Anyone thinks a contrarian view of CFC?

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Submitted by Coronita on August 16, 2007 - 6:46am

I know this is going against the grain...But anyone thinking about taking a contrarian view on Countrywide? That is, unlike other smaller mortgage lenders, this one is going to survive and the issues it faces are overblown? It seems like most of the companies that are having issues are having issues with access to funding. Even with the turmoil, it appears CFC is still obtaining funding, (albeit at substantially higher costs).

Submitted by stansd on August 16, 2007 - 6:54am.

I'll go on record in agreement. I think they will weather the liquidity crunch. They'll remain pretty beaten down as the fallout from the housing decline continues to make itself truly felt (they'll probably require big layoffs and a reorganization to "right size" their business), but I don't see them going bankrupt.

This board has some definite biases that always have to be remembered. If you look at the prices of credit default swaps on CFC, they have gotten much more expensive, but they are still placing the odds of bankruptcy as remote.

Stan

Submitted by capeman on August 16, 2007 - 7:02am.

Obviously you didn't see the news release this morning. They're buying time at this point. It's just a matter of whether BC will come before my Sept. Puts expire or will I have to buy some Octobers. It's all happening much quicker than I though it would.

Submitted by stansd on August 16, 2007 - 7:31am.

Hadn't seen that yet-think it came out within a few minutes of my post.

I've walked the plank now...still think they'll weather it (options still not pricing in real high odds of BK, TBTF, liquidity will ease up), but I wouldn't seek a loan from them at the moment:)

Stan

Submitted by aztecnology on August 16, 2007 - 7:40am.

CFC is done, down 30+% in 24 hours, bankruptcy on the horizon.They are no longer doing jumbo loans, and only conforming that they can sell to freddie and fannie...

Submitted by capeman on August 16, 2007 - 7:45am.

That last post says it all. Only conforming means pretty much all 80-90% of the business they've been doing the last couple of years is gone. Couple that with having so many REOs on the books (many more to come!) and having to deal with the paper coming back they will be BK within 2 months and likely right about 1 month from now.

Submitted by stansd on August 16, 2007 - 8:02am.

If they are smart, they'll announce a huge layoff in the next few days, cease all non conforming origination (I'm sure this is done), draw down all ST financing (which they've done). Auction off any houses on the books immediately.

Also, don't discount all the Private Equity vultures out there that might see this as an opportunity.

I think they've got a good chance of making it through.

Stan

Submitted by stansd on August 16, 2007 - 8:02am.

If they are smart, they'll announce a huge layoff in the next few days, cease all non conforming origination (I'm sure this is done), draw down all ST financing (which they've done). Auction off any houses on the books immediately.

Also, don't discount all the Private Equity vultures out there that might see this as an opportunity.

I think they've got a good chance of making it through.

Stan

Submitted by Allan from Fallbrook on August 16, 2007 - 8:14am.

Stansd: You make an excellent point regarding drawing down on available financing.

I used to do finance/accounting consulting for distressed businesses, and one of the first things I would check were the lines of credit.

This came to epitomize a company truly in trouble, because it speaks to the lack of liquidity. Generally speaking, it is cash flow (or lack thereof) that is gonna kill ya.

I think Mozilo saw the writing on the wall, and took the money and ran. I can't imagine the timing of his selling all of that stock was mere coincidence.

Submitted by Alex_angel on August 16, 2007 - 8:39am.

Let them burn down. They helped create this mess. Giving out million dollar loans to people that roll up in a beatup pickup smelling like horse crap that claim they have hundreds of thousands coming to them from their dying mother's uncle's cousin.

They built this house of cards and now it is falling on them.

Submitted by PerryChase on August 16, 2007 - 8:50am.

Lets see. Countrywide just got $11.5 billion in financing from 40 banks.

Some questions I would ask are:
1) How much do they have in cash total including the $11.5 billion?
2) How much do they loan out each month?
3) How much are they able to sell on the secondary market?
4) At this rate, how long can they last as a going concern?
5) What did they do the shrink their business as the secondary market seizes up? They have 62,500 employees, up nearly 10% from last year.

