Countrywide profit plummets

No. 1 mortgage lender, hurt by surging homeowner defaults, slashes outlook.

NEW YORK (Reuters) -- Countrywide Financial Corp., the largest U.S. mortgage lender, Tuesday slashed its full-year earnings outlook and said quarterly profit slid 33 percent, hurt by rising homeowner defaults in as the U.S. housing market slumps.

Shares of Countrywide sank more than 7.2 percent on the New York Stock Exchange Tuesday morning.

Second-quarter net income for the Calabasas, California-based company fell to $485.1 million, or 81 cents per share, from $722.2 million, or $1.15, a year earlier. Revenue fell 15 percent to $2.55 billion.

Analysts on average expected profit of 93 cents per share on revenue of $2.9 billion, according to Reuters Estimates.

Countrywide (Charts, Fortune 500) also cuts its full-year earnings forecast to a range of $2.70 to $3.30 per share from the $3.50 to $4.30 it had forecast in April, and the $3.80 to $4.80 it had forecast in January. Analysts on average expected $3.65. Profit was $4.30 per share in 2006.

"We expect difficult housing and mortgage market conditions to persist" this year, Chief Executive Angelo Mozilo said in a statement.

"Softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories," Mozilo added.

Countrywide, which competes against Wachovia (Charts, Fortune 500), Wells Fargo (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), set aside $292.9 million for credit losses, up nearly fivefold from $61.9 million a year earlier.

Countrywide shares fell $2.49 to $31.57 in pre-market trading. Through Monday, the shares had fallen 20 percent this year, compared with a 13 percent decline in the KBW Mortgage Finance Index.

Mortgage banking

Pretax profit from mortgage banking fell 49 percent to $319.6 million as revenue slid 18 percent, though earnings roughly tripled from the first quarter.

Results reflected a $388 million writedown in the value of "prime" home equity-backed loan assets on its balance sheet, and a $25 million writedown for subprime assets, largely because delinquencies and defaults are rising.

Fed looks to rein in 'liar loans'

Mortgage loan production rose 19 percent to $123.1 billion, of which just 4 percent was "subprime," Countrywide said.

The company has tightened its lending guidelines, and like many rivals has stopped making some of the more exotic subprime loans that have triggered greater-than-expected defaults.

In banking, pretax profit fell to $128.9 million from $324.6 million, as credit losses rose more than sixfold. Pretax profit also fell 31 percent in capital markets, while it rose 11 percent in insurance.

Dow sinks as earnings, housing sting

Benchmark index tumbles over 100 points a day after topping 14,000, its highest close ever; Google, Caterpillar, Ericsson all disappoint.

NEW YORK (CNNMoney.com) -- The Dow lost nearly 150 points Friday, a day after closing above 14,000 for the first time ever, as a spate of weak earnings news and continued housing fears rattled markets.

The Dow (down 149.33 to 13,851.08, Charts) sank over 1 percent, while the broader S&P 500 (down 18.98 to 1,534.10, Charts) and the tech-heavy Nasdaq (down 32.44 to 2,687.60, Charts) each fell about 1.2 percent.

The dollar hit a all-time low against the euro, bonds rallied and oil fell.

Coping with Dow 14,000

Despite the record-setting day Thursday, stocks still finished lower for the week. The Dow ended the week down 0.4 percent, while the S&P lost 1.1 percent and the Nasdaq declined 0.7 percent.

Next week investors will look forward to an advance reading on economic growth and numbers on the home sales. Both will be closely watched as economic growth has been slowing and real estate has deflated.

On the move

Stocks rallied Thursday, pushing the Dow, a blue-chip barometer that tracks 30 large companies, to its highest finish ever.

But a big miss from Dow component Caterpillar dashed hopes of another record- setting day Friday.

The heavy equipment maker said its net profit fell 21 percent and posted earnings of $1.24 a share, versus estimates for $1.49 a share. Caterpillar (down $3.78 to $83.20, Charts, Fortune 500) shares slid over 4 percent, although they were down over 9 percent earlier in the session.

Lackluster earnings in the tech sector also weighed on stocks.

Google (down $28.47 to $520.12, Charts, Fortune 500) reported earnings late Thursday that missed Wall Street's estimates even as its quarterly sales soared. The earnings miss - only the second since the Internet search firm went public in 2004 - rattled investors who have grown accustomed to solid results from the company. Google shares tumbled 5 percent.

