Company Notes Digest 04.30.17

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.

The common thread in this week’s notes is a heightened awareness of both cost push and wage push inflation. Companies are citing that wages are rising (due to a tight labour market) and prices for raw materials like steel are rising. Both of these are being reflected in companies’ aims to increase prices of goods and services. In Europe, growth is moderating as inflation picks up. 

The Macro Outlook:

Strong economic activity is causing bottlenecks in the supply chain

“the U.S. rail system is experiencing high demand driven by strong economic activity. This increased overall demand is adding stress to the rail system…This increased overall demand is adding stress to the rail system…After rail, the next logistics bottleneck is trucking. The issue today is not in tractors and trailers, it’s finding qualified drivers and dealing with congested infrastructure.”  –Halliburton’s (HAL) CEO Jeff Miller

A tightening labor market is leading to wage inflation

” The labor market is tight. U.S. unemployment is at an all-time low and in some basins it’s just above 2%…there will likely be wage inflation and additional pricing will be necessary for cost recovery.” –Halliburton’s (HAL) CEO Jeff Miller

Raw materials prices are also rising

“Raw material inflation was significant year-over-year headwind” –Whirlpool’s (WHR) CEO Marc Bitzer

“The revised outlook does reflect an assumption for higher material cost…we have also increased our estimate for price realization, partially due to a mid-year price increase” –Caterpillar’s (CAT) CFO Brad Halverson

” So we expect raw materials to be up and they are in the first quarter…steel is up about 15% and aluminum is up about 5% as of yesterday. So with that we expect even higher unfavorability in the raw materials part of our P&L” –Harley-Davidson’s (HOG) John Olin

“so just on food basket inflation, we’re still anchoring to the 2% to 4% for 2018, but what the stores in the U.S. will experience lines up pretty much with what we’re seeing in the rest of the industry”  – -Domino’s Pizza (DPZ) CFO Jeffrey D. Lawrence

Clearly there is underlying commodity cost pressure that affects everybody. Colgate-Palmolive’s (CL) CEO Ian Cook

But long term trends may keep wage growth down

“at this rate of unemployment, one could have expected wage inflation to be stronger than what it is…[but companies] also have more alternatives. So, we think that has a dampening effect on wage inflation. And we don’t – while we expect wage inflation to increase, we don’t think it’s going to increase very rapidly or for that matter, reach levels that we have seen in the past, despite a much lower unemployment rate than we’ve seen in a very long period of time.” –ManpowerGroup’s (MAN) CEO Jonas Prising

And trade war talk is affecting business confidence

“this escalation of protectionism and tensions, you can feel it not only in terms of business activity, but [also] are starting to somehow dent the confidence of investors” –UBS Group AG’s (UBS) CEO Sergio Ermotti

“the trade wars and the executive branch, which I’m not sure it’s easy to distinguish between the effects of both of those. Look, I think they are having an effect.” –Moelis & Co’s (MC) CEO Kenneth Moelis

“The increase in commodity cost was largely metals-driven, in part by the market’s reaction to potential increases in U.S. tariffs.”  –Ford Motor (F)  Robert L. Shanks

We’re in a tightening phase, not a shortage phase

“when we talk to our customers, they – and we ask them quite frankly. Do you see a shortage or do you see a tightening? And the answer we get is, we see a tightening.” –Nucor’s (NUE) CEO John Ferriola

Meanwhile the lower tax rates are:

-reducing willingness to tap debt markets

“[Lower tax rates are] providing at least a modest headwind, but it is very concentrated in terms of the number of firms that have large cash hordes overseas and may not feel they want to tap the debt markets given their repatriated cash…it’s a headwind not a serious one at this point ” –Moody’s (MCO) CEO Ray McDaniel

-improving competitive advantage

“the tax changes should make us somewhat more competitive, and that’s, by reducing the disadvantage we’d had against many of our competitors like the offshore reinsurers.” –Reinsurance Group of America’s (RGA) CEO Anna Manning

-making clients bullish

“[our clients] are bullish about the future, the economic outlook is positive, and tax reform has helped create that positive outlook.”  –ManpowerGroup’s (MAN) CEO Jonas Prising

-and creating incentives to grow 

“most certainly a lower tax rate, and therefore, better after-tax returns certainly helped on the margin, to put a little bit more incentive in there for the franchisees to grow.” –Domino’s Pizza (DPZ) CEO Richard E. Allison

…But having no impact on hiring

“I would not say that there are clients that have said because of tax reform, we are looking to hire more people at this stage.” –ManpowerGroup’s (MAN) CEO Jonas Prising

International:

Growth is moderating in Europe

“Following several quarters of higher than expected growth, incoming information…points towards some moderation, while remaining consistent with a solid and broad-based expansion of the euro area economy.” –ECB President Mario Draghi

Housing demand outstrips supply in Sweden

“the mismatch between housing supply and demand has not been solved, so we still see a high demand but for more affordable housing” Swedbank’s (SWDBF) CEO Birgitte Bonnesen

There is room for more coffee in China

“per capita coffee consumption in China is only about one half of one cup per person per year compared to roughly 300 or so cups per person per year in the U.S. and even more than that in certain Western European markets.” –Starbucks (SBUX) CEO Kevin Johnson

Financials:

The IPO market is healthy

“With 16 U.S. venture backed IPOs in the first quarter, the best quarter for innovation IPOs in three years, the IPO market has improved and the pipeline remains relatively healthy.”  –SVB Financial’s (SIVB) CEO Greg Becker

But excessive liquidity is helping companies stay private

“later stage funds, they’re putting some very, very big rounds, we like to call them private IPOs. And those are rounds that are more than $100 million and there’s a significant amount of those rounds taking place…With so much available liquidity…the bar for a successful exit is high, which could further slow the exit markets” –SVB Financial’s (SIVB) CEO Greg Becker

Lower rated issuers are tapping bank loan markets over high yield

“The bank loan market has been a bit more active than the high yield market. We’re seeing a lot of first time issuers come through the bank loan market. We’re also seeing a lot of issuers that are rated very low in the credit spectrum.” –Moody’s (MCO) CEO Bob Fauber

Mobile traders trade more often

“One of the things we know about, when a client adopts our mobile platforms, they clearly are more active with us, they login more often, and they trade more often.” –TD Ameritrade Holding’s (AMTD) CFO Steve Boyle

A bad flu season and harsh winter drove higher reinsurance claims

“we had elevated claims beyond our seasonally adjusted expectations…the flu season and the winter weather was especially severe this year, and thus we were not entirely surprised that we saw higher claims” –Reinsurance Group of America’s (RGA) CEO Anna Manning

Consumer

Retail inventories may be balancing out

“we continue to see retailers work down inventory but on our businesses for this quarter in a more measured way or a more modest way than we saw in the first quarter of last year” –Colgate-Palmolive’s (CL) CEO Ian Cook

Dominos sells 1 out of 6 pizzas in the US

“We are proud that we are now the largest player in pizza. But tonight, five out of six pizzas sold in the U.S. are going to be from somebody other than Domino’s. Globally, if you add in our international, 9 out of 10 are going to be sold by somebody other than Domino’s.” –Dominos (DPZ) CEO J. Patrick Doyle

New data regulation in Europe (GDPR) will impact digital advertising

“the amount of uncertainty there is for us and all the other companies in the digital advertising industry is reasonably higher than it’s been right now because we’re in the process of rolling out GDPR.” –Facebook (FB CFO) Sheryl Kara Sandberg

Technology

Businesses are embracing the subscription model

“partners and our customers are embracing the subscription model.” –Citrix Systems (CTXS) CEO David James Henshall

The transition to cloud is happening at an even faster rate

“the transition to cloud continues to occur. It’s occurring at a bit even faster rate, so that you do see that trend going on…our forecast for the long term is still in that high teens, low 20s range for that kind of growth. ” –Intel (INTC) CEO Brian M. Krzanich

Which is driving investment in cloud infrastructure

“Growth continues to be very strong in semiconductor manufacturing and data centers, with robust demand for cooling fluids and interconnect solutions.” –3M Co’s (MMM) CFO Nicholas Gangestad

“Blockchain is here to stay”

“The blockchain infrastructure is here to stay.” –Advanced Micro Devices (AMD) CEO Lisa T. Su

