Company Notes Digest 10.16.14

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

It’s really been volatile out there

“I mean, within the last two days we had some more volatility than we’ve had in two years, and prior to that, it’s been really volatile.” ($BBT)

Somebody big has been liquidating

“what we’ve seen in the last 48 hours is concentrated position liquidation, obviously triggered by stop-loss selling in multiple markets, and at times, as we’ve always seen, selling can begat selling” ($GS)

The last few days serves as a reminder of how fragile investor sentiment can be

“It’s clearly an environment that reminds all of us about the power of investor sentiment and how fragile it can be at times.” ($GS)

Things change quickly in this environment

“it’s incredibly hard to predict right now and I think John will tell you, you know, it’s a long time between Monday and Thursday.’ ($BBT)

The market decline has left some management teams at a loss for words

“I apologize for stumbling. I was looking at the stock going down at the same time and I couldn’t speak clearly.” ($FAST)

Larry Fink thinks the volatility is likely to continue

“volatility is likely to continue, as conflicting Central Bank policies and questions about the timing and magnitude of U.S. interest rate hikes led to an ongoing market uncertainty.” ($BLK)

The volatility comes at a tough time because companies are trying to plan for 2015

“As you well know and most of the people on this that are listening, our customers right now are in the throes of trying to determine what their budgets are going to be for 2015.” ($BHI)

It’s tough to make plans in an environment like this

“30 days ago the likelihood of us being in this environment was as high as the Reds making the playoffs at that time. The Reds didn’t make the playoffs, but here we are in this environment. And at the same time, this morning’s economic data indicated that the jobless claims are at the lowest level since April of 2000. So it’s difficult to predict exactly how this is going to play out in the global context and what the Fed will do.” ($FITB)

Its anyone’s guess what GDP will be

“We went into this year with the consensus forecast in the U.S. for GDP growth to approach 3%. The latest consensus is down at about 2.2% year-over-year for all of 2014, and it’s anyone’s judgment who’s listening to this call what events of recent days might mean even to that number.” ($AXP)

All eyes are on the Fed

“At issue is if, when, and how much the Fed will raise rates next year.” ($PNC)

On the bright side, credit has still held up

“Moving onto credit. The environment remains benign. We continue to see improvements in card early delinquencies and the card net charge-off rate was 252 basis points, an all time low.” ($JPM)

“in my 32-plus years with the company, I’ve not seen credit better.” ($WFC)

“We continue to see real favorable credit in North America, certainly in both our Mortgage business, but importantly in both of our Cards businesses…So that story is still continuing.” ($C)

Goldman’s economists don’t think anything has fundamentally changed in the past few weeks

“speaking with our economist only yesterday, they would argue that nothing has fundamentally changed the past few weeks, or certainly the last 24 hours, regarding the long-term outlook for the global economy.” ($GS)

John Stumpf still sees optimistic customers

“when I’m out calling customers, corporate customers, middle market customers, there seems to be at least more discussion about activity…clearly I see and I hear more optimism than I heard a year ago” ($WFC)

PNC says that this feels like an over-reaction

“we go out and talk to our clients. It actually feels a lot better than the sentiment. So I’m personally a bit confused…The U.S. economy feels very strong and resilient. And personally, I think this is a bit of an overreaction, particularly on the rate side…we’ve rallied rates down to basically zero again and have taken the Fed off the table for all of 2015…That doesn’t feel right to me.” ($PNC)

Steve Schwarzman at Blackstone agrees

“the U.S. economy is doing quite nicely and I think we’ve got like an overreaction going on because of health concerns and foreign policy concerns and all this stuff coming together, that is just scaring people and in a way you can’t blame them, because there is a sense that were sort of out of control and that’s being reflected into markets. But that’s not – I don’t think sustainable.” ($BX)

The consensus is that Europe is definitely slowing though

“I think you’re all very familiar with the fact that Europe is in fact slowing down, and we’re seeing that across our businesses as well.” ($JNJ)

“we’ve a very conservative view towards Europe. I guess you would, it’s another word choice you could tap for that, which is unoptimistic.” ($BX)

“The Eurozone is not yet in growth mode” ($C)

It may take longer to stabilize Europe than people expect

“I believe it’s going to take longer to stabilize Europe than many think and we’re likely to see an aggressive ECB behavior for a long time” ($BLK)

Emerging markets are still growing, just not as fast as we expected them to

“we still see good growth, good overall growth coming out of the emerging markets especially when compared to the developed markets. It’s just a little bit less growth than what we would have anticipated earlier in the year.” ($C)


The interest rate environment is making things complicated for banks

Banks aren’t sure what to do with their securities portfolios here

“I think at this point we’re being very cautious at looking at that buy ticket given the overall rate environment that we see that’s 30 to 35 basis points lower than what we saw during the second quarter of 2014.” ($BAC)

“We just don’t believe that the risk/return profile of those investments at this point are attractive enough…at 2%, 10-year and even the short end of the curve being where it is, I think we will remain on the sidelines.” ($FITB)

