A Chilling Reminder To Take the Madness of Trump (and Trumpism) More Seriously… Plus a Meuller Coda.

Back to the Fed and other matters next week.  I’ve been away from a real keyboard and a bit busy lately.  But had to share this bit.

I’ve been reading a phenomenal (both writing and content) book titled “Defying Hitler.”  Key to its fascination is that it was written in 1939 (unpublished until 2000).  The author goes about dissecting the Hitler phenomena – writing before the full horrors of WW2 and Nazism came to be.  I’m about halfway through it and can’t put it down.  It is brilliantly written – more a memoir than a polemic.  The author is also so poignantly likable and obviously prescient.  I highly recommend it.

He largely ignores Hitler the person to inquire into Hitler as a product of his times.  The question he struggles with is “How did the tides of society and politics and economics conspire to push this manifestly horrible little man into power?”  What phenomena of societal/economic/political conditions enabled Hitler’s rise?  How did reasonable, respectable, establishment Germans (like himself) let something so unreasonable happen?

This quote rang chillingly true for me.  Remind you of anyone?

“Hitler himself, his past, his character, and his speeches were still rather a handicap for the movement that gathered around him. In 1930o, he was still widely regarded as a somewhat embarrassing figure… And then there were the contents of those speeches: the delight in threats and in cruelty, the bloodthirsty execution fantasies. Most of those who began to acclaim Hitler at the Sportpalast* in 1930 would probably have avoided asking him for a light if they had met him in the street. That was the strange thing: their fascination with the boggy, dripping cesspool he represented, repulsiveness taken to extremes. No one would have been surprised if a policeman had taken him by the scruff of the neck in the middle of his first speech and removed him to some place from which he would never have emerged again, and where he doubtless belonged. As nothing of the sort happened and, on the contrary, the man surpassed himself, becoming ever more deranged and monstrous, and also per more notorious, more impossible to ignore, the effect was reversed. It was then that the real mystery of the Hitler phenomenon began to show itself: the strange befuddlement and numbness of his opponents, who could not cope with his behavior and found themselves transfixed by the gaze of the basilisk, unable to see that it was hell personified that challenged them.”

To be clear, I am not equating Trump with the real-world Hitler (see Godwin’s law below).  I AM equating the Trump phenomena with the Hitler phenomena as the books’ author understands it (in 1939, before the full arc of Hitler’s monstrosity played out).  A populist vulgarian whose transgressiveness is key to both his appeal and apparent invulnerability.  Characteristic of an entire parade of horribles today – Boris Johnson?  Viktor Orban?  Le Pen?  Nigel Farage?  Etc…

The chilling part of the book is how the author narrates the inch-by-inch surrender of “reasonable people” to a madman’s unreasonable demands.  “Everyone” comforts themselves that some higher authority – the law, social norms, big business, labor – will somehow rein in or temper the madness.

It rings uncomfortably true with Democrats denial before the election (people won’t actually vote for him, will they?) and Republican’s denial after the election (he’ll surround himself with competent people! sotto voice and we’ll still get that fat tax cut and my team is winning…).

It also echoes with the “well, the country might go to hell but my team will win the next election and that’s what matters” reasoning that seems to be motivating the UK’s conservatives as well as the Senate’s Mitch McConnell.  Everyone bends a little bit – assuming someone else will step in before all is lost.

It hits dead on on the inchoate, hesitant, hypnotized impotence of reasonable people to come to grips with Trump.  that “befuddlement and numbness of his opponents, who could not cope with his behavior and found themselves transfixed by the gaze of the basilisk.

The quote above is a sad coda for Mueller’s non-performance at this week’s congressional hearings.  We had an older, respected, Republican-voting man in the twilight of his career with 7 hours on the national stage.  Put aside what his report said or didn’t say.  Sometimes the facts matter less than the truth.  As a patriot, Meuller should have lied through his teeth in the most colorful, sound-bite friendly language he could muster.  Torching his reputation for careful establishment probity to ring the alarm.  Shaking “reasonable people” out of their torpor in front of that “basilisk stare.”  Sometimes the path of true patriotism lies with shading (or ignoring) the truth…

Anyway.  I’m not despairing yet.  I don’t think Trump is all that dangerous.  Hitler was a madman.  Trump is simply self-serving.  Trump is (thankfully) proving to be a paper tiger in many matters.  But that doesn’t excuse reasonable people from confronting the un-reasoning forces propelling him.  The damage done by overt racism, jingoism, and devil-may-care spending will take a long time to repair.  In many cases, things will simply remain broken.  Especially as regards the USA’s overseas credibility, which matters more to me than maybe it should.

Anyway.  Do read the book.  You’ll better understand the chains that bind today’s reasonable people (which I assume is most readers here) in the face of the unreasonable.   And it is brilliantly written.

A book summary and “Godwin’s law” below.

