Company Notes Digest 4.1.16

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This Week’s Post: God Awful Election

Janet Yellen gave an emphatic speech this week that advocated slower increases in interest rates. Despite the fact that asset prices have recovered, according to Yellen risks remain elevated from where they were in December.

It’s clear at this point that the Fed’s “data dependence” is primarily focused on asset prices. However, higher asset prices really only benefit a small segment of the population. Dollar General made a compelling presentation that its consumers never really exited the recession, and in fact things got worse. Inflation is outpacing wage growth for these low income earners.

While the Fed doesn’t see inflation, these are the forces that are leading to an angry electorate and what Lennar’s CEO called a “God Awful” election season. No doubt that 3 of the top 4 candidates are awful for capital, but their populist messages resonate with labor. If you’re betting on the Fed keeping asset prices high, beware that the Fed may be independent, but the President is still the most powerful person in government and even has the power to force changes at the FRB.

The Macro Outlook:

Coincident economic commentary is relatively positive

Lennar doesn’t see the telltale signs of recession

“We do not see the telltale signs of recession…we saw good sequential improvements throughout the quarter, December being the lightest and clearly February being the strongest month, pretty much spread across every operating territory that we’ve got” —Lennar CEO Stuart Miller (Homebuilder)

3M’s markets are less negative than initially forecast

“in January…we stated that we are expecting first quarter organic growth to be…down slightly. And as the quarter is progressing, we are seeing four of our five businesses tracking either at or above what we were expecting at that time.” —3M CFO Nick Gangestad (Conglomerate)

But the Fed isn’t raising rates any time soon

“the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years…Reflecting global economic and financial developments since December…the pace of rate increases is now expected to be somewhat slower.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen is concerned that longer term inflation expectations are falling

“Since [the 90s], measures of longer-run inflation expectations…have been remarkably stable…Lately, however, there have been signs that inflation expectations may have drifted down…It is still my judgment that inflation expectations are well anchored, but as I will shortly discuss, continued low readings for some indicators of expected inflation do concern me.” —Federal Reserve Chair Janet Yellen (Central Bank)

And it’s easier to raise rates if they need to than to lower them

“caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.” —Federal Reserve Chair Janet Yellen (Central Bank)

They’re not out of ammo if they need it though. They’ll use the same policies that have worked in the past.

“Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that…we used effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.” —Federal Reserve Chair Janet Yellen (Central Bank)

Have the policies really worked though? Not for low income consumers

“our core customer continues to live in a recessionary environment…our customers face much stronger headwinds in this economy than tailwinds.” —Dollar General CFO Jim Thorpe (Retail)

60% of Americans have less than $1000 saved. These individuals have not received a direct benefit from rising capital markets

“This has resulted in the majority of Americans living on the bubble of economic uncertainty. 60% of Americans don’t have a savings safety net of $1000 and 20% don’t have a savings account at all. So as you will see, our customers simply haven’t received the benefit of the economic recovery. Households earning less than $52,000 have experienced negative wage growth…only households in the top fifth quintile have seen any real income growth since the recession and most of that’s being driven by the top 5% of earners. So you can see that our core customers who were financially strapped before the recession are even worse off today.” —Dollar General CFO Jim Thorpe (Retail)

In fact, Fed policies have arguably stoked inflation in key areas that disproportionately impact low wage earners

“inflation is simply outpacing total wages…There were no cost of living increases this year and that particularly hurts our SNAP and Social Security recipients especially hard. And healthcare costs and rents continue to rise which also impacts our customers more than higher income households.” —Dollar General CFO Jim Thorpe (Retail)

Yellen’s attention appears to be elsewhere

“core PCE inflation…was up…somewhat more than my expectation in December. But it is too early to tell if this recent faster pace will prove durable” —Federal Reserve Chair Janet Yellen (Central Bank)

But these are the forces that are causing an election that’s “God-awful” (for capital)

“There have been some questions raised…about the implications of a God-awful election season in the United States… Well, they say that America always gets to the right answer right after we’ve tried all the wrong ones, we’ll see.” —Lennar CEO Stuart Miller (Homebuilder)

And the Fed chair effectively serves at the pleasure of the President. Others have been removed before.

“Q: Mr President, what prompted you to replace Mr. Eccles with this Philadelphia Republican?
The President: That is my prerogative. I decided to make the change without anybody’s request or influence…The President has a right to do that if he wants to do that.”

Harry Truman January 1948 (after removing Marriner Eccles as Chair of the FRB for raising interest rates)

There are signs that the pendulum may already be starting to swing away from capital in favor of labor

Restoration Hardware sees a softening at the higher end

“I think that we still feel that there’s a general softening at the higher end of the market.” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

Labor markets are tight in homebuilding

“Land and labor shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand…we’re not really seeing a recovery on the labor picture” —Lennar President Rick Beckwitt (Homebuilder)

Wage inflation should be 3-4% at restaurants thanks to minimum wage laws

“We experienced wage inflation of approximately 3% during the fourth quarter, primarily due to the higher minimum wage rates in both California and New York. As we look ahead we are projecting wage inflation of approximately 3% to 4% in 2016 which is higher than the 2.5% experienced in 2015.” —Dave and Busters CFO Brian Jenkins (Restaurant)

International:

There’s a belief that economies follow a pre-set path of development

“as you know, in all economies, you have the evolution of infrastructure coming first, followed by manufacturing, after that, safety coming in place, then you have retail and then finally healthcare is the evolution of all economies and it’s true for all economies around the world. This is the way it goes.” —3M CEO Inge Thulin (Conglomerate)

Urbanization continues to be assumed to be a demographic megatrend

“Every day 180,000 people move to urban areas. By 2050 cities will be home to 2.5 billion more people than today, generating a need for more apartment buildings, airports and mass-transit systems” —United Technologies CEO Greg Hayes (Conglomerate)

Governmental change has been a positive for economic sentiment in India

“As I had mentioned last year, the decisive mandate in the general elections was a very positive development for the economy. The immediate impact was felt in the form of a strong improvement in sentiment…Over the last year, the Government has taken a number of important steps. There has been a focus on improving governance; enhancing the ease of doing business; creating a conducive environment for investment by both international and domestic participants; and adopting a stable and prudent fiscal policy. At the same time, the Government has sought to bring about the engagement of more and more people in the economic mainstream. While the impact of these measures will be seen over the medium term, the steps taken are clearly in the right direction.” —ICICI Bank CEO Chanda Kochhar (Indian Bank)

