The Rude Awakening
Vancouver, Canada
Wednesday, July 25, 2007 ------------------------- - Countrywide's house of cards vs. the subprime tornado,
- Back to the future - "When Realtors Become Waiters,"
- The half of the story you didn't know and more…
------------------------- Eric Fry, reporting from Vancouver, British Columbia… "You are either a contrarian or a victim," Rick Rule declared yesterday from the podium of the Agora Wealth Symposium in Vancouver, Canada. "That's all you need to know about investing in resource stocks." But during yesterday's brutal trading action north of the 49th parallel, even some of the contrarians must have felt victimized. The TSX Index of Canadian stocks tumbled nearly 400 points - its largest one-day drop in more than three years. Energy and mining stocks led the decline, assisted by a few swooning financials. An X-treme contrarian would have enjoyed yesterday's devastation, of course. But only the most contrary (and nimble) of contrarians who could have maintained sufficient sanity and solvency to bet against the booming resource stocks…or against any other facet of North America's runaway stock markets. Meanwhile, down in the Lower 48, stocks also suffered a drubbing - especially energy and financial stocks. The shares of Countrywide Financial (NYSE: CFC), in particular, plummeted more than 10%. "That's a pretty surprising drop," a broker-friend remarked"Yeah," your editor replied, "but not nearly as surprising as the fact that this stock wasn't imploding last July instead of this July. I can't believe how long it has taken for the mortgage market's painfully obvious difficulties to begin imparting some pain to Countrywide shareholders." Here at the Rude Awakening, we've been annoying our readers for more than two years with ominous forebodings about the mortgage-lending industry and about Countrywide Financial in particular. To those readers who may have embraced a bearish perspective toward financial stocks before the stock market was prepared to reward it, we empathize with your pain. Too often, the stock market does not permit a choice between being a contrarian OR a victim. It insists that you be both at the same time. But now that the winds are beginning to shift, the stock market is victimizing the bulls, rather than the bears…and we'd guess that the bulls will enjoy no immediate respite. More than five months ago, in the February 9, 2007 edition of the Rude Awakening, we noted the curious strength of Countrywide Financial shares. And yet, CFC refused to yield to the weight of accurate skeptical analysis. For five long months (at least), the bears suffered for their prescient analysis. Should we be surprised, therefore, if the bulls now suffer for their delusional optimism? From the February 9, 2007 edition: A Curious Divergence
By Eric Fry Yesterday, the KBW Mortgage Finance Index (MFX) dropped about 2%. But the day before, this index of mortgage-lending stocks had kissed a new all-time high, despite the fact that the earnings of most mortgage lenders are slumping…or disappearing altogether. This curious divergence suggests one of two possibilities: 1. The stock market is "looking ahead" to an as-yet-invisible housing recovery.
2. The buyers of mortgage-lending stocks are deluding themselves. The nearby chart suggests that possibility #2 may be closer to the mark than possibility #1. Mortgage originations are plummeting, plain and simple. In fact, all types of originations are plummeting: "purchase loans" as well as "refinance loans," and "prime" as well as "subprime." In other words, there is no hint of recovery, nor even the suggestion that one might arrive. 
Most of the homebuilding market's industry insiders have been admitting publicly that the housing market remains very "challenging." Most mortgage-lending insiders seem to agree, including Angelo Mozillo, the Chairman and CEO of the nation's largest mortgage lender, Countrywide Financial.
"Looking forward to 2007," Mozilo remarked last week, "the industry will likely see continued pressure on margins as mortgage origination volumes decline and industry capacity is rationalized. We are also preparing for increased borrower delinquencies and continued credit deterioration." Previously, Mozilo had stated flatly, "There are no signs of the pressure abating in the subprime arena and, in fact, some signs that problems are accelerating." Yesterday's grim news from New Century Financial Corp. (NEW: NYSE) seemed to confirm Mozila's fears. New Century, he nation's second largest lender to home buyers with poor credit, disclosed that bad loans are piling up much faster than it had expected. As a result, the humbled lender reported, it probably lost money in the fourth quarter and will have to re-state its earnings for all of 2006. Perhaps the buyers of mortgage-lending stocks know more about the prospects for mortgage-lending than Angelo Mozilo…or perhaps Angelo Mozilo simply knows less about self-delusion than the buyers of mortgage-lending stocks. [Joel's Note: For a closer look at the woes of the mortgage-lending industry, check out the January 31, 2007 edition of the Rude Awakening: "When Realtors Become Waiters"] In the column, below, our colleague, Greg Guenthner has absolutely nothing to say about Countrywide Financial. But he does offer a few insights about contrarian investing - the kind of contrarian that focuses on the high-risk, high-reward stocks that populate the so-called Pink Sheets. Sure, these stocks can be risky. But what would you call the stock of a massive mortgage lender that loses 10% of its value in a single day? --- Bulletin Board Elite: Final 5 Days* --- The first time, I called it beginner's luck… When it happened again, I called it a coincidence… But after 9 stocks in a "secret" market one ace analyst was screening JUMPED to major exchanges - and major profits - in just a 12-month span, I knew he was hunting in the right place for huge gains. While the deadline for this offer expires in just 5 days, we are legally required to cap its membership. Already over half the spots are filled. If you want in, act now.