Godwin’s law (or Godwin’s rule of Hitler analogies)[1][2] is an Internet adage asserting that “As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1”;[2][3] that is, if an online discussion (regardless of topic or scope) goes on long enough, sooner or later someone will compare someone or something to Adolf Hitler or his deeds, the point at which effectively the discussion or thread often ends.

Book summary.

Written in 1939 and unpublished until 2000, Sebastian Haffner’s memoir of the rise of Nazism in Germany offers a unique portrait of the lives of ordinary German citizens between the wars. Covering 1907 to 1933, his eyewitness account provides a portrait of a country in constant flux: from the rise of the First Corps, the right-wing voluntary military force set up in 1918 to suppress Communism and precursor to the Nazi storm troopers, to the Hitler Youth movement; from the apocalyptic year of 1923 when inflation crippled the country to Hitler’s rise to power. This fascinating personal history elucidates how the average German grappled with a rapidly changing society, while chronicling day-to-day changes in attitudes, beliefs, politics, and prejudices.

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The Scariest Chart In The World Part 1

I am re-posting this as the charts didn’t show in the prior version for some reason.  I’ve pasted them in a different format.  Please view the post in your browser if need be.

All that money the Fed has been printing?  It’s not actually circulating.  The faster the Fed prints it, the slower it seems to go.  Money went from flowing like water in the 90’s to maple syrup in the 2000’s to molasses in 2010’s. 

You don’t need to know anything about monetary policy to read the three charts below (same data series starting from 1959, 1987, and 2007 respectively).  Something has clearly down-shifted drastically since the 2007 bust after starting to slide ahead of the 2000 bust.

That something is “monetary velocity.” Best understood by its folk definition – how fast a dollar bill changes hands as it moves around the economy.  Calculated as the quantity of money floating around at a given level of GDP.  A little money moving quickly = high velocity.  A lot of money moving sluggishly = low velocity.

What makes this double scary is the final chart, which is (roughly calculated) monetary velocity for Japan since 1996.   The Japanese have been printing money like mad, but its circulation has just decelerated.

I’m going to pick this up in a subsequent post, but take a look at these charts.  Take a look at the excellent post cited below.  Let it all rattle around for a bit

Velocity 1959 – Present

Velocity 1989-Present

Velocity 2007-Present

Japan chart (roughly calculated myself as GDP divided by M2 Money)

Rough Calculation of Japanese Monetary Velocity 1996 – Present

A more textbook explanation of Monetary Velocity follows (the linked piece is excellent BTW)

Money velocity, as might be suggested, isn’t necessarily how frequently a certain $1 bill exchanges hands in the economy through financial transactions. Hence the concept of money velocity spuriously suggests that its increase comes as a consequence of economic actors’ increased willingness to spend the same amount of money at a faster pace. But that’s not actually what’s taking place. Rather, money velocity is more accurately a measure of the rate of credit formation.

If the product of the money supply, M, and the velocity of money (i.e., credit formation), V, increases – i.e., M*V – this will either increase prices, P (i.e., inflation), increase real output, Q, or both.  The relationship was first expressed by Irving Fisher back in 1911: M*V = P*Q

P increases through an increase in spending. Q increases if the sum of productivity growth and growth in the number of hours worked in an economy increases.

One common criticism of central banks in recent years has been seemingly profligate monetary printing, or the idea that vast expansions of the money supply are inflationary. This is not correct, given that this money needs to be spent before it can influence prices and therefore inflation.

This is, for example, why Japan is expanding its money supply so rapidly. For demographic and other reasons, Japan has been fighting the ogre of deflation for nearly three decades. If the demand for lending remains low and credit isn’t formed in sufficient enough quantities – i.e., a fall in V – then the Bank of Japan has no other option but to keep expanding the money supply, M, in order to keep M*V above its previous mark.

If M*V falls, deflation sets in. This is bad, given some low level of inflation is necessary to incentivize consumption, which is primarily how developed economies grow.

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Why the Fed “Has” to Cut Rates.

The Fed “has” to cut its short-term rate.  Why?  Because their current lending rate seems to create an arbitrage incentive for banks to NOT LEND.  As currently structured, the Fed’s rate policy appears to be an active drag on the economy.

The chart below shows three interest rates.

  1. The Fed’s (now 2.35%) Interest on Excess Reserves rate: “The IOER is the interest rate paid to banks for the deposits they hold with the Federal Reserve above those required by banking regulation.
  2. Market rates on 1 year (1.8%)  and 2 year (2%) Treasuries.

What if someone could borrow at the 1.8% or 2% treasury rate and put that borrowed cash to work earning that IOER 2.35%  rate?  It is only a  0.35% to 0.55% profit, but it is (literally) risk-free.  Someone can do exactly that.  Federally chartered Banks are the only entities that can make deposits at the Fed and earn that IOER.


I have NO IDEA if this is actually happening out there.  But that dynamic may be one reason why market-driven rates went into free-fall shortly after crossing over the Fed’s 2.35% IOER rate (see chart below).  A whole lot of banks exploiting a free money opportunity.  Regardless, the gap leaves the Fed exposed until they cut the IOER (which means a general rate cut).

