Company Notes Digest 1.20.17

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.

Earnings season started this week with a heavy emphasis on banks. The quarter was relatively good for financial services companies, and economic optimism is high. For now though, the immediate state of the economy feels less important than understanding the role that the incoming administration will have in shaping it.

Two key players in the administration’s economic policy testified before Congress this week: Steve Mnuchin and Wilbur Ross. We picked out some key policy points from their testimony. Aside from tax reform, we think that Mnuchin’s second most important job could be housing reform. He is confident in that area and Fannie and Freddie need to be resolved in some way. He gave some high level thoughts on Fannie and Freddie before Congress. His most important comment in our opinion is that he wants to ensure that capital is still available to support the mortgage market in some way.

Janet Yellen also spoke this week and seems to want to continue to operate as if nothing has changed. She is communicating three rate increases this year, but also says that the Fed’s foot is still on the gas.

The Macro Outlook:

The optimism is 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 CEO Brian Moynihan (Bank)

There’s a lot of optimism but not a lot of action

“there’s more optimism and positive commentary for a lot of our business customers. But we haven’t seen a significant change in utilization or actually take down of credit yet. So while the talk is there, the actual action is not yet shown itself.” —US Bank COO Andy Cecere (Bank)

“What I’m cautious about is nothing has actually happened yet, other than there has been a move in rates, right, and it changes sentiment. And I think we need to start seeing some of confirmations get through. We need to see real progress on tax reform. We need to see real progress on infrastructure, spending bills of state and local, and then all of a sudden, this thing takes flight, but right now, it’s just people talking about it.” —PNC CFO Rob Reilly (Bank)

Businesses may just be gearing up

“It’s really a big deal. Optimism is up. I have been talking a lot to clients and to our RPs, regional presidents in the last several weeks, including yesterday, and clearly, CEOs are optimistic. They are making plans to invest and we really think this is going to kick into a meaningful improvement in investment and job growth as we head into the second and third and fourth quarter…I met with some regional Presidents in person yesterday and got a real current update and the message was very, very consistent. They gave me a number of anecdotes in terms of individual companies that were already requesting loans to buy trucks to expand their plan to expand their inventory, etcetera. So it is, in fact, happening. It’s across the footprint.” —BB&T CEO Kelly King (Bank)

The administration wants growth

“The most important issue we have is economic growth…In 1984, we had 7% and in 1998 we had 5% and in 2005 we had 3%. That was the last time we had appropriate growth rates. I share the president-elect’s concern of low growth. Our number one priority from my standpoint is economic growth” —Treasury Secretary Nominee Steve Mnuchin (Government)

Growth means that the Fed may pull back faster than anticipated

“The Fed’s decision to raise rates in December and the signal of additional hikes in 2017 suggest that the long period of accommodative monetary policy in the U.S. may finally subside at a faster rate that many have had anticipated.” —Blackrock CEO Larry Fink (Asset Management)

“if fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid than otherwise, with the conditions the FOMC has set for a cessation of reinvestments of principal payments on existing securities holdings being met sooner than they otherwise would have been.” —Federal Reserve Governor Lael Brainard (Central Bank)

A lot of banks are only counting on two rate increases this year

“we have built into our plans two rate increases in 2017, one in June and one in December both 25 basis points.” —PNC CFO Rob Reilly (Bank)

“I know there is a lot of work out there that have a June, September, December, we’re just using June, December projections right now.” —US Bank CEO Richard Davis (Bank)

But Yellen is saying “a few”

“as of last month, I and most of my colleagues–the other members of the Fed Board in Washington and the presidents of the 12 regional Federal Reserve Banks–were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 percent.” —Federal Reserve Chair Janet Yellen (Central Bank)

Growth probably also means more inflation

“I do think that if the economy holds out, which we are forecasting today that it will and business continues to travel which we are forecasting it will, that the opportunity to raise fares in that environment with a lower level of capacity offering from the industry is significant” —Delta EVP Glen Hauenstein (Airline)

“Inflationary pressures are expected to have an impact on annual merit, staff insurance, occupancy and marketing.” —Comerica CEO Ralph Babb (Bank)

