Mad Mad Day at the Market

Wow! What a hectic day! The day started out negative and stayed that way, seemingly gaining more and more bad news as the day wore on. It is no surprise that consumer confidence has dropped so dramatically. While this is not the most foreward looking or accurate indicator, when taken as a whole can provide some direction into where the economy stands. I usually do not put much credence to this report unless I was involved with retail stocks but as such it has an important undertone for the current market.

The hype and hope of the rate cut continues. I must warn those that are thinking of going long (I contemplated that yesterday on my blog), you must think about what this recent market rally is predicated on. It is mostly built on hope of a Fed cut sooner than later. It is built on hype from the mainstream media who continues to ignore the danger signs of the economy and geopolitical events and continues to mislead the investment community. There is not one bit of objective reporting save a few groups of people. I think Herb Greenberg's articles and blogs are excellent and "Rev Shark" on thestreet.com to be objective and usually point on. Besides those, you can count on IBD to provide some insight into the technical aspects of the major index action. I usually resort to blogs for my information and there are a lot of good blogs to find good alternative view points in the market. I won't go into those but I think I have highlighted some that I like in my prior blogs and responses.

Now all of a sudden, the market does not look so rosy in one day! That is how quickly the market sentiment can turn while you're in a bear market. I don't care if others characterize this as a new rally (IBD says it is in confirmed rally phase). I know that this mini-rally is within a bear market context which began back in 2/27/2007 and the technical damage to the market is irreversible and some heavy lifting must be done to build up the legitimate support level. I do not think we are there yet. I really think that a strong discipline and strong adherence to the market behavior is needed to survive. Or better yet, staying in cash and earning 5% in money market isn't the worst thing right now. I usually like to trade when the market is in a confirmed uptrend. But the fundamentals of this market is in such shambles, I am going short mostly on my trades.

On Mad Money, Jim Cramer was at his old self. I hate to harp on him so much but he makes my blood boil with his mindless rants and nonsensical projections that has a lot of people losing money right now. I admit it. I used to watch his shows. I even bought some of his books way back when. But lately, he has really become dangerous. He ceased to be entertaining. Today, he continues to extol the virtues of his interview with Angelo Mozilo of Countrywide. He points out that Mozilo made a good call about fraud within the home building and mortgage industry. Of course, he was referring to the Beazer Homes (BZH) investigation by FBI for broad fraudulent mortgage activities. One thing he fails to realize is that the company that he puts in such high pedistal is also probably not the cleanest company around. Here is why:

On their recent 10K Annual Report, Countrywide states:
"As our portfolio of investment loans has grown, our portfolio credit risk has also grown. Our allowance for credit losses was $269.2 million at December 31, 2006, an increase of 36% from December 31, 2005. The increase in our allowance for loan losses reflects prevailing real estate market and economic conditions and the seasoning of the Bank's investment loan portfolio. We expect the allowance for loan losses to increase, both in absolute terms and as a percentage of our loan portfolio as our loan portfolio continues to season and as current market conditions develop. However, we believe that our investment criteria have provided us with a high quality investment portfolio and that our credit losses should stay within acceptable levels. We also believe our allowances and provisions for credit losses are adequate pursuant to generally accepted accounting principles."

- I interprete this as saying that they have increased 36% the allowances for credit losses but anticipate that to continue to rise. But they then go on and say that they believe that the investment criteria for their loan investment portfolio is within acceptable levels. What? I don't know what that means but it certainly looks like they are saying that their loan investment portfolio may change based on changes in losses that they anticipate going forward.
- I would relate this issue with the fact that recent exposure of CDO's that are bundled with prime and non prime loans actually consists of 46% of subprime lower grade securitized loans that are sold in Wall Street. Also, we know the number of CDO's currently in Countrywide's portfolio as well.
-We know that Moodys is now pushing for re-rating of these securitized mortgage investments and we can expect lower grading from them at any time.
-thus we know that their position on the allowance for credit loss is misrepresented in the 10K.

Then there is the phantom buy backs, from 10K:
"As part of our ongoing capital optimization plan, our Board of Directors authorized a share repurchase program of up to $2.5 billion. In connection with this program, we repurchased $1.5 billion of our common stock in November 2006 and financed this activity through the issuance of junior subordinated debentures. The transaction is subject to a market price adjustment payment based on the actual volume-weighted average price of our common stock during the repurchase period. The price adjustment payment will be settled, at our election, in our common stock or cash. The final settlement is expected to occur in the second quarter of 2007."
-so we know that the buy backs are on further debt.
-prices are settled on CFC election. This is alarming because there is room for adjustment based on their view of what is the appropriate stock price for purchase. This means that they give themselves room to fudge their stock prices. This is dangerous because they can affect share prices based on their "repurchase" levels. Perhaps to prop up the share prices while the insiders sell?

Back to today's futher exposure of mortgage and housing ailments. Since Countrywide was a predominant mortgage lender associated with New Home Builders, their business was highly levered to the home builders. When new homes were built, Countrywide made strategic alliances to either buy the home builder's special financing loans or to provide financing on their behalf. In fact, the 10K shows that such alliance has increased their market dominance. So now, as the home builders are coming clean that the bottom is not yet here and that substantial slowing and losses are to follow. Additionally, Lennar today stated that subprime has affected their business adversely and significantly, quite a different tune from what the main stream media was saying. So why isn't Countrywide coming out clean and continue to point fingers and deny that they have any wrong doing in this process and that they are the only "good guys" in this business? I find that fishy.


The problems with the housing and mortgage industry is not yet done. It is just beginning. I think that there will be continued scrutiny by SEC and FBI for fraud.

With rumors running high today regarding increasing tension in Iran and Britain, the oil showed just how volatile this market can get by rising $5 on nonsubstantiated rumors. The oil is headed higher continuing to stoke higher inflation issues and slowing US growth. I don't know how this will play out but if the US and Britain resort to military options in this region, it will devastate already weak diplomatic relations in this area and continue to destabiliz the Middle East in the form of even higher oil prices.

For the cutting of interest folks, perhaps Ben Bernake will soothe the market. But remember that Bernake's job isn't to soothe the investors who are too overly bullish and complacent. Instead, he needs to act in accord with the fiduciary obligations of a FED Chief and that is to garner a safe and sound US economy and fiscal policies. If he cuts interest rates to save the housing market and to avert a recession, there is a high chance that we will be mired in a Staglfation that plagued the US economy in the 1970's. Bernake has the choice of mortgaging our future (no pun intended) or stay vigilant and continue fighting inflation. Higher interest rate is far better than stagflation and some greedy mortgage lending companies and greedy home owners from being saved. Frankly, I don't think even interest rate cuts will save that.