2016 Year in Review

This will be our last full post for 2016, so we decided to do a year end wrap-up.  The work below draws from all of the posts that we made this year and uses quotes from management to tell the story of 2016.  Click here to join our weekly email list.

We started this year with the economy deteriorating and finished it with the second interest rate increase in ten years.  There were a lot of ups and downs along the way, but ultimately 2016 was defined by three key story-lines:  1) Brexit 2) The Presidential Election 3) Fed Policy.

The first two events were votes that shocked the world.  The stock market’s reaction to each was arguably even more shocking.  If someone had told you in January that Britain would vote to leave the EU and Donald Trump would be president,would you have ever guessed that the Dow would be poised to break 20,000?  Some people view this as a lesson in the unpredictability of markets.  I would argue that the full story just hasn’t been written yet.  These were major political changes that are likely to have enduring effects on the global economy.

In terms of Fed policy, there were two key moments during the year.  The first was in February when the stock market’s decline caused the Fed to change its outlook that it would raise rates twice in 2016.  That helped spur the market’s rebound.  The second key moment was in June.  The markets had fully recovered by then but that’s when Janet Yellen began to adopt a philosophy that “neutral rates” were going to be low for a long time.  This shift in philosophy is probably the reason that we only saw one rate increase this year.

I’m proud to point out that careful readers of our work could have picked up some great insights throughout the year not only on the economy, but also for individual companies.  The best piece of information that we published was on January 29.  We picked up two quotes from Steel Dynamics and Cliff’s Natural Resources highlighting how government policy had helped stabilize domestic steel prices.  Those two stocks were up 114% and 507% respectively from that date.  We also did a great job tracking the industrial cycle, noticing that inventories were running leaner by February.

Our best call was highlighting that “animal spirits have returned” in our July 22 post.  In that same post we also wrote that interest rates likely couldn’t stay low.  The 10 year treasury yield was at 1.56%.  Throughout the year we also highlighted management teams who argued that the end of the election would provide a catalyst for the economy, that there were a lot of people sitting in cash and in our October 21 post, we noted that tax reform was likely no matter who wins.

We did publish some red herrings, but I must say that as I went through the posts week by week I was impressed by how much we got right and how accurately we told the story of the year.  I wish that we could take credit for this, but unfortunately we can’t.  The real credit goes to the process.  We just publish what the business leaders are saying.  It’s amazing how much great information you can get when you listen for it.  Tune out the journalists, the analysts and the pundits.  CEOs and government leaders are the ones with the best information and the means to turn their opinions into reality.  As Eric Schmidt said at Google’s annual meeting: “the best way to predict the future is to invent it.”  

We spent 2016 tracking the people who are inventing the future for our readers, and we hope that you enjoyed the work.  We definitely enjoyed providing it and especially enjoyed positive feedback from our readers.  That helps keep us going, but of course feedback alone isn’t enough.  If our weekly piece helped you to navigate markets this year (particularly if an insight here made you money!), please show your support by making a donation.  If a donation is too much, keep forwarding this to your friends so that we can grow our readership. Click here to join our weekly email list.

Especially in a world that is starved for thoughtful, information rich content, we believe that we are doing something special here and hope to continue and expand on our work in 2017.  We depend on your support to do that.

Happy Holidays!

January 7

The year began with the industrial economy deteriorating

“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.” —MSC Industrial Direct CEO Erik Gershwind (Distributor)

But the consumer was still holding up

“Our holiday sales results were solid…We started off strong as we said at the third quarter announcement, but our performance continued to become stronger and stronger closer to the end of the holiday.” —Signet Jewelers CEO Mark Light (Jewelry)

January 15

Jamie Dimon emphasized that he did not see signs of recession

“We’re not forecasting a recession. We think the U.S. economy looks pretty good at this point…obviously, market turmoil we all look at it every day but I’m not sure most of the 143 million Americans look at it that much who have jobs and you have a big change in the world out there. People are getting adjusted to China slowing down…hopefully this will all settle down. It’s not the beginning of something really bad.” —JP Morgan CEO Jamie Dimon (Bank)

But a “psychological movement towards caution” was spreading as the stock market fell

“we’re seeing a little bit of a slowdown, or a psychological movement towards caution – that’s definitely happening, and that translates into maybe a little more down, in fact, and a little less robust bidding.” —First Republic Bank CEO James Herbert (Regional Bank)

January 22

Banks confirmed that the markets were overreacting

“There’s been a lot written and said over the last few weeks about the issues in the stock market. We believe there’s a lot of overreaction going on. It’s like you woke up January 2nd, all of a sudden everybody decided the world’s falling apart and we reject that. We don’t see any fundamental structural changes between the first part of December and the first part of January. The world just doesn’t happen that fast.” —BB&T CEO Kelly King (Regional Bank)”

Lower oil prices were viewed as stimulative to the economy

““in this instance, cheap oil is a net stimulative impact on U.S. growth. A WorldCom fraud was not beneficial for everybody else in the U.S. Telecom didn’t get cheaper. But fuel has gotten cheaper which is good for consumers” —Wells Fargo CFO John Shrewsberry (Bank)

January 29

Even though the markets were in turmoil, most indicators continued to look strong

“there has obviously been turmoil in the markets recently…Having said that, most indicators of the real economy at least in the US continue to look pretty strong…from our own portfolio direct indicators of consumer behavior like payment rates and purchase volume, and from leading edge credit indicators like delinquency flow rates. These indicators all look consistent…they are not giving us cause for concern.” —Capital One CEO Richard Fairbank (Bank)

Steel companies were calling out positive momentum. (Note: STLD +114%, CLF +507% since the date of these comments)

““Well, I think there’s positive momentum, generally. I’m sure Dick can speak to some of it, but the inventory overhang, there’s continued destocking there and it’s becoming balanced. It’s still relatively high, particularly in hot band. But in coated products, in coated sheet, I think it’s getting into a good position. And you speak to a seasonal uptick. I think we’re seeing that as well…On cold roll sheet and coated, I sense a tightness forming in that arena.” —Steel Dynamics CEO Mark D. Millett (Steel)

“I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China…The impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.” —Cliffs Natural Resources CEO Laurenco Goncalves (Iron Ore)

February 5

Industrial companies had been in a recession for almost a year already

“we are now basically in our fourth quarter of the recession…I see at least one more quarter, maybe another quarter.” —Emerson CEO David Farr (Industrial Components)

Inventory depletion was near its bottom (Note: XLI +25% from this date)

“I would say what my knowledge is right now, inventory levels within the channel including ourselves, our levels that, they are pretty good levels, low…I don’t see much of a downward draft on that now. I think it’s pretty well over with, probably very minor downward draft.” —Emerson Electric CEO David Farr (Industrial Components)

February 12

Business leaders continued to say that the economy was doing better than Wall Street thought