Read on now for more information: Bulletin Board Elite -------------------------------------------------- Who is Phillip Fisher?
By Greg Guenthner I'm sure you've heard people say that Wall Street never gives you the whole story. That it is not in the Street's best interests to tell you about the market's biggest opportunities. That they keep you in the dark about all the money over-the-counter and bulletin board stocks can deliver. It might sound cliché… but I've found tangible proof that there's some truth to those stories. At least one of Wall Street's most trusted companies is pulling the wool over your eyes. It's everything short of a deliberate attempt to steer you away from the stocks they don't approve of. I'll explain in a second. But first, a little background is in order. The story starts with a man named Phillip Fisher. A stock analyst who survived the market crash of 1929, Fisher made his mark with a landmark book, Common Stocks and Uncommon Profits. In fact, it was the first investment book ever to make the New York Times bestseller list. And while most people like to associate Warren Buffet's investment style with Benjamin Graham's, the Oracle of Omaha admits that Fisher inspired him as well. That's partially because Fisher was a strong advocate of buying and holding. He once said the best time to sell was "almost never." Of course, he didn't mean blindly hold on to losing stocks… he meant that if you did your research right before you bought - and paid attention thereafter - you'd never have to worry about selling. So it's pretty amazing when you realize that Fisher was primarily a growth investor. He didn't care about a company's fundamentals… he cared about its business. He loved companies that were "highly speculative and beneath the notice of conservative investors or big institutions." In fact, he famously bought Texas Instruments and Motorola long before they were household names - and even held Motorola until his death. In Common Stocks and Uncommon Profits, Fisher spelled out 15 questions he used to evaluate a company. They were pretty open-ended and could be subject to interpretation. They were not, as he put it, "determined by cloistered mathematical calculation." They were: 1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder's benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity? Now, I'll admit, there's nothing groundbreaking here. Fisher's 15 questions are fairly well-known, and you can find them or slight variations all over the Internet. But I recently discovered that some of Fisher's wisdom has been purposefully been withheld from investors. In fact, one of Wall Street's most trusted Web site glosses over some of what Fisher had to say. You see, Fisher also listed 5 "don'ts for investors": 1. Don't buy into promotional companies. 2. Don't ignore a good stock just because it is traded "over-the-counter." 3. Don't buy a stock just because you like the "tone" of its annual report. 4. Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price. (Or, put simply, price-to-earnings isn't everything) 5. Don't quibble over eighths and quarters. (That is, don't stress over a few cents difference in price) Please pay attention to #2, where a man hailed as one of the greatest investors says there's nothing wrong with trading Bulletin Board and Pink Sheet stocks. I ask you to pay attention, because the good folks at Morningstar.com think you shouldn't know that rule. It's true. Its Website has an Investor Classroom, which includes a profile of Phillip Fisher. The article patiently explains his love of growth stocks. His 15 points are spelled out in detail. And then it goes on to paraphrase Fisher's "don'ts" - all 3 of them. Not five… three. Any bets to which ones are missing? Here's a hint - they're the ones that have nothing to do with fundamental analysis or exchange-traded stocks. See for yourselfhere. Now, I know - Morningstar can easily claim it is concealing parts of Fisher's message in order to protect investors. That over-the-counter stocks can be risky… and discounting fundamental analysis may encourage bad research. But whatever their reasons, one thing is clear - Morningstar.com is not giving you the whole story on Phillip Fisher's investment philosophy. Yet if it worked for him, why shouldn't it work for others? [Joel's Note: You wouldn't read half a book, or bake half a cake, or take half a golf swing and expect to come up with the goods. Why then do investors insist on using half their available resources and then expect full sized returns? Greg Guenthner has dedicated himself fully to investigating the opportunities available to investors in the oft-overlooked bulletin board companies. In other words, he looks at the whole story. It's telling too, because not one of the companies he has in his recently released Bulletin Board Elite portfolio is down. Companies traded in this arena stand to make huge gains when they list on the major exchanges. If you'd like to get the full story, follow this link: Greg Guenthner's Bulletin Board Elite. P.S. Due to the size of the companies Greg researches, we have to legally cap the amount of people who can participate in his service, lest we nudge a relatively tiny market. A little over a week after the launch of BBE, almost half the legal readership is already filled. If you want in, you'd better be quick. | 
