Got My T-Bill Blow Out

If you remember, many weeks ago I was perturbed by the ability of the treasury market to be so calm in the face of the ongoing discussion in Washington. I wondered out loud, how was it that the yield curve was not displaying the prospect of the U.S. not making a payment?

You can refresh yourself of that conversation here.

But today, vindication; as it appears the market was not immune to adversity. Rather, it was just sitting around with its head up its own ass.

I give you, “T-Bills On The Brink,” by the Wallstreet Journal:

Holders of First Treasurys Due After Aug. 2 Face Uncertainty

When Mark F. Travis bought a handful of Treasury bills back in February, he figured he had just bought the safest, most boring investment on the Street.

Almost six months later, that T-bill is among the most volatile in the stock-picker’s portfolio.

Mr. Travis, president and chief executive of Intrepid Capital Funds, holds $38 million worth of the Treasury bill that matures Aug. 4. It is the first Treasury to mature after the Aug. 2 deadline for Washington to approve an increase to the government debt ceiling. After that time, the Obama administration has said, the government may start defaulting on its debts.

Until a few days ago, that scenario appeared far-fetched, but, as gridlock continued in Washington this week, many in the market have been scrambling to figure out which debt would be most in danger of defaulting. Many looked to the Aug. 4 bill owned by Mr. Travis and others as a top candidate.

“I never thought I’d be interviewed about something as mundane as a short-term Treasury bill,” Mr. Travis says. “It scares me that we’re in this position.”

Risk-averse holders have bailed out of the bill, as well as others maturing in coming weeks, on the off-chance they may not be repaid.

That has taken the Aug. 4 bill on an unexpectedly wild ride. The bill yielded virtually nothing for months, until the debates in Washington heated up. As recently as July 18, the yield was less than 0.01 percentage point. As Aug. 4 approached, nervous investors weren’t willing to pay as much for the bill. Prices fell, which meant the yield jumped. It rose to 0.16 percentage point, and at one point Thursday reached as much as 0.21 percentage point, according to Tradeweb data.

“They don’t want to take the chance that there might be an issue” for that relatively low payoff, said Dan Mulholland, a government bond trader at RBC Capital Markets in New York. “Why wouldn’t you just stay in cash?”

I really insist you read the article, as it shows a picture of the short term maturity bills blowing out; five months of continuous declining yield followed by a massive uptick in July.

I know it may not seem like much, but remember that T-Bills are supposed to be zero risk instruments. Whenever you have a product like that, you have low brain morons using 20-1 leverage trying to pick up the “free” pennies.

Thus, that tiny little blowout could quite literally be costing some dipshit somewhere millions or billions of dollars.

Something to think about…

I’m circling underneath like a hungry shark off Lemming Ledge; my cash is armed and ready to be sunk into whatever might take the plunge.

In opposition to the piss poor reasoning of idiot fund managers, shorting the dollar hear because they think it will take a hit during a default, I am plush with cash simply because it isn’t true.

Let me break down for you the sequence of events that will unfold should the U.S. fail to make good on its debts.

The U.S. will announce the checks are not going out.

Repo markets and similar treasury backed deals will be reassessed. Collateral calls will be made.

Suddenly deprived of cash, people will send to withdrawal from their retirement accounts (what’s left of them).

Fund managers and financiers suddenly overwhelmed by requests for money orders will discover they don’t have enough to make the obligations.

These fund managers will then go to market to liquidate holdings, across the board.

And the U.S. dollar will strengthen significantly as forced liquidations send markets lower.

With their poorly thought out bets and “Fed Positioning” coming back up into their faces, anyone shorting the USD will release like a 5 year old who’s discovered their first jelly fish at the beach.

And that is when I will have my fill.

As expected, CLP posted smashing results this quarter, with FFO beating estimates by a full 10%. The company posted a small loss this quarter, again the same story as AEC; depreciation is artificially bringing results down, these companies are expanding so aggressively, have such improving cash flow, and are being so well positioned, that they will be set to make record profits in the coming years.

Yesterday at the close, CLP locked in a new credit facility, which they borrowed against immediately. That’s after they arranged the option agreement. They are putting cash to work in a big way.

And I must confess; I am intrigued.

I purchased the shares yesterday with the intention of playing the earnings casino, and selling them rather quickly. This was to be a scalp trade, on top of my core, long term position. But, after seeing the performance this quarter, and the recent terms of their right to sell option, I feel I’d rather just hold all the shares in covetous fashion.

This option agreement is the foundation of a big deal. 6% of their assets is no small matter to be putting on the line. Let me lay out a few goals that management might have in any asset swap that might come from this. They could:

1. Purchase younger facilities, cutting down on amortization costs.
2. Purchase in hotspots where they feel rent rates are set to rise most.
3. Purchase into higher occupancy areas.
4. Purchase locations closer to other existing operations, cutting down on maintenance costs by sharing resources and higher leverage negotiations with resource/service vendors.
5. Or, best of all, they could do some combination of all prior ideas.