The problem with the above is twofold.

  • Earning risk-free money at the Fed is a lot less work than the hard work of lending money to living breathing economic actors.  So the bank’s incentive is to sit back and earn deposit money at the Fed, not stimulate the economy.
  • The arbitrage profit gets BETTER as market-driven rates fall.  The selling pressure of a bank selling (imaginary) treasuries into the market would tend to push rates lower.  So the more banks sell to fund the trade, the more they will earn on the trade.  That is the really dangerous dynamic.

A caveat that this is just my thinking.  I may just be howlingly wrong on some important bit of the mechanics.  But the numbers above are real and there is clearly something broken in there.

There are any number of clever ways to sell Treasuries (that you don’t actually own) which effectively puts you on the hook to pay the interest on those Treasuries – 1 year treasuries (promising to pay 2% to the seller) or 2 year treasuries (promising to pay 1.8%).   So you sell $1b fake treasuries to someone promising to pay 1.85% (a 0.05% premium), they turn around and deposit that $1B at the Fed where it earns 2.35%.   It’s only a $500,000 profit on that $1b, but if you add a few more zeros it adds up…

And in answer to the next question – Yes, that is a hidden subsidy to the banks at the expense of the real economy and your average hard-working man on the street.  So happy you asked.

And in answer to your next question.  No, you can’t just go to the Fed and deposit YOUR money at 2.35%.  Because they don’t let little people (or even really big but non-bank-magic-circle people) step up to that deposit window.

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Trump’s Mexico Tariff Gambit May Be Good News.

After my initial dismay at the Mexico tariffs news, a certain optimism began to creep in.  The move is a disaster when seen through the cartoon lens of “Trump is a loose cannon.”   But it shows a way out of the current trade/economic mess if you start from “Trump is a pretty darn good reality TV show director.”  

To sketch this out;

  • Trump is in a bind with the China trade war.   He and the Chinese have no face-saving way to get out of the mess.  In TV terms, the plot-line has hit a dead end.
  • So you introduce a plot twist!  Some way to blast yourself sideways out of a narrative dead alley.  No matter how implausible.  “It was all a dream.  JR/John Snow/whoever really isn’t dead.”  Whatever it takes to shift the narrative.  Distract the audience, but keep them tuning in.  “Trade War with Mexico!!!” fits that bill.
  • Trump can get the “win” with Mexico he can’t get from China.  Some sort of toothless agreement with appropriately deferential noises from the Mexican government (said through gritted teeth with fingers crossed).  Because the US can’t push China around, but we can definitely push Mexico around.  Mexico’s tepid reaction suggests they understand the game and are (necessarily) willing to play along.
  • Conflate and confuse.  A “win” with Mexico is loudly announced around the same time as the less-than-a-win with China.  The halo effect keeps Trump’s faithful “tired of winning so much.
  • By August, Trump has talked tough, done little, and the economy/markets are back to business.

The timing for all this drama also comes into focus through that reality TV lens.  Trump is running the show to get it renewed for another season.   Putting us in act 3 of a four act play.  You build dramatic tension and drama in the 3rd act (keeping viewers engaged).   You use the 4th act to deliver a neat and tidy resolution – just in time for the applause election.

The above might be a little too neat and tidy.  But that is the point of good reality TV.  It is falsely tidy drama, not real “reality.”  By all reports, Trump learned a lot from “The Apprentice.”  That is arguably what got him into the White House.  It is definitely how he is going to try to stay there.


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Damned if We Don’t. A Glimmer of Hope if We Do. Worried The Fed “Don’ts” Instead of “Do’s.”

Lets do what so many self-described free-market thinkers won’t;  believe the market is smarter than a few, very human folks at the Fed.  A now-decisively inverted yield curve is the bond market “telling” the Fed it needs to cut short-term rates.

Cutting rates should re-draw the yield curve by pulling down the left side of the line (short-term rates) and cranking up the right side (long-term rates).  That will be perceived and experienced as a stimulus.  Markets will rip and etc. etc.  If the Fed doesn’t cut rates, we risk a recession.  The market is telling us cutting rates is the right thing to do. 

If the market is right, why is the Fed is shuffling its feet?  Partly because today’s economy seems so strong and unemployment so low (present situation bias).  Partly because it fears future impotence (“impotence” just is not a happy word).  So does the Fed ultimately choose action or inaction?

  • If the Fed acts by inaction.  The yield curve tells us we’ll have a recession sooner versus later.  When it comes, the Fed will fire all the bullets in its policy weapon.  That intervention will likely prove inadequate.
  • If the Fed acts by cutting rates.  This defuses the immediate recession risk.  The economy probably ticks along nicely for a while – tariff threats notwithstanding.  But the Fed unloads most of its policy ammunition.  Leaving the Fed powerless when some future shock tips us into a recession.