“I mean, it’s funny if you turned off the stock market, you’d go these are great days around here…in all areas tenant demand, tenant attitude deal flow…rental rates etcetera up, up and up all good…What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.” —Douglas Emmett CEO Jordan Kaplan (REIT)

But risk aversion was back

“Risk aversion is back after a five-year hiatus” —Oaktree Chairman Howard Marks (Asset Management)

And capital markets were shutting down

“Look, the financing market is very difficult. I think in certain industries it is almost completely shut down in the non-investment grade market and I think the lower end, triple C lower single B rating market is very difficult to access than the public markets.” —Moelis and Co CEO Ken Moelis (Investment Bank)

However, Janet Yellen told Congress that she did not think the Fed needed to act

“We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.” —Federal Reserve Chair Janet Yellen (Central Bank)

February 19

The Fed did not believe that financial conditions reflected the economy

“a number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments.” —FOMC Minutes

But also signaled that they would take a wait-and-see approach to further tightening

“they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook…Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent” —FOMC Minutes

February 26

By late February many were viewing the stock market decline as a buying opportunity

“I go back to what Buffett says…he’s nervous when people are greedy, and he’s greedy when people are nervous. Well, right now people are nervous.” —Fluor CEO David Seaton (Engineering and Construction)

March 4

Business leaders continued with a relatively positive tone into March

“Business, I would say, is a little softer in many places, than people than I anticipated say four or five months ago…But, you know…overall the economy’s just kept movin’ up around 2%.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)

As long as interest rates stayed low, stock prices could continue to go up 

“It does have the effect of making all assets more valuable. I mean, interest rates are like gravity in valuations. I mean, if interest rates are nothing, you know, values can be almost infinite.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)

But election risk began to come into focus too.  Trump would sink the country into a prolonged recession.

“If Donald Trump’s plans were ever implemented, the country would sink into a prolonged recession…His proposed 35% tariff-like penalties would instigate a trade war that would raise prices for consumers, kill export jobs, and lead entrepreneurs and businesses to flee America. His tax plan, in combination with his refusal to reform entitlements and to honestly address spending would balloon the deficit and the national debt. So even as Donald Trump has offered very few specific economic plans, what little he has said is enough to know that he would be very bad for American workers and for American families.” —Mitt Romney (Son of former American Motors President, George Romney)

March 11

The consumer kept on spending despite stock market volatility

“In the US, park attendance, advance bookings all very strong, the advertising marketplace is much stronger than we expected it would be…we gave some numbers that were certainly indicative of either a consumer or an economy that was stronger than a lot of people had considered. So, we’re feeling actually fairly bullish about our business prospects in this market” —Disney CEO Bob Iger (Magic Kingdom)

March 18

The Fed decided not to raise rates in March even though it believed that risks had diminished

“let me say that, in recent weeks, I think the Committee certainly thinks that risks to the outlook have diminished…Our decision to keep this accommodative policy stance reflects both our assessment of the economic outlook and the risks associated with that outlook.” —Federal Reserve Chair Janet Yellen (Central Bank)

It began to feel like rates would stay low forever

“We believe that when the Fed started quantitative easing, it entered Hotel California. As the classic Eagles song concludes, “you can check out any time you like, but you can never leave.”” —Alleghany CEO Weston Hicks (Insurance)

March 25

By the end of March the market was getting back on track

“There’s nothing that would suggest that we’re imminently ready to go into a recession here in the U.S…I think the market is starting to recognize as well. So, things seem to be getting back on track in terms of even a market perception. So, I think that everything is being set up of for the type of year that we had thought it would be, in terms of the U.S.” —Ford CFO Bob Shanks (Automobiles)

Businesses were seeing a “resurgence of confidence”

“we saw some signs of a slowing down in our industry over the last several quarters, particularly as we got into December and January, but now we are feeling some resurgence of confidence, at least a flattening out of that trend. So hopefully that was a moment and hopefully we’ll see some growth develop in the quarters to come.” —Steelcase CEO James Keane (Office Furniture)

April 15

Still, growth was relatively uninspiring

“I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth.” —CSX CFO Frank Lonegro (Railroad)

“I think we still feel we’re…in the same low growth…environment that we’ve been operating in for a couple of years, not enough to make it feel like rates are going to move as a result of it but not enough to feel like we’re stalling either.” —Wells Fargo CFO John Shrewsberry (Bank)

“to me the outlook is less about any sort of explosive growth. The word I would use is potential for stabilization. So things have been at a low level.” —MSC Industrial CEO Erik Gershwind (Industrial Distributor)

April 22

Caution abated, but the environment still felt fragile

“many of the factors that were impacting the market in the first quarter…seem to have abated and although the market feels a little fragile from all that, it feels like – for the most part, that’s behind us. But we’ll see how the year progresses.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

April 28

The oil industry was experiencing a “full scale cash crisis”

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels…our industry is now in the deepest financial crisis on record…This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns” —Schlumberger CEO Paal Kibsgaard (Oil Service)

The market was focused on Brexit and a possible July Fed hike

“I think that the market is now pricing, that the Fed go probably in July and there is a high probability of that, that is being priced in the market and the market is not pricing a lot about the Brexit, so a negative event could really produce some correction in the market.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

May 6

The economy was not rebounding as much as hoped

“The one surprise we had is in the last couple months we’ve seen the U.S. spending rate come back down again, which bothers us…I feel a little bit more worried about sales because of the U.S. marketplace in particular…this slow to start turning that nose up really bothers me.” —Emerson Electric CEO David Farr (Industrial Components)

May 13

Retailers reported poor results

“All of us have been reading the stream of negative news stories about various retailers over the past several weeks. Clearly, our industry is in something of a rough patch. We know we are not alone. But the consumer seems to be doing okay…We’re frankly scratching our heads. We see the same economic data you all see and it would point to a customer that would be spending more.” –Macy’s CFO Karen Hoguet (Mall Retailing)

May 20

But it appeared that it was an industry specific problem

“Obviously, the retail industry is going through a rather painful period of rationalization. Rarely have I read so many negative articles about our industry. Unlike much of what has been written, I don’t believe the consumer is the problem. I think our customer is in relatively good shape.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

May 27

Mastercard confirmed that consumer spending was still healthy

“I don’t think we see anything different really than what we said back when we had our last earnings call in our first quarter earnings call in April, right, I guess. So from a U.S. perspective…We don’t see that the consumer had a step-down in spend.” —Mastercard CFO Martina Hund-Mejean (Payments)

Brazil was the only place where the sky was falling

“I travel around the world a lot with our customers and I have seen nothing personally or heard of on my team that makes me think the sky is falling again anywhere but Brazil.” —Linkedin Head of Sales Mike Gamson (Social Network)

June 3

Capital markets began to reopen by June

“Capital markets have started to re-open a bit after a period of substantially lower activity.” —Goldman Sachs COO Gary Cohn (Investment Bank)

“I think there is some signs of recovery, if I look at the — month of IPO in the second quarter is larger than the total amount of IPOs in the whole first quarter.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

