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Five Things You Need to Know: Countrywide Empties Out on Widowmaker; Housing Starts Point to Increasing Reliability of Collapse; Everybody Out of the Poole!; Is Our Money Safe?; Who Let the Lepers Out?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Countrywide Empties Out on Widowmaker

The news trickling out on Countrywide Financial (CFC) is a big deal. Remember, this is the biggest mortgage lender in the country.

  • So, how bad is it?
  • Think of it like this. It's late December. Snowing. Aqueduct racetrack. The last race is in four minutes, you're down $287 and seven beers. But you're not finished yet. There's still one race left, the last race, the one they call The Widowmaker. Few losers ever survive The Widowmaker. But there it is, calling to you, asking for one last wager, one final grasp. Ah, but there's a slight snag, a hitch in your giddyup so to speak. The only paper in your pocket is a losing exacta ticket from the last race that came in backwards. We're talking the only paper in your pocket. You sold your unlimited subway card after the 5th race, plunged full-bore on a filthy hot dog, a beer and a 9-1 shot that finished next-to-last. You are Countrywide.
  • Who are you gonna turn to now?
  • If you're Countrywide you're gonna tap your entire $11.5 billion bank credit line.
  • What does that mean?
  • Yesterday, the company attempted to access the short-term credit markets (the equivalent of hitting up your buddies at the track for a little "working capital") and discovered the vig (what you're gonna have to pay your buddies to get the money) a little too steep.
  • So the company does what any jonesing gambler at the racetrack would do; they strolled over to that ominous-looking window with the telephone and credit card swipe and emptied out.
  • As Christopher Wolfe, managing director at Fitch Ratings told Bloomberg, "When a company draws on its bank lines, it just basically gives off the impression that it has run out of options."
  • "Typically these bank lines are there but not really meant to be used.''
  • So Fitch Ratings dropped Countrywide to BBB+, its third-lowest investment- grade rating.
  • Moody's Investors Service followed suit and downgraded the senior debt ratings of Countrywide to Baa3, from A3, and the deposits of Countrywide Bank FSB to Baa1, from A2.
  • Remember, this is Countrywide.
  • This is the guy that usually sits in the clubhouse reserved boxes.
  • According to Friedman, Billings Ramsey, Countrywide currently has exposure to $7.6 billion in Asset-Backed Commercial Paper and $5.8 billion unsecured commercial
  • The company is not a huge subprime player; they currently carry $442 million of subprime.
  • Yesterday, Merrill Lynch (MER) raised the possibility that Countrywide could conceivably be forced into bankruptcy if these credit crunch conditions linger.
  • Meanwhile, Angelo Mozilo, chief executive officer of Countrywide, recently exercised options for 46,000 shares in the company and then sold those shares for $1,306,400, according to Thomson Financial.
  • Mozilo owns 1,378,390 shares of company stock (497,297 held directly and 881,097 indirectly).
  • Over the last two years, in addition to the current filing, Mozilo has been awarded stock four times totaling 787,694 shares, and has exercised options 270 times totaling 14,553,538 shares and has sold shares 268 times (14,550,928 shares for $536,348,378).

2. Housing Starts Point to Increasing Reliability of Collapse

Speaking of housing... Housing starts decreased by 6.1% in July, and June starts were revised lower to 2.1% from the previously reported 2.3%, the Commerce Department said.

  • The numbers were worse than expected... as if that is even possible.
  • And it marks the lowest level of housing starts since January 1997
  • Building permits also fell to a 10-year low.
  • Year-over-year housing starts are running almost 21% below the July 2006 level.
  • And the National Association of Realtors' survey of homebuilder confidence is at its lowest level since 1991.
  • Earlier this week the Federal Reserve released a survey of bank officers and found 38% of respondents noting weaker demand for prime mortgages.
  • As well, the number of U.S. workers filing new claims for jobless benefits showed its third consecutive increase, and is now at its highest level in two months.

3. Everybody Out of the Poole!

Meanwhile, back in the fake world, St. Louis Federal Reserve president Bill Poole said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a "calamity'' would justify an interest-rate cut now, according to Bloomberg.

  • And, as if on queue, Moody's just moments ago warned that the "global credit rout" may cause a major calamity.
  • Hedge funds face potential losses on collateralized debt obligations, securities packaging other assets, Chris Mahoney, vice chairman of Moody's said on a conference call today, according to Bloomberg.
  • "A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as Long-Term Capital Management threatened to do in 1998,'' Mahoney said.

