Short interest versus borrowing costs

In my experience, the cost to borrow shares is a far more powerful predictor than short interest.  Anybody who looks at short interest instead of the cost of borrow is probably not that savvy.

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CWC merger / John Malone liked LiLaC more than Global

I tried to figure out what the CWC merger structure was about.  You can access my spreadsheet here: https://docs.google.com/spreadsheets/d/1c_31Z-eoxXAPc1TfeOMjgdirZu-nk54DHwGKXSlOao8/edit?usp=sharing

Summary:

• The way the merger is structured is that the Recommended Offer gives you the most value from a merger arbitrage perspective.  However, you will get a very low mix of LiLaC shares.  What Malone is doing here is luring institutional investors into taking a high proportion of Global shares rather than taking (relatively) undervalued LiLaC shares.
• Since the merger details were announced, Liberty Global has fallen by about a fifth.  So you should do your own homework as to the relative valuation between Global and LiLaC.

Wall Street is stupid: BATS IPO edition

In general, stock exchanges have a perverse business model: they sell out their clients (investors) to market makers.  They give special trading advantages to market makers, who then use those advantages to fleece investors.  Now one of these stock exchanges (BATS) wants investors to buy their stock.  I doubt that it is wise to buy stock from people whose business model is built on cheating you.

I’d be interested to see which institutional holders participate in the IPO.  It will be a who’s who list of clueless portfolio managers and those who enjoy the graft that investment banks send their way.  (If investor interest is strong, there may be some Jim Cramer types who immediately flip their IPO shares for an easy profit.  While this practice is not entirely kosher, any portfolio manager who does this is at least trying to make money; I would not classify them in the stupid category.  If these money managers care about their clients, they would flip these IPO shares in client accounts rather than their own personal accounts.)

Ocwen has bad management + CA DBO issues

Ocwen has gotten killed in the past few days, falling from $6.15 to today’s close of $2.27 (-63%).  I actually have no idea why it fell so much.  Things don’t seem as ugly as last year when it had issues with the NY DFS, CA DBO, and was in danger of losing MSRs due to its servicer ratings.

However, while Ocwen may potentially be quite cheap relative to liquidation value, it has not been very well managed lately.

1. The commercial auto lending business is likely a mistake.
2. They have lost their way and are wasting money on dumb things like $25M for strategic advisors.
3. In my opinion, management is trying to hide #2 from investors.  This is why their 10-K has unnecessary re-classifications of expenses.

Save time generating ideas from Activist Shorts

Adam Kommel’s (and Wayne Gerard’s) company, aptly named Activist Shorts, is a research service that keeps tabs on free, publicly-available research put out by short sellers.  Some of this research is the best research available for a particular stock.  Some of these reports expose fraud and act as the catalyst for a stock going to zero.  Examples include Muddy Water’s work on Sino-Forest and Jon Carnes’ work on Fab Universal.  In those situations, I would say that these short sellers’ reports were the most important document that you could have read for that particular company- more important than the annual report.

There are two parts to Activist Shorts

1. The @ActivistShorts Twitter account, which is free.  I highly recommend following it.  I read it regularly to find out about all the latest reports being released.  You can read it for yourself on Twitter and quickly see whether it’s worth a follow.
2. A paid subscription service, which can save time if you spend a lot of time following activist shorts (I kind of don’t).

As commodity prices plunge, miners are stretching their numbers

My July 8 post “Mine economics explained” explains why I think capitalization of stripping expenses is bullshit.  The current trend is for miners to make more aggressive assumptions in that department to boost their earnings.  This is contrary to reality.  Lower commodity prices means that mines will close earlier.  It would make sense to take impairments on previously capitalized expenses.  (Or better yet, accounting rules should be overhauled to reduce accounting shenanigans, investor transparency should be improved, and the accounting burden on public companies should be reduced.  Simpler rules would benefit investors.  The problem is that the system has been co-opted by public companies that want to play games with their accounting and rulemakers who enjoy lucrative consulting gigs helping companies game the complex rules that they created.)

Drug reimbursement shenanigans

In the drug industry, there are different types of abusive practices that occur:

1. Drug companies encouraging off-label use (and/or “recreational” use) of their drugs, potentially harming patients’ health.
2. Drug companies encouraging doctors to increase dosages and drug use, potentially harming patients’ health.
3. Drug companies encouraging waste to increase the volume of drugs sold.
4. Pharmacy benefits managers (PBMs) selling out their clients (payors) in exchange for kickbacks from drug manufacturers.
5. Drug manufacturers using “specialty” pharmacies to bilk payors, tricking the payors into reimbursing expensive drugs that they would otherwise not reimburse.  Unlike traditional pharmacies, captive pharmacies can go the extra mile to obtain (possibly improper) drug reimbursement for the drug manufacturer.

This blog post will look at #4 and #5.