Swedish firm Ericsson, the biggest maker of cell phone network equipment, also reported earnings that fell short of analysts' expectations early Friday. Ericsson (down $2.25 to $39.84, Charts) shares fell 5 percent.

"Google and Caterpillar have really taken the wind out of the sails," said Todd Clark, Director of stock trading at Nollenberger Capital Partners in San Francisco. "But this is just some healthy consolidation. The market really looked a little long in the tooth yesterday."

"Earnings are partly a factor, but they are not the whole thing," said Larry Peruzzi, a stock trader at The Boston Company Asset Management.

Peruzzi said the fact that the Dow hit the 14,000 mark Thursday, but just barely, was also giving investors pause.

"As the market gets up there, it acts as a reflection point," he said, noting that the Dow has often dropped after hitting other psychologically important benchmarks like 12,000 or 13,000.

Housing woes linger

Peruzzi said from comments Federal Reserve member William Poole that the subprime mortgage sector was large enough to affect the broader housing market also dampened the mood.

Defaults on mortgages in the subprime sector have risen sharply in the last few months, resulting in the implosion of several subprime mortgage lenders and funds that bought the repackaged debt.

Poole's comments follow those from Fed Chairman Ben Bernanke, who earlier this week told lawmakers that subprime losers could total $100 billion.

While so far limited, Bernanke said a housing slowdown had the potential to cut into consumer spending, hurting the broader economy. His comments helped stocks close lower Wednesday.

Is Baidu still a buy?

Is Baidu still a buy?

Think that Google’s (GOOG) stock has been on a tear lately? Maybe so, but Google’s got nothing on Baidu (BIDU), aka the Google of China.

Shares of Baidu, China’s top search engine, have surged more than 40 percent in just the past month. The stock is up about 72 percent year-to-date. But the stock took a bit of a breather on Monday after Citigroup analyst Jason Brueschke downgraded Baidu from “buy” to “hold” citing valuation concerns. The stock dipped about 2 percent in mid-afternoon trading.

Still, that’s not that big of a drop considering how much momentum the stock has had lately. And a closer inspection of the Citigroup report shows that Brueschke isn’t exactly turning into a Baidu bear.

“To be clear, we do not recommend liquidating an entire position in Baidu,” he wrote, adding that he believes Baidu will report revenues for the second quarter that are higher than Wall Street’s consensus expectations of $48.9 million, which would be an increase of 105 percent from a year ago. What’s more, Brueschke even raised his price target for Baidu to $218 a share, about 12 percent higher than the stock’s current price.

I’ve already written about how Baidu and several other Chinese Internet stocks such as Sohu (SOHU), Sina (SINA) and Shanda Interactive (SNDA) have been hot performers as of late. Baidu’s gains have dwarfed the appreciation of these stocks, though.

But that’s precisely what makes putting new money into Baidu a little bit of a scary proposition now.

Much like Google, Baidu’s growth potential appears, on the surface, to justify its performance. But as Brueschke points out, the valuation may be ahead of itself. Baidu’s triple digit P/E - the stock trades at 107 times 2007 earnings estimates - makes it an exceptionally expensive stock.

Sure, profits are expected to increase by nearly 70 percent this year and in 2008 and at about a 48 percent clip, on average, for the next five years. But the stock is a bigger gamble now since expectations for the next few quarters are so high.

After all, Baidu has surpassed earnings estimates by nearly 20 percent a quarter, on average, for the past four quarters. So the pressure is on Baidu to keep wowing the Street in order to satisfy the momentum investors that have bid up the stock to just under $200 a share in the past few weeks.

That’s exactly why Ryan Jacob, manager of the Jacob Internet fund, has been reducing his stake in Baidu recently. He still owns a small position in the stock in his fund but said he’s concerned about the valuation.

“The problem is that Baidu is such an early stage company. By far, they are the search leader in China and all indications are that they will have a very strong quarter. But we’ve cut back our position because at these prices, there’s a lot more risk,” he said.

Still, Jacob agreed with Brueschke and said investors should not completely bail on Baidu.