Whichever path the Fed takes, we end up (faster or slower) in the same place.  Out of bullets on conventional monetary stimulus.  Wallowing in a downturn or possibly spiraling into a deeper depression.  Unable to deploy the weapon of (meaningfully large) fiscal stimulus; politically hog-tied by 30-40 years of faith-based rejections of “wasteful government spending” in any guise at any cost.

Eventually our politics would change enough to substitute fiscal stimulus for monetary stimulus.   But remember that means turning over the Senate, not just the White House.  Call me in 2024?

There is a a third possible scenario if the Fed cuts rates quickly nowSomething somehow somewhere (gasp) sparks some decent (3%-4%) inflation.  The economy “overheats.”  That is serious-people-Fed-speak for workers regaining bargaining power and clawing wage gains back out of cash flows currently shifted to record-high profit margins.   Debt risks diminish as inflation eats away at now-low-real-rate mortgage and bond obligations.  The strong economy auto-reloads the Fed’s policy weapon as inflation pushes nominal interest rates ( real growth + now-higher inflation) back to more normal 5%-7% levels.  Everyone lives happily ever after.  Even the anti-government spending crowd wins in the same way as anti-vaxxers that manage to avoid the reality of a measles epidemic – they don’t even have to question their own faith-based delusions.

I’m worried the Fed doesn’t cut rates.  Pretending they are smarter than the markets.   Tipping us into a self-inflicted, unnecessary recession.  Why?  Because cutting rates leaves the Fed powerless to intervene in the future.  “Powerless” isn’t a word any institution willingly embraces.  Although “recession” isn’t a great word either – especially if it improves the chances of anti-bank-crusaders Elizabeth Warren or Bernie Sanders in 2020.  It’s a tough choice, but reality is a tough place.

Absent rekindled inflation, we’ve seen this movie before.  In Japan.  It’s a long slow slog without much drama to enliven the misery.  So really, most people haven’t really seen this movie before (myself included).  The Japan story was a depressing financial widow-maker that played out to a shrinking, now-tiny audience.  Most people read the (terrible) reviews and stayed far far away.  I think that is why I’m finding it so hard to find much decent English language insight on Japan’s last 20-30 years.  Even though it might foretell our next 20-30 years.

We’ll know about the Fed’s decision in the next 6 months.

  1. If they don’t cut rates, we have a clear and present danger.
  2. If they do cut rates, we watch (and hope) for inflation, but plan for something far worse.  Maybe a crash course in modern Japanese economic history (ugh).

In this post, I’m going to assume  you’ve read my post linking to the excellent NYTimes article explaining our out-of-whack interest rate environment.   If you haven’t, swing over and give it a skim.  We’ll wait.  Just don’t wander off to that click-bait cat video mid-way through.

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Required Reading. Seriously. Make the Time. Forward It.

Its 2007.  Someone sends you a simple, definitive article on mortgage-backed securities.  You shrug and move on to a cat video.  2 years later, struggling with a financial meltdown, you wish you had taken time to read it.

In that spirit, review the attached piece.  It is the best layperson’s summary I’ve seen for what is currently going on out there with the price of money.  The charts alone are worth it.  Not saying we have a repeat of 2008-2009 ahead, but something is definitely wonky out there.  And we could.

From The New York Times:  The Bond Market Is Trying to Tell Us Something (Worry)

Bond yields, the yield curve, inflation expectations, Fed-rate predictions. The bond market might seem indecipherable but it’s full of important clues about the economy.


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Calix (CALX); A Hobby Farm, But Still 2x or Greater Upside

One last post on Calix and then back to my regular not-so-scheduled programming.  Actually I’ve got a backlog of posts so I’ll try to space them out.  I sent the below out vie e-mail last night, but figured I’d post here too.  Partly to have a “live” copy up for later reference.

I figured I owed an update on Calix after a pretty eventful month. Over the course of May, I’ve written two letters to Calix’s Board and met once with Calix’s Chairman Don Listwin. I also wrote an investment outlook in Seeking Alpha. All are attached at the bottom of this post.

The meeting with Calix’s Chairman was productive, but not constructive. My specific suggestion was that Calix hire an empowered, execution-oriented COO to balance its more visionary CEO. He flatly rejected that idea. Nor did he accept my other concerns.

My “Getting Better or Getting Worse?” conclusion is below, but I would encourage you to read the attached documents. The letters were carefully written to be as constructive as circumstances allowed.

The Seeking Alpha investment write-up was my attempt to answer the Chairman’s repeated question of “If you are so unhappy, why don’t you just sell the stock?” That I would instead try to effect change as a co-owner seemed to perplex him. More worrying, it seemed equally beyond him that Calix’s Board might take action itself. His passivity left me perplexed in turn.

Getting Better or Getting Worse? Getting Better, but Calix Will Always Be a Hobby Farm.

Per my 3Q18 comment, “things are good enough even these yahoos (probably) can’t screw it up.” I was wrong then, but still (I think) directionally correct..

Short Term – Positive Catalyst Ahead

  • Calix remains cheap vs estimates for a reason. No-one has confidence they can execute and actually hit those estimates. The cash situation is now also dangerously tight – the immediate reason I decided to write to the Board.

