Reading between the Lines: Countrywide Announces $1+ billion Dollar Loss, Stock Soars
You may be utterly surprised that Countrywide, the embattled lender actually posted an amazing 32 percent jump on Friday when it announced 3rd quarter results. Was it the stellar green earnings? No, it actually announced a whopping red $1.2 billion loss for the third quarter, the first quarterly loss in 25 years. Is it that the overall housing market is taking a turn? No, here in California DataQuick just announced a record number of notice of defaults, the highest since it started keeping records. Then what could it be? How about a simple bracelet promise? Yes! Just like a middle school promise ring, Countrywide gave the entire market an assurance that it will be profitable again in the forth quarter. We should take a look at the current trajectory:
Quarter Ended September 30, 2006: Net Earnings:$648,000,000
Quarter Ended June 30, 2006: Net Earnings: $485,000,000
Quarter Ended September 30, 2007: Net Loss: ($1,200,000,000)
Not exactly something to cheer for. Now where exactly is this profitability going to come from? Since the market is not turning around it will come from taking the axe to thousands of people. Countrywide has openly talked about cutting back 10,000 to 12,000 people. They’ve cut back here and there but nothing significant. The big jump on Friday is good for senior management in the company but not good for rank and file employees of the company. Think about this. Where else are they going to recoup their losses? The worst time for housing markets is fall and winter, this is pretty standard for most housing markets in the United States. Subprime and high-risk loans are essentially gone and this was a huge source of income for the company. Now what? Each foreclosure is estimated to cost a lender $50,000. I’ve gotten many e-mails from people shocked that a company announcing a $1 billion loss can actually rocket up by 30 percent in one day. The answer is rather simple because the announcement of profitability means they are going to “right size.†As a business, your largest expense will always be employees. The market is simply cheering for the company to cut back. The announcement that they will be profitable can come from only one spot. Sadly, as most intense parties the hangover normally last much longer than the festivities. The big jump is premature and a temporary respite in a market where each piece of housing news is negative. The market was happy to see positive words from a large housing player.
The Fed Cutting Rates: Giving Alcohol at an AA Meeting
The juggling act of good public relations and telling the truth is a line that many high profile companies need to walk. A company like Countrywide is not going to openly announce that it had abysmal quarterly results without adding a touch of spin. Just like any good debtor, they are keeping their credit lines open and promising that the debt binge is not over. The Fed is expected to cut rates again, the exact thing that caused the spur in lax lending and credit expansion. It is like providing a recovering drug addict heroine to ease the withdrawal pain; unfortunately there is no way to completely soften the pain without prolonging the misery. The brutal facts must be confronted. The policy the Fed is taking is one in which they hope to inflate debt away and create more and more credit without accelerating hyper-inflation. They openly state that they are combating inflation but their policy is actually causing more inflation; by default lowering rates is inflationary. They have a much larger fear, that of deflation. You will never hear them whisper those words for fear of the market taking a swift turn.
DataQuick: Record Number of Foreclosures and Notice of Defaults
Foreclosures are up, get this, 604 percent from last year. I didn’t misplace a digit. If that isn’t surprising enough, Notice of Defaults are up 166 percent and are the largest number ever recorded since DataQuick started keeping track of records:
“Last quarter’s default level passed the previous peak of 61,541 reached in first-quarter 1996. A low of 12,417 was reached in third-quarter 2004. An average of 34,781 NoDs have been filed quarterly since 1992, when DataQuick’s NoD statistics begin.â€
You may be saying, “so what, we all know the housing market is bad.†The ominous sign is again, in reading between the lines. The previous trough was hit in 1996, after 5 years of a declining housing market. We had massive job layoffs in Southern California and again, a deflating bubble housing market. If we are to compare bubbles, we are only in stage 1 of this bubble since even at the moment, Los Angeles County is sitting on a peak median price. We all know how flawed the median price is in comparing homes but it is still an indicator that homes are moving at absurd price levels. The fact that we’ve already surpassed previous records is telling in what we can expect. Keep in mind that we also had a national recession in 1991 so it is expected that the following years, housing would be contracting:
But if we are to read inflation signs, employment statistics, and housing prices one would expect this economy to be booming. It is for those on Wall Street and Washington but ask the average person on the street and they can clearly tell you that inflation and prices are out of control in many metro areas.