“We are excited about the long term potential blockchain and what it might be able to do in terms of distributed trusted applications and…I don’t just mean crypto….blockchain is still in the very first innings.” –PayPal Holdings’ (PYPL) CEO Dan Schulman

Industrials, Materials and Energy:

Demand for oil has been high

“demand has been fairly strong last couple of years…it’s been in excess of the 10-year average…Going forward, we see it fairly similar to 2017” –Exxon Mobil (XOM) Jeff Woodbury

Supply and demand has come into balance

“the absence of the normal seasonal stock builds in the first quarter clearly demonstrates that supply and demand is now in balance, which combined with increased geopolitical risk is what has driven oil prices up” –Schlumberger Limited’s (SLB) CEO Paal Kibsgaard

Consumers in energy markets like Houston are feeling more confident

“We finally are starting to see a brighter picture in the energy-related markets…the sentiment in consumer confidence are definitely improving ” –Group 1 Automotive (GPI) CEO Earl J. Hesterberg

Things are looking up in mining

“We continue to see robust rebuild demand; strong utilization in the mines is driving improving aftermarket parts demand and orders.” –Caterpillar’s (CAT) Amy Campbell

The LNG market is oversupplied

” the LNG market is becoming oversupplied in the short term as new projects continue to ramp up…the demand drivers appear mostly sustainable ….the LNG market should rebalance with a supply gap expected to open before the middle of the next decade.”  –Chevron’s (CVX) CEO Pat Yarrington

Miscellaneous Nuggets of Wisdom:

Customers’ needs change with their daily rhythms

“[We’ve recognized] that the dominant customer need state in the morning is the need state of convenience. And…as we transition into the afternoon day-part, the need state starts to balance between both convenience and community…what we know about the occasional customer in the afternoon is that they don’t shop with us as frequently, and they’re not aware of our offerings as our Starbucks Rewards customers…We know that the afternoon customer is looking for refreshment, and they are really interested in cold brew.” –Starbucks (SBUX) COO Rosalind Brewer

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 04.23.17

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.

Avondale’s digest of earnings calls is back for earnings season! We’ve been on an extended hiatus because Scott has been working on outside projects that have taken priority over our weekly newsletter.  Still, we’ve heard from a lot of readers that they miss this piece and so we’ve been working to bring it back.

With the return there will be some format changes though.  The newsletter will now be released on Mondays instead of Fridays and most of the heavy lifting will now be carried by Erick Mokaya.  Scott will still serve as editor for the time being but Erick (along with a growing team of contributors) will be responsible for an increasing amount of the content.

I (Scott) am excited to be able to bring this piece back and hope that we will be able to maintain our high standards and frequency of publishing.  I’m confident that Erick will be a great steward of this project. 

With this transition in mind, I wanted to highlight a particularly salient quote from our miscellaneous nuggets of wisdom section about scaling content production.  If you want to scale, it’s about picking great people and letting them go to work.  With Erick we’re in good hands.

The Macro Outlook:

Things look good

“Conditions remained healthy, sentiment in the field remains constructive and the good demand of the past few quarters appears to be carrying into the second quarter of 2018.” –Fastenal (FAST)

“Things look awfully good and it feels like awfully good in a way in which there could be a bit of a runway here for things to remain pretty good…I think we will go forward here on a playbook that involves optimism with a kind of healthy state of anxiety” –Goldman Sachs (GS)

The economy is in full employment with a tight labour market

“it’s affecting everybody, all businesses in our footprint, very tight job market, it’s facing a full employment economy type of situation.” –Mercantile Bank’s (MBWM)

“The labor market is tight, and wage growth continues to improve.” –Citigroup (C)

Confidence is high

“There is clearly something going on with increased confidence and increased spending.” –American Express’ (AXP)

“business confidence is strong. People are looking to invest.” –Textron (TXT)

“confidence is high and that should be a benefit generally speaking. So, overall, we still feel pretty good and it’s showing a little bit in our sort of consumer spend data where we’re seeing that confidence continues to sort of a spur a bit in spending” –JPMorgan Chase (JPM)

The Impact of lower tax rates is being felt

“our first quarter results reflect the new U.S. corporate tax rate, which resulted in a significant reduction in our tax provision. And like many U.S. companies, we expect to see some modest adjustments related to the Tax Act throughout the year.” –American Express’ (AXP)

“U.S. corporations are starting to see the benefits of tax reform.” –Citigroup (C)

Which is showing up in increased actual demand

“Some of the things that we’re feeling from a macro and micro economic perspective out there is starting to expand some into actual demand from our clients.” –Comerica (CMA)

Businesses are investing in expansion

“we are starting to hear more and more discussion about going out and buying some new equipment and becoming more productive, more efficient.” –Mercantile Bank’s (MBWM)

“we’re starting to have some conversations with clients about CapEx and expansion opportunities…” –Comerica (CMA)

International:

Some companies welcome the new tariffs

“So certainly the language or the rhetoric that we are hearing would be positive to allow U.S. companies to compete in that space, but that remains to be seen. The rhetoric sounds good. But it’s been a huge hindrance to the business” –Textron (TXT)

but most wonder if they will implemented

“Whether that actually turns into policy and execution that allows us to compete in those international marks is still to be determined.” –Textron (TXT)

“The real question that comes down is how are those tariffs enforced, really, what countries are accepted and then are quotas actually placed? ” –Alcoa (AA)

Financials:

There’s a lot of idle cash

“We estimate there is over $50 trillion of cash that’s sitting in bank accounts earning less than 1%, some places negative. So as rates go up especially in the short end that is going to attract a lot of this cash into the fixed income markets ” –BlackRock (BLK)

But investors are getting more comfortable deploying it

“Our clients are deploying more cash into the markets and then putting it into different types of investments. ” –Morgan Stanley (MS)

Industrials:

Tariffs have not affected demand yet

“We take a pretty close look at demand as you can imagine, and we’ve not seen any impacts yet. ” –Alcoa (AA)

Steel prices are up but not due to impending tariffs

“The price increases we have seen so far are a function of production cost increases and that includes commodities inflation.” –MSC Industrial Direct (MSM)

Materials, Energy:

Crude oil markets have stabilized

“Market fundamentals are supportive of growth as crude oil prices have remained relatively range bound, providing stability for customers to more effectively evaluate projects.” –General Electric (GE)

Alumina markets are tight

“we’re experiencing considerable price volatility as illustrated here with spikes in both aluminum and alumina markets… in the near-term, the alumina market is tight…our global forecast is for a deficit market with competition among consumers for available alumina tons” –Alcoa (AA)

Miscellaneous Nuggets of Wisdom:

Greatness takes time

“Often, when a memo isn’t great, it’s not the writer’s inability to recognize the high standard, but instead a wrong expectation on scope: they mistakenly believe a high-standards, six-page memo can be written in one or two days or even a few hours, when really it might take a week or more!…The great memos are written and re-written, shared with colleagues who are asked to improve the work, set aside for a couple of days, and then edited again with a fresh mind. They simply can’t be done in a day or two ” –Amazon (AMZN)

Scaling is about picking great people and letting them go to work

“I think, in terms of scaling the original production and the licensing of content around the world, it’s mostly about picking great people, giving them a great place to work, trusting their – trusting them and empowering them to continue to make great choices” –Netflix (NFLX)

Full transcripts can be found at www.seekingalpha.com

2017 Year in Review

This will be our last full post for 2017, 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 2017.  Click here to join our weekly email list.

2017 began and ended with excitement about tax reform.  In between, equity markets climbed to new peaks as optimism boomed and the economy posted solid growth. 

Even though stocks posted one of their better performances in history, 2017 felt like a strangely boring year.  Not much happened except for unwavering optimism.  Although the fundamentals were positive, the stock market really felt like it was going up “just because.” 

Nothing exemplified the zeitgeist of 2017 better than Bitcoin, which rose 1,642% between January and December 15.  Stock prices diverged from fundamentals many years ago, but at least they have fundamentals.  Bitcoin is an asset with zero intrinsic value.  It rose only because buyers believed that it would go up.

This type of thinking is typically a hallmark of the extreme late innings of an economic cycle.  Rising inflationary pressures and a tightening Federal Reserve are also hallmarks of the end of an economic cycle.  We saw both in 2017.  Of course, this has not been a typical economic cycle, so anything is possible, but 2018 is unlikely to look like 2017.

