Company Notes Digest 4.27.17

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.

Optimism continues to run high even though the hard data isn’t reflecting it yet. It’s very likely that the hard data will eventually follow the optimism, but remember that securities prices are forward looking, so by the time hard data shows up, markets may already be on to the next thing.

The Macro Outlook:

Companies love tax reform

“at the highest level, we’re a big supporter of tax reform. It’s going to drive jobs. It’s going to drive the U.S. economy, broadly speaking. And it’s going to allow us to compete in any, whether – doesn’t matter what industry you’re in. If you’re a global company, it’s going to allow you to compete on a global platform.” —Boeing CFO Gregory Smith (Aerospace)

It’s driving a lot of optimism, but the real impact wont come until 2018

“We believe business optimism, which may be contributing to elevated quoting and ordering activity in North America, is partially a reflection of the benefits of pro-business policy in regards to infrastructure and tax reform. However, we don’t expect to see any meaningful impact from these changes until 2018.” —Caterpillar CFO Bradley Halverson (Construction Equipment)

GDP growth was actually quite low 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.” —Robert Half CEO Harold Messmer (Temp Staffing)

April may have been a little slow too

“April frankly is slowing a little bit. I don’t know what that means.” —Procter & Gamble CFO Jon Moeller (Consumer Packaged Goods)

But the data should follow the optimism eventually

“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. But the good news for us …our people are moderately more optimistic. And so they’ve actually seen some signs of improvement at least for 1 month” —Robert Half CEO Harold Messmer (Temp Staffing)

There is room for inventories to grow

“without a doubt, the inventory levels, as you mentioned, are extremely low. Our sheet products are about 1.8 months on hand. I can’t — frankly, I can’t remember the last time they were that low…I guess, part of it has been that the service center industries have been waiting to make sure that what they’re seeing today…wasn’t one of those short pops.” —Nucor CEO John Ferriola (Steel)

Might that lead to inflation?

It’s a tight labor market

“So now for the U.S. specifically, I would say that, it’s a tight labor market. So we are seeing some wage inflation.” —Manpower CEO Jonas Prising (Temp Staffing)

Raw material prices have inflated

“We are experiencing raw material inflation at higher levels than we expected in January” —Whirlpool COO Marc Bitzer (Appliances)

International:

The Euro area economy is increasingly solid

“Incoming data since our meeting in early March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished.” —ECB President Mario Draghi (Central Bank)

Chinese consumption has picked back up after Xi’s anti-corruption drive

“The suppression of the VIP market was something that was the result organically of a process that the administration of President Xi Jinping thought was appropriate for the country, the elimination of corruption. And it had secondary effects on high-end products like shopping, and automobiles, and gaming was part of that. But having made a corrective move in China there comes a point when the corrective move, it sort of finishes. And although corruption is still a major item in the PRC, the initial impact has softened, because so much of the work that they thought had to be done, was done. And so people begin to return to normal spending habits, and they are not so strongly influenced by public policy issues that involve public officials. So the people are settling back into routines that they’re comfortable with, and that includes going to Macau and buying a new car or shopping at Louis Vuitton” —Wynn CEO Steve Wynn (Casinos)

The UK market is showing softness

“we’d note that, the UK market is getting a little bit soft during the numbers of areas. And I think, we’re starting to see our clients react to that and especially the bigger clients that we have.” —Manpower CEO Jonas Prising (Temp Staffing)

Financials:

Capital One saw a slight uptick in credit card charge offs

“Based on portfolio dynamics and industry conditions we observed in the first quarter, we now expect that the full-year Domestic Card charge-off rate will be in the high 4%s to around 5%, with quarterly variability. That is up from our prior expectation of the mid 4%s.” —Capital One CEO Richard Fairbank (Bank)

M&A activity is solid in middle markets

“Last year, I said we might experience an increase in middle market activity particularly with the sale of private businesses. In fact the number of global market completions was up 13% year-over-year for transactions size between $500 million and $2 billion and the number of announcements was up 25%. And we are benefiting from this activity” —Moelis & Co CEO Ken Moelis (Investment Bank)

Consumer:

Consumers actually expose themselves to fewer brands online

“From an assortment standpoint, if you actually look at shopping behavior, a typical shopper exposes themselves to a lower, smaller assortment online than they do offline. When they go to the store, they’re exposed to what’s ever there. Very few shoppers click through to the third or fourth page of a search, and what typically shows up on the first page of a search are the more popular offerings, the larger offerings. And then there are tools, whether it’s subscription or other tools that allow us to increase the loyalty of those consumers to our brands.” —Procter & Gamble CFO Jon Moeller (Consumer Packaged Goods)

Industrials:

Airline traffic is strong

“we’re continuing to see strong passenger traffic growth in particular. It’s only one quarter, but 8.8% passenger growth in the first quarter this year, again just speaks to the fundamental strength of the marketplace” —Boeing CEO Dennis Muilenburg (Aerospace)

Auto production is leveling out

“As we think about some of the headwinds, we think that auto production is clearly flattening out, and we think for the rest of the year relatively flat.” —CSX CFO Fredrik Eliasson (Railroad)

Defense contractors are counting on a new appropriations bill

“At this time, government spending remains limited by the continuing resolution that is set to expire on April 28…Discussions are underway to extend the CR as Congress continues to debate the regular appropriations bills. We are hopeful that these discussions result in an approved FY 2017 Defense Appropriations Act” —Lockheed Martin CEO Marillyn Hewson (Defense)

Materials, Energy:

There’s been underinvestment in energy exploration

“we are heading towards a third year of significant underinvestment, which increases the likelihood of a medium-term supply deficit as produced reserves are not replaced in sufficient volume…The current level of underinvestments is most visible in exploration, where the record-low investments, including both drilling and seismic, led to a total amount of industry discoveries of less than 5 billion barrels in 2016 versus a produced volume of over 30 billion barrels, dropping the industry-wide reserves-to-replacement ratio to 32%.” —Schlumberger CEO Paal Kibsgaard (Oil & Gas)

Miscellaneous Nuggets of Wisdom:

There is an informational advantage that comes with size

“There’s also an information advantage that comes with size…We’re basically in the intellectual capital production business. Assuming that our people are equally as smart as the best qualified investors in the world but have a more informed view, then logically, we should be able to produce better results. As Blackstone grows larger, our access to information increases and our returns benefit…This ability to generate and evaluate information is a key structural advantage at Blackstone.” —Blackstone CEO Steve Schwarzman (Asset Management)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 4.20.17

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.