  • But all that negativity baked into the stock also creates a clear, near-term positive catalyst if they fix recent production problems. Critically, that fix is less a bet on Calix’s (in)competence and mostly a bet on the competence of their outside contract manufacturer. The CM’s are generally competent folks, so this is probably a good bet at the current price.

  • Calix still has great technology with customers that will drive strong revenue growth as 2019 plays out. The second half of 2019 was always going to show solid organic demand.  The 1st/2nd quarter production shortfalls will further boost the second half by adding in catch-up sales on previously unfilled orders. That solves for a strong 2H19 which should put Calix back on the path past $11. Where it was in December before their most recent screw-ups.

  • From there, I’ll re-assess my position. Factoring what I’ve learned about Calix’s long-term execution and governance weaknesses into that decision. See the attached Seeking Alpha article for more details, valuation and price outlook.

Long Term – Calix Will Never Amount to More Than a Hobby Farm (Absent External Activism).

  • If Calix had better management, Calix could be a great company. It doesn’t. It won’t be. Calix’s Board is unlikely to change or shore up current management.

  • In my letters and meeting, I did my best to puncture the bubble of mutually-reinforcing self-regard surrounding the CEO, Chairman, and at least one other Board member. I believe I failed to do so. The emperor still thinks his new clothes are just dandy. His buddies are still reassuring him “everyone” agrees. The parade goes on. I’ve got a more psychologically explanatory analogy rooted in Orson Welles “Citizen Kane,” but it was too much to dive into here.

  • In short, Calix will remain a hobby farm – run primarily for the CEO and insider’s gratification. I did consider that risk 3 years ago. My bet was the CEO would fear the public shame of investor indifference (now verging towards ridicule) more than the private shame of asking for (needed) help. That bet proved wrong.

Depressing, but still a 2x or more return from where it is today. Going from “Awful” to “OK” still makes for a nice gain.  Its too bad going from “OK” to “Good/Great” looks so unlikely. But if Calix’s CEO and Board won’t square up to that, we don’t have to stay along for their ride.

Meeting with Chairman Don Listwin – Productive, But Not Constructive

Productive. I learned a lot.

  • I learned a lot about Calix’s governance. Or lack thereof.

  • I came away more confident with the bet Calix likely recovers from its production woes and posts decent 2H19 numbers. Why?  The Chairman seemed to be almost daring me to sell out at $6.50.

    • From his tone, he was presumably anticipating my future regret after CALX’s price recovered. I read that as confirmation he believed the short-term cash situation is manageable and the contract manufacturer is likely to resolve the production problems. Of course I may have misread him. Also his confidence in Calix could prove misplaced.  It has certainly disappointed before.  Per the attached article, I’m basing my bet on the more solid plank of the contract manufacturer’s competence and incentives. Plus what we already know publicly about customer demand.

But Not Constructive. I concluded Calix is a hobby farm. Per my meeting wrap-up notes.

  • Chairman Don Listwin does not seem particularly interested in constructive engagement with shareholders. He seems to view public markets investors more as renters than as co-owners. He expects shareholder concerns to be dealt with by shareholder exits, not by Board action. He asked me several times “why haven’t you just sold the stock.” I felt like a vexatious tenant being asked by a landlord “if you’re so unhappy, why don’t you just move out?” It was not a conversation between co-owners.

  • He did not see scope for the Board to take action that might realize more value faster for all owners. In general, he had a curiously passive, victim’s view of his and management’s role at Calix.

    • He seemed to view the low share price as reflecting poor judgment by overly short-term investors. The valuation stemmed from the market’s lack of vision, not investor’s lack of confidence in execution based on Calix’s prior track record.

    • What I saw as mis-execution, he saw as Calix management falling victim to unfortunate external circumstances.

    • He did not see room or reason for the Board to take action that might improve or reinforce management and execution.

  • Absent a split within the Board, I concluded further private engagement with Calix’s Board probably wouldn’t be constructive or productive. I remain unclear as to why the activist investor on the Board (Dan Plants of Voce Capital) has had so little impact. Regardless, given the above, internal change is unlikely at Calix given the current Board. Change will come either through further external activism, or not at all.

The Seeking Alpha Article

Don kept pushing me on why I hadn’t sold already. I went away and asked that same question myself.  The article linked to below and attached came out of that exercise.  Setting out the balanced investment case as I saw it. It is worth a review if you own CALX yourself. With particular reference to the section on management and governance.

Why did I publish it? I saw no point in further dialogue-of-the-deaf. So I figured I would make double use of the write-up.  Seeking Alpha is a crowd-sourced research site. I’ve found it a useful resource for under-followed stocks. I figured a write-up there would shine a light into an otherwise ignored corner of the market. Any illumination is better than none, even if it necessarily casts a fairly harsh light.


