Company Notes Digest 6.15.17

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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.

Editor’s note (@skrisiloff): I’ve been off for a few weeks working on an outside project. Erick has done a great job in my place. I may still be in and out of writing these for the time being, but I am still contributing where I can and you are in good hands with Erick.

I was back in the saddle this week though and I’m pleased to report that not much has changed. The economy is still moving forward even though it has a distinctly late cycle feel to it. The perception of the strength appears to be greater than the reality. It’s not that the economy is doing poorly, but it’s just chugging along. Meanwhile market prices reflect a phantom euphoria and no one expects that to change even though the Fed has been raising interest rates.  It’s a delicate cocktail.

The Macro Outlook:

The US hasn’t changed much

“I would say that based on my observation of actual spending behavior and my discussions with our wide range of contacts that I haven’t seen very much evidence that thus far expectations of policy changes have driven substantial changes in either consumer spending or investment spending. So, I really wouldn’t expect any significant pullback, many of our business contacts I think their confidence remains high. They’ve not really changed their plans yet and they have a wait and see attitude.” —Fed Chair Janet Yellen (Central Bank)

“So from the United States point of view, we are still seeing consumers behaving pretty well, so I think the market is doing very well. We see really no different trends than what we had seen before.” —Mastercard CFO Martina Hund-Mejean (Payments)

The economy looks pretty good

“The employment situation looks strong, small business looks strong, and actually slightly improving I would say, slightly improving. So generally speaking, despite perhaps what you might read in some publications or the perspective that some people might take away from the media, I think the economy actually looks very good and we’re seeing that growth as I say across all the credit range.” —JP Morgan Consumer Bank CEO Gordon Smith (Bank)

Even beaten up segments are showing some life:

Credit is being extended to lower prime borrowers

“Yes we have extended slightly into that lower prime, if you like segment, certainly not into sub-prime, but we have extended slightly our credit box. In about 2013 2014, everything that we read in the numbers we feel comfortable that we will get paid for taking that extra risk. We are going to sub-prime lending, but we are seeing growth actually across all segments” —JP Morgan Consumer Bank CEO Gordon Smith (Bank)

Caterpillar sees a solid recovery for mining

“We are seeing a good solid recovery from a really low level… We are seeing a good solid recovery from a really low level.” —Caterpillar Resource Industries President Denise Johnson (Mining)

Grocers are seeing less severe deflation

“The deflationary environment was less severe in the first quarter compared to the fourth quarter…produce, while deflationary for the quarter, showed inflation in the last four weeks of the first quarter and pharmacy was inflationary…We do think there could be a little more inflation by the end of the year than we originally thought” —Kroger CFO Michael Schlotman (Grocery)

Mario Draghi says the risk of deflation has dissipated

“nothing has substantially changed as far as inflation is concerned. There is going to be also in the coming months, by the way, a significant amount of volatility due to oil prices and food prices, but the underlying inflation is basically staying what it is today. So what we see now, based on the current information, is a path of low inflation, underlying inflation, and flat across time…the risk of deflation has dissipated.” —ECB President Mario Draghi (Central Bank)

Still there is uncertainty

“although the consumer seems to be growing at a relatively good pace, the corporate side just seems to be in that uncertain phase where they want more certainty in the world before they make the next decisions.” —Bank of America COO Tom Montag (Bank)

Professional investors are among the most leery

“We’re on increasing watch for volatility…there is a massive amount of money that is being short VIX. It’s a trade that’s made a lot of money and its very very crowded, which suggests to me the days of low volatility are numbered…If you’re a trader or a speculator I think you should be raising cash today, literally today. If you’re an investor you can easily sit through a seasonally weak period” —Doubleline CIO Jeff Gundlach (Asset Management)

Credit quality is going to deteriorate at some point

“people still seem to be surprised that we are at the end of that cycle that we have never seen in the 50 years of lending money on credit cards, I was not there the whole 50 years, but we have never seen losses this low, and then I will begin to migrate back up to more the historical averages over time” —JP Morgan Consumer Bank CEO Gordon Smith (Bank)

Policymakers seem to feel that they have plenty of gas left in the tank

“I would say the use of QE in the United States relative to the size of our economy is not as high as it’s been in some other countries that have employed it.” —Fed Chair Janet Yellen (Central Bank)