January 13

We started the year excited about tax reform

“I could spend all day on tax reform.…the lowering of the corporate tax rate would be a good thing…And then the other one is obviously what they’re talking about relative to overseas earnings and repatriation…For us, this is potentially a really big positive” –Pfizer

But Congress decided to focus on healthcare reform first

“our legislators have been telling us [that] the first thing that’s going to happen in Congress…is Obamacare…So Congress has a lot on its plate right now. And to work through all of the details and get [tax] legislation like that passed, well, Congress is telling us it’s going to be a while in any event.” –Constellation Brands

January 20

Still, the optimism was palpable

“The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. We will have to see how these topics play out, but we are optimistic.” —Bank of America

January 27

Capital markets loved the idea of a pro-business administration

“Obviously our new administration is pro-business, but there’s a lot of moving parts in that…I think we’re all waiting to see if there’s a tax reform package that would allow us the ability to access overseas cash and repatriate cash…I think that would make a big difference for a lot of multinationals” —Abbott Labs CEO Miles White (Healthcare)

“I think all of us recognized we’ve got a new administration in Washington which has an agenda to be friendly to business and I think, we’re anxious to see how all of that will play out certainly tax reform is the biggest single item that we’re focused on this year.” —United Technologies CEO Greg Hayes (Conglomerate)

And that helped give businesses confidence to invest in growth

“As I have gone around the state, visiting all our locations during the month of December, one thing it was a consistent message was how many customers particular I would say mid and small customers are moving forward with plans that they had, had delayed, right? Somebody had a piece of equipment they want to put in and they can wait for six months, after they got the clarity from the political situation, the word was let’s move forward, let’s move forward now. So I think you are definitely seeing just general optimism in the market moving forward…I think we are seeing momentum increase. I would expect loan growth to be better than 2016 for sure.” —Cullen Frost CEO Phillip Green (Bank)

February 3

Animal spirits had been unlocked

“the animal spirits are real, there is no doubt about it…when you have the whole herds thinking about slow global growth and that’s just the way it is and that’s just the way it’s going to work, well, it becomes self-reinforcing because we all act that way…but right now the feelings are better than I’ve seen them in long time and that could be enough to get the herd moving in the direction of saying, I’d better not miss this moment as oppose to just hunker down and keep waiting it out.” —Honeywell CEO Dave Cote (Conglomerate)

But the hard data wasn’t keeping up with the soft data

“client sentiment has clearly and markedly improved. With that said when you look at their actual activity levels…There is a little sense of urgency…they are waiting to see more activity in their business before their hiring activity reflects that.” —Robert Half CEO Harold Messmer (Temp Staffing)

February 10

There were risks, but markets didn’t seem to care

“The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more…To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely…It’s a tough market in which to be a disciplined buyer.” –Loews

February 17

The President was the stock market’s biggest cheerleader

“The stock market has hit record numbers, as you know, and there’s been a tremendous surge of optimism in the business world, which means something different than it used to. Now it means it’s good for jobs. Very different. Plants and factories are already starting to move back into the United States, big league, Ford, General Motors.” —President Donald Trump (Government)

February 24

And optimism continued to grow

“I think everybody is optimistic…it’s really not specific to one particular industry, okay. It’s really across the board and it’s across the country, whether it be if you’re on the East Coast, West Coast, the mid chapters, what have you, all of our companies are all simultaneously doing better than, frankly, we would have thought.” —Reliance Steel CEO Gregg Mollins (Steel Distributor)

March 3

Markets loved Trump

“Well, there’s no question that animal spirits have been unleashed a bit post the election. Stock market is up a lot. Household and business confidence have increased significantly…there’s no question that sentiment has improved quite markedly post the election.” —Federal Reserve Bank of NY President Bill Dudley (Central Bank)

March 10

Retailers were just about the only industry that was struggling

“Our industry is the midst of a seismic shift, and, of course, you read the headlines. In fact, many of you write the reports, we’re operating in an incredibly challenging environment. All across the retail industry, many of our competitors are aggressively rationalizing their assets. They are closing stores, exiting markets. They’re cutting costs just to keep their heads above water. We’ve not seen this number of distressed retailers since 2009 in the Great Recession.” —Target CEO Brian Cornell (Retail)

March 17

Even the Fed noticed the change in sentiment

“I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many, many businesses in recent months…the shift in sentiment is obvious and notable.” —Fed Chair Janet Yellen (Central Bank)

They raised rates in March, but continued to take an accommodative stance

“Even after this increase, monetary policy remains accommodative…the data have not notably strengthened…we haven’t changed our view of the outlook. We think we’re on the same path; not, we haven’t boosted the outlook projected faster growth. We think we’re moving along the same course we’ve been on” —Fed Chair Janet Yellen (Central Bank)

March 24

Consumer confidence boomed with the stock market

“There’s clearly a sense of general optimism in the market. There’s a perception that jobs are being created and that wages are actually starting to move upward. There’s a solidifying sense that the government has adopted a business-friendly posture and that will result in real changes to tax rates and to the regulatory environment.” —Lennar CEO Stuart Miller (Homebuilder)

April 20

But as the administration stumbled, optimism began to wane

“The first quarter was an interesting one, as we entered it with a lot of optimism about what the new administration might do to further improve the economy. As the quarter continued, some of this optimism has slowed and now companies are more cautious or skeptical about what shape some of the programs, including tax reform, infrastructure projects and ACA reform will take and when they might actually take effect, if at all.” —Brown and Brown CEO Powell Brown (Insurance Broker)

The yield curve fell along with expectations

“So, because that stimulus hasn’t occurred, it still may, but certainly is lower probability today than it was in November and December. They were back down in lower 10-year rates, lower mortgage rates than we were there for a while. And now we have to ask ourselves again, are we going to be lower for a while, lower for longer or are we still awaiting for a shoe to drop in for there to be a big backup in rates?” —Wells Fargo CFO John Shrewsberry (Bank)

Companies said that they were waiting for more clarity on policy

“In general, when we talk to our RMs and talk to the customers, I think the general sentiment is one of optimism, but they’re in kind of a wait-and-see mode. And they’re just waiting, I think, for more certainty about which direction the administration is going to go” —M&T Bank CFO Darren King (Regional Bank)

April 27

Growth turned out to be fairly anemic in Q1

“You had a fairly anemic GDP growth rate this first quarter. The projections are for great improvement coming up and we hope that’s the case…you read almost every day and you see in the press virtually every day…the gap between hard data and soft data, sentiment optimism on the one hand and actual levels of activity on the other.” —Robert Half CEO Harold Messmer (Temp Staffing)

May 5

But market participants stayed optimistic anyways

“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed….The Committee views the slowing in growth during the first quarter as likely to be transitory” —The Federal Reserve

Global growth began to kick in

“When the US economy, which is approximately 20 trillion, does well much of the world does well. To us this means our concerns of China or Europe precipitating a worldwide recession depression have been significantly reduced, but not delaminated. Also the trade policies of the US could precipitate a collapse in world trade.” – Fairfax Financial Holdings CEO Prem Watsa (Insurance)

May 19

French elections helped ease political risk in Europe

“It’s nice to hear people talking about Europe in a positive way. We’re really seeing growth in a broad way you haven’t seen in 5 or 10 years. The political risk in Europe is coming down. Europe is in the 3rd inning of a recovery. The US, depending on Trump, is somewhere between the 7th and 9th inning.” – Polygon Global Partners LLP Founder Reade Griffith

June 9

By mid year it was clear that relatively little change would actually be coming from Washington

“You’ll probably get some tax reform and it will more likely resemble a tax cut as opposed to broad-based reform” – PIMCO Global Chief investment officer Dan Ivascyn

But investors kept buying anyways

“The level of complacency about where markets are today is pretty scary. People are just sort of assuming it’s OK, that it is what it is, and I have to say that I’m a little bit concerned about it.” – TPG Co-CEO Jon Winkelried

June 15

Volatility was abnormally low

“We’re on increasing watch for volatility…there is a massive amount of money that is being short VIX. It’s a trade that’s made a lot of money and its very very crowded, which suggests to me the days of low volatility are numbered…If you’re a trader or a speculator I think you should be raising cash today, literally today. If you’re an investor you can easily sit through a seasonally weak period” —Doubleline CIO Jeff Gundlach (Asset Management)

