The grim housing market is haunting Countrywide Financial (CFC). Shares of the large mortgage broker sank to a new 52-week low July 24 after it reported a drop in second-quarter profits and cut its outlook for the year.
Countrywide said second-quarter net income fell to $485.1 million, or 81 cents per share, from $722.2 million, or $1.15, a year ago. Revenue dropped 15%, to $2.55 billion.
Falling Sales, Rising Delinquencies
"Countrywide's results for the second quarter of 2007 reflected strength in our core loan production business, but were adversely impacted by continued weakness in the housing market," Chairman and Chief Executive Angelo Mozilo said in a press release. "During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result. Due to these adverse conditions, the company incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans."
Credit-related costs in the second quarter included impairment charges of $417 million on the company's investments in credit-sensitive retained interests. This included $388 million, or about 40 cents per share, of impairment on residual securities collateralized by prime home equity loans. The company said "the impairment charges on these residuals were attributable to accelerated increases in delinquency levels and increases in the estimates of future defaults and loss severities on the underlying loans." The other credit-related cost was $293 million in losses in Countrywide's "held for investment" [HFI] portfolio.
Countrywide lowered its 2007 earnings-per-share forecast from a range of $3.50 to $4.30 to a range of $2.70 to $3.30. "Looking to the second half of 2007, we expect difficult housing and mortgage market conditions to persist," Mozilo said. This was the second time Countrywide cut its profit outlook for 2007.
The stock dropped 10.5%, to $30.50, after touching a new 52-week low of $29.50, on volume of more than 51 million shares. [Average volume has been 9 million shares.]
Analysts Fear Widening Crisis
Some analysts expressed concern about Countrywide's shortfall. "After CFC's Q2 conference call, we are wary of further credit deterioration, as softening housing prices and higher interest rates should make it difficult to refinance," said Standard & Poor's equity analyst Stuart Plesser in a note. [S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).] "We are concerned about the 24-basis-points drop in net interest margin due to the holding of less risky securities."
Plesser, who kept a hold opinion on the stock, added that he expects loan loss provisions to rise for the rest of the year -- they roughly doubled sequentially in the second quarter -- given the ongoing weakness in the housing market. He slashed his 2007 EPS estimate by $1.05, to $2.82, and his price target for the stock by $8, to $32, which amounts to 11.3 times his 2007 EPS estimate, in line with the historical average.
Indeed, the markets are very sensitive to any news related to the subprime and credit markets. On July 24, bond guru Bill Gross of PIMCO Bonds warned of a "sudden liquidity crisis in the high-yield debt markets" in his latest monthly commentary. Thanks to problems with subprime and other mortgage debt, lenders also seem to have lost their appetite for risky corporate debt, Gross said. That threatens the billions of dollars in leveraged buyouts and stock buybacks in the stock market. "No longer," Gross wrote, "will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks."
Thursday, July 26, 2007
Friday, July 20, 2007
Go for quality stocks and not quantity
New investors often want to make a quick buck (some old investors do, too). Sometimes you can do that if you get lucky. But the really big money in investing is made from holding quality stocks a long time. Many investors ask for information on cheap stocks. The usual premise is that they don't have much money, and they want to own thousands of shares of something, that way when it goes up, they'll make big money. The problem is these stocks don't go up. They're a scam for the brokers, and the spread between the bid and the ask on these stocks is enormous, making it impossible to sell them at a profit.
Instead of trying to buy thousands of shares of a worthless stock for Rs 10000, let's see what else you can do with it. These examples are all split adjusted and show what that Rs. 10000 can do when you buy the right stocks.
If you had bought Infosys in 1991 for Rs share (split adjusted), you would own n shares
Obviously it's easy to look back to find great stocks. And you had to hold onto these volatile issues to reap these rewards. But the point is that quality stocks are worth holding. In the above examples, the owners have paid no taxes because there have not been any gains taken. The only commission paid was the original one. And as long as the stocks continue to produce good earnings, there's no reason to sell them. Again, it's easy to pick the good ones looking back, going forward, which stocks are the best ones to own?
Do your research thoroughly. Build a portfolio of stocks, one stock at a time, even with Rs 10000. Be sure to diversify over several industries over time. And only buy the best, no matter how few shares that might be. Then be patient, keep up with the news on the stock, and let the stock grow. That's the way the big money is made.
Instead of trying to buy thousands of shares of a worthless stock for Rs 10000, let's see what else you can do with it. These examples are all split adjusted and show what that Rs. 10000 can do when you buy the right stocks.
If you had bought Infosys in 1991 for Rs share (split adjusted), you would own n shares
Obviously it's easy to look back to find great stocks. And you had to hold onto these volatile issues to reap these rewards. But the point is that quality stocks are worth holding. In the above examples, the owners have paid no taxes because there have not been any gains taken. The only commission paid was the original one. And as long as the stocks continue to produce good earnings, there's no reason to sell them. Again, it's easy to pick the good ones looking back, going forward, which stocks are the best ones to own?