“if you ask me now, “What do you expect?” I would say that based on a current assessment, current information, I don’t expect lower interest rates. If you ask me, “But in case things were to worsen, are you ready to lower interest rates?” the answer is yes.” —ECB President Mario Draghi (Central Bank)

International:

Freeport still sees strong demand for copper in China

“while the credit has tightened in China, the demand as we see it remains strong, particularly in the wire and cable markets.” —Freeport McMoRan CFO Kathleen Quirk (Mining)

The UK’s economy may be slowing markedly

“GDP growth declined markedly in the first quarter, in part reflecting weaker household spending. It remains to be seen how large and persistent this slowdown in consumption will prove” —Bank of England Monetary Policy Committee

“Europe is–you know, some countries are doing well, like Germany; some other countries are doing a little bit less well, like the U.K., France, Italy…given the weaker pound…everybody outside of the U.K. loves to come to London, but the Brits are not going to be able to spend quite as much as what they would like to do in Spain and other countries where they like to go for vacation” —Mastercard CFO Martina Hund-Mejean (Payments)

Financials:

Yellen seemed to give a blessing to weakening the Volcker Rule

“a number of my colleagues have spoken about the Volcker Rule. Implementation of it is frankly complex and I’m certainly open to looking at ways to reduce regulatory burden in that area.” —Fed Chair Janet Yellen (Central Bank)

Consumer:

Wal Mart has 50m SKUs online

“So back about a year ago, we had around 10 million items online. Now, we have over 50 million items online. Now, 50 million still not as much as some of our competitors would have. The difference between 10 million and 50 million is a big difference.” —Walmart CFO Brett Biggs (Retail)

Tim Cook seems to be getting excited about AR

” You’re going to see some consumer things [in AR] that are unbelievably cool. Can we do everything we want to do now? No. The technology’s not complete yet. But that’s the beauty to a certain degree. This has a runway. And it’s an incredible runway. It’s time to put the seat belt on and go. When people begin to see what’s possible, it’s going to get them very excited—like we are, like we’ve been” —Apple CEO Tim Cook (Consumer Electronics)

Technology:

All businesses are becoming tech businesses

“the thing is the technology spend and business spend is getting closer and closer together, not farther and farther apart. It’s hard to differentiate between, well, are you investing in a new branch or is it the technology in the branch? Are you investing in — with clients, or you investing in a trading system, or is it in a mobile platform. It’s almost — well, you say tech dollars, but the tech dollars basically is the business in a lot of these places.” —Bank of America COO Tom Montag (Bank)

Automation, automation

“The mining methods of the past have changed. And where we’re controlling mines from for the future from pit support is located in office buildings instead of the mine sites…I was talking to a customer last week about autonomy and they have a goal to be fully autonomous on every mine site by 2025. And they have thousands of pieces of equipment. So, you’ve got these bold goals being placed out there. So, clearly, the momentum is moving.” —Caterpillar Resource Industries President Denise Johnson (Mining)

“We are digitizing our manufacturing operations and automating with robotics. We see opportunity for an additional $1 billion of savings from transportation, warehousing and other costs of goods sold. These savings will come from work to improve warehouse productivity by as much as 25%, digitized algorithmic planning that reduces inventory and optimizes vehicle fuel rates and by rebidding regional transportation alliance based on our optimized manufacturing site and mixing standard locations.” —Procter and Gamble CFO Jon Moeller (Packaged Goods)

Devices at the edge of the cloud still need processing power

“There will be more processing on the edge than we think in the cloud. And we think that the ability to run on the edge is an important part. Why? Because it’s a real-time game and the amount of data and the amount of processing that’s necessary in real-time to change a control system is not going to allow you to go back to the cloud, make that decision and lose the efficiency. So we have an architecture that’s cloud-to-edge oriented.” —GE Chief Digital Officer Bill Ruh (Industrial)

Everybody loves Amazon

“I want to tell you, AWS, Azure, these are great companies, we really like running on. We will continue to be strong supporters of everyone’s cloud. We don’t want to spend on those data centers. We will cheer them on and ride them.” —GE Chief Digital Officer Bill Ruh (Industrial)

“The Amazon relationship is a terrific one, a really terrific one. It is an amazing company. The way that they have thought about the business in every segment that they play in, they really understand the use of data, as we do, so it is a terrific partnership.” —JP Morgan Consumer Bank CEO Gordon Smith (Bank)

Full transcripts can be found at www.seekingalpha.com