It's clear the secondary market is not accepting junk loans anymore. That means that CFC has to underwrite quality loans in order to sell them (and perhaps include buyback covenants in case of default). That will mean they'll have much less business. Unless we hear of large lay-offs, I don't think that Countrywide can make it. They need to shrink their cost structure first and foremost.

Submitted by kev374 on August 16, 2007 - 9:13am.

Not sure if they will go out of business but they may have to declare Chap. 13 BK (viz Delta and other companies). The downturn is just getting started and already they are having serious problems, what is going to happen when all the ARMs reset in massive numbers and defaults/foreclosures go through the roof?

Submitted by Allan from Fallbrook on August 16, 2007 - 9:15am.

Perry: Add another couple of questions.

How much is their existing capital base right now?

How much of a reserve will they need to provide in order to cover bad, sub- and non-performing loans?

In boating, there is a term called "the following sea". It indicates a rogue wave from behind that you don't see that swamps you. In CFC's case, their balance sheet has to be in tatters right now. While cash flow/liquidity is the main issue immediately, they are also carrying a huge amount of drag related to bad paper.

I believe that this is what will kill them: Not what is in front, but the following sea.

Submitted by bsrsharma on August 16, 2007 - 9:19am.

just got $11.5 billion in financing from 40 banks

 

One question though: Who in his right mind would loan 11B to a sinking ship? I want to open a (FDIC covered) account there (for high rates), but even I am hesitating!

And 62,500 employees losing jobs, man this is a great tragedy whichever way you see it. Bubble bursting is good ; but the human costs are going to be terrible.

Submitted by kev374 on August 16, 2007 - 9:37am.

Bubble bursting is good ; but the human costs are going to be terrible.

Yes it's no good for the employees, but what about all those financially ignorant people who are losing their homes right now who got those exploding mortgages from Countrywide.

Submitted by FormerSanDiegan on August 16, 2007 - 9:50am.

The CFC situation is too volatile in my mind to take a contrarian view.
I am, however, more optimistic about the large banks (e.g. BofA, Wells Fargo, and Citigroup) I think they will survive and that there will be opportunities through this mess to pick those up on the cheap.

Submitted by betting on fall on August 16, 2007 - 10:08am.

I think the fundamental problem is that with home sales cut in half and higher interest rates eliminating refinancing, demand for loans is probably down 75%.

If we were suddenly buying 75% fewer cars, what would happen to the auto industry?

There are two choices: downscale yourself quickly, or have a bankruptcy judge and your creditors decide how to do it.

Submitted by deadzone on August 16, 2007 - 10:19am.

Go ahead and take the contrarain view and buy some CFC stock, see how that works out for you..

CFC is finished, it was this viewpoint of their so-called diversity that allowed their share price to weather the initial subprime meltdown in February. That is why it was an enourmous opportunity to short them at that point.

If CFC does under the housing market is officially toast.

Submitted by asragov on August 16, 2007 - 10:40am.

It seems like it is "too big to fail."

Although being somewhat outside the banking system, CFC presents a difficult policy challenge.

You might enjoy this post, from over at Minyanville, "CFC empties out on Widowmaker":

http://www.minyanville.com/articles/CFC-...

Submitted by lonestar2000 on August 16, 2007 - 12:56pm.

With CFC execs cashing out their options, and CFC tapping their entire available credit for the next three months, I hardly think their issues are overblown. Even if they survive they are a huge target for a takeover/buyout. I can think of several Chinese banks with more money collecting dust than they know what to do with.

Submitted by stansd on August 16, 2007 - 1:54pm.

Deadzone,

You might consider being a bit more circumspect in your assessments. You may be right, but your judgment is at odds with a market that is still putting the probability of bankruptcy as quite remote.

Stan

Submitted by FormerSanDiegan on August 16, 2007 - 1:58pm.

It seems like it is "too big to fail."
Yeah, just like Worldcom.

Submitted by SD Realtor on August 16, 2007 - 1:59pm.

Stan you know how it is around here....

we don't take kindly to them there contrarian views padner... just move along...

SD Realtor

Submitted by no_such_reality on August 16, 2007 - 2:13pm.

bankruptcy as quite remote.

Hmm, I don't know if losing nearly 40% of your market cap in a month and having your debt rerated to the step above junk bond is a vote of confidence.

Submitted by deadzone on August 16, 2007 - 2:22pm.

