Shorting WaMu

[powayseller]

davelj, has your approach been promising? What is the rate of return you have earned over the last decade?

By the way, I would love access to companies to ascertain more than they are required to publish in their SEC reports. So many times I have wished I could call the CEOs with a list of further questions. Have you access to that kind of info?

Can you get WaMu info for us? What do you think of shorting WaMu? You’ve criticized my approach, but didn’t answer the purpose of this thread, which is shorting WaMu. Would you do it, and why or why not?

[HereWeGo]

poway,

There are WaMu options that expire in January of 2008.

WWIMI, with a $45 strike price, trades at 5.75. Given the 9/1 stock price of 41.90, that’s an eminently reasonable premium.

———————————

davelj,

I have a question wrt/ the supply side of shorting. Let’s hypothetically assume I own 1000 shares of WaMu, and that poway wants to short WaMu. How could I go about lending some of my shares to poway? What sort of premium should I expect for the loan (or, from a differnt perspective, what is the carrying cost of a short position?)

Thanks.

[justme]

WaMU passes the buck.

According to this story at Marketwatch,

http://www.marketwatch.com/news/story/Dbc4bPb44FrVg14SF745g5f?siteid=mktw&dist=morenews

Wamu passes on >90% of their mortage loans to the bond
markets.

This seems to mean that WaMu perhaps isn’t as vulnerable to
bad loans as one might think, at least not in terms of
danger of capital losses.

However, as poway has indicated already, it seems that
earnings are in danger of taking a big hit.

In general, I would caution against shorting. For example,
one could argue that Google is quite overvalued. But I would
think more than twice about shorting it.

I’m speaking from similar experience,
here , and I lost a big bundle 🙂

[powayseller]

If WaMu keeps recording $200 mil/quarter of unearned option ARM income, by the end of 2006 they would have close to $1 bil of neg-am income, and I wonder if that entire amount has a chance to disappear. Just think how likely it is that an optionARM borrower will make the payment on the unpaid interest after their loan resets to a higher rate. If the ARM resets go as we think, many of those borrowers will give their keys back to the bank, and then there goes a big chunk of WaMu’s past recorded income, and future income stream, plus the bad loans they have to record on top of it. One thing’s for sure, WaMu’s share price has stayed steady for 2 years, so the risk of losses is not yet priced into the stock.

Bugs and SDAppraiser, when you see NODs, which lenders are the main ones? The article listed the top 10 subprime lenders in the US, with Wells Fargo at the top and WaMu last.

[justme]

Here’s another tidbit: Wamu is working on floating bonds
in Europe. There may not be anything sinister about that,
but on the other hand it is tempting to think that perhaps
they are trying to unload some US mortgaes in another market.

http://search.ft.com/searchResults?queryText=wamu&x=0&y=0&javascriptEnabled=true

This looks like a bearish sign to me, but what do I know…

[LookoutBelow]

Wall Street= “Casino Royale” as my Dad used to tell me, “The players winnings dont keep the lights on at these casino’s, but their losings sure do” !!

I have always had more success in knowing when to get OUT of a market, like real estate and some stocks, I really dont have a clue as to “when” to get in to a market. Its very complicated and you dont know 1/10th what the players do. Your guessing, they have access to lots of privvy info and they are …well, guessing too !

Shorting is risky business. Good luck.

Isider trading is alive and well in American business today, problem is, your not allowed to be an INSIDER !!!

The stock market is a scam. Think Las Vegas. Odds are probably better in Vegas.

A little story here:

At one time in my career, I was in upper middle management of a fortune 50 company, I thought I KNEW what was happening as I was involved in some of the things that were planning to happen….Truth is, I knew “NADA”, and my stock portfolio showed it.

Im so good at knowing when to get out of something that I have a serious collection of cassette tapes and 8 tracks !!! STILL !!! I even have a BetaMax !!
Im not nearly as smart as I thought I once was. I just got lucky and I know it.

[Anonymous]

If you want to look at another Short idea in the mortgage industry look at FirstFed (NYSE: FED).

These guys have 96% of their loan portfolio in adjustable negative amortizations loans. They grew from a $3 billion company to $10 Billion with the majority of thier loans put on in 2004 and 2005.

FED’s negative amortizaion unpaid interest in the last quarter was $39 million. The company earned $63 million for the quarter. So almost 2/3’s of their income did not really come in the door.

Look at their loan portfolio only 20% of their loans were with Verified Income and Verified Assets. The other 80% were either Stated Income, Stated Asset or No income or asset.

Unlike WAMU these loans are all in California. And over 57% of these loans made were greater than 75% LTV. Add in the negative amortization that these loans accrued and the lack of underwriting done FED is the completely reliant on the RE market continuing to appreciate.

When these loan do reset and become fully amortized the defaults will erupt.

FED is very highly leveraged and pays incredibly high savings rate and borrows billons from the FHLB so their cost of funds has gone up tremendously.

The bailout for FED and all negative amortization borrowers is that they refinace out to a new loan. The problem with this theory is that refinanace appraissals are generally lower/tighter than purchases. And if the borrower put on a HELOC it makes it even more difficult in a flat to declining market. Throw in the higher payment given the reset, it pushes down the FICO score. All of this makes refinancing even more difficult.

