FYI | Aug 24 2007
By Greg Peel
The Dow traded up 62 points from the bell last night, spurred on by the announcement late on Wednesday that Bank of America – the largest holder of retail deposits – had jumped in to buy a significant stake in Countrywide – the largest non-bank mortgage lender. Countrywide shares had jumped by as much as 20% in the previous aftermarket. It was only last week that a Merrill Lynch analyst put a Sell on Countrywide, noting that in the current crisis there was no reason the giant lender could not be bankrupted.
Readers old enough to recall the seventies may remember the day radio announcer John Laws announced on air a rumour that the then St George Building Society was in trouble. The result was widespread panic as everyone from pensioners to young teenagers (read: me) rushed to local St George branches in order withdraw their savings. (I think from memory I had about $70 of gardening earnings). Well the same thing happened to Countrywide.
Countrywide CEO Angelo Mozilo appeared on CNBC last night, relating how last week his staff served coffee and cookies to long lines of mostly senior citizens who rushed to extract what savings they had in Countrywide branches. But he also elaborated on the Bank of America “rescue” that was announced the night before.
BA announced it had taken a US$2 billion stake in the lender. The market initially saw this as both a rescue and a sign that panic in the financial sector may be overcooked. However, when analysts looked closer at the deal, they realised it wasn’t necessarily all it was cracked up to be for Countrywide shareholders.
BA bought convertible preference shares, an instrument that acts initially as a debt but can be converted into ordinary shares if so desired. The coupon on the debt was a very high 7.25%. The price at which BA could convert into shares was set at US$18. As the shares traded as high as US$26 in the aftermarket (ie already well in the money) this seemed like a giveaway deal. When converted, the shares would represent a 16% stake in the company.
But Angelo Mozilo insisted on CNBC that while BA was clearly getting a bargain, Countrywide, which last week was in danger from an unjustifiable run on funds, was also a big winner. But then he put his foot in it to some extent, insisting that the US economy was headed for recession. Having absorbed all the information, the Dow fell to be down 67 points by lunch time.
The Dow then staged a patchy rally to ultimately close flat on the day. Countrywide’s share price also fell to virtually unchanged. The S&P 500 closed up 0.1% and volume on the NYSE was modest. The Nasdaq managed a 0.4% rise.
While Countrywide provided most of the focus on an otherwise slow news day, it is clear the market remains jittery. The Fed made another of its big injections into the overnight banking system, yet Associated Press reports 6.8% of over a trillion US dollars of commercial paper (much of which is mortgage-backed) could not be rolled over.
Elsewhere in the markets it was a similarly mixed day. Having shifted to a steep up-slope in recent days, the Treasuries curve straightened slightly last night, as 3-month yields continued their rise (up from 3.66% to 3.93% last night) and 10-year bonds fell a couple of bips to 4.63%. The US dollar continued to fall against the euro and pound and rally against the yen. Carry trade unwinding has at the very least ceased, and perhaps even reversed. The Aussie shot up once more to US$0.8210.
On the second anniversary of the day Katrina was first given a name, the oil price rose US57c to US$69.83/bbl. After an earlier rally, gold slipped back to be up US90c at US$659.50/oz. Base metals were relatively steady in London, with the exception of lead which jumped 5% as the battery manufacturers’ restocking season approaches. Copper rose 2%.
After yet another solid day of gains on the local bourse yesterday, the SPI Overnight fell 36 points.
