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Michael Spacey

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  • Santander Consumer USA - The Price Is Right [View article]
    hi JM I have no special insights there. The DOJ subpoena is about securitization of nonprime loans since 2007 but Santander's ABS from that time period never took any losses - so I don’t see where this is coming from.
    Aug 21 10:02 AM | Likes Like |Link to Comment
  • McDonald's: China Supplier Concern Is An Opportunity [View article]
    So anyone who eats fast food or smokes is ignorant or reckless now? How about people who drink alcohol?
    Aug 17 01:46 PM | 2 Likes Like |Link to Comment
  • Not A Fan Of Fannie Mae And Freddie Mac [View article]
    You have to adjust those numbers because recent earnings including the 2Q14 numbers are significantly distorted by reserve releases. After some quick adjustments I got to less than $10bn of net income, meaning they'd have trouble paying preferred dividends even if the sweep gets taken away.

    Here are the adjustments I was looking at: 1) back out "Benefit for credit losses" of $1.6bn, 2) apply a more normalized credit loss (say 15bps of guaranteed book of business), and 3) add back one-offs such as impairment, fair value loss...etc get you to $3.6bn pretax/2.4bn net income --or $9.7bn annualized net income..
    Aug 14 06:17 PM | 2 Likes Like |Link to Comment
  • Mercury General Is 20% Overvalued Relative To Its Peers [View article]
    hi Loophole I just looked at the reserve development table on p5 of 10K. You can also compare this to Progressive's to see the difference.
    Jul 28 08:29 PM | Likes Like |Link to Comment
  • Housing Starts Plunge Due To Horrific Data From The South [View article]
    the non seasonally adjusted data doesnt look as bad
    Jul 17 01:35 PM | Likes Like |Link to Comment
  • Untangling Ocwen's Free Cash Flows [View article]
    Curtwa & swing/miss. In your opinion what is the worst thing about having OCN as a servicer? i.e what would they have to do to change your mind? And what are they NOT doing that other servicers are doing?

    I tried to read through some complaints online, most of them seem to fall in the following buckets:

    1) angry rants that unfortunately fail to articulate anything
    2) modifications promised by a prior servicer not being honored
    3) Unresponsiveness. OCN messed up operationally (forgot to credit a payment for example) and homeowners were not able find that single point of contact. They call some generic 1800 and keep get transferred around

    #3 seem to be a biggest that I can certainly sympathize with. Ideally everyone has a go-to representative (not just when they're delinquent or about to be foreclosed on)...and that persons' cell phone and email is on every bill. However I'm not sure that's the norm in the industry. I have wellsfargo as a servicer and if I have a questions I'd be calling some 1800 number and get transferred around as well.

    I just think it would be more constructive to pinpoint how exactly OCN can improve its customer service. (and I mean going forward, not some past crime like robo-signing. No one can change the past)
    Jun 26 11:00 PM | 1 Like Like |Link to Comment
  • Stonegate Mortgage - A Value Trap With Dubious Adjusted Financials [View article]
    Hi Forensic,

    Thanks for the thoughtful article. The quality of earning is certainly weak, and I think the company would be a borderline investment even without any intention to deceive.

    The debate about MSR valuation is of minor importance here (as your thesis seem to center more around weak earnings). That said, SGM would probably argue that book value across the industry dramatically understate market value. These things usually trade at multiples to servicing fees, and in the 1Q14 call SGM referenced Ocwen's OASIS deal to justify higher marks ..

    " when you look at the market right now for servicing, below servicing, you look at the IO deal that Ocwen just did and your like wow! If we can get a five multiple on a 445 WAC, you know we have 374 WAC in our servicing portfolio, you know what could we monetize that at?

    To be clear, I'm not sure this IO deal would be comparable to an MSR sell b/c the buyer of that IO doesnt have to worry about cost of servicing, but the buyer of an MSR would have to. It'd be an interesting question to raise if you're talking to management.
    Jun 26 10:01 PM | Likes Like |Link to Comment
  • Chicago Bridge & Iron: Acquisition Accounting Shenanigans Dramatically Inflate Profitability - Prescience Point Initiates At Strong Sell [View article]
    Couldnt agree more. Who the authors are, whether they're long or short should be completely irrelevant. Each idea stands on its own merit.
    Jun 24 06:52 PM | Likes Like |Link to Comment
  • Santander Consumer USA - The Price Is Right [View article]
    1) Regarding using SDART as a proxy - loan loss experienced by SC mirrored those of SDARTs. You can see this by adding up net losses in the SDART trust reports, and compare them as a % of balance against losses shown in SC's filings. Yes there maybe some loans worse than SDART but keep in mind SC also retains some prime loans. They can also have some seasoned pools that already passed peak losses. I think the better loans offset the worse ones - in any case losses should still be better than what the accounting provisions would suggest. On a related note, in this analysis I didn’t give credit to unsecured consumer loans (neither as part of the loan growth or the losses), as they are still a small part of overall business.

