By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

I don’t know whether to be furious or relieved.

While at our Oxford Club Chapter Meeting in Colorado Springs last week, I happened to learn that Countrywide Financial Corp. (CFC) was planning to host several dozen mortgage company reps at the nearby Ritz-Carlton Bachelor Gulch ski area in Avon.

Unfortunately, public disclosure by The Wall Street Journal and other papers ruined their plans and the Calabasas, Calif.-based Countrywide cancelled at the last minute.

Countrywide claims to have cancelled all similar events, too, for the rest of the year "in light of recent events."

It’s for the best – believe me – for "swank" doesn’t begin to describe just how nice the Avon Ritz really is. For starters, weekday rooms there start at $750 a night.

As reported in the Rocky Mountain News, the multi-day soiree was set to start with cocktails and ski-fittings. Attendees were then to be feted at Spago on such delicacies as $105 a plate Kobe beef and $140 caviar, before enjoying a multi-day fiesta including hotel rooms, meals, skiing and gratuities – all of which was to be paid for by Countrywide and all of which is in line with annual industry "meetings" they’ve held since the 1990s.

Silly me … I thought the industry was in the dumper and that the company was struggling after taking $1.6 billon in losses during the second half of 2007.

Evidently things at Countrywide are a lot "richer" than most people think – and why shouldn’t they be?

If you recall, we suggested months ago that the real reason Bank of America Corp. (BAC) is buying Countrywide has nothing to do with the hundreds of millions of dollars worth of yearly loan-servicing revenue. Nor does it have anything to do with Countrywide’s dominant market share.

Instead, we posited that BofA was going to use Countrywide’s losses to offset its own taxable income.

Turns out we may have been "righter" than we care to admit.

Under the terms of the deal announced in January, Bank of America agreed to pay $4 billion in its own stock for Countrywide – slightly less than $8 a share. Proponents viewed the takeover bid as a much-needed rescue mission for Countrywide, which many believed to be out of cash at the time.

Just before the offer, Countrywide had seen its stock price plunge about 85% – a decline that steepened in the days immediately before Bank of America launched its bid.
Critics say the buyout offer was a bit on the rich side – especially after BofA Chief Executive Officer Kenneth D. Lewis had already injected about $2 billion into Countrywide to help prop it up last summer as the subprime mortgage crisis started to spiral out of control.

With mortgage defaults escalating, Countrywide was forced to boost its loan-loss provisions, leading to a loss of $1.2 billion in the 2007 third quarter and $422 million in the fourth quarter.
According to tax experts like Robert Willens, who was quoted in Fortune magazine at the time, the deal could be worth billions to BofA by the time all is said and done. In fact, in the first five years it owns Countrywide, BofA will be able to use a total of $1.35 billion of Countrywide’s losses to shelter its income. That works out, incidentally, to $270 million a year.
But here’s the kicker.

If Countrywide’s losses exceed $1.35 billion when the transaction ultimately closes [it's supposed to be finalized in the third quarter, as the two companies continue to work out the details], Bank of America could deduct the rest of the losses without limits beginning in year six.

What a country …run up billions of dollars in losses, hand your executives hundreds of millions in compensation, nearly wreck an entire industry single-handedly, spend millions on boondoggles…and qualify for an IRS sanctioned tax break at the same time!

Where do I sign up?

Wait…I already did. My wife and I got our mortgage through Countrywide. At least we haven’t been "countryfried" – yet.

Maybe that’s why shares of Countrywide rose a penny each after the ski trip was cancelled…to $6.96.

News and Related Story Links:

• CNNMoney.com:
  Countrywide Cancels Ski Trip Meeting.

• Money Morning News:
  Bank of America Will Buy Countrywide for $4 Billion in Stock.

• Money Morning News:
  Countrywide CEO Still Gloomy After $2 Billion Capital Infusion.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

As you might imagine, I have been inundated with telephone calls and e-mail messages from investors who are trying to understand exactly what’s happening in the world’s financial markets right now.

Needless to say, little of this has been a surprise to us here at Money Morning. We’ve warned that the subprime-mortgage fallout would have real staying power, that the dollar would continue to sink and oil prices to rise, that inflationary pressures would take hold, and even that some of China’s hotter stocks would correct. Several of these are issues I’ve been warning investors about for years.

In my columns and during presentations I’ve made across the country, one of the key points that I reiterate time and again is the importance of diversification. By diversification, I’m referring to the importance of keeping your money in front of factors that matter, while avoiding those that don’t. And my idea of diversification is worlds away from the shtick that Wall Street’s Armani Army trumpets over and over again.