June 10

But Janet Yellen was still shaken

“Over the past few months, financial conditions have recovered significantly…Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.” —Federal Reserve Chair Janet Yellen (Central Bank)

June 17

In mid June Yellen capitulated on long term interest rates

“I’ve often…talked about headwinds that reflect lingering effects of the financial crisis…I think many of us expect that these headwinds would gradually diminish overtime and that’s a reason why you see the upward path for rates. But there are also more long lasting or persistent factors that may be at work that are holding down the longer-run level of neutral rates. For example, slow productivity growth…and we have an aging, aging societies in many parts of the world that could depress this neutral rate.” —Federal Reserve Chair Janet Yellen (Central Bank)

She started talking more about a low “neutral rate” and a new normal

“The sense that maybe more of what’s causing this neutral rate to be low are factors that are not going to be rapidly disappearing but will be part of the new normal.” —Federal Reserve Chair Janet Yellen (Central Bank)

Meanwhile, Silicon Valley was entering a “post unicorn” era

“I think we’re entering the post unicorn era and what I mean by that is when the market corrects, you have a shift from growth to all costs to a back to the basics and a focus on profitability. The scorecard changes.” —Dropbox CEO Drew Houston (Cloud Storage)

June 22

Yellen struggled with the economy’s long term prospects throughout June

“although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.” —Federal Reserve Chair Janet Yellen (Central Bank)

July 4

We were travelling over July 4th so we compiled presidential quotes to help celebrate

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” –Theodore Roosevelt, 26th President of the United States

July 8

We came back to a world in which Britain had Brexited.

We happened to be travelling in London.  Here was our view of the scene:

“For what it’s worth, I attended a wedding outside of London last week and the political-mood was dour. The wedding was between two Oxford alums, so the guests were mostly well educated millennials. Almost everyone who gave a toast cited the “uncertain times” that we live in. The tone of the conversations that I had were pretty similar to what one might expect to hear in the US if Trump were to be elected in November (disbelief and distress). One cab driver that I had said that he might as well “light himself on fire” because “it would be less painful than the slow death his business will suffer” as a result of the vote. Still, hopefully any British readers can take solace in the fact that Britain has seen much worse times than these. Everything will turn out ok. It may just be a bit of a painful transition.”

People realized pretty quickly that Brexit was a process, not an event

“The situation is very volatile at this time. For sure, the period of uncertainty will be quite long whatever happens because even if the U.K. will leave the Euro, it cannot happen overnight, it will take at least two years. And the consequence of it will be much longer than two years. So, I believe that once the emotional impact is gone, things will settle down and we will have an idea of what is happening, but for now really — it’s really too early, too soon we have seen in the stores days — very good days, bad. So in a few months probably we will be able to say something.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

July 15

Brexit would likely lower British GDP but it was primarily a source of uncertainty

“So number one, we do think [Brexit] will reduce the GDP of the U.K. and the EU a little bit…Number two, we know that it is going to create uncertainty for an extended time period…We are hoping that political leaders are very sensible…I am not really worried about it. It would be nice if it doesn’t create a huge turmoil. So I am hoping the EU is sensible” —JP Morgan CEO Jamie Dimon (Bank)

July 22

The markets did not wait for resolution.  They took off like a rocket.

“I think you could have sat there those couple days after Brexit and if you were forecasting the next month of activity, I think you might have been surprised if we could have known in advance that equity markets would rebound so strongly, there would be a rebound in currencies, and the world would sort of normalize” —Goldman Sachs CFO Harvey Schwartz (Bank)

Animal spirits had returned

“the animal spirits are back in North America” —Halliburton CEO Dave Lesar (Oil Service)

Had Central Bankers had finally succeeded in breaking the global depression psychology? 

“The announced readiness of central banks to provide liquidity, if needed, and our accommodative monetary policy measures, as well as a robust regulatory and supervisory framework, have all helped to keep market stress contained.” —ECB President Mario Draghi (Central Bank)

We surmised that If this is true then the yield curve cannot possibly stay where it is. (10 Yr Treasury Yield: 1.56%)

“I personally think the flat rate scenario that everybody projecting is overstated. The underlying strength of our economy is not great, but it’s good. Fed, I believe, clearly knows they need to raise rates, and I think they will the minute they see a window, which could still easily happen at least one rate increase towards the fall.” —BB&T CEO Kelly King (Bank)

July 29

The reaction of markets to Brexit left everyone pleasantly surprised

“I think we were all pleasantly surprised…by how the markets have performed post-Brexit…I think we’ve probably…settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote.” —Lazard CEO Ken Jacobs (Investment Bank)

Companies saw very little impact

“As I said, we have no strong signs of Brexit so far.” —Volvo CEO Martin Lundstedt (Automobiles)

In fact, many companies were benefiting from a weaker pound

“With the recent weakening of the pound, exchange is forecasted to be a significant tailwind in fiscal 17.” —Diageo CFO Kathryn Mikels (Beverage)

August 5

Shortly after the dust settled we began to focus on our own elections

“going into the Presidential election, there’s a lot of uncertainty, there seems to be a lot of uncertainty around the world…So, I’m a little bit with you, I actually don’t think it’s going to be a huge finish to the year…I do look at the election as something that’s holding activity back quite a bit” —Ares Capital CEO Kipp deVeer (Business Development Company)

Election uncertainty kept everyone cautious

“we are look at a marketplace right now where people are being very cautious, they are being very careful with what they’re spending money on and they are very uncertain relative to what’s going on around the world from a political standpoint relative to just a business environment standpoint and where things are heading.” —Emerson Electric CEO David Farr (Industrial Components)

August 12

In mid August it looked like Clinton would almost certainly win

“We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election.” —Third Point Reinsurance Chairman Dan Loeb (Hedge Fund/Insurance)

The end of the election would be a positive catalyst for the economy

“Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however, it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and honestly probably for a lot of other markets as well, so that I would look for.” —Sothebys CEO Thomas Smith (Art Dealer)

August 18

In late August the industrial economy appeared to pick up

“around July…I think many [customers] had preventative maintenance productivity-type projects going…Now, as they’re back up and running…we see that brake fix demand coming through. And then…for those that would have planned downtimes…towards the end of the calendar year, they would be slating projects that would positively impact their uptime and their productivity.” —Applied Industrial Technologies CEO Neil Schrimsher (Distributor)

We also began to notice companies’ pricing power improving

“the pricing environment remains challenging…We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies.” —Nestle EVP François Roger (Packaged Food)

August 26

The Fed began to feel more confident that inflation was increasing

” Employment has increased impressively over the past six years since its low point in early 2010…core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

September 8

And began to signal that it could raise rates in September

“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting.” —Atlanta Fed President Dennis Lockhart (Central Bank)

