Company Notes Digest 10.27.17

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.

It’s increasingly obvious from conference calls that inflation pressures are building in the economy. Management teams in a wide variety of industries are talking about rising input costs and a “very, very positive pricing environment” in 2018. For whatever reason, securities prices suggest that most people don’t believe that the inflation will sustain itself, but at some point the weight of the anecdotal evidence should make its way into economic figures. If that surprises the market and policy makers, there could be a very significant reaction.

Note: raw quotes are now being posted to a streaming feed on tumblr and twitter (@avondaleam)

The Macro Outlook:

The global industrial economy is enjoying a broad based boom

“we’re seeing broad-based sales increases across a number of industries in all regions. We continue to see strength in China construction. Onshore oil and gas in North America is also strong. Construction activity in North America was up compared to last year, and we’re seeing increased order activity by mining customers.” —Caterpillar (Construction Equipment)

“Industrial demand remains strong…I would say that certainly the demand was broad based. If you look across our product lines, we’ve got 65 to 70 different product lines, and the demand was very strong across those as well as strong across the region. So we had revenue up in three of the four regions year on year in Europe, Asia and the U.S., and it was about even in Japan.” —Texas Instruments (Semiconductors)

“clearly we’re seeing clients starting more new projects. They’re spending more money. They have more sense of urgency. Their existing staff has a lean because they’ve held a line so far during this recovery. So, there’s some pent up demand that results from that.” —Robert Half (Temp Staffing)

Even the mining cycle has started to turn

“As we have stated previously, the mining cycle has started to turn. The parked fleet has come down from its peak and stabilized for several months” —Caterpillar (Industrial Equipment)

But commodity inflation is becoming more obvious

“I mean obviously we’re in a bit of an inflationary environment for some of the commodities…overall we’ve probably been more challenged on the cost side this year than we’ve seen in a while.” —Honeywell (Industrial)

“The core underlying market we’re facing for raw materials is certainly toughening.” —3M (Industrial)

“our commodity inflation estimate has increased somewhat from 3 months ago… In terms of the inflationary pressures that we see…it is stronger inflation than we were expecting” —Kimberly Clark (CPG)

“Lumber was on an upward trend even before some of the catastrophic natural disaster events that we’ve seen over the last 60 to 90 days. So that’s the one that I think we all need to be paying attention to for 2018. I think the premiums that are being paid for labor in Houston and Florida that will subside in time. the lumber impacts could be longer lasting.” —Pulte Home (Homebuilder)

“We knew we’d see higher pulp cost going into year, these costs have continue to increase beyond initial forecast ranges. Ethylene, propylene, kerosene, and the polyethylene and polypropylene resins have increased recently” –Procter and Gamble (CPG)

Even oil prices could start to rise

“the reduction in global oil inventories in the third quarter clearly demonstrates that the oil market is now in balance, which is creating the required foundation for a further increase in the oil price and the inevitable growth in global E&P investments.” —Schlumberger (Oil Service)

Wages too?

“There is some commodity inflation, but the biggest drag that we’re facing right now is related to the labor investments that are being made.” —McDonald’s (Restaurants)

“The labor market in the U.S. is extremely tight, hard to find people.” —Manpower (Temp Staffing)

For now, higher input costs are being absorbed by margins

“we’re now estimating about a $300 million profit hit from higher commodity costs.” —Procter and Gamble (CPG)

“scrap price has moved up and we were unable to move plate prices up with scrap prices. So we started to see a margin compression and that’s where we live now. We’re living in a margin-compressed world today.” —Nucor (Steel)

But those prices will start to get passed on to customers

“we continue to have a positive view on domestic steel consumption…This will be a solid foundation for a strong pricing environment as the macro market drivers continue to be persuasive…These dynamics could create a tight market and lead to significant price appreciation as we saw at the end of last year…I just see it setting up a very, very positive pricing environment for the first quarter of 2018 and all the way through 2018.” —Steel Dynamics (Steel)

Consumers usually don’t love higher prices

“we are seeing a little bit of resistance at the higher price points because of affordability and I think that’s a broader concern that affects the entire business.” —Pulte Home (Homebuilder)

Except when it comes to the stock market

“fairly broad based retail engagement overall commensurate with literally everybody seems to like new highs” —TD Ameritrade (Broker)

International:

China’s economy is also booming

“This revision includes a higher demand forecast in China, driven by strong growth in ultra-high voltage electrical applications, as well as growth in China’s two largest aluminum consuming sectors, transportation and construction.” —Alcoa (Aluminum)

Wealthier Chinese consumers are demanding higher quality goods

“I think what is happening as we speak is that the consumers in there and the OEMs, they’re becoming more demanding on performance, on quality, and functionality and brands” —3M (Industrial)

But higher standards lead to a higher cost of doing business

“China has started to really fight pollution as we have said several times that they would do…once the Chinese start to control pollution, one of their most unfair competitive advantages goes away.” —Cleveland Cliffs (Iron Ore)

Brexit has made Britain a global laggard

“When we say that we don’t think Brexit is a good idea, in this world of – in this future of work, having access to skilled talent is what’s going to define the competitive advantage for nations and organizations alike, and any country that appears to give the impression that they’re not really interested in people coming to their country and contributing to the growth of their economy and prosperity, that’s not a great sign.” —Manpower (Temp Staffing)

Financials:

The credit cycle began to soften at one point, but then recovered

“We saw trends actually flagging over the last year-and-a-half…Since then, we’ve subsequently seen some pullback…So, it feels like it’s settled out a little bit and something that would be consistent more with the middle of the cycle” —Capital One (Bank)

New regulations could lead to a significant contraction in sell side research

“I think the effects [of MiFID II] are going to be a significant contraction and sell-side research providers…We think that especially for some of our larger teams it’s going to end up being a competitive advantage as the amount of information and the amount of sell-side research declines.” —Cohen and Steers (Investment Management)

Insurance companies aren’t earning their cost of capital

“Loss trend has outpaced rate and exposure for a few years now to a degree that many others in the industry are probably not earning their cost of capital.” —Travelers (Insurance)

Disasters should lead to some firming of insurance prices

“given the level of destruction of capital give or take $100 billion vaporizing in a relatively short period of time…it is hard for us to imagine that given the loss activity it is not going to be a definitive wake-up call for market participants and capital providers to focus more deeply or to revisit what is an appropriate risk-adjusted return.” —WR Berkley (Insurance)

Consumer:

Consumer packaged goods companies are struggling to find growth in developed markets

“overall demand in Europe remains flat as it has been in for the past few years. And in North America, market growth slowed at the start of this year and has not yet improved” —Unilever (CPG)

“Overall, it’s challenging to find growth right now in several of our large markets.” —Kimberly Clark (CPG)

It’s hard to get consistent returns on digital ad spend

“The ROIs on traditional media TV advertising are what they are – this narrow band is quite predictable, the ROIs on today’s landscape of search investment, social investments, video, et cetera are – it’s much, much more wide.” —Unilever (CPG)

Technology:

Cord cutting isn’t really cord cutting

“we are not surprised by what we are seeing around the TV, but I would tell…when you move to over-the-top for your video entertainment, the quality of that broadband connection becomes more important than ever” —Verizon (Telecom)

Smartphone units are still growing 6% worldwide

“We forecast world smartphone long-term unit growth to be 6% compound annual growth rate from 2016 to 2021.” —Taiwan Semiconductor (Semiconductors)

But upgrades have slowed

“Revenues continue to be pressured by slow equipment sales and what were legacy services. We’ve had about 2 million fewer phone upgrades so far this year when compared to a year ago” —AT&T (Telecom)

AI is moving to the edge of the network

“AI and ubiquitous computing will be important drivers for long-term world semiconductor growth…AI will continue to proliferate from the cloud to broad based client devices such as smartphones and ADAS in cars, DTVs, set-top box, gaming, surveillance, robot and drone.” —Taiwan Semiconductor (Semiconductors)

Some older industries are adopting leading edge technologies

Travelers used drones to evaluate insurance claims

“We conducted more than a thousand inspections with drones, which significantly accelerates the speed and reduces the cost of handling those claims. Again, a better outcome for our customers and more efficient outcome for us” —Travelers (Insurance)

TD Ameritrade is launching AI chatbots

“We launched an AI powered Chatbot on Facebook’s Messenger, a first in our space. Initially the bot was an extension of our client’s service capabilities but this week we’ve enhanced it to include equity and ETF trading, account deposits and additional education capabilities as well…just yesterday I bought 100 shares of Apple on Facebook Messenger” —TD Ameritrade (Broker)

Healthcare:

Illumina expects to be able to map a genome for $100

“From a $100 a genome perspective, we continue to believe that that is attainable with the architecture that we have in NovaSeq.” —Illumina (Genetics)

Materials, Energy:

The oil industry may be stabilizing

“Oil and Gas end markets are beginning to stabilize and we expect them to return to growth over the medium term.” —Baker Hughes (Oil service)

Production companies are ready to drill again

“the only people that probably talk to more customers than me is my BD group and I talk to the BD group every day. And so, we’re having constructive conversations about 2018 and encouraging discussions. I think the $50 oil through the planning cycle is a great thing…And so, they are absolutely planning to work next year, hedges are getting in place.” —Halliburton (Oil Service)

Oil demand continues to be strong

“the growth in oil demand continues to be very strong and importantly the upward growth revisions in 2017 were primarily seen in the OECD countries. The demand growth outlook for 2018 is again expected to be north of 1.4 million barrels per day” —Schlumberger (Oil Service)

What are the long term prospects though?

