2017 Year in Review

This will be our last full post for 2017, so we decided to do a year end wrap-up.  The work below draws from all of the posts that we made this year and uses quotes from management to tell the story of 2017.  Click here to join our weekly email list.

2017 began and ended with excitement about tax reform.  In between, equity markets climbed to new peaks as optimism boomed and the economy posted solid growth. 

Even though stocks posted one of their better performances in history, 2017 felt like a strangely boring year.  Not much happened except for unwavering optimism.  Although the fundamentals were positive, the stock market really felt like it was going up “just because.” 

Nothing exemplified the zeitgeist of 2017 better than Bitcoin, which rose 1,642% between January and December 15.  Stock prices diverged from fundamentals many years ago, but at least they have fundamentals.  Bitcoin is an asset with zero intrinsic value.  It rose only because buyers believed that it would go up.

This type of thinking is typically a hallmark of the extreme late innings of an economic cycle.  Rising inflationary pressures and a tightening Federal Reserve are also hallmarks of the end of an economic cycle.  We saw both in 2017.  Of course, this has not been a typical economic cycle, so anything is possible, but 2018 is unlikely to look like 2017.

January 13

We started the year excited about tax reform

“I could spend all day on tax reform.…the lowering of the corporate tax rate would be a good thing…And then the other one is obviously what they’re talking about relative to overseas earnings and repatriation…For us, this is potentially a really big positive” –Pfizer

But Congress decided to focus on healthcare reform first

“our legislators have been telling us [that] the first thing that’s going to happen in Congress…is Obamacare…So Congress has a lot on its plate right now. And to work through all of the details and get [tax] legislation like that passed, well, Congress is telling us it’s going to be a while in any event.” –Constellation Brands

January 20

Still, the optimism was palpable

“The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. We will have to see how these topics play out, but we are optimistic.” —Bank of America

January 27

Capital markets loved the idea of a pro-business administration

“Obviously our new administration is pro-business, but there’s a lot of moving parts in that…I think we’re all waiting to see if there’s a tax reform package that would allow us the ability to access overseas cash and repatriate cash…I think that would make a big difference for a lot of multinationals” —Abbott Labs CEO Miles White (Healthcare)

“I think all of us recognized we’ve got a new administration in Washington which has an agenda to be friendly to business and I think, we’re anxious to see how all of that will play out certainly tax reform is the biggest single item that we’re focused on this year.” —United Technologies CEO Greg Hayes (Conglomerate)

And that helped give businesses confidence to invest in growth

“As I have gone around the state, visiting all our locations during the month of December, one thing it was a consistent message was how many customers particular I would say mid and small customers are moving forward with plans that they had, had delayed, right? Somebody had a piece of equipment they want to put in and they can wait for six months, after they got the clarity from the political situation, the word was let’s move forward, let’s move forward now. So I think you are definitely seeing just general optimism in the market moving forward…I think we are seeing momentum increase. I would expect loan growth to be better than 2016 for sure.” —Cullen Frost CEO Phillip Green (Bank)

February 3

Animal spirits had been unlocked

“the animal spirits are real, there is no doubt about it…when you have the whole herds thinking about slow global growth and that’s just the way it is and that’s just the way it’s going to work, well, it becomes self-reinforcing because we all act that way…but right now the feelings are better than I’ve seen them in long time and that could be enough to get the herd moving in the direction of saying, I’d better not miss this moment as oppose to just hunker down and keep waiting it out.” —Honeywell CEO Dave Cote (Conglomerate)

But the hard data wasn’t keeping up with the soft data

“client sentiment has clearly and markedly improved. With that said when you look at their actual activity levels…There is a little sense of urgency…they are waiting to see more activity in their business before their hiring activity reflects that.” —Robert Half CEO Harold Messmer (Temp Staffing)

February 10

There were risks, but markets didn’t seem to care

“The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more…To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely…It’s a tough market in which to be a disciplined buyer.” –Loews

February 17

The President was the stock market’s biggest cheerleader

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

February 24

And optimism continued to grow

“I think everybody is optimistic…it’s really not specific to one particular industry, okay. It’s really across the board and it’s across the country, whether it be if you’re on the East Coast, West Coast, the mid chapters, what have you, all of our companies are all simultaneously doing better than, frankly, we would have thought.” —Reliance Steel CEO Gregg Mollins (Steel Distributor)

March 3

Markets loved Trump

“Well, there’s no question that animal spirits have been unleashed a bit post the election. Stock market is up a lot. Household and business confidence have increased significantly…there’s no question that sentiment has improved quite markedly post the election.” —Federal Reserve Bank of NY President Bill Dudley (Central Bank)