Okay Stan, you go ahead and buy some CFC. I'll short some at the same time. In six months we'll see who made out better.

Submitted by deadzone on August 16, 2007 - 2:24pm.

Bankrupcy at New Century was considered quite remote a year ago.

Submitted by justme on August 16, 2007 - 2:25pm.

The original question is a bit of a strawman: The question is not whether CFC will "survive" or not. The question is whether the CFC stock will drop to $5 or below before all is said and done. Survival does not AT ALL equate with a stable stock price.

Submitted by stansd on August 16, 2007 - 2:43pm.

I don't have handy access to default swap quotes...Jan '09 put options quotes below. Notice the price on the $5 puts (Up a huge amount today, no doubt). Expensive, yes, but nowhere near what you would see if Bankruptcy was imminent.

I'm too far gone from this type of analysis to pin it well, but looks to me like the odds of bankruptcy implied in the quotes are in the 30% range (up from maybe 10% yesterday). Keep in mind this is on a day when the market was in an absolute panic.

Not to say that they don't have big issues, and those percentages are something to take note of, but they don't imply bankruptcy is around the corner.

Stan

PUT OPTIONS Expire at close Fri, Jan 16, 2009

Strike Symbol Last Chg Bid Ask Vol Open Int
5.00 OZFMA.X 1.50 1.05 1.30 1.70 200 70
7.50 OZFMR.X 2.10 0.60 2.20 2.85 124 2,213
10.00 OZFMB.X 3.10 0.40 3.10 3.90 424 2,950
12.50 OZFMS.X 4.40 0.60 3.90 4.90 100 1,778
15.00 OZFMC.X 5.10 0.40 5.10 5.70 199 640
17.50 OZFMT.X 7.00 1.00 6.10 7.10 807 148
20.00 OZFMD.X 7.50 0.20 7.30 7.70 558 8,239
22.50 OZFMX.X 9.40 1.60 8.60 9.70 111 335
25.00 OZFME.X 10.30 0.00 9.90 11.00 385 6,064
30.00 OZFMF.X 13.00 0.30 12.90 13.50 177 5,925
35.00 OZFMG.X 17.20 0.30 16.20 17.30 134 4,247
37.50 OZFMU.X 21.60 3.50 17.90 19.10 60 908
40.00 OZFMH.X 21.30 1.50 19.70 21.10 149 7,757
45.00 OZFMI.X 24.80 0.00 24.30 25.90 22 274
50.00 OZFMJ.X 31.00 5.60 28.60 31.10 1 481
55.00 OZFMK.X 37.00 12.00 34.10 36.00 1 49

Submitted by deadzone on August 16, 2007 - 2:52pm.

I'm targeting $10 as the point where I will exit all my short positions on CFC. Although realistically I wouldn't be surprised if it goes $5 or less.

Submitted by capeman on August 16, 2007 - 3:55pm.

bankruptcy as quite remote.

 

60 Days is optimistic... I'm giving them about 45 max till BK. 

Submitted by Coronita on August 16, 2007 - 7:11pm.

Well folks. Thanks for the opinions today.

This day has been really interesting and stressful for me today. This morning I took up a long position on 10k shares of CFC over a 15minute interval, averaging 17.80, hoping for a dead cat bounce over the next few days. However, this afternoon, I started shitting in my pants when things were down to the mid fifeteens. Fortunately, the last hour of trading, I was able to get rid of everything in between 19.80 and 20.05. I don't think I'll be trading in this crap again. Too much volatility for my stomach.

I haven't slept well in the past couple of days, trying to trade a few other stocks on the swings. I've been moving in and out of CVX , MO ,GYMB ,INTU over the past few weeks, trying to enter $79,$66,$38,$28 and exiting when things approach $83,$68, $42, $30... This morning i entered CVX, $79.15, MO $65.52 and GYMB $37.25, and this afternoon exited INTU at $29.01. This will be the fifth round of entry I'm doing. (Of course, I did a bonehead thing, and fat fingeredd MOV instead of MO when I was typing too fast during this morning, so I invariably picked up Movado too :( ).

We'll see how long I can keep this up before I die of a heart attack. Of course this is just play money, so if I lose it oh well. Not sure really how to play with this volatility, so it's just an (expensive) experiment for me right now.

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