“we are committed to an all-electric future, and we have announced plans for at least 20 new all-electric vehicles by 2023, including two in the next 18 months.” —General Motors (Automobiles)

Miscellaneous Nuggets of Wisdom:

Just keep growing

“In this business, you are growing or you are dying” —BB&T (Bank)

Small returns compound over a long time

“you can be a lot richer if you hold an asset for 10 years earning 12% than if you hold an asset for four years earnings 25%.” —Blackstone (Private Equity)

Spend on product over promotion

“As you know, we’d rather spend a dollar on innovation or equity every day the week before we spend money on promotion….And the reason is very simple is because there is nothing proprietary and promotion whereas we can build proprietary advantage with those innovation and equity investments.” —Procter and Gamble (CPG)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 10.20.17

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.

Earnings season began to pick back up this week led by banks. The economic story remains the same as it has been: growth and optimism.

The story line that caught my eye in the banking sector is that there is increasing focus on “deposit beta,” which is the rate at which deposits move given increases in interest rates. It looks like large customers are starting to optimize for higher yield on deposits.

This is important because it’s the first time in ~10 years that anyone has noticed what their deposits are paying them. It could mark the first rumblings of the end of a ZIRP mentality. If investors begin to believe that there is time value to money again, it would mark a seismic shift for capital markets.

The Macro Outlook:

Consumers are spending

“Consumers are spending, whether it is checks written, cash taken out of the ATM’s, P2P payments, and all the debit and credit cards, 5% more through the first nine months of 2017 than they did in the first nine months of 2016. That’s a faster growth rate than it has been in prior years.” –Bank of America CEO Brian Moynihan (Bank)

Companies are optimistic

“Our commercial clients continue to perform well. They continue to remain optimistic. They continue to look forward to continue implementation of a pro-growth agenda, particularly focused on meaningful tax reform.” –Bank of America CEO Brian Moynihan (Bank)

It’s a solid atmosphere with no signs of change

“Housing starts home prices continue to remain on positive trends. Employment is strong and employers continue to search for skilled workers. So that leads to a solid atmosphere and we see no near-term indications of any change to it.” –Bank of America CEO Brian Moynihan (Bank)

Investors are fully invested

“we saw more cash go into the markets, particularly the equity markets as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.” –Morgan Stanley CEO James Gorman (Broker)

Inventories are tight

“when we look at shipments versus retail sales next year, there is an opportunity to ship in at a little bit higher rate just because of the way we’re taking the inventory out this year…..overall inventory levels will remain tight through the fourth quarter and into 2018.” –Harley Davidson CFO John Olin (Motorcycles)

M&A pipelines are strong

“The pipeline…is strong also in our conversations with clients on the advisory side. There’s no sense of slowdown. We’re seeing a pickup in client dialogue, particularly I would note in technology, media, telecom, as well as industrials and natural resources. And so, it’s strong for all of the reasons that you would expect that CEOs are confident, equity market support valuations and acquisition currencies, the financing markets are open, the overall levels of financing costs are relatively low by historical standards.” –Goldman Sachs CFO Marty Chavez (Broker)

Companies are excited about lower taxes

“To level the playing field with other industrialized countries, tax reforms should include three fundamental elements, a lower corporate income tax rate in line with other industrialized countries, the adoption of a modern, globally competitive International tax system allowing U.S. companies to manage their cash without tax penalty and of course greater incentives for innovation in the U.S” –Johnson and Johnson CFO Dominic Caruso (Healthcare)

But they aren’t waiting on tax reform to move forward

“That’s all constructive on tax reform which you also mentioned, that is certainly a part of our engagement with clients. And I will also note however that clients, it seems to us, have moved towards saying, well, tax reform would be a good thing but it’s not stopping us from considering strategic acquisitions and sales right now.” –Goldman Sachs CFO Marty Chavez (Broker)

How would the stock market react if tax reform fell through?

“There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done…To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done, you’re going to see a reversal of a significant amount of these gains” –Treasury Secretary Steve Mnuchin (Government)

This environment wont last forever

“I don’t think it’s structural. I think it’s cyclical at this point. At some point, there will be catalysts to change the direction of the trading environment, and whether that’s tax policy, whether that’s better inflation data. But there will be something. And so this has been a sort of a subdued environment. I don’t think it persists forever. But when and how that catalyst appears is clearly a question mark.” –Morgan Stanley CEO James Gorman (Broker)

There is inflation in out there

“Now, we are starting to see inflationary pressures a little bit more than we’ve seen in the last few years of course. But so far, we have that is not shown up in our COGS line” –Grainger CEO D. G. Macpherson (Industrial Distributor)

Margin pressure is building

“Margins were softer than usual this quarter primarily due to a significant impact from copper prices. In the third quarter of last year, copper averaged $2.16 per pound but increased 35% over the past year to average $2.91 per pound during the third quarter” –Badger Meter CEO Rich Meeusen (Water Meters)

“Absent any unanticipated moves by the Fed, we expect some of the margin pressures we are seeing to be more apparent in the coming quarter.” –M&T Bank CFO Darren King (Bank)

And the Fed is unwinding QE

“there’s a positive backdrop, so the U.S. economy is performing…And at the same time, all of this unwinding quantitative easing is unprecedented territory, never happened before. So, you could see volatility and spikes showing up in this process, simply because it’s never happened before. We don’t see duly unwind risk priced into the markets. ” –Goldman Sachs CFO Marty Chavez (Broker)

International:

FX headwinds are starting to turn into a tailwind

“I’d like to thank you for pointing out that we have had a pretty dramatic [FX] headwind. In fact, I think from the time I’ve been in this job now, this is my 15th call. I think I’ve only had one other call where it was a small tailwind. And this was a small tailwind as well in the quarter, and hopefully, we’ve wrapped on some of the big, more profound effect” –IBM CFO Martin Schroeter (Enterprise Tech)

China’s economy has done better than most people expected

“I’d say we’ve seen a stabilizing of China, it hasn’t been as choppy as it was in the last two years…We were more conservative on market growth than recent data we’ve seen. The market growth is better than we indicated or better than we believed or better than we thought ” –Abbott Labs CEO Miles White (Med Device)

Financials:

Bank deposits are starting to be more fluid

“I think we are starting to see a little more fluidity with deposits” –Comerica CFO David Duprey (Bank)

Larger customers are more price sensitive

“our larger commercial customers, they tend to be the most price sensitive and we are working with each of those customers on an individual basis, to work through deposit pricing. And the other place where we see a little bit more activity and sensitivity, is with the larger balanced consumer customers, which are typically affluent or private banking types of customers, where because again, the size of the balances are a little bit bigger, they are a little more sensitive to rate. When we look through the rest of the portfolio, in general, on the consumer side and the rest of the smaller and the commercial, including small business; there still seems to be somewhat less of a focus on rate in those customers…Customers in the consumer and small business area are tending to stay short-dated” –M&T Bank CEO Darren King (Bank)

Rising rates are troublesome for real estate markets

“Rising rates to the real estate market are troublesome. They impact cap rates, they — if — as rates go up in the front end, since most of the borrowings on the projects are floating rate, you expose coverage ratios in those loans…at the margin, I would expect higher rates are going to cause greater delinquencies in real estate, and it’s one of the reasons we have at the margin, dialed back our growth.” –PNC CEO Bill Demchack (Bank)

Insurance companies have been hit by catastrophes, but that doesn’t mean a hard market is on its way

“In summary, there continues to be a lot of capital across the insurance market place. However the recent storms, fires and earthquakes may have implications on pricing in 2018. At the present time, we don’t have a clear view on the potential impact for next year. But there are a lot of discussions about rate increases for coastal properties. If there are proposed increases which we think there will be, the question really is will they stick. Certain markets are testing that philosophy right now…Right now I hear and what everybody else is hearing out there about the market place and what people are speculating on…I am guardedly optimistic…But if anybody is telling you they are getting ramped up for a hard market, I believe that’s a little premature” –Brown and Brown CEO Powell Brown (Insurance Broker)

Consumer:

We’ve heard this before from other retailers:

“I think grocery shopping remains for many a sensory experience, with the vibrant colors, sounds, and aromas of prepared foods and helpful human interaction enhance the shopping trip and help solve the issue of what’s to eat for me and my loved ones now, tonight, and later this week. I believe that retailers that do this well will continue to succeed.” –Supervalu CEO Mark Gross (Grocery)

Technology:

VCs seem to be investing more money in fewer deals

“what we’re seeing is that the venture capital firms have become a little bit more selective. They’re investing more money in fewer deals…a lot of competition is chasing a lot of the same transactions” –Comerica President Curtis Farmer (Bank)

Cyber security is top of mind for most executives

“This new mainframe addresses what is probably top of mind in every board discussion. It is top of mind for every CEO and it’s top of mind for the whole C-suite, which is the problem of cybersecurity.” –IBM CFO Martin Schroeter (Enterprise Tech)

Central bankers have an eye on crypto currencies

“With anything that’s new, people have great expectations and also great uncertainty. Right now we think that especially as far as bitcoins and cryptocurrencies are concerned, we don’t think the technology is mature for our consideration… One of the lessons of the great financial crisis is that financial innovation, in this case it’s financial and technology innovation… should be embraced with lots of attention to its potential risks” –ECB President Mario Draghi (Central Bank)

Industrials:

There may have been a softening in utility spending

“Although utility metering sales were relatively flat, we have seen an overall softening in the utility market over the past six months” –Badger Meter CEO Rich Meeusen (Water Meters)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 10.12.17

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.

Earnings season just started to trickle, but it was still a light week for conference calls. The story remains largely the same as it has been for a while now. The global economy is strong.