March 10

Retailers were just about the only industry that was struggling

“Our industry is the midst of a seismic shift, and, of course, you read the headlines. In fact, many of you write the reports, we’re operating in an incredibly challenging environment. All across the retail industry, many of our competitors are aggressively rationalizing their assets. They are closing stores, exiting markets. They’re cutting costs just to keep their heads above water. We’ve not seen this number of distressed retailers since 2009 in the Great Recession.” —Target CEO Brian Cornell (Retail)

March 17

Even the Fed noticed the change in sentiment

“I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many, many businesses in recent months…the shift in sentiment is obvious and notable.” —Fed Chair Janet Yellen (Central Bank)

They raised rates in March, but continued to take an accommodative stance

“Even after this increase, monetary policy remains accommodative…the data have not notably strengthened…we haven’t changed our view of the outlook. We think we’re on the same path; not, we haven’t boosted the outlook projected faster growth. We think we’re moving along the same course we’ve been on” —Fed Chair Janet Yellen (Central Bank)

March 24

Consumer confidence boomed with the stock market

“There’s clearly a sense of general optimism in the market. There’s a perception that jobs are being created and that wages are actually starting to move upward. There’s a solidifying sense that the government has adopted a business-friendly posture and that will result in real changes to tax rates and to the regulatory environment.” —Lennar CEO Stuart Miller (Homebuilder)

April 20

But as the administration stumbled, optimism began to wane

“The first quarter was an interesting one, as we entered it with a lot of optimism about what the new administration might do to further improve the economy. As the quarter continued, some of this optimism has slowed and now companies are more cautious or skeptical about what shape some of the programs, including tax reform, infrastructure projects and ACA reform will take and when they might actually take effect, if at all.” —Brown and Brown CEO Powell Brown (Insurance Broker)

The yield curve fell along with expectations

“So, because that stimulus hasn’t occurred, it still may, but certainly is lower probability today than it was in November and December. They were back down in lower 10-year rates, lower mortgage rates than we were there for a while. And now we have to ask ourselves again, are we going to be lower for a while, lower for longer or are we still awaiting for a shoe to drop in for there to be a big backup in rates?” —Wells Fargo CFO John Shrewsberry (Bank)

Companies said that they were waiting for more clarity on policy

“In general, when we talk to our RMs and talk to the customers, I think the general sentiment is one of optimism, but they’re in kind of a wait-and-see mode. And they’re just waiting, I think, for more certainty about which direction the administration is going to go” —M&T Bank CFO Darren King (Regional Bank)

April 27

Growth turned out to be fairly anemic in Q1

“You had a fairly anemic GDP growth rate this first quarter. The projections are for great improvement coming up and we hope that’s the case…you read almost every day and you see in the press virtually every day…the gap between hard data and soft data, sentiment optimism on the one hand and actual levels of activity on the other.” —Robert Half CEO Harold Messmer (Temp Staffing)

May 5

But market participants stayed optimistic anyways

“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed….The Committee views the slowing in growth during the first quarter as likely to be transitory” —The Federal Reserve

Global growth began to kick in

“When the US economy, which is approximately 20 trillion, does well much of the world does well. To us this means our concerns of China or Europe precipitating a worldwide recession depression have been significantly reduced, but not delaminated. Also the trade policies of the US could precipitate a collapse in world trade.” – Fairfax Financial Holdings CEO Prem Watsa (Insurance)

May 19

French elections helped ease political risk in Europe

“It’s nice to hear people talking about Europe in a positive way. We’re really seeing growth in a broad way you haven’t seen in 5 or 10 years. The political risk in Europe is coming down. Europe is in the 3rd inning of a recovery. The US, depending on Trump, is somewhere between the 7th and 9th inning.” – Polygon Global Partners LLP Founder Reade Griffith

June 9

By mid year it was clear that relatively little change would actually be coming from Washington

“You’ll probably get some tax reform and it will more likely resemble a tax cut as opposed to broad-based reform” – PIMCO Global Chief investment officer Dan Ivascyn

But investors kept buying anyways

“The level of complacency about where markets are today is pretty scary. People are just sort of assuming it’s OK, that it is what it is, and I have to say that I’m a little bit concerned about it.” – TPG Co-CEO Jon Winkelried

June 15

Volatility was abnormally low

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

June 29

Animal spirits were driving the economy

“a lot of what’s driving people to the market is a sense of confidence, it’s animal spirits…the confidence that people bring with them to the table about whether their job is stable and whether there’s going to be a wage increase or there is opportunity for them to move and be mobile to the next job opportunity.” —Lennar CEO Stuart Miller (Homebuilder)

After years of slow growth, a simple return to normal felt euphoric

“The slow and steady though sometimes erratic market improvement that we have seen for the entirety of this recovery continues to seem to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

July 14

Central Bankers began to feel like they could begin to unwind accommodative policies

“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)