Financials:

The Fed is pleased with the way that markets are reacting to data

“Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important “automatic stabilizer” for the economy.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen acknowledged that real interest rates are already negative

“the evidence on balance indicates that the economy’s “neutral” real rate–that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential–is likely now close to zero. However, the current real federal funds rate is even lower, at roughly minus 1-1/4 percentage point” —Federal Reserve Chair Janet Yellen (Central Bank)

Americans are increasingly choosing to rent rather than buy homes

“relative to the empty nesters rethinking their living conditions, there has been some movement in the direction of rental versus homeownership there as well. So we’ve seen that the rental option, the reduction in homeownership rate is something that is broader than just affordability, it reflects also appetites and desires that have evolved since the recession. And we think that some of those trends will continue.” —Lennar CEO Stuart Miller (Homebuilder)

Insurance companies are prime beneficiaries of advancements in big data

“The tools and techniques of big data continue to increase in affordability and utility. Simply put, information is king. Every transaction and data point continues to become more robust and informative about what the ultimate risk and outcome will be. Technology and digitization change the tools used in the task, not the task itself.” —Markel CEO Tom Gaynor (Insurance)

Torchmark has repurchased 78% of its outstanding shares over the last 30 years

“We have been conducting our share repurchase program for thirty years now. During that time…we have spent $6.5 billion to repurchase 78% of the outstanding shares of the Company.” —Torchmark CEO Gary Coleman (Insurance)

Consumer:

Malls are shifting emphasis from shopping to entertainment

“malls are not dead. Actually our mall stores are performing well…I think that mall developers are pivoting towards a bit more entertainment as they are going after trying to replace these folks” —Dave and Buster’s CEO Steve King (Restaurants)

“When you combine quality grocers and off-price retailers with many of our service oriented tenant businesses including medical services, restaurants, fitness centers and other e-commerce resistant uses, you have a winning formula” —Kimco Chairman Milton Cooper (REIT)

Grocery and off-price concepts drive traffic to malls

“the grocer has by definition an advantage over a traditional retailer of discretionary items…a quality grocer will generate consistent traffic in any economic cycle. Similarly off-price retailers with their constantly changing merchandise and appeal to treasure hunting consumers, dominate the retail landscape today and drive traffic to our centers.” —Kimco Chairman Milton Cooper (REIT)

There is a lot of real estate available for big box concepts

“There is a lot of sites available right now especially for our size…there are things like kind of sears coming online and saying they are going dispose a 100 stores…some Macy’s have come online, sports authority declared bankruptcy, so there is a lot of real estate coming online in our size.” —Dave and Buster’s CEO Steve King (Restaurants)

Campbell Soup intends to spend 40% of its media budget on digital this year

“In fiscal 2016, we plan to spend nearly 40 percent of our overall media budget on digital media. We also remain focused on growing our e-commerce capabilities, as this is becoming increasingly important to our consumers and our customers.” —Campbell CEO Denise Morrison (Packaged Food)

Technology:

Micron said that PC markets should continue to be weak but others are stronger

“Relative to PCs, yes, it continues to be weak. We think maybe down mid single-digits for the year…But once you get outside of PCs…and mobile growing maybe right around the market supply for DRAM. You got all these other segments that we think will out strip supply growth servers, automotive, etcetera, etcetera.” —Micron CEO Mark Durcan (Semiconductors)

Alexander Graham Bell invented wireless telephony in 1880

“Bell once said his “greatest invention” was the photophone, patented in December 1880. Six months earlier, he had used this device to transmit a voice message between 2 buildings…wirelessly!” —BCE Annual Report (Canadian Telecom)

Materials, Energy:

The Texas economy hasn’t exactly improved

“Yes. Just on the Texas question…our fourth quarter we were positive. It was not 6% positive, it trailed the overall change but it was still…I would not say that trend has improved.” —Dave and Busters CFO Brian Jenkins (Restaurants)

Renewable power generation is pushing utilities to transform electric grids

“There is a shift towards renewables, which is accelerating despite the low oil price…In power generation, renewables are transforming the energy mix…and dramatically increasing grid complexity. The future grid will be far more complex with multiple feed-in points from traditional power plants to large-scale renewables on the supply side, and a coexistence of traditional demand patterns and microgrids and nanogrids on the demand side. Managing this complexity will require intelligently automated, digital power grids that can anticipate demand and supply patterns, while routing and transporting power to the ever-increasing number of consumption points of electricity.” —ABB CEO Ulrich Speishoffer (Electrical Equipment)

Miscellaneous Nuggets of Wisdom:

Strong companies are often built during downturns

“I believe that strong companies are often built during downturns and our approach is to view this difficult period as an opportunity and a challenge.” —Suncor CEO Steve Williams (Integrated Oil)

There’s value in simplicity

“Simplification has made us more transparent and easier to value. First off, we have fewer properties overall. These properties are higher quality, are located in major US metro markets and are managed by Kimco. Moreover, by reducing both the number of joint ventures and assets under JV control, we have unlocked considerable value in properties that some analysts and investors viewed as “encumbered” and ascribed discounts to their value.” —Kimco Chairman Milton Cooper (REIT)

Don’t repeat the errors of the past

“It is often said that those who ignore the errors of the past are doomed to repeat them. As the economy shows signs of decelerating, our strong balance sheet will be the foundation upon which Kimco can act on opportunities rather than sit idly by.” —Kimco Chairman Milton Cooper (REIT)

Expect for your plans to be wrong

“by the way, any plan in my entire career I’ve ever been associated with or developed is some degree of wrong. So we expect to be some degree of wrong and that’s why we have a lot of what if scenarios and kind of backup plans in place.” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

Full transcripts can be found at www.seekingalpha.com

Krisiloff Miscellaneous Notes 3.31.16

Kirby Corporation 2015 Shareholder Letter
Joseph Pyne Chairman and David Grzebinski CEO

Additional pipeline capacity led to overcapacity in oil barges

“When crude oil began to be transported by water, Kirby believed that much of this capacity would ultimately be serviced by pipelines, but until pipelines were built marine transportation was a viable option. Unfortunately starting in late 2014 additional pipeline capacity began to come on line at the same time that crude oil prices collapsed. Much of the industry wide tank barge capacity built for crude oil service was returned from crude oil service during 2015, creating some industry overcapacity and affecting tank barge utilization and rates.”

