Microsoft & Yahoo And Bank of America & Countrywide

This marks the 100th post of this blog...and I have one burning question for you....

Which sounds more sexually deviant?

Micro-hoo

-or-

Ya-Soft

I think that they both sound sufficiently twisted. You can have agree. I prefer Ya-Soft, which sounds like a Bostonian insult.

It is a whole separate question on whether you would want to invest in the company. It is questionable that this combined company has what it takes to really tackle Google. They have many redundant elements. I think that the Curious Investor's post regarding the merger/buyout gives all the pros and cons of what each company is bringing to the table.

I'm not hot on the deal. If I was an investor before the offer in Yahoo! I would be clamoring for them to take it being that it was over a 60% premium on it's current stock price.

Another interesting posting I came across was an ingenious way of investing in Bank of America through Countrywide on Arohan's Investing Life. Though as it is noted in this post the gap has closed significantly.

I hope you have enjoyed the first 100 postings. I hope to entertain, inform, and explore with you in the next 100 and beyond.

A Beating in the Offing & Adding Two Shorts

Just take a look at this headline found on Market Watch:

Dow Jones Industrial Average futures down nearly 500 points

Looks like Tuesday is going to be awesome when the market opens back up. Foreign stocks are taking a beating rubbing their hands together worrying about a US economic slow down. And I guess that they should be worried. The market looks lost and there just aren't enough breadcrumbs to find our way home.

Northern Rock looks like it finally has a plan to get out from it's pickle. Want to see what would have happened if Countrywide hadn't been thrown a lifeline by Bank of America? Here it is. But I think it would have been even worse due to the size of the servicing portfolio Countrywide holds. And if you don't think our government wasn't propping CFC up you're nuts. Want to guess who was one of the biggest window tappers and money bidders in the last few months...that is right, Countrywide.

With so much sunshine these days it is hard to find really good companies that you look at and say, "I want to buy this today." Everything is going down. It is fairly orderly and consistent. At least it's that.

But I am tired of seeing red numbers in my pretend portfolio. I don't think there is anyone that likes red numbers, except those who profit when the numbers go red. That's right, shorting.

Now shorting individual stocks is well, something that should really be left to those who know just what the heck they are doing. It is not for the faint of heart. The gains can be glorious. The losses can be devastating.

So, I'm not going to short individual stocks. I am going with two EFT's that I mentioned previously, DOG & SDS.

Short Dow30 Proshares (DOG) Want to talk about risk? Here is a pick for you. This is a new EFT that has a very small market cap (126 Million) and volume runs about 500,000. Compare that to QQQQ with market cap of 20 billion and a volume that runs 273 million. What that means is that it is hard to determine what the real value of DOG is. When you go to sell this position (when the market stops heading south) you might have trouble finding a buyer at a price that you want. DOG has been doing well recently, of course, up over 8% since the start of the year and 15% from the October lows. I foresee this being in my portfolio anywhere for the next 6-12 months.

UltraShort S&P500 Proshares (SDS) This EFT reacts to twice the performance of the S&P. As you can imagine, it has been doing quite well lately. And I also fully believe that the turmoil in the financial markets is not nearly over. The S&P is roughly 20% financial companies. Believing that the market will continue to head lower and that financials will lead the way down as they have, SDS is a perfect pick for me. Let's see how it performs. Since the start of the year this EFT is up over 22% and over 35% since October. Again, I'm seeing a 6-12 month timeframe.

Both of these EFT's will require close watching for any sign that the market is going to turn. These are not the buy and let set type of purchases.

Countrywide's Loss Is Investor's Gain

Ok, not really. The stock simply rebounded today based on comments that the company thinks this is an earnings trough and things look good for the fourth quarter and through 2008.

The stock rallied 15% today close at $17.03. Don't get too excited. It is still down from a high of $45 in February, and still below the $18 price target Bank of America had the right to buy common stock when BoA infused $2 billion into the company.

The company reported a $1.2 billion dollar loss, including losses from operations, loss due to the 10-12 thousand works it plans to lay off, and increasing it's provisions for loan loss over 2000% year over year. The loss doubled analysts estimates and the company still gain more than it has in over two decades.