Even the oil industry was on the road to recovery

“I think the headline reads on the road to recovery. You have to look hard, but if you look at the headline, you’ll see on the road to recovery. But at the same time, I would describe this as sorting through the wreckage of the worst downturn that we’ve ever seen. We see the after-effects just about everywhere that we look.” —Halliburton President Jeff Miller (Oil Service)

September 16

But less than a week later Fed Governor Brainard squashed expectations for a September hike

“In today’s new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness. This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” —Fed Governor Lael Brainard (Central Bank)

September 23

Lo and behold the Fed didn’t raise rates

“We judged that the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward our objectives” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen relied on her “new normal” assessment to justify staying put

“we’re struggling with difficult set of issues about what is the new normal in this economy and in the global economy more generally which explains why we keep revising down the rate path.” —Federal Reserve Chair Janet Yellen (Central Bank)

She again cited a low neutral rate

“We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That’s based on our view that the neutral nominal federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–is currently quite low by historical standard” —Federal Reserve Chair Janet Yellen (Central Bank)

Most companies continued to see an improving outlook though

“The good news for the Americas is that we had stronger orders in August and those have continued through the first three weeks of September…our backlog of high confidence opportunities in the Americas has strengthened for the second half of the year…we’ve seen recessions before in our industry and they are characterized by significant and sustained drops in order patterns. And that’s not really what we’re seeing this time.” —Steelcase CEO James Keane (Office Furniture)

September 30

The economy was getting closer to full employment

“businesses are getting closer to full employment and we are seeing the checks per client slow, but we expect that frankly for the last couple of years as people came back from recession.” —Paychex CEO Martin Mucci (Payroll Processing)

And inventory destocking was complete

“I think largely the destocking has occurred. And I think what will happen is the dealers and the larger distributors wind up having more line of sight to more demand. They are going to bring more inventory in…So, I really think as we move through ‘17, we are going to see some improvement in that general industrial market.” —Actuant CEO Randy Baker (Industrial Components)

October 7

Central Bankers continued to argue that they were not to blame for low rates

“Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis…the level to which real interest rates can eventually return when the economy strengthens is not determined by monetary policy. Instead, it depends on the economy’s long-term growth prospects. Productivity and demographics play a decisive role in this, and the development of these factors has not been favourable in Europe in recent years.” —ECB President Mario Draghi (Central Bank)

But voters were running out of patience

“the impatience with economic stagnation, especially among middle and lower income earners, is leading to dangerous populism and nationalism.” —Bridgewater CEO Ray Dalio (Asset Management)

October 13

We continued to see signs that pricing power was firming

”pricing has been low or negative for the past few years as a result of the benign commodity cost environment…As commodities have stabilized and start to turn up, we are seeing a return to more normal price inflation or in the case of Europe reduce deflation in some markets.” —Unilever CFO Graeme Pitkethly (Consumer products)

Meanwhile the Fed continued to ponder academic theory on neutral rates

“Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest–or r*–including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth.” —FOMC Meeting Minutes (Central Bank)

October 21

There was a lot of anxiety leading up to the election

“I saw report a couple of days ago that 60%, or slightly less, but about 60% of the market it is really, really anxious about the elections. And I suppose we quite understand that. And so I think when all this subsides, however it goes, it will be less uncertainty and less anxiety, I think that will in still a bit more confidence then people will be a little bit more willing to invest, and make acquisitions and borrow money.” —BB&TCEO Kelly King (Bank)

And there were a lot of people sitting with cash

” people are being a lot more conservative than they have been in the past. They’re sitting on a lot of cash. They’re in a good financial position and as things begin to pick up…our customers will begin to invest more in the future as well as some of the new products and services.” —Comerica CEO Ralph Babb (Bank)

Investors were expecting a greater emphasis on fiscal policy and tax reform no matter who won

“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth.” —Blackrock CEO Larry Fink (Asset Management)

“I can tell you that I visit in Washington often and speak with members of the House Ways and Means Committee and the Senate Finance Committee and the tax staffs are busily working and working very collaboratively with U.S. multinationals on an appropriate tax reform package. We think there is more bipartisan support now than there has been in the past…we think that overall the climate for international tax reform post the election, quite frankly, is more positive than it’s been in the last year or so.” —Johnson and Johnson CFO Dominic Caruso (Healthcare)

However, one President was expected to bring more change than the other

“I also think a new President which is undoubtedly going to happen, has a slight variation one way or the other. I won’t talk about which one I think does which, but one gets a little more uncertain and causes us to stand back a little bit and wait to see how things settle. The other one is a lot more of the same and probably, whether we like it or not, is something we can manage because it’s the devil we know.” —US Bank CEO Richard Davis (Bank)

October 28

The economy definitely slowed in the weeks leading up to the election

“Yes. I’d just add that I spend a lot of time talking to executives of other companies and many of our clients and the elephant in the room probably is the election. Nobody really knows exactly what the impact is. They just know it is much different.” —Robert Half (Temp Staffing)

November 4

Businesses were waiting to see what would happen

“from many of our customers, we’re hearing wait-and-see and that’s pretty typical in an election year. I mean, that’s the one new thing I’d call out over the last quarter and it’s typical that it builds as you get close to November. So, I don’t make much of it either way. I don’t think any of our customers have a sense of what it’s going to mean for after. The only thing I think it means is that, we always say our visibility is low, it’s probably even a bit lower just because of the cautious perspective that many of our customers have.” —MSC Industrial Direct(Industrial Distributor)

Here’s what we had to say before the election:

I know that there’s a large contingent of investors who believe that the President doesn’t matter to markets, but if you study history, you know that nothing could be further from the truth.  Almost all the significant turning points in market history have coincided with policy changes that were actively or passively set by POTUS.

November 11

Then, for the second time in 2016, there was a massive electoral surprise

“Last night, like so many of you, I watched the election returns with family and friends. And like so many of our fellow Americans – both Democrats and Republicans – I am stunned.” —Starbucks CEO Howard Schultz (Coffee)

A frustrated electorate wanted change

“We are going through a period of profound political and economic change around the world, and American citizens showed that deep desire for change in voting to elect Donald Trump as the 45th President of the United States. We have heard through democratic processes in both Europe and the United States the frustration that so many people have with the lack of economic opportunity and the challenges they face. We need to listen to those voices.” —JP Morgan CEO Jamie Dimon (Bank)

The result was expected to cause panic, but instead the market rallied

“We are definitely prepared to intervene in an emergency. What that will really look like, we must wait and see.” —ECB Governing Council member Ewald Nowotny (Central Bank)

Buying pressure had built up before the election

“the summer was a little bit of a pattern of the doldrums. Coming out of the summer there was a little bit more confidence…And there is a sense in the art market from lots and lots of consigners that we’ve had a long sort of not very exciting patch during the art market, and that they are looking for an opportunity to buy.” —Sotheby’s CEO Thomas Smith (Art Dealer)

Certainty provided a catalyst

“I think our experience over a long period of time is things that are distracting like the election, once there’s an outcome, certainty is a good thing. So from a positive perspective, having certainty on that is probably a good thing looking into the holiday.” —Kohls CEO Kevin Mansell (Apparel)

Here were our thoughts:

For the past eight years we have obsessed over the effects of ZIRP, NIRP and QE. Those days are now over…For now, most are expecting lower taxes, less regulation and infrastructure spending. However, while we can speculate about what is to come, it will simply take time for a clearer picture to emerge. The true framework of a Trump Presidency wont be discernible for at least several months. We’ll help chart that path as it emerges.

