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March 2014 portfolio update: Feeling the squeeze…

Unfortunately, I’ve had a bad start in 2014.  My long positions and my short positions are moving against me.  I suppose that this is bound to happen because stocks are never perfectly correlated.  (If they were perfectly correlated then there would be no point in trying to pick stocks or to profit from short selling.)

While I have a large number of short positions (30+), I have managed to find many stocks (mainly Chinese and solar stocks) that have quickly moved against me.

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Ocwen/Altisource update and links

Lately, the share prices of OCN and ASPS have dropped around a third since the beginning of the year.  This is presumably due to the negative press coverage that Ocwen has been receiving due to its regulatory problems.

  1. Ocwen reached a settlement with the Consumer Financial Protection Bureau (CFPB), authorities in 49 states, and the District of Columbia.  Many articles in the media have reported that the settlement amount was $2.125B ($2B in principal reductions to homeowners and $125M in cash).  This is misleading.  Ocwen likely would have provided at least $2B in principal reductions anyways without the settlement.  As for the cash settlement, Ocwen only pays part of it.
  2. Wells Fargo’s sale of MSRs to Ocwen has been blocked by the New York State’s Department of Financial Services (DFS).  (The DFS was not party to the settlement mentioned above.)
  3. The press has reported speculation that MBS investors might sue Ocwen.  I believe that this is misleading because such lawsuits would be silly.  While the contracts that structure securitizations have problems, Ocwen has not breached their contractual obligations.  As a servicer, Ocwen is allowed to modify mortgages and to reduce the principal on mortgages.  When it comes to principal reductions, Ocwen’s incentives are aligned with investors.

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(Altisource/Ocwen) Mortgage servicing rights overview

Lately, Ocwen has been receiving a lot of bad press due to its problems with regulators.  Both Ocwen and Altisource have seen their share prices tank.  I think that the selloffs are overdone.  If anything Ocwen should have sold off worse than Altisource.

Here’s my take on the situation.

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Magnum Hunter (MHR) short thesis

In the independent oil and gas space, I will happily bet against the high-cost operators.  I would argue that Magnum Hunter overpays insiders, wastes money on corporate aircraft, and has excessive G&A as a percentage of revenue.  This has contributed to Magnum Hunter’s track record of GAAP losses since current management took over in May 2009.

Market cap: $1.42B
% of float short: 18.2%
Cost of borrow: ~0.6%
The put options are somewhat liquid.

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Veris Gold: The end is near…

Yukon Gold is an illiquid $58M market cap gold miner with an expensive borrow (over 10%).  I’ve mentioned Yukon-Nevada Gold / Veris Gold 3 times in the past.  The most relevant post explains why it is a value trap.

On Jan 29, 2014 it issued a press release saying that it defaulted on its gold loan with Deutsche Bank (press release).  The company blames it on a fire that happened on Dec. 19, 2013.  This fire was reported in the Dec 30, 2013 press release entitled “Veris Gold Corp. Reports on Production and Toll Milling for November“.  Apparently the company did not think that the fire was important enough to report right away.  It’s not like defaulting on your debt is a big deal right?

In any case, fire or no fire, I think that Veris Gold would have defaulted anyways.  The mine should never have been restarted and has continually lost money since.

*Disclosure:  I am short common shares of Veris Gold.  In hindsight I should have shorted this earlier (e.g. a year and a half ago).

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Avid update

Today Avid dropped around 29% on basically no news.  It issued a press release saying that Avid shares would be delisted, which they had already said would happen.

At a market cap of 192M, I think that Avid’s valuation is reasonable.  While management is poor and the company hasn’t made GAAP profits in years, the assets are valuable.  Avid’s video editing systems and Pro Tools are leaders in their field; Avid itself has strong turnaround potential.  There is the possibility of a takeover as an Avid and Autodesk combination would make a lot of sense.  Avid’s customers would certainly welcome such a merger/takeover.

*Disclosure:  No position.  I covered earlier today and missed most of the drop in price.

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Access Midstream Partners: Are their distributions sustainable?

I think that ACMP’s cash flows will decline due to:

  1. Less gas being carried on their gathering pipelines.  Throughput will decline as shale gas wells naturally decline.  Throughput on ACMP’s existing assets cannot grow unless more shale gas wells are drilled.
  2. Cash flows from minimum volume commitments ending.

*Disclosure: I am short ACMP common.  This is not one of my better short ideas and I may cover this position in the future.

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