This was the first full week of earnings season and as usual the schedule was heavily populated by banks. The commentary was definitely more subdued than I expected it to be. Optimism has ticked lower from the start of the year. CEOs are citing a lack of progress in Washington for the downtick. Still, optimism overall is higher than it had been and there’s a good chance that pent up demand will take over regardless of what happens with tax reform in Washington.

The Macro Outlook:

Despite optimism, growth hasn’t yet materialized

“Loan growth, despite the optimism for change in a more business-friendly administration, has yet to materialize in a meaningful way…The net result is that our outlook for loan growth for the full year of 2017 is a little lower than it was in January.” —M&T Bank CFO Darren King (Regional Bank)

Companies are more skeptical than they were

“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)

Expectations for policy changes have become more muted

“anything on the corporate tax rate front is positive to Morgan Stanley, and it appears likely whether it’s this year ultimately or next year, there will be movement on that rate. I suspect it will be a little more modest and some of the numbers that have been thrown out. But nonetheless, anything sub 30%, appears probable would be very positive.” —Morgan Stanley CEO James Gorman (Investment Bank)

The yield curve is falling 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)

Businesses are awaiting clarity from policymakers

“During the first quarter of 2017, commercial loan growth was sluggish across the industry. Our large corporate customers tell us that they are optimistic about the future, but are awaiting more clarity regarding potential changes in tax and regulatory reform, infrastructure spend and trade policies.” —US Bancorp CEO Andy Cecere (Regional Bank)

“we haven’t seen the pipeline deteriorate materially, but we’ve seen people not following through to date and accepting those loans and moving forward. 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)

Congress is waiting for guidance from the administration

“With respect to tax reform and what we expect to happen, I was actually just in Washington last week and one of the things that I think is very clear is that the House has a plan that they want to move forward which includes the border adjustment tax, that has not yet been adopted by the Senate…I would say the grand summary from my takeaway was that both the House and the Senate are waiting for guidance from the White House on whether they prefer the border adjustment tax or whether they have another vehicle that they would like to implement. And while everyone is waiting for that, things have in fact stalled” —Johnson & Johnson CFO Dominic Caruso (Healthcare)

If Washington doesn’t act it could certainly stall the economy

“If they make no progress in Washington at all then eventually that optimism will turn to pessimism and…capable of a return into recession… I don’t think it will wane immediately, but by the end of the year let’s say if there’s been no positive movement on taxes regulation, healthcare and all that combined then I will be very worried to be honest.” —BB&T CEO Kelly King (Regional Bank)

On the other hand, companies may be eager to get moving either way

“But here is the reason that the resiliency of the activity in the marketplace will be stronger than you might think. Remember that eight plus years these companies have not been investing. They’re using 20 year old computers. They’re driving trucks of 300,000 plus miles. At some point regardless of how frugal you want to believe you can’t got a replacement of few computer and buy few trucks. And then the other thing is kind of a psychology and that is after feeling bad and conservative…you kind of want to invest. So number one, they need to invest, number two, they want to invest.” —BB&T CEO Kelly King (Regional Bank)

International:

The administration seems to have softened its rhetoric on Mexico

“So I don’t see an issue with Mexico. I think the administration has softened or kind of moderated its stance. There’s a recognition that we need to be good trading partners. Maybe the NAFTA agreement should be modified. I think it’s been around for a long time and I think both parties will benefit from a new look at that, but I think it’s going to be a prudent, pragmatic review. So I don’t have any concerns, any issues with trade with Mexico. ” —Steel Dynamics CEO Mark Millet (Steel)

There’s a sizable spread between Brazilian interest rates and inflation

“we’re in a situation where I think interest rates in Brazil around about 13%, inflation is around about 4%. What you see within our distributors and wholesalers and within the trade is a bit of a credit crunch if you like, you see a lot of tendency to put and take money out of inventory investment and put it on deposit where you make a 13% return against only 4% inflation, so it’s quite a good place to invest at the moment.” —Unilever CFO Graeme Pitkethly (Consumer Packaged Goods)

Financials:

Hedge funds are struggling to survive this low return environment

“long term returns are structurally lower than they were 10 and 20 years ago. So if you have an expected long term return of let’s say 6%…Fees take up a lot of that return…I think this is one of the big issues around hedge funds and why we are constantly reading about some hedge funds closing some hedge funds are lowering their fees because the fee structures are just too large versus the returns on a risk adjusted basis” —Blackrock CEO Laurence Fink (Asset Management)

Discount brokers are trending towards zero-cost trades

“First of all, the good news is that even if commission rates went to zero tomorrow, we’d still be profitable…If you remember, there are zero dollar players in the marketplace now and have been for quite some time. It’s been tried for many, many times over the years.” —TD Ameritrade CEO Tim Hockey (Broker)

“as far as advertising these goals, if they really were to cut the commissions to zero, as Schwab for example could easily do…” —Interactive Brokers CEO Thomas Peterffy (Broker)

M&A activity has been sluggish, but Goldman is optimistic

“So the pipeline is good and we’re cautiously optimistic. Many of the factors that one would look for remain in place, so CEO confidence, attractive financing levels, relatively supportive equity market backdrop. So I’ll say cautiously optimistic.” —Goldman Sachs CFO Martin Chavez (Investment Bank)

The rise in interest rates slowed mortgage lending

“the sudden rise in long-term rates in late 2016 caused a noticeable decline mortgage production from Q1.” —Bank of America CFO Paul Donofrio (Bank)

New home markets have stayed active though

“Not a lot of chatter about interest rates, I can tell you the sales people in our company today feel as good about the market as they have ever. Traffic numbers are up. We’re selling houses, we’re well positioned against competition, where we have competition and it’s just a good time to be in the business.” —DR Horton CEO David Auld (Homebuider)

Consumer:

Consumer spending isn’t robust

“On the US, I think there’s a general observation here and that is pretty weak consumer demand and that’s not a particular issue here for Nestle. I think that’s all throughout…category by category, whether it’s us or anyone else, what you’re seeing is fairly soft demand, even in the face of pretty good fundamental economic data.” —Nestle CEO Mark Schneider (Consumer Packaged Goods)

Technology:

