Countrywide, BofA reports spark market rally; airline merger reports send Delta, Northwest, United flying

By Evan Weinberger

New York, Jan. 10 - Countrywide Financial Corp. proved to be the center of the market universe again Thursday. Reports surfaced in the afternoon that Bank of America Corp. had been engaged in serious takeover talks with the Calabasas, Calif.-based mortgage lender.

That sent Countrywide stock soaring. The report also sparked a broader stock market surge.

The Wall Street Journal, which broke the story, said that the deal was not set in stone and that there was still a chance that it might not get done at all. But the New York Times reported an agreement could be announced as early as Thursday afternoon or Friday morning.

Bankruptcy rumors smashed Countrywide, and the wider markets, Tuesday. Prior to the takeover talk, an analyst remarked that the pattern for Countrywide was moving in reverse of the old market dictum of buy on the rumor, sell on the news. "That's going to continue to be volatile anytime anybody opens their mouth," he said. "Any rumor that comes along, it's sell on the rumor."

The old saw held true Thursday, however. When the analyst made his observations, at around 1:30 p.m. ET, Countrywide stock was up around 50 cents, or 10%.

After the report surfaced, the stock took off.

Countrywide stock (NYSE: CFC) closed at $7.75, a gain of $2.63, or 51.37%.

Market watchers contacted at the time said they were confident that Bank of America, which had invested $2 billion in Countrywide in August, would not let the mortgage lender go under.

They stuck by that view Thursday when the takeover chatter heated up. "I have always said it will happen," a trader said.

He added that holders of Countrywide stock shouldn't expect much of a premium if the deal goes through, however. "I expect they hope to get BAC stock and make money on that," he said.

Shares of Charlotte, N.C.-based Bank of America (NYSE: BAC) gained 56 cents, or 1.45%, for a $39.30 close.

Another trader, who said he saw reports of Federal Reserve backing of the deal on CNBC late in the afternoon, said that just having the news that Bank of America and Countrywide were talking out on the street was a big deal.

An agreement between the two financial institutions would also spark other similar deals. "I think if CFC happens that the door to a whole lot of transactions [opens], probably in rapid succession," he said.

Markets rally on Countrywide

Markets were volatile but relatively flat leading up to the Countrywide, Bank of America reports. Even a promise from Fed chairman Ben Bernanke that the central bank would aggressively lower interest rates to support the economy and stave off a recession could only start a small rally that was quickly snuffed out.

"All Bernanke said was: 'Greenspan left us in a world of hurt,'" a trader said.

Investors were looking for any shred of good news, however, and the Countrywide talk provided the kindling for a real rally.

"I think anything good, resembling good or faintly good would be taken as an excuse to go up," the trader said.

After flirting with a 200-point gain, the Dow Jones Industrial Average closed 117.78 points, or 0.92%, higher for a 12,853.09 close.

The Nasdaq punched its way to a 13.97 point, or 0.56%, gain to close at 2,488.52.

The Standard & Poor's 500 closed at 1,420.33, a gain of 11.20 points, or 0.79%.

Airlines take off

Consolidation talk spurred a rally in airline stocks Thursday.

The day began with the release of a letter from the chairman of the executive committee of Delta Air Lines Inc.'s powerful pilots' union, Lee Moak, to its membership saying that a deal between Atlanta-based Delta and Eagan, Minn.-based Northwest Airlines Corp. was close.

A JPMorgan analyst, Jamie Baker, further set the tone by saying airline consolidation was not far off in a note to clients Thursday morning.

On Thursday afternoon, The Wall Street Journal reported on its web site that Delta CEO Richard H. Anderson would ask the company's board of directors for permission to enter into merger talks with Northwest and UAL Corp., the parent company of United Airlines.

It is believed that once the first deal is reached among the airlines, a slew of others will take place in rapid succession.

Delta stock (NYSE: DAL) gained $2.46, or 18.20%, for a $15.98 close.

Northwest stock (NYSE: NWA) went farther, gaining $3.84, or 31.97%, to close at $15.85.

Chicago-based United (Nasdaq: UAUA) flew $6.16, or 23.66%, to close at $32.19.

Even airlines not directly named in the speculation were buoyed by the chatter - and falling oil futures.

Shares of Fort Worth, Texas-based AMR Corp. (NYSE: AMR), the parent company of American Airlines, gained $1.57, or 13.26%, to close at $13.41.

And Houston-based Continental Airlines Inc., which has consistently maintained its Garbo-esque stance of wanting to be left alone, saw its stock take flight. Continental stock (NYSE: CAL) picked up $4.45, or 23.67%, for a $23.25 close.

Reddy Ice has new dance partner

Dallas-based Reddy Ice Holdings Inc. announced Wednesday after the market close that it had engaged GSO Capital Partners LP and the rest of the buying group in talks Jan. 4. Included in those talks were "conceptual discussions regarding a modified transaction," a statement from the country's largest manufacturer and distributor of packaged ice said Wednesday.

There has been a great deal of speculation that the Reddy Ice deal would be the next leveraged buyout to falter. The $1.1 billion takeover of Reddy Ice by the GSO-led group was agreed to in July. Holders of Reddy Ice stock will receive $31.25 per share when the deal closes, which was expected this year.

A new party has been thrown into the deal, however, as the New York-based Blackstone Group announced that it had purchased GSO Capital for $930 million Thursday. Blackstone also said that it would buy back $500 million of its stock.

In a conference call Thursday, Blackstone CEO Stephen Schwarzman said despite the recent collapse of Blackstone's takeover of mortgage broker PHH Corp., he expects all of the buyout shop's deals in the pipeline to go through.

Investors apparently thought Schwarzman's statement included Reddy Ice, because the stock moved up sharply on the day.

Reddy Ice stock (NYSE: FRZ) gained $1.26, or 5.93%, for a close at $22.50.

Blackstone Group stock (NYSE: BX) moved up sharply, gaining $1.74, or 9.61%, for a close at $19.84.

Microsoft rumors rise again

The periodic rumors that Redmond, Wash.-based software giant Microsoft Corp. was interested in buying out Sunnyvale, Calif.-based internet service provider Yahoo! Inc. surfaced again Thursday.

This time it was in the New York Post. The rumors appear to have been sparked by the announcement that Bruce Jaffe, the director of Microsoft's acquisitions strategy, will leave the company in March.

The rumor sparked a rise in Yahoo stock and a fall in Microsoft.

Yahoo stock (Nasdaq: YHOO) was up $1.53, or 6.78%, to close at $24.09.

Microsoft stock (Nasdaq: MSFT) slipped 11 cents, or 0.32%, to close at $34.33.

All of the Yahoo speculation lifted shares in Fremont, Calif.-based computer peripherals maker Logitech International SA, which has also reportedly been the apple of Microsoft's eye.

Logitech stock (Nasdaq: LOGI) picked up $2.01, or 6.47%, to close at $33.07 Thursday.

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