June 29

Animal spirits were driving the economy

“a lot of what’s driving people to the market is a sense of confidence, it’s animal spirits…the confidence that people bring with them to the table about whether their job is stable and whether there’s going to be a wage increase or there is opportunity for them to move and be mobile to the next job opportunity.” —Lennar CEO Stuart Miller (Homebuilder)

After years of slow growth, a simple return to normal felt euphoric

“The slow and steady though sometimes erratic market improvement that we have seen for the entirety of this recovery continues to seem to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

July 14

Central Bankers began to feel like they could begin to unwind accommodative policies

“for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.” —Federal Reserve Governor Lael Brainard (Central Bank)

The Fed started to talk about shrinking its balance sheet

“If the economy continues to evolve in line with our expectations, it is something we should begin to do this year. To my mind, I would say relatively soon. The exact timing of this, I do not think matters a great deal. It is something we have long been preparing to undertake.” —Federal Reserve Chair Janet Yellen (Central Bank)

July 20

At the same, time retail investors started to pour back into investment markets

“We are seeing this quarter very broad-based engagement in the market, so everyone from brand-new customers opening their first account to very active traders seem to be engaged in the market. We saw a good activity across pretty much all of our products.” —TD Ameritrade CEO Tim Hockey (Broker)

Voices of warning were few and far between

“…don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk….Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par.” —Janus Portfolio Manager Bill Gross (Investment Management)

August 11

The original reasons for optimism never really materialized but it’s better to be lucky than right

“I guess this is a case of better lucky than right. We expected the market to go up but for different reasons. We thought it would be based on generally positive growth oriented policies enacted by the administration, lower taxes, infrastructure spending, healthcare, reform et cetera, none of these things transpired. But what has transpired has been kind of global synchronized economic growth and a very accommodative global monetary structure. So, I’m happy with the outcome the reason for it was different from what we anticipated, but we’ll take it.” –Third Point CEO Dan Loeb (Hedge Fund)

September 14

People who know market history knew that cycles go both ways

“It’s definitely cyclical folks, I mean you will have a volatile market…people panic. People panicked in 2008 and 2009, they panicked in the 1989, they panicked in 1994, they panicked in Asia in 1997, they panicked in the Internet thing in 2000, the people will panic, you will panic. You will all be running through the door like everybody else and regulators will panic and – come on, and I just said, the government support $12 trillion securities that has to have some effect on depressing volatility…so the market will become more normal again one day” —JP Morgan CEO Jamie Dimon (Bank)

And warned against chasing the hot dot

“it will eventually blow up. It’s a fraud okay. And honestly I’m just shocked anyone can’t see it for what it is.” —JP Morgan CEO Jamie Dimon (Bank)

September 22

Cycles usually end when Central Banks tighten

“in October we will begin the balance sheet normalization program that we outlined in June. This program will reduce our securities holdings in a gradual and predictable manner.” —Fed Chair Janet Yellen (Central Bank)

October 6

But the economic momentum was still strong

“I think we are absolutely seeing that continued momentum, particularly in the upper end of the economy” —Vail CEO Rob Katz (Ski Resorts)

Labor markets became particularly robust

“The often discussed labor shortage in many sectors of the economy is translating into wage growth. And while much of the data collected by the government doesn’t seem to reflect significant wage growth, the customers visiting our Welcome Home Centers are reflecting an optimistic sentiment and an ability to afford today’s more expensive homes.” —Lennar CEO Stuart Miller (Homebuilder)

October 12

Consumers were healthy

“not just in the U.S. but as we look around the world we would rate the health of the consumer right now is pretty good…as you look across the world unemployment is low, employment is high. Probably the bigger challenge to the consumer or to the worker has been the lack of wage growth…And we’re beginning to see some of that and again that’s helping to the consumer.” —Citigroup CFO John Gerspach (Bank)

October 20

Optimism built

“Our commercial clients continue to perform well. They continue to remain optimistic. They continue to look forward to continue implementation of a pro-growth agenda, particularly focused on meaningful tax reform.” –Bank of America CEO Brian Moynihan (Bank)

Investors continued to chase rising markets

“we saw more cash go into the markets, particularly the equity markets as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.” –Morgan Stanley CEO James Gorman (Broker)

October 27

The environment began to resemble a boom

“Industrial demand remains strong…I would say that certainly the demand was broad based. If you look across our product lines, we’ve got 65 to 70 different product lines, and the demand was very strong across those as well as strong across the region. So we had revenue up in three of the four regions year on year in Europe, Asia and the U.S., and it was about even in Japan.” —Texas Instruments (Semiconductors)

Booms come with inflationary pressures

“I mean obviously we’re in a bit of an inflationary environment for some of the commodities…” —Honeywell (Industrial)

“The core underlying market we’re facing for raw materials is certainly toughening.” —3M (Industrial)

“our commodity inflation estimate has increased somewhat from 3 months ago… ” —Kimberly Clark (CPG)

“We knew we’d see higher pulp cost going into year, these costs have continue to increase beyond initial forecast ranges.” –Procter and Gamble (CPG)

November 3

Yet investors seemed indifferent to risk

“It’s an environment where the uncertainties are unusual in terms of number, scale and insolubility, where prospective returns are just about the lowest they have ever been, where asset prices are high across the board and where pro-risk behavior is commonplace. It’s impossible for us to predict what will catalyze the market’s correction, how severe it might be and when it will occur…We do not believe this is a time in the cycle for reaching for return” —Oaktree (Investment Management)

November 10

It was hard to see any reason that the cycle wouldn’t last into 2019

“I fundamentally believe the recovery is going to spread out over two years. I think the recovery is going to be spread out over 2018 and 2019….I fundamentally don’t believe the bigger projects will start happening…until late 2018 early 2019. ” —Emerson (Industrials)

November 17

There were some signs that consumer credit quality may be fraying

“there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.” —Tenet (Hospitals)

“As it relates to credit…we are seeing a little bit more of a normalization as we move forward…we actually have seen a little higher level of reserves that need to be put in place, as well as some financing charges that have been recognized” —JC Penney (Retail)

December 1

But consumers continued to spend

“People are spending more, in some cases, they’re earning more.” —Wells Fargo (Bank)

Consumption was fueled by optimism

“Our third quarter Consumer Sentiment Survey highlighted that consumers have an increasingly positive view of the national economy and continue to view their personal financial situation favorably. Given that over half of homeowners believe their home values are increasing, intent to engage in discretionary home improvement projects remains strong.” —Lowes (Home Improvement)

December 8

Congress finally made progress on tax reform at year end

“we’re very excited about where the tax reform is headed, we’re especially excited about the house version because it starts almost immediately where the Senate is the later year.” —Kroger (Grocery)

That put the cherry on top of 2017

“our expectation is that…tax reform…will create a little bit more momentum. Exactly how much momentum? I am not 100% sure but could you imagine that increasing whatever the run rate GDP is by half a percent, I think that’s a reasonable assumption, may be not happen on January 1 but this could happen overtime.” —Wells Fargo (Bank)

December 15

The year ended with one last increase in interest rates

“Today, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1-1/4 to 1-1/2 percent.” –FOMC

And Janet Yellen said goodbye

“Finally, I’d like to note that, although I have one more FOMC meeting to attend in the New Year, this will be my last scheduled news conference. Over the next month and a half, I will do my utmost to ensure a smooth transition to my designated successor, Jay Powell. I am confident that he is as deeply committed as I have been to the Federal Reserve’s vital public mission. Thank you for being such an attentive audience these past four years.” –FOMC

She will be sleeping well

“I mean of course the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price earnings, ratios, and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out. But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued. We are in a, I’ve mentioned this in my opening statement, and we’ve talked about this repeatedly, likely, a low interest rate environment lower than we’ve had in past decades, and if that turns out to be the case, that’s a factor that supports higher valuations. We’re enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. I think what we need to and are trying to think through is if there were an adjustment in asset valuations with the stock market, what impact would that have on the economy and would it provoke financial stability concerns. And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange…look, at the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable, build-up of debt as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook.” –FOMC

FOMC Press Conference Notes

The Fed raised rates again

“Today, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1-1/4 to 1-1/2 percent. Our decision reflects our assessment that a gradual removal of monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent, consistent with the maximum employment and price stability objectives assigned to us by law”

Expect the labor market to remain strong

“You may have noticed that we altered the statement language about the labor market outlook. This change highlights that the Committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers, and rising wages. ”

Inflation measures remained below 2%

“Even with a firming of economic growth and a stronger labor market, inflation has continued to run below the FOMC’s 2 percent longer-run objective. The 12-month change in the price index for personal consumption expenditures was 1.6 percent in October, up a bit from the summer but still below rates seen earlier in the year. Core inflation–which excludes the volatile food and energy categories–has followed a similar pattern and was 1.4 percent in October.