Do your research thoroughly. Build a portfolio of stocks, one stock at a time, even with Rs 10000. Be sure to diversify over several industries over time. And only buy the best, no matter how few shares that might be. Then be patient, keep up with the news on the stock, and let the stock grow. That's the way the big money is made.
Wednesday, July 18, 2007
Forex Trader
The Forex Trader’s Bill of Rights (2007) is a non-fiction book about the foreign currency trading market, published by OANDA_Corporation. It is primarily a call to arms for currency traders to call for greater transparency and accountability within the market. The overleaf provided with the printed version of the book states: “Big banks and confederated brokerages have overcomplicated forex: trading costs are inflated, unnecessary risk abounds, and the system is grossly unfair.” Essentially, the book elaborates on this premise, detailing ways in which traders are being unfairly treated and encouraging them to take action.
OANDA is a company that provides currency trading tools for investors, travelers, and businesses. As such, there is an unavoidable marketing aspect to this publication. However, OANDA is not mentioned throughout the book. There has been a clear effort to maintain a relatively neutral point of view. The back cover does state “OANDA is a leading provider of online currency trading…FXTrade…enables all currency investors to change the way forex trading is done”.
The authors believe currency investors have 10 basic rights which are being violated: each short chapter deals with one of these rights. They are:
1. The right to immediate, uncensored access to the marketplace
2. The right to trade real spot
3. The right to know
4. The right to trade whenever you want
5. The right to equal treatment
6. The right to choose and manage risk
7. The right to understand cost
8. The right to learn – on your own, or through free exchange with other traders
9. The right to full disclosure
10. The right to pay and receive interest
1) The right to immediate, uncensored access to the marketplace Chapter one argues that when trading traditionally (with banks etc.,) execution and price are affected by who you are (size of your order/ relationship with your market maker etc.), the amount of greed on the part of the market maker, and manual intervention which can delay the trade. The chapter calls for transparency, fairness, and efficiency for traders from market makers.
2) The right to trade real spot
Chapter two addresses unnecessary delays in settlement of trades, which according to the authors increase risk for investors.
3) The right to know
The third chapter states that market makers share information based on who you are: in some cases they share information that should not be shared; in other cases they do not share information that should be publicly available. This leads to an unfair advantage.
4) The right to trade whenever you want
The chapter asserts that market makers may advertise 24 hour trading but they close the books on Friday. However, world events which affect currency price occur on weekends. The argument continues that since the technology for 24/7 trading is available, it should be offered by all market makers.
5) The right to equal treatment
Chapter five argues that every trader should be given the same price and spread, and that market makers should not discriminate between traders.
6) The right to choose and manage risk
Traders are encouraged to use a market maker who does not require high minimums, lets them trade any amount, and provides immediate settlement as a way of minimizing risk.
7) The right to understand cost
It is reasoned that traders have the right to understand spreads, as well as who gets a “cut” and why. This chapter also includes a profitability calculator.
8) The right to learn – on your own, or through free exchange with other traders
This chapter covers multiple ways to learn about trading, and test new strategies, including trading games offered by online market makers and other sources of Internet information.
9) The right to full disclosure
The book claims that a lack of transparency in pricing, execution, and after the trade needs to addressed. Market makers should publish statistics regarding real spreads and prices and traders should demand that they do this.
10) The right to pay and receive interest
It is argued that continuous interest should be introduced, which would make for price flows that are less volatile
OANDA is a company that provides currency trading tools for investors, travelers, and businesses. As such, there is an unavoidable marketing aspect to this publication. However, OANDA is not mentioned throughout the book. There has been a clear effort to maintain a relatively neutral point of view. The back cover does state “OANDA is a leading provider of online currency trading…FXTrade…enables all currency investors to change the way forex trading is done”.
The authors believe currency investors have 10 basic rights which are being violated: each short chapter deals with one of these rights. They are:
1. The right to immediate, uncensored access to the marketplace
2. The right to trade real spot
3. The right to know
4. The right to trade whenever you want
5. The right to equal treatment
6. The right to choose and manage risk
7. The right to understand cost
8. The right to learn – on your own, or through free exchange with other traders
9. The right to full disclosure
10. The right to pay and receive interest
1) The right to immediate, uncensored access to the marketplace Chapter one argues that when trading traditionally (with banks etc.,) execution and price are affected by who you are (size of your order/ relationship with your market maker etc.), the amount of greed on the part of the market maker, and manual intervention which can delay the trade. The chapter calls for transparency, fairness, and efficiency for traders from market makers.
2) The right to trade real spot
Chapter two addresses unnecessary delays in settlement of trades, which according to the authors increase risk for investors.
