TheStreet.com's Jim Cramer says it'll be a huge, bizarre investment that sticks -- not a bid for Wachovia.
Why is there so much chatter about Wachovia (NYSE: WB) (Cramer's Take) getting a bid? Why do people think that its deposit base is worth the heartache of dealing with its mortgage portfolio?
We have all heard the chatter about a potential bid for Wachovia, and it sure would be sweet, because the stock has been one of the worst of the group. It doesn't have a CEO, so that fits the scenario of a company that could be for sale. The franchise was always a solid one until now. And I will admit that the secret to the bulls' case for a better second half is a bid for Wachovia, a premium bid that takes everyone's breath away and causes a short panic.
My problem is that if you wanted to buy Wachovia, why not wait? What's the hurry? Is it that you might miss a chance at a bottom? Is there someone else out there who might want it? Do you perceive a bidding war, for instance, between JPMorgan (NYSE: JPM) (Cramer's Take) and Wells Fargo (NYSE: WFC) (Cramer's Take) for WB? How about USB (NYSE: USB) (Cramer's Take)?
Wells Fargo (NYSE: WFC) closed at $25.27 Monday. WFC July option implied volatility of 51 is above its 26-week average of 40 according to Track Data, suggesting larger price movement.
US Bancorp (NYSE: USB) closed at $30.95 Monday. USB June option implied volatility is at 39, July is at 35; above its 26-week average of 31, suggesting larger risks.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Some analysts thought that once banks moved though their bad bet on subprime paper, they might start to see improvements in their earnings. Not so fast. Plain old loans for houses and condos are going bad so fast that lenders are about to get hit again on the bottom line.
The Wall Street Journalpoints out in one of it top stories that "Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums."
Many investors may say that the information is obvious, and that it was expected that falling real-estate prices would hurt banks. But the real victims may be bank shareholders. As large lenders take more losses on their portfolios, they will have to raise more capital and further dilute shareholders. Banking stocks which are down two-thirds from their highs could drop even further.
Now that banks are selling off these large loans, the quarterly reports for companies like Wachovia (NYSE:WB) and Wells Fargo (NYSE:WFC) are about to get hammered again. Wachovia trades at below $22, down from a 52-week high of more than $54. Wells Fargo has fallen from a 52-week high of almost $38 to $27. Regional banks like National City (NYSE:NCC) have had it worse. It shares have fallen from a one-year high of $34.62 to $5.25.
Selling in those stocks in not over. Not even close.
The stock market was down today and the financial sector was hit as hard as anything else. These are the days you want to have your watch-list ready or perhaps your stock alerts triggered. I have been watching Wells Fargo (NYSE: WFC) for quite some time. Today at $27.00 I received an alert and decided to buy some.
As a value investor I am seeking not to just make a profit but to have as large a margin of safety as possible. That means I do not want to just buy a discounted stock but I want to "steal it". Patience is always in order, and usually is rewarded. That was the case when we watched Tiffany & Co. (NYSE: TIF) go from the low $40's to $57 per share and think we had missed the train, only to keep our eyes open as it fell back down to $36 where we pulled the trigger.
Last week TIF did us proud (see: Chasing Value: Tiffany's -- all that glitters) and although I am wrong way too often, I would be greatly surprised to see TIF anywhere near $36 ever again. It has reached $50 since we purchased it in April. The following chart illustrates the recent path of Wells Fargo.
The banks are starting to call in their markers. Home equity lines of credit, also known as HELOCs, were all the rage over the past few years and became very common among homeowners wanting to free up some equity. Perhaps it was for a room addition or college tuition. Maybe it was a 30 foot sail boat or just consolidating credit card bills at the lower interest rates. For me, it was used to create an opportunity fund for real estate investments.
Whatever your deal was, the HELOC landscape is changing rapidly. According to one of my lenders, Wells Fargo Bank (NYSE: WFC), the retail banking industry is looking for safety and liquidity -- and to improve theirs, they may be reducing yours. I have heard the same thing from mortgage brokers and private equity sources.
Lenders have been getting nervous as they watch home values move lower. They were writing equity lines at 80% loan-to-value. To maintain a margin of safety, they are reducing their exposure by calling due any unused portion of the available line. This means that if you had only used $100,000 of your $150,000 equity line you may receive notice in the mail that they are reducing the line to $100,000 and your available cash is zero.
This week's Barron's [subscription required] reverses itself -- after panning Berkshire Hathaway Inc (NYSE: BRK.A) in December 2007 it has now reversed course -- with a hedge from a short seller. Since panning Berkshire in December -- when it traded for $143,000 a share, the stock has lost 14% so Barron's was right then. Is it right to bet on a rise in Berkshire now? I really don't know because I don't find either the bear or the bull case persuasive.
Why did Barron's pan Berkshire back in December? As I posted, Barron's bear case on Berkshire was simply that it was overvalued on the basis of its book value and earnings growth. Berkshire's ratio of market value to book value was then at 1.8 times its September 30 book value, of $77,800 a share. That was above its average of 1.6 in the past five years.
It was also valued at 23 times estimated 2007 operating profits of $6,300 a share. 2008's profits were then expected to be similar to 2007's. If Berkshire were then valued at 1.7 times book value, a premium to its five-year average, Barron's estimated that stock would trade at $132,000.
