Do you worry that the subprime fallout will bleed into the prime mortgage market?
I don’t think it’s going to bleed substantially into prime.

(Well he announced in earnings that it did bleed…oopps)

How exposed is Countrywide to the subprime mess?
In 2006 subprime loans were about 9% of our total business, now down to 7%. We’re a prime lender…but we also have been on a mission…to try to increase home ownership opportunities for minorities and low-income borrowers.

(Well I guess your mission to put people in homes that don’t belong there isn’t the best idea…is it?)

What will the impact be?

When you cut that first-time home buyer out, there’s a ripple effect. I’ll be the first to admit that a lot of players came into the industry that were not banks, not even mortgage banks, and that they exploited a certain number of people. But that exploitation was in the minority. You had 17 increases in the Fed funds rate. Then those [exotic] loans began to reset, and that was the tipping point. When you begin to cut off the demand, values start to recede. And there’s an old saying that you never know who’s swimming naked until the tide goes out.

(Well I guess you’re right there was some exploitation and it’s just starting to tip and it looks like you may be swimming naked)

The Wall Street Journal said you sold $140 million worth of stock. Do you worry that shareholders will say: “Oh well, he’s selling. He must be losing confidence. Maybe I should sell”?
As a CEO, the only way to eliminate that issue is to never sell stock, just die. Die owning the stock and never exercise an option. In fact, I’ve sold very little stock. Almost all of what I sold were options I accumulated over the last 10 years. I’ve chosen to keep most of my net worth in Countrywide.

(He didn’t quite answer the question because changing those options to stocks meanings selling stock you retard plus 140 million worth of stock is a pretty nice chunk of change – plus he sold most of his stock at $40s while now it’s about $18)

WHAT A GREAT INTERVIEW HUH FOLKS?

I just read the Barron’s article and the Cramer support but yesterday the stock gapped on the story but didn’t move much but it’s been flat the next few days. These two pieces of support puts my short in danger so I feel the shorts may now have to wait. Barron’s is a decent place for good reliable analysis. I used to subscribe but no longer because I have so much to read these days I never get to it. Anyhow the article will give the stock some support but I doubt enough to push the stock high enough. But the stock is due for a pull back toward $25-26.

My analysis is based on a few things. First technicals. Technically the chart seems to be in a very very very very good uptrend. But that is very deceptive because you can start to see there is a bearish divergence that is starting in terms of the price versus the indicators like the MACD. The angle of the rise is perhaps the most scary because it’s in a trend that cannot continue especially for a non growth company in a mixed market situation.

Fundamentally it looks decent but if you look into the numbers, you will see it is priced for growth not a turn around. It’s current PE is at 50 while it’s competitors Best Buy and Circuit City is under 20. For 2007 earnings, they are still at 23 – if they make those earnings. At $36 (30% from this point), the PE is a whopping 31 for a old beat up retailer. For 2008 at the new prices, the PE is still 27 with earnings of $1.30. It needs to earn about $1.80 to justify the 30% rise to $35-36. Seriously, they have already cut cost and cut stores. Where are they going to find more revenue. They cannot cut anymore cost. They have to grow organically to justify the growth. They cannot grow with more stores. They need to increase sales per square feet. They don’t have anything that could possibly do that.

Let’s take a common sense approach to Radio Shack. Go into a store and you can tell they have no staff. Plus how can they compete when they lack the products to keep them competitive. Best Buy comes to mind for electronics. Not Radio Shack. Their marketing is subpar at best. If Circuit City can bearly make the cut, their Radio Shack more than lost. Let’s forget that. Let’s look at their sales. 35% of their sales come from wireless products. Ok there is a huge problem. Well it’s more like a gigantic problem. The market is flooded with dealers. One, there are authorized mom and pop dealers. There are large retail dealers like Best Buy, Walmart and the list goes on. Then there is internet dealers. But the worst competition is Verizon, Sprint, AT&T and TMobile who doesn’t care if Radio Shack can makes earnings or not. They are sprucing up their stores and their offerings. With their special phones and their products. How can you sleep with the enemy and expect to live. The IPhone already has one million orders and Radio Shack has no piece of that. There is a movement to more exclusive phones and products. But margins are also lower except for everything Apple. Who will end up winning? Let’s see…there is Apple, Verizon, Sprint, AT&T, TMobile and…well no one else…especially not Radio Shack with their declining sales and margins.

NEW ADDITION: Radio Shack reported declining earnings and Yahoo Finance still has a 13 Forward PE which is wrong because with declining revenues there is declining.  I think this retailer has a way to drop at least below $20.  Think Circuit City but worse.

PUTT OPTIONS:

With increase volatility and stocks heading down, you can buy putts to simple gain some cash while your positions drop.  For example if you own Apple, AAPL at $130, you can buy some puts at $130 so when they drop, you can make some money on the options and still keep your longs in Apple.

SHORT ETFs:

These are exchange traded funds that short the market but the good thing about these funds is that you buy these funds and you don’t short regular stocks that could skyrocket causing you to lose more than you expect.  Some examples are:

UltraShort QQQ ProShares (QID) – Double the move of NASDAQ

UltraShort Dow30 ProShares (DXD) – Double the move of DOW

Short Dow30 ProShares (DOG) – Shorts the DOW

UltraShort S&P500 ProShares (SDS) – Double the move of S&P

UltraShort MidCap400 ProShares (MZZ) – Double the move of MidCap 400

These are options for people but it’s worth noting that the user oriented community Marketocracy had a spike in negative sentiment about the market a couple weeks back and it seems they were right.  Crowd sentiment.  I’ll try to follow it more for everyone.  For now, don’t panic, it’ll be ok.