The exuberance our industry had is disappointing but not fatal

“Although the exuberance our industry had for crude oil volumes is disappointing, it is by no means fatal. Some crude oil will continue to be moved by water where there is not enough volume to build a pipeline or where shippers want the flexibility that barging provides with respect to volumes moved and distribution.”


BCE Inc 2015 Shareholder Letter

BCE is Canada’s leading telecom, which traces its roots back to Alexander Graham Bell

“135 years after our company’s founding, Bell is a highly successful competitor in a dynamic Canadian communications marketplace, ranked in 2015 as the leading brand in our sector and one of the most valuable in Canada…As Bell was in 1880 we are today: the key builder of the nation’s next generation communications infrastructure and a technology pacesetter standing alongside the world’s best.”

Alexander Graham Bell was Canadian

“Inspired by his mother, who experienced hearing loss and the work of his father, a pioneering elocutionist, Bell worked in Boston teaching deaf children and adults while pondering ways to improve our ability to communicate across distances. But he spent his summers at the Bell family home in Brantford, Ontario, now a National Historic Site supported by Bell Canada. There Bell conceived the principle of the telephone. He received one of the most valuable patents ever granted on March 7, 1876, and made the first telephone call on March 10 in Boston.”

Bell invented wireless telephony in 1880

“Bell once said his “greatest invention” was the photophone, patented in December 1880. Six months earlier, he ahd used this device to transmit a voice message between 2 buildings…wirelessly!”


Aqua America 2015 Shareholder Letter
Christopher Franklin CEO Nicholas DeBenedictis Chairman

130 year old water utility

“It is in this strong position that we entered 2016, a year that marks the company’s 130th anniversary, a milestone reached by very few American companies.”

Water utilities serve a unique product

“Although our mission is simple, it is an extremely important one. After all, we are the only utility whose product is ingested by humans”


Kimco Realty Shareholder Letter 2015
Milton Cooper Executive Chairman

Must withstand economic change

“History teaches us that in the retail real estate space a critical component of success is the ability to withstand economic change and downturns.”

Grocers and off-price retailers have inherent advantages

As a basic necessity, the grocer has by definition an advantage over a traditional retailer of discretionary items. This advantage translates into drawing power for the center and a quality grocer will generate consistent traffic in any economic cycle. Similarly off-price retailers with their constantly changing merchandise and appeal to treasure hunting consumers, dominate the retail landscape today and drive traffic to our centers. Traffic drives sales for other tenants in the center, particularly the small shops, which in turn allows us to demand higher rents. ANd when it comes to generating traffic, off-price retailers and grocers often have higher per square foot sales than department stores.”

Service oriented tenant businesses are also key

“When you combine quality grocers and offprice retailers with many of our service oriented tenant businesses including medical services, restaurants, fitness centers and other e-commerce resistant uses, you have a winning formula”

Simplicity creates its own value

“Simplification was at the core of our back to basics strategy. Simplification has made us more transparent and easier to value. First off, we have fewer properties overall. These properties are higher quality, are located in major US metro markets and are managed by Kimco. Moreover, by reducing both the number of joint ventures and assets under JV control, we have unlocked considerable value in properties that some analysts and investors viewed as “encumbered” and ascribed discounts to their value.”

Don’t ignore the errors of the past

“It is often said that those who ignore the errors of the past are doomed to repeat them. As the economy shows signs of decelerating, our strong balance sheet will be the foundation upon which Kimco can act on opportunities rather than sit idly by.”


Winpak 2015 Shareholder Letter
BJ Berry CEO

Consumer trends are leading to demand for specialty packaging

“Winpak’s future growth is hinged in part by consumer demand for more convenience type food products and packages…Consumer pressure for quick to prepare food, such as hot beverages and ready to serve meals has leant itself to high barrier materials of the type manufactured at Winnpak. Shelf stable food items similar to thos utilized by the military and astronauts are becoming more appealing for everyday consumers.”

Saltzberg Miscellaneous Notes 3.31.2016

Source: United Technologies 2015 Annual Report

United Technologies (UTX) CEO Greg Hayes said the company benefits from the global trend of urbanization towards the cities

“We are well-positioned to benefit from three megatrends that are shaping the world— urbanization, an expanding middle class and extraordinary growth in commercial aviation. Every day 180,000 people move to urban areas. By 2050 cities will be home to 2.5 billion more people than today, generating a need for more apartment buildings, airports and mass-transit systems —all of which will be equipped with elevators and escalators, climate systems, and fire and security systems.”


Source: Aflac 2015 Annual Report

Aflac (AFL) CEO Dan Amos explains the power of the company’s brand

“Maintaining our powerful and respected brand is essential because it represents who we are – the spirit of our people in Japan and the United States who represent the face of our products and who build trust with businesses, policyholders, consumers, our field force and brokers. We’re pleased that the Aflac brand is also both well known and well respected. Having a trusted and compassionate brand has opened many doors for Aflac. Our brand represents who we are as a company and reflects how our constituents see us, so we’re very protective of maintaining our reputation.”


Source: ABB 2015 Annual Report

Swedish Industrical congolmerate ABB CEO Ulrich Speishoffer highlighted several trends in renewable energy affecting his industry

“There is a shift towards renewables, which is accelerating despite the low oil price – 2015 was a strong year for investment in renewables, with 121 gigawatts of capacity added. This results in unprecedented demands to manage the complexity of the “digital grid” of the future. In power generation, renewables are transforming the energy mix, putting pressure on traditional producers to rethink their business models while lessening environmental impact and dramatically increasing grid complexity. The future grid will be far more complex with multiple feed-in points from traditional power plants to large-scale renewables on the supply side, and a coexistence of traditional demand patterns and microgrids and nanogrids on the demand side. Managing this complexity will require intelligently automated, digital power grids that can anticipate demand and supply patterns, while routing and transporting power to the ever-increasing number of consumption points of electricity.”

Geographically, he expects India to be a driver of growth

“Our markets remain challenging, with slower growth in China and steady conditions in Europe and the United States. We expect India to invest in power infrastructure and industrial development, but see continuing weakness in other emerging markets.”


Source: Markel 2015 Annual Report

Markel (MKL) Co-CEO Tom Gaynor explains the company’s flexible culture and ability to adapt to the operating environment

“We are encouraged to look for a better way to do things…to challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity and flexibility. This requires a respect for authority but a disdain of bureaucracy.”

