Company Notes Digest 2.12.16

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.

This Week’s Post: Oracles Speak

There are a few oracles scattered throughout this week’s post:

Janet Yellen is one oracle. She testified before Congress and took a relatively optimistic view of the economy. Judging by her language it doesn’t appear that the Fed is moving in a more dovish direction in the near future. Although many business leaders appeared to agree with Yellen that the economy is doing ok, credit markets have continued to tighten, which is always a negative sign.

Charlie Munger is another oracle. This week we attended a couple of events in LA that we took notes on to share with our readers. The first event was the Daily Journal annual meeting, where Charlie Munger is the chairman. Each year he hosts the annual meeting and gives a one hour Q&A session that is typically extremely enlightening. The second event was an angel investment conference that featured some big names from Silicon Valley; however, unfortunately we were asked to keep their comments off the record, so the quotes have been anonymized.

The Macro Outlook:

Janet Yellen does not think that we should jump to premature conclusions about recession

“I do not expect that the FOMC will soon be in a position where it becomes necessary to cut rates…while there is always some risk of recession…I think we want to be careful not to jump to a premature conclusion about what is in store for the US economy.” —Federal Reserve Chair Janet Yellen (Central Bank)

But Charlie Munger thinks that Alan Greenspan was an idiot, so…do we trust the Fed?

“Alan Greenspan is an amiable man but he’s an idiot.” —Daily Journal Chairman Charlie Munger (Publishing)

Howard Marks appears to agree with Yellen and doesn’t see a recession this year

“My general feeling is, I just don’t think that we’re in for a recession this year…Eventually, we’re going to have a recession, we always do, but I just don’t think it’s imminent and I don’t think it’s going to be a strong one in large part because we didn’t have a strong boom. We didn’t have an overexpansion of facilities or payrolls.” —Oaktree Chairman Howard Marks (Asset Management)

Other business leaders also said that the economy is doing better than Wall Street thinks

“those of us that are on Wall Street can sometimes be overwhelmed by the problems that we see on the horizon. And I think from time-to-time, it’s important to step back, take off your Wall Street glasses and put on industrial America glasses. And I think things don’t look as bad when you look that – with that lens.” —Loews CEO Jim Tisch (Holding Company)

“I mean, it’s funny if you turned off the stock market, you’d go these are great days around here…in all areas tenant demand, tenant attitude deal flow…rental rates etcetera up, up and up all good…What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.” —Douglas Emmett CEO Jordan Kaplan (REIT)

CVS hasn’t seen much change in the consumer

“I would just say overall I’d say things are holding fairly steady. We certainly have seen the consumer – I wouldn’t say any change, really, from what we were seeing in the fourth quarter.” —CVS President Helena Foulkes (Pharmacy)

21st Century Fox said that the advertising market feels pretty good

“the advertising market feels pretty good…and internationally businesses are operating pretty well also. So I don’t think there is a dramatic issue outstanding on a macro-economic basis.” —21st Century Fox CFO John Nallen (Media Conglomerate)

But risk aversion is back

“Risk aversion is back after a five-year hiatus” —Oaktree Chairman Howard Marks (Asset Management)

And capital markets are shutting down

“Look, the financing market is very difficult. I think in certain industries it is almost completely shut down in the non-investment grade market and I think the lower end, triple C lower single B rating market is very difficult to access than the public markets.” —Moelis and Co CEO Ken Moelis (Investment Bank)

Default rates will likely start to tick higher

“We expect a meaningful uptick in the U.S. high-yield bond default rates over the next 12 months with distressed energy sector contributing most significantly.” —Oaktree Chairman Howard Marks (Asset Management)

Credit market tightness is leaking into other sectors besides basic materials

“for a while there it felt like it was only going to be in the commodity based sectors but it has leaked across the board and financing is tougher in almost all transactions that are less than investment grade right now…it hasn’t spread as wide as it did in 2008 but I think it will continue to spread.” —Moelis and Co CEO Ken Moelis (Investment Bank)

Consumer sectors including media, retail and restaurants are potentially at risk

“weakness is starting to bleed into other segments of the bond market, including media and retail” —Oaktree Chairman Howard Marks (Asset Management)

