Company Notes 6.2.2017

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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.

Optimism and confidence run high around the world and the economic recovery in the US and Eurozone is expected to continue, but there is less confidence that the Trump administration will execute on its agenda. There are assurances  from the new administration that the reform agenda will continue undeterred and companies are hopeful this will materialize soon but they are adopting a wait and see attitude. We still have a month or so to go before companies report on Q2 but initial assessments indicate a lower Q2 performance in financials.

Editor’s Note: Great work again this week by @probinginvestor, who did most of the heavy lifting

The Macro and International Outlook:

Confidence remains high around the world

“Our most recent Consumer Sentiment Survey revealed that homeowners have an increasingly favorable view of the national economy and their personal financial situation.”  — Lowes CEO Robert Niblock (Home Improvement)

“The mood among German business was euphoric in May….Companies upwardly revised assessments of both their current business situation and their business expectations significantly. Economic activity in Germany remains very brisk.”  – Ifo Institute President Clemens Fuest (NGO)

Central bankers share in the optimism

“The U.S. economy has fully recovered from the global financial crisis and the ensuing recession. In fact, the U.S. economy is about as close to the Fed’s dual mandate goals as we’ve ever been.” – Federal Reserve Bank of San Francisco President John Williams

“There are good reasons to believe that the improvement in real economic activity will continue.” – US Federal Reserve Governor Lael Brainard

“The economic upswing is becoming increasingly solid and continues to broaden across sectors and countries.”  – ECB President Mario Draghi

Some of the optimism may be excessive

“I think a lot of people, maybe stock market investors and others, have counted up all the positives and kind of ignored how do you pay for that and the negatives. I think there may be some excessive optimism in the U.S. around how this will affect the economy.” – Federal Reserve Bank of San Francisco President John Williams

But optimism has faded slightly from pre-election highs

“The levels of optimism are still high…They may be off slightly from their peak, but I think generally people are still feeling that the pro–growth agenda is real.”  – JP Morgan CFO Chase Marianne Lake

Businesses have less confidence that government reforms are going to actually happen

“as a result of no real forward momentum on any of those fronts and frankly a little bit more of a sense of paralysis in terms of getting that legislative agenda through, my sense is that people are waiting and seeing. There still is a lot of optimism, especially at the small business end of things, but I think confidence is lower that these signature policy initiatives are going to come through.” —Wells Fargo CFO John Shrewsberry

“in the U.S., we’ve decidedly seen a lot of our commercial clients sitting on the sidelines for the last couple of quarters with a wait and see attitude with everything from decisions on taxes to infrastructure spend and the rules of the road in the U.S. with the new administration” – Toronto Dominon CEO Bharat Masrani CEO (Bank)

Companies have to keep moving anyways

“…you don’t get a number of years to sit around waiting for policy changes to kind of move their growth trajectory forward. And so CEOs by nature has to act they have to move forward, they don’t spent a lot of time waiting, they take the current environment and they figure out how to do what they need to do strategically in that current environment.” – Goldman Sachs COO David Solomon

If you look at it objectively, the US economy is doing fine, not great, but fine

“If you look at it objectively, the U.S. economy is doing fine, not great, but fine.”  – Morgan Stanley CEO James Gorman

But markets are fully valued

“I think the U.S. market is fully valued right now” —Vanguard CEO William McNabb

“I’d say the second quarter is going to be disappointing in terms of earnings and growth. It’d tell me markets are probably fully priced at this moment” – BlackRock CEO Larry Fink

The downside risk is probably outweighing the upside risk

“There is enormous uncertainty which typically would breed tremendous volatility and it’s not…It’s this very passive perspective that investors have and I think the downside risk at this point is outweighing the upside risk.”  – Morgan Stanley CEO James Gorman

But Central Bankers don’t see much risk

“…risks to the U.S. financial system do not appear to be flashing red in the way they did in the run–up to previous downturns….In recent quarters, the balance of risks has become more favorable, the global outlook has brightened, and financial conditions have eased on net.” – Federal Reserve Governor Lael Brainard