Let me explain …

In the late 1990s, for instance, many investors "diversified" into tech – which sent them off the cliff like the lemmings they were when the dot-com bubble imploded in 2000. Many of those folks still aren’t back to even. And some were burned again this summer when an over-reliance on "safe" tech stocks caught up with them: Techs stumbled and gave their portfolios a nice haircut.

And while it looks as if the U.S. Federal Reserve may try to bail them out – you can’t be certain that a rate-cut-fueled rebound will get you back to even.

Besides, why struggle to recoup your losses when it’s so much easier just to stay ahead of such nasty reversals in the first place. Not only do you keep your risks at a minimum and avoid losses, you also position your investments to generate massive profits when the powerful global forces that we key on send your stocks higher.

To diminish your risk exposure while positioning yourself for the inevitable rebound, here are some moves investors should make right now:

1. Mix in Safety and Balance: When markets correct, volatility soars. We saw that happen in 1987, after the Dow Jones Industrial Average dropped a staggering 22% on Black Monday, having learned that international monetary flows really were linked. That means that the gyrations we’ve been experiencing in recent weeks are likely to continue for some time to come. With the so-called "decoupling" of global markets still in its early stages – and world markets as highly correlated as they are right now – don’t ever forget that what happens in one market, will usually be replicated in others.

2. Invest for Income: This is yet another investing truism investors have either forgotten, or have just chosen to ignore, falsely believing that income investing is "boring." Dividend-paying stocks outperform non-dividend paying stocks by even more in down markets than they do in up markets. What’s more, by consistently reinvesting dividends during down markets, investors can substantially expand their asset base, which puts them way ahead of the game when markets recover and stock prices soar – as they always eventually do.

3. Follow the Money: While Armani Army Analysts are lousy market prognosticators, there are two financial indicators that are well-worth following: Interest rates and currencies. In other words, while analysts can’t predict the markets, interest rates and currency prices often can. For instance, if bonds rally and interest rates decline, smart investors buy. But, if bond prices fall as stocks are falling, better make like "Chicken Little" and break out the umbrella, since it’s probably going to rain on your parade [if the sky doesn't fall, first].

4. Future Profits are "Made in China:" Every investor needs a China strategy. But with global markets currently in turmoil, a "safety-first" strategy is key. Although it’s tempting to invest "in" China-based companies, right now you’re better off buying shares of firms positioned to profit "from" China. In other words, with market risks so high right now, it’s far better to capture the profits of China’s growth by investing in globally diversified companies that are doing business in that emerging Asia nation. That gives you the benefits of China without exposing you to the risk of direct investments in an immature and substantially unregulated market.

5. Alternative Energy is No Longer Merely an Alternative: So-called "Big Oil" won’t cut it any longer. In terms of direct investments in the oil patch, look at the smaller firms that actually do the work. That way, regardless of how much – or how little – oil is actually out there, you will profit from the firms who process, refine or move the crude. Also, look at established companies profiting from oil alternatives. The re-emergence of commercial nuclear power is a good example.

Far too many investors stick with the money-losing strategies pushed by Wall Street simply because that’s how "everybody does it." Those investors fear that any change will get them into areas that are too sophisticated to understand and manage.

But that’s just flat out wrong.

The strategies we advocate are actually elegant in their simplicity. And, as my experience has demonstrated over and over, the simplest strategies are often the best and can produce head-spinning profits no matter what kind of market we face.

How can you argue with that?

News and Related Story Links:

• Money Morning:
• How Dividend-Paying Stocks Can Help You Tame the Bear

• Money Morning:
  U.S. Dominance Bites the Dust: How Wall Street Sold Itself Down the River

• Money Morning:
  Foreign Markets Slump, But U.S. Markets Gain

• Reuters:
   Wall Street rallies on hope for Fed rate cut

• CNNMoney.com:
  What’s the Definition of a Bear Market?

• Bloomberg:
   Stocks Fall in Europe, Asia, U.S. Futures Drop; Total Declines

By Keith Fitz-Gerald
Contributing Editor

Whenever I’m faced with a market like this one – rocky and volatile, with hidden wildcards just waiting to trip us up – I can’t help but think about my late grandmother, successful amateur investor Virginia Gruner, and the warning she would issue in just these situations: “Hold onto your bippies!”

