Bank of America to acquire Countrywide: This MSNBC story is reporting that Bank of America is acquiring Countrywide Financial for $4.1 billion. The big question I would ask here is why is B of A buying up Countrywide? Now I know that B of A would love to expand their own home mortgage business in this collapsed housing market, but it will probably take several years for the market to recover from the subprime mortgage delinquencies and to reduce the supply of foreclosed homes already on the market. Then again, B of A may be hoping to ride out this housing market mess, and when the market does stabilize, then B of A may be in a good position to increase its share of the mortgage business. We'll just have to see.
Of course, the one person who will be laughing all the way to the bank will be Countrywide's CEO Angelo Mozilo. Mozilo will take home a severance package worth more than $110 million. And that is on top of the $140 million in stock options Mozilo raked in during 2006 and 2007, when the mortgage industry was crashing. Talk about CEO greed here.
Stocks Drop Sharply Amid Subprime Woes: You have got to love this New York Times story, reporting a big drop on the Dow--right as Bank of America bought up Countrywide. According to the NY Times:
The Dow Jones industrials fell 246.79 points, or 1.9 percent, to close at 12,606.30, capping a 5 percent swoon in the blue-chip index since the start of the year. The broader Standard & Poor’s 500-stock index lost 1.4 percent, or 19.31 points, to finish at 1,401.02, and the Nasdaq composite index lost almost 2 percent.
The declines began at the opening bell after a report that Merrill Lynch, the nation’s biggest brokerage firm, is expected to announce a $15 billion write-down on soured mortgage-backed securities, far more than analysts expected. Meanwhile, American Express, the credit card company, said it would take a $275 million after-tax charge as it sets aside more money to cover bad loans.
Investors took the setbacks as a sign that the financial industry is still reeling from last year’s collapse in the subprime mortgage market.
[....]
The deepest declines came from the retail sector, where recession fears are sending investors scurrying from companies that could be the hardest hit by an economic slowdown over the next several months. In a speech on Thursday, Ben S. Bernanke, the chairman of the Federal Reserve, predicted a drop-off in spending amid a softening job market and record-high oil prices.
“The financials have grabbed all the headlines, but retail stocks suffered in 2007 and so far this year pretty substantially,” said Bruce Bittles, chief investment strategist at R. W. Baird. “With housing prices going down and energy prices going up, the consumer is really in a bad fix.”
What is happening here is that investors are scared. The retail sector reported some of the worst holiday sales since 2002. Merrill Lynch is posting a $15 billion loss due to the souring mortgage investments. Capitol One is reducing its profit expectations by 21 percent, to a 2007 profit of $3.97 per share from its prior forecast of around $5.00 a share. We are seeing serious signs of this country heading into a deep recession, and investors are probably selling. I want to bring up this one month chart of the Dow:
One month chart on the Dow Jones Industrial Average. From Prophet.net.What I find interesting here is the almost 900 point drop from 13,550, on December 26, 2007, to around 12,600 today. Investors are taking in all this bad economic news, the subprime mortgage mess, the financial institutions reporting big losses due to the mortgage investment losses, and even the Fed chatter on recession, and they are getting scared. One more chart that I want to include on the Dow is the one-year chart:
One year chart showing the Dow Jones Industrial Average. From Prophet.net.What I find interesting about this chart is that the Dow is right where it was, one year ago--from 12,570 back in February 2007, to the current price of 12,540. Whatever gains that too place in 2007 have been erased. Now I'm not a technical analyst here, but just looking at these two charts, even I have to wonder if our economy is heading into a recession.
Gold hits record $900 an ounce: This MSNBC story makes me wonder if we're heading into an inflationary period:
NEW YORK - Gold futures rose above $900 an ounce for the first time Friday, as high oil prices, a weak dollar and fears of a U.S. recession led uneasy investors to keep buying the precious metal.
An ounce of gold for February delivery on the New York Mercantile Exchange jumped $6.50 to $900.1 in morning trading, an all-time high and a psychologically important milestone. Gold later slipped to $898.70 an ounce but remained in record territory.
"It's a reflection of market sentiment: Gold is a hedge against uncertainty and right now it's the best bet," said Carlos Sanchez, a precious metals analyst at CPM Group in New York. "None of the other investment options look that great and gold does."
Still, when adjusted for inflation, gold remains well below its all-time high. An ounce of gold at $875 in 1980 would be worth $2,115 to $2,200 today.
Gold has seen a meteoric rise the past year — rising 32 percent in 2007 — boosted by rising prices for oil and other commodities and also by the falling U.S. dollar. Those trends have increased the metal's appeal as a haven; gold is also seen as a safe investment in times of political and economic uncertainty around the world.
I'll admit that between the high oil prices, the falling stock prices, the talk of recession, gold prices rising, and the Iraq war, I seriously wonder if we're heading into a period of stagflation. Looking at the last seven years of this Bush administration, I see disturbing similarities between Bush's presidency, and Lyndon Johnson's presidency. Both administrations brought us into a losing war--Bush in Iraq, Johnson in Vietnam. Both administrations funded their wars through deficit spending. Both administrations created major economic stimulus packages in spite of the wars--Bush with his tax cuts to the rich, and Johnson with his Great Society programs. Even when both the Vietnam War, or the Iraq war, neither president bothered to increase taxes to pay for their wars. And now we're seeing the potential rise of inflation, the possibility of a recession, and the complete end result of stagflation.
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