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Two Ways To Play: End Of Country Road For Countrywide?


Position your portfolio in good times and bad.


The markets got an unexpected jolt late in today's session with Standard & Poors cutting the credit rating of Countrywide Financial (CFC) to junk status. According to Bloomberg, the ratings agency said it doubted if Bank of America (BAC) would back the debt of Countrywide.

In January, Bank of America agreed to acquire Countrywide for $4 billion. Bondholders were counting on BAC to put its financial strength behind Countrywide, the largest U.S. mortgage lender. But today, BAC said in a regulatory filing that there was no guarantee that CFC's $97.2 billion in debt would be assumed. An S&P analyst said that it was their understanding that BAC would do so but the filing definitely raised doubts.

Credit default swaps soared on the news, according to the WSJ. Countrywide's five-year credit default swap (CDS) jumped to 250 basis points and was moving wider towards the end of the session. This signaled increased speculation that Countrywide would default on its bonds. Prior to Thursday's close, Countrywide's CDS were trading around 165 basis points. The new level represents an annual cost of $250,000 to protect $10 million of CFC's debt versus a previous figure of $165,000. Toddo asked if Countrywide was the next shoe in today's Random Thoughts.

From the Bull Pen: The markets stayed relatively flat after the news broke, which is a good sign heading into the weekend. Bulls can consider playing the upside using the S&P Depository Receipts (SPY).

From the Bear Cave: However, if the piggies go, so does the poke. Professor Bennet Sedacca asked on the Buzz that if Countrywide is junk, then what does that make other companies similar in structure? Bears are considering downside plays in the financial sector with one option being the Financial ETF (XLF).

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