Big data and analytics continue to be an area of increased emphasis to drive improved decision making in their insurance operations

“The tools and techniques of big data continue to increase in affordability and utility. Simply put, information is king. Every transaction and data point continues to become more robust and informative about what the ultimate risk and outcome will be. Technology and digitization change the tools used in the task, not the task itself.”


Source: Accenture 2015 Annual Report

Accenture (ACN) CEO Pierre Nanterme said they have long term relationships with their top clients so they focus on making the business relationship mutually beneficial

“We serve more than 80 percent of the Fortune Global 500 and 94 of the top 100. We also continue to build strong and enduring client relationships. All of our top 100 clients have been clients for at least five years, and 97 have been clients for at least 10 years. Quite simply, our client relationships are second to none, and our continued success underscores our ability to address our clients’ most complex and strategic issues.”


Source: Suncor 2015 Annual Report

Suncor (SU) CEO Steve Williams said 2915 will be the year that energy companies focused on reducing their costs in order to be able to survive the downturn in the oil sector

“Without question, 2015 was one of the most dramatic years in recent memory. It was a year of managing challenges and capturing opportunities. We were well positioned to take immediate action as oil prices fell to their lowest levels in over a decade. We responded swiftly to reduce capital and operating costs. We looked for efficiencies in every corner of our organization.”

Suncor (SU) CEO Steve Williams said the best companies are often strengthened through downturns in the industry

“The market downturn may continue to present opportunities – ones that we’re able to take advantage of because of the strong foundation we’ve built in recent years. Seeking these types of opportunities are strategic and another way we’re building shareholder value for the long term. In fact, I believe that strong companies are often built during downturns and our approach is to view this difficult period as an opportunity and a challenge.”


Source: Campbell 2015 Annual Report

Campbell (CPB) CEO Denise Morrison wants consumers to know exactly what goes into all of their products

“Our purpose has created the conditions for Campbell to become increasingly open about our food with the goal of setting the standard for transparency in the food industry. In fiscal 2015, we initiated an important project to increase consumer trust by providing greater access to information about our products, especially in our core U.S. soups, sauces and beverages.”

Intend to grow their online presence meaningfully

“Over the past several years, we have built stronger digital, social and mobile capabilities and have steadily increased our digital budget. In fiscal 2016, we plan to spend nearly 40 percent of our overall media budget on digital media. We also remain focused on growing our e-commerce capabilities, as this is becoming increasingly important to our consumers and our customers.”


Source: Torchmark 2015 Annual Report

Torchmark (TMK) CEO Gary Coleman said they have been repurchasing their own shares for nearly 30 consecutive years now

“We have been conducting our share repurchase program for thirty years now. During that time, the only year we didn’t repurchase stock was in 1995 due to the acquisition of American Income. Since 1986 we have spent $6.5 billion to repurchase 78% of the outstanding shares of the Company.”

Torchmark (TMK) CEO Gary Coleman said that as a result of “industry experts,” they expect oil to rebound to $45 per barrel

“Based on a consensus of industry expert views, we believe oil is more likely to increase to over $45 a barrel during the next 12 to 24 months than remain at the $30 a barrel level we saw in 2015. We believe the companies in our portfolio can continue to operate for a very long time with oil prices at $45 to $50 a barrel. However, even if oil was around $30 a barrel for the next 12 to 24 months, we wouldn’t expect to have significant defaults during that period.”


Source: ICICI Bank Annual Report

ICICI Bank(IBN) CEO Chanda Kochhar reiterated India’s strong demographics and strengthening growth trajectory

“As I had mentioned last year, the decisive mandate in the general elections was a very positive development for the economy. The immediate impact was felt in the form of a strong improvement in sentiment. India’s inherent strengths are well-known – the demographic dividend and the vast potential for investment. It is these strengths that propelled us on a high growth path for several years.”

The Indian government is fostering a more pro-investment environment

“Over the last year, the Government has taken a number of important steps. There has been a focus on improving governance; enhancing the ease of doing business; creating a conducive environment for investment by both international and domestic participants; and adopting a stable and prudent fiscal policy. At the same time, the Government has sought to bring about the engagement of more and more people in the economic mainstream. While the impact of these measures will be seen over the medium term, the steps taken are clearly in the right direction.”

ICICI Bank(IBN) CEO Chanda Kochhar said effectively utilizing technology allows them to reduce their cost of serving customers

“ICICI Bank has been at the forefront in leveraging technology including the current and emerging transformational trends of mobility, digitisation and rapid growth of social media, to bring value to our customers. We have leveraged our technology capabilities to facilitate faster and convenient processes, create best-in-class technology platforms and reduce transaction costs. Over 50% of all banking transactions are now done over mobile phone or on the internet.”

Dollar General Investor Day Notes

Todd Vasos

We check prices every two weeks

“we check prices every two weeks in our top 250 and we check prices across our entire 10,000 SKU portfolio about once a quarter against again all the disciplines you see here of mass grocery and drug. So we know every two weeks exactly where we stand on retail prices on the shelf.”

Being out of stock is about the worst thing you can do to a customer

“we check prices every two weeks in our top 250 and we check prices across our entire 10,000 SKU portfolio about once a quarter against again all the disciplines you see here of mass grocery and drug. So we know every two weeks exactly where we stand on retail prices on the shelf.”

Opening 1000 stores in 2017 with an 18-20% return on investment

“Number two is capturing those growth opportunities. With 13,000 opportunities out there, we opened up 730 stores last year, we’re opening up 900 this year and I’m sure many of you saw we announced yesterday we’re going to open up 1000 stores in 2017. That’s aggressive growth but it’s growth that we can manage and when you look at the returns, I don’t know about you, but I would give my personal investment money to anyone that tells me and show me that I can get an 18% to a 20% return on my money and that’s exactly what this new store profile does for us”

Jim Thorpe

Our core customers continue to live in a recessionary environment

“our core customer continues to live in a recessionary environment and understanding the challenges of our customers and what they face and how it influences their shopping behaviors and attitudes allows Dollar General to serve them better than anyone else. ”

Our customers have some tailwinds, but the headwinds outweigh the tailwinds

“Now it’s true our customers are benefiting from some economic tailwinds. There’s been some minimum-wage increases but that only helps customers who have a minimum-wage job but it could also cost jobs too. Unemployment is coming down. Last month we added 242,000 jobs to the economy but our customers they may be saving a few dollars at the pump with lower gas prices but what you’ll see is these savings really haven’t shown up in their spending. And that’s because we believe our customers face much stronger headwinds in this economy than tailwinds”