The mobile device market grew by 10% last year

“We estimate that approximately 1.7 billion 3G/4G devices were shipped in 2016, up approximately 10% year-over-year. For calendar 2017, we are reaffirming our estimated global 3G/4G device shipments of 1.75 billion to 1.85 billion devices, up approximately 6% year-over-year at the midpoint.” —Qualcomm CFO Derek Aberle (Semiconductors)

Reed Hastings has his sights set on YouTube

“Well, I’m – we’re super excited expecting to cross 100 million this weekend, that’s a big accomplishment. But it’s really just the beginning. When you look at YouTube having a billion active users and a billion hours every day…we definitely got YouTube envy” —Netflix CEO Reed Hastings (Media)

Materials, Energy:

Banks are releasing reserves on energy loans

“we’ve been releasing reserves on energy now for a few quarters and a lot of that has really been as a result of payoffs and pay-downs. Now we’re starting to see the risk rating upgrade…as long as energy prices remain relatively stable, we’ll be seeing upgrades and pay-downs approved as credits. And therefore, there will be an opportunity for us to release more reserves on Energy.” —Comerica CCO Pete Guilfoile (Regional Bank)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 4.13.17

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 is back and CEOs are optimistic. It was really only half a week of earnings, so this post is still light, but next week should bring more data.

I chose to highlight MSC Industrial’s CEO this week because I thought he did a great job of framing where I think we are in the economic cycle. Optimism surged early in the year, activity should lag optimism and inflation should lag activity.

Judging by the 10 year treasury yield, inflation expectations appear to have been falling recently. My guess is that markets are anticipating that the “V” shaped part of an inflation rebound has already passed. We anniversaried low oil prices in Q1.

Right now markets are betting that additional inflation won’t arrive. If the economy continues on its current course though, it probably will. We should start to get a clearer picture on whether or not markets are right around summertime.

The Macro Outlook:

People are no longer just “cautiously” optimistic

“The growing optimism in the industrial economy has continued as the outlook has turned noticeably more positive over the past two quarters…I would say in general we are seeing a building optimism in our customers. So I would describe it more is building optimism than I would cautious optimism” —MSC Industrial CEO Erik Gershwind (Distributor)

Sentiment has gotten ahead of activity, but activity is turning a corner

“While order volumes are not yet as robust as sentiment, they’ve begun to turn the corner for most of our customers…Last quarter, we were cautious not to call December’s improvement a sustained trend. Today, we would. If the indices hold the current levels, we should continue to see improving sales trends for our business.” —MSC Industrial CEO Erik Gershwind (Distributor)

When activity picks up, inflation should too. Keep an eye out for price increases this summer.

“We are…hearing more and more conversation about potential future more meaningful price increases from suppliers…they are all seeing what we are seeing which is commodities recovering from a two year low period…and saying demand environment is getting better…Those of have not yet come to market but if they do as we suspect they will that could mean a more robust increase in the future…the typical catalogue increase is in August-September…and if this trend continues it would be a healthier increase.” —MSC Industrial CEO Erik Gershwind (Distributor)

International:

Consumer confidence has even improved in Mexico

“Well, I do think that the Mexico economy, at the beginning part of the year, I’d say that there was somewhat of a decline in consumer confidence that did occur. I was in Mexico three weeks ago. My sense was that that had changed, it was beginning to come back. But there was definitely a drop in consumer confidence at the beginning of the year” —Citicorp CFO John Gerspach (Bank)

Trump is now talking about a “reciprocal” tax rather than a border adjusted tax

“when you say reciprocal, nobody fights you. When you say I’m going to charge a 10 percent or a 20 percent border tax, everyone goes crazy, because they like free trade. Well, they don’t say that the other countries are charging you much more than that. But when you say a reciprocal tax — and I’m not saying that’s what I’m doing, but there has to be a certain reciprocal nature to it. But when you say reciprocal tax, nobody can get angry. Even the other countries, if like — if they’re charging you a 50 percent tax, you say, OK, whatever you charge, we’re charging.” —United States President Donald Trump (Government)

Financials:

C&I loan growth has slowed, but it’s probably due to some noisiness

“Consistent with the industry broadly, we have seen a slowdown in C&I growth with our loan balances remaining relatively flat sequentially, although up 8% year-on-year. There are a number of factors likely contributing including potential noise in the data from large acquisitions in prior periods and a resurgence in capital markets activity” —JP Morgan CFO Marianne Lake (Bank)

We’re late in the credit cycle but credit quality is still strong

“At the current point in time, we consider ourselves to be somewhat later in the credit cycle and we’re paying even additional attention to prudent lending and credit quality. To that point, our credit quality continues to be excellent. Non-performing assets were at a very low 7 basis points.” —First Republic Bank CEO Jim Herbert (Regional Bank)

Expectations for interest rate increases are still very low

“We were pleased and frankly a little bit surprised to see another interest rate hike by the Fed in March.” —PNC Financial CEO Bill Demchak (Regional Bank)

Consumer:

It’s never been a better time to go to Europe

“what we have seen is, it’s never been a better time to go to the UK or it’s never been a better time to go to Europe for U.S. travelers. And we have seen an offset of UK point of origin, the U.S. point of origin has more than offset the decline in the existing UK weakness.” —Delta Air Lines EVP Glen Hauenstein (Airline)

Technology:

Semiconductor inventories are too high in smartphone and PC markets

“We now estimate fabless DOI is still high, high above seasonal exiting first quarter ‘17. Our second quarter revenue guidance that reflects a quite severe inventory adjustment by our customers, particularly in smartphone and PC markets. However, the overall end market smartphone demand appears stable in second quarter ‘17.” —Taiwan Semiconductor CEO Mark Liu (Semiconductor Manufacturing)

Industrials:

Transportation markets are lagging the industrial rebound

“There remains a great deal of enthusiasm around oil and gas, and during the quarter the outlook for the general manufacturing space and the construction space also improved even as the quarter wore on. The only laggard we could see would be…in transportation markets, things like heavy duty truck, rail et cetera. But other than that, frankly on the whole customer demand strengthened and broadened throughout the quarter and we remain encouraged about the near-term trend.” —Fastenal CFO Holden Lewis (Industrial Distributor)

Materials, Energy:

Fuel costs have become a headwind again for energy consumers

“Fuel presented us with our greatest challenge in the March quarter as our fuel expense increased by 26% or $325 million from the prior year. Our all-in fuel price of $1.71 per gallon was up almost 30% as crude prices climbed roughly $20 per barrel from the first quarter ‘16 low levels. Our fuel price also includes $0.09 per gallon of losses from our legacy hedge book during the quarter.” —Delta Airlines CFO Paul Jacobson (Airline)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 3.31.17

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 was another very light week for corporate comments. The consumer is probably holding steady, but there were a couple of data-points to suggest that Q1 growth might have been a little bit soft.  Earnings season will pick up in a few weeks and then the pace should increase by quite a bit. I’ll be careful what I wish for.

