Meredith Whitney Slams Wachovia: Actionable Short Opportunity

Oppenheimer's Meredith Whitney is out downgrading Wachovia (WB) to Underperform noting that as more news about WB comes out, they are increasingly convinced that the outlook is bleak for equity shareholders. WB has said that it's in the process of "enhancing the capital efficiency of the balance sheet" and "reducing mortgage exposure."

The firm estimates its mortgage portfolio will decline by 9% sequentially and total on-balance sheet loans will decline by at least 5% by year-end. The problem is the "denominator effect"; the loss numerator grows while the asset denominator declines, resulting in spiking loss ratios, lower assets, and lower net interest income, at least 50% of its earnings. In this very real scenario, expenses simply can not come down fast enough, seriously jeopardizing WB's ability to grow earnings.