Luminent tumbles hard; Countrywide rallies; consolidation in medical diagnostics; markets jagged

By Evan Weinberger

New York, Aug. 7 - A jagged day on Wall Street was highlighted by, what else, problems with a mortgage lender. Luminent Mortgage Capital Inc. stock swooned Tuesday as the company announced the suspension of its dividend payments due to increased margin calls.

Reassuring statements by Luminent late in the trading day were no match for the bad aura surrounding the mortgage lender, as the stock closed down nearly 80%.

Also active within the mortgage lending sector was Countrywide Financial Corp., which staged a rally following its announcement that it will take over the mortgage lending operations of HomeBanc Corp.

Calabasas, Calif.-based Countrywide stock (NYSE: CFC) moved up on the news, gaining 60 cents, or 2.24%, to close at $27.35.

With one new merger agreement finalized- a small-cap takeover of HemoSense, Inc. by Inverness Medical Innovations, Inc. - and little in the way of private equity investments coming on the horizon, all eyes were on the equity markets Tuesday.

Stocks started mixed early in the day as investors waited for the Federal Reserve interest rate announcement. As expected, the Fed left rates unchanged at 5.25% while saying that inflation remained the central bank's primary concern. But Fed policy makers did say in their short statement that they were aware of problems in the credit market, although they didn't expect those problems to affect overall economic growth too badly.

In the two hours after the announcement, the Dow Jones Industrial Average moved down about 100 points, then up about 100 points, before settling in at 13,504.30, a gain of 35.52 points, or 0.26%.

The Nasdaq was on a similar roller coaster and finished the day at 2,561.60, a gain of 14.27 points, or 0.56%.

The Fed announcement was not unexpected, and neither was the brief statement on the state of the home lending and credit markets. "I'm not surprised they didn't do anything," one analyst said. "I'm not surprised they didn't do anything about [mortgages].

But the acknowledgment of problems in the sector seemed to allay some investor fears.

Luminent sinks on margin calls

It seems that just about every day brings a new round of bad news from the mortgage or home building sector. And while mortgage lenders continue to announce the tightening of lending procedures, the big mover Tuesday was Luminent Mortgage Capital.

The day started with Luminent stock being battered, dropping as much as 85% of its value, as the company announced that because of increased margin calls the company would suspend its dividend payments.

"Effectively, the secondary market for mortgage loans and mortgage-backed securities has seized up," the company said in a statement. "As a result, Luminent is simultaneously experiencing a significant increase in margin calls on its highest-quality assets and a decrease on the financing advance rates provided by its lenders."

The sell-off wasn't restricted to the company's stock, as convertible senior notes due 2027 issued by the company fell off the charts as trading progressed.

"I think people right now, besides panicking and not wanting to bid for this thing, I think for right now people are trying to figure out whether there's more than a short-term liquidity crunch," one analyst said.

The San Francisco-based mortgage-financing REIT released a statement late in the trading day Tuesday saying that quality, not subprime, mortgages made up the bulk of its portfolio and that it has experienced fewer delinquencies than prime mortgage lenders because of their stringent credit checks.

The stock (NYSE: LUM) didn't improve much after Luminent's announcement, closing down $3.2999, or 75.34%, to finish the day at $1.08.

But analysts and traders said that a general fear of mortgage lenders was clouding judgment on some companies, including Luminent.

"There's no way people can be valuing things correctly," one analyst said.

A trader said that he was confident that Luminent, because of its relatively solid mortgage portfolio, would be able to survive the immediate credit crunch and get more financial backing. Because of that, he said investors looking for a big upside should look closely at Luminent.

"I think they're going to have a grand slam," he said.

Not everyone was convinced, however. Another analyst said he couldn't see how Luminent could break out of its box.

"You'll never get out of them," the analyst said. "Just because it's 20 cents on the dollar doesn't make it a good bet. It's trading like it's already belly up, essentially."

Consolidation in medical diagnostics

There was one merger announced in the health care sector Tuesday. Waltham, Mass.-based Inverness Medical Innovations and HemoSense agreed to an all-stock merger agreement.

Shareholders in San Jose, Calif.-based HemoSense, which produces handheld blood coagulation diagnostic systems, will receive 0.274192 shares of Inverness common stock in the transaction.

The rate represents a 37.5% premium on the average trading prices of both companies over the last five trading days, according to a statement released by Inverness. Inverness stock (Amex: IMA) closed at $46.46 Monday. HemoSense stock (Amex: HEM) closed at $9.27 Monday.

Inverness produces diagnostic equipment to monitor pregnancies. The company says that acquiring HemoSense will allow it to expand the range of medical conditions for which it produces diagnostics.

"With the acquisition of HemoSense, Inverness takes another step in our strategy of providing diagnostic testing to hospitals, physicians' offices, and the home for patient self testing," Inverness chairman and chief executive officer Ron Zwanziger said in the statement. "HemoSense is a particularly good fit with Biosite and QAS, which we have recently acquired.

"As health care moves closer to personal responsibility, Inverness is and will remain at the forefront with the materials and methods that allow individuals to take better control of their health."

The deal is scheduled to close in the fourth quarter of 2007. It is subject to a vote by HemoSense stockholders. According to the press release, HemoSense stockholders representing 33% of outstanding shares have already agreed to support the deal.

Inverness shares slipped 10 cents, or 0.22%, on Tuesday. The stock closed at $46.36. HemoSense stock surged higher on Tuesday, jumping $3.13, or 33.76%. The stock closed at $12.40.

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