The Macro Outlook:

The consumer is pretty steady

“When I think about the consumer, I think the consumer has been pretty steady. We know the consumer is looking for everyday value. The consumer is not reacting to promotional value constructs, the way they did a few years ago and I think that when you give the consumer what it is that they want, they’re visiting restaurants.” —Darden CEO Gene Lee (Restaurants)

Some first quarter numbers may be soft, but mostly for transitory reasons

“U.S. consumer purchases for center-of-store food were soft in the first quarter, especially in February. This is based on retail consumption reports for the period which showed a measurable year-on-year deceleration across many categories…We believe that this short-term slowdown can be attributed to a confluence of factors, including unseasonable weather, a late Easter and the timing of income tax refund payments, which are likely temporary. In fact, a few weeks into our second quarter we have seen an uptick in our sales of U.S. consumer products…we don’t see anything in our data going into March to suggest the slowness that we saw in January and February as continuing.” —McCormick & Co CEO Lawrence Kurzius (Spices)

“The slowing sales trend early Q1 has most acutely impacted eCommerce. We have clearly identified the issues, an assortment lacking depth and color for spring compounded with visual merchandising that did not powerfully translate our design vision.” —Lululemon CEO Laurent Potdevin (Apparel)

Wage inflation could moderate a bit, but is still a pressure point

“we expect wage rates to moderate a little bit, we were near 5% this year for the full year, California, New York, are the two states that we expect to have less pressure in, because we’re not seeing the same kind of minimum wage increase. New York had a 50% increase last year and California right about half as much as last year. So we’re getting a little bit of moderation on the wage rate in our view. But we still think it’s going to be a pressure point above what we’ve seen in the history of this company” —Dave and Buster’s CFO Brian Jenkins (Restaurant)

Electronic component costs are rising

“there is a rising component cost environment right now. On the Client side we see it in memory, we see it in glass and LCD panels. On the server side and storage side, we are seeing it in SSD drives and memory.” —Dell Technologies CFO Tom Sweet (Enterprise Tech)

International:

Cuba is opening up slowly but surely

“at this point in time obviously there are number of ships going for the first time…So we are sending larger ships, Paradise probably the largest ship from the U.S. to Cuba going. And so you know, it will happen over time, they’ve got pace and take their time but again there is a lot of change already occurring there…things are increasing and we’ll just have to continue to work with them and go at the pace they want to go.” —Carnival Cruise CEO Arnold Donald (Cruises)

Financials:

The trend towards indexation is more pronounced in the Americas

“I would say that what we are observing is that trend is more pronounced in the Americas than we are seeing in the EMEA and Asia-Pac region” —Factset CEO Phil Snow (Fintech)

Miscellaneous Nuggets of Wisdom:

Strive for simplicity

“if you try to take a complexity and you then try to solve it with a complex system, you have created a double complexity and that usually doesn’t work very well. All the companies I have ever been involved with and studied, most of the time when they are launching a big system or they are opening a new facility, if something drastically goes wrong and that’s because they haven’t first simplified it.” —Restoration Hardware CEO Gary Friedman (Retail)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 3.24.17

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 will be another few weeks before earnings season begins to pick back up. Until then we’re picking up scraps of information where we can.

Lennar’s CEO features prominently in this week’s digest. The underlying fundamentals for the housing industry are arguably stronger than any other industry in the economy. We’ve massively under-built since the bubble and there is a huge demographic wave of millennials who want to buy homes. Still, pricing has been so distorted by low interest rates that it’s tough to say how these forces will balance out.

Unfortunately, my expectation is that millennials will likely end up buying houses at inflated prices and have a similar experience that we got from our college degrees. Societal pressures will cause us to lever up to purchase an asset with an extremely low return on investment.

The Macro Outlook:

Housing market conditions are stronger and strengthening

“market conditions certainly feel like they are strong and strengthening. The slow and steady, though sometimes erratic, market improvement that we’ve seen for the entirety of this recovery seems to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

There’s clearly a sense of general optimism in the market

“As our traffic has increased, we’re getting some very direct feedback from our customers as they tell us what they are looking for, their timing and, sometimes, their motivation. 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. The banking world is making more overtures to small businesses and to mortgage borrowers and there’s a sense that borrowers can make their way through the process.” —Lennar CEO Stuart Miller (Homebuilder)

People want to buy before rates go up

“Additionally, the upward direction of interest rates has encouraged some to get off the fence and consider purchasing a home rather than renting. Rents have risen and the prospect of higher purchase prices and higher interest rates makes a compelling case that today’s opportunity might be the best opportunity to leave those annual increases in monthly payments behind.” —Lennar CEO Stuart Miller (Homebuilder)

60% of 18-35 year olds are living with parents, relatives or roommates

“Interestingly, the front page of U.S.A Today reports today that 60% of millennials ages 18 to 35 are living with parents, relatives and roommates and that is a 115-year high.” —Lennar CEO Stuart Miller (Homebuilder)

Pricing power is on the horizon

“Limited supply and production deficits are now intersecting with land and labor shortage and this suggests, though not yet seen, but suggests, that pricing power is on the horizon as we move through the year.” —Lennar CEO Stuart Miller (Homebuilder)

You can only be positive when you see such momentum

“to put it very simply we feel very good for the second half of the year…We have very good bookings, we have good pipeline. We have great momentum in most part of our business…So you could only be positive when you see such momentum.” —Accenture CEO Pierre Nanterme (Consulting)

International:

The UK and Europe are benefitting from weak currencies

“I think the currency situation particularly in the UK is very favorable and they are benefiting from a significant amount of European tourism into the UK as well as Asia and U.S. tourism into the UK. And I can say the same thing about Continental Europe where we are seeing from the credit card data that we look at every month that particularly Chinese stores given the euro’s lack of strength is also a place that there is a lot of tourism going on and a lot of shopping going on, so really benefiting from that.” —PVH CEO Manny Chirico (Apparel)

Financials:

Tax reform will create winners & losers

“I will say that I’ve had a recent opportunity to listen to Steve Mnuchin, the Treasury Secretary…And the two things that I take away from listening to him is that he’s very smart, very thoughtful in his approach…The other thing that I walked away with is a sense that he and this administration are listening carefully knowing that there will be winners and losers, there will be ups and downs, in any configuration of the tax revamp and so there is, virtually, no ability to draw certainty today from what pieces and in what proportion they are going to be woven into a new tax program.” —Lennar CEO Stuart Miller (Homebuilder)

Food inflation remains modest

“we see a bit more modest inflation outlook versus what we saw a year ago in the fourth quarter” —General Mills CFO Don Mulligan (Packaged Foods)

Consumer:

The Retail environment is not in a steady state

“The retail landscape is particularly in the U.S. is not – is in a steady state…I think the important thing to point out is that these changes are really being driven by the consumer, and consumer demand at the same time remains quite strong. But we know that consumer expectations are quite high in terms of product, the type of product they want, the innovation, the style. They want the product fast, they want it easy, they want personal service.” —Nike CEO Mark Parker (Apparel)

Third and fourth tier locations will struggle to stay open

“the trend is now that A&B super centers are going to be open and the C&Ds are not. If you happen to be in a center that’s not A&B, you have a very large percentage of probability that you will not be making money and if you’re in A&B, the more developers are trying to balance their loss of income by increasing their rents on the A&B. That’s why so many specialty store business are going out of business” —Perry Ellis Chairman George Feldenkreis (Apparel)

The US has overbuilt retail

“I think you know brick and mortar in general is under pressure, but I think one of the benefits that exist in Europe and in Asia even to a greater extent is the level of retail square footage on a per capita basis is just significantly lower, 50% lower than it is in the United States. So I think some of the challenges with — the challenges that we’re facing in brick and mortar in the United States has to do with there is too many stores. I don’t believe that issue to the level that it exist in the United States exist in Europe and in Asia.” —PVH CEO Manny Chirico (Apparel)

Retailers are aggressively cutting inventory

“I think the retailers have done a very good job in department store sector in particular about keeping inventories clear. We came out of the fourth quarter, I think they reacted strongly to some of the softer sales trends…Whatever they’re planning be it flat sales or slightly negative comps sales, the buy plan is even lower than that.” —PVH CEO Manny Chirico (Apparel)

Customers are asking FedEx for more pickup locations. Maybe there is a role for omnichannel after all…

“FedEx On-Site is a nationwide network of alternate delivery locations, which is a direct response to our customers telling us they want access to more choices for package delivery and drop off. FedEx On-Site locations include some Albertsons and some Kroger grocery stores as well as select Office Depot, OfficeMax and FedEx authorized ship centers.” —FedEx EVP Rajesh Subramaniam (Delivery)

Technology:

Office layouts have changed

“Day-to-day business continues to be considerably softer likely because of the ongoing decline in demand for traditional private offices and open plan cubicles…[customers] want offices that practically support creativity and innovation by helping their people do their best work.” —Steelcase CEO James Keane (Office Furniture)

Steelcase listed healthcare and technology as weak sectors

“we experienced growth in six of the 10 vertical markets we track including five with double digit percentage growth rates. This growth was dampened by declines in the technical professional, education, healthcare and information technology sectors” —Steelcase CFO David Sylvester (Office Furniture)

Industrials:

There’s more to the economy than mobile phones

“Amazon is a wonderful company and they certainly have revolutioned the e-commerce world and we’re not sure what Amazon is going to do one way or another. But the FedEx system that consists of thousands of facilities and the ability to pick up transport and deliver it in one to two business days between any two addresses in the United States has been decades in the making and we think that we have a not great risk of being disrupted…people focus on e-commerce because everybody looks at this from their mobile phone forward where the real story is everything behind the mobile phone and that’s what FedEx has in enormous quantities; airplanes, trucks, facility, team members.” —FedEx Chairman Fred Smith (Delivery)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 3.17.17

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.

It’s almost the end of the first quarter, so this was a particularly light week for earnings calls. There were a few companies that spoke at conferences, but in general there’s not a lot to talk about this week.

Janet Yellen held a press conference after the FOMC meeting, which was more of the same. The Fed did make a token rate increase, but is in no hurry to change course. Even though Yellen acknowledged that there has been an “obvious and notable” improvement in sentiment, the Fed seems determined to wait to act until something happens to force its hand.

The sun is quickly setting on the Yellen Fed though. Yellen’s term expires in January 2018 and Trump will probably appoint someone from his camp. That creates an odd lame duck period for Yellen. Her opinions are likely to matter less and less in the months ahead. The Fed may raise three times this year, but what about 2018? The outlook is foggier than usual.  It’s very possible that Trump’s Fed Chair will have a radically different vision for monetary policy. 

The Macro Outlook:

The Fed raised rates, but policy remains accommodative

“Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to 2 percent inflation.” —Fed Chair Janet Yellen (Central Bank)

There is an “obvious and notable” improvement 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)

But the Fed is taking a “wait and see” attitude

“But I’d say most of the business people that we’ve talked to also have a wait and see attitude, and are very hopeful that they will be able to expand investment and are looking forward to doing that, but are waiting to see what will happen. So, we will watch that. And, of course, if we were to see a major shift in spending reflecting those expectations, that could very well affect the outlook. I’m not seeing it — I’m not seeing that at this point.” —Fed Chair Janet Yellen (Central Bank)

The Fed isn’t changing its outlook

“as you said, 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)

And is staying on a gradual course

“I think the trajectory that you see is the median in our projections which, this year, looks to a total of three increases. That certainly qualifies as gradual.” —Fed Chair Janet Yellen (Central Bank)

They continue to believe that the “neutral rate” is existentially low

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

International:

Visa said that international economies have stablized

“Chinese growth isn’t changing, that still I would say, okay, not great, but at least it’s stabilized, the rate of growth is not declining. Oil economies have stabilized. So, cross-border commerce out of there is returning. And then beyond Europe…there was a massive amount of inbound commerce into the UK and frankly into many parts of Europe because of the weak euro and then the strong dollar moderated. I mean it isn’t getting weaker, but it’s not getting stronger at the same rate.” —Visa CFO Vasant Prabhu (Payments)

GE sees improvement in Europe

“In Europe things were better particularly in Germany and Spain driving Europe and then secondly I think actually we’ve seen some improvement in France and Italy, so I think it’s market-by-market, but we are seeing in general strong economy that’s driving equipment sale.” —GE Capital CEO Richard Laxer (Conglomerate)

