Nassim Taleb is Hilarious But I Disagree With Him About Treasuries

From the widely circulated video of The Russia Forum panel last week, Nassim Taleb (@13:20),

"So long as you see the picture of, what's his name, Bernanke, and he still has that job, you gotta run to make sure that you are short" Treasury bonds.

Regular readers will know that I've been bullish on Treasuries and Treasuries volatility. (By the way, for the past several months there has been a Current Trades sidebar on the right side of the blog, which shows us long Ts.) Evidently, I have a friend in UK hedge fund manager Hugh Hendry, who, while chewing gum, made the point to Mark Faber,

"You're bearish on Treasuries, you're bearish on the dollar. My hero is Mr. Consensus."

Indeed! At the end of 2009, every hedge fund manager's letter was declaring an impending Treasuries rout and $2,000 gold. Don't get me wrong - I would not want to be stuck with a Treasury bond until maturity, but sentiment was totally one-sided. Specifically, as Hugh Hendry puts it,

"My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation."

We all know that the U.S. Treasury has gotten itself into a jam with too much of the national debt now financed with short term paper.

This is a problem for two reasons. First, it creates rollover risk. Second, you can't "inflate away" debts of very short tenor, for the simple reason that your creditors will have the opportunity to demand higher coupons at frequent intervals. They see you inflating and you end up digging a deeper hole because you are rolling over debt so often!

So from their (Geithner and Bernanke) perspective, it must seem imperative to lengthen the average maturity of the national debt. But what the consensus doesn't appreciate is how easily this could be accomplished.

An equities crash. Remember when the 30-year Treasury rate hit 2.5%? If we start having a sickening crash again, they can sell as many T bonds as they want.

That's when I'll be selling my Treasuries calls and buying back my equities shorts.

SEC to Force Politician Disclosure Risk

Via Capitalism Betrayed, SEC to Force Politician Disclosure Risk

Would a rule forcing companies to disclose the potential havoc that politicians might wreak make you more or less likely to invest in public companies? Shareholders should take note that Barney Frank hates us and has threatened to step on our air hose. Can you imagine what the trial bar is going to do with this? When did you learn that Nancy Pelosi was targeting your industry and what did you do about it?

Zale (ZLC)

I had been looking at Zale (ZLC) as a possible short. Now in today's WSJ:

Gil Hollander, Zale's chief merchandising officer, late last month wrote to one supplier: "We are looking to trade inventory (mostly diamond fashion), at our full cost, with an agreement to purchase 2x's that amount over the next year," according to a copy of the email reviewed by the Wall Street Journal.

That's basically a really expensive way of borrowing money! Just defers the problem a bit. One point in ZLC's favor was that they have close to a billion dollars worth of inventory - but maybe much of it is junk. Tomorrow I'll take a look at the inventory/sales ratio over time.

To preserve funds, Zale also has canceled much of the advertising it had planned for Valentine's Day as well as Mother's Day, said people close to the company. These are the two biggest jewelry sales holidays after Christmas, which accounts for almost 70% of Zale's profit. The company declined to comment.

Ouch. That's not going to work well.

Bearish Indicators

Mutual funds are heavily invested in the rally - their levels of cash as a percentage of assets are at record lows. Historically this has been a good indicator of a top.

Investment bankers are using derivatives trades to lock in today's prices on their bonuses that were paid in restricted shares.

Federal government receipts are not improving the way you would expect in an economic recovery.

Part of my current thesis is that a selloff in risky assets would benefit the federal government because they could sell more Treasuries and refinance the debt. Treasuries will be easier to sell if other vehicles are less attractive, and behold, money market funds are now able to suspend redemptions.

Positioning: I sold more REG today and bought more TLT calls.

Callon Petroleum Company Completes $100 Million Credit Agreement

Callon Petroleum Company Completes $100 Million Credit Agreement

The Credit Agreement provides an initial borrowing base of $20 million, which will be reviewed and re-determined on a semi-annual basis. There are no borrowings outstanding under the Credit Agreement, which matures on September 25, 2012.

The new Credit Agreement replaces the company’s existing borrowing base facility. Borrowings will be used for capital expenditures and general corporate purposes.

This is more good news for us bondholders.

Review of John Brooks' Once in Golconda: A True Drama of Wall Street 1920-1938

"In April [1930] the Dow Jones industrials touched a point 50 percent above the November low; no one could know that it was a point they would not touch again until 1954."

That's a quote from Once in Golconda: A True Drama of Wall Street 1920-1938; a Roaring 20s through Great Depression tale that is strictly about Wall Street, primarily the New York Stock Exchange (NYSE).

One thing that hasn't changed since the 1930s is desperate, pathetic attempts to prop up an overvalued stock market. Short selling bans are tried in every market crash, always without success.

I actually like the 1930s version better - on Black Thursday, NYSE President Richard Whitney personally walked the floor making above-market bids for 10,000 shares of US Steel and other industrial heavies. Much better than waking up Monday morning to a Federal Reserve intervention with my money.

For all his power and influence, Whitney was a rube and blew millions of dollars throughout his career buying what we today would call penny stocks. The result was that for most of his tenure at the NYSE, Whitney was insolvent and owed large sums including $500,000 to J.P. Morgan - a 90-day unsecured loan that was quietly renewed for years. It's naive of the author, John Brooks, not to observe that this was a bribe.

And for all the talk of what a great financial journalist John Brooks is, it's pretty astonishing that the book doesn't contain a single valuation ratio - not even a P/E - to put the market gyrations in context. Even though Whitney is the central character, and his financial ruin revolves around buying overpriced stocks, there are no specifics!

Review: 2/5

P.S. Since it's under $20, I may pick up a copy of Brooks' The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s.

Series 65 Exam Study Guide

I recently had occasion to take the Series 65 exam and used this Series 65 Exam Study Guide to prep for it. Worked well for me (I crushed the exam) and the publisher has a money back guarantee.