That was the message on the American Home Mortgage (AHM) website this morning after they fired over 6,000 people effective today. They will still keep their loan servicing business with about 750 people but everyone is unemployed and looking for a job. I wish them all luck but with unemployment, there will come a few mortgage deliquencies and then some foreclosures. It’s a vicious cycle that is happening. But it happens all the time. After the sun shines for so long, it gets a little dry and we’ll need some rain.

Jim Cramer rephrased the subprime problems to the “mortgage” problems because it’s being more wide spread as seen by Countrywide Financial (CFC) who say their profits depleted by the problems outside of subprime. Don’t get me wrong, Countrywide Financial does have subprime exposure but their exposure include a lot in Alt A loans. They had to defend themselves saying they had an extra 50 billion access to cash. I happen to be very familiar with the loan industry so I can tell you, Alt A is almost as bad as subprime.

Basically Alt A loans are one step above subprime which is usually called “C” paper. Alt A is “B” paper. While subprime is bad credit with little or no documentation, Alt A is usually good credit with little or no documentation. Yes there are a lot of people with “A” credit because if you look at the credit data about 50% of people have excellent credit but doesn’t mean that all those people can afford big houses. But in some occasions, loan folks have to push up the credit by disputing charges on the credit report and if the bank doesn’t respond, it’s automatically off their credit report regardless if it happened or not. But banks doesn’t respond often. Well Alt A is a good plan for the self employed who make a lot of money and cash flow but can’t document it but it’s been used by regular people to have someone else vouch for their false incomes. This is fraud and it happens all the time. Why do you think all these people are going into foreclosure.

Then to make matters worse, there is the creative loans with insane teasers rates that reset to the point where people can barely afford them on their falsely reported incomes. Great, they pay 150% of their income before taxes on their mortgage. How does that work? IT DOESN’T!

So the hedge fund bury all these details in these mortgage securities that are bundled so that they vary the risk. Oh great hide the truth of the loan because once you sell the loan four levels up, you don’t know who the heck your borrowers are. A few mortgage fund burn ups later, we are realizing it’s a bigger problem than we thought.

Short term: there will still be problem until the middle of next year as the majority these adjustable rate mortgages reset later this year and early next year. So here are some short ideas but keep in mind a lot of them are down a lot already especially American Home which stand now at $0.71!

Here are some ideas:

Mortgage Insurers (They insure the worst quality loans): PMI Group (PMI), MGIC Investment (MTG)

Mortgage Reits (They specialize in mortgage securities): RAIT Financial Trust (RAS), Anthracite Capital, Inc. (AHR)

Mortgage Providers (Poor loans are their specialty): Accredited Home Lenders Holding Co. (LEND), IndyMac Bancorp Inc. (IMB)

It’s odd to see a lot of these companies especially the mortgage providers go out of business in California but it’s actually not. California is overpriced for now and a lot of people even people making six figures are struggling. So it’s not a surprise that much of the meltdown has happened to companies in California. One non public bank, Ameriquest is notorious for their loans but unfortunately we can’t short that one. But we’ll see. I think the government will have to set in sooner but they keep saying it will correct itself.

The Good (sorta):

It is the best run private equity fund in the world. So good that China thinks it’s a darn good idea to invest in it. Or perhaps China just wants to learn the buyout trade to take over America! Ok enough of this conspiracy thinking because China is our friend, right? Anyhow there were a rash of upgrades but most of them were from the same banks that had a hand in the IPO. Fishy aye. Citibank analyst said that it’s assets total 88 billion while controlling over 16 billion of disposal cash makes this a compelling by. Citibank had a hand in the IPO of course. But yet we have to keep in mind that Blackstone does make stellar returns and it’s much more flexible than a holding company like the great Berkshire Hathaway (BRKA) and less bank than Goldman Sachs (GS) or Bear Stearns (BSC); perhaps giving it the advantage of both.

The Bad:

It’s down here for a reason. With more private equity or LBO shops becoming profit, the market for them is becoming thin. So if you want to buy a LBO stock, you’ll have more options with Fortress (FIG) out there but Kolberg Kravis Roberts & Co. and Carlyle Group rumored to go public as well. Also there is this financial sector breakdown that is happening because of mortgage breakdowns causing tighter corporate rates for LBOs and corporate borrowing.

The best thing may be to wait it out but Blackstone in the long term does seems compelling perhaps closer to $20 or so (that’s an arbitrary price – not chart to go from). You can’t argue that they aren’t smart. Purchase of Equity Office Properties (EOP) and flipping the majority of properties then keeping the best before the real estate breakdown. Linking up with China to become the only private equity to have truly direct access to China.

So what price do you think it’s a buy (if a buy at all)?

Douglas A. McIntyre of Street 24/7 thinks that Bear Stearns (BSC) will drop from the current $121 to below $100 by Labor Day especially with another hedge fund getting very close to liquidation.  Also it does have exposure to American Home Mortgage which dropped 85% yesterday on missing it’s margin call.

There is a possibility of Bear Stearns dropping more especially with Australia’s Macquarie Bank (ASX:MBL.AX – News) warning that retail investors in two debt funds face losses of up to 25 percent from exposure to US mortgage.  So this is spreading and with every bit of bad news, BSC could eventually go under $100.  A bearish sentiment over financials and the overall market will not help either.