As I sit here and stare at my trading screens this afternoon (Monday) – watching as central banks around the world inject billions into the global economy in an effort to blunt the effects of the spiraling credit crisis – I can just hear my grandmother issue her ever-so-familiar warning.

The Greatest Investor I’ve Ever Known

You see, my grandmother was a super-successful amateur investor.  She’d spent most of her adult life managing her household, the wife of a highly successful insurance-industry executive (my grandfather). When her husband died, my grandmother found that her family’s own finances were in disarray. So with characteristic commitment, and with a resolve I always admired, she set out to become a successful investor. She became one of the smartest individual investors most of us will ever see – and, actually, one of the best investors of any kind I have ever known.

My grandmother then set out to pass that “gift” along – to me. Starting when I was a teenager, she made sure that I always had the entire Value Line investment research series, and annual subscriptions to such leading publications as Business Week and Forbes. She wasn’t forcing this on me, mind you, but rather was sharing it with me – and in a way that made me want to learn all that I could, and be as successful at this wonderfully engaging pursuit as my grandmother.

Yesterday’s late-afternoon trading patterns suggest that her bit of wisdom may somehow be fitting to keep in mind over the next few days. I’m now hearing from traders based both here in the United States and around Europe that the $275 billion injected into the world economies by the global central banks may not be enough.

And, yet, Asia’s traders seem placated.
 
So, what gives?

I honestly don’t know. But here’s what my experience tells me should be happening – as well as what’s actually happening.

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The Global Realities

Somehow, the Euros and Americans don’t trust the system. They think that Monday’s rally is nothing more than a continuation of the short covering and limited bottom fishing that began Friday on the heels of nearly $275 billion in central bank liquidity injections

They’ve got a bad case of: “I’ll believe it when I see it.” And investors seemingly want the ECB and Fed to drop rates as a sign of good faith that things are truly behind us. Yesterday, in fact, I saw no fewer than 20 different news stories, research reports, and market essays from various people suggesting that a “Fed rate cut is in the bag” – which makes me suspect all the more that it isn’t.

Asian traders, on the other hand, seem to think that the massive amounts of money shot into the system was enough to fix the problem.

It’s the way that the Asian markets are trading that leads me to draw this conclusion – that, of course, plus the 20-plus years I’ve spent in and around the Asian markets.

The Japanese and Chinese in particular have a different cultural framework than we rely on here in the West. As a result, the Japanese have a sort of implicit trust in the government as a benevolent entity while the Chinese view it as a strict leader to be obeyed…maneuvered, but obeyed nonetheless. There are, of course, finer points to each but those are more academic than anything else.

In more practical terms, based on how the two camps (the West vs. Asia) appear to be divided in their trading philosophy right now, what we as individual investors are left with is a dichotomy: Roughly half the world’s financial system wants more “liquidity,” while the other half seems content with what it’s got.

Really Time to Go Global

So, who’s right and what does it mean for us?

That remains to be seen. I’m personally of the opinion that we have a long way to go before the extent of the damage is truly recognized. There will undoubtedly be some big names on the chopping block in the weeks to come as more light is shed on this messy credit situation. Some of these revelations will have been anticipated. But others will be huge surprises, and could well roil the markets.

Either way, this suggests to me that individual investors have yet another reason to focus at least part of their financial strategies on global investing (Wharton Professor Jeremy Siegel recently said that an international allotment of under 40% was a “disservice,” as well as a recipe for substantial underperformance).

That said, it’s clearly not enough any more to diversify by country because most of the countries, as so many people found out last week, are inextricably linked at the central banking level.

Therefore, it is vitally important to take a different approach that both lessens your risk and heightens your potential returns. Part of that approach includes lining up your money with the virtually unstoppable trends of our time. The other part suggests “an offensive defense” may be more appropriate now more than ever.

Last week’s financial shenanigans have clearly changed the rules of the game – yet again.

As I reason this all through, I can’t help but consider what my grandmother would say about this situation. The best revenge, of course, is to take advantage of all possible profit opportunities. But we all know that these next few weeks could be highly volatile, which either connotes danger or opportunity – depending upon your viewpoint.

So brace yourself for still more volatility (“hold onto your bippies!”). Then capitalize on whatever opportunities the financial markets throw at you. Look especially closely at global investment opportunities, but don’t be afraid to be opportunistic domestically, either. Be bold, but not reckless.

And have at it!

Good Investing to us all.

 Keith Fitz-Gerald

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