The Five Dumbest Things on Wall Street This Week

Apple bruised; Countrywide's risks; Yackety Yahoo!; Mattel mess; NovaStar falling.
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1. iPhone Bubble Bursts

The iPhone isn't aging well.

Apple

(AAPL) - Get Report

surprised Wall Street Wednesday by

slashing 33% off the price on the heavily hyped phone. The cut comes barely two months after the iPhone went on sale, to

great expectations.

"Today Apple is going to reinvent the phone," CEO Steve Jobs thundered back on Jan. 9, according to an engadget.com transcript of his MacWorld keynote speech. "Every once in a while a revolutionary product comes along that changes everything."

Well, maybe not everything. Even as consumers lined up this summer to buy their fashionable iPhones, some observers were wondering about sticker shock.

Skeptics suggested the iPhone's price tag -- initially topping out at $599, with a two-year cellphone service contract -- would scare some gadget lovers away. The chatter got louder after Apple and retail partner

AT&T

(T) - Get Report

reported weaker-than-expected iPhone activations.

At first, Apple responded by saying the iPhone was off to a great start. The company added this week that "iPhone customer satisfaction scores are higher than we've ever seen for any Apple product."

But in the same breath, Apple cut the iPhone's price to $399. Jobs said the move would make iPhones "affordable for even more customers."

Of course, it also means the people who rushed to AT&T stores at the end of June to get the revolutionary device overpaid by $200.

Bet those iPhone customers are feeling less satisfied now.

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Dumb-o-Meter score: 93. The company said Thursday it will give existing iPhone customers $100 in store credit to smooth over ruffled feathers. "We want to do the right thing for our valued iPhone customers," Jobs explained.

Updated from 5:25 a.m.

2. Countrywide's Perfect Storm

Countrywide

(CFC)

is playing catch-up.

On Tuesday, the Calabasas, Calif., lender named a new chief risk officer. The company tapped Jess Lederman, previously its managing director of products and pricing, for the newly created job.

"Jess is an extraordinarily talented and seasoned professional who brings tremendous knowledge of risk management to his new role," said operating chief David Sambol. "Countrywide is fortunate to have someone of Jess's caliber and experience to help us navigate the current mortgage environment."

Countrywide can certainly use the help. Its shares have lost nearly 40% of their value since late July, when the company

slashed its 2007 earnings guidance. The company cited a spike in defaults and delinquencies on recent-vintage loans. It seems Countrywide and other lenders badly misjudged the risk of handing huge sums to borrowers with poor credit histories.

One particular blemish is the so-called piggyback loan. In some cases, Countrywide gave borrowers two loans: one for the full value of a house, and a home equity loan for spending money. When house prices stopped appreciating, these borrowers started defaulting at a rapid clip.

While the practice seems manifestly unsound now, Countrywide chief Angelo Mozilo insisted on a July conference call that the mortgage industry's near collapse came out of the blue.

"Nobody saw this coming," he claimed.

That's the risk of having your eyes closed, Angelo.

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Dumb-o-Meter score: 90. Or maybe Mozilo was busy counting his stock option winnings.

3. Yackety Yahoo!

Bear Stearns can't stop yapping about

Yahoo!

(YHOO)

.

The New York investment bank ignited a 5% surge in Yahoo!'s beaten-down shares Tuesday by making Yahoo! its top stock pick. A research note pointed to the company's progress under new CEO Jerry Yang and to its strategic value.

"We believe that Yahoo! remains an attractive acquisition candidate for eithertraditional media companies seeking to deepen their exposure to the Internet or from technology companies like

Microsoft

(MSFT) - Get Report

," the firm wrote. "Indeed, we believe that Microsoft continues to evaluate Yahoo! as a target."

Rumors of a Microsoft-Yahoo! deal are nothing new, though they aren't widely considered credible. As

TheStreet.com's

Marek Fuchs

noted this week, reports that talks were under way have been around since May -- but they haven't been confirmed.