November 18

The end of the election unleashed a huge amount of pent up demand

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)

December 2

The year ended with a lot of positive hype

“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)

But it’s all speculation at this point

“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)

December 9

The stock market has continued its remarkable run

“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)

And that has helped boost business sentiment.  Companies are ready to get down to business.

“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

Donald Trump sounds pleased

“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)

December 17

Trump loves the bounce

“I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue” —President Elect Donald Trump (Government)

But will he love Yellen? She doesn’t want to engage him but probably disagrees with his policies.

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy.” —Federal Reserve Chair Janet Yellen (Central Bank)

Her #1 concern is protecting the Fed’s independence

“I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on.” —Federal Reserve Chair Janet Yellen (Central Bank)

In 2017 Trump will take office.  Everyone is focusing on the “carrot” of his policies, but there will be a “stick” too

“we’re being stripped of our jobs…we’ve got to stop it… we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy…But when a company wants to move to Mexico…or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax…not going to happen that way. And the way you stop it is by imposing a tax…Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all…You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.” —President Elect Donald Trump (Government)

Company Notes Digest 12.17.16

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 piece is a short one, all macro.  We have a larger year end piece in conjunction with this one.

The Macro Outlook:

The Fed raised by 1/4 point

“Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen said that they remain accommodative

“And this we said in our statement, policy remains accommodative. The degree of accommodation I would characterize as moderate. As I’ve emphasized and said in the statement, we currently judge the neutral level of the federal fund’s rate to be pretty low. So there is some accommodation.” —Federal Reserve Chair Janet Yellen (Central Bank)

She does not believe that the Fed is behind the curve

“inflation is still operating below our objective. So, I do not judge that we are behind the curve. I’ve– My judgment is that we’re in a good path to reaching our objectives. But of course the outlook is uncertain.” —Federal Reserve Chair Janet Yellen (Central Bank)

There were a lot of questions about Trump, but Yellen was evasive

“I’m not going to offer the incoming president advice about how to conduct himself in policy.” —Federal Reserve Chair Janet Yellen (Central Bank)

“…But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy” —Federal Reserve Chair Janet Yellen (Central Bank)

“I don’t want to weigh in. I don’t intend to weigh in. I haven’t weighed in on either fiscal policy specifics of evaluating policies. I’m not going to weigh in either on the details of particular trade policies.” —Federal Reserve Chair Janet Yellen (Central Bank)

She did question whether more fiscal stimulus was needed

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.” —Federal Reserve Chair Janet Yellen (Central Bank)

Her top concern is protecting the Fed’s independence

“I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on.” —Federal Reserve Chair Janet Yellen (Central Bank)

The Fed shares everyone’s uncertainty

“I really can’t tell you what the Fed’s response would be to any policy changes that are put into effect. I wouldn’t want to speculate until I– we’re more certain of the details and how they would affect the likely course of the economy.” —Federal Reserve Chair Janet Yellen (Central Bank)

“we’re operating under a cloud of uncertainty at the moment and we have time to wait to see what changes occur and to factor those into our decision-making as we gain greater clarity.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen was also evasive about the stock market

“So, you know, I really don’t want to comment on the level of stock prices. They may have been boosted by expectations about tax policy, possible cuts in corporate tax rates that have been much discussed, or by expectations about growth, possible reductions and downside risk to the economy…But I don’t– I don’t want to offer a view as to whether they’re appropriate” —Federal Reserve Chair Janet Yellen (Central Bank)

Donald Trump loves the stock market’s bounce though

“So I want to add that I’m here to help you folks do well. And you’re doing well right now and I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue” —President Elect Donald Trump (Government)

Everyone is focusing on the “carrot” of Trump’s policies, but there will be a “stick” too

“we’re being stripped of our jobs…we’ve got to stop it… we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy…But when a company wants to move to Mexico…or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax…not going to happen that way. And the way you stop it is by imposing a tax…Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all…You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.” —President Elect Donald Trump (Government)

The US doesn’t operate in a vacuum though

“Because we fly the American flag, because we are domiciled in the United States, we are a beneficiary or victim of America’s foreign policy and position in the world. And therefore, wherever we go, the first thing they talk to us is about the United States. What I worry about is that there might be discrimination against American companies overseas, if there is protectionism in the United States” —Pepsi CEO Indra Nooyi (Beverages)

Full transcripts can be found at www.seekingalpha.com

FOMC December 2016 Press Conference Notes

Quarter point raise

“Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability”

Growth has picked up

“Economic growth has picked up since the middle of the year. Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft, despite some stabilization in the energy sector. Overall, we expect the economy will expand at a moderate pace over the next few years.”

Market based measures of inflation have moved up but are still low

“Our inflation outlook rests importantly on our judgment that longer-run inflation expectations remain reasonably well anchored. Market-based measures of inflation compensation have moved up considerably but are still low. Survey-based measures of longerrun inflation expectations are, on balance, little changed”

Changes in fiscal policy could affect the outlook but too early to know

” As many observers have noted, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is far too early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook and the appropriate course of monetary policy. ”

This is a modest adjustment in path

” Well, I would like to emphasize that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, you know, some of, you know, some of the participants. So, in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants”

I really can’t tell what our response would be to policy changes

“I really can’t tell you what the Fed’s response would be to any policy changes that are put into effect. I wouldn’t want to speculate until I– we’re more certain of the details and how they would affect the likely course of the economy.”

Different policy could affect the neutral rate

“we’ve been saying we estimate that the value of the neutral federal fund’s rate is quite low has– And one of the reasons for that is slow productivity growth. And so it’s very hard to generalize about it because it could affect that neutral rate.”

This is a vote of confidence in the economy

” let me say that our decision to raise rates is– should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue and the economy is proven to be remarkably resilient. So it is a vote of confidence in the economy.”