It’s tough to predict what will happen in DC, but you can prepare

“One of things we have encouraged our customers to do is run three, four, five scenarios so they kind of get it into muscle memory and therefore depending on whatever happens in terms of DC and the U.S. government, we are ready to act swiftly.” —Jabil CEO Mark Mondello (Electronics Manufacturing)

Financials:

Mastercard still sees room for more electronic payments

“The verticals that are not as mature or more nascent are rent, education, consumer loans, utilities…it’s in those verticals that we really see the opportunity to convert a significant amount of volumes, trillions of dollars in volume over to electronic…84% of our world transactions are conducted in cash and check today.” —Mastercard EVP Linda Kirkpatrick (Payments)

Consumer:

Location is still important in a digital retail world

“we are looking at our business as a digital business and with the digital business you have to place warehouses [stores] close to your consumer and with our 500 warehouses we have today, we’re within 20 minutes of 70% of the U.S. population. So when we’re looking to build out a new warehouse we’re trying to figure out, how can we get closer to that customer, so that someday we can meet that demand of the customer of delivery within whatever short period of time we want to deliver upon.” —DSW CEO Roger Rawlins (Shoes)

Healthcare:

Credit analysts looking for a deleveraging story might consider Abbott

“I think right now in the short-term, our big focus is debt repayment…We come out of the gates this year, and doing the St. Jude acquisition with about $28 billion; so it’s going to be in our best interest to pay down as much as we can as quickly as possible.” —Abbott Labs CFO Brian Yoor (Healthcare)

Industrials:

Non-res construction markets are solid

“we feel really good about the customers we are talking to. There is no customers that I have talked to in a non-res construction environment that didn’t say, hey, we feel really good about the year and we are proceeding as we thought. So, I think its line with being a solid market out there. I think that’s the right description of it.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

Television inventories are healthy

“Our view of inventory is that it’s going to be healthy coming into the year…the panel market inventory which is where we have the best line of sight has been pretty consistent. They’ve been running high utilizations and have maintained the same level of inventory now for quite a while. So, I think we feel good about supply chain inventory assuming that retail demand does what we expect this year in total which is up mid-single digits.” —Corning IR Ann Nicholson (Glass)

Miscellaneous Nuggets of Wisdom:

Valuations go up and they go down

“So there is one thing I know with certainty about valuations, they will change right. They will go up, they will go down and they will float but that’s the only thing I know with certainty about valuations” —Pfizer CFO Frank D’Amelio (Pharma)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 3.10.17

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.

Arguably the biggest story of this quarter has come late in the earnings season. Retailers are truly coming to terms with the massive challenges that the industry is facing. This isn’t a new realization. CEOs have known this is coming for more than a decade, and they have spent at least the last five years heavily investing in “omni-channel.” But this is the first quarter where CEOs are recognizing that they’re losing the war. Amazon is taking a larger and larger bite of retail sales every quarter, and because retailers have high fixed cost bases, every lost sale becomes more and more painful. This means that the process is likely to accelerate from here.

CEOs have to be optimistic for their shareholders, which is why investors have to train themselves to read between the lines. All of these CEOs are talking about seizing the moment and investing in new platforms. But the vast majority of these companies are trying to take hills that have already been lost (more than a decade ago).

For most of these companies, investing now is just throwing good money after bad, which is the antithesis of being a steward of capital. However, most of these CEOs are staring their career’s mortality in the face, and when that happens its easier to go down with the ship than tell everybody to get into life boats.

There are some management teams who will tell you the truth and those are the ones to listen to. The only way to have a positive outcome is to see the playing field clearly and operate without bias. Adversity is what separates great management teams from weak ones.  Invest in great management teams.

The Macro Outlook:

Retailers can’t hide from their problems

“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)

There’s too much retail space in the US, especially in a digital world

“Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 90’s and early 2000’s. Thousands of new doors opened and rents soared; this created a bubble, and like housing, that bubble has now burst. We are seeing the results; doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.” —Urban Outfitters CEO Richard Hayne (Retail)

Old empires are shrinking

“we made great progress narrowing our geographic focus to North America. While we have successfully provided tremendous value to business customers across Europe over the years, we have not been as successful creating shareholder value in Europe. We believe it’s in the best interest of our shareholders to narrow our focus to North America” —Staples CEO Shira Goodman (Retail)

Management teams are scrambling to build new platforms

“We certainly view 2017 as a year of investment. In 2018, we’ll continue to transition as these different initiatives begin to mature. As we get into 2019 and beyond, we certainly expect stability and a return to growth…We’ve got to invest to grow. We’ve got to reimagine our stores. ” —Target CEO Brian Cornell (Retail)

“we plan to do what any good portfolio manager would. Invest resources in the most promising opportunities, diversify to lower risk, and increase liquidity…Our highest priority is where we’ve had the most recent success, digital” —Urban Outfitters CEO Richard Hayne (Retail)

But they are still holding on to their old ones

“First, let’s talk stores, our key competitive advantage. They are at the center of everything we do for our guests regardless of how we deliver. The 40% digital growth we saw in December, they enabled it.” —Target COO John Mulligan (Retail)

And although the economics of e-commerce are good

“to kind of call out the profitability of e-commerce versus the profitability of the store, we’re not ready to do that. But I will tell you that the e-commerce business is probably more profitable than you think.” —Dicks Sporting Goods CEO Ed Stack (Retail)

This is worse than a zero sum game

“This would be fine if the increase in DTC sales were wholly additive, but they’re not. Digital shopping is partially replacing store shopping and thus is negatively impacting store traffic and store generated sales. Flat to negative store ‘comps’ are causing occupancy deleverage and eroding four-wall margins.” —Urban Outfitters CEO Richard Hayne (Retail)

The positive is that this isn’t the first paradigm shift for retailers

“these inflection points come around every generation or so. And strong retailers endure, while others, well, they don’t. Pick your era defining change throughout history from downtown department stores to suburban malls, catalogs, e-commerce.” —Target CEO Brian Cornell (Retail)

And it’s a good time to pick up real estate if you can use it

“We look at this going forward that now is absolutely the right time to be patient from a real estate standpoint, with all the real estate that’s going to come up on the market. Penney’s announcing stores that they’re closing, Macy’s announcing stores. Some other people that are rumored to be closing stores or — consolidation in this industry is not over. And this is a time that we’re going to be very patient going forward.” —Dicks Sporting Goods CEO Ed Stack (Retail)

