What's Going To Happen Tomorrow (I Think)

Wild ride on The Street today. Taking my own advice (always a bad idea) I was stopped out on SKF and SRS first thing in the morning, only to see them rally huge by days end.

But you know what? So what?

I had my back stop in place and the market's knee-jerk reaction to the vague, ambiguous and tentative bail out of Freddie and Fannie should have been anticipated by me, but it wasn't.

Net result was I left about 6K on the table.

That is not an easy thing to take when you are a trader. Losses are felt personally, much more so than gains, and I wish I had had a bit more balls to see what the end of the day would bring.

The only saving grace was my (I think ballsy) decision to get back into my positions at about 7% over where they were when I got taken out. And you know what? I am GLAD I did.

Even with my colossal failure of will, all the while showing the stones of an 11 yr. old girl, I actually ended UP for the day. Not many can say that tonight I would wager.

But, as they say, hindsight is 20/20, and the real issue is what happens tomorrow?

Well, let's take a look at some of the late headlines from tonight.

Futures for all the major indices are down, and nothing new has surfaced to make me think that they have any chance of rebounding before the sun rises. In fact, there have been several news stories that reinforce my belief that WaMu is the next bank to fail.

To wit:

July 15 (Bloomberg) -- TPG Inc.'s plan to profit by rescuing Washington Mutual Inc., the biggest U.S. savings and loan, may be sinking with the housing market.

The private-equity firm, led by David Bonderman, anchored a $7 billion cash infusion into Washington Mutual in April by purchasing stock at a discount. The Seattle-based lender's share price has since plummeted, wiping out two-thirds of the investment's value.

Washington Mutual tumbled to the lowest since 1991 yesterday on the New York Stock Exchange, leading a slide in home lenders after IndyMac Bancorp Inc. was seized last week by U.S. regulators. Bonderman's firm, which bought $2 billion in Washington Mutual shares to gain a 13 percent stake, has been stung amid record foreclosures, particularly in California, home to half of the bank's loans.

Wow. So a private equity firm - supposedly REALLY SMART GUYS - decided to get in at a discount when the getting was good.

Well, maybe not so much. What's that 7B worth today?

Three months ago, with Washington Mutual's shares at $13.15, Forth Worth, Texas-based TPG and a group of investors agreed to buy $7 billion of stock at $8.75, a 33 percent discount. The stock slumped 35 percent yesterday to $3.23, leaving TPG's investment down 63 percent. TPG also has warrants to buy 57.1 million shares at $10.06 a piece.

63% of 7 Billion: 4.38 Billion. That is how much thay have lost - so far.

But it gets better.

While WaMu burns through cash, a clause in the TPG agreement makes it more costly for the bank to raise capital again or be acquired. If WaMu is sold for less than $8.75 a share or is forced to raise more than $500 million in equity, it must compensate TPG for the difference, according to filings with the U.S. Securities and Exchange Commission.

Well, at last they put a nice backstop in, eh?

Now where, exactly, WaMu would find $500M is a mystery to me. Hell, I'd be surprised if they make payroll on Friday.

But it gets even better. The story ends with this nice little blurb on how, exactly, WaMu got as big as it did.

Washington Mutual ranked sixth among U.S. mortgage companies last year, according to trade publication Inside Mortgage Finance. During the height of the real estate boom, WaMu ranked No. 11 among subprime lenders, or companies that specialized in customers with the weakest credit.

Well, shit. How can I invest?

WaMu is a rotten, creaking hull of a financial company. If you have not yet, pull ALL of your money from them. NOW!

I had several discussions with "the smart people" at work today and was given every reason under the sun as to why WaMu is "too big to fail". To that I say bullshit, and here's why.

First, Bear Stearns was rescued because they were the first. Never discount that in your reasoning. My analogy would be akin to the Great Fire that consumed most of Chicago in 1871. Surely the first firefighters, once arriving upon the scene, felt they were battling an "ordinary fire". Events soon took over, though, and before you knew it half of Chicago was ash and people were living in the streets and wondering from where their next drink of clean water would come.

Secondly, Bear Stearns had ENORMOUS exposure to Credit Default Swaps - which is the selling or buying of insurance on corporate bonds - and the Fed felt that if they failed it could set off a chain reaction in this market.

This same logic was used when the U.S. conducted nuclear tests at Los Alamos. The scientists feared that the first fission bomb might "ignite the atmosphere", and bets were placed as to whether or not it would hapen when Trinity finally occured.

Well, it didn't. A-Bombs were tested over 500 times in the next 35 years, in open air, and nary a one ignited the planet. So, until one really goes off, we won't know for sure, will we? Bottom line: WaMu has NONE of this "counterparty risk", and will receive none of the prtection from the Fed that it felt (at the time) was so crucial for Bear Stearns.

And this, my friends, is what makes WaMu so ripe for the picking. They have ZERO exposure to this CDS/counterparty risk, their own loan portfolio is basically worthless and if they fail the government would get a much needed, and appropriate, scapegoat.

After all, Sec. Paulson of the Treasury has been saying for weeks that "financial institutions" must be "allowed to fail". Yet, as he says this out of one corner of his mouth, from the other he bails out Freddie and Fannie, the poster children of "financial institutions". How do we reconcile the statements?

Easy.

Wamu reports not tomorrow, but a week from then (my bad), and I would bet that by the time that happens they will essentially be worthless.

They do, however, have a large "retail" deposit base (meaning we all better pray that FDIC doesn't have to make good), so what better way to show that you "are serious" about your statements than letting them "fail", and shipping off their good assets to someone like a JP Morgan - who could easily absorb their retail business - while making the Fed guarantee the cost of the transaction and letting the rest of it go the way of the dinosaur or the SUV?

My $.02

Buy more SKF. If you recall I said it might hit $200 by the end of the year. It closed today at $192.50.

Res Ipsa Loquitor