Company Notes Digest 2.17.17

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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.

The two most powerful people in America, Janet Yellen and Donald Trump, each were in the spotlight this week.  Yellen testified before Congress, where she directly said that the Fed still wants to raise rates three times this year.  She still sounds like she lacks conviction though, which is probably why markets don’t believe that she will actually carry out the plan.

Meanwhile, Donald Trump certainly doesn’t lack conviction.  Most of his news conference was spent sparring with the press, but he did make some comments that started to lay out a timeline for Obamacare and tax reform.  We’re still lacking clear details on both policies though.

Readers should also note John Legere’s comments in this week’s post.  It sounds like he could be signalling deal activity.  Charlie Munger also shared some words of wisdom at the Daily Journal Annual Meeting.

The Macro Outlook:

Yellen continues to say that the Fed could raise in March

“I indicated that at our up coming meetings we will try to evaluate whether or not the economy is progressing, namely labor market conditions and inflation in line with our expectations. And if we find that they are, it probably will be appropriate to raise interest rates further. We’ve indicated that we think a gradual path of rate increases is likely to be appropriate if the economy continues on its current course.” —Fed Chair Janet Yellen (Central Bank)

She is sticking to three rate increases this year

“We last said that…a few increases would be appropriate. The median was three at that time, that means we have eight meetings a year and means at some meetings we would if things remain on course increase our target for the federal funds rate and not act at others. And precisely when we would take an action whether it’s March or May or June…I know people are focused on that. I can’t tell you exactly…It’s our expectation that there will be increased rates” —Fed Chair Janet Yellen (Central Bank)

Inflation expectations have definitely risen

“As we look forward into 2017, in the first half in particular, before we lap the inflation that we saw in 2016, we do expect to see a higher level of low single-digit inflation in commodities. And that combined with our annual pricing outlook will probably result in a bit of pressure on gross margins.” —Pepsi CFO Hugh Johnston (Beverage)

“it appears, we’ve now reached the bottom on commodities and are likely to have to contend with commodity inflation beginning in Q1 of this year…in 2017, when we take a look at the spot and forward rates, we’re likely to see year-over-year inflation. And we’re already seeing that in cheese, coffee, bacon” —Kraft Heinz CFO Paulo Basilio (Packaged Foods)

Companies are thinking about expansion

“Since the election of course there has been a marked shift in the mood around major financial institutions. While that mindset may take some time to be captured in job numbers, there certainly is reason to believe that we may once again see increases in financial services employment here in New York” —Vornado President David Greenbaum (REIT)

Financial markets are wide open

“Turning to the financing markets. After periods of volatility in 2016, we are now open and liquid, especially for blue chip sponsors like Vornado. While the 10-year Treasury is up 60 basis points since the election, CMBS spreads have tightened and risk retention has been the Y2K of real estate finance, a non-event on large loans. Overall, we are seeing active bidding from all types of financing sources. CMBS lenders, life companies, balance sheet lenders and foreign capital all of which is good for borrowers.” —Vornado CFO Michael Franco (REIT)

Yellen still sounds hesitant though

“Right now, the Taylor rule would call for a short-term interest rate somewhere between 3.5 and 4%. Which is obviously a much higher value of the federal funds rate than the FOMC has deemed appropriate given the needs of the economy.” —Fed Chair Janet Yellen (Central Bank)

Meanwhile, Trump sounds pleased

“The stock market has hit record numbers, as you know, and there’s been a tremendous surge of optimism in the business world, which means something different than it used to. Now it means it’s good for jobs. Very different. Plants and factories are already starting to move back into the United States, big league, Ford, General Motors.” —President Donald Trump (Government)

He’s having a great time

“But I’m having a good time. Tomorrow, they will say, Donald Trump rants and raves at the press. I’m not ranting and raving. I’m telling you you’re dishonest people, but I’m not ranting and raving. I love this. I’m having a good time doing it, but tomorrow’s headlines are going to be Donald Trump, rants and rants. I’m not ranting.” —President Donald Trump (Government)