We still consider this to be an accommodative policy

“And this we said in our statement, policy remains accommodative. The degree of accommodation I would characterize as moderate. As I’ve emphasized and said in the statement, we currently judge the neutral level of the federal fund’s rate to be pretty low. So there is some accommodation. ”

We do not believe that we are behind the curve on inflation

” We’re not seeing evidence in labor markets of very substantial upward pressures on labor that could signify extreme shortages of labor that could propel inflation higher in a very rapid way, and inflation is still operating below our objective. So, I do not judge that we are behind the curve. I’ve– My judgment is that we’re in a good path to reaching our objectives. But of course the outlook is uncertain. ”

I’m not sure that fiscal stimulus is needed

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy. ”

It’s also important for congress to take debt to gdp ratios into account

“it’s also important for Congress to take account of the fact that as our population ages that the debt to GDP ratio is projected to rise and that needs to continue to be taken into account. And so, there are many factors that I think should enter into such decisions”

I never said that I was in favor of running a high pressure economy

” So I want to be clear that what I said in that speech in Boston is that an important research question is whether or not in an economy with a very strong labor market, there might be changes that took place that permanently raised the labor force participation training and other things of the labor force that would be positives for the productive potential of our economy on a long lasting basis. I never said that I favor running a high pressure economy. ”

I’m not going to offer the incoming president any advice

“Well, I’m not going to offer the incoming president advice about how to conduct himself in policy. I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on. ”

We did discuss the incoming administration but we are currently under a cloud of uncertainty

“we did discuss these topics in our meeting today. I would simply summarize by saying that all the FOMC participants recognize that there is considerable uncertainty about how economic policies may change and what effect they will have on the economy. And in so far is that will affect monetary policy, of course we will have to factor those policies along with many other things, including the global environment and oil prices and other matters. We will have to factor that into our outlook and figure out what is an appropriate response. But we’re operating under a cloud of uncertainty at the moment and we have time to wait to see what changes occur and to factor those into our decision-making as we gain greater clarity.”

Gobbledygook about stock prices

“You mentioned the market moves. So I see the market moves as implicit forecasts about what impact these policies are likely to have on the economy. The changes, the financial market changes that you described, particularly the increase in stock prices, the increase in longer term rates and the strengthening of the dollar suggests that many market participants anticipate expansionary fiscal policies that would raise interest rate somewhat in the United States relative to abroad and would cause strengthening in the dollar. But market participants were uncertain
too, and I would expect changes in our understanding of what is going to happen to also affect market prices in financial markets as we move forward. ”

I don’t want to comment on the level of stock prices

“So, you know, I really don’t want to comment on the level of stock prices. They may have been boosted by expectations about tax policy, possible cuts in corporate tax rates that have been much discussed, or by expectations about growth, possible reductions and downside risk to the economy. But, you know, these are things that market participants are trying to view along with the likely path of– paths of interest rates, and I think all of that factors into movements and stock valuations. But I don’t– I don’t want to offer a view as to whether
they’re appropriate”

They’re within the normal range relative to interest rates being low

” Well, I think rates of return in the stock market relative to– Remember that the level of interest rates is low and taking that into account, I believe it’s fair to say that they remain within normal ranges. ”

I’m not going to weigh in on trade policies

“So, I don’t want to weigh in. I don’t intend to weigh in. I haven’t weighed in on either fiscal policy specifics of evaluating policies. I’m not going to weigh in either on the details of particular trade policies. ”

We still intend to let our balance sheet decline

“So, we’ve indicated in our normalization principles that we expect to diminish the size of our portfolio over time largely by ceasing reinvestments of principal rather than by selling securities. We’ve indicated that once the process of normalization of the federal funds rate is well under way, we would probably begin to allow our portfolio to run off. We’ve not yet made any precise decisions about when that will occur. We want to feel that if the economy were to suffer an adverse shock, that we have some scope through traditional means of interest rate cuts to be able to respond to that. Now there’s no mechanical rule about what level of the federal funds rate we might deem appropriate to begin that process. It’s not something that only depends on the level of the federal funds rate, it also depends on our judgment of the amount of momentum in the economy and the possible concerns about downside risks of the economy. So, we’ve not yet made this decision, but it is something that we have long planned to begin to allow our balance sheet to run off. And then it would take several years. And we would end up if all goes well with the substantially smaller balance sheet than we have at present.”

Pfizer (PFE) at Guggenheim Conference Notes

Ian C. Read – Chairman and CEO

 

Delegation is a necessary evil, and the reason company culture is important

“they told at business schools we have delegations great, and I say it is not, it is the worst thing in the world. The only reason I delegate it is because I can’t do everything. So, you suddenly realize that the only way you are going to move the company is through the culture.”

 

In fact, company culture is the determinant of success in the pharmaceutical industry

“I have always finished by saying the only thing that in the end will make a difference is our culture. We all in the pharmaceutical industry most of us have capital, most have bright people, we all have the tools we need to be successful but we will make the difference if our culture is better than the culture of the other companies. And so when I took over I wanted to instill a culture.”

 

Mechanisms and procedures for deciding when to end product development are crucial

“you don’t want to spend money on something that is going to fail so you really want to be very critical as you put things into Phase 2. You don’t certainly want to get what we got to in Phase 3 with our PCSK9 and have it fail. That’s a very expensive failure. Now that’s a drug that started this development eight years ago, nine years ago so, you really want to make sure that you have made very hard and critical decisions in Phase 1. And you don’t let this sort of lingering syndrome of repurposing or staying around…  we need to know the mechanism…  we are not going to bring a product for development unless it’s first in class or best in class and within two years of the first in class. Because that’s the competitor dynamic you need to force yourself to”

 

95% of research is done outside the company

“research is driven by you believe you need experts inside the company and you need the most brilliant scientists. But you certainly — we certainly have forced ourselves to understand that 95% of the research is outside of the company. And the trick is to get the scientist focused early on, on outside opportunities. So we have a partnership with about 19 universities. We get some 300 submissions on things that our clinicians and our research scientists wants to develop. We go through them, we pick about 16, we put our scientists in their labs, they come to our labs. We are trying to cut out that five to six period where it sort of swims around in universities and doesn’t really go anywhere in the Academy. And then some VC picks it up. What we’re trying to do is get ahead of the VC”

 

Current US tax policy allows foreign companies to buy US assets at zero tax, putting PFE at a disadvantage

“I think for the US companies there are multinationals, that is the biggest competitive reset against our European competitors if we get an effective tax policy. Suddenly they can’t buy U.S. assets at a zero tax rate because they have no profit in the U.S. and they take it away outside. So your ability to buy U.S. assets compared to Europeans become equalized and all of a sudden they’ll end up paying at least the corporate tax rate or the import tariff on everything they sell in the United States. So I think it’s the biggest level there for us in that sense competitively.”

 

Responsibility for long-term healthcare costs is best handled by providers

“So I think the long-term risk needs to be with the providers. The providers, the hospitals have formed chains, they’ve formed semi monopolies in geographic areas. So they hold the patient for the patient’s life other than people who leave the area to go to another area. But 90% of their population is theirs for their whole life. So these are the individuals, these are the institutions that you should be able to incentivate to look after long-term healthcare costs. Work on smoking, work on lipids, work on diabetes, work on obesity. Work on smoking cessation where you can pay these institutions to lower and bend the cost curve and they are the natural holders of that. You need to be able to have rewards and incentivate them to hold those risks.”