Yellen out

“Finally, I’d like to note that, although I have one more FOMC meeting to attend in the New Year, this will be my last scheduled news conference. Over the next month and a half, I will do my utmost to ensure a smooth transition to my designated successor, Jay Powell. I am confident that he is as deeply committed as I have been to the Federal Reserve’s vital public mission. Thank you for being such an attentive audience these past four years.”

Of course the stock market has gone up a lot this year

“I mean of course the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price earnings, ratios, and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out. But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued. We are in a, I’ve mentioned this in my opening statement, and we’ve talked about this repeatedly, likely, a low interest rate environment lower than we’ve had in past decades, and if that turns out to be the case, that’s a factor that supports higher valuations. We’re enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. I think what we need to and are trying to think through is if there were an adjustment in asset valuations with the stock market, what impact would that have on the economy and would it provoke financial stability concerns. And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange.”

There’s a lot less to lose sleep over

” look, at the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable, build-up of debt as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook. “

Company Notes Digest 12.8.17

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.

Our focus this week was on tax reform. A bill is now expected to be passed before the end of the year and corporate America is excited. Companies will certainly benefit, but how will they spend their extra cash and will it boost the economy? Average Americans don’t get quite as big of a windfall.

The Macro Outlook:

Corporate America is excited about tax reform

“we’re very excited about where the tax reform is headed, we’re especially excited about the house version because it starts almost immediately where the Senate is the later year.” —Kroger (Grocery)

Most companies are well positioned

“I would say overall we feel we’re well positioned for the things that are being talked about – almost all of our cash is outside of the U.S., so any sort of repatriation that will be a positive for us.” —Donaldson (Industrial products)

Some companies will benefit more than others

“we don’t expect tax reform to have an impact on us for quite sometime. We have over $1 billion worth of net operating losses that we can burn going forward…So we will have a – some slight balance sheet adjustments as we revalue our tax assets and tax liabilities” —Workday (SaaS)

Domestic companies will benefit most

“We are entirely a domestic company. 98% of our revenues are here in the U.S. We are not a capital-intensive company. So…we will pay tax at close to the statutory rate. So, a reduction from 35% to what’s currently being discussed at 20%, very significant for us, even if it drifts up a little bit from 20%. ” —HD Supply (Distributor)

How will companies use the extra cash?

“you’ve heard some people now say they’ll increase their capital expenditures and that will accelerate. So, I think that’s what our corporate clients are telling us…So, I think it will unleash some activity. No question.” —Bank of America (Bank)

“We believe it will also influence us to continue to invest in our business which will grow jobs and I think what will end up happening is you will see us do a balance of everything together, some of it our shareholders will benefit from, some of it our associates will benefit from and our customers will benefit from it as well” —Kroger (Grocery)

“I think we don’t have any particular direction for that incremental cash other than to put it in the general coffers that I spoke about on the first question” —Toll Brothers (Homebuilder)

Will it boost the economy?

“our expectation is that…tax reform…will create a little bit more momentum. Exactly how much momentum? I am not 100% sure but could you imagine that increasing whatever the run rate GDP is by half a percent, I think that’s a reasonable assumption, may be not happen on January 1 but this could happen overtime.” —Wells Fargo (Bank)

Economic activity is already pretty strong

“If we look at what we’re seeing in our customer behaviors…I would say consumers are spending…the spend patterns were really quite strong and pretty broad across categories…Loan demand…is still pretty solid…so we’re really quite optimistic actually…it doesn’t feel like there is a meaningful point of fragility out there.” —JP Morgan (Bank)

“consumers are spending. They’re spending well. The unemployment is low. They’re getting paid…When we talk to our corporate customers, the commercial customers – small businesses, medium-sized businesses – they’re all making money. They’re seeing good, decent final demand, but it’s consistent with that 2% growth economy.” —Bank of America (Bank)

“feedback that we’re getting from our customers in terms of looking at customer activity on the consumer and the commercial side is that there it seems as if that there is some reasonable momentum.” —Wells Fargo (Bank)

The tax bill’s impact on consumers is less certain

“On the corporate side, we are encouraged by the potential reduction in the corporate tax rate as it will help our earnings and cash generation. On the personal side, while the potential reduction in the MID, real estate tax and self-deduction not being helpful to buyers, especially in our coastal regions, we believe they may be offset by a lower stated tax rate, the doubling of the standard deduction, the potentially removal of AMC, lower pass-through tax rates, and the elimination of the phase-out of itemized deductions.” —Toll Brothers (Homebuilder)

It’s likely to be a wash

“If SALT passes where there is limited or no deductibility of state and local taxes, and obviously, California, New York, New Jersey are impacted with higher state tax rates. But I’ll reiterate what I said before, we don’t think our buyers, that our price point are driven by the taxes they pay when it comes to purchasing our homes…We’ve also studied in some detail, a typical buyer in eastern states and also in California, and again without knowing exactly where the new bill comes out…it appears as a wash or very close to a wash.” —Toll Brothers (Homebuilder)

We’ll have to wait for the final details

“our tax team is anxiously awaiting any final laws that are adopted…I know the guys are studying everyday and we’re just kind of waiting for what the final revolution will be.” —Donaldson (Industrial products)

Financials:

This bull market has been relatively unexciting

“volatility has remained pretty low across the spectrum…I wouldn’t use the word challenging, I would use the word that it hasn’t been – there haven’t been that many catalysts [for trading activity] it hasn’t been that exciting” —JP Morgan (Bank)

Consumer:

The holiday shopping season is off to a strong start

“We have seen a strong start to the North American holiday season with improvements in both traffic and sales trends” —PVH (Apparel)

Retail traffic has improved

“Traffic has improved and we see business just in general improved. And the other big benefits that I think everyone will see is inventories under real tight control. So I think it feels like again we’ve got a month ahead of us of this holiday selling, but it feels like we’re going into December with a lot of momentum, tighter inventories. I think it will be promotional, but probably not as promotional as last year there’ll be less goods to clear on January, if these trends continues. So we are very positive in all that we’re seeing throughout North America across all of our businesses and across the various different channels of distribution with our key customers.” —PVH (Apparel)

But that doesn’t mean that retail is out of the woods

“I’m not ready to say that everything is great in North America retail overall. I think we’re going to continue to see downsizing of businesses and store closings…I think that our retail partners have done a terrific job of managing into the fourth quarter…But it doesn’t mean that the ills that are impacting retail in North America…is over…And I think we’re going to have to deal and manage through some probably bankruptcy situations with some of our smaller accounts as we move forward. But I think that’s just the nature of the North America retail business.” —PVH (Apparel)

Technology:

There’s also a bit of a bubble in blockchain development

“The underlying technology of blockchain is definitely very interesting. We have been interested from the very beginning. I would say there’s a little bit of a bubble in blockchain technology too because…Every CEO who goes to a meeting is asked about cryptocurrencies and blockchain as they go back to their office and say hey what are we doing about blockchain. So, there’s a lot of experiments going on in blockchain. But there isn’t to the best of my knowledge a real industrial quality use of blockchain that is up and running today.” —Visa (Payments)

Blockchain is not yet suitable for high volume transactions

“our view right now at least based on the technology as it stands today is that it’s applicable in let’s call it high ticket low volume kinds of situations, not our kinds of low ticket extremely high-volume situation, because the technology is not set up for that, maybe it will someday.” —Visa (Payments)

We won’t really know what cryptocurrencies are worth until they are tested

“My own view on cryptocurrencies is until there is a – until we have a crisis we won’t know much about them, right. They have never been tested. And I think we are getting to a point where they will be tested and then we will know what they are all about” —Visa (Payments)

Steve Ballmer deserves some credit for Microsoft’s renaissance

“Some decisions were made when Steve was still the CEO, like investing in Azure, for example, was the decision that was made originally under Steve’s watch…Steve was there when we started the move to Office 365. Steve was there when we decided to get into CRM online business. And so a lot of that stuff was started many years ago. And I think what Satya did is really to step on the gas.” —Microsoft (Enterprise Tech)

The cloud still only handles 10% of compute workloads

“I would say some of the numbers I’ve seen is that like 10% of the workloads are in the cloud. I would make an argument that that might even be optimistically, we might not even be there yet. And so, I think we still have lots of opportunity to move workloads to the cloud. And so, I think that will take place not over the next year or two years but more like over the next 5 to 10 years” —Microsoft (Enterprise Tech)

Deep pockets will be needed to win the AI race

“I think the folks who win in AI will be the ones that are willing to make the big investment and who are willing to innovate both on the hardware and the software side. And we’re making investments in both those. We’re also seeing some companies out of China that are leaning in heavy on AI. And so, I think it will be – I do think it will be a bit of a deep pockets race.” —Microsoft (Enterprise Tech)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.17.17

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.

