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.

Reefing my Sails

The market is now down about 5% since I wrote my Next Leg Down post.

In sailing they say "the first time you think of reducing sail you should," which is what I'm doing in my portfolio today - buying back some of my REG and GGC shorts.

Fascinating Article on Desktop Manufacturing

Fascinating article on desktop manufacturing in this month's Wired.

Treasuries Trade

One of the cheapest things in the market right now is Treasuries volatility. I'm placing straddle orders.

Also - the market's reaction to the FOMC statement (right now - rallying) is totally wrongheaded.

Callon Petroleum Gets the $40 Million Reimbursement from MMS!

Callon Petroleum Company (CPE) today announced it has received $44.7 million from the U.S. Department of the Interior’s Minerals Management Service (MMS) to reimburse the company for the overpayment of royalties at its Medusa Field in the Deepwater Region of the Gulf of Mexico.

This was something we were hoping for when we bought the notes.

Although the notes were already trading close to par, this is nice news. For one thing, it reduces the chance that the value of the bonds gets hit by bad Q4 earnings or a market selloff.

Next Leg Down?

I would say there is a strong chance that we are on the verge of another equities selloff.

First, valuations and bullish sentiment have reached strained 2007 (pre-crash) levels, though economic fundamentals (rail traffic, employment, etc) have not shown commensurate improvement.

Second, the Treasury has gotten itself into a bind with too much short term debt perpetually needing to be rolled over. But they could refinance this easily into long-term Treasuries at attractive rates given another equities crash.

If this happens, gold will do poorly. Institutions such as hedge funds own a lot of gold, and are positioned very bullishly. They are all-in on inflation. They will be forced sellers of gold à la summer 2008, when it fell from almost 1000 to 700.

Grubb & Ellis Company (GBE)

I am looking at Grubb & Ellis Company (GBE) as a possible short.

On November 6, 2009, they sold $90 million of a new issuance of a 12% cumulative participating perpetual convertible preferred stock to various qualified institutional buyers and accredited investors. The proceeds were used to "repay in full its credit facility at the agreed reduced principal amount equal to approximately 65% of the principal amount outstanding [!] under such facility."

Each share of preferred stock is currently convertible into 31.322 shares of the Company’s common stock, meaning that the strike price is $3.19/share, which is about 2x the current level. GBE has 67 million shares outstanding and so the preferreds are potentially convertible into approximately 30 million shares.

My reasoning is that GBE has pretty consistently negative EBITDA, largely because compensation costs are so high that, and now they have added to that $10.8 million dollar burden from preferred stock dividends.

Here's another tidbit: "the Company provides guarantees of loans for properties under management. As of June 30, 2009, there were 148 properties under management with loan guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.7 billion."

To put that in context, the property management segment makes less than $20 million annually. Now, the $3.5 billion is a "non-recourse/carve-out guarantee" which they say "imposes liability on [them] in the event the borrower engages in certain acts prohibited by the loan documents." The recourse guarantees are limited to $40 million.

They have a really complicated balance sheet and mess of subsidiaries which I will have to delve into. Are any readers following this situation? Does anyone know what price the preferred stock is trading at?

Distressed Debt Analysis: Strategies for Speculative Investors

I was just rereading Stephen Moyer's Distressed Debt Analysis: Strategies for Speculative Investors, which is by far the best investing book I have ever read.

I actually got the book for free, but even if I had paid full boat for it, I would be looking at over a 1,000x return by now!

Books are priceless.

Kyle Bass - Surprisingly Good CNBC Interview

Steak n Shake Shareholder Letter

Steak n Shake Shareholder Letter