The Fed started to talk about shrinking its balance sheet

“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)

July 20

At the same, time retail investors started to pour back into investment markets

“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.” —TD Ameritrade CEO Tim Hockey (Broker)

Voices of warning were 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)

August 11

The original reasons for optimism never really 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)

September 14

People who know market history knew that cycles go both ways

“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)

And warned against chasing the hot dot

“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)

September 22

Cycles usually end when Central Banks tighten

“in October we will begin the balance sheet normalization program that we outlined in June. This program will reduce our securities holdings in a gradual and predictable manner.” —Fed Chair Janet Yellen (Central Bank)

October 6

But the economic momentum was still strong

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

Labor markets became particularly robust

“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)

October 12

Consumers were 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)

October 20

Optimism built

“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)

Investors continued to chase rising markets

“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)

October 27

The environment began to resemble a boom

“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)

Booms come with inflationary pressures

“I mean obviously we’re in a bit of an inflationary environment for some of the commodities…” —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… ” —Kimberly Clark (CPG)

“We knew we’d see higher pulp cost going into year, these costs have continue to increase beyond initial forecast ranges.” –Procter and Gamble (CPG)

November 3

Yet investors seemed indifferent to risk

“It’s an environment where the uncertainties are unusual in terms of number, scale and insolubility, where prospective returns are just about the lowest they have ever been, where asset prices are high across the board and where pro-risk behavior is commonplace. It’s impossible for us to predict what will catalyze the market’s correction, how severe it might be and when it will occur…We do not believe this is a time in the cycle for reaching for return” —Oaktree (Investment Management)

November 10

It was hard to see any reason that the cycle wouldn’t last into 2019

“I fundamentally believe the recovery is going to spread out over two years. I think the recovery is going to be spread out over 2018 and 2019….I fundamentally don’t believe the bigger projects will start happening…until late 2018 early 2019. ” —Emerson (Industrials)

November 17

There were some signs that consumer credit quality may be fraying

“there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.” —Tenet (Hospitals)

“As it relates to credit…we are seeing a little bit more of a normalization as we move forward…we actually have seen a little higher level of reserves that need to be put in place, as well as some financing charges that have been recognized” —JC Penney (Retail)

December 1

But consumers continued to spend

“People are spending more, in some cases, they’re earning more.” —Wells Fargo (Bank)

Consumption was fueled by optimism

“Our third quarter Consumer Sentiment Survey highlighted that consumers have an increasingly positive view of the national economy and continue to view their personal financial situation favorably. Given that over half of homeowners believe their home values are increasing, intent to engage in discretionary home improvement projects remains strong.” —Lowes (Home Improvement)

December 8

Congress finally made progress on tax reform at year end

“we’re very excited about where the tax reform is headed, we’re especially excited about the house version because it starts almost immediately where the Senate is the later year.” —Kroger (Grocery)

That put the cherry on top of 2017

“our expectation is that…tax reform…will create a little bit more momentum. Exactly how much momentum? I am not 100% sure but could you imagine that increasing whatever the run rate GDP is by half a percent, I think that’s a reasonable assumption, may be not happen on January 1 but this could happen overtime.” —Wells Fargo (Bank)

December 15

The year ended with one last increase in interest rates

“Today, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1-1/4 to 1-1/2 percent.” –FOMC

And Janet Yellen said goodbye

“Finally, I’d like to note that, although I have one more FOMC meeting to attend in the New Year, this will be my last scheduled news conference. Over the next month and a half, I will do my utmost to ensure a smooth transition to my designated successor, Jay Powell. I am confident that he is as deeply committed as I have been to the Federal Reserve’s vital public mission. Thank you for being such an attentive audience these past four years.” –FOMC

She will be sleeping well

“I mean of course the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price earnings, ratios, and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out. But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued. We are in a, I’ve mentioned this in my opening statement, and we’ve talked about this repeatedly, likely, a low interest rate environment lower than we’ve had in past decades, and if that turns out to be the case, that’s a factor that supports higher valuations. We’re enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. I think what we need to and are trying to think through is if there were an adjustment in asset valuations with the stock market, what impact would that have on the economy and would it provoke financial stability concerns. And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange…look, at the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable, build-up of debt as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook.” –FOMC

Company Notes Digest 12.8.17

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.

Our focus this week was on tax reform. A bill is now expected to be passed before the end of the year and corporate America is excited. Companies will certainly benefit, but how will they spend their extra cash and will it boost the economy? Average Americans don’t get quite as big of a windfall.

