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Volcker - Book Review

Volcker – The Triumph of Persistence, by William L. Silber (2012)

 

 

SUMMARY THOUGHTS 

  1. Published in 2012, this book provides fresh (and timely) historical context on the causal factors affecting the US Dollar
  2. Monetary Policy Style: critical contrast between the McChesney/Volcker Feds and the Burns/Bernanke Feds #study
  3. The book’s mapping of the sequence of political decisions made prior to Gold’s top in 1980 is well done (Chapter 11, New Territory

 

CONTENT HIGHLIGHTS

  1. “Five American Presidents (3 Democrats, 2 Republicans), spanning nearly half a century, have called on Paul A Volcker to serve…” (pg 1)
  2. “Do not suffer your good nature to say yes when you ought to say no” –George Washington quote hanging in his father’s office (pg 15)
  3. “I never got along with the coach” –Volcker on his basketball coach @Princeton (1) #athlete (pg 17)
  4. Morgenstern… left his mark by turning Paul into a professional skeptic” #German born economist, author of Theory of Games (pg 17)
  5. “Martin thought economists’ forecasts rivaled the accuracy of fortune tellers” #WilliamMcChesnyMartin, one of Volcker’s heroes (pg 21)
  6. “Kennedy Pledges He Will Maintain The Value of The Dollar” @NYTimes headline #1960, Gold was $35/oz - #perspective (pg 23)
  7. “Gnomes are imaginary, but speculators are not.” #1960s roots of our friend @DougKass macro machinations? (pg 27)
  8. “All I can remember after that was a word flashing in my brain like a yellow caution sign: Bullshit” #Samuelson #Keynes policies (pg 31)
  9. “Hayek’s words forever linked inflation and deception deep inside my head. And that connection, which undermines trust in government” (pg 33)
  10. “Charles de Gaulle pursued Gold the way Henry VIII did wives.” #1965 context #zeigeist of the times very different than today (pg 42)
  11. “If the US could change the rules in March 1968 and stop selling Gold… it could amend them further” #1968, Martin #StrongDollar (pg 50)
  12. “Failure to maintain those promises undermines trust in America. And trust is everything.” #1969, epic #StrongDollar quote by #JFK (pg 53)
  13. “Preserving the Dollar’s status had been the focus of Volcker’s favorite committee” #1969 Volcker Group, de Gaulle resigned 1969 (pg 60)
  14. “Chairman Martin wants to raise the discount rate.” But #LBJ wanted nothing of it (neither did Nixon) #USD credibility 1969 (pg 69)
  15. “Soon after becoming Fed Chairman in February 1970, Burns began to ease…” sound familiar? #Bernanke, didn’t work either (pg 72)
  16. “We can’t afford to risk a downturn, no matter how much inflation” –Nixon #1970 w/ #Burns Fed, conflicted/compromised (pg 73)
  17. “August 15, 1971… Nixon stunned the world in a televised Sunday night address” #GoldStandard, gone – thanks Nixon (pg 79)
  18. “The Coming Devaluation of the Dollar” @NYTimes May 1971, yep #sad – where it all started #Burns/Bernanke (pg 101)
  19. “If I have to talk to Burns again I’ll do it. Next time I’ll just bring him in” –Nixon, goodbye “independent” #FederalReserve (pg 105)
  20. “I don’t give a shit about the Lira” –Nixon, #1972 Dollar Debauchery (pg 110)
  21. “The difficulty is that no one is ever prepared to move except in a crisis” –Volcker #1973 (Shultz announced a 10% USD devaluation) (pg 117)
  22. “Burns exploited Volcker’s fixation with public service to persuade him to accept the Presidency of the Federal Reserve of NY” #1975 (pg 125)
  23. “The public’s resentment made sense, considering that consumer prices surged by 12% during 1974”, #output of 1971 Policies To Inflate (pg 129)
  24. “Whip Inflation Now” #WIN buttons for Jimmy Carter, elected into office #1976 to do a job he didn’t accomplish; #1970s = Stagflation (pg 133)
  25. “It’s the same old story – lack of confidence in US government policies” –Currency Analyst (in #Frankfurt), sound familiar? (pg 139)
  26. “Volcker participated in the Dollar rescue by requesting an increase from 8.5% to 9.5% in the discount rate” #1978 (pg 140)
  27. “I am not particularly eager to make a major move now or in the fore-seeable future.” –Volcker #1979, so #Gold rallied one last time (pg 156)
  28. “I think there’s a need to come in here as inconspicuously as possible… at diverse hotels” –Volcker #1979, no #Bernanke style #leaks (pg 165)
  29. “The price of Gold hit an all-time high of $850 an ounce on Monday, January 21, 1980” #study history vs causal #Fed factor (pg 182)
  30. “Jimmy Carter ended his honeymoon with Paul Vocker on October 2 , 1980, a month before the presidential election” #compromised (pg 190)
  31. Partisan politics ought not be around the Dollar” –William McChesney Martin #Patriot #1980
  32. “Milton wants to abolish the Fed” –Arthur Burns #1980, the American #zeitgeist was very 2011 @RonPaul #libertarian (pg 194)
  33. “Do we really need the Fed” –Ronald Reagan #1980 message resonated with common sense (pg 195)
  34. “We obviously have a credibility problem – by “we” I mean the United States” –Volcker #1980 in “To Be or Not To Be a Central Banker” (pg 197)
  35. “People have to change their expectations and their behavior… that is always an uncomfortable process” –Volcker #1980 (pg 198)
  36. “I was very pleased to read a prediction that the price of gold will nosedive below $300/oz” –Reagan #1980 #StrongDollar leadership (pg 200)
  37. “None of us really understands what’s going on with all these numbers” –David Stockman (#Reagan’s Budget Director) #classic (pg 209)
  38. “He now refers to you as Paul rather than Chairman Volcker” #Reagan understood #StrongDollar tax cuts #commodities (pg 214)
  39. “I think we’ll re-appoint Paul Volcker for about a year and a half. He doesn’t want a full term” –Reagan #1983 #winning (pg 233)
  40. “Having 2 or 3 $40B institutions in trouble is a horse of a different color” –Volcker in #1984 as #ContinentalIllinois was imploding (pg 243)
  41. “Keynesians such as Samuelson said it was impossible, monetarists such as Friedman said Fed was doing wrong” #1985 Volcker right (pg 247)
  42. “Volcker resigned twice, but only one stuck” post #1985, James #Baker politicized everything all over again #PlazaAccord (pg 252)
  43. “The role you have played has been invaluable” –Margaret Thatcher on #Volcker #1987 (pg 265)
  44. “I may be old but I am persistent” –Volcker #2010, #Volcker Rule
  45. “Foreigners hold Dollars because America has demonstrated fiscal and monetary integrity” #basic, pure #Constitution (pg 298)