How much additional revenue could the company free up, on 6% of net assets, if they manage this swap properly? They already managed to have a quarter of higher revenue with lower costs. Imagine if they did it again, but in a bigger way.

And by not selling the assets first, they manage to retain revenue on the prospective sale properties in case no suitable purchases can be found. Worst case, there’s nothing here and they drop $250,000 to break the option while still making money on these properties.

The potential for a big deal here is just too great; the kind of deal that puts a smile on my face and gives me a massive erection, as I skip down the street waving from the sidewalk.

BG also reported 2Q performance today. As usual, they absolutely destroyed estimates and made a bundle of money, resulting in an immediate sell off of shares, which were down 3% last I looked.

Fucking ridiculous…

At least this time I can sort of follow what may have spooked people. In their performance, they state they’re recording 10% tax rates for the remainder of the year, down from more than 20%. Obviously, if that isn’t true, then their performance is going to suffer; maybe this was even a bad quarter.

But really, they started a call an hour ago. You’d think people would be patient enough to wait and find out why exactly management thinks they won’t pay as much in taxes? Especially with the company trading so freaking cheap (not to mention they record their agriculture products at cost, which right now is significantly lower than selling price), it’s not like there’s a huge risk here.

Unless you’re thinking the shares should just be given away for free?

Psssh, market don’t you know that bond prices and stock prices trade inverse to one another…

Teeter totter, teeter totter, titter tatter, teeter totter….

This is regression, people; that’s re-gresh-in. Sure, they may sashay, but in general, yields and the market trade together.

TOGETHER, sether, to-do-together.

They can’t a-nope no way hosay, I say, they can’t both trade down together. No never, not a way.

Nope a dope, a nope-a way, I say no way they can ever trade the same.

It’s like a teeter totter.

CLP is having an issue today, down more than 2% thanks to a press release.

They have entered into an option arrangement to sell a large portion of their properties at some later date. Investors are taking this to signify a bad quarter and liquidity needs.

It doesn’t have to.

In the release, the executives point out that they are keeping in mind the age and condition of their properties, and their desire to hold the most desirable locations. There are plenty of other strategic issues, like keeping your vast network of properties in localized pockets to cut down on maintenance arrangements or management costs, that may be at play here.

Plus, in the release, the company has said it has every intention of rolling over all proceeds into new properties, yet to be selected.

If I were them, I’d use this guarantee to begin the selection process. It’s more ideal than selling first and then trying to roll the funds over. With the option, if they can line up potential purchases, they will know exactly how much money they have to spend. A few right to purchase options, and they can arrange a massive deal with otherwise very illiquid and volatile assets.

I am still convinced the company is doing everything right. I have no reason to suspect anything less than a stellar quarter.

I added to my position conservatively, for $21.11, looking for a large reversal later this week.

Ha! Bet you lot are starting to get sweaty palms now. Never thought it would come down to this, did you? It would be settled long before here, wouldn’t it? They would never willfully go through with it, now would they?

You, sirs and madams, are terrible judges of character.

Yes, take the high probability bet always, even when it yields nothing and brings calamity when it falters. ‘Almost always’ does not mean the same thing as ‘always’, but the way you bunch play it, you’d think the phrases were interchangeable.

Myself, I’m perfectly comfortable here, sipping on tea like a gentleman as ERX and UCO skydive. I’m up about a percent, thus far, as my hedges run and silver rallies.

And now, a quick word to those of you pumping treasuries as a safe haven play:

Don’t think I haven’t taken notice to you. To your arguments; your revolting dedication to catch phrases handed down to you by men you can’t even recall.

Why, you fools, would treasuries rally if the U.S. Government defaults?

BECAUSE THEY’RE A SAFE HAVEN PLAY??

Do you think, maybe, just maybe, a U.S. default would challenge that assumption? Because that’s all that argument is…an assumption.

But the market is so “liquid.”

Let’s try this line of reasoning elsewhere. Imagine it’s 2008 again, and you’re looking at some Lehman Brothers stock.

“Sure,” you say, “it isn’t paying off, and the spot price is in danger of bleeding out.” Whipping your head back, you give off a barking laugh. “But just look at that VOLUME, I mean, with that much stock trading hands, the market is so liquid, it’s obviously a reliable store of value.”

“I bet, even if they announce bankruptcy, the stock will rally because people can count on it to be tradable.”

That, miscreants, is how completely injudicious you sound right now.

You need to get used to challenging these decades old rules of thumb. All of you.

If you cannot, then it is only a matter of time before you face extinction.