First Segment

Opening Segment 1 Title: 'The Sell Block' .  .  .  .  . Featured Stock(s): Spotting the bottom in the financials: Countrywide Financial Corp. (CFC) Washington Mutual Inc. (WM) Citigroup (C*) Bear Stearns Companies, Inc. (BSC) Centex Corporation (CTX) The Blackstone Group (BX) Thornburg Mortgage Inc. (TMA) Beazer Homes USA Inc. (BZH) MGIC Investment Corp. (MTG) MBIA Inc. (MBI) Goldman Sachs (GS*) See Opening Segment 2, below...

        

JJC:   I preach every night that I want you to stay in the game... Had you sold Monday, you would have, perhaps, left 30... 40... 50% on the table in a lot of situations...

The markets always fluid.  At the bottom, things can go right... so let's talk about what happened, and do it through a game plan that we put together August 3rd of last year...  [See that Game Plan - complete comments here.]

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We created a 'Mortgage Madness Index' and we did it in order to be able to demonstrate that there could be a tremendous crisis coming... I thought that we could be in for a huge crisis...

And you know what?... Yesterday, this mortgage index, which we started at 100, August 3rd... hit 47... cut more than in half...

Now, in light of the news of the possible link up with Countrywide Financial (CFC) and Bank of America (BAC)...  In light of the fact that Ben Bernanke revealed that, perhaps, he does know something, by talking about - at last - substantive cuts, which is what we've been calling for endlessly on this show, as opposed to little quarter-point things...  We've got to go over the Mad Money mortgage index...

We have to find out whether some of these stocks should be taken out of the Sell Block... this is a special emergency Sell Block... and maybe even be bought...

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Let's start with the biggest offender, Countrywide Financial (CFC)...

I think the Bank of America (BAC) tie-up with CFC is brilliant...  I think they'll be some way that the government will say, look, we're going to lower interest rates... BAC, you take this out of our hands... You take this, so that the trillion dollar servicing business goes to you... You get a gigantic amount of great business, and we'll figure out some way to recompense you for the bad loans that you have to take.  I think those deals happen.  They happened in 1990...  This kind of deal - which is a huge windfall for BAC, the stock was up today - would never have been allowed during a non-crisis situation, because these two companies, BAC and CFC, have way too much of the mortgage market.  The anti-trust department would have stopped this at one time... It can't now.  There's too much crisis.

So, CFC?... Hey, listen, that's going to be gone.  I hope you bought the Countrywide Financial Preferred - COUNTRYWIDE CAP V (CFC-PB) - that's the one I've been recommending... I think you'll get a lot of BAC stock... That was up at one point 117% today...  

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Next, we want to focus on Washington Mutual Inc. (WM)...

WM, that's Kerry Killinger... He's on the Wall of Shame...  We've been recommending sell since August... It hit $11 yesterday.  I now feel that WM will have the same thing that happened with CFC...  I think those who bank at WM... one day, you'll wake up and you'll be banking at Wells Fargo (WFC), or HSBC (HBC)...

WM, no longer a sale, because it is too likely to be bought... It has too big a deposit base.

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Citigroup (C*)?... When we talked about it at $45, obviously a sale...  Now, all the way down here, it's about to get a gigantic capital infusion from another country... Maybe it has to cut its dividend, maybe it doesn't...  But that's no longer a sale, okay?  Because, if the Fed cuts rates, C* is going to make a lot of money...

So, we don't want to sell C* anymore. 

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Bear Stearns (BSC) was at $108.  That had already fallen some 70 points.  It's down to $77.  They've got new management.  If the Fed cuts rates aggressively, then it's more likely that BSC will find a buyer for itself...  You know I like Merrill Lynch (MER) more... Same situation, but better management... 

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KB Home (KBH)...  This is one that was at $30.  It went to $17.  It reported a very bad number yesterday, in the sense that it was in violation of its revolver... its credit line... but it still has more than a billion dollars in cash...  I think KBH, if people feel like things are going to get better, which is what happens... confidence returns, because of the Fed cutting rates... KBH gets a bid... you don't want to sell that anymore.

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Centex Corporation (CTX)... Also likely to be bought... Now, that stock I think gets a takeover bid at a lower price than it is right now...  That was a bit of a short squeeze today.  CTX is not as good as KBH... It doesn't have as much cash.

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Now, let's switch directions here...

Blackstone (BX) is something we took... We made a very gutsy position here...  We decided we didn't want to be invited to fancy parties, and we're cared more about trying to keep you from losing money... so we did the unthinkable, and we recommended selling BX, and I haven't been invited to a party since...   It's a little depressing... but, at the same time, the stock went down gigantically to $17, so maybe it makes up for some of this...  And that one is done going down probably.  They announced an acquisition today... it showed me that they had a pulse.  I don't want to own it, but I don't want to sell it anymore. 

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Now we're getting a little tricky... Thornburg Mortgage (TMA), down badly... This is the one that makes jumbo loans... Here's the problem with TMA... It too, like CFC, has a preferred (stock)... The preferred gives you a really good return and, if there is a takeover, you get made whole in whatever stock you get...  So, I don't want you to own the common.  I do want you to own the preferred... [Ed. note:  Just a caveat... We could not determine which preferred symbol to select for Jim's recommendation here.  You can start with this one, but we cannot sure it should be the right one, because it does not indicate a dividend and yield.]

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Now we start getting into a little tricky stuff here...  Beazer Homes (BZH)...  I don't like this situation at all.  I really don't think that the Fed moved in time.  Had they moved when I thought they should have done, in August, this company would make it.  I don't want to bet with BZH.  It has too many bad loans...  It's too troubled. 
 

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Now, MGIC Investment (MTG), which does personal mortgage insurance... I think that they'll probably have to get a bid... I don't think the bid will be as high as where the stock went out today... and MBIA (MBI), which Bill Ackman, who is a guy - who I think is very, very smart - has been fighting against...  This is a company that, if they disclosed everything they had, I think we would feel very negatively about them.  But it too has got a good enough brand name.  I don't want to sell it anymore, but I certainly don't want to buy it...   

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So, we've got some that I want to buy, and some that I don't... Then, of course, there's Goldman Sachs (GS*), which I am telling you is going to $300, all right?... and will probably own the world when this is finished, because it is the only one that is buying back stock... that is doing great...  that has great earnings... so GS* is the one to buy.

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Now, why is all this happening?...  Why am I changing my view?...

Why am I going from 'sell' to 'neutral' on some, and outright buys to another?... It's a very simple reason...

In 1990, which I have been comparing this period to, because that is the worst time of stress that I have seen in my trading career...  In 1990, the average financial roughly equivalent to what these are...  The average financial in 1990 fell 50% from peak to trough, before the Federal Reserve got engaged and came in to save the situation...

50% in 1990 was the bottom, okay?...

Well, how about history repeating itself?... We got a 50% decline from the top to the bottom, and the Fed got engaged... 

The bottom, friends, is in... 
 

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The Bottom Line!:    History seems to be repeating itself... I think the financials have hit a bottom...

[See Jim's 2nd Opening Segment stock picks below... ]