They’re going to continue to move very slowly

“When you’re docking a boat, you don’t run it in fast towards shore and hope you can reverse the engine hard later on. That looks cool in a James Bond movie, but in the real world it relies on everything going perfectly and can easily run afoul. Instead, the cardinal rule of docking is: Never approach a dock any faster than you’re willing to hit it. Similarly, in achieving sustainable growth, it is better to close in on the target carefully and avoid substantial overshooting.” – Fed Reserve Bank of San Francisco CEO John Williams

Financials:

Financial services companies have had a weak second quarter

“I will tell you that quarter to date across our markets businesses, we are down about 15% year-on-year”  – JP Morgan CFO Marianne Lake

“…volatility, client activities which were more subdued in the first quarter kind of in these first two months have continued in a comparable fashion in the second quarter  – Goldman Sachs President David Solomon

Banks will probably start to be able to return more capital though

“I do think that, in general, that this is probably true, that there will be banks this year – banks who haven’t been big returners of capital over the last few years who have earned their way into – built their capital level to a full level, gotten to something like a stable run rate of profitability. There’s probably an opportunity for some of those banks to have gotten more aggressive in their ask for return of capital this year.” —Wells Fargo CFO John Shrewsberry

The housing market is strong

“Solid and improving demand and the financial strength of our affluent buyer base are driving our growth. This was the best spring selling season we have had in over 10 years.” – Toll Brothers CEO Douglas Yearley (Homebuilder)

Consumer:

Consumers have deleveraged a lot in this cycle

“…consumers are in very good shape. Their balance sheets are repaired, they’re pretty liquid, their debt to income ratios are pretty low, debt service burdens are pretty well insulated from interest rate hikes because interest rates have been low forever, and they’ve been able to refinance debt at low rates“  – JP Morgan CFO Chase Marianne Lake

“I don’t think that we believe that today that the U.S. consumer is overburdened with debt, either with respect to cash flow in terms of the ability to service it, or with respect to the value of their assets given what’s gone on in home price appreciation over the time frame that you described” – Wells Fargo CFO John Shrewsberry

Amazon is gunning for a piece of the furniture market

“There is more competition coming in, particularly at the low end and there is still the big box retailers who have been offering furniture for a lot of years and we’ve just learned that Amazon is going to come into the furniture business. We believe that actually Amazon will take more market share from the mass retailers than anyone else” – Williams Sonoma CEO Laura Alber

Technology:

Electronics components are in short supply

“…we continue to see competitive pricing and a challenging commodities environment.The pricing environment was also increasingly difficult and hindered our ability to raise prices as an offset. We anticipate the impact from commodities will remain significant in the near–term” – Hewlett Packard Enterprise CEO Meg Whitman

VR has not been very successful

“it’s been very interesting to see the inflow and the regular inflow of a variety of technologies, VR being one of them…The impact of VR specifically is small, but we like the proliferation of innovation across our sectors.” – Best Buy CEO Hubert Joly

Real Estate, Transport and Energy:

Two Dry Bulk shippers have somewhat conflicting views of the market

“this might be the first quarter where we can say with a degree of certainty that we are at the point where demand and supply have reached balance.” – Diana Shipping CFO Stasi Margaronis

“Continued absence of ordering and acceleration of demolition are required to place a cap on fleet growth for 2019, as 2018 is already almost closed at low prospective delivery levels.” – Star Bulk Carriers CEO Petros Pappas

Oil and gas have stabilized

“the oil and gas market stabilized. We see orders improving, but it’s off a low base.” – General Electric CEO Jeffrey Immelt  

International energy production is probably going to be slower to recover

“Look, I think international is going to unfortunately tread water for a bit. I don’t know that it needs to come back…Some may never come back just given the producing power of the Middle East, North America and probably Russia will likely be more dominant. So there are some marginal markets that may not come back.” —Halliburton CEO Dave Lesar (Oil Service)