The Macro Outlook:

The market environment has improved considerably in the past year

“Over the past year, the market environment has improved considerably. We’ve seen greater political stability in Europe. China is continuing to show economic strength, and after a long period of stagnation, we’re seeing consistent growth in Japan. Overall, the world has become much more resilient. However, large cash balances remain on the sidelines.” —Blackrock CEO Laurence Fink (Asset Management)

The consumer is healthy

“not just in the U.S. but as we look around the world we would rate the health of the consumer right now is pretty good…as you look across the world unemployment is low, employment is high. Probably the bigger challenge to the consumer or to the worker has been the lack of wage growth…And we’re beginning to see some of that and again that’s helping to the consumer.” —Citigroup CFO John Gerspach (Bank)

Business travel is strong

“demand strength continues and we are seeing further improvements in business fares. Indeed our last survey of corporate travel managers showed more than 85% project their spend will be maintained or increased in the fourth quarter and into 2018…Europe is coming out of a multi-year recession. US economy is strong and people are traveling for business” —Delta President Glen Hauenstein (Airlines)

Credit quality is so good it’s hard to believe

“although we absolutely expect at some point that we’re going to see normalization of credit, we haven’t seen that yet – I just want to make that clear. We are appropriately cautious and staring at everything, but we’re not seeing any deterioration or any thematic fragility in our portfolio that we’re concerned about at this point.” —JP Morgan CFO Marianne Lake (Bank)

“Obviously we are a long way or we’re a long way from the last credit cycle and so we’re always challenging ourselves in terms of where we are. But a lot of the signs we looked for in terms of the deterioration of the consumer I got to say right now, we just don’t see” —Citigroup CFO John Gerspach (Bank)

Some still see risk

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it. I don’t know about you, but I’m nervous.” —Nobel Prize Winner Richard Thaler (Economist)

Geopolitical tensions always lurk

“geopolitical tensions don’t seem to have weighed on growth at least as of yet, I don’t know how long that can continue. And while tax reform remains a question mark we do like the direction the administration is going in terms of regulation ” —Citigroup CEO Mile Corbat (Bank)

Tax reform is uncertain but it’s not a factor in most business decisions

“at this point [tax reform] is not front and center in the dialog we’re having with our clients about whether they should or shouldn’t do a strategic deal or take an action, so I would say it is neither holding up business nor spurring business, but that could change. So at this point, I’d say it’s a factor but not a driving factor, and that could change.” —JP Morgan CFO Marianne Lake (Bank)

There is still inflation; that hasn’t changed

“There is still inflation; that hasn’t changed…if at some point we determine that we can’t protect our level of profitability without resorting to some sort of price action, then we will take that step…But we didn’t do anything along those lines in the third quarter.” —Fastenal CEO Dan Florness (Industrial Distributor)

International:

Brexit negotiations appear to have reached a deadlock

“we have reached a state of deadlock which is very disturbing for thousands of project promoters in Europe and it’s disturbing also for taxpayers…We worked constructively. We clarified certain points. Without making massive steps forward” —EU Chief Brexit Negotiator David Bernier (Government)

Financials:

Banks are constantly under attack from a cyber security perspective

“not to diminish the importance of any individual breach or situation, is that we are honestly under constant attack, both in a more general side but also from a fraud perspective, and so while we always react and learn lessons from every individual situation, this is not the first breach nor will it be the last breach” —JP Morgan CFO Marianne Lake (Bank)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 10.6.17

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 economy has strong momentum and there are increasing signs of production bottlenecks in various markets. Given the fundamentals it’s increasingly surprising that inflation expectations aren’t rising and that the 10 year treasury yield is still only 2.35%. In every decade before 1980 we would be on high alert for inflation by now and the Fed would be hitting the brakes. However, in the modern economy inflation appears to be a thing of the past. Either that, or the conditions are right for a big surprise.

The Macro Outlook:

The economy has momentum

“I think we are absolutely seeing that continued momentum, particularly in the upper end of the economy” —Vail CEO Rob Katz (Ski Resorts)

Bottlenecks are appearing

There is more demand for homes than supply

“right now, with the shortage of inventory and all the positive things I mentioned first time buyers coming out, wage growth, employment growth, all these good things are going on and there is more demand out there right now than there is supply.” —KB Home CEO Jeff Mezger (Homebuilder)

The memory industry is undersupplied

“Moving on to the demand and supply fundamentals, we expect the industry to remain moderately undersupplied for the rest of 2017 for both DRAM and NAND…The DRAM industry supply demand balance is expected to stay healthy throughout calendar 2018, driven in part by ongoing strength in data center and cloud computing trends” —Micron CEO Sanjay Mehrotra (Semiconductors)

Auto inventory is balancing

“we feel good about our inventory position…we would certainly be looking into leaning into giving some more production at this point over the next six-month period and now less just based on our current day supply.” —Ford VP Mark LaNeve (Autos)

Bottlenecks = pricing power

Labor shortages are leading to wage growth

“The often discussed labor shortage in many sectors of the economy is translating into wage growth. And while much of the data collected by the government doesn’t seem to reflect significant wage growth, the customers visiting our Welcome Home Centers are reflecting an optimistic sentiment and an ability to afford today’s more expensive homes.” —Lennar CEO Stuart Miller (Homebuilder)

Used vehicle pricing is stabilizing

“The used vehicle pricing has been very stable over the last I guess call it 8 to 10 weeks now Colin and in fact ticking up slightly depending on the segment very, very stable.” —Ford VP Mark LaNeve (Autos)

Home prices are increasing too

” With this market dynamic ongoing, we remain focused on maintaining our healthy pace and increasing overall price where appropriate across the broad range of opportunities in our built-to-order model, including base price, lot premiums, structural options and studio options.” —KB Home CEO Jeff Mezger (Homebuilder)

International:

Inflation is also back in the UK

“Market conditions have been challenging with the return of inflation, but we’ve been able to protect our customers from more of this pressure than others by working closely with our supplier partners.” —Tesco CFO Alan Stewart (Retail)

Consumer:

Consumer brand companies are speaking like they’re tech companies

“as we target doubling our direct connection to consumers, we are ramping up investment in digital capabilities ranging from data science and analytics to machine learning to augmented reality to image recognition and personalization. We will continue to use our unrivalled resources to ensure that NIKE is built to win now and for the long-term.” —Nike CFO Andy Campion (Apparel)

“today, we have a team of roughly 200 e-commerce professionals supporting our businesses to capture growth in the rapidly emerging e-commerce channels…For example, using big data and predictive analytics to shape real-time marketing messages, dynamic merchandising, and tailored offers, our team is enabling us to drive greater purchase instrumentality and higher basket size for our customers online.” —Pepsi CEO Indra Nooyi (Beverage)

Materials, Energy:

Vanilla bean prices are $200 per pound

“I’ll also say that we have taken several moves on vanilla as the cost of vanilla beans has moved from single digits per pound to well over $200 a pound and that’s been well understood in the industry and so their price increases have been accepted.” —McCormick CEO Lawrence Kurzius (Spices)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 9.14.17

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 features more highlights from investor conferences that were held this week.  Economic commentary remains optimistic.  The US economy appears to continue to perform well and no one sees signs of recession.  Still, inflation seems to be creeping into the system, and monetary policy is changing, which has historically created recession.

Barclay’s financial services conference usually attracts the industry’s top CEOs.  Jamie Dimon spoke there and was colorful as usual.  He reminded the audience that panics do happen and made headlines for calling Bitcoin a “fraud.”  Bitcoin investors should think about what happens when these two ideas intersect.  If Bitcoin is really a currency, it will probably experience a run at some point (as all currencies have).  When it comes to Bitcoin, which is backed by no assets, who is the buyer of last resort and at what price?

The Macro Outlook:

The US economy is doing fine

“The U.S. economy is doing fine…It’s the longest – one of the longest recoveries we’ve ever had, 10 years is the longest, I don’t think that has to end or not end. I would say a very important factor is it’s been half of a normal recovery.” —JP Morgan CEO Jamie Dimon (Bank)

It’s been a long cycle, but there aren’t signs of recession

“the last recession started in beginning of ’08, we’re a couple of months from beginning at 2018. So, it feels like we’ve been out there for a long time…the data that we’re used to seeing, none of it really indicates that a recession is coming in the foreseeable future.” —CBRE CFO Jim Groch (Real Estate)

Small and medium sized businesses are much more confident

“I’ll tell you that small and medium-sized business people are much more confident, much more optimistic…after the election they immediately became more optimistic and started moving towards investing what I call passive or replenish investment…now they are not doing expansion or investment…they are waiting on I think mostly tax reform. I think when you see tax reform, I personally believe…that will move then from just passive or replenishment investing to expansion oriented investment” —BB&T CEO Kelly King (Bank)

Credit quality is almost the best it’s ever been

“You know if you look at credit, it’s almost the best it’s ever been ever.” —JP Morgan CEO Jamie Dimon (Bank)

 

But inflation is picking up

“Another positive sign is that we had overall product cost inflation for the first time since 2015. As you know, the change from inflation to deflation and back again is one of the toughest environments to operate in for our stores” —Kroger CFO Mike Schlotman (Grocery)

And monetary policy is changing

“QE is still going on…all you hear now is talk about reversing that…so I’m not predicting bad things, but you don’t really know…We hope it’s seamless, we hope it’s painless…what is the chance it’s not? We never had QE therefore we never had the reversal of QE and it will have some consequences when people reverse it…So my view is, hold onto to you hats” —JP Morgan CEO Jamie Dimon (Bank)

Tighter monetary policy has historically been a leading indicator of recession

“As rates move up naturally, it will start to put some people or companies under stress. So higher rates is a little bit of a double-edged sword.” —Suntrust CEO Aleem Gillani (Bank)

There will come a day when people panic

“It’s definitely cyclical folks, I mean you will have a volatile market…people panic. People panicked in 2008 and 2009, they panicked in the 1989, they panicked in 1994, they panicked in Asia in 1997, they panicked in the Internet thing in 2000, the people will panic, you will panic. You will all be running through the door like everybody else and regulators will panic and – come on, and I just said, the government support $12 trillion securities that has to have some effect on depressing volatility…so the market will become more normal again one day” —JP Morgan CEO Jamie Dimon (Bank)

