Countrywide Financial ( CFC) CEO Angelo Mozilo may soon have more time to bask in the California sun, especially if Wall Street's speculation is on the mark.

Mozilo failed Tuesday to shoot down a recent media report that he is trying to work a deal with Bank of America ( BAC) about a potential sale of the nation's largest mortgage bank. In a conference call with analysts to discuss the California lender's lackluster fourth-quarter earnings, Mozilo repeatedly offered only a "no comment'' when asked about a possible deal.

Shares of Countrywide skyrocketed on Friday after the Financial Times reported that Countrywide and BofA were discussing a merger. The stock soared to a 52-week high of $45.26 Friday before retreating to close at $42, but the rally isn't over.

Indeed, shares were up another 79 cents, or 1.8%, to $44.17, even though Countrywide's earnings fell short of analysts' expectations and the firm gave a sobering outlook for the rest of this year.

But there are signs that savvy traders on Wall Street believe Mozilo may have something up his sleeve.

Several hedge funds including SAC Capital and HBK Investments recently bought up shares of Countrywide, perhaps in preparation that the mortgage lender will cash in as the sector consolidates and credit quality deteriorates in the home loan market. As of the end of September, SAC Capital owned 204,600 shares of Countrywide, while HBK had 65,200 shares.

Mozilo, who is also Countrywide's chairman, was set to retire at the end of 2006. But in a somewhat surprising move, he announced in October that he would stay on for three more years, despite the fact that the industry will remain challenging over the next year.

While Mozilo declined to comment on any deal speculation involving Countrywide, he did note that deals are taking place all across the mortgage banking business.

"There is a substantial amount of consolidation taking place either though acquisition or just going broke or bankrupt or everything that is happening," Mozilo says. "A lot of it is happening below the radar screen. We believe the shakeout is very positive for us because it has been in the past. And as we come out of the cycle we will have a much cleaner landscape to operate within generally margins improve, productivity improves."

Perhaps Mozilo's last task is to make sure the mortgage lender gets sold at a premium.

"Part of the reason Mozilo stayed on was because 2007 is going to be a difficult year, but with him at the helm it helps shore up investor confidence," says Ed Groshans, an analyst at Fox-Pitt Kelton. "In 2008, the oversupply of houses, the weakness in home price depreciation -- all that stuff will work itself out. With interest rates higher, you need to see the air come out of the home prices before people can afford it, and that's what we're seeing now."

That being said: "This is the kind of company you'd much rather by on the bottom than buy at the peak," Groshans says. "If the pricing comes in around $52 a share, I think a deal gets done."

But Prudential Equity Group analysts Mike Mayo and Matt Park say a deal is unlikely and it's more likely that the two companies will form a joint venture, since BofA "often looks for more product to push via its infrastructure, whereas Countrywide could use additional distribution," they wrote in a recent note.

Countrywide is the largest originator of U.S. residential mortgages, with 15% market share. Bank of America is No. 6, with a market share of about 5%.

Countrywide's fourth-quarter earnings fell short of Wall Street expectations, as the home lender sees another rough year ahead. Profit fell 2.7% to $621.6 million, or $1.01 a share. A year ago, the lender earned $1.03, or $639 million. Revenue fell 6% to $2.76 billion.

Analysts, according to Thomson Financial, were looking for earnings for $1.03 a share on revenue of $2.8 billion.

For the full year the company made $2.67 billion, or $4.30 a share, compared to $2.5 billion, or $4.11 a share, in 2005. Countrywide expects to earn $3.80 to $4.80 a share this year.

SAC Capital declined to comment. HBK did not return a call.

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