Company Notes Digest 08.05.18

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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 abounds as the boom times in the economy persist. As a result, companies have lots of positive commentary and reasons to be excited. Despite this, talk of trade war hangs over the markets.  Few people talk about risk, but history dictates that markets are cyclical. 

The Macro Outlook:

It’s booming times out there

“In terms of strength, I mean it’s booming times out there. So whenever you want to look: construction cranes, trying to hire somebody, looking at labor markets, trying to get a hold. Was there any one of those measures that you want to look at? The conditions are about running as hot as I could remember in a long, long time” – Markel Corporation (MKL) CEO Thomas Gayner

“The economy looks quite strong. Consumers are in good shape. Balances are in good shape. There are no potholes out there, lending has been pristine. Capital expenditures have been going up. More people are going back to work, unemployment may hit a post-war low at one point this year. Those are all positives” – JPMorgan Chase (JPM) CEO Jamie Dimon

“On the positive side, it’s a very long list…about everything we do is in the positive bucket.” – Parker-Hannifin (PH) CEO Thomas Williams

This cycle can extend longer than many think 

“the cycle can extend longer than many people think as companies are in good shape, particularly in the U.S. and the consumer is strong while carrying only modest debt levels…the risk of recession in the next year remains low” – Third Point Reinsurance (TPRE) Founder Dan Loeb

But don’t lose sight of cyclicality

“notwithstanding the positive environment that we are currently experiencing, we do not lose sight of the fact that economies will cycle, rates will cycle, rates will move and markets will fluctuate.” – Goldman Sachs BDC (GSBD) COO Jon Yoder

There was evidence of increasing market volatility this quarter

“Despite these challenging conditions for investing, we did see evidence of increasing market volatility in the liquid credit market beginning in late June, and has continued.Under the weight of strong new supply and deal activity, investors began to push back on both pricing and terms in the liquid loan markets” – Ares Capital Corporation (ARCC) CEO Kipp deVeer

“There’s been increased volatility in the markets, as everyone is aware, and that’s sidelined some issuers. Just to put some color around the increase of volatility, the average VIX for all of 2017 was 11. The average so far for 2018 has been 16. So, 2018 has been 16, so pretty significant move up just in terms of the total market environment volatility there.” – Moody’s Corporation (MCO) VP Stephen Marie

Sometimes there’s anxiety over rising interest rates but that seems short lived 

“There’s a little bit of anxiety that kind of comes in from time to time as the ten year moves around and touches 3% but that in the end doesn’t seem to – hasn’t seem to have had much impact and when there is an impact it seems to be relatively mild and relatively short. And then overall I would say there’s just – there’s as much or more dry powder targeting commercial real estate at this time than at any time that we can remember. So it feels like pretty healthy dynamics” – CBRE Group (CBRE) CFO Jim Groch

Some people are hedging

“With stock prices largely recovering from their February lows, and the ever-present threat of a global trade war, we are seeing growing demand for market hedges” – Cboe Global Markets (CBOE) CEO Ed Tilly

International:

The possibility of a no-deal Brexit is uncomfortably high

“I think the possibility of a no-deal is uncomfortably high at this point. It is highly undesirable. Parties should do all things to avoid it.” – Bank of England Governor Mark Carney

Certain softness in the Chinese economy

“the customer want more value right now or in the anticipation that there’s certain softness in economy that we need to respond to or prepare for.” – Yum China Holdings (YUMC) CEO Joey Wat

Politics:

The Trump administration views itself as free traders

“President Trump is an ardent free trader. Zero tariffs, zero subsidies, zero barriers. He’s looking to rebalance these relationships….perhaps it’s a multilateral arrangement. But more likely, it will be a series of bilateral arrangements. They tend to prove more effective, better for the American people. And they’ll get the outcome that President Trump is demanding. He’s simply looking for fair and open and reciprocal trade” – U.S. Secretary of State Mike Pompeo

Tariffs are a tax on consumers

“our view on tariffs is that they show up as a tax on the consumer and wind up resulting in lower economic growth and sometimes can bring about significant risk of unintended consequences.” – Apple (AAPL) CEO Tim Cook

The tariffs have had little impact so far but have created uncertainty

“in the conversations that I’ve had with our customers, their sentiments are…that they’ve seen so far very limited impact on volumes in their business or either the total amount of the volume or the origination and destinations for the volumes… there is uncertainty, that they feel just about what – ultimately how these tariffs are going to play out and what does it mean over time…it’s adding uncertainty, but everyone really is taking a wait-and-see attitude” – Triton International Limited (TRTN) CEO Brian Sondey

Financials:

In easy money times the advantage of public companies is non-existent

“in easy money times such as this, which may be coming to an end but may not be, the advantage that the public companies have access to capital does not exist. Private companies have as much access to capital, if not more.” – Vornado Realty Trust (VNO) CEO Steven Roth

It’s been a tough few decades to be a value investor

“This has been a frustrating environment for us and for value investing styles. AllianceBernstein recently reported that value-investing strategies are performing in the bottom 1 percentile since 1990. Reality is that the market is cyclical and given the extreme anomaly reversions to the mean should happen sooner rather than later, we just can’t say when.” – Greenlight Capital Re (GLRE) President Einhorn

Consumer:

Consumers are more skeptical of private label brands in emerging economies

“We have seen private label development around the world, probably most developed in Europe, but still low single-digits negligible in the United States, and in the emerging markets almost a nonexistent because our consumers have serious doubts about quality of certain products in those marketplaces. So, we’re very attentive to it” – Colgate-Palmolive (CL) CEO Ian Cook

Someone will probably try to take Toys R Us’ old market

“it would shock me if there’s not a toy retailer that you know re-emerges from the Toys”R”Us debacle…I mean, that toys thing was a debacle of massive proportions, but there is no question and there’s a number of people that you know that are out there, that are thinking about how to create a new generational toy a physical toy retail experience” – Simon Property Group CEO David Simon

Brick and Mortar isn’t dead just yet

“While I am certainly not calling a bottom, there is noticeably increased retail activity in doors” – Vornado Realty Trust (VNO) CEO Steven Roth

Technology:

Shortages of passive components are expected to persist into 2019

“shortage of passive components has created major supply chain challenges…In addition, we are experiencing temporary price increases on certain components for our new cameras due to the shortages. As you may have read in other reports, the industry-wide shortage is expected to last into 2019” – GoPro (GPRO) CFO Brian McGee

Tesla is designing its own chips to run neural networks

“we did a survey of all of the solutions that were out there for running neural networks, including GPUs. We went and talked to other people like at ARM that were building embedded solutions for running neural networks. And pretty much everywhere we looked, if somebody had a hammer, whether it was a CPU or a GPU or whatever, they were adding something to accelerate neural networks. But nobody was doing a bottoms-up design from scratch, which is what we elected to do…I’m a big fan of NVIDIA, they do great stuff. But using a GPU, fundamentally it’s in emulation mode.” – Tesla (TSLA)

Slow moving industries are finally entering the digital age

“financial services institutions are increasingly using iPads to deploy digital signature solutions for customer consent, compliance requirements, new account openings and services transactions.” – Apple (AAPL) CEO Tim Cook

“we’re moving to online ordering. We’re creating a portal so our customers can do online ordering today. Frequently, they phone us or even still fax us. And let me just say, fax machines aren’t the most efficient way to take an order, as you can imagine.” – Ecolab (ECL) CEO Doug Baker

Industrials:

Shipping container utilization rates are high

“the higher utilization is coming from a few things, and none of them are extraordinary. It’s coming from solid trade growth and really just coming from the fact that our customers continue to rely more heavily on leasing and they’ve been reducing the container purchases themselves. Our view is that those things are likely to continue, that trade growth is going to remain solid, and that our customers are unlikely to start buying containers very aggressively. I think as long as those things remain true, utilization should remain very high… we do think utilization is going to remain strong for the foreseeable future” – Triton International (TRTN) CEO Brian Sondey

Materials, Energy:

Many factors are driving oil capacity down, prices up

“On the whole, we continue our steady march out of the worst oilfield downturn of a generation…We believe that 3.5 years of E&P underinvestment; depletion-driven well declines; strengthening, synchronized global economic growth; and geopolitical flashbang events are all conspiring to drive the world-wide excess production capacity cushion down, and oil prices up” – National Oilwell Varco (NOV) CEO Clay Williams

Miscellaneous Nuggets of Wisdom:

There’s no excuse for bad manners

“I’d like to apologize for being impolite on the prior call. Honestly, I think there’s really no excuse for bad manners and I was violating my own rule in that regard. Certainly, I have some excuse. There are reasons for it in that I’d gotten no sleep and been working sort of 110-hour, 120-hour weeks. But, nonetheless, there’s still no excuse. My apologies for not being polite on the prior call.” – Tesla (TSLA)) CEO Elon Musk

Get one thing right first

“I remind people of jeff bezos, when he started amazon, he may have had visions about the everything store, but he started with books and he spent ten years getting books right. So we may spend a bunch of time getting one piece of it right before we—and testing various things to see what works”.- JPMorgan Chase (JPM) CEO Jamie Dimon

Full transcripts can be found at www.seekingalpha.com