Should I Buy?
I’m surprised how the media has shaped perception in the last few years. We live in a 24 hour news world with the ability to find the answer to practically any question online in the matter of seconds. This has influenced the way people perceive time and space psychologically. I’m getting many questions about people wanting to buy right now. Most e-mails go like “I know we’ve seen the worst already, should we buy?†We’ve only had 1 down year here in Southern California and a decade long bull market, I’m not sure we are even remotely close to the bottom. Then the rebuttal is, “well if you don’t know where future prices are going, we might as well buy.†Listen, anyone can buy. If you really want to buy right now, go ahead. No one is going to stop you. And you are right, no one really knows at what time or place prices will hit bottom. I’ve been following this market in great detail for a few years and thought what we are going through right now, should have started two years ago. Again, the market fundamentals are usually proven right but timing is more of an art than a science. Now that the momentum is clearly on the downside, if you are going to buy look at short-sales and REOs. These are motivated sellers. You can also use the fact that fall and winter are slow selling seasons to your benefit. Inventory is at an all time record high. Don’t get pressured into purchasing a home. Make sure you have contingencies for inspections and do your due diligence.
The last thing you want to do is post a quarterly drop and call it a win.
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18 Responses to “Reading between the Lines: Countrywide Announces $1+ billion Dollar Loss, Stock Soars”
Just shows the insanity of the times. A company LOSES a $billion and they are up 30% on a promise to do better next time! The realism is has been replaced by optimism and the release of any news that can be spinned to suggest a positive outlook is magnified times 10. The rich can do that as that spin is necessary to create or deflate more marketshare and stock movement depending on what they want done.
Anyone who purchases a home in Florida, Arizona, Nevada or California as well as a few other “can’t miss†real estate markets within the next year (unless they fully understand the ramifications and are in it for the next 15 years) are incredibly naive or foolish. In numerous settings I have heard the same garbage on the real estate run up and supposed “it’s over now†belief as I heard during the entire tech bubble from 1999 through 2002. Many people are simply gullible and greedy and will get shredded in any asset bubble, and then try to blame everyone else for their greed or stupidity.
ok 60,000 of defaults
but are we going from this to millions ????
60,000 is after all a small number
Hey! We just hit an iceberg, but we’re doing REALLY WELL!!!
Buy! Buy! Buy! Buy our stock, ya betta git in now while u still can!
You can’t afford NOT to!
@FI,
That is a record amount and the trend is only growing:
http://www.doctorhousingbubble.com/forum/viewtopic.php?t=76
It does matter because house prices are set at the margins.
The thinking on another board is the stock jump is due to a short seller squeeze-so many people are shorting the stock, their price went up.
I doubt that is sustainable. If anything, the jump on Friday was simply an acceptance that they will need to trim back. The market is happy that they haven’t imploded. Keep in mind they are way off their historical highs. Currently at 16.95, all time high of 45. So the 30 percent jump is a bit misleading considering the stock is off by 28.
Where did you get 60,000 defaults nationwide from, we are way beyond that.
Here in the Inland empire california, there have been over 50,000 N.O.D.’S alone since Jan 1 2007. The reo’s are piling up and the banks refuse to show their filings. I am a real estate investor and I am seeing some unthinkable figures in my county alone. This information is not passed on by the media, you have to know how to get it.
Now would be a great time to be a psychologist (if you cared about people). The pain and suffering is going to be so real to people, you know some of them won’t be able to handle this. People losing their “dreams” of a home, and their money? The media is obviously softening the blow–which is disgusting. And not to mention all the people who get laid off. I would like to see a raise of hands by those who define themselves by their jobs? Oh, and of those losing their jobs, how many of them are teetering with a bad home loan? We are a sick country, and if we can’t call it a recession, can we call it “criminal”?
