JANUARY STOCK TALK PART II

I just got back from an appearance on CNBC about Countrywide Financial and wanted to give you a quick update on what's happening.

Bank of America has just announced it's going to buy Countrywide for about $4 billion in stock, and B of A thinks it's a bargain.

I disagree. Bank of America is diving into the world's biggest mortgage cesspool — tens of billions in loans that are quickly turning sour.

So unless the plan is to stiff taxpayers with Countrywide's sinking mortgages and other bad assets, this deal could cost Bank of America a heck of a lot more than $4 billion.

The big picture: The value of $13 trillion in U.S. mortgages is sinking at an alarming pace, faster than anyone believed possible. This means that asset values, book values, and earnings estimates based on mortgages are being widely — and wildly — overstated.

That's why Merrill Lynch has suddenly discovered a flood of mortgage losses on its books, and that's why it has just announced write-downs of $15 billion, nearly double its earlier estimates.

That's why Fed Chairman Bernanke has just warned the world about many of the economic troubles we've been warning you about for months.

Scary because they're so cheap
The other group of companies to avoid are the companies that look cheap right now but actually aren't -- companies with significant exposure to the housing bust and credit crunch.

The housing bust is likely to continue in 2008, as tightening credit slows economic growth and hinders access to mortgages. Even companies such as MBIA (NYSE: MBI) and Washington Mutual (NYSE: WM), which seemed indomitable a year ago, look extremely, um, domitable now.

In other words, now is not the time to go bottom-fishing among the weaker homebuilders, lenders, and bond insurers ... even if some of these stocks look really, really cheap. Liquidity and balance sheet strength are critical when it comes to surviving the current environment, and companies that don't have it are likely to fail or require new capital at onerous terms, diluting existing shareholders.

Yes, this crisis will offer opportunities. But investors should do well waiting for more transparency and focusing on businesses that can survive for several years without new capital infusions.