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Have We Got a Long Way to Run?

It is ten minutes after one in the afternoon on Sunday. I am at the store. Last week was an exciting one in the markets, with many S&P cos reporting earnings including all of the tech giants. Readers may recall I had a small speculative bet on silver, with option expirations on the 17th, which I wrote about here: http://rwhadvisoryllc.com/animal-spirits-or-spirit-animal/

Sadly, my calls expired just as the trade was coming into the money, but I did get shares put to me as the price crossed $19 and have enjoyed the gains on the way up. I maintain my long position in silver and continue to accumulate physical at the store. I don’t really have a price target at which I will sell. I view this, like gold and #bitcoin, as an easy trade for the foreseeable future and will probably only sell for reasons of necessity. If we see $48, I will probably take some profits and reallocate. Recall that I took only a very small position.

I should also follow up on this note I posted in between blog entries: http://rwhadvisoryllc.com/note-to-self-when-to-sell-dollars/ . Since then, the dollar has, in fact, dropped below 94.5. In fact, is reached about 92.64 before turning around to end the week at 93.46. I have dutifully reviewed my dollar long position and left it in place. I have not previously disclosed or discussed my dollar long position, so let me start with that.

I am fundamentally in the camp which says the dollar is going to go up, and will become very strong, i.e. the deflationary camp. I have found strong thinking on both sides of the inflation/deflation debate, and I squirm a little knowing how smart some of the people are saying that the dollar is crashing, but when I weigh these arguments on my own scales I have assayed that the dollar will experience a very strong rise before any final capitulation, should final capitulation occur. Also for the record, I think final capitulation will occur, just not now and not next. For insights into one of the strongest influencers on my long dollar thinking follow @jeffsnider_aip on Twitter and watch his Eurodollar university series on youtube: https://youtu.be/P0q7W9Hqk0M

But that isn’t the only reason I went long USD. I am thinking of it as a little bit of a paired trade with a bullish spread on CVX. I think we will be seeing some real volatility in oil over the next 12 to 36 months, ultimately with much higher overall prices. CVX, which was hammered after a negative earnings report last week, is a business I am familiar with and have traded or owned in the past. I expect the volatility in the dollar to show its reflection, both positively and negatively, in the overall stock performance of CVX. In the longer term I am expecting to shed my dollar long, and in the meanwhile look for gains and losses to partially off-set between these two trades. I don’t expect it to be a very direct kind of hedge. Just a little bit of a paired trade. I will be looking for USD to reach at least 104 before I think about selling.

Here are the details on my CVX spread:

I was able to spend some quality time with the earnings release by NRZ this week, but since I have already carried on quite a bit, I will post my thoughts separately. PennyMac will release earnings this coming week, currently scheduled for August 6th and I am looking forward to hearing what they have to say. Broadly, for this group of companies, my themes are:

  1. Transferring the bag, i.e. – shifting shares to public float, insider selling, loading up on debt, special bonuses and payouts to executives, etc.,
  2. The attendant pumping behaviors that go with (1), above, especially an emphasis on the current and next quarterly outcomes, which will all be very strong, a reluctance to recognize known or knowable costs and impairments in the current period and an unwillingness to acknowledge the potential severity of our current economic situation,
  3. The lack of self-awareness, avoidance or denial of the fact that huge profits are currently being privatized at the cost of taxpayers due to government manipulation of the markets and nationalization of mortgage banking risk, while privatizing profits, and
  4. The structural weakness and obsolescence of residential loan servicing and correspondent lending as activities at all.

I will look forward to digging in deeper on those themes this week. Meanwhile, stay informed with these two fantastic podcasts from this past week (I am not compensated in any way for posting these links):

Pomp Podcast #351: Roger Ver on Personal Freedom and the Early Days of Bitcoin

https://www.youtube.com/watch?v=P9oC_goIX8I&feature=youtu.be

Danielle DiMartino Booth with Jeffery Gundlach

https://www.youtube.com/watch?v=WQQA74TtWao

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https://lolli.com/ref/G3qkhczpGf

Final thought, and it is a difficult one: as of August 1 we had about 155,000 covid-19 related deaths in the United States. This has played out almost exactly as I had guessed when I wrote this: http://rwhadvisoryllc.com/another-blog-post-about-covid-19/ . Now we can see with hindsight that it has coalesced in the public consciousness only very slowly, and in the face of unimaginable denial. And arguably, sadly, this amount of death has not yet been sufficient to fully bring about that coalescence, as politicians, press, and common people all battle over every aspect of the disease and our response, leaving us without a uniform plan. Have we got a long way to run? Yes.

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Request for Clarification on How to Get Sprayed With the Money Hose

It is about ten minutes after three in the afternoon on Sunday, and I am at the store. Sunday is a day I dedicate to study and learning, and today I have been smarting up on the CARES Act, CA AB 2501, and incidentally reading the MBA letter issued to the Chairman of the Federal Reserve on May 28, 2020 titled “Request for Clarifying Guidance on Independent Mortgage Banks Eligibility Under the Main Street Loan Program”. Let’s take this last one first, since it is the one that finally halted me.

