This week's Barron's [subscription required] reverses itself -- after panning Berkshire Hathaway Inc (NYSE: BRK.A) in December 2007 it has now reversed course -- with a hedge from a short seller. Since panning Berkshire in December -- when it traded for $143,000 a share, the stock has lost 14% so Barron's was right then. Is it right to bet on a rise in Berkshire now? I really don't know because I don't find either the bear or the bull case persuasive.
Why did Barron's pan Berkshire back in December? As I posted, Barron's bear case on Berkshire was simply that it was overvalued on the basis of its book value and earnings growth. Berkshire's ratio of market value to book value was then at 1.8 times its September 30 book value, of $77,800 a share. That was above its average of 1.6 in the past five years.
It was also valued at 23 times estimated 2007 operating profits of $6,300 a share. 2008's profits were then expected to be similar to 2007's. If Berkshire were then valued at 1.7 times book value, a premium to its five-year average, Barron's estimated that stock would trade at $132,000.
Countrywide (NYSE: CFC) directors and executives never did anything wrong? How can people tell? Because they say so.
The judge in a suit against the big mortgage company is not buying it. He wants a trial against the firm and its bosses to continue. According toThe New York Times, the court ruled that management "must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company's collapse."
The charges are serious enough to put some of the Countrywide people in jail, but are they important enough to get Bank of America (NYSE: BAC) to back away from its purchase of the company?
The case looks pretty bad for the mortgage company, at least on the face of it. Officers and directors sold $850 million worth of shares between 2004 and 2007. Toward the end of that period, the company was buying back $2.4 billion in stock, which would tend to keep the price up.
Almost no one would be unhappy to see some of the company's management behind bars. Countrywide issued huge numbers of mortgages to subprime borrowers, which reset at higher prices after the first few years. The homeowners could not make payments and often faced foreclosures. Countrywide got paid for each one of those, a clear reason it might have been aggressive in getting in more customers.
Countrywide executives cannot pay all of those people back, but they can make them license plates from inside a big federal prison.
BAC call option volume of 42,197 contracts compares to put volume of 19,995 contracts. BAC June option implied volatility of 30 is below its 26-week average of 34 according to Track Data, suggesting decreasing price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.
They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.
Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.
Maybe it was tightening bank standards, maybe it was strong business orders for the services sector. Or, maybe it was a big hike in oil prices back to the $120 mark. Stocks took it on the chin today. Below are the unofficial closes for the major US index readings:
Yahoo! Inc. (NASDAQ: YHOO) traded much lower, bringing Wall Street down after Microsoft Corporation (NASDAQ: MSFT) withdrew its $43.7 billion bid to acquire Yahoo Saturday. Shares fell 15% to $24.37.
In January, Bank of America (NYSE: BAC) made a gutsy move when it decided to purchase Countrywide Financial (NYSE: CFC). True, it would greatly expand its mortgage footprint, but it would also mean taking on lots of risk.
Of course, since then, the financials went into a swoon. In fact, the US financial system almost imploded because of the Bear Stearns (NYSE: BSC) debacle.
As a result, there is much skepticism that Bank of America will close its deal, as evident by remarks from an analyst with Friedman, Billings, Ramsey & Co. – Paul Miller – who thinks that Bank of America should forgo the deal.
His belief is that there will be a need for a whopping $30 billion writedown, which would be tough to swallow for Bank of America's shareholders.
Interestingly enough, there are already signs that Bank of America is getting skittish. Last week, the firm was not clear that it would back Countrywide's debt. The upshot was that S&P downgraded the debt to junk status.
And yes, in today's trading, Countrywide's stock is down 10% to $5.35.
Countrywide Financial (NYSE: (CFC) is recently trading at $5.42 in pre-open trading, below its close of $5.98.
Bank of America (NYSE: BAC) announced on Jan. 11, 2008 it will pay CFC shareholders 0.1822 per share of BAC for each share they own.
S&P lowered CFC debt to junk on May 2. Friedman Billings Ramsey says: "downgrading to Underperform and lowering price target to $2 (from $7). Given continued deterioration in CFC's loan book."
CFC overall option implied volatility of 74 is near its 15-week average of 77 according to Track Data, suggesting non-directional risk.
Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Avoid These Ugly, Risky Stocks For the moment, the market seems to have settled. Does that mean the worst is over? It's unclear. You should still be cautious. The key to investing during a crisis is making sure that the stocks you're buying truly are isolated from the blow-up. Avoid These Ugly, Risky Stocks - Motley Fool
10 Auto Brands in Trouble -- Which Auto Brands Should Go? Should Ford Motor dump Mercury and Volvo? What will happen with GMC, Hummer, Jaguar and Linconl?There are too many brands and not enough buyers. Many auto-industry insiders agree weak ones should go, but it's not that easy. Which Auto Brands Should Go? - BusinessWeek In Pictures: 10 Auto Brands in Trouble
Countywide Financial (NYSE: CFC) reported a loss of $893 million for the first quarter. BloggingStocks' Peter Cohan wrote that "Fortunately, Countrywide has an exit strategy. In January, Countrywide agreed to sell itself to Bank of America (NYSE: BAC) for about $4 billion in stock. The question is whether Bank of America will pull out of the deal now that it sees the rising costs it will incur if it moves forward. Since Countrywide trades 15% below that takeout price, the market has its doubts."