3) The right to know
The third chapter states that market makers share information based on who you are: in some cases they share information that should not be shared; in other cases they do not share information that should be publicly available. This leads to an unfair advantage.
4) The right to trade whenever you want
The chapter asserts that market makers may advertise 24 hour trading but they close the books on Friday. However, world events which affect currency price occur on weekends. The argument continues that since the technology for 24/7 trading is available, it should be offered by all market makers.
5) The right to equal treatment
Chapter five argues that every trader should be given the same price and spread, and that market makers should not discriminate between traders.
6) The right to choose and manage risk
Traders are encouraged to use a market maker who does not require high minimums, lets them trade any amount, and provides immediate settlement as a way of minimizing risk.
7) The right to understand cost
It is reasoned that traders have the right to understand spreads, as well as who gets a “cut” and why. This chapter also includes a profitability calculator.
8) The right to learn – on your own, or through free exchange with other traders
This chapter covers multiple ways to learn about trading, and test new strategies, including trading games offered by online market makers and other sources of Internet information.
9) The right to full disclosure
The book claims that a lack of transparency in pricing, execution, and after the trade needs to addressed. Market makers should publish statistics regarding real spreads and prices and traders should demand that they do this.
10) The right to pay and receive interest
It is argued that continuous interest should be introduced, which would make for price flows that are less volatile
Tuesday, July 10, 2007
ECB leaves interest rates on hold
The European Central Bank left its main interest rate unchanged at 4 per cent on Thursday but is expected to signal that at least one more quarter percentage point rise is likely this year– possibly in September.
The decision of the ECB’s governing council was expected but eurozone government bonds hit new session lows after Jean-Claude Trichet, the ECB’s president, reiterated warnings of inflation risks in the eurozone.
He also said the ECB would continue to monitor closely all developments to ensure that risks to price stability over the medium term do not materialise.
Recent eurozone economic data have beaten expectations and the ECB sees the 13-country region growing at a rate that is likely to fuel inflationary pressures. It remains concerned in particular by fast growth in money supply and credit data.
Since December 2005, the ECB has lifted its main rate eight times by a quarter point. Inflation in the 13-country eurozone, at 1.9 per cent, remains exactly within the ECB’s target of an annual rate “below but close” to 2 per cent. However higher-than-expected oil prices meant that the expected mid-year dip did not materialise, and Mr Trichet is likely to forecast that headline inflation will head higher later this year.
One issue that the ECB’s governing council is likely to have discussed is how it should signal a September rise in interest rates. Previously, Mr Trichet has pledged “strong vigilance” one month ahead of a rise in borrowing costs. The task this time would be more complicated because there is no press conference scheduled for August, when much of Europe is shut for the summer holiday, although on Thursday Mr Trichet said the ECB would hold a teleconference on August 2nd.
A possibility is that Mr Trichet will on Thursday promise to “monitor very closely” inflation developments – a form of words that in the past was used two months ahead of an interest rate increase. However, the ECB has shown signs that it wants to move away from such a mechanical interpretation of such “code words”.
Some economists do not rule out the ECB waiting until October before the next interest rate increase. That would make a further rise in December less likely.
The decision of the ECB’s governing council was expected but eurozone government bonds hit new session lows after Jean-Claude Trichet, the ECB’s president, reiterated warnings of inflation risks in the eurozone.
He also said the ECB would continue to monitor closely all developments to ensure that risks to price stability over the medium term do not materialise.
Recent eurozone economic data have beaten expectations and the ECB sees the 13-country region growing at a rate that is likely to fuel inflationary pressures. It remains concerned in particular by fast growth in money supply and credit data.
Since December 2005, the ECB has lifted its main rate eight times by a quarter point. Inflation in the 13-country eurozone, at 1.9 per cent, remains exactly within the ECB’s target of an annual rate “below but close” to 2 per cent. However higher-than-expected oil prices meant that the expected mid-year dip did not materialise, and Mr Trichet is likely to forecast that headline inflation will head higher later this year.
One issue that the ECB’s governing council is likely to have discussed is how it should signal a September rise in interest rates. Previously, Mr Trichet has pledged “strong vigilance” one month ahead of a rise in borrowing costs. The task this time would be more complicated because there is no press conference scheduled for August, when much of Europe is shut for the summer holiday, although on Thursday Mr Trichet said the ECB would hold a teleconference on August 2nd.
A possibility is that Mr Trichet will on Thursday promise to “monitor very closely” inflation developments – a form of words that in the past was used two months ahead of an interest rate increase. However, the ECB has shown signs that it wants to move away from such a mechanical interpretation of such “code words”.
Some economists do not rule out the ECB waiting until October before the next interest rate increase. That would make a further rise in December less likely.
Subscribe to:
Posts (Atom)