June 30 was the day when Thornburg Mortgage Inc. (NYSE: TMA) had hoped to complete at least 90% of its preferred stock repurchase as part of a last ditch effort to save the company from bankruptcy and return it to viability. CEO Larry Goldstone continues to state that bankruptcy is not an option.
Well, when the stock has lost 99% of its value, the company posted a $3 billion quarterly loss, no one will buy what you have to sell, shareholders who have lost just about everything don't want to play anymore, and Moody's handed the company a C (for crap) rating.
Bankruptcy looks like a realistic scenario. And just to keep things interesting, the SEC is investigating the company's 2007 financial results, the timing of margin calls, as well as accounting practices for the company's mortgage-backed securities.
Thornburg's problems have nothing to do with the sub-prime mortgage debacle, at least not directly. Thornburg specializes in jumbo mortgages to those with impeccable credit. Its default rate is the envy of the mortgage industry. So the problem is not creditworthiness, but liquidity. Investors simply are not interested in purchasing mortgage-backed securities of whatever quality in the secondary market.
Thornburg's latest last ditch effort calls for the company to purchase 90% of its preferred stock in exchange for $5 and 3.5 shares of common stock for each share of preferred stock. Shareholders recently gave the company permission to increase the number of shares outstanding from 500 million to four billion in order to make the tender offer possible. The deadline for tendering preferred shares has been extended to September 30. The stock is currently trading at $0.22 per share, way down from its 52 week high of $27.82.
Even a contrarian speculator will have to work very hard to find value in this one.
Thornburg Mortgage (NYSE:TMA) was one of the larger mortgage lenders in the US. Its stock now trades at $.65, down from almost $27 a year ago. That means it market cap was $5 billion then.
According toThe Wall Street Journal, TMA said in a federal filing that "the future of the home-mortgage finance company as a viable business remains in doubt." The company is trying to raise over $1.3 billion, but, by many accounts, that is not going well.
One of the issues that the Thornburg problems opens, again, is why Bank of America (NYSE:BAC) is so anxious to buy Countrywide (NYSE:CFC). While the largest mortgage lender may have problems which are not quite as severe as Thornburg's, it still faces a growing number of customer defaults.
Many on Wall St. would argue that Countrywide would trade well below its current price of $4.67,down from its 52-week high of $38.89, if BAC had not made its offer. It has traded as low as $3.95. CFC has had trouble with regulators, write-offs and in being probed for its lending practices.
Could Countrywide have fallen below $1 if it did not have a firm buy-out offer? Certainly.
Douglas A. McIntyre is an editor at 247wallst.com.
How did we get here anyway? Housing and construction companies have been crushed as the bubble burst and now investors have to make a critical decision. Do you stay and hope for a recovery or bag it and move to another position that has the potential to provide better returns?
The problem is simple to explain: Most investors hate taking a loss. In fact, most investors will look to get "even" before they sell and this attitude usually leads to greater losses, anxiety and poor decisions. The truth is that much of this can be avoided with proper risk management techniques. If any of this describes you, then consider developing a plan for risk management and a discipline that will help to protect your hard earned principal. Now, more than ever, investors need a plan. We all need a plan that includes well developed risk management disciplines, which is why I dedicate a full chapter to it in my book, The Disciplined Investor.
Monday, June 2
The week begins with the 10 am release of construction spending and the ISM Index. Construction spending is expected to continue to be weak as is the ISM.
Then we have a few housing-related earnings releases that should be of interest. Watch NCI Building Systems Inc. (NYSE: NCS). This company is engaged in manufacturing and marketing of metal products for the nonresidential construction industry. Terrific! This is a company that is suffering along with the entire construction sector...that is for sure. In fact, they company lowered the outlook for the remainder of the year back in March. It stands to reason that not much is better. The ace in the hole is the recent trend of lowering expectations and then coming out with an earnings beat. Even so, this has too much potential for problems and the sideline is a good vantage point to watch the earnings announcement, which is expected to come in with a PROFIT of 31 cents per share on $365 million of revenue. (Uh...That I would like to see.)