 

An easy read that will educate people on how central planning has become so causal to American Purchasing Power (US Dollar) and inflation/growth expectations.

KM

 

Keith R. McCullough

Chief Executive Officer

 

 

 


Q1 Earnings in a Single Chart

Offered with minimal commentary, other than to say that revenues were marginally light of consensus and EPS modestly ahead, on average.  We still don't see material upside to 2013 consensus estimates across consumer staples.

 

Q1 Earnings in a Single Chart - Q1 EPS Summary

 

 


Buyers of Corn, Beware

Takeaway: Hedge fund buyers of corn underestimate the power of modern farming techniques at their own peril.

Accommodating weather last week literally created fertile ground for a record corn planting pace, with a full 43% of the U.S. corn crop getting into the ground over the seven day period from Sunday to Sunday. U.S. farmers are expected to plant 97.3 million acres of corn this year, so 43% of that is an area roughly the size of Wisconsin. That's a lot of corn. Hedge fund buyers of corn underestimate the power of modern farming techniques at their own peril. Yes, we are sticking with our bearish bias on corn.

 

Buyers of Corn, Beware - corn


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Corn - Record Week for Corn Planting

Very accommodating weather through most of last week allowed for a record corn planting pace, with a full 43% of the U.S. corn crop getting into the ground over the seven day period from Sunday to Sunday.  As of a week ago Sunday, only 28% of the crop was in the ground and that number has moved to 71% as of this Sunday (5/19).  This compares favorably with the multi-year average of 79%.

 

Farmers are expected to plant 97.3 million acres of corn this year, so 43% of that is approximately 41.8 million acres or 16.9 million hectares or 169,000 square kilometers or an area the size of the state of Wisconsin (169,639 square kilometers). Hedge fund buyers of corn underestimate the power of modern farming techniques at their own peril.



Further, this past weekend saw heavy rainfall over most of the Western Corn Belt (moving east, slowly) so most of the corn states look to be getting a good soaking.  When we marry the moisture with improving soil temperatures, we see that corn emergence has improved as well with the crop now 19% emerged (versus multi-year average of mid-40%).



We are sticking with our bearish bias on corn and continue to see the corn crop development as constructive for the protein companies and agricultural processors.  The chicken producers (SAFM and TSN) look a little frothy to us in terms of valuation and expectations, so we prefer SFD at this point.  ADM continues to make sense to us.

 

Corn - Record Week for Corn Planting - Crop Progress

 

Corn - Record Week for Corn Planting - Crop Progress 5.17

 

Robert Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



JPM: JAMIE ASIDE, THE STOCK IS REALLY CHEAP

Takeaway: $JPM looks very mispriced at the moment. We think resolution of Dimon's role, CCAR and Brown-Vitter will catalyze upside.

