The stock market is like an ADHD kid. It moves at a mile a minute and it's all over the place. One minute it's giddy, the next it's highly moody and petulant. 

In a down market, or highly volatile market, FUD takes over: Fear, Uncertainty and Doubt. When animals in the herd panic, my dear value vultures, is when the hunters strike.

The last few weeks the lemmings have been fleeing Countrywide Financial Corp (CFC). The largest lender in a America saw its stock drop to just 11-12% of fair market value early in the week because some prudent person, probably shorting the stock, dropped the  bankruptcy bug in the right ears and set off another market panic.

Could CFC indeed go bankrupt? Sure. Any company could. However, if CFC did go bankrupt, it may be time to put the country up for sale and get out your Greater Depression gear because they will take the entire financial system and the nation with them.

For the lender who writes one in five home mortgages, and services more home loans than just about anyone else to go tits-up would send the entire financial system down with it.  Bear and the brokerage boys are just lifeboats that would get sucked down by the Titanic in that scenario.

The thought of which caused a large panic.  The problem with the news outlets, and sadly most of the analysts, including our friends here at Morningstar, is that it is much easier to run around like they do at the lemming channel, CNBC, and interview guys shorting the stock and making money, than it is to calmly explain this thing called a BALANCE SHEET.

The market is presuming total catastophe at CFC, and has overpriced the catastrophe to the point that CFC was becoming more a vent of investor anger than it was a rational stock ownership acquisition.

So the the Bank of America acquisition this morning was no great surprise. They staked a small claim with their $2Billion investment in the company. Now they were moving in for the kill.  Who wouldn't want to buy a company whose fair market value is $38-$42 and adjusted for even the most glum worst-case scenario is worth $19-20, for $7?

It was freakin' brilliant.

For them.

If you are a CFC shareholder, and you paid more than $10.00 for the stock, you have zero hope of recovering much from your stock now unless you bought some of the $4-5 stock this week to offset. 

Every last one of you should vote down this deal. It works against your interests. CFC was healthy enough to ride out the mortgage storm.

So why did they sell?

The market is not only behaving irrationally right now, it's being downright vicious. CFC was the poster child for sub-prime. Right or wrong, investors were sucking it dry of cash, with the shorter hyenas plucking over the bones as it was being killed. CFC needed a white knight to get their name out from under the mess, and return the value to what has value within their massive financial services network.

Now the question remains: Will the mob turn on BofA?  Probably. The difference ist hat BofA is one of the Untouchables.  To assault them the way that Countrywide was pilloried would undermine US financial institutions. They have a big enough sea wall to bat back all of the shorters and naysayers, even if they take a short-term ding in their armor for making the move.

$7 for $42? Freakin' brilliant value play.
 

 

 

CGFM  FOCUS Fund recently purchased Countrywide stock.  Does the recent happenings involving BofA indicate Ken Hebner made a mistake?

Don't know the management of the fund, but they were also buying on the supposition that CFC could weather the shorters and emerge a much stronger and more focused company.  My guess is, much as it triggered my systems that analyze my value stocks, when the stock hit 4-5, it was pretty clear that BofA or one of the bigger companies could gobble up CFC for a song. I bought a bunch more to offset the higher acquisitions at 4-5, figuring that $6-7 would be the least that CFC could sell shareholders on a white knight move.  Hopefully they bought into the below-offer position.

Please note the report by Morningstar on CFC-BAC

Bank of America BAC announced Friday that it will purchase Countrywide Financial CFC in an all-stock deal. Based on our fair value estimate for Bank of America, Countrywide shareholders will receive shares worth $12.75 (0.1822 Bank of America share for each Countrywide share), although the current market price is much lower. The deal is expected to close in the third quarter and should effectively end the bankruptcy speculation surrounding the mortgage company. We believe Bank of America is an extremely savvy and opportunistic deal maker and will get a good franchise, Countrywide's excellent technology, and the largest mortgage servicing book in the nation--which is the key moneymaking asset in this deal--for a good price.