Ordinarily we would focus on retail in this week of the earnings cycle. There are a number of quotes in this week’s piece from traditional brick and mortar stores, but companies like Macys no longer feel relevant to the broader economic picture. It feels like that alone speaks volumes about the state of the industry.

Instead this week, the headline macro discussion is about housing. Following years of under-building we now find ourselves in a supply constrained environment. This is favorable for homebuilders and home-owners, but frustrating to anyone who hopes to buy. Political gridlock and rising prices are leading to a great migration of millennials from coastal markets to southern and midwestern cities with a lower cost of living.

The Macro Outlook:

Homebuilders are jacked up on housing markets

“I will tell you, Bob, the market feels really good. The positioning of this company with its people and its communities – never been better. So yes, we are pretty jacked up.” —DR Horton (Homebuilder)

There’s a lack of supply, especially on the coasts

“Especially in highly competitive coastal markets, it has become extraordinarily hard for customers to buy a home…even though buyer anxiety about rising home prices remains a concern, the number of homes for sale is once again the overwhelming issue” —Redfin (Online Broker)

Political gridlock makes it impossible to build

“There is so much political gridlock in a place like San Francisco around building new homes, especially high-density homes…So I don’t really see that inventory crunch getting much better in most of the coastal markets. I just see it starting to become a problem in markets where we never thought it would be. Hearing that there’s a bidding war in Pittsburgh, who would have thought?” —Redfin (Online Broker)

Housing markets could stay tight through 2020

“As we think about housing broadly and fears of slowdown, we don’t see that for 2018, 2019 and 2020 for a number of reasons. We’ve talked about an aging housing stock, household formation and home price appreciation, and you may say, well, home prices are really hot, haven’t they fully recovered peak to trough? Well, yes, they have, but on an inflation basis, they’re still down double digit.” —Home Depot (Retail)

Tax reform probably won’t have much impact

“candidly, we don’t subscribe to the fact that…the mortgage interest deduction elimination would have much of an impact…in large part because the majority of households wouldn’t have an impact from what’s described today…Our research shows that only 23% of tax filers actually use the deduction. And then of the people who have mortgages, only 5% have mortgages in excess of $500,000.” —Home Depot (Retail)

As a result there is a great migration of buyers

“The larger long-term trend is a great migration from expensive coastal markets to more affordable Midwestern and Southern cities. This has already happened in places like Austin, Denver and Portland, and it is now transforming places like Charleston, Detroit, Nashville and Salt Lake City.” —Redfin (Online Broker)

International:

Growth has accelerated in developing markets

“We do see some acceleration in growth in developing markets. I mentioned our results in China. Those were both market and share driven results. We see the categories in India moving past all of the policy interventions, the tax intervention and the demonetization intervention and resuming very nice growth. Russia is also getting better sequentially quarter by quarter. Brazil…in general some pick up in developing markets and to the extent that commodity cost continue to move which they have been I would expect that developing market dynamic to improve since many of those economies are commodity based and funded, Russia is an example.” —Procter and Gamble (Packaged Goods)

Activity in China has been better than people expected

“I think we are seeing signs of progress and in China…So domestic activity is being better and then anybody is really anticipated early in the year. And so there is a signs of progress and capacities identified has been removed again probably more than people anticipated earlier in the year.” —Arcelor Mittal (Steel)

Visa is bullish on India

“We definitely are bullish on India for a variety of reasons…We’ve had a good constructive conversations with the central bank and the government all the way through this demonetization. We really are 100% behind the government’s desire to move to more of a cashless society.” —Visa (Payments)

Financials:

Consumer credit may be deteriorating some

“there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.” —Tenet (Hospitals)

“As it relates to credit…we are seeing a little bit more of a normalization as we move forward…we actually have seen a little higher level of reserves that need to be put in place, as well as some financing charges that have been recognized” —JC Penney (Retail)

Will reinsurance prices react to recent catastrophes?

“the million dollar question is, how will reinsurance market react to the recent losses…We believe the deterioration of pricing and terms and conditions has ended, but the magnitude of any improvement is uncertain… Historically it has taken up to two years for pricing to peak after big events.” —Third Point Reinsurance (Insurance)

Consumer:

No one is opening brick and mortar stores today

“People are not thinking about opening bricks-and-mortar stores if they don’t need to, right? So anybody who has a concept of being a merchant and selling your goods and services, initially, almost anywhere in the world today thinks about doing it in the digital world rather than in the physical world.” —Visa (Payments)

People want stuff delivered

“Delivery is one of those things that will grow over time, it doesn’t spike immediately. It’s a change in consumer behavior. So, it’s something that we’ll see grow over time…We’re excited about that business.” —McDonalds (Restaurants)

Particularly in concentrated urban environments

“If you look at the markets that have grown the fastest…one is Korea, one is China and they’re both…highly concentrated urban populations. And so, both from a consumer standpoint, traffic congestion, et cetera, e-commerce becomes a preferred shopping experience for some households, but also the economics work including the challenging dynamic of the last mile.” —Procter and Gamble (Packaged Goods)

Marketing is fundamentally changing to adapt

“I think that where we’re headed is mass one to one marketing. I mean historically our industry has been mass marketing, push a large volume of content out and hope it cuts through the clutter and I think we’re getting very close to a point…where the content is more pull versus push and again we refer to that as personal mass marketing and that, the return on that becomes much higher than a lot of very inefficient mass push.” —Procter and Gamble (Packaged Goods)

But price is really what matters most

“one thing we’ve learned this year is that price really matters to our customer. That sounds like an obvious statement, but it’s easy to convince yourself that other components of retail matter more” —JC Penney (Retail)

It should be another fiercely competitive holiday season

“In the fourth quarter, we expect the retail landscape to be fiercely competitive. With excess inventory still in the supply chain, broadened distribution strategies from some key vendors and a lack of newness and innovation, the fourth quarter and 2018 will continue to be promotional and pressure margins from last-year levels” —Dicks (Sporting Goods)

At least retailers feel like they are in a good inventory position

“We really entered the third quarter in a good inventory position…So, we are not anticipating having to liquidate a lot of unplanned inventory walking into the fourth quarter.” —Macy’s (Retail)

“For five straight quarters, sales growth outpaced inventory growth, and we exited the third quarter in a relatively clean inventory position.” —Nordstrom (Retail)

“We’re in really pretty good shape from an inventory standpoint… There’s still some stuff that needs to be cleaned through. But from an apparel standpoint, we’re really in very good shape” —Dicks (Sporting Goods)

Technology:

There’s tremendous competition in OTT television

“There is a tremendous amount of competition in the OTT space. I mean, there is probably approaching a dozen companies…And so what’s going to happen is that the market’s going to get more fragmented. And as a result, that’s consumers will have some choices. And not only will they have choices, but they can move between packages with a click of a button on the Internet.” —Dish (Television)

That could lead to more fragmentation and lower prices

“I can say that our plan on the Disney side is to price this substantially below where Netflix is. That is in part reflective of the fact that it will have substantially less volume…It is our goal to attract as many subs as possible as starting out.” —Disney (Media)

AI is a paradigm shift in computing

“AI is really one of these – once in a decade kind of transition. It is going to be a demand driver that really rises the entire market.” —Intel (Semiconductors)

Thousands of AI startups are cropping up

“There are thousands of startups now that are in – are startup because of AI. Everybody recognizes the importance of this new computing model. And as a result of this new tool, this new capability, all these unsolvable problems in the past are now interestingly solvable. And so you can see startups cropping up all over the west, all over the east and there’s just – there are thousands of them.” —NVIDIA (GPUs)

Miscellaneous Nuggets of Wisdom:

Stay focused on your product

“I remember, almost 10 years ago, when everybody went and invested in texting…And they took their eyes off the quality of the food. And I will tell you, many chains that I know, that became so tech savvy and then almost shrunk where they become irrelevant because they did not take care of the food consistency of the meals coming out quickly, and they neglected the kitchen. The kitchen at the end is the one that can keep a restaurant relevant. I don’t care what you – it’s about food” —Middleby (Restaurant Equipment)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.10.17

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.