    2) I have not seen any news that would explain the big drop today. IR hasn't responded either. Someone could have said something at a conference, or maybe negative news is coming and we'll find out soon..Who knows. Information flow is a problem and I can see how people want to sell based on that alone.
    Jun 11 06:16 PM | Likes Like |Link to Comment
  • Mercury General Is 20% Overvalued Relative To Its Peers [View article]
    Nice write up. longer term this doesn't look attractive at all. Auto insurance is very much a commodity product, consumers are shifting toward direct channel, and top players have engaged in advertising wars to grab market share - not sure how MCY can compete here.. Flipping through the 10K, MCY also has a history of under-reserving.
    Jun 6 02:59 PM | 1 Like Like |Link to Comment
  • Untangling Ocwen's Free Cash Flows [View article]
    That’s a fair criticism. Who's to say this thing should be valued at 14x vs 10x? Frankly I didn’t write about it b/c I wasn’t sure. The textbook way is to assign some multiple based on peer comps, growth prospect, return, risk...etc. I've always been skeptical of that approach however. (just like the DCF you can have some false confidence here.). While comps are a good check to make sure you don’t totally get ripped off, ultimately one should buy something based on his/her own required return, and that’s a function of personal objective, timeframe, as well as other available opportunities. .

    So my (still evolving) approach is basically 1) get a rough idea of value 2) to compensate for the risk that I could be wrong, try to pay as little as possible and cut losses when necessary.

    In this case I was working off a normalized/steady state multiple (not a 2014E multiple) . So growth is a minimal factor, and its more a matter of how much return I personally wanted for the risk. So I looked at normalized FCF yield of 6.6% and said, I wanted 8% instead, and that got me to about $40/share. Not much of a science I know. I'd be interested in learning how you looked at it
    May 16 11:07 AM | Likes Like |Link to Comment
  • Value Of GSE Preferreds Under Different Scenarios (Part I) [View instapost]
    thanks, it's a different set of distributions and I think a worse one (at least for risk averse investors). Under this analysis the commons would only be worth something under scenario 1 (everything goes back to pre-crisis mode), and maybe negligible return under scenario 5 (gets diluted by preferreds)

    So you would have ~50% chance of losing -100%, ~20% chance of getting maybe single digit return, and ~30% chance of getting say a 400% return. Obviously the probabilities aren't anywhere precise but it's important to note that this is not a simple binary outcome like some people would suggest (for example "no 3rd amendment = 400% return, 3rd amendment get upheld = -100% return, 50/50 chance so expected value = +300%"). Instead, there's a range of outcomes in the middle that are quite mediocre which makes the overall distribution undesirable
    Mar 31 10:55 PM | Likes Like |Link to Comment
  • Untangling Ocwen's Free Cash Flows [View article]
    Hi scorpion I'm not sure the internal valuation & the cash flow scenarios are comparable as they are likely under different assumptions as to discount rate, prepay/default rate..etc.

    a few things about management's scenario 1 ($7bn of value or about 50/share)
    1) this is not a liquidation. The 5% cash reinvestment is a key input and contributes a significant amount of value. This also essentially values the business as a going concern (albeit without a terminal value). I think 5% is an easy target to beat but you have to make your own judgment.
    2) The stated assumption about no UPB addition is somewhat misleading. I would think redeploying cash includes all options: enter into new businesses, buyback stocks, origination, and of course acquiring MSRs as well as other options. If management deploys cash into the latter two options then that’s implicitly assuming an UPB increase.
    Mar 8 06:46 PM | Likes Like |Link to Comment
  • Untangling Ocwen's Free Cash Flows [View article]
    some thoughts on recent events at the instablog here:
    Feb 16 10:44 PM | Likes Like |Link to Comment
  • Hatteras not a fan of Kain strategy [View news story]
    I think there's some merit to the argument of losing hedging control. There's a lot of decision up to the PM's discretion right? How much duration risk you want to take, which hedging instrument, how much basis risk to take...etc. For example Cain talked about increasing their duration gap this quarter - he would have no control how Hatteras does it
    Feb 13 12:38 AM | Likes Like |Link to Comment