Citigroup (C) Presents at Goldman Sachs Conference

John Gerspach – Chief Financial Officer

Few answers on what the Trump administration will do

“I have very few answers… Almost none”

 

Which is why the plan is to assume a similar environment to 2016 and be poised to react to changes

“we can’t build a plan on hope. So, our base plan going into next year is really looking very similar to an environment that looks like ‘16. We don’t know what the new administration is going to do. I think during the campaign trail, both candidates said a lot of things. And now exactly what gets rolled into policy and new laws and what gets repealed, we don’t know. We don’t know the timeframe in which they are going to handle things. We don’t know the priority in which they are going to handle things. So for us, it’s you build the plan based upon what you see and then you make sure that you are poised to take advantage of the opportunities…”

 

The reason behind interest rate increases is important  

“100% certain, 95% certain that we are going to get a rate increase next week. Fine, we had already assumed that. The key then becomes what happens after that and I think, even more importantly, why. If you are just getting rate increases for the sake of getting rate increases, that’s kind of nice. If those rate increases are because the economy really is growing at a faster rate, you do get stimulus as far as whether it’s tax reform or its infrastructure spending that would all be a big positive for us.”

 

No particular emerging market is an area of special concern

“we are no longer overly concerned about what’s going on with Brazil and Russia. When I look at the world, there really isn’t a spot in the emerging markets that really stands out as something that says, well, watch here. You watch everything, but there is no special area of concern right now.”

 

Europe deserves extra attention though

“I was going to say the one area that we actually are spending more time looking at right now is Europe… we are just not sure as to how that Brexit is going to be negotiated. So a lot of that is going to be determined over the course of the next several months and perhaps even years and therefore, it’s a little uncertain as to what the impact will be on the UK and uncertain as to what the impact is going to be on the remaining countries in the EU.”

 

1 million new accounts in the Costco portfolio

“Little bit of a rough patch in the beginning, but the Costco portfolio is performing extraordinarily well. Just this past weekend, we got to our 1 millionth new account since we have taken on the portfolio. So, we have added 1 million accounts in less than 6 months. Don’t take that as a run-rate, but it’s a great way to start. That’s pretty good. You take a look at how we are growing revolving balances with Costco. All of that is good. We have secured extensions on most of our key co-brand partnerships now.”

 

Yet, reserve build required for Costco rewards and rebates was high

“When you bring on a portfolio like that, it’s going to take you a good year before it really becomes accretive and there is probably 6 months after that before it normalizes… We had $150 million reserve build on Costco in the third quarter. That should be the highest reserve build that we ever have on Costco, so it should decline from here, but it’s still going to take until the second half of ‘17 before it’s really accretive to earnings.”

 

70% of Costco card spending is outside of Costco

“On the reward component for Costco is baked in there. There is nothing – there is no front end on that. So everything with the Costco portfolio as far as that value proposition that we put out in partnership with Costco is operating at or better than what we expected. We mentioned in the third quarter earnings that 70% of the spend on the Costco card is occurring outside of the Costco stores and that’s better than what we had planned.”

 

Compliance with the Volcker rule and regulations in general requires 29,000 workers

“When you take a look at our entire workforce of 220,000 people and you think about 29,000 people being involved in risk, compliance, audit, yes.”

Pfizer (PFE) at Citi Global Health Conference

Mikael Dolsten – President, R&D

 

Pipeline has a balanced distribution among phases

“When you look at the pipeline that deliver this flow of Phase 3 and approvals, we have about 90 projects. Slightly more than 40% in Phase 3 registration, slightly less than 40% in Phase 1, and about 20% in Phase 2”

 

PFE wants a “networked R&D organization” that utilizes both internal and external product development

“Very briefly when it comes to internal versus external, we really have our strategic ambition to be a networked R&D organization, some strong capabilities internally welcoming biotech and pharma partners and you can see three example of that approach. Product acquisitions through M&A, Medivation, access to Xtandi, Talazoparib… Next to that we have strategic acquisition of technology and early product. Bamboo is a company engaged in gene therapy… And then a partnership with Western Oncolytics that provides us with an oncolytic virus particularly interesting for cancer therapy of what we call cold tumors with moderate to low immune activity”

 

Strategic investments will likely continue into 2017

“I would say we will continue to have appetite for our strategic investment areas. Right now I think we have a very comprehensive immune-oncology portfolio but we would always built and if there is a new agent appearing, you may have seen that we have invested recently in — novel — see, there are four construct that are aimed to be local active in the tumor to circumvent that systemic talks…”

 

PFE’s Christmas wish list includes finding solutions for Duchene’s Muscular Dystrophy and diseases like Parkinson’s and Alzheimer’s

“And we’re going to Duchene’s Muscular Dystrophy, it would love to see us being able to change fatal outcomes for boys with that disease and we’ll certainly keep our eyes open if there is another gene therapist as we have one of the — I think best manufacturing facilities for clinical studies…One of the few areas of metabolic disease where you could come to market without big outcome studies and I think it would be a disappointment if I didn’t mention that you will always be open on your eyes for breakthroughs in neurological diseases like Parkinson’s and Alzheimer’s and then it’s going to be a combination therapy. Maybe, new agents that deal with newer inflammation which seems to be a major culprit, that would be nice New Year’s gifts”

Bank of England Monetary Policy Statement December 2016

A unanimous decision to maintain the status quo

“…the Committee voted unanimously to maintain Bank Rate at 0.25%. The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases totalling up to £10 billion, financed by the issuance of central bank reserves. The Committee also voted unanimously to continue with the programme of £60 billion of UK government bond purchases to take the total stock of these purchases to £435 billion, financed by the issuance of central bank reserves”

Increase in Long-term interest rates with a fragile global outlook

“Since November, long-term interest rates have risen internationally, including in the United Kingdom.  In part, this reflects expectations of looser fiscal policy in the United States which, if it materialises, will help to underpin the slightly greater momentum in the global economy evident in a range of data since the summer.  At the same time, however, the global outlook has become more fragile, with risks in China, the euro area and some emerging markets, and an increase in policy uncertainty.”

They are ready to respond up or down with monetary policy direction

“Earlier in the year, the Committee noted that the path of monetary policy following the referendum on EU membership would depend on the evolution of the prospects for demand, supply, the exchange rate, and therefore inflation.  This remains the case.  Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”

Rising inflationary expectations

“Twelve-month CPI inflation stood at 1.2% in November, up from 0.9% in October and 1.0% in September.  Looking forward, the MPC expects inflation to rise to the 2% target within six months.”

Miscellaneous Quotes from week to 16th December

Bill Gates on CNBC

On the Fed

“well, if you’ve got this anticipation at such high levels, that’s already going to be priced into stocks. It’s whether the fed starts raising interest rates in a way that people are not expecting. And you could always through the bond market kind of look and see what that expectation is of how many rate increases there will be over the next…If they go up to six, then you would see some – the market come down somewhat.”