But now that may be in further doubt. In a surprise move, Standard & Poor's downgraded Countrywide's debt to junk status, citing concern that Bank of America might not back the company's debt once the buyout is completed.
But some analysts say that the fact that Bank of America hasn't stood up and said it will back the debt raises questions about whether the deal can be completed at all. Friedman Billings Ramsey & Co. analyst Paul Miller said that "A lot of things have changed in the last 30 days. Home prices are still falling very rapidly and Countrywide's credit costs are getting worse from what we hear."
Shares of Countrywide fell on the initial news of the downgrade but rebounded to close down just 1.16% on the day. Still, the wide premium to the proposed takeover offer reflects a great deal of skepticism about the deal's prospects.
Bank of America (NYSE: BAC) is paying $6 million in fines to settle SEC charges that the company favored the recommendation of its own mutual funds while purporting to be offering unbiased advice. From the SEC's release on the matter, "The recommendations were supposed to be based upon an objective and unbiased research methodology that was outlined for clients and prospective clients in promotional literature and disclosures. However, in certain instances, Banc of America Investment Services and Banc of America Capital Management focused on subjective criteria in the research process, which favored Nations Funds, and resulted in increased assets under management for Banc of America Capital Management."
15,000 customer accounts were effected, and the settlement will be used to compensate those customers: an average of $400 each. The average "losses" to consumers were quite small, but there's an important principle here for investors to keep in mind: be wary of any advisor who suggests that you buy their products.
If you choose to work with a financial planner/advisor/manager, make sure it's a fee-only one, not someone paid on commission.
Better still, put together your own portfolio of low-cost index mutual funds. For a couple great examples, check out Ben Stein's model portfolios.
AP reports that Countrywide Financial Corp(NYSE: CFC) lost $893 million in the first quarter. That $1.60 a share loss was not exactly what analysts had forecast -- they were looking for a profit of two cents a share.
Meanwhile the LA Times reports that Countrywide CEO Angelo Mozilo took in $10.8 million and cashed out $121.5 million in stock gains as his company got hammered by losses on sub-prime loans in 2007. Mozilo also enjoyed perks worth $176,513, including $44,454 in rides on the company's jet; $23,755 in automobile use; $8,581 in country club dues; and $31,238 in company-paid tax and investment advice. Mozilo faces an informal U.S. inquiry into his stock sales.
And Countrywide's financial condition is deteriorating fast. It set aside a $1.5 billion reserve to cover loan up 62% from $925 million in the fourth quarter of 2007. Moreover charge-offs totaled $606 million during the first quarter. Fortunately, Countrywide has an exit strategy. In January, Countrywide agreed to sell itself to Bank of America (NYSE: BAC) for about $4 billion in stock. The question is whether Bank of America will pull out of the deal now that it sees the rising costs it will incur if it moves forward. Since Countrywide trades 15% below that takeout price, the market has its doubts.
Investors don't seem happy with today's announcement -- the stock was down 5% in premarket trading.
The Bank of America, seeking approval of its Countrywide Financial Corp. takeover, announced Monday it will modify at least $40 billion in troubled mortgages during the next two years to keep customers in their homes, Bloomberg News reported Monday.
The action could help as many as 265,000 homeowners, Liam McGee, president of the Bank of America's (NYSE: BAC) global consumer and small-business banking unit, said Monday in Los Angeles at a U.S. Federal Reserve hearing on the pending purchase, Bloomberg News reported.
``No one benefits from a foreclosed home,'' McGee told Bloomberg News. ``It is bad business for banks.''
Bank of America's shares moved 10 cents higher to $38.40 while Countrywide (NYSE: CFC) gained 7 cents to $5.91 on the news in Monday afternoon trading.
Dow Chemical (NYSE: DOW) reported a smaller-than-forecast 3% profit drop Thursday and said it would have a good second quarter. Higher feedstock and energy costs were blamed for the drop. The chemical giant reported earnings of 99 cents per share, beating the 94 cents estimate.
If two weeks ago some hoped we've seen the bottom of the subprime mortgage crisis, since then more problems, especially with European banks seem to pop. Credit Suisse (NYSE: CS) reported a wider-than-forecast loss of $2.1 billion on a $5.3 billion writeoff as the global effects of the U.S. subprime mortgage crisis continued to spread. Share of CS though are rising in premarket trading about 1.8% as the bank may have seen the worst.
Bank of America Corp. (NYSE: BAC) shareholders don't want the bank to proceed with the $4 billion acquision of Courntrywide Financial Corp. (NYSE: CFC), the mortgage lender that has become the poster child for the subprime mortgage problems. The have pleaded on Wednesday with the bank's CEO.
If the financial crisis hasn't crippled banks enough, the cost to build bank loan reserves may be just as painful, according to the Wall Street Journal's "Heard on the Street". The need for larger reserves is eating away at earnings and is showing up in first quarter reports for banks such as Bank of America Corporation (NYSE: BAC), whose results took an additional hit because of a $6B addition to its loan loss reserve.
Just four months after Journal parent Dow Jones & Co. was bought by Rupert Murdoch's News Corporation (NYSE: NWS), Wall Street Journal managing editor Marcus Brauchli is expected to resign, according to the Wall Street Journal. Journal publisher Robert Thomson may temporarily take over until a new managing editor is hired.
According to Reuters, activist shareholders in ASM International (NASDAQ: ASMI) believe, by giving more equity to top managers, that they can boost its value by $1.6B.
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