MOST NOTEWORTHY: CBS Corp., Thornburg Mortgage and DiamondRock Hospitality were among today's noteworthy downgrades:
CBS Corp. (NYSE: CBS) was downgraded to Market Perform from Outperform at Wachovia, citing the weak ad environment and potential M&A strategy to acquire growth, which will limit upside near-term.
Thornburg Mortgage (NYSE: TMA) was downgraded to Underperform from Outperform at Friedman Billings, which said the recent capital raise and related transactions result in 95% dilution, and questions how shares will trade when 2.9B restricted common shares are registered and start trading in mid- May.
DiamondRock Hospitality (NYSE: DRH) was downgraded to Neutral from Outperform at Baird following the company's reduced guidance.
OTHER DOWNGRADES:
Savvis Inc. (NASDAQ: SVVS) was downgraded to Equal Weight from Overweight at Lehman following the company's Q1 report and guidance.
Memc Electronic Materials (NYSE: WFR) was downgraded to Neutral from Overweight at J.P. Morgan, who cited high Street expectations and a very tight capacity expansion schedule over the next few quarters.
TheStreet.com's Jim Cramer says you can call him all the names in the book, but he's right, and the shorts know it.
It was a cause I didn't want to take up. I didn't want to take it up because I knew the short-sellers would paint me as a naïve, clueless defender of the bull, and the long owners wouldn't really understand the idiosyncrasies of the subject. It was a cause I knew the brokers would never defend because their best business that is left is prime brokerage, and they need giant hedge funds to trade with them and can't risk alienating them.
I am talking about the uptick rule, the 70-year-old rule put in by the SEC to stop the process of "raiding" stocks, meaning sending them down by knocking all bids down underneath to where panic could and would ensue.
Today's typical. The Journal breaks its seeming 10-year embargo on mentioning me or my show with a piece that basically says I have no idea what I am talking about and am a fool to bring it up. It quotes James Bianco, from Bianco Research right after me saying, "Anyone who thinks the removal of this rule is somehow causing havoc in the financial markets is hopelessly lost in the bark of one tree and may never be able to see the forest." He then goes on to say, "To suggest that the removal of this rule is causing the markets to go down is to loudly announce, "I don't understand the credit crisis and I am incapable of ever understanding it.'"
The short interest in most large stocks traded on the NYSE increased as measured on March 14. The figures compare to February 29. Car stocks were hit especially hard. Shares short in Ford (NYSE: F) moved up 20.3 million to 248.9 million. For GM (NYSE: GM) the number was up 19.4 million to 85.9 million.
Despite the fact that many big financial stocks are already close to lows, traders were willing to bet that they would fall off further. Shares short in Washington Mutual (NYSE: WM) moved up 15.9 million to 168.8 million. The short interest in Citigroup (NYSE: C) jumped 7 million to 125.6 million. For Wells Fargo (NYSE: WFC) the number added 9.3 million to 117.5 million. For Countrywide (NYSE: CFC) the figure was up 9.3 million to 111.5 million and at Wachovia (NYSE: WB) shares sold short were up 2.2 million to 105.4 million.
Other notable financial stocks with large increases included Fannie Mae (NYSE: FNM), up 11.4 million to 78 million, Thornburg (NYSE: TMA), up 11 million to 25.8 million, and CIT (NYSE: CIT), up 10 million to 20.1 million.
Troubled firms that have recently had bad news were hit very hard. Shares short in Sprint (NYSE: S) moved up more than any other NYSE-traded company, jumping 30.1 million to 75.2 million. Shares sold short in Blockbuster (NYSE: BBI) increased 8 million to 57.8 million.
Shorts moved out of Micron (NYSE: MU) where the number fell 4.3 million to 87.5 million, Wal-Mart (NYSE: WMT) where short interest dropped 3 million shares to 45.1 million, CBS (NYSE: CBS) which lost 2.7 million shares short falling to 29.2 million, The New York Times (NYSE: NYT) with shares short dropped 2.8 million to 30.6 million, and Time Warner (NYSE: TWX) which saw its short interest drop 2.2 million to 38.5 million.