Calix_ Cheap For A Reason – Calix, Inc. (NYSE_CALX) Seeking Alpha

Letter 1 & 2 Both to Calix Board April May 2019

Calix A Hobby Farm But Still 2x Return Update 26May2019


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Calix (CALX) The Hobby Farm Model isn’t Working for (Non-Executive) Shareholders.

As some of you may know, I have a fairly large investment in a Telecommunications Equipment company by the name of Calix.  I actually have a very modest profit in that investment, but it has been a tough 3 years.  The chart (CALX) looks like an EKG of a heart-attack.  It has felt like that too.

The lived reality of the past three years has been sort’ve the inverse corollary of the Warren Buffet quote.

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”  Warren Buffett

Particularly frustrating is that Calix’s future prospects looked good three years ago and, today, they have never looked better.  Really!  Seriously!  You just have to get over the 25% drop in February followed by the (self-inflicted) 15% drop in March.  Look to the future!  It gets a little old.

I find myself today on a bit of a tightrope.  Fed up and concerned about a series of self-inflicted disasters.  But painfully aware the next 12-18 months “should” finally see Calix realize its potential.  With that oh-so-slippery term “should” being the primary source of my present and past discomfort.

I am but a humble individual.  But I can’t just shrug and not try to do my part, however small, to try and nudge the company onto a more steady path.  To that end….

See link below for a PDF version.  It is a LOT more readable.

Letter to the Calix Board of Directors, 28 April 2019.

As a vote of “No Confidence,” I plan to WITHOLD my shareholder votes for Calix CEO Carl Russo’s nomination to Board. I detail my concerns below. The voting deadline is May 21.

A substantially identical version of this letter was received by Don Listwin, Calix’ Chairman on April 24th, 2019. It is not clear if the that letter was ever forwarded to the full Board as addressed and as requested.

I sent a follow-up to individual Directors on April 28. The text is below. I do know that follow-up was delivered today, April 29th.

Calix’s Earnings Call is Wednesday May 1st. I thought it important to note these concerns before the call. Before the message risks being swamped by the details of and market reaction to Calix’s 1Q19 production problems and 2Q19 guidance.

Steve Kamman , Berkeley, CA

April 28, 2019

Calix’s Board of Directors Individually and Collectively.

c/o Corporate Secretary, Ms. Suzanne Tom


Dear Mr. Christopher Bowick, Ms. Kathy Crusco, Mr. Kevin DeNuccio, Mr. Mike Everett, Mr. Don Listwin, Ms. Kira Makagon, Mr. Michael Matthews, Mr. Kevin Peters, Mr. J. Daniel Plants, Mr. Carl Russo,

I have grave concerns about the current and future direction of Calix. I assume you share many of them. Sometimes it helps to have someone else put those concerns into words. Hence this letter.

Carl needs help. He may be too proud to admit it. But you can help him nonetheless.

In my view, Calix needs a strong, empowered COO to help Carl run operations day-to-day. Someone whose joy is making the trains run on time.

Calix has the potential to do great things. But it needs someone to dig in and do those things. It needs consistent, focused, careful execution that drives steady cash flows. Especially given how far Calix has run down its cash reserves.

Taking that load off Carl serves the best interests of the majority of (non-executive) Calix shareholders. A COO’s salary is less expensive than a cash raise.

Continuing with an un-changed executive structure would amount to repeating the same experiment, but hoping for different results.

Carl Needs Help. He’s Taken Calix as Far as He Can Alone.

Carl has taken Calix to the cusp of great things. He has delivered inspired, visionary innovation. But his execution has taken Calix to the brink of a cash crisis.

  • The trap was loaded by spending $40 million of cash reserves on share buybacks just before losing tens of millions on cash-burning Services contracts – all while operating at a structural loss.

  • Calix now risks springing that trap shut after mis-executing a crash plan to shift production out of China in only 2 quarters.

  • We are one mis-step away from a ruinous cash crunch.

In his prior roles, Carl has done best when paired with strong, operationally-minded executives to handle the day-to-day. Calix shareholders have suffered from the absence of that complementary, counter-balancing skill set.

Calix’ stock is @60% below its $13 IPO price over a period the S&P 500 returned 198%. CALX has generally traded below 1x EV/Sales for 3+ years. The company has burned down cash. It is now navigating its 2nd self-inflicted operational crisis in 2 years. We may risk a cash crisis. All against an improving economic backdrop.

I’ve Owned a Lot For a Long Time. I Know Calix and Carl Well.

I own XXX,000 shares of Calix (some since 2011). That puts me among your top 10-20 shareholders. If you eliminate computer-driven and index funds, I am likely one of your top 10 human shareholders.

I know Telecom Equipment and Calix. I covered both at Fidelity Investments and CIBC/Oppenheimer since 2001. At Fidelity, I bought into Calix’s 2010 IPO at $13. Over 2011-2013, I experienced first-hand a now-familiar pattern of bold promises (taking CALX to $22) and weak follow-through (driving it down to $5).

