An amazing conference call with Countrywide Financial (CFC), the largest US mortgage underwriter. It was beyond ugly. Here are some notable quotables from Chief Executive Angelo Mozilo:

- "During the quarter, softening home prices continued to affect many
areas of the country, and delinquencies and defaults continued to rise
across all mortgage product categories as a result."

-Delinquencies and defaults rising across all investment tools.

-Lower home
prices may effect credit.

-S&P Case-Schiller is strong tracking tool
for health of housing market
[Editor: we have referenced this many times]

-CFC continues to study further
tightening of loan standards for both subprime and prime

-CEO believes markets will force the weaker
mortgage companies to either work with bigger players or look elsewhere for

-For a Fed Governor to
say that the lending group had this coming is unbelievable.

The WTF line that I don’t get is this one:

"no one saw the
deterioration of real estate values coming."


Here comes the money shot:

"Company is seeing home price
depreciation at levels not seen since the Great Depression"

-Previously, the company had stated they expected a
turnaround in mid-2008; now, they say they are not sure when housing
declines will cease. Refuse to rule out house price declines in 2009; 

-Surprising comment regarding the prime portfolio: so far what they have seen in deliquencies is
due to people losing job, losing health, lost marriage, more so than any resets. Stated that the "definition of prime may not be as high as some people think."

-Expects to hear
mergers and people going out of business in the near future;

-The company cut its 2007 earnings forecast to a range of $2.70 to $3.30 a share, down from previously lowered guidance of $3.50 to $4.30 range (projected in April). In the beginning of the year, the company said it expected to earn $3.80 to $4.80 a share.


All told, a simply brutal and market moving nearly 3 hour conference call . . .

Thanks to for the update

Category: Derivatives, Intellectual Property, Markets, Psychology, Real Estate

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Category: Credit, Derivatives, Fixed Income/Interest Rates, Investing

Kansas City Shadow Fed / Maine Fishing Trip Recap

I am back home, rested and refreshed after a wonderful few days on the lakes of Maine (and a grueling weather impaired return trip).

I wanted to give y’all a recap of the "Kansas City Shadow Fed Meeting" up in Grand Stream Lake, Maine. This is an invitation only  gathering that David Kotok of Cumberland Advisors has been running for the past few years. We all stayed at Leen’s Lodge on Grand Lake Stream, ME. Economists, strategists, fund managers, Fed employees, traders, journalists all mingle on the water and in the lodge. The participant who traveled the furthest came from Chile. A certain Scotsman regaled us with tales in that charming brogue, frequently punctuated with exclamations of "Crrrappp!" and "Foook!"

The entire event was under "Chatham House Rule" — meaning, I can not quote anyone by name or tell you which economist got drunk and danced until midnight (but one did).

But I can say that this is a very fine group of folk. The weekend was filled with good conversation, lots of wine, fine cigars, too much scotch, and outstanding fishing. we fished all three days — it rained on Friday, cleared on Saturday, was gorgeous on Sunday. I caught more freshwater fish than I ever have (and I spent the summers of my youth fishing in upstate New York). My canoe mate was hedge fund manager Scott Frew. Most days we pulled in 30-40+ fish — everything from Bass to Pickerel to the especially delicious White Perch. We released most of the Bass, and ate most of the Perch. On my last cast of the weekend, I pulled in the biggest freshwater fish I have ever caught — a fat 19" Bass that must have weighed 4 – 5 pound. Simply outstanding.

The weekend’s second biggest highlight — the first being that 19-incher — was the Saturday evening betting. Wagers are made by the group on S&P, 10 year, Fed Funds, Oil, Gold, Dollar/Euro, and CPI exactly one year hence. I made all bets, except CPI, choosing to boycott any BLS data. It was lots of fun.

David and I started an interesting side bet on the price of oil — over/under $66 — which attracted a lot of attention, and quite a few participants.

Here’s a bit of quirkiness: My outlook on the US economy was probably the most bearish of the entire group; at the same time, I probably had the most fully invested investment posture in terms of our managed accounts versus the rest of the fund managers. Kinda weird . . .

A few other interesting items worth relating:

Economics: The general consensus seems to be that the economy is middling, with some expecting it to slow further, and a few of the economists expecting a 2H re-acceleration. No one really thinks housing has bottomed, and I got the sense that I was the most moderate person in terms of how much further real estate prices will fall.

Politics: An interesting split between the two most esteemed political observers in the group: Both expected Mitt Romney to be the GOP nominee, while Obama/Clinton as the Dem nominee.

Markets: There was general caution amongst the group, with the expectation that a 5% correction is very probable. The range of other bets covered whether the markets run much further or get hit much harder  in the future.

The Fed: Likely to be on hold for the foreseeable future. The inside line is that Bernanke is a much bigger inflation hawk than Greenspan ever was. 

BLS: Clear consensus is there is no vast conspiracy manipulating there data. They have models, all models are biased, therefore their model is biased. I was surprised to hear a very experienced, highly placed participant mention in passing that he thought the Fed paid little attention to BLS data. Rather interesting.

If you have never spent an afternoon gently rocking in a small canoe on an northern glacial-formed lake, surrounded by pristine forests, with Loons crying in the distance as Bald Eagles wheel in the skies overhead, I highly recommend it.

Bottom line is that I expect to be back in Maine next summer . . .


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