Company Notes Digest 6.13.14

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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

Wells Fargo’s CFO hints that growth isn’t living up to expectations

“I think people really do believe that rates are going to be somewhat higher. But the rhetoric and frankly the growth at the moment isn’t really providing support for that.” ($WFC)

This home buying season is still not as good as we hoped it would be

“we’ve said over the last couple of weeks that this purchase season doesn’t seem as robust as we might have imagined it, it’s a little bit slower.” ($WFC)

The mortgage market is on pace to be the smallest it’s been in 14 years, JP Morgan expects continued weak activity in 2015

“the combination of re-fi burnout as well as slow purchase improvement has led to the smallest production market in over 14 years and for 2014, and for that matter, for 2015, the market is estimated to be $1.1 trillion or potentially smaller.” ($JPM)

Simply put:

“people just are not buying homes” ($WFC)

People may be getting priced out of the market in the hottest regions

“it could be that where economic situations are the rosiest, home price appreciation is less affordable in the New York area, in the Bay Area, in markets like that, people are getting priced out, that’s a possibility.” ($WFC)

Banks are easing credit standards, but it’s not having an impact

“I would say at the margin, credit is a little bit more available today but it is not driving a big difference in the outcomes for the size of the market.” ($WFC)

Credit is especially accessible for affluent customers

“we have a great interest in extending credit and holding loans for our best customers in the non-conforming space. And that’s contributing to loan growth” ($WFC)

“credit card, we’ve got a big emphasis, we’ve rolled out a couple of new products to attract more of our affluent customers.” ($WFC)

If you’re not affluent, underwriting standards are structurally tighter. People actually have to document their income

“two things that have really changed, especially for low FICO borrowers. First regulation, together with tighter market underwriting standards requires borrowers to fully document their income and assets and defend their ability to pay in a much more rigorous way, which is leading to a fewer qualified borrowers, together with the fact that affordability products like option ARMs and IOs are not being broadly offered across the FICO segment.” ($JPM)

The wealth of the ultra affluent is growing much faster than the mass affluent

“a lot of the asset growth has actually been among the very wealthy…Most people look at our business and think that we serve millions of small households. That is true, but we also served thousands of very, very, very large households and those are growing much faster. The growth rate is for the $10 million-plus household has been 71%, contrasted with the growth rate of the under $100,000 thousand household of -20%” ($MS)

A little rate volatility could catch a lot of people off guard

“We’ve seen corporate clients settled for – or benefit from the low LIBOR environment and not necessarily protect themselves from the prospects of rising rates regardless of the fact that the forward curve might be suggesting that they should do that. I think a little realized rate volatility where people got a taste of what might happen if rates move up quickly, would probably cause clients to come in at the margin and do more risk management activity” ($WFC)

JP Morgan is still positioned for rising rates

“as you know we are positioned short duration today relative to our expectation of a rising rate cycle.” ($JPM)


JP Morgan expects that after the end of QE, the Fed will first drain excess reserves for a couple of quarters, and then raise rates in 2H15

“In terms of sequencing, what we expect is that Fed will cease asset purchases by the end of this year. The likely next step will be to drain liquidity from the system, potentially as much as a trillion dollars or so using the reverse three tier facility with non banks. This is likely to happen over a short period of time maybe a quarter or two and probably in the second or maybe in the second half of 2015. After which the Fed funds rates will start to be raised and lastly re-investments cease in order to shrink the remaining balance sheet there over time” ($JPM)

JPM warns that a significant amount of deposit growth came straight from QE

“we should note that a significant portion of the growth in deposits that the industry has experienced has been as a direct result of the Fed’s QE policy and reserve bills” ($JPM)

They are preparing for $100 B in deposit outflows

“we estimate that we could experience during that same short time period potentially in the second half of 2015, deposit outflows of up to $100 billion.” ($JPM)

Reserve releases will provide a diminishing boost to bank earnings

“As you know we are facing smaller markets, revenue year-over-year, and although charge-offs continue to be very low, reserve releases will be lower this year than last.” ($JPM)

The market for e-filing of tax returns is still growing, but at a slower pace than in prior years

“The digital category continues to benefit from the migration of pen and paper filers though at a slower pace than in prior years.” ($HRB)

If you’re improperly claiming an earned income credit on your tax returns, you’re taking a big risk

“the EIC is one of the largest government social programs in the country and the IRS estimated that approximately $13 billion to $15 billion of improper payments were made to the EIC in 2013. This is obviously a significant issue for the U.S. Treasury Department and for the country.” ($HRB)

It will still be several years before H&R Block resolves rep and warranty claims on mortgages originated leading up to the financial crisis

“to really Sand Canyon to wind down its affairs in an orderly way and that’s by the way going to — will still take years at this point, but the fact they are able to continue to make forward progress is a good thing.” ($HRB)

Morgan Stanley seeing lower attrition in financial advisors because there’s been so much consolidation among wire-houses

“We are also seeing significantly lower attrition and financial advisor moves. This was not a planned outcome, but I think a direct result of the consolidation our industry has gone through in the last 20 or 30 years where there were effectively in traditional full-service large scale firms. There were four firms operating this country and there were a couple of midsized firms and after that it’s a very small operators and those four firms can only hire so many people from each other so many times before they stop doing that” ($MS)