Until then, while this lasts it’s terrific

“overall, we’re in a very benign credit environment, I think you got to be careful when you are in a benign credit environment like this…because you do want to believe that it’s going to continue forever, but geez while it lasts, it’s absolutely terrific.” —Wells Fargo CEO Tim Sloan (Bank)

International:

Global air travel is growing faster than GDP

“Traffic patterns around the world continue to be very strong, we’re running about 7.7% passenger traffic growth year-to-date. We expect nominally 6% to 7% rate over the next several years and over the 20 year timeframe we’ve assumed a 4.7% growth rate” —Boeing CEO Dennis Muilenburg (Aerospace)

Financials:

The regulatory environment has been slow to change because regulators’ seats are still empty

“I think the regulatory environment has not changed a lot because we don’t have the people in their job, so you now have the OCC head which was passed by the Senate, Randy Quarles, Fed Chair, Vice Chair just passed by the senate. You don’t have an FDIC person yet, so you are not going to have these huge changes in regulations.” —JP Morgan CEO Jamie Dimon (Bank)

Loan growth has slowed because of a spike in repayments

“in July…we had a higher guidance for loan growth…We’re now revising that to be slightly down…in late July, early August, when we saw a material reduction in long-term rates, there was a huge spike in payoffs. And so that’s kind of an uncontrollable event…So we’re not concerned about loan growth. We believe it will be steady and solid as we go forward.” —BB&T CEO Kelly King (Bank)

Commercial properties are trading at 4 caps

“we’re seeing maintained high level of competition for the trophy assets, Class A properties like we own. San Francisco 222 Second traded at around the 4% cap. That’s $1,200 – low $1,200 a foot…San Diego Diamond View Tower, which is in downtown San Diego, near the ballpark traded about a week ago, going in high 4s, like 4.7%, $675 a foot. And there’s a building in Del Mar, which is our largest submarket. It’s in Ashgrove 4.5% going in yield. So prices are strong. In San Diego, we’re seeing 50 to 100 basis points over San Francisco spreads.” —Kilroy CFO Tyler Rose (REIT)

Bitcoin is a fraud

“it will eventually blow up. It’s a fraud okay. And honestly I’m just shocked anyone can’t see it for what it is.” —JP Morgan CEO Jamie Dimon (Bank)

Consumer:

Broadcasters are offsetting ratings declines with higher ad prices. Can this last?

“all-in-all, the ratings decline gets offset by the CPM increase and the total dollars continue to be very stable and that’s critical and that happened again this year and in the scattered market, we’re seeing continued strength there.” —Comcast CEO Brian Roberts (Media)

The true economics of the digital economy are still unproven

“the more time I spend talking to the advertising folks…and [ask] are you getting paid on the Facebook platform, no…and are advertisers getting their value from some of those other platforms for what they say they’re getting versus what they are getting. There is a lot of swirl around those questions.” —Comcast CEO Brian Roberts (Media)

“All the major traditional grocers have been really working on omni-channel, click-and-collect, Home Delivery, that’s been something that everyone’s been doing. Nobody’s really made any money on it, but it’s really an amenity that I think consumers are demanding. You are also going to see meal kits from Blue Apron and others continue to be interesting even though, I’m not sure any money is made there either.” —Kimco CEO Conor Flynn (REIT)

Technology:

AI holds the promise of eliminating toil

“Work is what you make and create and where productivity and economic growth come from. Toil is just doing the same thing over again and over again and over again. And I think there is a whole trend in the industry, the idea is you take your toil and try to package it, try to offshore it, try to get to the lowest cost location as possible, and for me, that’s pretty much over. Now we have the ability to eliminate it entirely.” —Mastercard President
Ed McLaughlin (Payments)

You need scale to collect data for AI

“artificial intelligence is not easy, so you need to have the scale in the resources to be able to do it…it’s not just having the data…it’s like what is the quality of those records; have you curated them? Have you cleaned them?…are they ready to do something important.” —IBM GM Deborah DiSanzo (Technology)

Qualcomm expects commercial 5G handsets in 2019

“You’ll start to see the first commercial devices in 2019. You can go to the store, buy a device with 5G in it in 2019. You’re already seeing people doing trials and early developments in the marketplace now. But the real standard compliance, new radio 5G will happen in 2019 time frame.” —Qualcomm CEO Steve Mollenkopf (Semiconductors)

China is leading the charge for 5G adoption

“Interestingly…this is the first time I’ve seen this happen with the G transitions…This is the first time that China is not waiting, and they’re really wanting to go pretty aggressively as well.” —Qualcomm CEO Steve Mollenkopf (Semiconductors)

Materials, Energy:

Oil consumption will probably continue to grow for some time

“a lot of pundits talk about the end of the internal combustion engine or you hear countries that are announcing they’re not going to have any more internal combustion engines after a certain year. You also hear a lot about peak oil demand…the world population is growing we still have 15% of the world population of 7.5 billion people that don’t have access to electricity and particularly in developing parts of the world there will be continued need for fossil fuels. In fact, the prediction is that the absolute usage…will continue to grow 2040 and beyond…in fact oil and gas usage continues to advance as people want to improve their lives” —Caterpillar President Tom Pellette (Industrial Equipment)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 9.8.17

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.

September is a light month for earnings but a busy month for investor conferences. This week tech companies spoke at a Citi conference and Consumer companies spoke at a Barclays conference. The two conferences actually dovetailed nicely considering that technology is currently up-ending the consumer products industry.

The EVP of Johnson and Johnson’s consumer products division did a great job of summarizing the immense challenges facing the industry and features heavily in this week’s post. He argues that historical barriers to entry are crumbling and that data is the new barrier to entry. It’s an interesting thesis, and only time will tell if it’s the right one, but it explains why companies are scrambling to use machine learning to make sense of the data that they have access to. One might wonder though, if old-line companies are leveraging tech companies’ cloud and engineers to unlock insights into their data, who’s data is it anyways?

On the macro front, there is clearly underlying inflation creeping into the system. Commodity costs are rising, but companies don’t feel they have the pricing power to pass cost increases on to their customers quite yet.

The Macro Outlook:

Commodity costs are rising but companies don’t have pricing power

“[we] continue to see competitive pricing in a challenging commodities environment…when you compare year-over-year…DRAM cost will be roughly double…but we continue to expect to see a very difficult pricing environment. We are not anticipating that easing up in the near term. So that would provide some pressure ” —HP Enterprise CFO Tim Stonesifer (IT)

“The flow of imported steel into the US has dramatically slowed due to duties and the threat of additional counter availing duties by the current administration. The result is an increase in the cost of this product with a limited ability to pass the increase onto the come customer, due to the competitive environment.” —HD Supply CFO Evan Levitt (Industrial Distributor)

Currency is becoming a tailwind

“if rates stay where they are today and hold, then that would certainly provide some tailwinds for us. Now we’ll have to see what happens at the beginning of the year, but as I said, if they hold where they are today, that should provide some uplift.” —HP Enterprise CFO Tim Stonesifer (IT)

The political environment could still rattle the economy

“I am still a believer…that if there is not real legislative progress other than extending a debt limit by 3 months to give relief down to the people in Texas they needed, but if there is not real legislative progress the sense that I get is that it will be a different conversation” —Korn/Ferry CEO Gary Burnison (Executive Recruiting)

International:

Britain is challenged from Brexit

“I think when Brexit was first announced, we did see a pause in the demand in the UK market…customers were trying to decide do they want to build their next datacenter in the UK or should they be building that datacenter someplace else in Europe. I think we are still feeling some after-effects from Brexit, because it’s not clear exactly how this is all going to work. So I would say, the UK market is a bit challenged for us.” —HP Enterprise CEO Meg Whitman (IT)

Consumer:

The head of J&J’s consumer division laid out the problems facing consumer products companies:

Competitive advantages are being dismantled

“the reality is that the pace of change in our industry is truly accelerating…If you look at our last few decades in this industry, there were a series of barriers for entry or sources of competitive advantage that were well established but those are becoming less and less unique.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

It’s hard to have a monopoly on talent

“It used to be that companies like ours would acquire the best talent through our recruiting human resources mechanism, but it’s never been easier for you to source great talent across the world on demand.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

It’s never been easier to build a brand

“Our ability to build and nurture brands, brand building competencies used to be again a source of competitive advantage but the reality is it’s very easy for you to start building a business, building a brand from scratch and you really don’t need a ton of money to get a community of active users that support you.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

It’s not hard to access global manufacturing expertise

“Large scale manufacturing assets used also to be a source of competitive advantage. But the reality is if you want to compete in this industry, you can access high quality contract manufacturing work any place in the world.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

Retailer relationships are no longer a moat

“Retailer relationships used to be also a source of advantage and a barrier for entry, but as you all know, new companies can now sell directly to consumers profitably in most markets. And then financial firepower for companies like J&J is not as critical as it used to be because new startup entrants can access capital relatively easy through VCs.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

The disruption is digitally enabled

“So this disruption that is happening is digitally enabled and is changing the face of our industry. You see these new players coming into our category and at the heart of this disruption, there is a new consumer centric paradigm and that’s challenging completely the cost of goods scale and the value scale as we know it and its forcing a change in both the retail and the media landscape.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

Small companies are succeeding because they stay close to the consumer and have digital DNA

“small players are the ones that are gaining share and majority of large companies are losing market share…they are really committed to breakthrough innovation by staying really close to consumers and customers and staying on top of consumer trend. They see where the product is going and they are designing to what that emerging consumer need is. They are focused on building digital first brands that have a clear purpose and a reason for being that resonates with millennial consumers. They capitalize on the rise of emerging channels. They don’t just play in the legacy channels but they figure out what are the new shopping behaviors, new emerging channel trends and they disproportionately drive growth in those channels. They are hyper efficient. Normally have very lean cost structures, flat organizations, no bureaucracy and as a result they move very fast. Speed is a great currency for them.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