The Macro Outlook:

Corporate America is excited about tax reform

“we’re very excited about where the tax reform is headed, we’re especially excited about the house version because it starts almost immediately where the Senate is the later year.” —Kroger (Grocery)

Most companies are well positioned

“I would say overall we feel we’re well positioned for the things that are being talked about – almost all of our cash is outside of the U.S., so any sort of repatriation that will be a positive for us.” —Donaldson (Industrial products)

Some companies will benefit more than others

“we don’t expect tax reform to have an impact on us for quite sometime. We have over $1 billion worth of net operating losses that we can burn going forward…So we will have a – some slight balance sheet adjustments as we revalue our tax assets and tax liabilities” —Workday (SaaS)

Domestic companies will benefit most

“We are entirely a domestic company. 98% of our revenues are here in the U.S. We are not a capital-intensive company. So…we will pay tax at close to the statutory rate. So, a reduction from 35% to what’s currently being discussed at 20%, very significant for us, even if it drifts up a little bit from 20%. ” —HD Supply (Distributor)

How will companies use the extra cash?

“you’ve heard some people now say they’ll increase their capital expenditures and that will accelerate. So, I think that’s what our corporate clients are telling us…So, I think it will unleash some activity. No question.” —Bank of America (Bank)

“We believe it will also influence us to continue to invest in our business which will grow jobs and I think what will end up happening is you will see us do a balance of everything together, some of it our shareholders will benefit from, some of it our associates will benefit from and our customers will benefit from it as well” —Kroger (Grocery)

“I think we don’t have any particular direction for that incremental cash other than to put it in the general coffers that I spoke about on the first question” —Toll Brothers (Homebuilder)

Will it boost the economy?

“our expectation is that…tax reform…will create a little bit more momentum. Exactly how much momentum? I am not 100% sure but could you imagine that increasing whatever the run rate GDP is by half a percent, I think that’s a reasonable assumption, may be not happen on January 1 but this could happen overtime.” —Wells Fargo (Bank)

Economic activity is already pretty strong

“If we look at what we’re seeing in our customer behaviors…I would say consumers are spending…the spend patterns were really quite strong and pretty broad across categories…Loan demand…is still pretty solid…so we’re really quite optimistic actually…it doesn’t feel like there is a meaningful point of fragility out there.” —JP Morgan (Bank)

“consumers are spending. They’re spending well. The unemployment is low. They’re getting paid…When we talk to our corporate customers, the commercial customers – small businesses, medium-sized businesses – they’re all making money. They’re seeing good, decent final demand, but it’s consistent with that 2% growth economy.” —Bank of America (Bank)

“feedback that we’re getting from our customers in terms of looking at customer activity on the consumer and the commercial side is that there it seems as if that there is some reasonable momentum.” —Wells Fargo (Bank)

The tax bill’s impact on consumers is less certain

“On the corporate side, we are encouraged by the potential reduction in the corporate tax rate as it will help our earnings and cash generation. On the personal side, while the potential reduction in the MID, real estate tax and self-deduction not being helpful to buyers, especially in our coastal regions, we believe they may be offset by a lower stated tax rate, the doubling of the standard deduction, the potentially removal of AMC, lower pass-through tax rates, and the elimination of the phase-out of itemized deductions.” —Toll Brothers (Homebuilder)

It’s likely to be a wash

“If SALT passes where there is limited or no deductibility of state and local taxes, and obviously, California, New York, New Jersey are impacted with higher state tax rates. But I’ll reiterate what I said before, we don’t think our buyers, that our price point are driven by the taxes they pay when it comes to purchasing our homes…We’ve also studied in some detail, a typical buyer in eastern states and also in California, and again without knowing exactly where the new bill comes out…it appears as a wash or very close to a wash.” —Toll Brothers (Homebuilder)

We’ll have to wait for the final details

“our tax team is anxiously awaiting any final laws that are adopted…I know the guys are studying everyday and we’re just kind of waiting for what the final revolution will be.” —Donaldson (Industrial products)

Financials:

This bull market has been relatively unexciting

“volatility has remained pretty low across the spectrum…I wouldn’t use the word challenging, I would use the word that it hasn’t been – there haven’t been that many catalysts [for trading activity] it hasn’t been that exciting” —JP Morgan (Bank)

Consumer:

The holiday shopping season is off to a strong start

“We have seen a strong start to the North American holiday season with improvements in both traffic and sales trends” —PVH (Apparel)

Retail traffic has improved

“Traffic has improved and we see business just in general improved. And the other big benefits that I think everyone will see is inventories under real tight control. So I think it feels like again we’ve got a month ahead of us of this holiday selling, but it feels like we’re going into December with a lot of momentum, tighter inventories. I think it will be promotional, but probably not as promotional as last year there’ll be less goods to clear on January, if these trends continues. So we are very positive in all that we’re seeing throughout North America across all of our businesses and across the various different channels of distribution with our key customers.” —PVH (Apparel)