TheStreet.com's Jim Cramer says the latest proposal leans on private industry and the states, two groups that already failed.
"The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers."
That quote, from the lead story in The New York Times, headed "White House Offers Plan to Ward off Credit Crisis," is exactly what is wrong with every response from this government to the crisis we are in.
First, the state regulators are a joke, have been a joke and always will be a joke. We have had state regulators, some of them actually attempting to be good at their jobs, but this real estate industry is always more powerful than state government, so it is a hopeless proposition. All of the problems in this business may have started with mortgage brokers putting people into mortgages that they shouldn't have, but that would have simply stopped had the Federal Reserve said that it didn't see the wisdom in 2 and 28 loans. They pushed them, didn't believe in derivative packaging, and thought that loans should be kept on the books of the banks UNLESS bought by Fannie Mae (NYSE: FNM) (Cramer's Take).
The stock market was up earlier today on hopes of a continue follow-on from yesterday's monster gains, but closed weak at the end of the day. The good news is that we didn't give back most of yesterday's gains. The bad news is that bears can claim there isn't enough positive mojo to keep the market surging a second day. That's what makes a ballgame. Seeing oil hit $110 per barrel probably didn't help matters for those hoping for an ease in gas prices and a break for retail. Below are the unofficial market closing levels:
Southwest Air (NYSE: LUV) was one of the standout stocks with a 7% price drop down to $11.49 after it grounded 41 planes and canceled flights. The airline will recover from this incident, but what is odd is that if you look it up and down it isn't rewarding shareholders even when it cheats.
Humana Inc. (NYSE: HUM) was the news disaster of the day for large cap stocks with a 13.7% drop to $40.88 after noting higher pharmacy charges were going to nearly chop first quarter earnings in half. The stock put in another 52-week low under the $42.85 prior low despite a Merrill Lynch upgrade late in the day defending the stock.
A biotech called Progenics Pharmaceuticals, Inc. (NASDAQ: PGNX) acted as the biotech implosion of the day with a monster drop of 63% to $5.31 (close to perceived cash balance) after its bowel drug failed in Phase II tests. It looks like the placebo was even better.
Thornburg Mortgage (NYSE: TMA) was the monster gainer today with shares up 82% to $2.86, after its coverage was raised to Peer Perform at Bear Stearns. KLA-Tencor (NASDAQ: KLAC) saw shares fall more than 9% to $37.80 on a downgrade today. (Top 10 pre-market calls).
Tomorrow we have the weekly jobless claims, and while weekly numbers are less watched they may be more front and center as everyone is hoping the job market doesn't head as far south as the economy. We also have February import prices, so we'll get to see more evidence of the inflation we know is there.
MOST NOTEWORTHY: Nokia, Thornburg Mortgage and AbitibiBowater were today's noteworthy upgrades:
Oppenheimer upgraded shares of Nokia (NYSE: NOK) to Outperform from Perform on valuation following the recent weakness, as their checks indicate demand remains solid. WestLB raised Nokia to Buy from Add on valuation, as they believe concerns about Chinese demand are overdone.
Bear believes Thornburg Mortgage (NYSE: TMA) is much more likely to survive given liquidity from the Fed's Term Securities Lending Facility. Bear upgraded Thornburg to Peer Perform from Underperform.
BMO Capital upgraded AbitibiBowater (NYSE: ABH) to Market Perform from Underperform citing the company's $496M private debt exchange offer.
OTHER UPGRADES:
JMP raised Cash America (NYSE: CSH) to Outperform from Market Perform.
June 30 was the day when Thornburg Mortgage Inc. (NYSE: TMA) had hoped to complete at least 90% of its preferred stock repurchase as part of a last ditch effort to save the company from bankruptcy and return it to viability. CEO Larry Goldstone continues to state that bankruptcy is not an option. .gif){kind=logo}
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