Meanwhile, in other macro news…

Demand still hasn’t caught up with sentiment

“I’m optimistic about some of the changes that we see more broadly in the environment but at this point in time there’s nothing really that’s quite happened yet. Tax reform is still a discussion, it hasn’t occurred” —Verizon EVP John Stratton (Telecom)

Inflation may not be as strong as advertised

“Regarding deflation, overall, primarily in the US, we have seen deflation in the 1%, 1.5% range in February. Departments such as foods, sundries, frozen foods, liquor meat, dairy showed the most deflation on the foods and sundries side. On the non-food side consumer electronics continue to be deflationary, primarily in the TV category…The collective view is inflationary, or less deflationary, for the next few months and maybe a little inflationary, but it’s a crap shoot.” —Costco CFO Richard Galanti (Retail)

“we also have to acknowledge the ongoing challenges facing our industry. Our customers are facing a difficult retail environment due to deflation and increased competition. We view deflation as cyclical, inflation will come back at some point but while it’s here, it’s leading to some very real challenges for us and our retail customers.” —UNFI CEO Steven Spinner (Food Distributor)

A border adjusted tax would probably change that quickly

“We don’t believe it’s good for consumers – it’s going to raise prices…we personally don’t buy into the fact that it will be offset by a big rising dollar. We don’t know what’s going to happen with the retaliation out there by other countries, and we’ll see. But as a retailer, we definitely think that it’s bad, and we’re against it.” —Costco CFO Richard Galanti (Retail)

Financials:

Housing markets are strengthening

“we definitely are feeling a little strengthening in the marketplace and I think our sales per community, our contracts per community are certainly an indication of that. If I look around the country, I’d say we’re feeling some strengthening, certainly in Northern California in the Sacramento area that has been strong. We’re continuing to see a strong Texas market, the Arizona market in Bromley in Phoenix that has been strengthening as well.” —Hovnanian CEO Ara Hovnanian (Homebuilder)

Asia leads the US in digital banking

“I would say that we’re most advanced in digital right now in Asia as you might suspect. And Asia kind of leads the U.S. and the U.S. certainly leads Mexico…In Asia, if you didn’t have a great digital offering you would be dead. And clearly, the way the U.S. is going that’s the same way it is.” —Citigroup CFO John Gerspach (Bank)

Consumer:

Digital spend is now 55% of Home Depot’s marketing budget

“You might be surprised to know that a better part of 55% to 60% of all of the marketing that we deployed now is in the new media or digital world…very active with Google search terms…very active social media practice. We do a lot of retargeting for customers and are constantly looking at ways to make our marketing and advertising more personal…and also more location aware. So, talking to you based off the weather patterns that you’re experiencing in your local neighborhood, those are all things that we have and we’ve deployed in our marketing spend.” —Home Depot CMO Kevin Hofmann (Retail)

“Celebrity” is a commodity with rising value

“In January to broaden Revlon’s social reach and digital relevance we announced the signing of Gwen Stefani as our new global brand ambassador and four new digital influencers” —Revlon CEO Fabian Garcia

Technology:

5G will change the architecture of the telecom network

“the reinvention that’s required has surprised us…RF design is a really critical point. We’ve run and managed and design these networks a certain way for 20 years and the 5G paradigm is completely different. I think that’s going to surprise some people.” —Verizon EVP John Stratton (Telecom)

5G requires more small cells

“it’s going to require a lot of small cells, lot of space, lot of power, a lot of backhaul…it doesn’t propagate walls very well, or trees or other obstacles and so we think there is going to be – in order to get it effectively into the home and an antenna is required to be mounted on the house to get the propagation through the house that’s required.” —Comcast Cable CEO Neil Smit (Media)

It probably wont be deployed on mobile until 2020

“maybe the end 2019 into 2020 where you might see the first sort of delivery of mobile based 5G. And remember also to scale you have to seed the base of handsets and so you’ll have that curve. There’s a cost curve, there’s an initial integration that needs to happen.” —Verizon EVP John Stratton (Telecom)

Industrials:

Connected cars generate a lot of data, but who owns the data?

“there is an awful lot of engineering resources going in where the OEMs realize the vast amount of data that they could provide, how do they want to collect it and how do they want to retain it and how they want to process it…One of the things we have to remember is that the customer owns the car. And so the data coming off the car belongs — I think most people feel belongs to the customer.” —Sirius XM CFO David Frear (Telecom)

Miscellaneous Nuggets of Wisdom:

If you optimize your business for any single metric it should be Net Promoter Score

“we put in one measurement system, Net Promoter System and everyone is measured on that and paid on that including Brian and myself. It focuses on what the customers want and need, and whether they would promote your service to a friend or family, and we also have an employee NPS score, which gets the feedback of the employees who are fundamentally trying to service the customer. So it’s been a real morale lift for the employees.” —Comcast Cable CEO Neil Smit (Media)

You’re better off paying a fair price for a healthy company than a low price for a dysfunctional one

“we typically don’t like to acquire turnarounds or companies that are financially troubled. We’d rather pay a fair price for a company that’s doing well than a very inexpensive price for a company that’s not doing well.” —UNFI CEO Steven Spinner (Food Distributor)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 3.3.17

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.

All it took was a change in tone from Trump to get the bull market party revved back up this week. Many people have noted that the improvement has mostly been in “soft” survey data so far, but spending is likely to follow the surge in optimism. The real concern is what happens if the policy agenda stalls in a few months at the same time that inventories have been restocked and the Fed has raised rates. Even though economic activity is picking up, stock prices are so over-extended that it will take a growth miracle to justify current valuations. If interest rates rise significantly, even a growth miracle may not be enough.