Restoration Hardware argues that PE ownership taught extremely valuable management lessons

“I think we’re as disciplined is any kind of retail company out there I think our five years in the stewardship of private equity ownership that we develop really-really good capital discipline. And I think we all learned a lot here and we’re so much smarter and grateful for that experience. I think about it how it’s changed myself and changed our team. We look at our investments just like probably an investor look to their portfolio” ($RH)


Retail is not dead

“The retail store is not dead. We believe it is anything but over the past three years we’ve continued to innovate, test and prove that we can build the retail experience that defies the conventional wisdom that everything is moving to the web and retail stores are a dying platform. We have proven just the opposite ” ($RH)

The internet democratizes retail. (DSW CEO argued the opposite, but I tend to agree with RH)

“what people overlook is the fact that the web is a very democratic platform. The smallest retailer in the world can look as dominant as the largest retailer due to the fact that we are limited to the same-size store frame.” ($RH)

60 m cars sell per year, 3x as many used as new

“60 million cars sell every year, 60 million, only about 15 in the new car market and 45 in the used car market to add so you sort of this 3:1 ratio.” ($SIRI)

It takes a long time to break into the automotive world

“it’s like everything else in the automotive world it takes a long time to get there.” ($SIRI)

Lululemon sounds like a mess to me

People are coming into LULU’s stores, but not buying anything

“what we’re seeing is traffic a little bit stronger which is very encouraging but conversion down which makes sense with a non-ideal product assortment so means it’s telling us that we’re maintaining the guest coming in and when the product is right that should deliver a rebound but in the back half.” ($LULU)

They have a problem with their core product

“we have a core product assortment that has not been evolved as quickly as it should have been and we’re diligently working away at that.” ($LULU)

Their “parents are fighting”

“I think you know we’re not commenting on the Board, but you know meeting with the company yesterday we sort of mentioned that our parents are fighting and it’s awkward.” ($LULU)

Their CFO is leaving to go skiing

“you know that my long standing goal has been to ski each season the number of days equal to my age. Since I turn 60 next year and these goals are difficult to achieve with a day job, I’ve decided that this is the time to announce my retirement plans.” ($LULU)

And they admit that they don’t know as much as they should about their customer

“We’ve actually never used a lot of data in the history of lululemon and we are shifting that as quickly as possible, I mean we’ve got a very loyal guest and we should know a lot more about him or her, and it is part of our CRM effort. So, we are investing heavily both from a talent standpoint and from a technology standpoint to really ramp that up.” ($LULU)


Youtube is the biggest source of music streaming globally

“YouTube is far and away the bigger source of music listening globally.” ($SIRI)


The market for minimally invasive surgery in gynecology has been saturated

“f you look back to prior robotics, it was all vaginal and laparoscopic surgery represented about 40% of all hysterectomy. And so robotics has been able to expand the market from 40% to 80%. But the days of significant share gains relative to open surgery are largely behind us” ($ISRG)

It’s been tough to crack general surgery, because it’s a unique type of specialty

“general surgery is a category with multiple sub-specialties within it. And so if you look at the way in which we grown in general surgery is a lot of different than how we grew in urology and gynecology where there is really one key procedure like prostatectomy or hysterectomy where our growth came from.” ($ISRG)

Miscellaneous Nuggets of Wisdom

It’s not that this time is different, it’s that every time is different

“It’s too early to tell but every time is different.” ($WFC)

In tax preparation (and probably more than that) slightly more people want help than don’t

“About 60% of the world wants to have assistance and about 40% of the world wants to do it themselves.” ($HRB)

One of the benefits of losing a bunch of money up front is that you shelter your cash flow when you make it back

“I guess one of the benefits of having spent so much money, we invested $11 billion to 12 billion in building the business. And then we saw in 6 billion of NOLs which will provide a nice shelter for cash flow over the course of the next several years.” ($SIRI)

If you want loyal supply, invest in small partners and grow them to meet your needs

“We have developed an exclusive network of artisan vendors who act as an extension of product development merchandizing teams. These are some of the most unique and talented individuals in their respective industries. Many of these businesses were small $5 million to $30 million companies, where we now buy $50 million $120 million of cost receipts from annually and represent 60% to 100% of their production. Over the years we have invested both human and financial capital to enable these partners to scale their businesses and now are enjoying the benefits of having an exclusive product platform that provides us with the unique and very hard to replicate competitive advantage.” ($RH)

“free” is not a very good business model

“The one thing that really seems to be working in the streaming world is free, okay. Now we’ve never thought free was a great business plan. And business plans, so it matter to — matter to us. But free definitely works, free music you choose is part of life” ($SIRI)

Be defined by your values

“we believe it goes beyond what we have done but rather who you become. We will become a team of people who don’t know what can’t be done. Will become a team of people who are defined by our values and beliefs, those things we would fight for and value for and die for.” ($RH)

Your values are what drive your results

“What’s the most important is who we are, how we think, and what we believe in. That is why we achieve these results and why we believe we will be able to continue innovating, leading your industry and bringing your future dreams alive” ($RH)