“As for inflation, we expect 2017 inflation will be around 3%, which will equate to a cost that is significantly higher than the inflation was in 2016.” —Union Pacific CFO Rob Knight (Railroad)

But the Fed is still pressing on the gas pedal

“Right now our foot is still pressing on the gas pedal, though, as I noted, we have eased back a bit. Our foot remains on the pedal in part because we want to make sure the economic expansion remains strong enough to withstand an unexpected shock, given that we don’t have much room to cut interest rates.” —Federal Reserve Chair Janet Yellen (Central Bank)


The administration is NOT going to push for a border tax

“He’s not suggesting a border tax. What he’s suggested is that for certain companies that move jobs, ok, that there may be repercussions to that. He’s not suggested in any way an across-the-board 35% border tax…he’s in no way contemplated a broad 35% border tax that couldn’t be further from anything that he’d possibly consider” —Treasury Secretary Nominee Steve Mnuchin (Government)

Trump’s comment about the strong dollar was not meant to be taken as a long term policy objective

“I think when the president-elect made a comment on the U.S. Currency, it was not meant to be a long-term comment. It was meant to be that perhaps in the short term, the strength in the currency as a result of free markets and people wanting to invest here may have had negative impacts on our ability in trade, but I agree with you, the long-term strength over long periods of time is important” —Treasury Secretary Nominee Steve Mnuchin (Government)

Wilbur Ross wants fair, sensible trade

“I am not anti-trade, I am pro trade but I’m pro sensible trade, not pro trade that is to the disadvantage of the American worker and the American manufacturing community. I think we should provide access to our market to those countries who play fair, play by the rules and give everybody a fair chance to compete. Those who do not should not get away with it, they should be punished and severely.” —Commerce Secretary Nominee Wilbur Ross (Government)

Ross talked tough on China

“China is the most protection protectionist country of very large countries. They have both very high tariff barriers and very high non-tariff trade barriers to commerce. So they talk much more about free trade than they actually practice. We would like to levelize that playing field and bring the realities a bit closer to the rhetoric.” —Commerce Secretary Nominee Wilbur Ross (Government)


Financial services reform is probably not high on the new administration’s agenda

“based on what I understand, the administration that’s going to take office in a few days. The number one issues are health care reform, taxes and infrastructure and somewhere in the top five might be financial services, but it’s not the top three, a lot of financial services issues I think will be dealt with in the early part of the year but with some implications later.” —US Bank CEO Richard Davis (Bank)

Regulators have compiled a huge body of work over the last eight years

“the body of work that’s been created by the regulators whether it’s Basel capital ratios, the implementation of CCAR, stress testing broadly globally, the leverage ratios, the requirements around liquidity, all those things that were designed to address points to systemic risk, clearing, margin requirements, all of that data reporting, I think sometimes gets lost in the narrative and have to step back and look at the past eight years and realize that and it’s an incredible body of work that regulators, the industry participants and the clients have actually created.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

The two areas that Mnuchin wants to re-evaluate are the Volcker Rule and regulatory burden on small banks

“The concept of proprietary trading does not belong with banks with — the Federal Reserve put out its own report that that rule has completely limited liquidity in many markets and the federal reserve is concerned that the interpretation of the Volcker rule does not allow banks to create enough liquidity for customers. That is something I would absolutely want to look at” —Treasury Secretary Nominee Steve Mnuchin (Government)

“My biggest concern and I fully support regulation for banks with FDIC insurance but my biggest concern is that this regulation is killing community banks, we are losing big community banking business.” —Treasury Secretary Nominee Steve Mnuchin (Government)

Mnuchin considers himself an expert on Fannie and Freddie and wants to see housing finance reform

“My comments were never that there should be recap and release. I have been around the mortgage industry for 30 years and I have seen this for a long period of time. This is an area I believe I have expertise in. For very long periods of time I think Fannie and Freddie have been well run without creating risk to the government and they played an important role…I believe these are very important entities for liquidity…What I have said and believe, we need housing reform…We need housing reform and a solution. The status quo is not acceptable of just leaving them there. There are two extremes on this and it is something I look forward to sitting down and talking with you. One, we don’t put the taxpayers at risk and two, we don’t eliminate capital for the housing market. I’m very concerned that middle of income people who need mortgage loans have access to the capital.” —Treasury Secretary Nominee Steve Mnuchin (Government)