Inflation is simply outpacing wage growth

“And one of the biggest challenges that our customers are facing is that inflation is simply outpacing total wages ”

Our customers simply haven’t received the benefit of the economic recovery

“There were no cost of living increases this year and that particularly hurts our SNAP and Social Security recipients especially hard. And healthcare costs and rents continue to rise which also impacts our customers more than higher income households. This has resulted in the majority of Americans living on the bubble of economic uncertainty. 60% of Americans don’t have a savings safety net of $1000 and 20% don’t have a savings account at all. So as you will see, our customers simply haven’t received the benefit of the economic recovery. ”

Households earning less that 52k have seen negative wage growth since the recession

“households earning less than $52,000 have experienced negative wage growth. Now these are our core customers and only households in the top fifth quintile have seen any real income growth since the recession and most of that’s being driven by the top 5% of earners. So you can see that our core customers who were financially strapped before the recession are even worse off today. ”

Our customers need us now more than ever

“our customers need us now more than ever and our everyday low prices that will help them stretch their shrinking budget”

3M Investor Day Notes

Inge Thulin

Infrastructure > Manufacturing > Retail > Healthcare

“as you know, in all economies, you have the evolution of infrastructure coming first, followed by manufacturing, after that, safety coming in place, then you have retail and then finally healthcare is the evolution of all economies and it’s true for all economies around the world. This is the way it goes.”

Paul Keel

Manufacturing is one component of supply chain, logistics, engineering and procurement are others

“manufacturing is one of our four fundamental strengths, very important. But manufacturing is just one component of supply chain at 3M. We also lead logistics, engineering, procurement and a number of other activities”

Drive returns with automation

“Pick a 3M product that you know well, post-it notes, scotch tape, Tegaderm dressings. These products run at line speeds several fold what you will find in a competitive plant. And when you automate this level of process capability, as you can see, the returns are very attractive. Now, those of you who have been following us for a while know that Lean Six Sigma is the foundation of our culture of customer centricity and operational excellence.”

Six sigma has yielded $16B in benefit to this company

“Since inception in 2001, Lean Six Sigma has generated over $16 billion of benefit for our company. We have completed more than 100,000 projects and we have trained more than 75,000 employees. And despite being more than a decade into the journey, we find that the impact from Lean Six Sigma continues to grow. In 2005, an average project for us yielded about $300,000 of benefit. By 2010, that number had grown to $450,000.”

Frank Little

7 million people died from air pollution in 2012

“There are over 120 million workers that are exposed to dangerous noise levels in the workplace today. Over 1 million people die in traffic-related accidents with over 20 million additional injuries. And in 2012 alone, there were more than 7 million people who died from air pollution-related health issues.”

Mike Roman

We stay very close to the customers in auto

“In automotive, that means we align our organization around our top 20 global OEMs. We get very close to them, sales, marketing, supply chain, technical top to top. We engage them on a regular basis. We get deep understanding of their challenges, leading to opportunities for designed-in unique solutions from 3M. We also get a very clear understanding of their value chains and so we can better support their tier suppliers. This deep engagement leads to an understanding of the market trends and what’s behind the market trends and you can see some examples here around fuel efficiency, light-weighting and electrification.”

Products come from listening to what our customers need

“This understanding leads to customer-inspired innovation, acoustic control, lightweight assembly and increasingly, solutions to help enable the use of aluminum in automotive manufacturing. Ultimately, all this turns into high-value 3M products, 3M Thinsulate acoustic control, glass bubbles for light-weighting and acrylic foam tapes to help solve the increasing complexity of the bonding solutions as automotive manufacturers introduce new materials and dissimilar materials.”

Jim Bauman

By 2030, 50% of component costs of an automobile will be electronics

“By 2030, 50% of the component cost of an automobile will be electronics. What we will do is leverage our existing partnerships. Mike talked about it, the automotive OEMs, the deep understanding at the tier”

Joaquin Delgado

Four industry success enablers in healthcare:

“We see that there are four industry success enablers: prevention; care pathways innovation; digitization; and health economic-based outcomes. A health economic-based outcome is that the outcome is going – has to be based on the clinical outcome that it delivers that solution, but also the economics that are associated with it. So, we see more and more the need to make the decisions by not only just in clinical data, but it’s in economics data put – being put together.”

H.C. Shin

Healthcare is the fastest growing and most profitable business for international

“I will start from healthcare. Joaquin talked about healthcare. We love healthcare. That’s the fastest growing and most profitable business for international. It has been growing very, very nicely. And I think we can accelerate the growth rate in healthcare. Why? Because healthcare spending is increasing rapidly, whether in developing – even in developed market, healthcare spending is growing very, very nicely. ”

Nick Gangestad

Seeing organic growth still down slightly but tracking better than expected

“Before I head into the main portion of the agenda, let me just comment on what we are seeing so far in 2016, where we remain on track for the planning estimates that we shared in our December Outlook Meeting. As we further stated in January, giving a little more color about first quarter, we stated that we are expecting first quarter organic growth to be very similar to what we saw in the fourth quarter, which was down slightly. And as the quarter is progressing, we are seeing four of our five businesses tracking either at or above what we were expecting at that time. Those are Healthcare, Consumer, Safety and Graphics and Industrial. Our Electronics and Energy business is trending below our expectations. We are seeing end-market demand weaker in the Electronics and Energy business. So, we are trending to a first quarter organic growth that is low double-digit decline due to softer consumer electronics.”

Micron FY 2Q16 Earnings Call Notes

Mark Durcan

Automotive remains strong

“In our Embedded business unit, automotive design-in activity remains strong, particularly with 20-nanometer DDR3 and low power DDR4 products. We’re seeing growth with automotive customers in greater Asia and continuing to build upon success with European and U.S manufacturers.”

AUto is an attractive business

“Yes, the automotive business has been pretty strong for us. And its also we view it as an attractive business, because the sockets are pretty sticky, the life times of the products are longer and so from a total return its very positive market for us.”

Clearly the Chinese want to be in memory markets, and now focused on organic growth but that will be tough

“Well, its — I don’t think I’ve got anything really new to say about that. I think we’ve said before that we anticipated that clearly China was interested in being the memory market and that they would look for ways to find partners or to grow organically. We’ve now heard about significant investments in organic growth. But we would remind everyone a yes, that we believe that there are significant technology hurdles and intellectual property requirements in terms of being a major player in the memory space and we think its going to be a challenging road for the — for organic and will take sometime.”