Big companies are becoming value added VCs

“the innovators are launching hundreds of new products every year. But once they’re successful, they all have the same kind of issues, issues like buying, procurement, like selling, distributing, manufacturing and capital. And so, we have a venture group that we started about ten years ago and, basically, it goes out to all the entrepreneurs and says, instead of going to private equity to get money, why don’t we work with you, we’ll invest in you and we’ll help you. And we’ll help you take your idea, solve some of the issues you might have, and we can see how you can be a part of what we’re doing and we can help you achieve your dreams as an entrepreneur…All of that allowing us to kind of source external innovation, so that when you take a healthy core, build strong, new businesses, and then bring all the next businesses in, it gives you a sustainable top line.” —Coca Cola EVP Sandy Douglas (Beverage)

Data is the new barrier to entry

“And what we’re seeing now is there is a new playbook emerging, a new how-to-win playbook that is really characterized by an asset light infrastructure. And the control of the consumer relationship, via the acquisition of the…data that allows for you to have a highly personalized iterative on demand consumer experience. And the ownership of this relationship with consumers and associated ecosystem that comes with it is now the new playbook. It is now the greatest new source of competitive advantage.” —Johnson and Johnson EVP Jorge Mesquita (Healthcare)

Technology:

Every business is becoming a data business

“Cloud was originally a place for startups, a place for surplus capacity, sort of a cost savings thing. And now with every business becoming a data business, the Cloud, people are moving to the Cloud to be secure and they’re moving to the Cloud to gain competitive advantage.” —Google SVP Diane Greene (Cloud)

Companies are data mining for business intelligence

“I think the big driver for server demand…is simply there are massive amounts of data that have been collected that have sat unused for a long time and you now have people using more and more and more of that data to try to form business insights and business intelligence…So, AI is an important trend…this is a trend that will sustain demand we believe on a going forward basis.” —Micron CFO Ernie Maddock (Digital)

Alert to NVDA investors. Google is building its own chips for machine learning.

“we have a lot of GPUs in Google Cloud, and we work very well with NVIDIA. And the TPU…for the big data machine learning, training and using the models, we saw an opportunity to build a custom chip that would give an order of magnitude performance advantage, which actually saves us a lot of money and also lets us do a better job on the machine learning because you could turn things around so quickly.” —Google SVP Diane Greene (Cloud)

Miscellaneous Nuggets of Wisdom:

Not all market share is good

“As the CFO, I get quite nervous about having a goal of market share, because you could go out and buy a lot of bad units. And you could high-five on the market share. So, it’s important that it’s profitable and then it’s then consistent with our strategy.” —HP CFO Cathie Lesjak (PCs)

The more you try the more likely you are to succeed

“we did a pretty exhaustive study to try to figure out how we could become more innovative. And the net is that there are a lot of things going on in innovation, but the one thing that had the highest correlation with success was the number of at-bats. It wasn’t the super brainy process. It wasn’t the eight-page request for authorization form that was better than another. It was, you had the general idea of what you’re trying to do and where the consumer is going and you create the opportunity for lots of tries. And the only way we could figure how to do that was to get other people to try and then to give us the chance to help them make the more likely winners succeed. But even then, the more likely winners don’t all win.” —Coca Cola EVP Sandy Douglas (Beverage)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 8.11.17

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.

Earnings season began to slow back down this week. Most of the important companies have now reported, so this week’s post draws heavily from a handful of calls. The economic picture remains unchanged. There’s still a lot of optimism, but fundamentally GDP growth has been anemic and policymakers haven’t come through on promises.

Among the quotes are two interesting blocks. One is from Charlie Ergen of Dish. He implies that internet companies are seeing more than their fair share of profits from connectivity and that telecom companies (the distributors that make the internet possible) will fight back. Ergen has an ulterior motive in saying this. He owns a large chunk of wireless spectrum and may be trying to get one of those internet companies (Amazon?) to think about buying him.

The other interesting block is from David Seaton of Fluor. He points out that construction markets have never really gotten back to prior peaks. He is optimistic about infrastructure spending though. Even without a large stimulus bill, American infrastructure is probably overdue for some heavy investment.

The Macro Outlook:

Most people are feeling pretty good

“I feel pretty good about the global economy right now. We’ve already experienced, as you’ve seen in our orders the last couple of quarters, this is pretty good activity right now and we look for it to continue.” –Parker Hannifin CEO Tom Williams (Industrial Components)

The original reasons for optimism haven’t materialized but it’s better to be lucky than right

“I guess this is a case of better lucky than right. We expected the market to go up but for different reasons. We thought it would be based on generally positive growth oriented policies enacted by the administration, lower taxes, infrastructure spending, healthcare, reform et cetera, none of these things transpired. But what has transpired has been kind of global synchronized economic growth and a very accommodative global monetary structure. So, I’m happy with the outcome the reason for it was different from what we anticipated, but we’ll take it.” –Third Point CEO Dan Loeb (Hedge Fund)

Profits have rebounded but GDP growth has been anemic

“I think GDP probably is still a better reference point for assessing demand than corporate profits are. Obviously, they’re both averages of lots of economic activity and lots of participants in the economy. But GDP is a broader measure. Obviously, GDP has been quite anemic.” –Marriott CEO Arne Sorenson (Hotels)

Washington is gridlocked

“So one of the frustrations I see, and this is kind of a political commentary…there’s 2,200…candidates have to go through Senate approval. I think the last count was 55. And you’ve got people like Elaine Chao in transportation. You’ve got Rick Perry in energy, Rex in State. These people that we know and know well are sitting there twiddling their thumbs, so to speak, because we haven’t been able – the government hasn’t been able to give their team. So I think that is why you saw things screech to a halt. And I don’t see a whole lot of improvement until that phenomenon is behind us and the efforts that the administration are putting forth in terms of the regulatory reform actually see light of day. A lot of good intent, a lot of good thought and strategies to people that I’ve talked to, including the folks I just mentioned, but until we get those things, done you’re not going to see these permits that are absolutely necessary to go forward actually awarded.” –Fluor CEO David Seaton (Engineering)

But don’t under-estimate the optimism

“Don’t under-appreciate the optimism, which still seems to exist in the market and in corporate America these days. And compare it to the point of view last August, September, and October, you’re talking about a pre-election time. I think there was not a sort of robust optimism. Economy seemed to be producing, again, fairly anemic GDP growth. And I think in some respects, while that fairly anemic GDP growth has continued into 2017, there is still some optimism. You can see it reflected in certainly the equities markets and other places.” –Marriott CEO Arne Sorenson (Hotels)

Inventories are still low

“we are continuing to see a very strong business environment for our products worldwide…Our bookings rate in the June quarter was extremely strong. Our inventories at Microchip as well as at the distributors are towards the low end of the normal range.” –Microchip CEO Steve Sanghi (Semiconductors)

There’s some modest restocking taking place

“On the distribution level, I would say there is some modest restock taking place. There’s been a surge in activity and I have North America mostly in mind when I make that comment.” –Parker Hannifin COO Lee Banks (Industrial Components)

Radical price transparency makes it harder to have inflation

” we’re nearly 80% [occupied] for the full quarter, which is a pretty impressive kind of number. And so, you would expect a little bit more pricing movement. But…you’ve got to remember that we have thousands of franchisees who are pricing their own hotels on a day-to-day basis. And it is a market with radical transparency in pricing. And that may have some impact on our ability to move rates in this cycle compared to prior cycles.” –Marriott CEO Arne Sorenson (Hotels)

Consumer:

Disney is ready to go head to head with Netflix

“It’s been clear to us for a while with the future of this industry will be forged by direct relationships between content creators and consumers…we’re accelerating our strategy to be at the forefront of this transformation…With this strategic shift, we’ll end our distribution agreement with Netflix for subscription streaming of new releases beginning with the 2019 calendar-year theatrical slate.” –Disney CEO Bob Iger (Media)

No other studio gets Netflix’s multiple

“we have Netflix envy, and we try to present our results in a way to give you the ability to value us on an equivalent metric. So we’ll leave the valuation to you guys. We’ll post the results and you tell us what it’s worth.” –CBS CFO Joseph Ianniello (Media)

Food companies are struggling

“clearly not everything went our way in the first half. Canada, India and commodity cost in United States are just a few examples” –Kraft Heinz CEO Bernardo Hees (Packaged Food)

“we’re experiencing a decline in our base volume greater than our previous expectations…Volume softness continues to weigh on the broader food industry.” –Dean Foods CEO Ralph Scozzafava (Dairy)

Technology:

Charlie Ergen made a good point about the relative strength of telecom and internet companies

The $500B tech companies all depend on connectivity

“I think Amazon is one of those $500 billion companies that probably have to think about connectivity in their future…their cloud business doesn’t work unless it’s connected.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

That connectivity may not always be as cheap as it is today

“I think everybody in – the really big companies have always assumed there’s going to be a connectivity network out there that they can piggyback off of. And I think that if net neutrality rules get more define…you’re not going to be quite as confident of that in the future.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

The telecom companies aren’t going to let the internet companies make all the money

“You can’t have all the profits going to three or four companies and have the guys that are – the companies that are providing them the raw material to make that money, not get wake up one day and get a little smarter…at some point, all the money going one direction, a lot of people are enabling that.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

The balance of power always shifts between content and distribution

“They’re going to wake up and say maybe they should get – I’ve been through this business long enough to know that the money ebbs and flows between distribution and content. It’s probably going to continue to do that today. And a lot of the content companies, probably the distribution guys, probably are going to be in position to get a more of it. Then it may go the other direction.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

Industrials:

Construction markets have never fully rebounded

“the current market environment is perhaps the worst I’ve seen in my 30-plus years. The market has contracted since 2014. The good news is that we’re starting to see prospects come back in some of our end markets including mining” –Fluor CEO David Seaton (Engineering)

Infrastructure spending is one brightening spot

“I feel pretty good about infrastructure and what’s going to happen. I would caution though…there is no such thing as a shovel-ready project. But what I’m very eager to see is that at least the dialogue is around…toll roads, bridges, ports, airports…But I believe that our infrastructure group will continue to be a bright spot” –Fluor CEO David Seaton (Engineering)

Infrastructure projects definitely suffer from the regulatory environment

“I think the capital is there. I agree with you 100%. I think the problem is, you got to look at the Purple Line in Baltimore. Project passed all the hurdles environmentally, financially, everything else and then the regulatory environment slowed it down and actually stopped it for a while. So even though the capital is ready, some of the projects, I think, are at least to a point where you get to that next stage. I think the regulatory reform that the government is talking about has to come through before the timing of those things actually improve. And I’d put pipelines in that category.” –Fluor CEO David Seaton (Engineering)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 8.4.17

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 Dow hit 22,000 this week but the commentary that we’re reading is less exuberant than the market would suggest. Many CEOs are relatively subdued about the environment. Considering that nominal GDP growth is below 4%, maybe that shouldn’t be too surprising.