After hitting a one-year high of $37.99 in September, the stock hit a one-year low of $24.38 in January. This morning, WFC opened at $29.64. So far today the stock has hit a low of $28.61 and a high of $29.65. As of 12:05, WFC is trading at $28.71, down 89 cents(-3.0%). The chart for WFC looks neutral and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $32.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in nine weeks as long as WFC is below $32.50 at July expiration. Wells Fargo would have to rise by more than 12% before we would start to lose money. Learn more about this type of trade here.
WFC hasn't been above $32.50 since February and has shown resistance around $30 recently. This trade could be risky if the flagging US economy turns around quickly, but even if that happens, this position could be protected by resistance WFC might find at its 200 day moving average, which is currently around $32 and falling.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in WFC or BRK.A.
The model portfolio of Insiders Plus gains 48% last year; here, editor Jack Adamo reviews two of his portfolio holdings -- both bank stocks being accumulated by Warren Buffett's Berkshire Hathaway.
"U.S. Bancorp (NYSE: USB) reported a slight decrease in Q1 earnings of 62¢ per share versus 63¢ last year; the shares rose 2.8% the next day. Compared to the disastrous results of its peers, this small decline in earnings was a home run.
"That's a testament to the company's savvy managers. USB steered clear of the toxic problems that choked most banks. Only 2.7% of its loans are subprime.
"Warren Buffett's Berkshire-Hathaway continues to buy the stock steadily. Recent SEC filings show that in the fourth quarter of 2007 Berkshire increased its share of the Minneapolis-based bank by 3 million shares to a total of 75 million.
"This represents 4.4% of its shares outstanding, and up tremendously from its stake of 23 million shares just a few years ago. The Wizard of Omaha knows what he likes and why he likes it.
"Meanwhile, Wells Fargo & Company (NYSE: WFC) reported Q1 earnings of 60¢ per share down 9% year-over-year, but up 46% from the December quarter. Like USB, Fargo shares continue to be accumulated at Berkshire Hathaway.
"The stock is a solid long-term buy, with good prospects of steadily raising its 4.2% dividend. It has capital appreciation potential to boot, especially after the housing hangover abates."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
JP Morgan Chase (NYSE: JPM) May option implied volatility of 33 is below its 26-week average of 38 according to Track Data, suggesting decreasing price movement.
Wells Fargo (NYSE: WFC) May option implied volatility of 33 is below a level of 52 from April 14 and below its 26-week average of 40, suggesting decreasing price movement.
Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
MOST NOTEWORTHY: GFI Group, Wells Fargo and Cirrus Logic were today's noteworthy downgrades:
Goldman downgraded GFI Group Inc (NASDAQ: GFIG) to Neutral from Buy following the company's announcement that credit chief, Donal Fewer, left the company to go to a rival firm and that about two dozen brokers may defect to follow him.
Oppenheimer cut Wells Fargo & Company (NYSE: WFC) to Underperform from Perform as they believe the company is under-reserved by at least $4.5B and that there is significant room for multiple contraction.
Cirrus Logic Inc (NASDAQ: CRUS) was downgraded at Jefferies to Hold from Buy on valuation, as they believe the risk/reward is no longer favorable at current levels.
Oppenheimer downgraded Wells Fargo (NYSE:WFC) from "perform" to "under-perform" according toBriefing.com. The financial news service also reports that Soleil upgraded Ford (NYSE:F) from "sell" to "buy".
Credit Suisse writes that it expects Hanesbrands (NYSE:HBI) to post strong earnings for the last quarter, according to the AP.
Douglas A. McIntyre is an editor at 247wallst.com.
While bank stocks aren't exactly hot, they triggered yesterday's rally because when J.P. Morgan Chase & Co (NYSE: JPM) and Wells Fargo & Company (NYSE: WFC) reported, there were no unexpected surprises, according to the Wall Street Journal's "Heard on the Street". The ups and downs in the sector are expected to continue.
According to people familiar with the matter, the Wall Street Journal reported that Yahoo! Inc (NASDAQ: YHOO) may be moving closer to outsourcing its search advertising to Google Inc (NASDAQ: GOOG) after an initial test yielded what they considered to be positive results.
OTHER PAPERS:
The New York Times reported that AT&T Inc (NYSE: T) is planning today to make an announcement that they will gift $100M to improve the skills of the nation's work force and fight the problem of high school dropouts.
WEB SITES:
Celgene Corporation (NASDAQ: CELG) is best known for its blockbuster drug Revlimid which is used treat multiple myeloma, a cancer which attacks blood and bones. For patients, it can prolong their lives about 2.9 years, or longer, according to Investor's Business Daily's "The New America".
Wells Fargo
The banks are starting to call in their markers. Home equity lines of credit, also known as HELOCs, were all the rage over the past few years and became very common among homeowners wanting to free up some equity. Perhaps it was for a room addition or college tuition. Maybe it was a 30 foot sail boat or just consolidating credit card bills at the lower interest rates. For me, it was used to create an opportunity fund for real estate investments.
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Here are some highlights from this past week's 
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
Starbucks: The next McDonald's