3D X-Point update

“This year we’re short of an enablement mode, and we’re working with a number of different end market segments. Some customers then have significant interest in mobile, some customers in enterprise, or big data applications, I mean mobile for low power — from the low power benefits. Early on as we ramp this technology we expect cannibalization to be low to zero. Over time, as the technology matures and drive to significantly higher volumes. I’d expect some of that volume to come out of what otherwise would have been DRAM and maybe even eventually what otherwise have been other types of Non-Volatile memory. But generally speaking, this is a differentiated technology that will grow the size of the overall memory market at least over the next two, three, four years.”

Focus not on market share, it’s on deploying equivalent advanced tech to competitors

“Our focus isn’t on market share. Our focus is on making sure that we’ve deployed equivalent advanced technology, at least equivalent advanced technology to our competitor, so that we’re not incentivising others to play for market share. And we think that’s just really a prudent thing to do as managers of our business that we should make sure that we’re putting in place efficient manufacturing production capacity and that’s what we’re very, very focused on.”

PC weak but other segments should outstrip supply growth

“Relative to PCs, yes, it continues to be weak. We think maybe down mid single-digits for the year, DRAM content maybe up about 10% for the year. We’re not expecting any big things out of PC demand when we give you our view as the demand growth for the year across all the various segments. But once you get outside of PCs, growing obviously slower than overall market supply for DRAM, and mobile growing maybe right around the market supply for DRAM. You got all these other segments that we think will out script supply growth servers, automotive, etcetera, etcetera. So, generally speaking we do believe that in aggregate things are going to take care of themselves. ”

Restoration Hardware 4Q15 Earnings Call Notes

Gary Friedman

Still feels like a softening at the higher end of the market

“Yes, we definitely saw disruption in our business within January that was related to the significant disruption in the capital markets. Post that period, I’d say that aspect has seemed to have stabilized, although I’d say it’s stabilized at a somewhat lower level. I think that we still feel that there’s a general softening at the higher end of the market.””

Specifically seeing drag from energy and currency

“And then I think more specifically, as I outlined in the video, the continued pressure from the markets relating to energy and currency continue to be a down drag. I think that’s what we’re most concerned about. If you think about last year, and we’ve been tracking this very specifically, we saw a two point drag. The total company revenues coming out of those markets and that two point drag in the first half accelerated to a four point drag in the second half. And now has accelerated to a five point drag in Q1, and that’s on top of the two point drag of Q1 last year. And even more specifically, it’s accelerated to a six point drag in March at the end of the quarter.”

I think our business is more of a leading indicator

“I think our business is more of a leading indicator than a lagging indicator. Someone asked me recently about, gosh, Home Depot’s business looks strong. Lowe’s business looks strong, why are you feeling the headwinds differently than others. And I’d say again, if you think about our business in the context of businesses like those, home improvement businesses are tied more to hard, physical construction at homes. And so, our business is more discretionary based.”

It’s easy to wait to buy new furniture

“you can finish that home or if you have moved into a new home, say cheese, maybe we ought to use the furniture we have, maybe we don’t need to buy that new couch just yet. And I think that’s why you see our business somewhat more volatile than maybe other data points and things that people might compare to us. ”

More development stage projects are taking longer to complete than expected

“What we are learning, however, is due to the significant development nature of these projects, we have less control of the timing aspects of the approvals and construction schedules than we may have previously had experience with.”

We don’t want to flood customer’s inbox with redundant promotional emails

“And additionally, we don’t believe anyone wants their inbox flooded with redundant promotional emails. If we just think about how many President’s Day sales we hear about, private sales, spring sales, fall sales, holiday sales, winter sales, Mother’s Day, Father’s Day, one day only sales, friends and family sales, so on and so forth, how many can a customer process before you lose all credibility and they become numb to your brand.”

Your plans are always going to be wrong in some way

“if for some reason our assumptions are incorrect, and by the way, any plan in my entire career I’ve ever been associated with or developed is some degree of wrong. So we expect to be some degree of wrong and that’s why we have a lot of what if scenarios and kind of backup plans in place.”

We look at things based on emotional value

“One, we look at everything based on emotional value. Do we – is this going to connect with our customer on an emotional level, or is it something that we connect with emotionally, are we going to be passionate about it? Because we think if you try to do work you’re not passionate about, you’re not going to do very good work. So emotional value.”

Dave and Buster’s 4Q15 Earnings Call Notes

Steve King

There is a lot of real estate our size coming on line

“There is a lot of sites available right now especially for our size. And I think that they changes, there are things like kind of sears coming online and saying they are going dispose a 100 stores and while we may not want to go every sears, there is probably of handful sears that would make chance for us to take a portion of and subdivide, you know they are huge spaces so we won’t be able to take the whole thing but us in conjunction with few other retailers or entertainment facilities might be willing to take down some of that, some Macy’s have come online, sports authority declared bankruptcy, so there is a lot of real estate coming online in our size.”

Malls are not dead, just pivoting towards entertainment

“The only other thing I will say malls are not dead. Actually our mall stores are performing well. And we get that question periodically but the mall stores are performing well. So I think that mall developers are pivoting towards a bit more entertainment as they are going after trying to replace these folks and so we are an attractive alternative for them.”

Brian Jenkins

Expecting 3-4% wage inflation

“We experienced wage inflation of approximately 3% during the fourth quarter, primarily due to the higher minimum wage rates in both California and New York. As we look ahead we are projecting wage inflation of approximately 3% to 4% in 2016 which is higher than the 2.5% experienced in 2015.”

Wouldn’t say that Texas has improved

“Yes. Just on the Texas question. We don’t typically make a practice to talking about states and geographies that much there has been so many questions around the state of Texas and impact of oil and gas in that part of the country. And we felt like we wanted to talk about it little bit here today and reality was in our fourth quarter we were positive. It was not 6% positive, it was a trail the overall change but it was still nose let’s say. I would not say that trend has improved. Part of the situation in Texas for us that make a little hard to read whether its oil or something else. We opened three stores in our 2015 class in three of our markets in the state of Texas. One in St. Antonio, one in Houston and one in Dallas. So we know we are impacting our sales a little bit as well as oil and gas but I would not say we’ve seen it improved.”