A lot has been made of earnings growth this quarter, but it’s worth remembering that when the final results are in it’s very possible that S&P 500 earnings won’t break the quarterly record set in 3Q 2014, almost three years ago. So far earnings have only rebounded from a significant decline. However the S&P 500 has climbed 20% since then.

The Macro Outlook:

If you cut through the noise, US growth is a little softer

“If we look at the macro environment, the economies around the world we’d say are mixed but in aggregate, are okay to good. FX headwinds have subsided. Energy markets have recovered some and certainly stabilized. Raw materials, though, are rising and creating some short-term margin pressure but we believe are manageable over the year…If you cut through the noise, U.S. growth is a little softer.” —Ecolab CEO Doug Baker (Business Services)

Activity remains mixed

“Overall, I’d say industrial activity remains weak with mixed activity across the remainder of what we call nonresidential construction segments…growth rates for most construction markets are slowing, and growth in the office construction is also beginning to moderate somewhat. Large industrial project activity continues to be weak. The manufacturing category, as a key indicator of the C-30 report showed through April and May, down some 8.5%. We’re also seeing somewhat slowing growth in housing starts” —Eaton CEO Craig Arnold (Industrial)

Expectations have declined

“Industrial production and retail are still growing, although at a slower pace than originally projected…the forecast for B2B, if you go back earlier in the year to today, is not quite as strong because of retail sales and also because industrial production forecasts were higher even three months ago to where they are today.” —UPS (Package Delivery)

Office leasing has been a little weaker than CBRE expected

“Even though the economy is generally doing nicely, there is a couple of things going on. In general, corporations are being very careful about costs. We are doing it and so are the other big corporations around the U.S. and around the world. And secondly, in a few markets, there have been limited circumstances where leases would have otherwise gotten done, but there was inadequate big blocks of space to get them done” —CBRE CEO Bob Sulentic (CRE Broker)

Restaurant spending has been decelerating

“in the U.S. and just about any other market we’ve studied, there’s been a decades-long trend for growth away from home, food and beverage consumption…However, in the past year, we’ve seen some pullback from that trendline.” —Starbucks CSO Matthew Ryan (Restaurants)

Not everyone is gloomy though

“Global demand conditions strengthened versus the second quarter. Emerging markets were up low single digits and mature markets grew mid-single digits. Growth was supported by improving end markets in the U.S. and Asia and early signs of improving demand conditions in Canada. Growth in Asia accelerated during the quarter, led by China. Excluding China, the rest of the region also improved, growing at low single digits in the quarter…We’re seeing some improvement from Middle East. If you remember the last call, I was somewhat concerned about the Middle East, but that’s turning right now. Investments are starting to happen.” —Emerson CEO David Farr (Industrial Conglomerate)

Lyondell Basel’s ethylene crackers are operating at 98% of capacity

“with operating rates of 98% of nameplate capacity across our U.S. and European ethylene crackers. Our polyethylene production operated at 95% of capacity…at our Houston refinery…crude throughput rates increased to an average of 99% of capacity during the second quarter.” —Lyondell Basel CEO Bhavesh Patel (Chemicals)

High capacity utilization usually leads to cost pressures

“We do continue to experience commodity cost pressures as we move into the second half…if you take a look at the basket of commodities that are important to our company and you go commodity by commodity, and I’d say almost every commodity today that we purchase is at a higher level than what we originally anticipated. And so I think it’s a pretty broad-based commodity challenge across most of the baskets of commodities that we buy as a company. So it’s pretty broad-based.” —Eaton CEO Craig Arnold (Industrial Conglomerate)

It’s a low return high risk world

“Markets normally respond to elevated uncertainty with lower asset prices and compensatorily higher returns. But that’s not what we are encountering today. We are living in a low-return, high risk world and an environment where most investors are happy to bear risk.” —Oaktree CEO Jay Steven Wintrob (Investment Management)

Complacency leads to surprises

“But the stock market trading at 17x, 18x, or 19x earnings, the fact that interest rates are still as low as they are when we’re seeing economic growth of 2.5%. The fact that there is a lot of complacency in all markets, not just the equity markets, leads me…to the view that this complacency that we’re seeing in the markets can lead to a decline in equity values.” —Loews CEO James Tisch (Conglomerate)

International:

Europe’s economy is strong

“our economists are reasonably positive on the next 12 to 18 months’ economic outlook. And may I say in particular, in Europe, you have seen the Q2 figures and provided that there is not any extraordinary event, I would say, the economy should carry on doing pretty well on the back of a high level of confidence with more clarity on the political side, et cetera.” —SocGen CEO Frederic Oudea (Bank)

Could Europe see inflation?

“In terms of raw materials, they’re biting us in Europe. No doubt about it. We have the same story there. It takes us a while to recover via pricing, but we’re starting to get pricing in Europe as well.” —Ecolab CEO Doug Baker (Business Services)

Financials:

Debt markets are as liquid as we have ever seen

“Debt market for New York assets are as liquid and strong as we have ever seen…Given the relative strength in the debt markets, many owners are choosing to refinance rather than to sell.” —Vornado CEO Steven Roth (REIT)

Banks feel confident

“The banks feel more confident in their ability to syndicate paper. That is an environment that we’re experiencing now. I think as a result you have seen some smaller — not as many big deals from us because the banks can easily underwrite and distribute paper. We’re hopeful that its slows…banks I think are more careful going into September than perhaps they are going into April” —Ares Capital CEO Kipp deVeer (BDC)

Consumer:

Retailers see the Whole Foods acquisition as a validation of omni-channel

“what we’ve seen over the last few months with Walmart and Jet.com and PetSmart and Chewy and most recently Amazon and Whole Foods, I think this is just, we’re in the nascent stage of these kinds of commercial relationships that are going to elevate the experience of a brick-and-mortar retail company.” —Starbucks Chairman Howard Schultz (Restaurants)

Amazon is open to multiple solutions

“we are excited about that acquisition and looking forward to working with the team at Whole Foods…On your larger question about what the place of Amazon Fresh, likely Prime Now and some of our other efforts, I would say we believe there’ll be no one solution, so we’re experimenting with a number of the formats from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and Amazon Fresh.” —Amazon CFO Brian Olsavsky (E-Commerce)

Technology:

The shift to the cloud is going to continue

“look, enterprise is going to continue to decline…it’s going be lumpy as we see this shift, but the overall macro shift of enterprise to cloud or traditional on-prem systems to cloud is going to continue.” —Intel CEO Brian Krzanich (Semiconductors)

Industrial companies have lots of data they want to harvest

“We’ve got, I don’t know, some 2 million customer sites nearly if you add up all the restaurants, probably collecting data 90%. But we only have a small fraction of it currently connected to the cloud. So, in most instances, our people have to walk into the unit, download via an RF port, and then they have the data to start analyzing how they can further improve the customer’s operation. We know that if we take that and send it to the cloud, do the analytics, send it to our person in advance of them arriving at the front door that we’re going to improve their productivity significantly and improve the amount of time they have for up-selling and for doing other things, even handling more accounts. So, technology, I would say in all industries, we have not yet pushed boundaries in these areas we are going to.” —Ecolab CEO Doug Baker (Business Services)

When tech meets old industries there can be a culture clash

“We, like a lot of people, are starting to look at the Insurtech space…It’s a clash of cultures there, I would say. The Insurtech folks are used to things happening lightening fast and with minimal regulatory issues and all that and that’s not insurance. So there almost needs to be a translator between Insurtech folks and standard insurance folks.” —Markel CEO Richard Whitt (Insurance)

Apple has created 2 million jobs in the US if you include App developers

“We’ve created 2 million jobs in the U.S., and we’re incredibly proud of that. We do view that we have a responsibility in the U.S. to increase economic activity, including increasing jobs, because Apple could have only been created here…About three-quarters of the 2 million are app developers.” —Apple CEO Tim Cook (Consumer Electronics)

Industrials:

The auto market is heading towards continued electrification

“These statements by Volvo by 2025 in the U.K., by 2040, those just seemed to be statements of strategic intent and very much in tune with the consumer psychology at the moment. It’s driven by all this negative press about diesels. But clearly, things are headed that direction and as there is more offerings from the powerful OEMs, I think it will continue to head toward materiality in our business.” —Group 1 Automotive CEO Earl Hesterberg (Auto Dealer)

China is likely to lead the world in electrification

“China’s forecasted to lead the global trend in Powertrain electrification, representing over 50% of unit production in 2025, reflecting a 40 fold increase over today’s levels. We remain optimistic about the China market as a result of the underlying macro trends which include increased government focus on emissions regulations, which are increasing demand for China’s new energy vehicles” —Delphi CEO Kevin Clark (Auto Parts)

