The Evening Read

Friday could not have come sooner. Here are some quick reads before the weekend.

• Blockbuster year expected for Buffett's Berkshire - WSJ
• Emerging markets look appetizing...Again - WSJ
• The ham sandwich standard - Economist
• Obama vows Putin faces "costs" if troops intervene in Ukraine - Bloomberg

"Sell a man a fish, he eats for a day. Teach a man to fish, you ruin a wonderful business opportunity."
- Karl Marx

After a strong rally this morning, we saw a dramatic finish to trading - US equity markets swung to an intra-day loss before retaking some of that ground into the close. The S&P closed 5.16 points higher to settle at 1,859.45; the Dow added 49.06 to 16,332; and the Nasdaq actually lost nearly 11 points to finish at 4,308. The day's trading ranges covered nearly the entire week's range - a clearly volatile day.

I would like to spend a quick minute on Ocwen Financial Corp (OCN). Ocwen services and originates mortgage loans - in FY12, $840m of their total revenue ($845m) came from mortgage servicing. Their only profitable business in FY12 was their servicing business, bringing in a cool $274m - lending and "corporate items & other" netted them losses of $260k and $16.6m, respectively.

These mortgage services typically buy MSRs (mortgage servicing rights) from the larger banks in order to service the loans and generate fee income. Servicing entails collecting the payments from borrowers and distributing them among the proper mortgage-backed securities' accounts. In January, New York's top banking regulator put the kibosh on a deal in which OCN was to buy a fairly large amount of MSRs from Wells Fargo. Since, the stock has lost 20 points and looks to be putting in a meaningful bottom.

Not having done a lot of the fundamental legwork as of yet, I cannot put an intrinsic target value on Ocwen; however, the market has taken this stock and beat it senseless. An attractive trade would be to buy ~.80 delta calls 6+ months out (the Jul 32.5s are trading at $7.40 as of this writing) and selling front-month at-the-money calls - basically a synthetic covered call. The idea here being to collect the depreciating time value (theta) of the front-month call and financing your underlying long call until the stock shakes off the bad weather. I have yet to put this trade on, but I am finding myself increasing interested. You would basically be risking $2 (February low of $33.54, vs. today's close of $37.44) to make $8 (or more). Not a bad risk/reward scenario.

I'll be doing some further work on OCN this weekend. Let me know if you would like to see the note.

See you Monday morning. Have a great weekend.