Lennar 1Q16 Earnings Call Notes

Stuart Miller

Have only seen mild negative impacts on business from Fed

“Even while the month of December was defined by the first interest rate hike by the Fed since the great recession, which turned into capital market turbulence and fears of recession as we entered calendar 2016. We have seen only mild negative impacts to our business and have continued to be able to perform, as expected.”

We do not see telltale signs of recession

“To answer the questions directly, we feel certain that modest moves in interest rates tied to low unemployment and some wage growth will be a net positive for housing. We do not see the telltale signs of recession. Global terror seems to highlight that the U.S. is the safest place to be and to invest in the world and teach U.S. citizens focused right here at home. And that’s for the election. Well, they say that America always gets to the right answer right after we’ve tried all the wrong ones, we’ll see.’

Housing stock has been under-built

“As we’ve noted consistently over the past few years, the overall housing market has been generally defined by a rather large production deficit, and this is resulted in a growing pent-up demand. Stronger general economic conditions, including lower unemployment, modest wage growth, and general consumer confidence are still driving consumers to form new households and to rent and to purchase apartments and homes. We expect the demand will continue to build and come to the market over the next years, and will drive increased production at the deficit and housing stock ultimately needs to be replenished.”

Labor and land shortages will constrain supply

“Land and labor shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand, while the mortgage market will continue to constrain purchaser’s access to mortgages. These conditions will continue to result in slow and steady positive homebuilding market conditions and will enable slow, steady, though sometimes erratic growth across our platforms.”

Recovery is mature

“We have noted in the past quarter conference calls that given the now mature recovery, we have been and continue to carefully manage our growth in order to grow our bottom line and to drive strong cash flow. We’ve moderated our growth targets to achieve a growth rate in the 8% to 10% range, as we’ve redirected our management efforts towards creating operating efficiencies and leveraging SG&A.”

Moving away from heavy land acquisition

“We’ve also talked consistently about a soft pivot in our land strategy away from the land heavy acquisition strategy in the early stages of the recovery. And we are now targeting land acquisitions with a shorter two to three-year average life. ”

First time purchasers continue to come back more slowly

“First time home purchasers have come back to the housing market more slowly than they have historically and more slowly than expected. ”

Digital marketing enables greater penetration

“we think first time homebuyers as most likely to decide to purchase a home when they’re getting married or one they’re having children. In a digital platform, we can target our message to people who are looking for wedding dresses or purchasing cribs, that’s a more targeted focused audience and it costs a lot less to target that group. Digital marketing enables a greater penetration to the people that we want to hear our message”

There’s been a shift from buy to rent

“relative to the empty nesters rethinking their living conditions, there has been some movement in the direction of rental versus homeownership there as well. So we’ve seen that the rental option, the reduction in homeownership rate is something that is broader than just affordability, it reflects also appetites and desires that have evolved since the recession. And we think that some of those trends will continue.”

There’s some dysfunction in CMBS markets

“Okay. So remember that we’ve been in the CMBS markets for a couple of decades now. We’re probably one of the most – we’re probably the most seasoned participant in those markets. We’ve recognized the ebb and flow of demand and supply in CMBS markets. And we recognize we see when the market dries up, sometimes there’s more demand than there is supply and we generally sit on the sidelines as we are right now. At those times, the demand side seem – tends to go away…the way we think about that market is in recognizing that ebb and flow uniquely relative to its market recognizing the dysfunction generally works to our favor, given our experience.”

Demand is strong but affordability is a question

“I think that we continue to see fairly strong demand. I think affordability is a looming question as prices have tended to go up. They tend to go up because the supply, we read about it, see it all the time both on existing homes and new homes just fairly tied and the demand as we emerging. It hasn’t emerged, but it’s still emerging and I think that there is a sizable pent-up demand.”

Rick Beckwitt

Things got better throughout the quarter

Yes, I would tell you from a – an overall standpoint, we saw good sequential improvements throughout the quarter, December being the lightest and clearly February being the strongest month, pretty much spread across every operating territory that we’ve got, and I’ll address Houston in a little bit. We saw that with regard to both home sales activity as well as pricing, so we’re optimistic that we’re entering the sale season

Jon Jaffe

Northern California remains very strong

“Northern California, the Bay Area remains very strong, really defined by a shortage of both housing and particularly in Silicon Valley by a shortage of skilled labor in the tech and biotech world. So that continues to feel demand there. And then in Sacramento, we’ve seen a nice recovery where that’s become a strong market.”

Not really seeing a recovery in the labor picture

‘Yes, we’re not really seeing a recovery on the labor picture…we’ve seen a very steady environment for us in terms of cycle time, very little increase in cycle time year-over-year. But that doesn’t mean that the labor market is improving any.”

Yellen March 29, 2016 Speech Notes

Committee anticipates only gradual increases

“In my remarks today, I will explain why the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years”

This is just a forecast not a plan

“emphasizing that this guidance should be understood as a forecast for the trajectory of policy rates that the Committee anticipates will prove to be appropriate to achieve its objectives, conditional on the outlook for real economic activity and inflation. Importantly, this forecast is not a plan set in stone that will be carried out regardless of economic developments. ”

Monetary policy will respond to the economy’s twists and turns

“Instead, monetary policy will, as always, respond to the economy’s twists and turns so as to promote, as best as we can in an uncertain economic environment, the employment and inflation goals assigned to us by the Congress.”

The events since December have not been inconsequential

“The proviso that policy will evolve as needed is especially pertinent today in light of global economic and financial developments since December, which at times have included significant changes in oil prices, interest rates, and stock values. So far, these developments have not materially altered the Committee’s baseline–or most likely–outlook for economic activity and inflation over the medium term. Specifically, we continue to expect further labor market improvement and a return of inflation to our 2 percent objective over the next two or three years, consistent with data over recent months. But this is not to say that global developments since the turn of the year have been inconsequential. In part, the baseline outlook for real activity and inflation is little changed because investors responded to those developments by marking down their expectations for the future path of the federal funds rate, thereby putting downward pressure on longer-term interest rates and cushioning the adverse effects on economic activity. In addition, global developments have increased the risks associated with that outlook. In light of these considerations, the Committee decided to leave the stance of policy unchanged in both January and March.”

Many indicators have been quite favorable

“Readings on the U.S. economy since the turn of the year have been somewhat mixed. On the one hand, many indicators have been quite favorable. The labor market has added an average of almost 230,000 jobs a month over the past three months. In addition, the unemployment rate has edged down further, more people are joining the workforce as the prospects for finding jobs have improved, and the employment-to-population ratio has increased by almost 1/2 percentage point.”