“Long-term, this is what’s hard. Baidu’s extremely well positioned and they’ve done an excellent job competing against Google and other local players in search. So eventually, the company will justify its valuation,” he said, but added that there’s more to China than Baidu and recommended that investors diversify their holdings in the country.

As such, he also owns Sohu, Sina, Chinese travel site Ctrip (CTRP) and Tencent, a popular instant messaging company. Tencent shares aren’t as easy to purchase for the average investor, though, since they trade only in China and do not have a U.S. Nasdaq listing

Man not buying Snapple's 'all natural' claim

Suit alleges Cadbury Schweppes' drink uses high fructose corn syrup; seeks class action status.

NEW YORK (Reuters) -- A New York man sued Cadbury Schweppes Plc Friday, alleging the company mislabeled certain products, including its Snapple juice and tea drinks, as "all natural" when they were not.

Hemant Mehta, who wants the suit to become a class action complaint, alleged that the drinks contained high fructose corn syrup (HFCS) and "other non-natural products," according to the suit filed in Manhattan federal court.

Mehta seeks to represent all people who bought certain Cadbury Schweppes (Charts) and Snapple drinks over the last six years.

"HFCS does not exist in nature and is not 'minimally processed,"' the complaint alleges. "Describing HFCS as an 'all natural' ingredient is deceptive and unfair to consumers and competitors."

A Cadbury Schweppes representative was not immediately available for comment.

Rye Brook, New York-based Snapple uses "Made from the best stuff on Earth" as its slogan. British-based Cadbury is the world's largest confectionary company and competes with Coca-Cola (Charts, Fortune 500) and Pepsi (Charts, Fortune 500).

Hedge fund settles Azerbaijan oil bribe case

Omega Advisor to pay fine, cooperate with on-going probe into alleged scheme to gain control of Central Asian state oil company.

NEW YORK (Reuters) -- The U.S. government said Friday it had agreed not to prosecute Omega Advisors Inc., a $6 billion hedge fund, over its role in an alleged scheme to bribe Azeri officials and gain control of the Azerbaijan state oil company.

Omega will not be prosecuted for any crimes related to its investment in a privatization program in Azerbaijan, the U.S. Attorney's office in Manhattan said in a statement. Omega will forfeit $500,000 and continue to cooperate with the probe.

The agreement ends uncertainty over the case for Omega, which was founded by Leon Cooperman, a former general partner of Goldman Sachs (up $1.60 to $222.92, Charts, Fortune 500).

It also comes after recent setbacks for prosecutors in the case, which includes allegations that Czech investor Viktor Kozeny sent "planeloads of cash" into Azerbaijan in the late 1990s to acquire a controlling interest in the former Soviet republic's state oil company, SOCAR.

Omega invested more than $100 million in the privatization program in 1998 through a co-investment agreement with two companies controlled by Kozeny, prosecutors said.

Clayton Lewis, a former Omega employee who was the hedge fund's point of contact on the Azeri investment, has admitted he knew about Kozeny's alleged arrangements before he invested on Omega's behalf, prosecutors said.

Lewis pleaded guilty in February 2004 to charges of violating the Foreign Corrupt Practices Act and conspiracy to violate the act, prosecutors said.

After UBS hedge fund trouble, executives shuffle

Omega lost all of its investment and SOCAR has not yet been privatized, prosecutors said. Omega substantially wrote down its investment in 1998. It has sued Kozeny and Lewis.

"I am happy that the government has understood that Omega has acted appropriately since it learned of Mr. Lewis' improper conduct," said Omega's lawyer Robert Anello, of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C.

In a letter to investors, Cooperman said he was pleased "the saga relating to Omega's 1998 investment in the privatization program in Azerbaijan has come to an end."

In June, a federal judge threw out most of the charges against two defendants in the case -- David Pinkerton and Frederic Bourke -- saying the indictment was filed too late.

Pinkerton was managing director of AIG Global Investment, a subsidiary of American International Group Inc (down $0.27 to $70.00, Charts, Fortune 500)., while Bourke was the principal shareholder in Blueport International Ltd, which allegedly invested in a company involved in the scheme, according to the ruling last month.

The two still face charges of making false statements. The judge has set a conference for July 17.

Kozeny was released on bail in April from a Bahamas prison where he was sent in 2005 to await extradition to the United States.