Pepsi (PEP) CEO Indra Nooyi on Yahoo Finance

More than just a Tweet

“A lot of what should have been said during the election I don’t think was said. Because I think we had the politics trump the issues, pardon the pun…I think the real issues that face us as a country weren’t talked about, the reason being that if the real issues were put on the table we would have had to engage in a serious discussion. I don’t think we are ready for serious discussions. The real issues don’t lend themselves to [140] characters, the real issues don’t lend themselves to sound bites on television.”

Life has to go on after the elections

“I think that the first thing that we have to do is to assure everyone living in the United States will be safe. Nothing has changed because of this election. What we heard was election talk and we will all come together and unify as a country. So, the process of democracy happened. We just have to let life go on.”

Caution against protectionism as it can be retaliatory

“Because we fly the American flag, because we are domiciled in the United States, we are a beneficiary or victim of America’s foreign policy and position in the world. And therefore, wherever we go, the first thing they talk to us is about the United States. What I worry about is that there might be discrimination against American companies overseas, if there is protectionism in the United States,”

She hopes talk is different from action

“I´m sincerely hoping based on the talk we heard from our president-elect the day after the election, that what we’ve heard before the election and what we are seeing in action are quite different, and that it’s much more measured and it’s more sensitive to the trade deals that we have already and that we want to build this country the right way going forward not necessarily retreat into, you know, isolationism or whatever.”

 

Donald Trump Comments at Tech Round Table 12.14.16

Trump is “honored by the bounce”

“So I want to add that I’m here to help you folks do well. And you’re doing well right now and I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue and perhaps even more importantly we want you to keep going with the incredible innovation. There’s nobody like you in the world. In the world, there’s nobody like the people in this room.”

We have no formal chain of command here

“And anything we can do to help this go along, and we’re going to be there for you and you’ll call my people, you’ll call me, it doesn’t make any difference, we have no formal chain of command around here. I’m honored to have Gary, the president of Goldman Sachs, left Goldman Sachs to do this, and Wilbur, everybody knows Wilbur, they never call him Wilbur Ross on Wall Street, they just say “Oh, it’s Wilbur.” There’s nobody like him.”

We’re gonna do fair trade deals

“And we’re gonna do fair trade deals. We’re going to make it a lot easier for you to trade across borders because of a lot of restrictions, a lot of problems that I think you’ll see. And if you have any ideas on that, that would be, that would be great because there are a lot of border restrictions and a lot of border problems, you probably have less of a problem than some companies, some companies have — you have some problems.”

Donald Trump Fox News Sunday Interview 12.12.16 Notes

http://time.com/4597416/transcript-donald-trump-fox-interview/

Dems putting out the Russia story

“I’m not sure they put it out. I think the Democrats are putting it out because they suffered one of the greatest defeats in the history of politics in this country. And, frankly, I think they’re putting it out. It’s ridiculous.”

I don’t need to be told the same thing every day for eight years

“I don’t have to be told — you know, I’m, like, a smart person. I don’t have to be told the same thing in the same words every single day for the next eight years. It could be eight years — but eight years. I don’t need that. But I do say if something should change, let us know. ”

Staying at the White House

“I’m going to live in the White House with my family. Baron is going to finish up school because he’s got just a couple months to go. So, it’s a little hard to take him out of school. And Melania will be back and forth for that first couple of months.”

Wants to have Kushner working with him

“I’d love to have Jared helping us on deals with other nations and see if we can do peace in the Middle East and other things. He’s very talented. He’s a very talented guy. So, we’re looking at that from a legal standpoint right now”

F-35 call out

” I want to make good deals for this country. I don’t need a $4.2 billion airplane to fly around in, O.K.? I don’t need that, especially when it’s totally out of control. You know, they’ve lost control of it. I let them know that I don’t want this. I just see things that’s — if you look at the F-35 program with the money, the hundreds of billions of dollars, and it’s out of control. And the people that are making these deals for the government, they should never be allowed to go to work for these companies.”

Need to speed up approval of things like EPA

“EPA, you can’t get things approved. People are waiting in line for 15 years before they get rejected, O.K.? That’s why people don’t want to invest in this country. I mean, you look at what’s going on — and you can look at a jobs report, but take a look at the real jobs report, which are the millions of people that gave up looking for work, and they’re not considered in that number that’s less than 5%. O.K.?”

We can’t let it take 10-15 years to permit to build stuff

“I do know this: other countries are eating our lunch. If you look at what China is doing, if you look at what — I could name country after country. You look at what’s happening in Mexico where our people — just our plants are being built. They don’t wait 10 years to get an approval to build a plant, O.K.? They build it, like, the following day or the following week. We can’t let all of these permits that take forever to get stop our jobs.”

Thoughts on Tillerson

“Well, in his case, he’s much more than a business executive. I mean, he’s a world-class player. He’s in charge of, I guess, the largest company in the world. He’s in charge of an oil company that’s pretty much double the size of his next nearest competitor. It’s been a company that’s been unbelievably managed. And to me, a great advantage is he knows many of the players. And he knows them well. He does massive deals in Russia. He does massive deals for the company, not for himself, but the company.”

We’re going to have to impose a major tax on companies that leave

“we’re going to have to impose a major tax on companies that leave, bill their product, and think they’re going to sell it right to our border, like we’re a bunch of —”

Reducing taxes and regulations are the nice ways of doing things and everyone loves those, but there will be taxes too

“I’m a big free trader. But it has to be fair. So, what’s happened is we have lost, over a period of years, short years, 70,000 factories in this country. Chris, 70,000. I always say to people, I think it’s a typo. How could it be so many? Seventy thousand factories. We’re being stripped of our workers. We’re being — I mean, we’re being stripped of our jobs, our good jobs are really good down, and we’ve got to stop it. And the only way you’re going to stop it, the nice way is, we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy. Businesses, way down. Also middle class, but way down, O.K., taxes and regulations. But when a company wants to move to Mexico or another company — or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax, and the people that all got fired, so we end up with unemployment and debt, and they end up with jobs and factories and all of the other things, not going to happen that way. And the way you stop it is by imposing a tax.”

If you move there’s a 35% tax. No one’s going to move.

“Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all. You know, people are saying, they don’t understand, really, what I’m doing. I read the Wall Street Journal the other day. Honestly, their editorial board doesn’t get it. I don’t think they understand business. I don’t think the Wall Street Journal editorial board — and I know some of them. They’re really nice. I don’t think they understand business. They don’t understand what I’m saying. There’s a 35% tax, but there is no tax if you don’t move. But if you move your plant or factory and you want to sell back into our country, you fire all your people, there are going to be consequences for that. There are going to be consequences. You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.”

The money I spent is peanuts compared to the money I wont make

“If I were going to do new deals right now, I am turning down billions of dollars of deals. I will tell you, running for President, the money I spent is peanuts compared to the money I won’t make. And that’s O.K. because this is so important. What I’m doing is so important. This is a calling. This is so — this is a movement. It’s not just me, it’s millions and millions of people. ”