4. Is Our Money Safe?

The questions about the "safety" of our money continue to pour in:

Dear Minyanville -

I wanted to ask a quick question. My 401k only offers a stable money market fund that "cuts corners" to get added return. I have no other "safe" options other than some bond funds to place my money for the downturn I suspect is on its way. What do you think I should do? It is not like they offer a plain cash account. I feel like many folks will be in the same boat I am in and even though they think they are safe they can end up getting hurt.

Thanks, Minyan C

Dear MC -

If you trust the company that houses your 401k, if its a legitimate investment firm that has a long history of successfully weathering market downturns and holding onto client assets as most 401k firms are and do, then you will probably be fine.

Only people who NEED liquidity on a daily basis - and a 401k by definition does not NEED liquidity - should worry about whether their money market fund is "safe" from Asset-Backed Commercial Paper, which is where the major problems are beginning to show up.

Most companies would rather take a loss than let their money markets fall below $1. The reason why this money market fund issue is an issue at all is because many companies and institutions that require cash flow need to be able to access that cash at will, or they are suddenly finding that risk aversion in the commercial paper market is making it far more expensive than they anticipated to manage their short-term cash positions. And most money market funds do have some exposure to commercial paper.

Two years ago I wrote a piece called Savings versus Investment that may be worth revisiting:

"Today this may seem like a petty game of semantics – "savings," versus "investment." But I assure you the difference between the two will not be a petty game of semantics when, and I believe it is a matter of when, not if, the day comes that investment risk finally shows itself, and those who have been fooled (some would even go so far as to say forced) into treating their savings as investments pay the price."

There are many reasons Americans are now conditioned to view common stock ownership and 401ks and IRAs as "savings," and none of them are good. They range from Fed policy that systematically punishes savings, to the elimination of defined benefit plans to easy credit terms and predatory lending.

The end result has been the Death of Savings in this country. In its stead, a complacent view has developed where cash has been supplanted by credit and the ability access credit has somehow come to be equated with "savings."

Money in a 401k is investment money. Even money in a money market fund is, by definition, investment money. If the goal in your 401k is to avoid all losses, and it sounds like from your question it may be, then that money should by definition not be in a 401k. If the goal is to minimize losses, then you are in the safest investment vehicle available through your 401k. Just remember, savings is money you cannot afford to do without. Investments, even low-risk investments such as money market funds, are by definition money you are willing to risk losing - even if that risk of loss is very, very low. Risk is a two-way street.

5. Who Let the Lepers Out?

Speaking of credit as a substitute for savings, Minyan RatpackMike (not his real name!) forwarded us an interview in today's Washington Post with James Scurlock, director of the documentary Maxed Out, which takes an in-depth look at America's debt and credit obsession. Although released months ago, the plot is all too familiar.

  • There are just a couple of quotes we want to pull out:

    Q: So, are you a genius, or what?
    It's funny, it really wasn't that difficult to understand. In some ways, it's just mathematics. Yet there are regulators and analysts and investment bankers who do this day in and day out for years and years, who were saying the opposite of what I was saying. But for someone like me to come in and spend six months snooping around this industry and come to a pretty clear conclusion about where it was headed, it just tells you it wasn't all that difficult.

    Q: How do you think the crisis is being handled in Washington?
    I think it's been exacerbated by people like [Federal Reserve Chairman] Ben Bernanke and [Treasury Secretary] Henry Paulson and others coming out and saying, "Oh, subprime isn't contagious"... as if subprime borrowers were like lepers confined to some colony on an island and couldn't swim over and infect the rest of us... Now that it has spread, the party line is "The economy's strong and we'll power through this." But the only way you power through a crisis in our economy is by making sure people keep spending.
  • Societal mood is shifting, which is why Scurlock was interviewed in the Washington Post and not in some underground "Alternapaper."
  • As these attitudes toward credit become more "common sensical" - after all, Scurlock notes he is no genius, "it really wasn't that difficult to understand," - we will begin to see risk appetites diminish, risk aversion grow, and time preferences shrink.
  • In other words, deflation.
  • But we are not doomsdayists.
  • Bear markets come and go, and what they do is re-price inflated assets, and re-adjust under-inflated assets.
  • The credit mania has created an overvaluation of all financial assets.
  • What is undervalued are intangible assets; relationships, time, quietude, reflection - all those things that are difficult to define and whose value deflated in the mania for material goods and financial assets.
  • Because social mood is shifting, as a consequence of that shift, certain intangible assets will be re-priced.
  • Perhaps the most important of these intangibles will be time.
  • It is arguably our most precious commodity, and how we spend it may dramatically change as the structural bear market reasserts itself.
  • But the bull and bear coexist on Wall Street, which is why you never see Hoofy without Boo on MVTV.
  • All that changes is which one has the upper hand.

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