Even if regulations go away the extra costs probably don’t

“There’s also a lot of regulatory costs that probably were missing from the industry historically. I’m thinking about to build an AML costs…I’m thinking about general compliance with consumer laws…We are done investing in that by and large, but I don’t think those costs go away, no matter nor should they, no matter what really happens to the regulation.” —PNC CEO Bill Demchak (Bank)

“Our compliance costs in the entire company are now in terms of FTE, there are over 7000 people of our 70,000 and that’s up more than twice what it was a few years ago…it’s not going to go back to where it was, it’s going to stay much higher because that’s the cost of running a high-quality bank.” —US Bank CEO Richard Davis (Bank)


Wilbur Ross recognizes that technology is an important factor in the employment equation

“I think more research and development, more encouragement of technological breakthrough, is clearly an important thing, but at the same time, we need to protect our existing industries because they really are very much labor intensive. And I think we also are going to have to cope with the challenge that combined with the opportunity of some of the technological advances. For example, driverless cars are probably a very good thing. They seem to be, in any event, an inevitable thing, but that presumably will also lead to driverless trucks. Well, there’s something like 3 million american adults who depend on over-the-road trucks for their livelihood and it’s a pretty good livelihood…So I think what we have to do is to figure out how to make sure we get the benefits of the improved technology and yet cope with the dislocation that it inevitably will produce in certain of the industries. So I think that’s going to be a real balancing act.” —Commerce Secretary Nominee Wilbur Ross (Government)

Activity in high tech industries is coming back after pausing in 2016

“the high-tech sector, I think after maybe pausing a little bit in 2016, it seems to be coming back at the year activity, etcetera, the California market, real state values remained strong in California both in Northern and Southern California.” —Comerica CFO Dave Duprey (Bank)

AI is a new computing architecture and that levels the playing field for new players

“AI is – this is new, so the all the algorithm or the architecture, they are all new. So the computing…basically it’s the playing field is level. It’s not as before, where the high component is computing. It has to be a certain architecture to get into this field. This is a leveling playing field, so many players are into this field. That is where the massive innovation can come.” —Taiwan Semiconductor CEO Mark Liu (Semiconductor Fab)


Healthcare is driving labor cost inflation

“you heard the $35 million inflation on labor…it’s not really on the wage side of things, it’s on health and welfare side so medical inflation obviously there’s always going to be a little bit, little bit higher than we would like.” —CSX CFO Frank Lonegro (Railroad)


Low interest rates facilitate Trump’s infrastructure plans

“I think we’re fortunate to be coming to grips with infrastructure in a relatively low interest rate environment because that will facilitate getting a lot of projects done that could not be done in a lower interest rate environment because there would be a crowding out effect.” —Commerce Secretary Nominee Wilbur Ross (Government)

General industrial companies are still challenged

“We listen to our Regional Vice Presidents and what they’re seeing in the marketplace…what I would tell you is, the general industrial companies on our lists, they’re still challenged…if you sort of listen to some of our RVPs talk about energy there definitely is more of an enthusiasm”–Fastenal CEO Dan Florness (Industrial Distributor)

Materials, Energy:

The worst of the energy cycle is believed to be behind us

“We expect our provision to be lower in 2017 as we believe the worst of the energy cycle is behind us. Assuming energy prices continue to be stable, we expect non-accruals and charge-offs to remain manageable.” —Comerica CEO Ralph Babb (Bank)

Wilbur Ross wants to boost the fishing industry

“One of the things I’d like to try to help correct is we believe it or not, have a trade deficit in fishing of some $11 billion a year. Given the enormity of our coastlines and enormity of fresh water, I would like to try to figure out how we can become much more self-sufficient in fishing and perhaps even a net exporter of fishing.” —Commerce Secretary Nominee Wilbur Ross

Full transcripts can be found at