Wachovia Trade?

Posted by Bull Bear Trader | 4/15/2008 07:52:00 AM | ,

On Fast Money (CNBC, Monday), it was mentioned that Wachovia was setting up for a good trade. Reasons for the trade included the current write-downs (assuming that all the bad news is out?), and the mention of the stock approaching recent lows (the 3 month chart does show $25 providing some short-term support, but the longer-term trend looks less bullish). As a caveat, it was mention that any buy here should have tight stops, very tight stops. In general, it is probably more prudent to wait until one sees a break from the longer-term downtrend, currently at around $28, before stepping in the waters. Granted, you lose that 10% move, which I am sure the $25.50 trade with tight stops is hoping to capture, but the risk in financials in general is a little too steep. There are also new concerns with dilution, the reduced dividend, and the extra cash that is not needed for current write-downs ($7 billion in new stock offerings and saving $2 billion in reduced dividends to cover $4.1 billion in write-downs and credit loss provisions). Where is the other money going? If future write-downs are expected, and anticipated, then the stock may trade lower. On the other hand, if the extra cash is to sure up the balance sheet, and give Wall Street confidence that the bank can weather any new, smaller hiccups, then we may see higher prices. Either way, the recommended tight stops are certainly in order, and prudent, not just for WB, but all financials. If one really wants to consider any potential bottom move for financials, the Financial Select Sector SPDR (XLF) ETF may be a safer trade. It will help reduce your firm-specific risk, which still seems to frequently pop-up in this sector.

Ticker: WB, XLF