Musk is confident that Tesla will produce 10k cars per week by the end of next year

“I’m very confident that we will be able to reach a production rate of 10,000 vehicles per week towards the end of next year…what people should absolutely have zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year” —Tesla CEO Elon Musk (Automobiles)

Materials, Energy:

Oil drillers need to replace their equipment eventually

“As two-and-a-half plus years of this downturn have gone on, the stuff that we’ve had out in the marketplace is slowly getting consumed. Those inventories are diminished and depleted and folks have to step back to the table and start ordering more of our products, even at very low activity rates. So we’re seeing some positive signs that give us some optimism in some sustainability of those businesses even in a flattening rig count environment.” —National Oilwell Varco CEO Clay Williams (Oil Service)

Australian Iron Ore is being sold to traders, not users

“what these guys are doing, these guys mean, for abundance of clarity, Fortescue, BHP and Rio Tinto, Vale and even the midget, Roy Hill, they sell to traders. And these traders do not have blast furnaces. They buy because it’s cheap to borrow money in Chinese banks. Then they put that iron ore in the ground, not in a blast furnace, at the port. And then they go back to the banks, and say, hey, I have collateral, can I borrow more? And the banker say, yes, and they borrow more, and they buy more for the same idiots…That’s my problem with the business in Australia. Then comes the question, will this be happening forever? Yes or no? Of course, the answer is no. One day, this bubble will burst. And on that day, people will say, oh, we are surprised that we are not seeing iron ore inventories going up.” —Cliffs Natural Resources CEO Lourenco Goncalves (Iron Ore)

Miscellaneous Nuggets of Wisdom:

Building a brand requires consistency and saturation

“While the intersection of digital, social, and traditional continues to blur lines, success is now measured in terms of months, weeks and even days. Engagement and intimacy requires consistency, saturation and showing up whenever and wherever a consumer engages our brand.” —Under Armour CEO Kevin Plank (Apparel)

Full transcripts can be found at www.seekingalpha.com

Earnings Call Digest 7.20.17

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 first week of earnings season showed a continued abundance of optimism.  Expectations have definitely risen for the economy.  Curiously though, expectations have not risen for interest rates.  Citigroup’s CEO mentioned that he only expects one rate hike per year through 2020.  Banks were prominent this week and credit quality remains strong, but CRE is an area where there appears to be a growing mismatch between risk and reward.

The Macro Outlook:

Optimism abounds

“Main Street continues to rebound. Our confidence is up. I’ve been in 23 of our 26 regions in the last few months…everyone is talking about increased optimism on the part of small- and medium-sized businesses…I’ve had 23 lunches where I’m sitting and talking to six to eight business people over the last few months. I’ve gotten this across our entire footprint…All of that is very, very positive.” —BB&T CEO Kelly King (Bank)

CEOs are confident

“I would say the CEOs are confident, the conversations are happening all the time and strategic M&A in the U.S. those discussions are occurring especially in technology and consumer retail and natural resources.” —Goldman Sachs CFO Martin Chavez (Investment Bank)

Consumers and investors are bullish on America

“across all the years since the crisis there has been ebbs and flows in customers’ views about where they want to invest and the cash portion of our balances has come up and down. But I think the consumer and the investor are very bullish on America and they continue investing” —Bank of America CFO Paul Donofrio (Bank)

Retail investors are highly engaged with the market

“We are seeing this quarter very broad-based engagement in the market, so everyone from brand-new customers opening their first account to very active traders seem to be engaged in the market. We saw a good activity across pretty much all of our products…So on the other end, the conundrum part is, as we said, we’re at multi-decade lows in the VIX, which tends to drive more trading activity.” —TD Ameritrade CEO Tim Hockey (Broker)

Voices of warning are few and far between

“…don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk….Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par.” —Janus Portfolio Manager Bill Gross (Investment Management)

Yet the expectation of low yields persists

“while markets have started to anticipate a normalization, a policy in the environment of sustained expansion, negative yields remain a reality in some countries and expectations for a continued low yield environment persists.” —Blackrock CEO Larry Fink (Investment Management)

Central banks aren’t very hawkish

“The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions…While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics.” —ECB President Mario Draghi (Central Bank)

Citigroup is only expecting four more rate hikes through 2020

“we’ve got one more rate hike for the US built in and its December of this year. And quite frankly we’re assuming one more rate hike in ’18, one more rate hike in ’19 and one more rate hike in ’20.” —Citigroup CEO Miles Corbat (Bank)

A lot is still riding on a tax cut

“And can I guarantee that all the craziness in Washington will not derail that? No. But I’ll be honest with you as I’ve talked to business people out there, they’re not worried about all this craziness going on in Washington. They’re just focusing on growing their business. Now I will say I think they are expecting a tax reduction deal and, to a lesser degree, they’re counting on infrastructure. But if we get the tax reduction deal, they’ll continue” —BB&T CEO Kelly King (Bank)

International:

Emerging markets have been weak for a long time

“since the financial crises, interest rates, currencies etcetera, we’ve had a prolonged period of about eight, nine years now where we have seen significant weakening of emerging market currencies…you actually see the volume component of these emerging markets continuing to be very, very low, while historically it was all volume-driven growth. I am convinced that that is coming back now.” —Unilever CEO Paul Polman (Packaged Goods)

China may be stabilizing

“China for example is actually much more stable than the last 12 to 18 months. I like what I’m seeing in China right now.” —Abbott CEO Miles White (Medical Device)

Chinese are still buying international assets

“we’re still seeing the trend of Chinese buying and international assets. ” —Goldman Sachs CFO Martin Chavez (Investment Bank)

Financials:

The Fed should start shrinking its balance sheet in September

“So on the balance sheet, it is still the case that we expect to start seeing normalization in the balance sheet, in September, if not in September by the end of this year with the actually calling for the next rate hike in December the market is calling for March of next year.” —JP Morgan CFO Marianne Lake

No one knows how it will affect banks

“I mean the Fed has never had a balance sheet of this size. We’ve never been through a situation where they’re talking about reducing a balance sheet. We can talk about history all day long, but since we’ve never been through that, nobody knows exactly what’s going to happen.” —Wells Fargo CEO Tim Sloan (Bank)

There will likely be an increase in competition for deposits

“we think as excess liquidity comes out of the market you could expect to see and you will expect to see more competition with respect to deposits, I would also expect that the long end of the curve on a relative basis would be a little bit higher” —US Bancorp CFO Terry Dolan (Bank)

Consumers may not shift deposits until rates are higher

“I think we are a couple of moves away from the Fed before you start really seeing the positive beta shift on the consumer side.” —PNC CEO Bill Demchak (Bank)

CRE lenders see unfavorable risk and return

“there’s a fair amount of competition in stabilized commercial real estate projects, I mean there’s lots of liquidity out there. And so this quarter there just happen to be more transactions that we’ve looked at where we said, gosh, another risk return it just isn’t there” —Wells Fargo CEO Tim Sloan (Bank)

“[we] remain cautious in commercial mortgage markets where the competitive environment has created unfavorable conditions from a risk and return standpoint.” —US Bancorp CFO Terry Dolan (Bank)

So far credit quality in CRE has remained pristine

“As far as the credit quality within commercial real estate has been pristine…as far as the strength of our commercial real estate portfolios, it’s performing extremely well.” —Comerica CCO Pete Guilfoile (Bank)

Technology:

AI is becoming ubiquitous

“AI is going into every segment of our growth sectors. AI is getting to mobile. AI is getting to high-performance computing like deep learning. AI will go into automotive…And AI will go to simple IoT, MCU also…it is ubiquitous.” —Taiwan Semiconductor Co-CEO Mark Liu (Semiconductors)

Financial service companies are adopting it

“Technology will impact all aspects of our business…Our investment teams are combining big data and machine learning with traditional fundamental human analysis to generate better sustainable alpha for our clients.” —Blackrock CEO Larry Fink (Investment Management)

“We are focused on our digital agenda on advancing the way we leverage data on exploring and piloting smart investments and things like AI and robotics on setting the standard in terms of the experience for our customers and distribution partners and as always on being as productive and efficient as possible.” —Travelers CEO Alan Schnitzer (Insurance)

“We have a number of expense initiatives. We are using, for example, artificial intelligence, AI, robotics…we will be going enterprise-wide in terms of finding ways to take these repetitious activities and apply good digitization and artificial intelligence to find more efficient and effective ways to reduce our cost.” —BB&T CEO Kelly King (Bank)

Robots are not necessarily that much cheaper than people

“If you look at the average basis points paid from the various robo platforms, they range in general like things from something like 20 to 40 basis points. If you look at the average basis points for a full service advisory like us, just divide our revenue into our assets including everything, you get somewhere in the 70s, low 70 basis points. So the value added of the financial advice and the institutions behind it and the research, the product offering, the new issued calendar you could argue is being put out there for 30 to 40 basis points. It’s not clear to me that, that is such an expensive gap that that’s going to lead to the cannibalization issues” —Morgan Stanley CEO James Gorman (Investment Bank)

80% of the world’s data isn’t public

“80% of the worlds data is owned by enterprises, it’s not searchable on the worldwide web, it’s customer data, and patient data, clinical data, supply chain data, transaction data and companies want to unlock and exploit that data.” —IBM CFO Martin Schroeter (Technology)

John Legere had nice things to say about Masayoshi Son. Trying to butter him up?