I am not of the school that the RE market is crashing at the speed of light. However, for these borrowers who did over leverage at the top of the market they are going to be facing incredibly difficult times.

I beleive that Real Estate like all markets are cyclical and we are in the down leg of the cycle. Unfortunately, some homeowners will get hurt. However, I feel no sorrow for lenders who willingly and intentionally made loans ignoring prudent business judgment.

[HereWeGo]

FED seems like it could be in for trouble, but on the other hand, the short interest is around 30% of float. That’s awfully high.

By comparison, the WaMu short interest is less than 2% of float.

[powayseller]

davelj wrote to me “That you “buy stocks only after studying the financial statements and making a list of 3 reasons for buying the stock,” while perhaps more effective than prayer, is not what I personally would consider proper due diligence for an investment. Although I’m sure that Barnes & Noble sells plenty of books that suggest your approach is more than adequate. So, to each his/her own.”

The 3-reasons approach was recommended by Peter Lynch in one of his books.

Another question for davelj: in your post on WaMu you suggest that at least 100 traders would not short WaMu, but then you go on to say that some very smart people have done so. 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?

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

I feel compelled to chime in here aside from not getting pre-approval from my nemesis anx. The mixed comments about this WAMU short discussion from dave makes me curious as to exactly what you do dave. If you are truly an experienced trader you would know that when the majority of the wall street analysts are on one side of something, that is a very nice opportunity to do the opposite. This is why people analyze sentiment indicators, to fade them. This is a component of my trading system for entries. Kevin Haggerty, Larry Williams, Paul Tudor Jones ( the one of these three that I do not know personally ) to name a few thrive on doing exactly that. With all of your experience you have to know this. Those who support analysts are normally shills for the brokerage firms.

We also know that the majority of mutual funds do not beat the S&P 500, and this has been the case for years on end. So to claim that the analysts are not recommending something is absolutely no reason at all to do or not to do it. History shows quite clearly most of them were bullish on internet stocks in 2000, and some have actually gone to jail due to conflicts of interest.

There is no reason to study a stock for months upon end before taking a position, that is absolutely the last thing I would ever do. That opens the door to far too many subjective evaluations of different pieces of information. Maybe you are capable of doing it, but the average person cannot get caught up in “the story.” There is far too much BS in it, and why many execs get themselves into trouble. Further, there are very intelligent people in this blog, and there is no reason that they have to hand there money over to a professional just for the sake of doing it. I talked personally with a few at our get together and their knowledge of trading stocks was impressive.

Keeping things simple is what the majority of great traders that I know would tell the average person to do in making their decisions. If most analysts were capable of being traders they would be, the pay is much higher. Many of them would not even know how to place an order to buy or to short. You have to know this so that leads me to the question of what exactly is the point of your input here?

I do agree that shorting this stock right here is not something I would do. However, there is a solid downtrend in place, and the last 12 months earnings are declining so shorting a pullback in this stock of a 10 day high or so would be a reasonable short term trade to make. I would not chase it right here due to it being pretty far extended downward already.

[lewman]

Powayseller, you said:

If WaMu keeps recording $200 mil/quarter of unearned option ARM income, by the end of 2006 they would have close to $1 bil of neg-am income, and I wonder if that entire amount has a chance to disappear.

Why would there be unearned income from option ARMs ? Could you elaborate ?

Thanks. Lewis

[powayseller]

I meant to say “negative amortization income”, which is income booked but not received from option ARM loans. I’m wondering how much of those unpaid interest payments will ever be made; you’ve got option ARM borrowers making the minimum, partial-interest payment. Once the loan resets, not only will they have to pay the higher loan balance (original mortgage + unpaid interest tacked onto the mortgage) over the shorter amortized period, i.e. 27 years if it was a 3/1 ARM, they’ll also face a higher interest rate. I think most of those option ARM borrowers will default. WaMu’s losses will become apparent sometime in 2007 or 2008.

[lewman]

Thanks powayseller. I understand that there is unpaid interest payments for negative amortization loans, but do you mean banks are actually permitted to book these unpaid interest payments as revenue even though they haven’t been received ?

I was under the impression that banks just book the portion received and the principal amount increases and if the key is handed back to them they have to write off a bigger loan than the original loan balance.

[powayseller]

GAAP rules allow unpaid neg-am income to be reported as income. Fifteen percent of WaMu’s income is neg-am, that is it is earned but not yet received. Probably most of it will never be received.
I knew about the neg-am income reported as profit, and posted about that in the spring, but had no idea how much it was.

Business Week’s Nightmare Mortgages covers this topic quite well.

[rseiser]

Poway, thanks for digging this up, as it is another nugget I didn’t know about at all. I suppose, one would have to be intimately familiar with the banks’ practices to paint a full picture of what is going on in their balance sheets. All these little things together might absolutely be capable of putting the nail in some of the banks’ coffins. I heard another thing on an older Jim Puplava show, that I don’t know if it has been discussed before. Despite selling off their mortgages as packaged instruments on wall-street, the guest claimed that banks end up buying these back as a way of investing their reserves. According to him 60% of some banks’ reserves are sitting in these mortgage backed securities. As discussed on another thread, these MBS could be in some mid-range of risk, e.g. A or AA, but that hardly makes them bullet proof. The guest also claimed that the worse slices were still held by the banks, since they couldn’t be sold off so easily.

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