report on July 22, when it booked a loss of $2.67 in tangible assets.  The rest of its losses were $6.1B in intangible value - a large chunk of it a goodwill write-down of the company’s nightmare acquisition, Golden West Financial Corp.

Wachovia bought the mortgage lender for $25B in 2006, but Golden West’s value has evaporated because of the bad loans on its books.  Investors hated the deal so much that Wachovia’s market cap fell by $1B in May 2006 when the acquisition was announced, and they really punished Wachovia in 2007 while the bank raised capital to cover the losses of Golden West’s defaulted mortgages. 

Tuesday’s writedowns are another sign that Wachovia will make concessions to its angry investors under CEO Ronald Steel, a veteran of the Treasury Department and former vice chairman at Goldman Sachs Group (NYSE:GS), who was appointed in July 2008 to clean up Wachovia’s messes.  Steel has vowed to remove Wachovia from the mortgage business and to raise capital to cover future losses from bad loans in California and Florida (the two areas of the country hit hardest by subprime).

So what Wachovia reported yesterday was that it had lost almost $9B, and that it continued to expect losses in the future.  And yet, investors rewarded the stock with a huge price boost.  It seems it’s all about confidence on Wall Street, and investors are behind Steel and the direction he’s taking at Wachovia.  As confidence goes, so does share price, and WB holders can thank the market’s fickle nature for their unexpected big day.

Disclosure: Long

Comments

[valueinvestor123]

I reason that the stock rallied because all of a sudden people like subpar companies that lose money.

[BrendaWalshCFM]

2 words: short covering. This article is just fluff.

[JohnPseudonym]

The price rallied because prices have very little to do with fundamentals.

Turn off the news and learn to read charts. Then you will understand why the price went up; because the charts said it was time for a rally.

We went from $60 to $10 in nearly a straight line down. That's way to steep and the coil was so tightly wound negative that it had to unwind to the positive and it did; mystery solved!

[EE]

Yep, but remember the trend is still down. When covering stops and the " we hit the bottom" hype cools, it is back to the longer trend.

[EE]

Read the death spiraling Alpha report above.

[Deals2save]

Remember I said Buy about a week ago?

[bbzz24]

dead cats bounce! and banks do too!

[jjason]

I asked my genie in the bottle if I should buy WB or C or WM and he said " of course ". Case closed.

Why listen to MISH when I have a genie?

[jamesa40]

Actually, WB stated that the $6B+ impairment was not even related to Golden West, but "other" lines of business. That should mean more pain is coming down the track.

[geecheeboy]

The Q2 report was like that huge massive puke you've been fighting, trying to hold back. You always feel better after you let it go and your head is laying on the toilet seat. WB has gotten up off the floor and rinsed out the mouth. Let's see if there is more to go.

[P00005955]

I would make a decision before 7/29 when the SEC "crimp" on short selling might vanish. My decision will probably be sell, use the loss later on during tax season to possibly offset some profit taking from other stocks that used to, but no longer fit in my investment world, and invest the proceeds in more promising territory.

Good hunting to all.

[Scrabble]

Read the second quarter financial highlights - none of the $6.1 billion in goodwill impairment is attributed to the acquisition of Golden West. All you're doing is repeating the bullshit that all of Wachovia's troubles are due to GDW

[User 207572]

23-Jul-08 17:24 ET In Play Wachovia CEO bought 1 mln shares at $15.32-17.02 on 7/22 (17.65 +0.86) :

[swingforthefence]

Wachovia stock rallied because Bob Steel managed investors' expectations!

The earnings should not have been a surprise to any. Wachovia gave a very close guess a week or so before the announcement. It gave many investors what they were waiting on, a possible light at the end of the tunnel. I saw Bob Steel instill confidence on Monday. His presentation conveyed that Wachovia is on the right track to preserve its capital over the long haul (through 2010 as conservatively forecasted). I laughed when most of the analysts were already beaten to most of their questions with Q&A documentation. People were watching the stock takeoff on their phones as the meeting went along. If you haven't already heard the announcement, go to Wachovia's website, click on the earnings link and see for yourself.

Bottom line: If Wachovia preserves its capital it can only go up over the long haul.

[notsosmart]

everybody should save these comments for future reference.