Venture Capital is starting to get concerned about a downturn too

We all are getting this feeling that there may be an economic downturn coming. As an investor I’m actually excited about that. When things get difficult that’s what separates the great founders from the weak. –Angel investor at Angel Investor Conference

Don’t invest in tech…There’s an adjustment happening…this bubble is deflating. Asset valuations were astronomical. The Fed kept interest rates low and there was a lot of money floating around. Companies’ valuations were very ripe and now they’re getting marked down…I think the real companies will survive but other than that we’ll see a little bit of a blood bath. –A-list hollywood actor at Angel Investor Conference

Don’t expect the Fed to ride to the rescue any time soon though

Yellen believes that we’ve not yet seen a sufficient shift in the economy to make lower rates likely

“We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.” —Federal Reserve Chair Janet Yellen (Central Bank)

The Fed is watching credit but doesn’t seem too concerned about current conditions

“Well not really [do we see credit tightening] at this stage, but what we do see is that spreads especially on lower graded bonds have widened, bank rates have widened…and it’s not just energy…in our recent survey of banks we’ve seen a tightening of lending standards…that is something that bears watching.” —Federal Reserve Chair Janet Yellen (Central Bank)

And does not think that the Fed’s decision to raise rates is a primary factor in the recent market decline

“The immediate market response for a number of weeks to the Fed decision was quite tranquil it was a decision that was well communicated and was expected and there was very little market reaction. Around the turn of the year we began to see more volatility in financial markets. Some of the precipitating factors seemed to be the movement in Chinese currency and the downward move in oil prices. I think those things have been the drivers and have been associated with broader fears that have developed in the market about the for the potential for weaker global growth with spillovers to inflation, so I don’t think it’s mainly our policy” —Federal Reserve Chair Janet Yellen (Central Bank)


Coke says that the global economy remains challenged, including China

“The global economy remains challenged and is not improving rapidly. We do see slightly better GDP growth rates for 2016 as compared to 2015. But to be fair, forecasts continue to be revised downwards and there is still much uncertainty…I think that the environment in China is pretty clearly having slowed down” —Coca Cola COO James Quincey (Beverages)

Even if the dollar continues to weaken, many companies may have already hedged their exposure

“In terms of coverage, we are fully hedged on the euro, yen and sterling for 2016. We also have near-term coverage in place across several other major currencies.” —Coca Cola CFO Kathy Waller (Beverages)


Charlie Munger had harsh words for the finance industry at this week’s Daily Journal annual meeting

Both Elizabeth Warren and Bernie Sanders (not two of my favorite people) are absolutely right on this subject. American finance is out of control and has too much evil and folly in it…We have this huge over development of finance…We have a vast gambling culture and people have made it respectable to bet on the price of securities. Very respectable people get drawn into casinos when they see others getting wealthy…I am always concerned that I will be a terrible example. We have something going on in our nation that is very bad. —Daily Journal Chairman Charlie Munger (Publishing)

Large amounts of money create regrettable human behavior

Venture capitalists make their living more honorably than other members of finance but they do not escape their own sin. Even our most reputable part of finance has dirty sleazy activity creeping in. Large amounts of money create regrettable human behavior. That’s Mungers rule. —Daily Journal Chairman Charlie Munger (Publishing)

Startup investors have a different way of looking at things than regular investors

“The key to normal investing is to not lose money. The key to startup investing is to not not make a lot of money.” —Angel Investor Conference

There’s a debt refinancing wave starting in 2017 especially in commercial real estate

“we do have the refinancing build from 2017 through 2019 coming closer on the horizon… I think the most important driver in structured side is the refinancing that has to occur for commercial real estate.” —Moodys CEO Raymond McDaniel (Credit Rating Agency)

Some people are still hoping for higher interest rates

“We continue to hope for higher interest rates. As discussed on previous analyst calls, rising new money rates will have a positive impact on operating income” —Torchmark CEO Gary Coleman (Insurance)

Most have given up though

“I was worried about interest rates going up. About mid-year last year, I decided that I was wrong and that as the phrase goes, rates were likely lower for longer.” —Markel CEO Tom Gayner (Insurance)


