Mr Cooper Group Inc fka COOP

[SamuraiProgrammer]

JWW, I mostly agree with you. You have stimulated some additional thoughts. Thank you for that.

AS ALWAYS - ALL IMO

You said

The acquisition of COOP by RKT will be directly accretive,

I agree wholeheartedly with that. I believe that this is a fundamental factor that will drive growth in the long term. At the same time, we are approaching a peak in the 18 year real estate cycle. See The 18 Year Real Estate Cycle for more details. This is not the article I originally read back in the day, but it is the first one I found this morning relating to real estate. The stock of the merged companies should (excuse the obvious pun) should rocket for a couple of years before the next crisis.

Don't make the mistake of counting from 2008. In the paradigm presented in this article, the cycle begins with recovery.

You said

there is also still a high short-interest of RKT's float

This is true, but I don't believe it will have any material effect on what happens after consummation. Some seem to expect a short squeeze and I don't see that in my crystal ball (LOL). I believe the huge short interest of RKT is the short side of arbitrage trading. When consummation occurs, the long side of the arbitrage (COOP) will cancel the short side (RKT). If the arbitrage trade was laid on correctly (11 short RKT for 1 long COOP), there will be no effect on price for the shorts due to arbitrage. Plus, those who partook in such mystic behavior will be rewarded with $2 for each lot they laid on.

There are likely some shorts in RKT that are not part of an arbitrage play but IMO they are less than 10% of the total short interest.

You said

I think the PPS will see gains directly after the acquisition is consummated

I believe there will be gains after the acquisition but I believe there will be turbulence first.

You said

nobody knows what MMs are going to do

Correct, nobody really knows, but I have a strong opinion.

My background is more from the commodity side than the stock side, but I have seen some strange things happen. Remember that in commodity trading there is always the same number of shorts as longs.

I had the privilege to spend a couple of days with a commodity trader that was estimated to have made between $200M and $400M from scratch. He was an author of several successful books and successfully encouraged the CBOT to add some esoteric contracts. One of the things he taught me comes in two parts.

1) In every transaction, there is a disadvantaged participant.

2) Until you know why both sides took their positions, it is hard to understand who is disadvantaged.

AGAIN, ALL IMO

Thinking in these terms, I believe there are at least 3 motivations that categorize the holders in COOP/RKT.

1) Long term investors

2) Opportunists who are looking to profit from the anomaly of such an important merger in this sector.

3) Market Makers and Day Traders.

Group #1
IMO, At first kneejerk reaction, they will likely hold through the storm of not just chaos of consummation but the coming correction in the real estate market. But they are not stupid (at least not all of them) and this may cause some behavior that will be explained in Group #3.

Group #2
IMO, These are the people who have laid on the arbitrage positions and as they have become informed about the possible power of the consummated company may be looking to establish a permanent position for the long term. However, IMO, as opportunists, they understand how Group #3 is motivated and they are prepared to play along. I say this because if they are not willing to play along, they would have dropped the short leg of the arbitrage and moved themselves to Group #1. I believe scrutiny of the short interest in RKT can be interpreted as evidence of some of this happening.

Group #3
Before I explain my opinion on these folks, let me tell you another thing I learned from my 2-day mentor...

Scared Money NEVER Wins

RKT has moved nicely since the announcement. If my facts are correct, it has about a 58% increase. (13.03 the day before the merger announcement and 21.10 at latest close.) IMO, many of these people have (or should have) stop loss orders to protect their profits. My rough estimation of the placement of these stops is between 19.00 and 20.00.

I expect most everyone in Group #1 COOP holders have made great sums of money and do not want to commit the sin of letting such a winner turn into a loser. The gains have been a phenomenal 210% since the merger announcement (104.49 the day before and 220.35 at last close). If they choose to hold their stock through consummation, will they not also be a little nervous? Will they place stops?

Group #3 (for real this time)

These are the people that smell fear and act quickly. I believe they will first drive the stock down hard on the first open of the consummated company. They will run as many stops as they can driving the price down even further. THEN, they will cover their shorts by buying the shares of the 'scared money'.

The only question is if they will continue to add shares and try to 'eat their own' by catching other MMs & DTs in a short squeeze against shorts initiated that day. How many times can this be repeated as people scramble to make back their losses? If they try to eat their own, this will just be a violent day of price action possible ending near (within 10% or so) the value on the day before. If the people who start running the stops don't try to rinse and repeat, it may take weeks or even months for the new RKT to reacquire the price levels of the last 6 trading days if not the last 6 weeks.

For those who trade on margin, such chaos could prevent them from being able to reinvest. Others may be thankful for their gains and look elsewhere for the next "big" opportunity.



A Cautionary Tale In Two Parts - Both True
I have seen this sort of thing happen before.

Part One - A Personal Tale
Many years ago (before electronic trading), the Corn market had been steadily climbing for months. No excitement. No bouncing up and down.

And then, the day happened...good news came (rain makes grain) and the price started to drop. Know that the commodities markets are 'margined' by default so everyone is a margin trader. The stops started getting hit. I placed a small order to sell at the market to 'catch' the ride down and waited for confirmation as to what price I got in at. And waited. And waited. So much was happening so fast that the traders in the pits Youngsters see this picture were so busy making trades that the information on fills was not getting back to the trade desks in a timely fashion. The price had dropped dramatically and was climbing up from the low of the day. The market had run all the stops on the way down but there were so many that standing buy orders and buy stop orders were picking up the shares instead of the locals (equivalent of MMs). That is when I realized that all hell had broken loose and I had better act again. I placed the same size order to buy at the market not even knowing if my original order had gotten filled. Had I not done that, the losses would have been catastrophic. I lost money, but thank goodness it didn't break me.

Part Two - A Familiar Tale To Some Here
Many here will remember the fateful day that Rosen said there would be nothing for shareholders. The price dropped like the proverbial rock, the stops got run and many people lost a lot of value that day. By the close, the price had dropped 30% but the intraday lows were much worse.

Moral of the Story
Even with electronic trading, none of us are as 'close' to the market as the computer algorithms. Make up your mind where you want to be when the dust settles and Stick With It. If you try to evaluate the situation on the fly, you will likely be punished.

One Last Platitude
A coworker of mine used to say "The Market Has a Paddle Big Enough to Whip ANYONE's Ass"

Batten Down The Hatches, Secure The Valuables, and COVER YOUR ASS - This is going to be a wild ride, IMO.

P.S. If you read this far, thanks for listening to an old man who wants to share his knowledge. GLTA