| Looking for Profit Oppurtinities in Falling Financials with Hedge Fund Manager Joe Capone |
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| Written by David Neubert | |
| Thursday, 26 July 2007 | |
 One nice thing about being a blogger who was a successful trader and is still an active investor/trader means that when I ask a hedge fund manager some questions, he asks me some too. We also talk about our positions. Yesterday I was lucky enough to get a bit of Joe Capone's time while he was listening to earnings-related conference calls. Joe is the owner and portfolio manager at Smart Financial Partners - a long/short hedge fund dedicated to the financial sector. I always value his opinions and find his analysis methodology completely value-driven. He is not tricked by market momentum, technicals or emotion. In other words, he's my kind of manager. Multi-tasking is typical on Wall Street. People talk on the phone, watch a screen or two, read research and carry on several Instant Messenger conversations at once. Following is our discussion (after the closes yesterday and today) of sub-prime mortgages, the market decline in the financial sector, Goldman Sachs (GS) and CountryWide Financial CFC): neubertdave: Heya Joe can I ask you a few questions about this market? I might put it on my Blog at The Panelist. "Joe Capone": Sure. That would be fine. I am on earnings-related conference calls until 6PM but if IM works for you it works for me; otherwise I can call you after 6 "Joe Capone" : super neubertdave: So CountryWide (CFC - $29.25) is falling huge. Is it misplaced panic? neubertdave: Also, I have a theory that if all the CDO/CDS structures unwind GS will be the biggest benificiary "Joe Capone" : I never like to say that "panic" is deserved, but in this case, Countrywide has been the first company to present Wall Street with some evidence that "prime" mortgages are deteriorating. I believe the market could well punish CFC further, possibly to a small premium to its $25 book value. neubertdave : is that Tangilble book of 25 or does that include goodwill? "Joe Capone": CFC does not have significant goodwill, but its mortgage servicing rights (MSR) is an intangible asset and it is greatet than the entire equity account. "Joe Capone": So that is GAAP goodwill "Joe Capone" : I find the CDO-GS theory interesting. GS is the only investment bank that I own (well I also own UBS - $54.38 ). "Joe Capone" : did you have other questions? neubertdave: I just bought Goldman Sachs (GS - $202.25) for the first time yesterday. For myself and for a friend. neubertdave: I am also long a bit of CFC at $34.50 "Joe Capone" : I have owned GS for some time; I think you have a good entry point. "Joe Capone" : CFC may take some time, but it is a good company at least, unlike many of its competitors neubertdave : It's main problem is a decline in mortgage originations. right. They don't hold any CDO's on the balance sheet do they? "Joe Capone" : CFC's principal issue is that it believes that the prime mortgage business (whether originated for sale to third parties, to securitize to third parties or to hold on its balance sheet) will suffer from sharply lower profitability for the next 1-2 years. Mostly, this is due to credit, and more specifically, to a linkage between housing prices and mortgage delinquencies, across the credit spectrum (earlier this linkage was really only drawn between real estate prices and subprime mortgages). "Joe Capone" : In all fairness, this is a surprise. neubertdave : That's great stuff. I've heard you say before that you don't think CountryWide have any direct exposure to sub-prime or CDO (Collateralized Debt Obligations) junk tranches. Do you think they post a losing quarter or year in the next two years? "Joe Capone" : no "Joe Capone" : no to CDO "Joe Capone": they have a subprime business, but amazingly, that is not the problem "Joe Capone" : Extremely unlikely they post a losing year and unlikely they post a losing quarter neubertdave : hey joe do you own GS or CFC for your funds or yourself? "Joe Capone" Own GS for fund "Joe Capone" Do not own CFC neubertdave: have you ever owned CFC recently? "Joe Capone": sold a few months ago "Joe Capone": would buy CFC @ $25 neubertdave: thanks a bunch. "Joe Capone" no worries
David Neubert 
GS 
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