I also know Carl Russo well. I first met Carl in 2001. I am personally fond of Carl. But I have done my due diligence over those 18 years. Carl is a visionary thinker and a great salesperson. He is less strong in execution.

Over the past year and a half, I have sought to engage with Carl. I have concluded that is no longer, and may never have been, constructive.

Calix’s Recent Track Record Points to Continuing, Structural Weakness in Oversight, Controls, and Operational Execution.

Operational discipline has been a recurring weakness at Calix since the IPO. But I will focus here on patterns over the past two years. In 2017 and now 2019, mistakes were made that lie directly in the remit of a CEO or COO.

  • Supervision, oversight, and remediation of Executive-level errors.

  • Internal communications and chain of command.

  • Investor communications, relationships and reputation.

2017: Unrealistic targets, weak oversight and flawed execution dragged Calix into a self-inflicted crisis that consumed tens of millions of dollars. We can’t quantify revenues lost from un-signed customers worried about viability/valuation. Most investors walked away.

Carl is not responsible for negotiating those money-losing Services contracts. But look past that immediate error. Consider the response that followed.

My concern lies in how long it took 5 to 8 months – to uncover, investigate, and scope those losses. It was a delayed, fumbling reaction that points to deeper structural problems. That failure of supervisory oversight was the CEO’s responsibility.

  • On the May 9, 2017 call, Calix gave guidance for an extremely strong second half rebound. This was based on (false) confidence the Services problem was confined to Windstream. In retrospect, that guidance was clearly fantastical.

  • Evidently, 5+ months in, senior executives still hadn’t understood the breadth and depth of the baked-in contract losses that would drag down the rest of 2017. Calix had already fired the executive responsible. Why hadn’t anyone dug deeper by May 9th? An effective operational manager would have immediately investigated and quantified the risks embedded in all the contracts. Instead, Calix sailed on blindly toward an iceberg dead ahead.

  • A broken internal communications dynamic most likely explains how senior management remained ignorant long enough to deliver that fantastical May 9th guidance. It took 5 to 8 months for executives to understand the damage buried in those contracts. It beggars belief that lower-level staff at Calix didn’t already know more Services contracts were rotten. So why didn’t senior management know until sometime between May 9th and August? Middle and line management clearly chose NOT to pass the bad news up the chain of command. Senior management didn’t dig deep enough to find out. Then it bubbled up in the numbers.

  • Calix didn’t disclose the damage to shareholders until the scheduled August 2017 call. With no pre-announcement, the result was a chaotic “surprise” call that lacked clarity. The stock dropped @40%. The reputational damage was far greater. Analysts have dropped coverage. Meeting schedules are hard to fill. I know first hand than many investors have simply removed CALX from consideration. Calix is generally perceived as a sort of “hobby farm” for Carl.

2019 – Echoes of 2017: Calix is exhibiting a similar pattern of failure in the botched production shift out of China. I do not yet know, before the call, how bad the situation truly is. Even if it isn’t as bad, 2019 bears the same hallmarks of insufficient oversight and poor internal/external communication.

  • Overly aggressive targets set beyond the organisation’s capability to deliver.

  • Weak oversight of day-to-day execution to reach those targets.

  • Delayed recognition and/or disclosure of the problem. Calix held its call on February 5th. Someone at Calix already had to know production was going badly 5 weeks into the quarter with only 7 weeks left to go.

    • If Senior Management didn’t know. Why isn’t bad news making it up the chain? What structural/cultural failings does this point to?

    • If Senior Management did know. Wasn’t it already evident by February that Calix would struggle to make its 1Q19 production goals? Why wasn’t that disclosed? When was the Board told?

    • The February call also saw a -25% stock price drop from a revenue miss Calix’ management did not judge material enough to pre-announce. News that cuts the price -25% would seem “material” by definition. That judgement call further undermined investor confidence in Calix.

To Achieve Carl’s Vision, Calix Needs Someone to Execute On It. A Different Skill Set.

Steady, focused, operational oversight is critical at any company. A repeated pattern of failure in 2017 and 2019 makes clear that is lacking at Calix.

Carl is a visionary thinker and a brilliant salesman. He deserves tremendous credit for bringing Calix to the cusp of great things.

But Carl is (still) operating without the effective, empowered counter-balance he so clearly needs. That balance was key to his prior success.

Mistakes will be made. A COO won’t stop that. A strong COO can minimize shareholder’s losses from those mistakes. Surfacing problems before Calix sails blind into an iceberg. Setting achievable targets with realistic margins for error.

At this point, Calix needs execution more than it needs vision. Especially given the tight cash situation. Hiring a strong COO will cost shareholders less than raising cash on ruinous terms.

An Intervention Serves the Best Interests of Non-Executive Shareholders. The Board Should Help Carl. Even if He Isn’t Asking for Help.

Today, Carl is still alone at the helm. He is too stretched. He has no-one to counterbalance his blind spots. He needs someone.

The situation does not give me a great deal of confidence in Calix’s prospects. Especially over an operationally critical 2 years with so little cash on hand.