The purpose of the letter is to ask the Fed to clarify restrictions and limitation on participating in the Main Street Lending Program (MSLP) to ensure Independent Mortgage Banks (IMB’s) can participate and get loans to fund their operations. The MSLP is among the many actions taken by congress, the Fed and Treasury to provide liquidity to small businesses. Here is my recap of the letter:

  • IMBs need access to operating funds, even though they have large credit facilities for the purpose of financing their mortgage loan purchases. Since these giant facilities can’t be used for operating purposes, generally, the IMBs want access to loans which can be,
  • The giant warehouse credit facilities are already lent at multiples much higher than the maximum multiple allowed under the MSLP. The letter seeks to exclude these giant credit facilities so that their remaining leverage ratio will allow them to qualify for more debt,
  • The giant credit facilities already encumber all of the company’s assets, and it is warranted that no new lien will hold the same or higher level of security interest. The MSLP requirement of seniority or pari passu renders IMBs ineligible. They would like the government to accept a lower priority so that the IMBs can access the funds,
  • Banks and finance companies whose stock and trade is money, and who engage in finance activities, are expressly excluded, except for i.) those that engage primarily in loan servicing and ii.) those that “originate to sell” and sell their loans within 14 days of origination. The letter hopes to eliminate the 14 day requirement, since some loans may take longer than 14 days to sell.

That isn’t exactly how letter-writer Pete Mills put it though. Here is the link to the letter:

https://www.mba.org/advocacy-and-policy/all-letters-and-testimony

I have a few beefs here. The main one though, amid what is otherwise a weak plea for a spray with the Fed’s money hose, is that this exact cohort of businesses are currently experiencing some of the most gob-smacking margins any of them have ever witnessed, and the industry is so far over its capacity with quick, easy-money refinances due to the low, Fed-induced rates their main problem is stuffing their pockets as fast as they can while these dislocations prevail. It is gross.

Independent banks that “originate to sell” in particular should not need the benefits of additional operating capital during these times. They are drowning in a sea of money and asking for a money float. Servicers face a different set of challenges, and I will write more about them here shortly, but they, too are not in a position of financial difficulty at this time, and are in fact enjoying out sized gains and opportunities. Recall that I wrote about the first quarter earnings calls for some of these same businesses a short time ago, here:

Oil Wasn’t the Only Asset That Went to Zero in March

I will re-post the quote from CEO of Ocwen (OCN) Glen Massina:

“In terms of the profitability of new servicing, look, margins in the origination environment we’re in today are at levels few of us have seen in our lifetime. It’s a very robust originations market, both from a volume and a margin perspective. In our portfolio retention channel, the economics are such that fundamentally, MSRs — the cash cost of the MSR is zero. So we are — that MSR has come back — coming back to us without necessarily a cash investment. And margins and correspondent lending, again, are as wide as — and our flow channel’s wide as we’ve seen them in quite a long time. So the cash cost, so to speak, of MSR creation is well below the fair value. There’s a number of dislocations in the market, as you might be able to suspect, that’s kind of driving that. But the returns on MSRs today are some of the best we’ve seen.” [emphasis mine]

To translate, he is saying that this industry is currently feasting, and that the market dislocations are a big part of it. Massina repeatedly made the case during the earnings call that the only constraint on (Ocwen’s) growth would be its access to capital to invest. They don’t need this money to continue as a going concern, they want it to further leverage profits.

I get the MBA is in the business of advocating for the advantage of their constituents. I get that everyone who is in business is trying to leave no advantage on the table when it comes to profit, or survival. It is still gross. Maybe if you are an IMB and finding yourself in financial difficulty right now, you should call rwhadvisory LLC and ask for help instead of asking the taxpayer for another bailout. I will accept either equity in your company, or #bitcoin as payment.

Anyway, I set out today to address this CA AB 2501 matter and got side-tracked. I have used my entire time-block to scree on this other letter. Here is the short version of my AB 2501 thoughts:

  • Predictably, I am unsympathetic to the servicers
  • I find the May 17, 2020 MBA letter to the California assembly to be more weak tea
  • I think this bill seems like too much right now, but will turn out to be almost about right as we continue through the pandemic, and I bet multiple, successive actions at the federal level will eventually catch up with what is being proposed in AB 2501
  • Whether the bill is good or bad, this bill is reason #47 for why residential mortgage loan servicing is not an asset

I will be back very soon to expound a little more.

Final thought, and it goes pretty good with the mood of my post, check out the latest by @peterMcCormack on his Defiance TV pod:

https://www.defiance.news/podcast/robbing-hood-the-steve-mnuchin-story-part-1-friends-with-benefits

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Residential Mortgage Loan Servicing Deep Thoughts #2

If homeowners could choose to service their loan for themselves for free, or pay the .25% servicing fee to have one of our big bank or non-bank servicers do it for them, how many would still pay the fee? How about once the homeowners learn that servicing their own loan requires no extra work from them?