The macro story continues to be an industrial boom. There was also some focus on tax reform this week. I thought that the more interesting quotes were outside of the macro section though. I’d highlight a few areas of interest:

–Public markets are shrinking and private markets are growing
–Used car prices have stabilized
–Loyalty programs are an antidote to price transparency
–Higher deductibles have led to lower healthcare spending

The Macro Outlook:

The industrial economy has broad based momentum

“If I look at all of my end markets, if I look at all the key markets I serve, for oil and gas to powered to chemical to pharmaceutical, the mining – even mining is doing well for us right now… We’re seeing a pretty good momentum” —Emerson (Industrial)

Are companies ready to invest in new capacity?

“we are continuing to see good business environment for our products worldwide…Our inventories at Microchip as well as the distributors are towards the low end of our normal range. We are continuing to slowly add incremental capacity at various bottlenecks.” —Microchip (Semiconductors)

There have been false starts before

“I’m cautiously optimistic. I mean I’ve been bitten over the last five quarters on certain things continuing to be shifted right on the schedule. But this does kind of give us some optimism that the trough is the trough and we’re starting to come out of it.” —Fluor (Engineering & Construction)

But there could also be a feeding frenzy

“I’ve not seen the markets this low for this long in my career. And I do think that there is going to be a bit of a feeding frenzy with some of these projects that need to go forward if these companies are going to make the kind of numbers that they’re suggesting.” —Fluor (Engineering & Construction)

New investment could propel the industrial cycle into 2019

“I fundamentally believe the recovery is going to spread out over two years. I think the recovery is going to be spread out over 2018 and 2019….I fundamentally don’t believe the bigger projects will start happening…until late 2018 early 2019. ” —Emerson (Industrial)

Is the service economy booming in the same way?

“one of the questions we get often today, given the GDP numbers of the last two quarters, the optimism in the market, people ask, are you seeing more healthy demand today from your corporate customers than a year ago for example, and I think, generally, we would say no, it’s about the same. It feels to us like the economy is growing at more or less the same pace it was before” —Marriott (Hotels)

A lot of optimism has been contingent on political changes

“I believe a good portion of the reason for why the economy has gotten better is regulatory relief and there’s going to be more to come” —Wilbur Ross (Commerce Secretary)

But not much has happened yet

“we’re a year in and the situation, interestingly enough, is probably a bit more cautious on the political front because I think there is a point of view that a lot of those policies, other than things that can be done by executive order, haven’t come to – haven’t really made progress yet.” —Sotheby’s (Art Broker)

It’s not clear if tax reform will happen at all

“we’re not going to be brave enough to forecast an estimated tax rate for next year, yet.” —Moody’s (Credit Ratings)

Even if it does, will it boost earnings as much as expected?

“on tax reform, most of our income is domestic, so we’re not anticipating a whole lot of change, certainly in our book tax rate. Obviously, it’s a little higher, so that would go down a little bit. But then we’ve got to factor in what happens with state deductions or not. So we’re going to monitor this closely. We don’t think it’s again going to be a huge driver one way or the other for our cash flow or our GAAP earnings” —CBS (Television)

Some will be negatively impacted

“The thing that in the short term would likely have the greatest impact would be the repeal of 1031, the ability to do like-kind exchanges for art, which in the long term is a mild negative for the market…there is material activity at the high end of the market using 1031.” —Sotheby’s (Art Broker)

“the interest deductibility cap first of all should have essentially no impact on the investment grade sector, and should not have a significant impact for the higher rated portion of the speculative grade sector. So, it’s real, when you get more deeply into speculative grade that those was caps may make a difference.” —Moody’s (Credit Ratings)

It probably doesn’t move the needle on investment decisions

“If you wave a wand and say tax reform is done, and our tax – cash taxes and book taxes decline by a certain amount, I don’t think that, by itself, is going to change our capital availability, if you will. I think, the longer-term question would be whether or not that has the impact of reducing our cost of capital, which could – in some respects could go into a calculation about whether or not there are investments that make sense for us to do. But I think that’s a longer term, more theoretical question” —Marriott (Hotels)

International:

Britain will have to adjust to Brexit

“In the short term, without question, if we have materially less access (to the EU’s single market) than we have now, this economy is going to need to reorient and during that period of time it will weigh on growth.” —Mark Carney (BOE)

Negative interest rates have not impacted bank profitability

“We have also seen little evidence that negative interest rates are undermining bank profitability…In fact, net interest income has remained quite stable over the past two years, even as overnight rates have drifted lower.” —Mario Draghi (ECB)

Financials:

Public markets are shrinking

“if you go back and you look at the data, you’ll see that there are a lot fewer listed companies in the U.S. today than they were in years past and the size of those companies continues to get larger…the middle market size business is…not looking to do an IPO…I think in the past one of the main drivers of why you would go IPO was because you could oftentimes get a better valuation in the public markets than you could get in the private. But I think as has been widely reported, valuations on the private sale transactions have crept up over the years and so today the discount between a private sale and a public exit are really not necessarily all that significant. And so that’s the broader trend that I think is going on in the middle market, is that these companies are simply moving more to private equity ownership and away from public ownership” —Goldman Sachs BDC (BDC)

Private markets are growing

“we’re seeing new buyers coming in the market at lower price points, who are really interested in collecting, very interested in this both intellectual and somewhat financial exercise in their lives, and there’s no stemming the tide of people coming in…both in terms of the amount of collecting activity that we’re seeing and in terms of the number and range of artist that collectors are enthusiastically pursuing, we see an increase.” —Sotheby’s (Art Broker)

“There’s a lot of money on the sidelines for transactions in the U.S., particularly in the areas of industrial and multifamily…we’re having trouble keeping the buyers that we work with satisfied with the amount of product we’re delivering…It’s still a healthy market out there, and we’ve had nice growth in our investment sales business around the world.” —CBRE (CRE Broker)

That is making those markets more efficient

“the market is getting smarter and more efficient about finding its own level for different things. So there’s a sort of certain knowability or range of what particular work of art or markets are worth. And that’s helpful. It’s speeding up deals and probably increasing the flow of capital in the market because it’s smarter and more efficient.” —Sotheby’s (Art Broker)

Consumer:

Consumer debt is growing

“In the broader environment, the economy remains healthy with growth in GDP and continued low unemployment. At the same time, consumer debt levels have continued to increase as credit supply has returned to the market and losses have risen from their post-recession lows.” —Lendingclub (P2P Lending)

Loyalty programs are an antidote to radical price transparency

“we live in a world with radical transparency in pricing, where prices are available for essentially every hotel at an instant notice. We are doing everything we can. I mean, obviously, the core platform for us is the loyalty program…And that’s a powerful thing. Obviously, some of these other booking platforms are not conducive to loyalty members, because they will not earn points associated with them.” —Marriott (Hotels)

Technology:

Apple’s service business is the size of a Fortune 100 company

“In fiscal 2017, we reached $30 billion, making our Services business already the size of a Fortune 100 company.” —Apple (Technology)

Healthcare:

Patients are making different choices because of high deductibles

“there’s no doubt we continue to see a very soft volume environment…The fact is, consumers are making different choices with higher copays and deductibles” —Tenet (Hospitals)

Industrials:

Used car markets have stabilized

“the used car market stabilized compared to the first half of the year…residual values have really stabilized.” —Avis (Rental Car)

Materials, Energy:

Oil markets appear to be rebalancing

“we’re, I think, certainly encouraged by the improving market conditions as we look forward. The market, obviously, is continuing to rebalance nicely. Inventories are moving towards the five-year average, and we are watching the market closely for opportunities.” —EOG (Oil & Gas)

Oil service capacity is narrowing

“you mentioned pinch point, and pinch point would probably be in just thinking about the various services that are available. There’s been little equipment added over the last couple of years. And that’s one of the main reasons that we’ve increased our activity here with the additional 25 wells; it’s just to ensure that we have top-tier services available” —EOG (Oil & Gas)

Production companies could start producing free cash flow again

“The good news is…the price movement has gotten very constructive lately. And we…can see a price now where we could actually have some free cash flow next year pretty soon” —Apache (Oil & Gas)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.3.17

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.