On the other hand manufacturing and exports have been hit by slow global growth

“On the other hand, manufacturing and net exports have continued to be hard hit by slow global growth and the significant appreciation of the dollar since 2014. These same global developments have also weighed on business investment by limiting firms’ expected sales, thereby reducing their demand for capital goods; partly as a result, recent indicators of capital spending and business sentiment have been lackluster. ”

Although prices have rebounded, conditions remain less favorable than they were in December

“For a time, equity prices were down sharply, oil traded at less than $30 per barrel, and many currencies were depreciating against the dollar. Although prices in these markets have since largely returned to where they stood at the start of the year, in other respects economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting. In particular, foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined. ”

Lower expectations for the Fed funds rate likely limits US fallout from global market developments

“By themselves, these developments would tend to restrain U.S. economic activity. But those effects have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending. For these reasons, I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty.”

The pace of rate increases is expected to be slower

“Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower. For example, the median of FOMC participants’ projections for the federal funds rate is now only 0.9 percent for the end of 2016 and 1.9 percent for the end of 2017, both 1/2 percentage point below the December medians.”

The level of real interest rates appears to have fallen to a low level in recent years

” the level of inflation-adjusted or real interest rates needed to keep the economy near full employment appears to have fallen to a low level in recent years. ”

The current real federal funds rate is roughly minus 1 1/4%

” Although estimates vary both quantitatively and conceptually, the evidence on balance indicates that the economy’s “neutral” real rate–that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential–is likely now close to zero.3 However, the current real federal funds rate is even lower, at roughly minus 1-1/4 percentage point, when measured using the 12-month change in the core price index for personal consumption expenditures (PCE), which excludes food and energy. Thus, the current stance of monetary policy appears to be consistent with actual economic growth modestly outpacing potential growth and further improvements in the labor market”

The neutral fed funds rate should rise if headwinds fade as expected

“If these headwinds gradually fade as I expect, the neutral federal funds rate will also rise, in which case it will, all else equal, be appropriate to gradually increase the federal funds rate more or less in tandem to achieve our dual objectives. Otherwise, monetary policy would eventually become overly accommodative as the economy strengthened”

Core PCE inflation is a little higher than expected, but hasn’t proven durable

“core PCE inflation, which strips out volatile food and energy components, was up 1.7 percent in February on a 12 month basis, somewhat more than my expectation in December. But it is too early to tell if this recent faster pace will prove durable. Even when measured on a 12-month basis, core inflation can vary substantially from quarter to quarter and earlier dollar appreciation is still expected to weigh on consumer prices in the coming months.”

Continued low readings of expected inflation do concern me

” It is still my judgment that inflation expectations are well anchored, but as I will shortly discuss, continued low readings for some indicators of expected inflation do concern me.”

One concern is about Chinese growth

“One concern pertains to the pace of global growth, which is importantly influenced by developments in China. There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it.”

A second concern is about commodity prices

“A second concern relates to the prospects for commodity prices, particularly oil. For the United States, low oil prices, on net, likely will boost spending and economic activity over the next few years because we are still a major oil importer. But the apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms.”

Economic conditions could turn out to be more favorable than expected

“But at the same time, we should not ignore the welcome possibility that economic conditions could turn out to be more favorable than we now expect. The improvement in the labor market in 2014 and 2015 was considerably faster than expected by either FOMC participants or private forecasters, and that experience could be repeated if, for example, the economic headwinds we face were to abate more quickly than anticipated. For these reasons, the FOMC must watch carefully for signs that the economy may be evolving in unexpected ways, good or bad.”

Even if negative things happen they would only delay the return of inflation to 2%

“even if such developments were to occur, they would, in my view, only delay the return of inflation to 2 percent, provided that inflation expectations remain anchored.”

Inflation expectations have been anchored at 2% since the 90s

“the FOMC gradually succeeded in bringing inflation back down to a low and stable level over the course of the 1980s and early 1990s. Since this time, measures of longer-run inflation expectations derived from both surveys and financial markets have been remarkably stable, making it easier to keep actual inflation relatively close to 2 percent despite large movements in oil prices and pronounced swings in the unemployment rate.”

Inflation expectations have drifted lower recently

“Lately, however, there have been signs that inflation expectations may have drifted down. Market-based measures of longer-run inflation compensation have fallen markedly over the past year and half, although they have recently moved up modestly from their all-time lows. Similarly, the measure of longer-run inflation expectations reported in the University of Michigan Survey of Consumers has drifted down somewhat over the past few years and now stands at the lower end of the narrow range in which it has fluctuated since the late 1990s.”

I think longer run inflation expectations actually remain stable, but risks to that outlook have increased

“Taken together, these results suggest that my baseline assumption of stable expectations is still justified. Nevertheless, the decline in some indicators has heightened the risk that this judgment could be wrong. If so, the return to 2 percent inflation could take longer than expected and might require a more accommodative stance of monetary policy than would otherwise be appropriate.”

Economists’ understanding of inflation is far from perfect

“generally, economists’ understanding of inflation is far from perfect, and it would not be all that surprising if inflation was to rise more quickly than expected over the next several years. For these reasons, we must continue to monitor incoming wage and price data carefully.”

The FOMC should proceed with caution because it’s easier for us to raise rates than to provide additional accommodation

“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.”

We’re not out of ammo though, we could still do QE again

“One must be careful, however, not to overstate the asymmetries affecting monetary policy at the moment. Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis to put additional downward pressure on long-term interest rates and so support the economy–specifically, forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities.10 While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.”

We are data dependent

“As our March decision and the latest revisions to the Summary of Economic Projections demonstrate, the Committee has not embarked on a preset course of tightening. Rather, our actions are data dependent, and the FOMC will adjust policy as needed to achieve its dual objectives.”

Fed seems pretty pleased with the way the market is interpreting data

“Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important “automatic stabilizer” for the economy. As I have already noted, the decline in market expectations since December for the future path of the federal funds rate and accompanying downward pressure on long-term interest rates have helped to offset the contractionary effects of somewhat less favorable financial conditions and slower foreign growth. In addition, the public’s expectation that the Fed will respond to economic disturbances in a predictable manner to reduce or offset their potential harmful effects means that the public is apt to react less adversely to such shocks–a response which serves to stabilize the expectations underpinning hiring and spending decisions.”