The administration has big plans for next week

“there’s never been a presidency that’s done so much in such a short period of time, and we haven’t even started the big work that starts early next week. Some very big things are going to be announced next week.” —President Donald Trump (Government)

Healthcare is first up, tax reform will be next

“Frankly, the tax would be easier, in my opinion, but for statutory reasons and for budgetary reasons, we have to submit the health care sooner, so well submitting health care sometime in mid-March, and after that, we’re going to come up, and we’re doing very well on tax reform.” —President Donald Trump (Government)

Financials:

Rising interest rates haven’t impacted CRE markets

“[interest rates] may have had a slight impact on the appetite in the pricing, but not a material impact. We still see a lot of capital that wants to go into real estate…institutions are under-allocated to commercial real estate by about 100 basis points relative to where they want to be. So that could be a positive impact.” —CBRE CEO Bob Sulenic (CRE Broker)

The Fed is still planning to shrink its balance sheet someday

“The FOMC has enunciated it is longer run goal is to shrink our balance sheet, to levels consistent with the efficient and effective implementation of monetary policy. And while our system evolves and I can’t put a number on that, I would anticipate a balance sheet substantially smaller than at the current time. We would like to — in addition, we would like our balance sheet to, again, be primarily treasury securities, where as you pointed out, we have substantial holdings of mortgage backed securities…What we would like to do is to find a time when we judge that our need to provide substantial accommodation to the economy in the coming years is minimal, when we have confidence that the economy is on a solid course, and that the federal funds rate has reached levels where we have some ability to address weakness by cutting it. And once we have that confidence, we will try to — we will begin to allow maturing principle from — from our investments to gradually and in an orderly way we will stop reinvestments or diminish them and allow our balance sheet to shrink in an orderly and predictable way. The committee has decided that it will not sell mortgage backed securities, but as principle matures we will begin to allow — allow those assets to run off our balance sheet.” —Fed Chair Janet Yellen (Central Bank)

Consumer:

Not everyone can produce all original content

“And there are more players in the marketplace that are now looking for content, which is great, on the streaming services as well. So it’s really a mixed bag. I think some of the cable operators are coming back to buying off-network product. They realize they can’t do their own all-original content.” —CBS CEO Les Moonves (Media)

The average Candy Crusher plays for 30 minutes a day

“we have more than half an hour of gameplay per player per day, and we think this is an attractive opportunity, a very attractive opportunity for advertisers. It’s a very engaged user base.” —Activision/King Digital CEO Ricardo Zacconi (Video Games)

John Legere is telling cable operators that they won’t get into wireless without buying a carrier

“if you think about what happened, the cable industry has been hoping to use MVNOs on Verizon to get economics to do something in the wireless entry point. However, there’s no possible way they’ll get economics to do unlimited, which has now become the industry standard, and that will compel them. And don’t rule out that part of what Verizon did with their unlimited offer is send a message to the cable industry that you’re not going to ride us to what’s going to happen on your entry into wireless.” —T-Mobile CEO John Legere (Telecom)

He’s hinting that a deal could go down after the spectrum auction is over

“I couldn’t be more excited about the period that’s going to come up when this auction is over, while we continue to do what we just announced and then engage in understanding what the future of this industry is going to be, which is fascinating.” —T-Mobile CEO John Legere (Telecom)

Technology:

With technology one minute you’re a market leader, the next minute you’re washed-up

“the global watch market has experienced significant disruption over the last couple of years. Prior to that, we were clearly positioned as the competitively advantaged leader in a growing category. However, with the introduction of technology into wrist devices, traditional watches came under pressure and we were disadvantaged. We didn’t have the technology capabilities to compete with smartwatches, leading to a decline in our addressable market.” —Fossil CEO Kosta Kartsotis (Watches)