The economy is strong, capacity utilization is narrowing and inventories are growing.  It’s hard to find anyone who isn’t bullish.

The Macro Outlook:

The industrial economy is enjoying broad based growth

“From an end market perspective, virtually all improved during the quarter. Aerospace, fabricated metals and oil and gas continued to show strength while other end markets like heavy truck and agriculture which had bottomed out several quarters earlier are improving. In general, as customer sentiment remains positive and the industries hold the current levels, we should continue to see solid sales trends.” —MSC Industrial (Distributor)

“this is a broad-based growth…We’re really growing across the globe…better than we’ve seen in over five years. Really, really coming out of the recession was the only other time we saw this kind of growth number.” —UPS (Logistics)

Inventories are building

“The inventory destocking would seem to be behind us, and we’re building against the underlying growth in the categories going forward” —Colgate Palmolive (CPG)

Capacity is tightening

“the data that we see has the ocean utilization at over 97%. So you have a high, high, demand environment now with capacity really becoming tight…then you get up in the air, this is the fourth consecutive quarter where you really had demand outpacing capacity.” —UPS (Logistics)

“markets are still relatively tight and not all of the industry has returned to unconstrained operations because of some of the comonomer lingering outages that does impact some grades of polyethylene. ” —Lyondell Basel (Chemicals)

Price increases are on their way

“While competitive intensity remains high, several suppliers began taking prices up or signaling that price increases are likely in the coming months…what we are telegraphing here is a big bit firmer and more defined activity than what we have seen in past years at this point in time.” —MSC Industrial (Distributor)

What could go wrong?

“It’s an environment where the uncertainties are unusual in terms of number, scale and insolubility, where prospective returns are just about the lowest they have ever been, where asset prices are high across the board and where pro-risk behavior is commonplace. It’s impossible for us to predict what will catalyze the market’s correction, how severe it might be and when it will occur…We do not believe this is a time in the cycle for reaching for return” —Oaktree (Investment Management)

International:

Foreign exchange has become a tailwind

“We are also encouraged that on balance, foreign exchange turned favorable in the quarter, as we experienced a top line benefit from foreign exchange for the first time since the third quarter of 2011.” —Colgate-Palmolive (CPG)

Regulators have been more active in Europe

“In terms of regulation, we certainly recognize that there is more regulatory activity in Europe than the other regions.” —Visa (Payments)

Zuckerberg had some choice words for the Russians

“I’ve expressed how upset I am that the Russians tried to use our tools to sow mistrust. We built these tools to help people connect and to bring us closer together, and they used them to try to undermine our values. What they did is wrong, and we are not going to stand for it.” —Facebook (Social Media)

Financials:

The private funding market is still incredibly robust

“there hasn’t been as much, as we talked about, in the IPO market, but the private funding market is incredibly robust. And it’s impacted by the Sovereign Wealth Funds coming in, it’s impacted by the Vision Fund from SoftBank, it’s impacted by a lot of money that’s being invested by the Venture Capital Community. ” —Silicon Valley Bank (Bank)

CRE transaction volume has slowed

“Investment sales activity is down appreciably from last year, largely a function of buyer caution, lesser quality product being brought to market and owners electing to refinance rather than sell.” —Vornado (REIT)

Consumer:

The holiday spending outlook is bright

“We also remain confident about the holiday season, as consumer sentiment remains elevated” —UPS (Logistics)

But no one wants to invest in retail

“Because the retail industry is likely facing more structural than cyclical issues, we’re approaching it with extreme caution.” —Oaktree (Investment Management)

Mall operator Macerich says that sentiment is worse than reality

“As you can tell from the facts that our operating results, our company continues to perform at a very high level. However many folks tend to look at the glass as being half-empty instead of half full. Why is that? That’s because there is a major negative sentiment that we all know about retail, about our sector and about our company.” —Macerich (Mall REIT)

Technology:

Companies are getting more and more comfortable with the cloud

“the kinds of workloads now that are moving to the cloud has qualitatively changed. In the past we participated, but a lot of Tier 1 workloads were not on Microsoft stack, whereas now, a lot of Tier 1 workloads are in fact increasingly on Microsoft cloud.” —Microsoft (Enterprise Tech)

It’s tough to say how much companies are really using AI

“when somebody goes out and builds a rack…How much of its workload is really being used by AI? Anybody who tells you exactly what that number is, is just wrong, to be honest with you.So it’s very hard for us to say with precision that X percent of our units went into AI workloads because it’s rare that a rack is purely AI except for rare cases. But we know that it’s small, just by the type of interactions we have, but also fast-growing and one of the biggest areas of interest.” —Intel (Semiconductors)

Healthcare:

Healthcare markets have moderated

“this is just one of those years I believe where the market has been a bit overheated in the past and maybe it just moderated.” —HCA (Hospital)

Amazon won’t confirm or deny whether they are getting into pharmacy

“Yeah, I can’t confirm or deny any of the rumors related to pharmacy or anything else.” —Amazon (E-Commerce)

Industrials:

A lot of new cars were sold in Houston

“we’ve never seen anything like that before, and I don’t think we will ever see anything like that again. Our Houston stores on new vehicles basically doubled what they normally do.” —Group 1 Automotive (Auto Dealership)

A manufacturer can only move as fast as its weakest link

“there’s 10,000 unique parts, so to be more accurate, there’re tens of thousands of processes necessary to produce the car. We will move as fast as the least competent and least lucky elements of that mixture.” —Tesla (Automobiles)

Automation also makes it harder to ramp if a link is broken

“There’s vastly more automation with Model 3. Now the tricky thing is that when one automation doesn’t work, it’s really harder to make up for it with men and labor. So with S or X, because a lot less that was automated, we could scale up labor hours and achieve a high level of production. With Model 3, it tends to be either the machine works or it doesn’t or it’s limping along and we get short quite severely on output.” —Tesla (Automobiles)

Materials, Energy:

With Brent Crude back over $60, oil investment is likely to rebound

“In fact, Brent is already over $60. So as I like to say, I’m going to declare victory and retreat. In terms of what has to happen now for there to be increased investment, I think it’s going to happen…I think what’s going to happen – what’s happened is that there has been an enormous, enormous underinvestment in productive capacity worldwide. It’s breathtaking how big that underinvestment has been.” —Loews (Conglomerate)

There may be a limit to shale capacity in the US

“And it is my belief, based on study and research that shale oil produced in the United States, we’ll not be able to fully supply worldwide oil demand over the next 5 to 10 years that there is a limit to the shale productive capacity in the United States. I know that that statement maybe going against history and the trend so far, but I think that what you will see is that there is a limit to how much shale oil can be produced here.” —Loews (Conglomerate)

Miscellaneous Nuggets of Wisdom:

It’s not bad to be a little paranoid

“I think a good characteristic of any CEO is to be a bit paranoid” —Visa (Payments)

Love your customers

“We don’t comp people that don’t play, period…So maybe we have a little less business, but we send a lot of non-productive customers over to our neighbors. And because we love our customers, we send them over to our neighbor in a Rolls Royce.” —Wynn (Casinos)

Full transcripts can be found at www.seekingalpha.com

Credit Suisse Group AG 3Q17

David R. Mathers – Credit Suisse Group AG

No worries on MIFID II

“clearly MiFID II actually goes way beyond just being a research issue. It comes down to the reporting requirements that we have to our accounts. That’s a big investment process for us, a little work being into that. We’ll be able to deliver that on time for our clients and I’m not particularly worried about that

Bank of England Monetary Policy Decision

Business affected by uncertainties

“Business investment is being affected by uncertainties around Brexit, but it continues to grow at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity…. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.”

Rates raised, QE continues

“…the MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.”