But that doesn’t mean that retail is out of the woods

“I’m not ready to say that everything is great in North America retail overall. I think we’re going to continue to see downsizing of businesses and store closings…I think that our retail partners have done a terrific job of managing into the fourth quarter…But it doesn’t mean that the ills that are impacting retail in North America…is over…And I think we’re going to have to deal and manage through some probably bankruptcy situations with some of our smaller accounts as we move forward. But I think that’s just the nature of the North America retail business.” —PVH (Apparel)

Technology:

There’s also a bit of a bubble in blockchain development

“The underlying technology of blockchain is definitely very interesting. We have been interested from the very beginning. I would say there’s a little bit of a bubble in blockchain technology too because…Every CEO who goes to a meeting is asked about cryptocurrencies and blockchain as they go back to their office and say hey what are we doing about blockchain. So, there’s a lot of experiments going on in blockchain. But there isn’t to the best of my knowledge a real industrial quality use of blockchain that is up and running today.” —Visa (Payments)

Blockchain is not yet suitable for high volume transactions

“our view right now at least based on the technology as it stands today is that it’s applicable in let’s call it high ticket low volume kinds of situations, not our kinds of low ticket extremely high-volume situation, because the technology is not set up for that, maybe it will someday.” —Visa (Payments)

We won’t really know what cryptocurrencies are worth until they are tested

“My own view on cryptocurrencies is until there is a – until we have a crisis we won’t know much about them, right. They have never been tested. And I think we are getting to a point where they will be tested and then we will know what they are all about” —Visa (Payments)

Steve Ballmer deserves some credit for Microsoft’s renaissance

“Some decisions were made when Steve was still the CEO, like investing in Azure, for example, was the decision that was made originally under Steve’s watch…Steve was there when we started the move to Office 365. Steve was there when we decided to get into CRM online business. And so a lot of that stuff was started many years ago. And I think what Satya did is really to step on the gas.” —Microsoft (Enterprise Tech)

The cloud still only handles 10% of compute workloads

“I would say some of the numbers I’ve seen is that like 10% of the workloads are in the cloud. I would make an argument that that might even be optimistically, we might not even be there yet. And so, I think we still have lots of opportunity to move workloads to the cloud. And so, I think that will take place not over the next year or two years but more like over the next 5 to 10 years” —Microsoft (Enterprise Tech)

Deep pockets will be needed to win the AI race

“I think the folks who win in AI will be the ones that are willing to make the big investment and who are willing to innovate both on the hardware and the software side. And we’re making investments in both those. We’re also seeing some companies out of China that are leaning in heavy on AI. And so, I think it will be – I do think it will be a bit of a deep pockets race.” —Microsoft (Enterprise Tech)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.17.17

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.

Ordinarily we would focus on retail in this week of the earnings cycle. There are a number of quotes in this week’s piece from traditional brick and mortar stores, but companies like Macys no longer feel relevant to the broader economic picture. It feels like that alone speaks volumes about the state of the industry.

Instead this week, the headline macro discussion is about housing. Following years of under-building we now find ourselves in a supply constrained environment. This is favorable for homebuilders and home-owners, but frustrating to anyone who hopes to buy. Political gridlock and rising prices are leading to a great migration of millennials from coastal markets to southern and midwestern cities with a lower cost of living.

The Macro Outlook:

Homebuilders are jacked up on housing markets

“I will tell you, Bob, the market feels really good. The positioning of this company with its people and its communities – never been better. So yes, we are pretty jacked up.” —DR Horton (Homebuilder)

There’s a lack of supply, especially on the coasts

“Especially in highly competitive coastal markets, it has become extraordinarily hard for customers to buy a home…even though buyer anxiety about rising home prices remains a concern, the number of homes for sale is once again the overwhelming issue” —Redfin (Online Broker)

Political gridlock makes it impossible to build

“There is so much political gridlock in a place like San Francisco around building new homes, especially high-density homes…So I don’t really see that inventory crunch getting much better in most of the coastal markets. I just see it starting to become a problem in markets where we never thought it would be. Hearing that there’s a bidding war in Pittsburgh, who would have thought?” —Redfin (Online Broker)

Housing markets could stay tight through 2020

“As we think about housing broadly and fears of slowdown, we don’t see that for 2018, 2019 and 2020 for a number of reasons. We’ve talked about an aging housing stock, household formation and home price appreciation, and you may say, well, home prices are really hot, haven’t they fully recovered peak to trough? Well, yes, they have, but on an inflation basis, they’re still down double digit.” —Home Depot (Retail)

Tax reform probably won’t have much impact

“candidly, we don’t subscribe to the fact that…the mortgage interest deduction elimination would have much of an impact…in large part because the majority of households wouldn’t have an impact from what’s described today…Our research shows that only 23% of tax filers actually use the deduction. And then of the people who have mortgages, only 5% have mortgages in excess of $500,000.” —Home Depot (Retail)