“let’s remember that [Masa] is one of the richest, biggest dealmakers in the world and his moves are significantly tracked and I dare any of you to dissect when he is working on vision fund and when he is working on, the guy is one of the biggest players in the world. And what he has been doing makes sense. That’s Masa. Sprint is very lucky to have him as an owner.” —T-Mobile CEO John Legere (Telecom)

3G/4G market growth is now just 6%

“For calendar 2017 3G, 4G device shipments, we continue to estimate shipment of 1.75 billion to 1.85 billion devices globally, up approximately 6% year-over-year at the midpoint.” —Qualcomm CEO Steve Mollenkopf (Semiconductors)

Industrials:

Manufacturers are trying to increase prices

“we are increasing our price that we are realizing out there in the marketplace…so we are seeing improved pricing versus where we were last year when we said sort of said hey guys enough is enough, we need to start getting some price back into the market…I think it’s moving in the right direction.” —Textron CEO Scott Donnelly (Conglomerate)

Transportation markets seem sluggish

“a few of our markets will experience year-over-year volume declines in the third quarter due to market specific headwinds you’re very familiar with. Auto shipments will be impacted by softening production.” —CSX CFO Frank Lonegro (Railroad)

“Truckload volume growth has slowed from the second quarter. The holiday timing makes precise comparisons difficult this early in the month but truckload volume growth has been in the low single digits.” —CH Robinson CEO John P. Wiehoff (Trucking Logistics)

Miscellaneous Nuggets of Wisdom:

It’s ok to fail. It means you’re trying.

“Failure is not such a bad thing and if you’re not failing maybe you’re not trying hard enough…you want to be introspective and look at that and say, are we being adventurous enough?” —Netflix CCO Ted Sarandos

Press your winners

“You ask about how we prioritize? Generally, when we see success, we try to add on to that until we reach a point of diminishing returns. And so, if we’re going to see success in some markets, we may up the content budget in those markets.” —Netflix CEO Reed Hastings (SVOD)

Full transcripts can be found at www.seekingalpha.com

Earnings Call Digest 7.14.17

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.

Earnings season started this week, but only with a few reports. Many more companies will report next week. A couple of industrial distributors, MSC and Fastenal, confirmed that the industrial economy is holding strong. Prices haven’t moved yet, but probably will if the economy continues to improve.

While there weren’t a lot of companies speaking, a lot of central bankers were. Yellen spoke about balance sheet normalization with Congress, and other central banks around the world are likely to begin normalizing soon too.

Bank of the Ozarks made a comment about commercial construction markets that bears watching though. The regional bank said it expects markets to slow because of high costs of labor, increasing interest rates and satisfaction of pent up demand. If this is true, it’s an interest rate sensitive market that is showing signs of sluggishness. This is a classic late cycle event. We will watch what other bank CEOs say next week for confirmation.

The Macro Outlook:

The industrial economy is showing continued and steady improvement

“Feedback from customers is consistent with the theme of continued and steady improvement…From an end market perspective, aerospace, fabricated metals and machine jobs continued to improve as did oil and gas related business…end markets like heavy truck and agriculture have appeared to bottom and showed some improvement.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

Pretty much all markets are performing well

“In fact, it’s difficult to identify a major market that is acting particularly poorly at this point. And the feedback that we’re getting from our RVPs remains overall very favorable.” —Fastenal CFO Holden Lewis (Industrial Distributor)

Prices still haven’t moved, but that could change

“…even if the commodities have moved and to be honest that’s something that surprised a bit over the last call it 6 months to 12 months these commodities certainly for a while have firmed up and there wasn’t as much manufacturer movement. Now, that could change. We are hearing bits and pieces that that could change as capacity starts to get fueled out by the manufacturers. But really for us the trigger is seeing a manufacturer move their list prices.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

A better economy will eventually allow companies to take price

“if we continue to see demand get better and the environment remains somewhat inflationary, then a window would probably open for us to take advantage of a little bit of pricing if the market affords.” —Fastenal CEO Daniel Florness (Industrial Distributor)

But the Fed continues to expect that interest rates will remain low for the longer run

“the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades.” —Federal Reserve Chair Janet Yellen (Central Bank)

International:

The global economy is strong and central banks are noticing

“for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.” —Federal Reserve Governor Lael Brainard (Central Bank)

If the Fed keeps hiking, the ECB will have to follow

“If the U.S. hikes more than once or two times it is going to be very difficult for the ECB to stay on hold for too long. I think that you don’t want to create too much of an interest rate gap between the between the euro and the dollar.” —UBS CEO Sergio Ermotti (Bank)

Canada is already beginning to raise rates

“Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time” —Bank of Canada

Central bank actions could impact currency markets

“the pace and timing of how central banks around the world proceed with normalization, and the importance of balance sheet policy relative to changes in short term rates in these normalization plans, could have important implications for exchange rates and financial conditions globally.” —Federal Reserve Governor Lael Brainard (Central Bank)

British consumer confidence is currently quite volatile

“the customer is quite volatile and what do I mean by that, they are shopping very much for today…we’re seeing fluctuations on a weekly basis in departments like men’s knitwear from sort of plus 50 to minus 20 on a weekly basis, depending on weathers. So, they’re really are shopping for today…consumer confidence overall, how they feel about themselves, is actually reasonably robust albeit it came down by about 5 or 6% over the last few weeks…In terms of how they feel about the economic environment though, they still feel less robust about that as we move forward” —Marks and Spencer CEO Steve Rowe (Retail)

Financials:

Yellen expects to start winding down the balance sheet “relatively soon”

“If the economy continues to evolve in line with our expectations, it is something we should begin to do this year. To my mind, I would say relatively soon. The exact timing of this, I do not think matters a great deal. It is something we have long been preparing to undertake.” —Federal Reserve Chair Janet Yellen (Central Bank)

Caps will start at $10B per month and rise to $50B over the course of a year

“The cap will initially start at low levels, $6 billion a month for treasuries and $4 billion a month for mortgage backed securities. And over the space of a year we will ramp that up to $20 billion for mortgage backed securities and $30 billion for treasuries.” —Federal Reserve Chair Janet Yellen (Central Bank)

This process could go on until 2022

“I would say this process will play out probably to around 2022, when our balance sheet will probably be shrinking to normal levels…Our balance sheet will end up substantially larger than it was before the crisis, but appreciably lower than it is now.” —Federal Reserve Chair Janet Yellen (Central Bank)

It sounds like the Fed will focus on the Fed Funds rate if the economy deteriorates while normalization is under way

“the Federal Open Market Committee (FOMC) decided to delay balance sheet normalization until the federal funds rate had reached a high enough level to enable it to be cut materially if economic conditions deteriorate, thus guarding against the risk of returning to the effective lower bound (ELB) in an environment with a historically low neutral interest rate.” —Federal Reserve Governor Lael Brainard (Central Bank)

This is the end of an era

“we are at a) the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets, and b) the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.” —Bridgewater Chairman Ray Dalio (Hedge Fund)

The risks may be greater than people think

“We’ve never had QE like this before, we’ve never had unwinding like this before. Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before….When that happens of size or substance, it could be a little more disruptive than people think. We act like we know exactly how it’s going to happen and we don’t.” —JP Morgan CEO Jamie Dimon (Bank)

Consumer:

Consumers want less carbonation and less sugar in their diets

“we continue to transform our beverage portfolio to offer more non-carbonated options and reducing sugar levels across the portfolio.” —Pepsi CEO Indra Nooyi (Beverage)

QSR dining looks much different in China

“If you now come to China and visit a KFC you will be surprised of the number of people not standing in line but actually ordering on their phone just like you would at an airport where you check in at a machine. And also Alipay, WeChat have been very good at expanding their networks and promoting it well. As a result of that we believe China is far ahead of anybody else in terms of mobile payment.” —Yum China CEO Micky Pant (Restaurant)

Technology:

The Youtube Generation still prefers printed textbooks

“Printed textbooks are still the format of choice for most students…While the evolution toward digital solutions has been slower than some originally anticipated, we saw an increasing shift toward a broader adoption of digital solutions in fiscal 2017” —Barnes and Noble Education CEO Max Roberts (Books)

Industrials:

Construction may be starting to slow

“We do have the expectation that construction nationally across all product types and all markets across country is likely to pullback a little bit and whether that number is 10% or 20% I don’t know, but in talking with our customers…they are passing that feedback along to me, cost of labor and materials in some markets are going up significantly. Cost of construction financing is going up…So, it’s costing more…to build things and we are working against a period of years coming out of the great recession, where supply did not keep pace with demand and supply of product and lot of product types has caught up with demand now and lot of submarkets. So, there are lot of markets around the country where you might have had 5 projects coming to market a year ago, but there is really only a need for two more projects coming to market this year and that is slowing the volume to some extent.” —Bank of the Ozarks CEO George Gleason (Bank)

Manufacturers are paying up for productivity

“most of our customers right now they are facing competitive threats, they need more productivity, they need to get product to markets faster, etcetera, etcetera. They are starving for productivity…so what’s actually…happening like if you take our cutting tool portfolio, it’s actually migrating up in quality of products, because in a lot of cases they are going to spend more for the product if they are going to get a much better length of cutter, the length of the tool life and the productivity coming out of the tool. And it’s actually moving the other way towards high performance. So I think our core customers anyway the big lever for them is productivity and getting more output for less dollars” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

Materials, Energy:

One oil company CEO says we could see $60 oil by the end of the year

“my personal view is we will probably edge back in the $60 range by the end of calendar 2017. I think it will be in the high 50s, low 60s….the amount of capital that’s actually come out of spending programs, globally depends on who you read, but its on the order of $1 trillion to $2 trillion, and that capital is not being reinvested in. It will start to cause declines with some point. So while we do have production growth in the Permian and it’s a fantastic resource, I do believe that the supply and other things will have a supply crunch at some point and we’ll see high oil prices.” —TAG Oil CEO Toby Pierce (Energy)

Miscellaneous Nuggets of Wisdom:

It’s better to go slow in the right direction than fast in the wrong one

“I would like to share with you a quote from Simon Sinek, it’s better to go slow in the right direction than to go fast in the wrong direction” —WD-40 CEO Garry Ridge (Industrial supplies)

Full transcripts can be found at www.seekingalpha.com