I'm still not buying this. "No one can do what Countrywide can," is their famous motto. Maybe it should be more like, "Nobody claims what Countrywide can." Have you noticed not one other major bank is saying that the mortgage market is stable or that they see gains for the coming quarters? So how is Countrywide going to pull this off?

I'm really not sure. If they can really pull it off, my hat is off to them. But there are a number of problems.

1) The possible SEC investigation into Angelo Mozilo stock sales.
2) Consumer confidence in the company is at an all time low.
3) They are losing market share due to consumer sentiment and changing their style, focusing on more conventional/conservative lending guidelines.
4) Does the company realize that we are in the middle of the largest housing slump since the early 90's?

I know, I know, the company announced that they were going to aid some 82,000 homeowners to help them avoid foreclosure. Well, first of all, they should. It is more profitable to keep these loans performing and charge some closing costs as opposed to letting the homes fall into foreclosure and have to drop the properties onto market. But this won't be enough to really give the company a shot in the arm it really needs.

We will see what happens. But I'm not smoking what Angelo is selling...that is for certain.

Countrywide Again

It's been awhile since I wasted my time talking about Countrywide. But they are in the news again. Today they announced they were cutting 5,000 jobs, which is part of the 10,000-12,000 already announced. That really wasn't the news. It was that NC Treasurer, Richard Moore, has asked that the SEC look into the timing of stock sales completed by one Angelo Mozilo.

Oh tell me it isn't so Angelo! Mr. Mozilo has stated that the trades were preplanned and has been doing such since 2004. Which is totally correct and some of the stock he was actually required to sell. But is what really is getting people upset is that the selling of his stock accelerated rate in October of 2006. And it changed (picked up steam) on a month by month basis.

Suspicious, absolutely. Consider that Countrywide's stock has gone from over $45 in early February (before New Century's demise)to under $18 in the last few months (CFC closed at $18.28 today). Mr. Mozilo has pocketed over $100 million in that time frame. You can see why people would be upset.

I will give Angelo the benefit of the doubt here. I think that his stock sales have been perfectly legal in all aspects. However, I feel that legal and ethical are two entirely different things. If Mozilo, who is already a very rich man, sold his stock to pocket even more money, in a conscious effort. Well, that is just sleazy. Which is what I call Angelo Mozilo consistently....a sleaze-ball.

Moderator vs Mozilo

Thank you and welcome to this week's edition of The Moderator. Our fake guest this week is CEO of Countrywide Angelo Mozilo. I know that FB has been waiting for this inview since we first decided to do this.

Mozilo: Glad I could make it.

Moderator: Rough week or month or so?

Mozilo: You could say that. It is always a difficult decision to let people in your organization go.

Moderator: 10-12 thousand more in the next 3 months?

Mozilo: We have to be concerned about the future of the company. This is a necessary step to insure that Countrywide continues in the future.

Moderator: And what about news today about the company looking for more help?

Mozilo: No comment.

Moderator: That means it is true. Bank of America put $2 billion up for you and now your company can't even deliver the stock price of $18 that they convert to common stock. And you need even more help?

Mozilo: It is a difficult market out there.

Moderator: No one can do what Countrywide can.

Mozilo: ..............

Moderator: Sorry, must have struck a nerve. Ok, so you don't blame your company for a large part of the current fallout from sub-prime lending?

Mozilo: No, I don't. We originated loans to what the market called for.

Moderator: But you were the largest sub-prime lender in the country. Don't you hold responsibility for some of the issues that now plague the market?

Mozilo: I am responsible to my shareholders.

Moderator: And how is that working out, Spanky?

Mozilo: No so well at the moment...not so well.

Moderator: Yeah. Down 57% on the year. But you personally aren't hurting. You have a high compensation package. You were on the board when Robert "Count the Money and Run" Nardelli was stealing Home Depot blind.

Mozilo: So? You don't think it kills me to see the company I created struggle the way it has? Do you think I enjoy cutting staff? Do you think I give a darn about what I make personally when the rest of the company is basically dying?