As a result there is a great migration of buyers

“The larger long-term trend is a great migration from expensive coastal markets to more affordable Midwestern and Southern cities. This has already happened in places like Austin, Denver and Portland, and it is now transforming places like Charleston, Detroit, Nashville and Salt Lake City.” —Redfin (Online Broker)

International:

Growth has accelerated in developing markets

“We do see some acceleration in growth in developing markets. I mentioned our results in China. Those were both market and share driven results. We see the categories in India moving past all of the policy interventions, the tax intervention and the demonetization intervention and resuming very nice growth. Russia is also getting better sequentially quarter by quarter. Brazil…in general some pick up in developing markets and to the extent that commodity cost continue to move which they have been I would expect that developing market dynamic to improve since many of those economies are commodity based and funded, Russia is an example.” —Procter and Gamble (Packaged Goods)

Activity in China has been better than people expected

“I think we are seeing signs of progress and in China…So domestic activity is being better and then anybody is really anticipated early in the year. And so there is a signs of progress and capacities identified has been removed again probably more than people anticipated earlier in the year.” —Arcelor Mittal (Steel)

Visa is bullish on India

“We definitely are bullish on India for a variety of reasons…We’ve had a good constructive conversations with the central bank and the government all the way through this demonetization. We really are 100% behind the government’s desire to move to more of a cashless society.” —Visa (Payments)

Financials:

Consumer credit may be deteriorating some

“there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.” —Tenet (Hospitals)

“As it relates to credit…we are seeing a little bit more of a normalization as we move forward…we actually have seen a little higher level of reserves that need to be put in place, as well as some financing charges that have been recognized” —JC Penney (Retail)

Will reinsurance prices react to recent catastrophes?

“the million dollar question is, how will reinsurance market react to the recent losses…We believe the deterioration of pricing and terms and conditions has ended, but the magnitude of any improvement is uncertain… Historically it has taken up to two years for pricing to peak after big events.” —Third Point Reinsurance (Insurance)

Consumer:

No one is opening brick and mortar stores today

“People are not thinking about opening bricks-and-mortar stores if they don’t need to, right? So anybody who has a concept of being a merchant and selling your goods and services, initially, almost anywhere in the world today thinks about doing it in the digital world rather than in the physical world.” —Visa (Payments)

People want stuff delivered

“Delivery is one of those things that will grow over time, it doesn’t spike immediately. It’s a change in consumer behavior. So, it’s something that we’ll see grow over time…We’re excited about that business.” —McDonalds (Restaurants)

Particularly in concentrated urban environments

“If you look at the markets that have grown the fastest…one is Korea, one is China and they’re both…highly concentrated urban populations. And so, both from a consumer standpoint, traffic congestion, et cetera, e-commerce becomes a preferred shopping experience for some households, but also the economics work including the challenging dynamic of the last mile.” —Procter and Gamble (Packaged Goods)

Marketing is fundamentally changing to adapt

“I think that where we’re headed is mass one to one marketing. I mean historically our industry has been mass marketing, push a large volume of content out and hope it cuts through the clutter and I think we’re getting very close to a point…where the content is more pull versus push and again we refer to that as personal mass marketing and that, the return on that becomes much higher than a lot of very inefficient mass push.” —Procter and Gamble (Packaged Goods)

But price is really what matters most

“one thing we’ve learned this year is that price really matters to our customer. That sounds like an obvious statement, but it’s easy to convince yourself that other components of retail matter more” —JC Penney (Retail)

It should be another fiercely competitive holiday season

“In the fourth quarter, we expect the retail landscape to be fiercely competitive. With excess inventory still in the supply chain, broadened distribution strategies from some key vendors and a lack of newness and innovation, the fourth quarter and 2018 will continue to be promotional and pressure margins from last-year levels” —Dicks (Sporting Goods)

At least retailers feel like they are in a good inventory position

“We really entered the third quarter in a good inventory position…So, we are not anticipating having to liquidate a lot of unplanned inventory walking into the fourth quarter.” —Macy’s (Retail)

“For five straight quarters, sales growth outpaced inventory growth, and we exited the third quarter in a relatively clean inventory position.” —Nordstrom (Retail)

“We’re in really pretty good shape from an inventory standpoint… There’s still some stuff that needs to be cleaned through. But from an apparel standpoint, we’re really in very good shape” —Dicks (Sporting Goods)

Technology:

There’s tremendous competition in OTT television

“There is a tremendous amount of competition in the OTT space. I mean, there is probably approaching a dozen companies…And so what’s going to happen is that the market’s going to get more fragmented. And as a result, that’s consumers will have some choices. And not only will they have choices, but they can move between packages with a click of a button on the Internet.” —Dish (Television)