I invested in Calix because its valuation did not appear to square with its future prospects. Today, Calix still could be on a path to great things. That much-delayed potential is why I have so far held on to my investment.

  • With Verizon, CityFibre, and others ramping up spending, 2020 Revenues of $500m to $600m and Earnings of $0.50 to $1.00 seem reasonably achievable.

  • With 5G ramping up and broadband becoming a basic utility, revenues and EPS well above that are achievable in 2021 and beyond.

Calix just needs focused, steady, patient execution.

Carl needs help.

Hire someone to help. Get the trains running on time.

Your views may differ, but I am sure you have considered some of this yourselves. My hope is this letter might clarify those thoughts and encourage you to act on them. I look forward to discussing this further.

Sincerely yours,

Steve Kamman

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About That “We’ll Close the Strait of Hormuz” Thing…

Iran renewed its oft-repeated threat to close the Strait of Hormuz  2 days ago.  This in response to the US cranking up sanctions to cut off all Iranian oil exports.  Markets and analysts shrugged.  Iran’s made this threat before and never followed through.  Why would it be different this time?

But the sanctions are different.  The response could be too.

The US is seeking to cut off ALL oil exports by Iran.  Its questionable if that will succeed.  But lets assume it does.

We cut off Iran’s ability to export oil.  Holding the Iranian economy hostage to achieve our (to me unclear) goals

Iran, backed into a corner with nothing to lose, takes the global economy hostage in response.  Iran cuts off the Strait of Hormuz.   “At its narrowest, the strait has a width of 21 nautical miles (39 km).  About 20% of the world’s petroleum (about 35% of the petroleum traded by sea) passes through the strait.

All hell breaks loose.  Oil prices spike.  Gas lines re-appear.  Markets crash.  Plagues of locusts.  Etc…

Or maybe not.  But its worth considering.  Particularly given this administration.  Trump has so far been lucky to avoid an improvisational, not-thinking-through-the-full-consequences, crisis.  This could be where our luck runs out.

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Elizabeth Warren May Win. Even if She Loses.

Watch Elizabeth Warren.  Whether she gets the Democratic nomination or not, she is methodically driving the agenda.  No matter how many votes she pulls, she’s setting up her ideas to win.

Warren is like Sanders in 2016.  Remember that he never expected to get as far as he did.  The real goal was always to shift the terms of debate.  Warren is following that same strategy.  The more specific proposals she puts down, the more she forces others to reply with specifics of their own.  Even if she loses in the primaries, she will have “won” in that longer game.

And if she does win the primaries.  These are some dangerously populist specifics…

  • Democratic presidential candidate Elizabeth Warren has identified something else to finance with her proposed wealth tax: wiping out student debt and tuition at public colleges.
  • She says her proposal would benefit 95% of the 45 million Americans carrying student debt and wipe it out for 75% of them.
  • Warren’s plan would also cut off federal money from for-profit colleges, which she says “enrich themselves while targeting lower-income students, service members and students of color and leaving them saddled with debt.”

The danger of these ideas is their simplicity.  Free money for “me” by taking back from “them.”  Like a certain kind of Republican lies to him/her self that cutting “waste, fraud, and abuse” will somehow pay for tax cuts deficit spending.  Warren’s proposals are equally simplistic, unrealistic, and enabling of the same comfortable self-delusion.  Everyone sort’ve knows its a lie.  But hey – I’ll get my money and the devil take the hindmost.  If 45 million debtors/ votes start thinking that way, its powerful stuff.

It is going to be really really really hard for Trump to combat these sort of ideas without either cranking up the coarse culture war (losing more suburban women voters) or responding with MORE specific “simple” policy proposals of his own.  Trump will probably do both.

Trump tries to avoid policy specifics, but he loves the big promises to “do stuff” about populist pain points like infrastructure, drug prices, health care, education, etc…  Warren is calling that bluff.  Making similar promises with more specifics.

It doesn’t matter if her proposals are also unrealistic.  What matters is the shift to specifics.   They sound actionable.  More than anything Trump has offered (so far).

Trump clearly has no principles.  If has to out-populist Warren, he’ll gladly throw Mitch McConnell and establishment Republicans under the bus.  As a serial thrower-of-people-under-buses, he’d probably enjoy it.

The resulting specifics will anchor the debate in the territory of left-wing populism, no matter who gets elected.

For those who see the world in terms of “Makers vs. Takers,” that would qualify as a nightmare scenario come true.  For “the establishment,” (of whom I am a card carrying member), this creates a pretty awkward choice on who to vote for.   For the Republican-leaning folks in the the establishment, the above solves for a double whammy.

A lot of affluent folks just paid a much higher tax bill last week.  A bitter harvest for loyally voting Team Republican.  If Warren’s strategy succeeds, they may have even more reasons to regret for putting tribal loyalty over self-interest.

Voting against Hillary created a vacuum.  Warren is aiming to fill it with her ideas if not herself.  If her ideas catch fire, it really doesn’t matter how she does herself.


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