Many have been wrong on rates for a long time

“we do have a lot of dry powder. We’ve been that way for a while. We’ve been wrong for a while. I wish I had a perfect crystal ball and we could have invested and then sell everything today, but we didn’t. And we’re not in the business of making those dramatic bets with our balance sheet.” ($PNC)

Lower rates may impact interest income, but will boost mortgage refi originations

“when there is a decline in purchase activity because of stock market variations like this and rates are down, we see an uptick in refi activity and we usually get more than our share” ($FRC)

If rates are going to stay low for longer, banks need to focus on expenses

“if we’re going to be lower for longer, I think it means a lot for banks like ours, I think it means you have to be that much more vigilant on expenses” ($WFC)

Remember though, the short end of the curve has a much greater impact on profitability than the long end

“The long end of the curve doesn’t have as much of an impact on us as the shorter end of the curve. If you look at our asset portfolio, loans typically have an average life of three years. Most of our loans are LIBOR-based, and so we’re going to see more lift when we see the shorter end of the curve moving up.” ($KEY)

The regulatory environment continues to put pressure on banks

The collective impact of all these rules is enormous

“Again, the impact of the collective rule sets of all the rules: balance sheet, leverage, risk-weighted asset, liquidity, it’s pretty enormous. And I don’t think we can only have positive effects from that over the next three, four, five, 10 years. I wish that was case.’ ($GS)

Some banks will need to fundamentally change their business models

“there’s no question that the global regulatory community apparently keeps adding onto both capital and liquidity requirements that are going to have the combined effect of changing business models’ ($WFC)

Still, Jamie Dimon notes that banks have always found a way to make money despite the regulations

“You know acutely that we’ve added significant capital over the last however many years and have been able to over time continue to reorient the business and optimize against it to deliver strong returns.” ($JPM)

More importantly, perhaps, regulations have unintended consequences

Increased capital requirements may be creating a dangerous lack of liquidity in fixed income markets

“we are worried about the liquidity in the fixed income market especially in the corporate bond area…this is the big role that the investment bankers and Wall Street played in terms of providing balance sheet…and that balance sheet has been reduced significantly” ($BLK)

Larry Fink is emphatic that regulators need to focus on standardizing credit and moving trading to electronic markets

“This is why we have been so loud in stating that we need a more expedient adoption of electronic protocols and markets. I do believe this is one of the areas where regulators need to focus…the faster and sooner we have this adaptation of electronic trading, the sooner we have standardization of some form of corporate bond issuance.” ($BLK)

We need to do this before we have a liquidity event

“the worry we have is, do we have enough time before there is a true liquidity event that really destabilizes the market.” ($BLK)

This is interesting: banks pointing the finger at themselves for weak mortgage markets

Wells Fargo blames tight credit standards for the sluggish housing recovery

“I believe there are several factors holding the housing market back from a complete recovery…credit is still not attainable for all qualified borrowers due in part to the credit overlays that many mortgage lenders, including Wells Fargo, used to help reduce repurchase risk.” ($WFC)

Citigroup also blames tight credit standards for a weak mortgage market–shouldn’t they have the power to loosen them?

“the mortgage market today isn’t functioning what we’d like. If you’re not 20% down in high FICO it’s been tough for people to get in and be able to afford and buy homes.” ($C)

Wells argues that lenders are frozen by the threat of repurchase risk

“if the originator does a poor job and doesn’t underwrite properly, sure they should be held accountable. But if a default happens later and it’s due to a technical issue unrelated to the payment ability of the customer, that could have been known, then risk should transfer.” ($WFC)

Small banks are getting overwhelmed by competition

The C&I lending space is still extremely competitive

“especially in C&I…we maintain our cautious approach with respect to the industry’s aggressive pricing and structure…We believe that the current market environment and pricing levels leave little room for error in extending loans under riskier structures” ($FITB)

It’s tough for small banks to compete against big banks because big banks price loans as a loss leader to win relationships

“It is a competitive environment out there…We’re happy…we’re in a position to earn more of their business and to generate more of a return on the risk capital that’s associated with the loan…some other firms that we compete with who are getting paid primarily from the loan yield itself and not from the broader relationship.” ($WFC)

If rates stay low for longer, small banks may throw in the towel and put themselves up for sale

“I think every time you add one more weight on the challenges, and lower, longer is another weight, it causes people to think more seriously about strategic opportunities and I would expect if we stay lower longer, that would create — if not an outright, you know, discernible inflection point, it will certainly create higher propensity of M&A activity.” ($BBT)

Regulators may be warming to more M&A

“I believe the regulators are becoming pretty realistic with regard to this. I think they recognize that the industry needs to consolidate…so, yes, I think the regulators are beginning to warm up to the idea of the need for consolidation” ($BBT)


Netflix just didn’t grow as much as they thought they would

“we just didn’t grow as much as we thought, we were going to in terms of bringing folks in. So across a number of markets, we were lighter versus our forecast than we expected’ ($NFLX)

Don’t forget that NFLX has been pretty aggressive with its balance sheet

“I think that we have $1.7 billion in cash. I think we’re okay for the next few quarters. But we continually look at this. And if we continue to do expand both content and international as we expect to do, then you should continue to see some pressure on the cash on the free cash flow.” ($NFLX)