European stocks hit 2-week highs

Expectations for strong corporate earnings growth help push markets higher; hotel stocks advance after Blackstone buys Hilton.

LONDON (Reuters) -- European shares ended strongly for the second straight session on Wednesday, with a key benchmark hitting its highest closing level in two weeks, but volume was stifled by a U.S. holiday.

Travel and leisure stocks were standout gainers, with hotel group Accor rallying 10 percent and Intercontinental Hotel up 4 percent as private equity firm Blackstone Group (Charts) agreed to buy Hilton Hotels (Charts, Fortune 500) in a deal valued at $26 billion, spurring talk of further industry consolidation.

The pan-European FTSEurofirst 300 index rose 0.4 percent to 1,620.2, its strongest close since June 20, and up 9 percent so far this year, boosted by corporate takeovers and strong earnings. The index jumped 16 percent in 2006.

About 1.8 billion shares were traded, about half the average daily volume traded so far this year.

Fund managers said strong corporate profit growth was supporting stocks.

"Recent highs in European equities are driven by expectation of European earnings growth picking up as corporate investment remains strong and unemployment rates continue to fall," said Vincent Devlin, investment director of European equities at Scottish Widows Investment Partnership.

Around Europe, Germany's 30 share DAX index added 0.3 percent while UK's FTSE 100 and France's CAC 40 both rose 0.5 percent.

Focus on rates

Interest rates will be eyed Thursday with the European Central Bank expected to hold rates at 4 percent, while the Bank of England is forecast to raise rates a quarter percentage point to 5.75 percent.

In June, concerns over rising interest rates and costlier credit hit European stocks as investors worried that higher borrowing costs might derail M&A activity.

"M&A is still alive," said Philip Isherwood, a strategist at Dresdner Kleinwort. "With the maturity of the profit cycle, the concept of cost synergies appeals to management, because companies are not willing to let their profit growth slow down."

Among gainers, Volkswagen added 1.3 percent after Europe's largest carmaker reported a 15 percent rise in car sales in the United States in June, marking its strongest overall sales month since August last year.

British Airways rose 5.3 percent after the airline reported strong figures for its premium class seats in June.

Oil

Oil steady above $70; terror risk considered

In holiday week, traders await inventory report expected to show higher fuel production in the world's top consumer.

SINGAPORE (Reuters) -- Oil prices steadied Monday, the start of a holiday-shortened week, as traders looked ahead to a recovery in U.S. refinery use to offset declining gasoline stockpiles.

U.S. light crude eased 13 cents to $70.55 a barrel in electronic trading, after a $1.11 rally Friday to the highest settlement since August 2006. London Brent crude traded 9 cents lower at $71.32, after gaining 89 cents Friday.

Oil traders worried about geopolitical supply risks saw London's Heathrow airport and New York's JFK terminal reopened Sunday after bomb scares, following an explosion at a Scottish airport Saturday and failed car bombing attempts in London.

"We can see some profit taking after short covering brought the market up to $71," said Ken Hasegawa at Himiwari CX in Tokyo. "The market will be rangebound until the U.S. holiday."

Wednesday's Independence Day holiday will delay until Thursday weekly U.S. inventory data, in which some analysts expect to see higher U.S. fuel production after several plants returned from maintenance.

Retail gasoline price dips below $3

ConocoPhillips (Charts, Fortune 500) planned to begin a restart of a gasoline-making unit in Texas Friday, while two crude units at a BP (Charts) refinery in Indiana, the country's fifth biggest, will reach full rates within two to three weeks after a fire slashed output in April.

A series of outages in the world's top consumer has helped drive down gasoline stockpiles during peak summer demand, though crude stockpiles have risen to nine-year highs despite OPEC production cuts.

Oil market speculators trimmed their exposure to rising prices in the week ended June 26, paring their net long gasoline and heating oil positions from the previous week's multi-year highs. Crude oil net length was almost unchanged.

Crude stockpiles in Cushing, Okla. - the delivery point for U.S. crude futures - fell by 1.4 million barrels in last week's data, leaving the price gap between American and European oil benchmarks at under $1 a barrel after U.S. crude has been trading at an atypical discount to Brent since February.

Iran's dispute with the West over the country's nuclear program is still in focus after an Iranian official said Saturday a team from the U.N. nuclear watchdog will visit Iran on July 11-13 for discussions.

