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Two Financials Should Rise as Rates Fall

10/02/2007 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Skousen Turnaround Trader and Turnaround Trader Alert, says the Fed’s rate cut marks a dramatic turn and he finds two financial stocks that should post good gains as a result.  

The Federal Reserve made a dramatic turnaround by shifting its monetary policy from tight money to easy money when it slashed the discount rate and the federal funds target rate by half a percentage point. Chairman Ben Bernanke's Fed also is pumping more money into the system; the money supply (M2) now is growing at an 8% clip.

The markets responded positively after the cuts were announced. The Fed, deeply worried about the threat of recession and more bad news in the real estate market, decided to act forcefully to reverse the tide.

Among our recommendations, CEO Angelo Mozilo of Countrywide Financial (NYSE: CFC), the nation's largest mortgage lender, stated that about 80% of the subprime loans in Countrywide's servicing portfolio are paying on time, and only 4% are in foreclosure.

Countrywide will continue to "right-size" its operations by engaging in cost cutting and headcount reductions of 10,000 to 12,000, during the next three months. The company has tightened its underwriting guidelines by requiring better credit scores, enhancing appraisal requirements, and shifting toward a higher concentration of agency-eligible loans. "We are out of subprime lending entirely," Mozilo declared.

Meanwhile, he announced that Countrywide was doubling its branches and he added that retail and commercial deposits recently increased.

Countrywide's stock rose 14% in one day after announcing that it had arranged $12 billion in additional borrowing capacity through new and existing credit agreements. (The stock closed below $20 Monday—Editor.)

I have a new recommendation: Brookfield Asset Management (NYSE: BAM).

Based in Toronto, Brookfield is an asset management company with more than $50 billon in assets under management. The company's operations are quite extensive.
In addition to managing money, the company operates hydroelectric power facilities, manages office properties, makes business loans, and develops master-planned residential communities.

The outlook for the housing division, needless to say, is a bit cloudy. But the rest of the business is throwing off cash at an astonishing rate.

Revenue is growing at a 48% quarterly rate. Operating margins are north of 30%. And return on equity—Warren Buffett's favorite measure—is a satisfying 17.5%.
How do they do it? Brookfield has relatively young, aggressive management with an exceptional track record of realizing value from its assets.

Plus, this stock is denominated in Canadian dollars, a currency that now is trading at parity with the dollar, and appears to be headed higher.

So buy Brookfield at market. And place a protective stop at $30. (The stock closed below $39 Monday—Editor.) If you prefer to play this one more aggressively, try the January $40 calls (BAM-AH)

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