On net neutrality: Netflix doesn’t ask Comcast to pay for its content, Comcast shouldn’t ask Netflix to pay for its network

“Well, the simple version is [internet providers] collect revenue on the Internet from their customers and that pays for the network, and we don’t ask them to pay for our content. And we don’t think they should ask us to pay for their network. So, that’s the basis of the no-fee interconnect.” ($NFLX)


Stronger PC trends held steady for Intel

“The trends we observed in the PC market last quarter continued with stability in mature markets offset by ongoing declines in emerging markets” ($INTC)

PC strength may be about more than just the Windows upgrade cycle

“based on what we see in our surveys, there’s a variety of things that are causing people to go and upgrade their PC. Certainly the Windows refresh is one of them, but it’s also form factors, it’s the age of the PCs and the price points…we’re seeing growth that’s more broadly than just something where people are upgrading Windows’ ($INTC)

Intel doesn’t see excessive inventory out there

“I’d say the inventory levels, what we see is when you look at it in terms of weeks of inventory, it’s appropriate levels of inventory…So you termed it as excessive inventory, I think. We’re not seeing that.” ($INTC)

A lot of banks gave a shout out to Apple pay, but most comments were measured

“mobile wallet can have the potential to change consumer behavior for some years, but it’s unlikely to be an overnight shift. It will take time, even with Apple’s innovative technology and customer base. ” ($AXP)


Johnson and Johnson sees improving healthcare utilization trends

“Although modest, we have now seen two consecutive quarters of positive momentum in hospital utilization rates, which is in line with recently published analyst reports noting this trend. We continue to remain confident that as economies recover and as healthcare reform continues to gain momentum here in the U.S. and abroad, utilization rates are going to increase.” ($JNJ)

You know what would really boost healthcare utilization?…If this isn’t accurate (let’s all hope it is)

“the virus, I’m sure you know, is extremely difficult to transmit…there’s virtually no risk to all air travelers no matter where you’re traveling.” ($DAL)

United Health expected the newly insured medicaid population to use their insurance more than they did

“We expected higher utilization in the expansion population. In almost every case, we got paid for that higher expectation of cost and that’s what we’ve seen. So we expect long term for the population to perform in that 3% to 5% margin and are very confident about the continued growth.” ($UNH)

Contrary to Wellpoint, UNH does not expect small employers to dump employees onto exchanges

“let me deal with your question on small employer dumping. We have not seen a lot of that. We don’t really expect an acceleration in that given how reform has played out some of the offerings that are in the marketplace. So I don’t expect any significant increase in dumping, although we do expect some decline in the market which has been happening over time but not a significant dumping.” ($UNH)

Materials, Industrials, Energy

Banks aren’t the only ones dealing with volatility at the core of their businesses

“As I mentioned in my opening remarks, our industry is seeing a number of evolving dynamics. The most obvious being the recent slide in oil prices. If oil remains at these levels for a sustained period of time, it will clearly have an impact on our customers in form of reduced cash flow and accordingly less funds available for capital expenditures.” ($BHI)

For now it looks like oil companies wont cut back on activity

“In the near term, we could see customers curtail activity, especially those who are more sensitive to commodity prices or pursuing marginal onshore and shallow water plays, but for national oil companies and deepwater customers, two areas where Baker Hughes is in a very strong position. We do not expect to see a meaningful change in activity anytime soon.” ($BHI)

E&Ps don’t seem to trust that prices will settle here

“what I can tell you the channel checks I do with my peer customers are that they’re concerned with what’s going on in the oil markets, but they’re not nervous at this stage I think frankly because we’re all a bit surprised with the markets. [they aren’t] willing to give it a whole lot of credibility either that these numbers are, what we’re going to see in terms of commodity prices. So, they’re still confident that, I think at this stage, these oil prices are not where they’re going to settle” ($BHI)

Shale oil plays break even at $60-$70 per barrel

“With current breakeven prices for most basins in the $60 per barrel to $70 per barrel range, we do not expect to see a meaningful pullback in North American activity in the near-term.” ($BHI)

Oil would have to hit $75 and stay there for a while for activity to slow

I think $75 is a – is the starting point to where activity could start to slow…if we were to see $75 next week, I don’t think you’re going to see one iota of activity slippage, none. But if we’re sitting at $75 come the holiday season or early into Q1, then certainly I think the conversations with the customers will be different.” ($BHI)

Miscellaneous Nuggets of Wisdom

Buy assets that can be improved upon

“We also when we buy something, we’ll try not to be passive buyers of anything, and we usually have some improvements planned of what can be done. And, even if our market is flat. If an asset has not been maximized, our job as Jon Gray would say it very nicely it’s buy it, fix it, sell it.” ($BX)

Always consider whether a salesman would take his own advice

“we are the leading merger and acquisition advisory firm in the world. It would be somewhat inconsistent philosophically for us; I just think it would be inconsistent with our core being if we said we weren’t willing to consider acquisitions…Having said all that, I think we’ve benefited as a firm over many years by keeping our culture intact and doing nothing major. But you have seen us do bolt-on acquisitions from time to time.” ($GS)

Full transcripts can be found on Factset or at