Company Notes Digest 1.15.15

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Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

The Macro Outlook:

The big question on everyone’s mind is: how does the oil price drop affect business?

The consensus is that it’s a net positive for the consumer

“America as a whole is a net consumer of energy and American households will benefit from the decline in energy prices, which is positive for the U.S. economy.” ($WFC)

“From any indication that we see it’s a positive experience for the American tax payer, for the American economy.” ($CSX)

“Overall, oil is a reasonable positive for the economy and consumer” ($JPM)

Bank of America is already seeing a benefit from lower oil prices in its credit card data

“in the consumer spending in January on debit and credit cards basically…even the first week or so January we’re seeing the benefit of the consumer very historically when the year-over-year compares” ($BAC)

So far growth is only 3% though, a step down from where it was

“So far January of 2013 versus January of 2014, spending on credit debit cards of about 3% year-over-year and that’s overcoming a drag effect of about percentage and a half from lower fuel prices.” ($BAC)

Wells Fargo is still optimistic on the economy

“when I look at the businesses that we’re in and as I am talking with customers…and frankly looking at the numbers..I am optimistic…I don’t think this is a breakout, but I think we’re on the front foot and consumer’s confidence is at a all time high since the downturn. So the way I read the tea leaves, I’m optimistic.” ($WFC)

CSX maintains a positive view of the economy too

“Looking forward, we expect a positive demand environment in the first quarter with stable to favorable conditions for 96% of our markets and unfavorable conditions for the remaining 4%.’ ($CSX)

Some geographies are certainly going to be impacted

“We’re sensitive with the Houston situation, we are very watchful right now, in fact we actually pulled out of a couple of land transactions in the fourth quarter because of our sensitivity there.” ($KBH)

“If you are talking about commercial or even consumer real estate, Dallas, Denver, Houston. As you saw in 1986, 1989 and those all slight negative” ($JPM)

All of these dynamics are going to take time to unfold though

“by the time it drops to the net effect where it hits us, it could be six months out there or something. There is that lag.” ($FAST)

This drop in crude hasn’t made its way into loan quality yet

“this drop in crude is very recent and the companies are taking the appropriate evasive actions to preserve cash, to de-lever, to reduce their expense base etcetera, but it hasn’t worked its way into loan quality.” ($WFC)

“we may need to take more reserve but it doesn’t feel like its a very significant issue or imminent series of charge -off rates now” ($JPM)

It’s really just too soon to tell what the impact is going to be

“there are more questions than answers right now from the field…as it relates to Houston, it’s not an exact science. The market has not yet quite revealed itself.” ($LEN)

“It’s probably too early to tell though if that’s really a trend here, but it’s an interesting development. So lower gas prices I would say increase — lead to bigger vehicles.” ($AA)

Energy loans haven’t been impacted yet, but there are some signs that auto loans may be deteriorating

“For auto, credit losses were higher on balance growth and as a charge-off rate start to trend off from historical lows.” ($JPM)

Credit card hasn’t deteriorated though, so it’s not clear if auto is a canary in the coal mine

“when we look at credit card, we don’t think it is early indicator credit card. We will be very conscious. As Marianne said, auto did unbelievably well through the crisis, shockingly well, we will all say so maybe there is return to norm. But we are going to be paying a lot of attention.’ ($JPM)

Jamie Dimon doesn’t think that oil’s decline is a financial market liquidity issue, it’s fundamental

“On the first point, I think there is probably some truth to the less liquidity but it is more about over supply and lack of global growth simulating demand than it is I think a liquidity story from a capital market perspective.’ ($JPM)

Liquidity in markets is a legitimate concern, but in credit markets

“I think it is a legitimate concern about liquidity in markets that when we have volatile markets or violent markets, how much liquidity will remain but I think you there you are talking more about– which you saw a little bit in treasuries but it is about credit. And it’s possible. We just don’t really know. So we are little worried about it. But we will there hopefully making healthy markets for our clients when the times come” ($JPM)

Financials:

Wells Fargo expects a good year for loan growth

“I think knowing what we know about the economy today, we feel better about the next four quarters than couple of the last four quarters…But yes, it feels like a good year for loan growth.” ($WFC)

Jamie Dimon shot down calls for JPM to split up

“There is reason you have big global multi national banks. And they are so big global multi national including government. This company movies $6 trillion to $10 trillion a day, you are not going to do that as a small bank.” ($JPM)

Dimon argues that keeping JP Morgan together is a public policy issue

“And remember, again, you got to look forward in this. America has been the leader in global capital market to the last 50 or 100 years, it is part of the reason the country is so strong. I look as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase to be a Chinese company.” ($JPM)