Whole Foods is hoping that a new concept will give it a fresh start

“one of the things perhaps not fully appreciated is that the 365 stores are going to leapfrog ahead on many of the practices that we will be evolving in Whole Foods Market. We can put them in. There’s no culture. There’s no legacy there to overcome.” —Whole Foods EVP Ken Meyer (Grocery)

The trend towards cord cutting may have taken a pause last quarter

“Broadcast season to date prime time ratings have stabilized and overall Ad revenues for the network were up in the quarter.” —21st Century Fox CFO John Nallen (Media Conglomerate)

“So what we believe we’ve seen or what we have seen, recently is that subscriber trends going in the negative direction have abated somewhat. We’re not making any predictions about them going forward, because we really don’t know.” —Disney CEO Bob Iger (Media Conglomerate)

“We and a lot of other folks had very good reason to believe that there was going to be the good possibility of a large influx in OTT traffic. That did not take place.” —Akamai CEO Frank Leighton (Content Delivery Network)

Most local businesses are still not advertising much online

“in general, when they hear Google and Facebook from a local advertiser, that’s a really good sign. That means that the local advertisers who has already started to shift online…More often frankly, we are dealing with prospects who don’t advertise online at all yet and that’s a more difficult conversation, because you are trying to get somebody effectively out of print and online, which is happening over time, but is a more gradual process.” —Yelp COO Geoff Donaker (Consumer Reports)


Labor markets are very tight in Silicon Valley

“We remain very competitive, especially with regard to technical hires, which has been a challenging hiring environment, I think, for a couple of years, especially here in the valley. And I think our team has done excellent work in terms of continuing to add to the world-class folks that we already have here.” —Linkedin CEO Jeff Weiner (Social Network)

Viacom is trying to remain relevant by partnering with Snapchat

“We have taken a significant number of steps…to move into the future, to build the existing ecosystem, we finalize our brands grow internationally, grow on multiple platforms the Snapchat deal that we announced this morning is an indication. You will see more deals to come. As I said in my remarks, I will leave no stone unturned, I never have and I never will.” —Viacom CEO Philippe Dauman (Media Conglomerate)

Twitter is trying to figure out what has been inhibiting growth

“we are focusing a lot of our energy on refining the core products, and looking at what is confusing about the service. What is inhibiting growth?” —Twitter CEO Jack Dorsey (Internet)


The auto industry is brutally competitive today

The auto industry is about as brutally competitive now as I have ever seen. Everyone knows how to make good cars. —Daily Journal Chairman Charlie Munger (Publishing)

Materials, Energy:

Offshore oil production is still key to global supply

“By some estimates, offshore oil production supplies up to 30% of the world’s oil, a significant percentage that cannot be replaced by conventional onshore drilling or shale production.” —Loews CEO Jim Tisch (Holding Company)

Miscellaneous Nuggets of Wisdom:

Be fanatical about improving your product

People who don’t care about anything other than making their product better. Those people build big companies. –Angel Investor at Angel Investor Conference

“we don’t plan to obsolete things. We just relentlessly make things better…it is a continuous improvement process…when people say, when should they buy Model S? Like what model year? It’s like, we don’t really have model years. We keep improving the car. If you want to wait until the car stops improving, you’ll be waiting forever.” —Tesla CEO Elon Musk (Automobiles)

Great startup founders make something out of nothing

“Great founders make something out of nothing. Most founders make nothing out of something.” —Angel Investor Conference

Value investing will never go out of style

Value investing will never go out of style it’s like arithmetic. —Daily Journal Chairman Charlie Munger (Publishing)

Negative emotions cloud the ability to think rationally

Anger, resentment, jealousy, envy, all of these are one way tickets to hell in rational decision making. —Daily Journal Chairman Charlie Munger (Publishing)

Take pride in your accomplishments

I think most people who have stood on top of Everest are pleased with that accomplishment —Daily Journal Chairman Charlie Munger (Publishing)

This is a tough business

You all are in the business. It’s not easy. Anyone who thinks it’s easy is wrong. —Daily Journal Chairman Charlie Munger (Publishing)

Full transcripts can be found at