Focused on the Wrong Things 

JPMorgan is getting a lot of airtime, but we think for the wrong reason. While the media is preoccupied with Dimon's fate and the potential implications for the company, we're more interested in the fact that JPMorgan looks extremely compelling on an P/TBV:EVA basis.

 

For those unfamiliar, our approach to determining fair value for the banks looks at the interplay between EVA and price/tangible book value. The first chart below shows the strength of the relationship between these two factors. The R-Squared is 0.90. For reference, the strength of the relationship between P/TBV and Return on Tangible Capital alone is a less meaningful 0.68. In other words, EVA explains 90% of the variability in the price to tangible book value multiple. Our EVA approach looks at the difference between return on tangible capital and cost of capital. For cost of capital we're using CAPM with a 2% risk-free rate, a 9% long-term market return and a beta for JPM of 1.26. 

 

By our calculations, JPMorgan is going to generate a return on tangible of 14.4% over the next twelve months with a cost of capital of 10.8%, resulting in a positive EVA of 3.8%. On our model, y =7.971x + 1.4568, JPMorgan's fair value is 175% of tangible book value [ 1.75 = (7.971 * .038 + 1.4568) * TBV) ], or $67.81. The stock is currently at 135% of tangible book value, or $52.29. As we show in the second chart below, this works out to 30% upside, or the most within the group on a relative basis. 

 

There are a few narratives underpinning the discount.

 

* The first, and most obvious, reason is the carnival-like atmosphere surrounding today's annual shareholder meeting and the outcome of the dual CEO/Chairman role. That concern should be put to rest based on early reports that the shareholder proposal to split the roles has been defeated.

 

* The second reason goes back to CCAR, and the penalty box JPMorgan was put in by the Fed. As a reminder, the Fed didn't object to JPMorgan's plan, but required that they re-submit their plans to address weaknesses in their capital planning process by the end of the third quarter. If the Fed feels the weaknesses have not been sufficiently addressed, it can reject JPMorgan's plan. Recall that the company suggested that the Fed's concerns were qualitative in nature, not quantitative. On this issue, we think expectations are fairly low. It was a surprise when JPM and GS were flagged, but now, with expectations low, the surprise is more likely to be to the positive.

 

* Third, uncertainty around the Brown-Vitter DC dynamic is also unsettling investors. This is an interesting dynamic. As friend of the firm, Peter Atwater, who has held various senior management roles at Banc One and JPMorgan, likes to say, bank regulation is strongly inversely correlated with bank stock prices. We agree. Just look at the last five years. With financial markets hitting new, all-time highs and banks making progress alongside them, we think the probability of Brown-Vitter or something analagous is very low in the current environment. Moreover, there's an element of win/win here. As we see it, breaking up the global banks would ultimately unlock value, but we acknowledge the path from A to B would be unpleasant. 

 

Valuation is never a catalyst, and we're not suggesting this time will be different. However, with the ongoing improvements in the labor, housing and capital markets we think the current discount in JPMorgan reflects overdone concerns around issues that should resolve themselves in the coming 6-12 months. 

 

JPM: JAMIE ASIDE, THE STOCK IS REALLY CHEAP - JPM 1

 

JPM: JAMIE ASIDE, THE STOCK IS REALLY CHEAP - jpm 2

 

JPM: JAMIE ASIDE, THE STOCK IS REALLY CHEAP - banks ytd

 

Joshua Steiner, CFA

 


Interconnected Risk Rising

Client Talking Points

USTs

We witnessed no selloff in long-term Treasuries yesterday when US stocks went red. The rotation here is still very early as one of the most bullish net long positions in all of the CFTC data (futures/options) 3 weeks ago was in the long bond (and short SPY); 1.96% and looking like 2.02% is very easy to achieve if Bernanke acknowledges economic gravity in his testimony tomorrow. (Fed’s Evans just did)

Gold

Public enemy #1 for gold is Bernanke laying off QE5. That is key. Closely behind that is bond yields rising. The “End of the World” trade remains under pressure after an unconvincing 1-day bear market bounce yesterday to lower highs. I have another lower-low of $1339/oz support in play now.

JGBs

We are witnessing some solid follow through in one of the world’s most asymmetric moves off all-time lows (long-term JGB yields); 10yr JGB yield up another full 5bps this morning to 0.89% (+31bps in the last month) after breaking out above my TAIL risk line of 0.81% last week. We’re short.

Asset Allocation

CASH 38% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

“My research  team is crushing it on the long side right now – world class team, on  a run.” @KeithMcCullough

QUOTE OF THE DAY

“The only man who never makes a mistake is the man who never does anything.” – Teddy Roosevelt

STAT OF THE DAY

$253,000,000 – the amount of money 26 year old Tumblr CEO David Karp will receive from Yahoo’s $1.1B acquisition; $278,000,000 – the amount of money this weekend’s lone Powerball winner will walk away with after taxes.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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