[I’m going to try to answer some of the various questions posted to me here.]
Poway, you wrote: “So what is your take on shorting WaMu? Please, instead of writing about me, which is very boring to everyone, could you add something tangible to the discussion?”
I already answered this question above: “Having said all that, do I think WAMU’s stock will be lower at some point over the next two years than it is today? Yes. But it’s not a bet I’m willing to take.” Since that wasn’t clear enough: No, I don’t think it’s a good idea.
(By the way, Frank is right. If you’re really worried about option ARMs/neg am loans FED is a better short. But, personally, I wouldn’t short FED either – trading isn’t my business and I religiously stick to those very few areas where I have a large competitive advantage.)
A quick note on trading in large cap stocks. I’ll use WAMU as an example. I could pick up the phone right now and find two equally smart, well-informed analysts/traders who have taken opposite positions in WAMU, one long and one short. They could each wax poetically and convincingly on all the reasons they are on the “right” side of the trade and why the other side of the trade is wrong. After hanging up the phone, I might be swayed more by one than the other based on my preconceptions, but it would be a tough decision. My point is that as an individual you’re making a decision based on 1% of the information and analysis that these guys have, and as a GROUP they’re STILL conflicted. What’s the takeaway? Your odds of a successful trade in WAMU are the same odds as a coin flip. There are many reasons that WAMU’s stock could rally despite the fact that it has a lot of these toxic loans on the balance sheet (and it’s stock may ultimately fall): market perceptions that the Fed will lower interest rates faster than previously believed, WAMU discovers some exotic way of hedging their loss exposure to the ARMs on its balance sheet, the company sells a subsidiary for a huge premium that the market believes will offset any losses from ARMs… I could go on and on and on. My point: your success or failure here will likely be random. That’s the nature of large-cap stock trading unless you have an informational/analytical advantage. And I’m biased about all this as an investor – I don’t do any trading and really don’t do much with publicly-traded stocks. (Finally, if you invest on the belief that the other market participants are stupid and that the people that run these companies are stupid, you’ll be disabused of that notion eventually. They’re not stupid – but they are impatient, and that’s your arbitrage opportunity, as I’ve explained previously.)
Poway also wrote: “I think most of those option ARM borrowers will default.”
This is precisely the sort of baseless outlandish prediction that delegitimizes otherwise legitimate claims you might make. What you’re saying here is that 51% or more of all option ARMs are going to default. I have an extraordinarily bearish friend who’s hoping that 20% default (that’s by far the highest informed prediction I’ve heard). My understanding is that, in very rough terms, about a third of all option ARM users have very good credit and won’t have any problems at all; another third have decent credit and a small percentage will hit the wall; the other third will feel the pain, but even a lot of those people at the bottom will find a way to stay solvent – they always do. If you would like to take a $100,000 (or more) position in betting that 51% or more of option ARM borrowers will default over some specified period, I will be happy to have my legal counsel structure a product so that I can take the other side of that deal. We can definitely do business. Just let me know.
HereWeGo, if you want to lend your shares to Poway you can draw up a simple legal agreement and give her your stock certificates. The premium you should expect for the loan is dependent on your estimation of Poway’s credit. Also, you’d want her to replace your dividends. Broker’s Call Rate is typically a few points above LIBOR, which is the price most retail investors pay for borrowing on margin. Obviously, stocks with big dividend yields are very expensive shorts once you factor in the dividends and interest.