That could lead to more fragmentation and lower prices

“I can say that our plan on the Disney side is to price this substantially below where Netflix is. That is in part reflective of the fact that it will have substantially less volume…It is our goal to attract as many subs as possible as starting out.” —Disney (Media)

AI is a paradigm shift in computing

“AI is really one of these – once in a decade kind of transition. It is going to be a demand driver that really rises the entire market.” —Intel (Semiconductors)

Thousands of AI startups are cropping up

“There are thousands of startups now that are in – are startup because of AI. Everybody recognizes the importance of this new computing model. And as a result of this new tool, this new capability, all these unsolvable problems in the past are now interestingly solvable. And so you can see startups cropping up all over the west, all over the east and there’s just – there are thousands of them.” —NVIDIA (GPUs)

Miscellaneous Nuggets of Wisdom:

Stay focused on your product

“I remember, almost 10 years ago, when everybody went and invested in texting…And they took their eyes off the quality of the food. And I will tell you, many chains that I know, that became so tech savvy and then almost shrunk where they become irrelevant because they did not take care of the food consistency of the meals coming out quickly, and they neglected the kitchen. The kitchen at the end is the one that can keep a restaurant relevant. I don’t care what you – it’s about food” —Middleby (Restaurant Equipment)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.10.17

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 macro story continues to be an industrial boom. There was also some focus on tax reform this week. I thought that the more interesting quotes were outside of the macro section though. I’d highlight a few areas of interest:

–Public markets are shrinking and private markets are growing
–Used car prices have stabilized
–Loyalty programs are an antidote to price transparency
–Higher deductibles have led to lower healthcare spending

The Macro Outlook:

The industrial economy has broad based momentum

“If I look at all of my end markets, if I look at all the key markets I serve, for oil and gas to powered to chemical to pharmaceutical, the mining – even mining is doing well for us right now… We’re seeing a pretty good momentum” —Emerson (Industrial)

Are companies ready to invest in new capacity?

“we are continuing to see good business environment for our products worldwide…Our inventories at Microchip as well as the distributors are towards the low end of our normal range. We are continuing to slowly add incremental capacity at various bottlenecks.” —Microchip (Semiconductors)

There have been false starts before

“I’m cautiously optimistic. I mean I’ve been bitten over the last five quarters on certain things continuing to be shifted right on the schedule. But this does kind of give us some optimism that the trough is the trough and we’re starting to come out of it.” —Fluor (Engineering & Construction)

But there could also be a feeding frenzy

“I’ve not seen the markets this low for this long in my career. And I do think that there is going to be a bit of a feeding frenzy with some of these projects that need to go forward if these companies are going to make the kind of numbers that they’re suggesting.” —Fluor (Engineering & Construction)

New investment could propel the industrial cycle into 2019

“I fundamentally believe the recovery is going to spread out over two years. I think the recovery is going to be spread out over 2018 and 2019….I fundamentally don’t believe the bigger projects will start happening…until late 2018 early 2019. ” —Emerson (Industrial)

Is the service economy booming in the same way?

“one of the questions we get often today, given the GDP numbers of the last two quarters, the optimism in the market, people ask, are you seeing more healthy demand today from your corporate customers than a year ago for example, and I think, generally, we would say no, it’s about the same. It feels to us like the economy is growing at more or less the same pace it was before” —Marriott (Hotels)

A lot of optimism has been contingent on political changes

“I believe a good portion of the reason for why the economy has gotten better is regulatory relief and there’s going to be more to come” —Wilbur Ross (Commerce Secretary)

But not much has happened yet

“we’re a year in and the situation, interestingly enough, is probably a bit more cautious on the political front because I think there is a point of view that a lot of those policies, other than things that can be done by executive order, haven’t come to – haven’t really made progress yet.” —Sotheby’s (Art Broker)

It’s not clear if tax reform will happen at all

“we’re not going to be brave enough to forecast an estimated tax rate for next year, yet.” —Moody’s (Credit Ratings)

Even if it does, will it boost earnings as much as expected?

“on tax reform, most of our income is domestic, so we’re not anticipating a whole lot of change, certainly in our book tax rate. Obviously, it’s a little higher, so that would go down a little bit. But then we’ve got to factor in what happens with state deductions or not. So we’re going to monitor this closely. We don’t think it’s again going to be a huge driver one way or the other for our cash flow or our GAAP earnings” —CBS (Television)

Some will be negatively impacted

“The thing that in the short term would likely have the greatest impact would be the repeal of 1031, the ability to do like-kind exchanges for art, which in the long term is a mild negative for the market…there is material activity at the high end of the market using 1031.” —Sotheby’s (Art Broker)

“the interest deductibility cap first of all should have essentially no impact on the investment grade sector, and should not have a significant impact for the higher rated portion of the speculative grade sector. So, it’s real, when you get more deeply into speculative grade that those was caps may make a difference.” —Moody’s (Credit Ratings)