Avis doesn’t see an impact from ride-sharing

“as we continue to update our analysis of car-hailing or ride-hailing impacts on our business…they don’t really change that much across the country basis. It’s just not that big of a part of our business to begin with. As we’ve said, our average rental is four days and 450 miles, so those kind of short mileage and short length of rental type transactions are not a big part of our volume.” —Avis Budget CEO Larry De Shon (Rental Cars)

NVIDIA says that deep learning is a breakthrough in AI

“deep learning is a breakthrough technique in the category of machine learning, and machine learning is an essential tool to enable AI, to achieve AI. If a computer can’t learn, and if it can’t learn continuously and adapt with the environment, there’s no way to ever achieve artificial intelligence. Learning, as you know, is a foundational part of intelligence, and deep learning is a breakthrough technique where the software can write software by itself by learning from a large quantity of data. Prior to deep learning, other techniques like expert systems and rule-based systems and hand-engineered features, where engineers would write algorithms to figure out how to detect a cat, and then they would figure out how to write another algorithm to detect a car. You could imagine how difficult that is and how imperfect that is. It basically kind of works, but it doesn’t work…well enough to be useful. And then deep learning came along…deep learning has proven to be quite robust. It is incredibly useful, and this tool has at the moment found no boundaries of problems that it’s figured out how to solve.” —NVIDIA CEO Jen-Hsun Huang (GPUs)

Healthcare:

Pharma companies are trying to blame PBMs for rising drug costs

“I’ve never seen more misinformation and absence of facts in the dialog about our role…Drug companies set drug prices and over the last eight years those list prices have increased by more than 200%…Drug makers set prices and we exist to bring those prices down” —Express Scripts CEO Tim Wentworth (Pharmacy Benefit Manager)

Materials, Energy:

Cliffs Natural says that sanity has returned to iron ore markets

“The most important point I would like to make today, we finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value. Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case. For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not, nor will it ever be normal.” —Cliffs Natural CEO Lorenco Goncalves (Iron Ore)

But stockpiles are building in China

“Every time we felt that iron ore stockpiles are very high. The Chinese would buy more. And when we felt that they didn’t have enough, for some reason they would stop buying. So unfortunately, it’s unpredictable. Their criteria have to do more with how they view the cost of acquiring iron ore and the prospect of utilizing it in their steel industry. So from here onwards what we are looking at is pretty high stockpiles admittedly. But that is not sufficient in itself to make us draw the conclusion that the Chinese are not going to continue buying iron ore, if they feel that it is a opportunity to do so for them.” —Diana Shipping President Anastasios Margaronis (Dry Bulk Shipping)

Miscellaneous Nuggets of Wisdom:

Investing has gotten much harder over the years

“In the old days, what we did was shoot fish in a barrel. It was so easy, we didn’t want to shoot fish while they were moving, so we waited until they slowed down and then we shot them with a shotgun. It was just that easy. It’s gotten harder and harder and harder…Think of the hooey we built up over the years: we don’t understand it, it’s outside our circle of competency, the worst business in the world is airlines – and what appears in the holdings? Apple and a bunch of airlines. Have we gone crazy? I think the answer is, we’re adapting reasonably to a business that’s gotten much more difficult…Things have gotten so difficult in the investment world that we have to be satisfied with the type of advantage we can get…Indexes have created absolute agony among investment professionals because 95% of people have no chance of beating it over time…most people handle that with denial…I think the people who are worried and fretful are absolutely right. I would hate to manage $1 trillion in the major indexes.” —Berkshire Vice Chair Charlie Munger (Buffett’s Partner)

Engage life

“My hero is Maimonides. All that philosophy, all that writing he did after working all those hours a day as a practicing physician all his life. He believed in the engaged life. I recommend that you engage life. If you spend all your time on how some politician wants it this way or that way and you’re sure you know what’s right – you’re on the wrong track. You want to do something every day where you’re coping with reality.” —Berkshire Vice Chair Charlie Munger (Buffett’s Partner)

Full transcripts can be found at www.seekingalpha.com