New lending guidelines from GSEs may grease the wheels of the mortgage market

“recent development such as the announced reduction in FHA premiums, GSE clarification on repurchase rules and changes in GSE lending guidelines should provide some benefit to the housing market where affordability remains attractive” ($WFC)

The mortgage market is rebounding

“if we look at the pipelines and compare the mortgage pipeline at year-end relative to the comparable period, it’s up pretty significantly” ($BAC)

Consumer:

Homebuilder KB Home saw softening in demand in some markets along with rising cost pressures

“Unfortunately we experienced the softening in demand in some of our served markets as the quarter progressed with increased pricing pressure while at the same time we continue to face cost pressure among other things.” ($KBH)

Still strong traffic though

“traffic levels per community remain strong up 15% over the prior year. This data point reinforces that there continues to be strong interest in home ownership” ($KBH)

Home price increases should moderate as comps get tougher

“We also anticipate selling price growth to moderate in 2015 given the higher price levels we have reached after 18 consecutive quarters of year-over-year increases.” ($KBH)

There’s intensified competition among home builders

“pretty much across the board, we are seeing intensified competition as builders do go out and chase volume. It’s been somewhat of a complex market where a lot of factors are impacting sales across the board.’ ($LEN)

KB Home is seeing Chinese money shifting in Orange County, CA

“Orange County, there has been a pull back on the new home side with the Chinese buyer and these people are heavily controlled by realtors that they’re comfortable doing business with. Where the realtors are taking them today is the resale side’ ($KBH)

Lennar isn’t seeing much change in CA

” I know that there are questions about the currency changes and what that will mean for some of the foreign buyers there, but we haven’t seen much of a pullback there. I know that there been other reports.” ($LEN)

If there is weakness in home-building, there’s limited downside. Homebuilders and banks have been very conservative

“the downside in the housing market is very limited and the upside is very significant. We believe that the market is downside supported by many years of production deficits…from a lessons learned perspective, we have clearly not gone out to the B-, C locations. We have not gotten out over our skis” ($LEN)

KB Home and Lennar are both trying to move to shorter term projects

“we have been evaluating potential opportunities to more quickly monetize certain and long term development assets in order to redeploy the capital in the more productive assets that have a shorter life cycle.” ($KBH)

“Over the past quarters, we have been articulating a soft pivot to a land-lighter model in homebuilding and an asset light model for our ancillary businesses.” ($LEN)

Technology:

Inventory levels look healthy for the global PC market

“The worldwide PC supply chain appears to be healthy with inventory levels appropriate as we enter the first quarter.” ($INTC)

Moore’s law lives, but it’s getting harder for companies to keep up

“The cost of transistor continues to go down, and by scaling mostly is — everybody knows. Nobody, nobody I think refuses that statement. We see the cost of transistor continue going down in a constant rate and in going forward, the cost of transistor going down probably at slightly slower rate. That’s the argument. But it really depends on companies, and some companies simply do not have the technology capabilities.” ($TSM)

Materials, Industrials, Energy:

It shouldn’t be a surprise that commodity markets are volatile

“I am surprised that people so surprised when commodity moves like this. Commodities move like this my whole life.” ($JPM)

“we don’t want to minimize this, but this is nature of that business. If you go back just six years, we’ve had $30 a barrel oil and we’ve had $140 a barrel oil. We’ve seen gas for example, natural gas go from $6, $7 Mcf to $2 and some change today and that’s just part of that business.” ($WFC)

Coal stockpiles are at normal levels

“We see the stockpiles, both in the north and the south are pretty much where we expected them to be. They’re at normal levels, in both the north and the south.’ ($CSX)

Demand for intermodal shipping is driven by a shortage of truck drivers

“The big issue that has been in trucking remains the big issue in trucking and that is driver availability. Most people that I am aware of don’t want their sons to grow up to be truck drivers. And so truck drivers become an issue. People don’t want to be away from home five, six, seven days. There is issues in passing the drug test to get a commercial CDL.” ($CSX)

Miscellaneous Nuggets of Wisdom:

Know that you have demand before you build capacity

“some companies, some foundries build capacity on speculation, just like builders build houses or condos on speculation. They haven’t sold them yet. Their speculation is that after they build the apartments or houses, they will be sold, but that doesn’t always happen of course. Now we however are different. We build capacity when we know it’s already sold.” ($TSM)

Measure your business by what you do for your customers

“the first way to look at a business first and foremost has been and always will be what do you for customers. Not what you do for yourself and your return et cetera” ($JPM)

PE multiples are temporary, focus on the E

“the other thing I want to point out about the current narrative which kind of surprises me that people don’t mention, when you all talked about P/Es and sum of the parts, P/Es are temporary. P/Es change over time and the real question we should asking is, is the E going to be much higher or much lower under scenario A or B not just what the P/E going to be.” ($JPM)

Full transcripts can be found at www.seekingalpha.com