It probably doesn’t move the needle on investment decisions

“If you wave a wand and say tax reform is done, and our tax – cash taxes and book taxes decline by a certain amount, I don’t think that, by itself, is going to change our capital availability, if you will. I think, the longer-term question would be whether or not that has the impact of reducing our cost of capital, which could – in some respects could go into a calculation about whether or not there are investments that make sense for us to do. But I think that’s a longer term, more theoretical question” —Marriott (Hotels)

International:

Britain will have to adjust to Brexit

“In the short term, without question, if we have materially less access (to the EU’s single market) than we have now, this economy is going to need to reorient and during that period of time it will weigh on growth.” —Mark Carney (BOE)

Negative interest rates have not impacted bank profitability

“We have also seen little evidence that negative interest rates are undermining bank profitability…In fact, net interest income has remained quite stable over the past two years, even as overnight rates have drifted lower.” —Mario Draghi (ECB)

Financials:

Public markets are shrinking

“if you go back and you look at the data, you’ll see that there are a lot fewer listed companies in the U.S. today than they were in years past and the size of those companies continues to get larger…the middle market size business is…not looking to do an IPO…I think in the past one of the main drivers of why you would go IPO was because you could oftentimes get a better valuation in the public markets than you could get in the private. But I think as has been widely reported, valuations on the private sale transactions have crept up over the years and so today the discount between a private sale and a public exit are really not necessarily all that significant. And so that’s the broader trend that I think is going on in the middle market, is that these companies are simply moving more to private equity ownership and away from public ownership” —Goldman Sachs BDC (BDC)

Private markets are growing

“we’re seeing new buyers coming in the market at lower price points, who are really interested in collecting, very interested in this both intellectual and somewhat financial exercise in their lives, and there’s no stemming the tide of people coming in…both in terms of the amount of collecting activity that we’re seeing and in terms of the number and range of artist that collectors are enthusiastically pursuing, we see an increase.” —Sotheby’s (Art Broker)

“There’s a lot of money on the sidelines for transactions in the U.S., particularly in the areas of industrial and multifamily…we’re having trouble keeping the buyers that we work with satisfied with the amount of product we’re delivering…It’s still a healthy market out there, and we’ve had nice growth in our investment sales business around the world.” —CBRE (CRE Broker)

That is making those markets more efficient

“the market is getting smarter and more efficient about finding its own level for different things. So there’s a sort of certain knowability or range of what particular work of art or markets are worth. And that’s helpful. It’s speeding up deals and probably increasing the flow of capital in the market because it’s smarter and more efficient.” —Sotheby’s (Art Broker)

Consumer:

Consumer debt is growing

“In the broader environment, the economy remains healthy with growth in GDP and continued low unemployment. At the same time, consumer debt levels have continued to increase as credit supply has returned to the market and losses have risen from their post-recession lows.” —Lendingclub (P2P Lending)

Loyalty programs are an antidote to radical price transparency

“we live in a world with radical transparency in pricing, where prices are available for essentially every hotel at an instant notice. We are doing everything we can. I mean, obviously, the core platform for us is the loyalty program…And that’s a powerful thing. Obviously, some of these other booking platforms are not conducive to loyalty members, because they will not earn points associated with them.” —Marriott (Hotels)

Technology:

Apple’s service business is the size of a Fortune 100 company

“In fiscal 2017, we reached $30 billion, making our Services business already the size of a Fortune 100 company.” —Apple (Technology)

Healthcare:

Patients are making different choices because of high deductibles

“there’s no doubt we continue to see a very soft volume environment…The fact is, consumers are making different choices with higher copays and deductibles” —Tenet (Hospitals)

Industrials:

Used car markets have stabilized

“the used car market stabilized compared to the first half of the year…residual values have really stabilized.” —Avis (Rental Car)

Materials, Energy:

Oil markets appear to be rebalancing

“we’re, I think, certainly encouraged by the improving market conditions as we look forward. The market, obviously, is continuing to rebalance nicely. Inventories are moving towards the five-year average, and we are watching the market closely for opportunities.” —EOG (Oil & Gas)

Oil service capacity is narrowing

“you mentioned pinch point, and pinch point would probably be in just thinking about the various services that are available. There’s been little equipment added over the last couple of years. And that’s one of the main reasons that we’ve increased our activity here with the additional 25 wells; it’s just to ensure that we have top-tier services available” —EOG (Oil & Gas)

Production companies could start producing free cash flow again

“The good news is…the price movement has gotten very constructive lately. And we…can see a price now where we could actually have some free cash flow next year pretty soon” —Apache (Oil & Gas)

Full transcripts can be found at www.seekingalpha.com

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