Moderator: No, I don't think it bothers you at all.

Mozilo: Ok, (laughing) you're right. I do have a lot of money. I had you going no? You thought for a moment I was a good guy right? Can I sell it? Huh? Huh? Can I sell it?

Moderator: No. Not impressed in the slightest. Well that is all for this week. We haven't decided on who I will interview for next week. I am hoping the Bullet will let me choose someone from another arena other than personal finance. It would be nice.

Later.

Killing Countrywide

<-------Scumbag, Angelo Mozilo


So, you know by now how much I like Countrywide. It's not a lot for those of you new to my blog. And I have again and again mentioned how surprised I have been that the company has not suffered from larger lay off numbers. Last month the company shed 500 jobs and Wednesday cut another 900. But this is/was a company of 60,000 employees. If Countrywide was going to originate mortgages to Fannie Mae and Freddie Mac guidelines, there just wasn't going to be enough work to go around. For all intents and purposes the company was going to basically cease doing all their sub-prime lending. This is/was the largest sub-prime lender in the country. How could they not be cutting more jobs, if they were changing the way the do business? The other shoe finally dropped today. The company announced it was laying off 12,000 workers.

Now, I'm not saying this makes me happy. As much as I dislike Countrywide's business model & CEO, it is sad to see a large employer announce reducing staff by over 20%. But if Countrywide wants to survive, it is what had to happen. It is amazing that it didn't happen sooner. The company was actually adding staff up until July when the wheels fell off and people started to wonder if the company would have to seek bankruptcy protection.

It is still to be seen as to what extent the company is really damaged. They reduced their own origination outlook for 2008 by 25% (which makes sense when you are cutting roughly the same percentage of staffing) but I think those estimates are still too rosy. I wouldn't be surprised if Countrywide drops originations by 40% next year. Most people seeking a mortgage, either for purchasing or refinancing, will likely seek out other lenders because of all the negative press Countrywide has received in the last few months. Impressions linger.

And you know what? I can't remember seeing one of those, "Nobody can do what Countrywide can," in a at least a week. If that commercial is dead. I would be happy.

What Does Warren Want With Countrywide?

The answer is simple. It’s not the origination side of the business.

Consider Countrywide’s mortgage servicing portfolio by itself. Countrywide services $1.4 trillion in mortgage loans. Most servicers “value” their servicing portfolio anywhere between 100 and 200 basis points. In real terms, Countrywide’s servicing “value” is somewhere between $14-28 billion. That is some chunk of change for just collecting mortgage payments and handling escrow accounts. Yes, there is more to it than that, but that is the gist of mortgage servicing.

Now Berkshire Hathaway will not be interested in purchasing the entire servicing portfolio of Countrywide. A good portion of Countrywide’s servicing portfolio is sub-prime mortgages and ALT-A mortgages. Berkshire would be interested in the portfolio of the performing mortgages as not to get dragged down by any of the current mess that has so often commented on. There are other aspects of Countrywide that interests Buffet, such as the companies mortgage backed securities.

But if Buffet can get a portion of Countrywide at a discount now, it’s a win-win situation for the two companies. Berkshire gets to add Countrywide to it’s stable of companies and a company that has delivered good earnings over a large period of time. Countrywide would get some much needed relief.

I do not like Angelo Mozilo but he has built the largest lender, prime and sub-prime, in the country and does not want to see it go up in smoke. I’m sure he would be acceptable to the idea of being brought into the Berkshire stable of companies.

Buffet does not comment on companies that it is buying and selling but Berkshire did recently disclose holdings in both Bank of American and Wells Fargo, the sixth and second largest mortgage lenders. And Buffet told TV network CNBC last week that the worsening credit and housing markets may present some “real” investment opportunities.

Berkshire is not interested in the origination portion of Countrywide. This is the same portion of Countrywide that announced 500 job layoffs and it is my belief will have to trim more jobs before the pain is truly through.

You saw a big jump in stock price today based on the information above. Countrywide has lost about 50% of it’s stock value within the last year. Maybe now is the time to look at Countrywide, even though I don’t like it.