Bear Stearns doesn't just believe a deal could happen, though. It believes Microsoft would be willing to pay double Yahoo!'s recent trading price of around $24 a share. This despite the fact that the Redmond, Wash., software giant has never done a deal even approaching the $67 billion or so a Yahoo! acquisition would cost.

A buy of Yahoo! at recent industry multiples "would value that stock at nearly $40 per share," Bear Stearns wrote. But it quickly added that "we believe that the company could command multiples in the mid-20s, which would value the shares at closer to $50."

This is all starting to sound far-fetched, but Bear Stearns won't leave it there. Despite the meltdown of the credit markets that has stopped the leveraged buyout business in its tracks, the firm claims that Yahoo! has one more advantage: "Its inexpensive relative valuation and clean balance sheet is prime for private equity players, who could take a longer-term view than most investors, in our view."

In this case, Bear Stearns' view is just batty.

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Dumb-o-Meter score: 88. Yahoo! and private equity? Please.

4. Wheels Off at Mattel

Mattel

(MAT) - Get Report

is on a roll.

The El Segundo, Calif., toymaker issued its third recall notice in a month on Tuesday. Mattel said it is withdrawing some 844,000 Barbie accessories, Fisher Price drums and Geotrax trains because they contain toxic lead paint.

Hardly a week goes by anymore without Mattel recalling more of its products. In August alone, Mattel recalled 1.5 million Sesame Street and Nickelodeon figures, along with 436,000 "Sarge" die-cast toy cars, for lead paint contamination. It has withdrawn some 18 million Polly Pocket playsets for magnet problems.

Mattel has been pilloried in the press for the defective goods, which mostly were made in China. The company's convenient take on the recalls has been that they show that its quality control efforts are unmatched in the toy industry.

"The voluntary recall results from Mattel's thorough investigation of vendor-sourced toys," it said Tuesday. "Mattel has also globally implemented a strengthened, three-point check system to test toys throughout the manufacturing process."

Mattel's claims have started to ring hollow, though. On Tuesday, just before the latest recall was announced,

The Wall Street Journal

reported that Mattel has been taking its time in reporting product-defect claims to the Consumer Product Safety Commission, which is charged with protecting the public from consumer-goods injuries. Agency guidelines say possible defects should be reported within 24 hours, but Mattel has in some instances waited months, the

Journal

reported.

Mattel CEO Bob Eckert bristles in an interview with the

Journal

that the defect-reporting law is too broad.

"It's very easy," he tells the paper, "for anyone to apply the word 'could' backward."

You could easily say these guys are running out of excuses.

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Dumb-o-Meter score: 85. Are any Mattel toys not being recalled?

5. NovaStar: Going, Going, Gone

The outlook is dim at

NovaStar

(NFI)

.

The Kansas City, Mo., mortgage lender scrapped plans to raise $101 million in an offering of preferred stock. NovaStar investors MassMutual and Jefferies had agreed to backstop the offering, but NovaStar yanked the deal after the funds declined to waive some conditions on timing.

"As a result and given market conditions and the current market price of NovaStar's common stock," the company said, "NovaStar decided it was in the best interests of shareholders not to spend the resources to pursue the offering."

That's one way of putting it. Another way is to note that auditor Deloitte & Touche told NovaStar it couldn't go ahead with the preferred stock offering without reissuing 2006 financial statements.

Deloitte also told NovaStar that any reissued statements would include a "going concern" clause -- language that tells investors a company may not be able to stay in business without raising new money.

The company's stock has lost 93% of its value over the last year, but CEO Scott Hartman hasn't forgotten about shareholders.

"Suspending wholesale lending and shrinking the retail operation are painful decisions," said Hartman, "but we believe it is best, at this point, to concentrate on serving our current customers and managing our portfolio for the benefit of NovaStar shareholders."

Everyone might benefit if Hartman would just concentrate on finding a new job.

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Dumb-o-Meter score: 78. "With today's actions, we are pulling back to focus on NovaStar's core strengths and preserve liquidity," Hartman said.

As originally published, this story contained an error. Please see

Corrections and Clarifications.

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