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Investors in banks seeking a bottom

Countrywide's results, unveiled today, may offer clues to how much pain is still ahead.

October 26, 2007|Tom Petruno and Walter Hamilton | Times Staff Writers

Will Countrywide Financial Corp.'s earnings report today deepen the gloom over housing-related stocks -- or lift it?

After another blistering trading session for financial issues on Thursday, the Calabasas-based mortgage giant will announce its third-quarter results before the market opens this morning.

The shares of many financial companies have tumbled to multiyear lows amid worries about the losses that may await the industry if mortgage defaults continue to rise and home prices decline further.

Countrywide's stock slumped 76 cents, or 5.5%, to a four-year low of $13.07 on Thursday, and traded down to $12.07.

The ongoing rout in financial issues is vexing money managers who believe that at least some of the stocks are looking like long-term bargains.

"Really big performances will be generated by investors who get the [timing] right" on buying battered financial shares, said Jeffrey Bronchick, chief investment officer at Reed Conner & Birdwell in Los Angeles.

With pessimism already high, a better-than-expected report from Countrywide -- the largest U.S. home lender -- could persuade some investors that their fears were exaggerated.

But it's also possible that Wall Street will view Countrywide's results, no matter how they come in, with suspicion, analysts said.

When Merrill Lynch & Co. reported a $2.2-billion quarterly loss Wednesday after taking a $7.9-billion write-down on mortgage-backed bonds it held, the brokerage might have hoped to get kudos from investors for adopting what it termed a "conservative" approach in estimating the bonds' value.

Instead, Merrill's shares plunged 5.8% on Wednesday, and the selling continued Thursday as the stock lost $2.32, or 3.7%, to $60.90, a two-year low.

Investors reacted angrily in part because Merrill's loss was far greater than what it had projected less than three weeks ago.

But the brokerage's huge write-down also suggested that Wall Street still doesn't have a good handle on the ultimate cost it will have to absorb from failed mortgage loans. That uncertainty is keeping many investors away from taking stakes in financial issues.

In a note to clients Thursday, Goldman, Sachs & Co. analyst William Tanona said that Merrill might have to write off an additional $4.5 billion, or more than 20%, of its $20.9 billion in mortgage-related assets.

The markets for mortgage securities have "continued to deteriorate," Tanona said.

Countrywide is expected to report a third-quarter loss in the hundreds of millions of dollars after write-downs for potential losses on loans and bonds.

Frederick Cannon, an analyst who tracks Countrywide at Keefe, Bruyette & Woods Inc. in San Francisco, expects the company to report a loss of about $600 million, or $1 a share.

But if Countrywide were to take the same kind of "haircut" that Merrill took on its mortgage-backed securities, the loss could be far larger, Cannon said.

Investors haven't been encouraged by profit reports from other financial giants besides Merrill in recent weeks.

Bank of America Corp. and Wachovia Corp. have seen their shares slide since they reported declines in third-quarter earnings related at least in part to the mortgage market's woes.

On Thursday, insurance titan American International Group Inc. was slammed by rumors that it would face a mammoth write-off on mortgage bonds.

AIG stock plunged as much as 8% before ending down $2.05, or 3.2%, at $61.79. The company said it had no comment.

Also Thursday, shares of MBIA Inc., which provides insurance for mortgage-backed securities and other bonds, plummeted $8.20, or 15%, to $46.99 after the company reported its first-ever quarterly loss.

Money manager Bronchick said he had been researching depressed mortgage-insurer stocks such as Radian Group Inc. because he believed investors were making "outrageous" assumptions about how bad things might get for the companies.

Still, he said, he was glad he hadn't put money to work in the stocks in recent weeks.

At the rate they're falling, he said, "I save myself 20% every two days" by staying on the sidelines.

Some of the selling in financial stocks in recent weeks has been attributed to mutual funds, which typically end their fiscal years on Oct. 31. That often means the funds sell portfolio losers in October to record losses that can offset gains on other stocks, reducing total taxable gains, said Anton Schutz, manager of Burnham Financial Services fund.

That could mean an easing of selling pressure on financial issues once October ends.

What's more, on Wednesday the Federal Reserve is expected to cut its benchmark short-term interest rate for the second time in two months. The rate will drop at least a quarter of a percentage point, from the current 4.75%, as the Fed tries to buttress the economy against the housing woes, many analysts say.

Fed rate cuts historically have been a tonic for financial firms by lowering their cost of money.

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