Worries over Iran's nuclear dispute together with disruptions to Nigerian supplies, OPEC supply curbs and growing fuel demand have left Brent oil prices up 17 percent this year.

Job growth, subprime on investors' minds

Stocks posted solid 2nd-quarter gains but rising interest rates and the subprime mortgage mess are a concern.

NEW YORK (Reuters) -- Investors are hoping this week brings some answers to the question of whether an improving U.S. economy unleashes inflationary forces, and one place to look will be in the government's June employment report.

At the same time, the potential for defaults in subprime loans to spill over to the general economy remains a concern. Nervousness that tighter credit may affect the availability of financing for buyouts prompted investors to sell banks' and brokers' shares on Friday, which helped cut short a morning rally.

In this holiday-shortened week, the most significant data, the June payrolls report, will come on Friday.

U.S. financial markets will be closed on Wednesday, July 4, for the Independence Day holiday and the New York Stock Exchange will close early, at 1 p.m. ET on Tuesday.

Stocks can't muster turnaround

Last month, investors were cheered by news that employers added 157,000 jobs in May. But a Reuters poll of economists found forecasts for weaker job growth in June: analysts on average said payrolls added 120,000 jobs last month.

Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, expects growth of 120,000 to 130,000 jobs. "I think the economy is still chugging along and the consumer is in pretty decent shape," Dwyer said. He added that with decent economic fundamentals, no recent announcements of major layoffs and signs that manufacturing is picking up, the payrolls report should be at or a little better than the consensus.

Other reports due during the week include the Institute for Supply Management's readings on June manufacturing, on Monday, and the services sector, on Thursday. The Reuters survey forecasts that ISM's June index of national factory activity will be unchanged at 55.0. The ISM services index is expected to drop to 58.0 from 59.7 in May. Any reading above 50 points to growth in the sector.

Al Kugel, chief investment strategist at Atlantic Trust in Chicago, noted that some recent data from regional Federal Reserve banks has been good. He said he expects the ISM data to be strong. "People need some new information to become more bullish and the ISM could be the trigger," he said.

The stock market turned in a strong performance for the second quarter, but has hit a wall in recent weeks after Treasury bond yields climbed above 5.0 percent and problems surfaced at two Bear Stearns hedge funds that held investments in subprime loans, home mortgage loans to borrowers with weak credit.

Cracks in the buyout boom

For the second quarter, the Dow industrials jumped 8.5 percent, the S&P 500 rose 5.8 percent and the Nasdaq gained 7.5 percent. So far for the year, the Dow is up 7.6 percent, the S&P is up 6 percent and the Nasdaq 7.8 percent.

After losing ground Friday, the Dow finished last week up 0.4 percent, the Nasdaq gained 0.6 percent and the S&P ended little changed.

In the week ahead, Tuesday will bring its fair share of numbers. A government report on May factory orders is due that day, along with car and truck sales in June. After a lull this week, S&P 500 companies' earnings will begin to trickle out the following week and then the quarterly deluge begins later in July.

Bob Millen, co-portfolio manager of The Jensen Portfolio, a $2.3 billion mutual fund, noted that S&P 500 earnings growth is down significantly from the double-digit readings of a year ago. He said price-to-earnings multiples are unlikely to expand, and that companies generating significant revenue from outside the United States are the best bets now.

News of a probe into two Bear Stearns (Charts, Fortune 500) hedge funds heavily invested in subprime mortgages added to investors' worries last week that the potential fallout could spread throughout the banking industry. One company was forced to postpone a bank loan and another firm delayed the pricing of a $1.1 billion high-yield bond offering.

Mergers fail to lift media stocks

Referring to the problems in subprime debt, which have devastated some hedge funds that made heavy bets in the sector, RiverSource Investments chief market strategist David Joy said he believes that "it's the primary preoccupation of equity investors and that is going to continue next week.

"The issue is: 'Does it result in a tightening of lending standards that could spill over into a general credit tightening?' That's the biggest concern."

As for the week's statistics, Joy said he will be watching the average hourly earnings figure that is included with the payrolls data, as well as the prices paid numbers in the ISM reports.

"Our view is that inflationary pressures are probably going to increase in the second half of the year" but at a modest rate as the economy picks up steam, Joy said.