The 32% price gains don’t really mean much, they just went back to the Oct 17th price on the 26th. Not a huge change in fortune. If my new uninsured car is totaled and the first salvage guy offers me $250 that sucks, and is the market value. If another guy gives me $1000, I’m not really up 400% for the day, I’m out $39,000. Life still sucks.
Hey Doc, just saw this article describing the incredible lengths one older couple is going through to sell their house… “you buy and you get all your money back when we die”. In other words, the couple’s assets are willed back to the buyer. Can you believe this? What are your thoughts?
http://www.post-gazette.com/pg/07302/829344-30.stm
@ Debbie
I’m surprised no one has offered them a reverse mortgage, which is essentially the same concept, only they keep the house. I suppose if they want to get outta Dodge, then that solution doesn’t work.
Have to admire good ole American ingenuity. If it were Tony Soprano buying the house, I wonder what would keep him from putting out a contract on the nice old couple?
Ok, let me see if I get this right? Countrywide will have to cut x amount of people in order to reach profitability in 4Q. The stock goes up…then they have to hire x amount of people to service the homeowners that they claim they are going to help work out their problem loans and avoid foreclosure. and the stock goes down?
Dr Bubble,
Today there is an interesting article about how the Fed lowering interest rate will actually be hurting the ARM borrowers:
http://realestate.yahoo.com/Real_estate_news/story?s=rytimes/item-28ae4f7a62040fe7aeaa7c9a6ca8aa85.html
It kind of make sense.
Rick- good article. I do think that many people and journalists overstate how much the Fed’s can affect things. Yes, there is an immediate response to their decisions, but the main reason rates have been so low is the demand on the secondary markets in commercial paper. Pressure from overseas has been good for our rates. It will be interesting to see what happens when, or if, China starts diversifying its assets out of the dollar.
Countrywide announced that it expects to be profitable in the fourth quarter and for the year. Since their profitability or loss depends on the amount of write-downs in their mortgage portfolio, it is completely up to management whether they make money or not (at least in the short term). If I have $100 billion in mortgages on my balance sheet, and I choose to write down $2 billion of them as bad debt, who is checking up on me? The auditors?
This especially applies if Countrywide has securities based on mortgages, rather than mortgages of themselves on their balance sheet. There is no way to price most of the mortgage backed securities, CDO’s and others, other than making up a value out of thin air. Since there’s no market for them, how do you value them? It’s a game all of the banks and Wall Street investment banks are playing right now. Until aggressive auditors get in there and dig through the crap on their balance sheet, we won’t know. And most auditors are not aggressive, as they’re being paid by management.
Going forward, Countrywide is out of the “affordable” loan business. No more subprime, no more option arms, no more loans that they made so much money on. Now they’ve gotten religion. Now they are only going to sell agency loans, or ones that can be sold to Fannie Mae or Freddie Mac. In other words, in other words, 30 year, 20% down, fixed rate loans. Ones that they will make very little money on, as they are commodities. And, to fund these loans, they are not going to be borrowing in the short term asset-backed paper market. Instead, they are going to fund these loans through Countrywide Bank deposits. Which is paying above market rates to attract deposits. So you have a case where they are going to be making low-margin loans, at a cost of funds above market. What a recipe for profits!
So Angelo and David can say anything they want — who can check up on them? Meanwhile, Angelo props up the stock price with bogus announcements, and behind the scenes he’s selling, selling, selling. I suggest anyone holding Countrywide stock do the same.
If you’re like me, you used this temporary uptick as an opportunity to further short Countrywide stock.
You cannot cut staff in December to make a profit in the 4Q – too late. If the large RIF has not happened yet, then 4Q profits will not be impacted by lay-offs. I think Brian has an interesting perspective. Perhaps CW is telling us they will not be writing down too many $$$ of their protfolio in the 4Q, while the rest of Calif drops like a rock. . Stockholders with law degrees should enjoy seeing that.
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