The Macro Outlook:

Trump changed his tone and the markets went wild

“A new chapter of American Greatness is now beginning. A new national pride is sweeping across our Nation. And a new surge of optimism is placing impossible dreams firmly within our grasp. What we are witnessing today is the Renewal of the American Spirit.” —President Donald Trump (Government)

Markets loved him already

“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)

And he loves the bull

“The stock market has gained almost three trillion dollars in value since the election on November 8th, a record.” —President Donald Trump (Government)

Optimism is running high

“we were cautiously optimistic in November, but as it turns out, the weight in that statement should have been on optimism…if you look at the stock market, if you look at generally the growth profile in the United States, I think on average people are feeling noticeably better about it.” —Sotheby’s CEO Tom Smith (Art Dealer)

Surveys show that spending is on its way

“our fourth quarter consumer sentiment survey…revealed that post election homeowners have an increasingly favorable view of the national economy and their personal financial situations and we believe this trend will continue, as almost half of the homeowners we surveyed indicate that they are very likely to begin a home improvement project in the next six months, and more than half of homeowners believe that home values are rising and will continue to increase.” —Lowe’s CEO Robert Niblock (Home Improvement)

No one sees any reason to be concerned

“I think the state of the consumer from every measurement we look at, I mean, that there are no red flags out there why the consumers should be pulling back. Unemployment is stable. Wages are relatively up. And so, we don’t see anything from a macro standpoint that gives us any concern.” —JC Penney CEO Marvin Ellison (Retail)

But, every party needs a pooper

“As an aside, I feel compelled to add a bit of restraint to the recent enthusiasm regarding market conditions… While these trends are encouraging there is still uncertainty relating to the timing of sustainable demand driven growth. The mixed outlooks provided by our large customers reinforce the point that it is unlikely that we will see a meaningful turn prior to the end of our fiscal year in July.” —Donaldson CEO Tod Carpenter (Industrial Components)

There is a lot is riding on uncertain policy outcomes

“everyone is feeling better but there’s a higher probability, very gently higher probability, that there is some risk around it…If either the prospects for either legislation in the United States dim or people get a look at what the legislation is and they decide they don’t like it quite as much…Well, that would be an example of a situation where they may not be as enthusiastic and that would be a risk to the marketplace.” —Sotheby’s CEO Tom Smith (Art Dealer)

And the Fed is priming us for a March rate increase

” We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time. Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.” —Federal Reserve Board Governor Lael Brainard (Central Bank)

” After the election we’ve seen very large increases in household and business confidence, we’ve seen very buoyant financial markets — the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction. So, put it all together, I think the case for monetary policy tightening has become a lot more compelling.” —Federal Reserve Bank of NY President Bill Dudley (Central Bank)

“We stood pat after our meeting a month ago, but we’ll meet again in March to assess whether the time is right to raise rates further. In my view, a rate increase is very much on the table for serious consideration at our March meeting.” —Federal Reserve Bank of SF President John Williams (Central Bank)

A former dove is even talking about shrinking the Fed’s balance sheet

“As normalization of the federal funds rate gets further under way, monetary policy too is approaching a transition, prompting increased focus on the balance sheet…There are good reasons to expect a normalized balance sheet to be considerably smaller than its current size” —Federal Reserve Governor Lael Brainard (Central Bank)

Financials:

Dan Loeb sees plenty of investment opportunities

“I’m not sure that given the increase in S&P earnings that we expect due to changes in policy as well as tax reform that it’s as overvalued as people think, but no we don’t invest in markets, we invest in individual companies and we are seeing – we’re seeing plenty of good valuation situations.” —Third Point CEO Dan Loeb (Hedge Fund)

Consumer:

Retailers are lobbying hard against the border adjusted tax

“First, following the election, the border-adjustable tax has become a hot topic. As I’m sure many of you know, I was part of a contingent of Retail Industry Leaders Association CEOs who went to Washington, D.C. and met with President Trump, members of his administration, and various members of Congress to share our perspective on the potential harmful effects of this proposal. While we are concerned about the impact on retail business models, we are more concerned about the ramifications for hard working American families due to likely significant inflation that would ensue. Our key message is that we certainly support a pro-growth agenda, including corporate and individual tax reform, but we stress the importance of a thoughtful approach to tax reform to avoid any unintended consequences.” —Autozone CEO Bill Rhodes (Auto Parts)

Delayed tax refunds have been a headwind

“Late last year, the IRS announced that, in an effort to combat fraudulent tax refund filings, they would be delaying the issuance of refunds associated with returns claiming the earned income tax credit. Unfortunately, the timing of refunds typically begins in the last two or three weeks of our second quarter, and this year most of the refunds were delayed until after our quarter concluded” —Autozone CEO Bill Rhodes (Auto Parts)

Consumers are attracted to an industrial aesthetic

“now everybody is going back to this industrial kitchen look. where everybody is going back to a professional looking stove and hood, that looks and made for industrial style kitchen…people are looking for…I want to be able to look at my griddle and look like the griddle that they have at Five Guys, or Culvers, or Steak Shake, or you name it.” —Middleby CEO Selim Bassoul (Kitchen Equipment)

The QSR dining experience will probably change a lot over the next 10 years

“I’m fairly certain that my own young children will experience retail and restaurants in a very different way than I did. When we look at the digital landscape, our future is focused on removing those constraints and friction points that previous generations have accepted as a way of life, knowing that future generations just won’t accept it. For Shake Shack, that evolution begins now with our Shack App. Today, it’s focused on mobile pre-ordering.” —Shake Shack CEO Randy Garutti (Restaurant)

Healthcare:

Trump is proposing incremental changes to Obamacare

“First, we should ensure that Americans with pre-existing conditions have access to coverage, and that we have a stable transition for Americans currently enrolled in the healthcare exchanges. Secondly, we should help Americans purchase their own coverage, through the use of tax credits and expanded Health Savings Accounts –- but it must be the plan they want, not the plan forced on them by the Government. Thirdly, we should give our great State Governors the resources and flexibility they need with Medicaid to make sure no one is left out. Fourthly, we should implement legal reforms that protect patients and doctors from unnecessary costs that drive up the price of insurance – and work to bring down the artificially high price of drugs and bring them down immediately. Finally, the time has come to give Americans the freedom to purchase health insurance across State lines –- creating a truly competitive national marketplace that will bring cost way down and provide far better care.” —President Donald Trump (Government)

Industrials:

Trump wants to eliminate the defense sequester

“I am sending the Congress a budget that rebuilds the military, eliminates the Defense sequester, and calls for one of the largest increases in national defense spending in American history.” —President Donald Trump (Government)

Inflation is coming

“Yeah, there is certainly some inflation coming. We monitor our commodity prices every day and they are providing a little bit of a headwind going forward. We work to mitigate that, but that’s something that we are aware of.” —Donaldson CFO Scott Robinson (Industrial Components)

Materials, Energy:

Oil inventories are drawing down

“I think just in the last week or so, we’re starting to see very encouraging signs on inventory drawdown, and I think we’re getting close. It won’t be in the next month or two. I think we’re going to know a lot about how the OPEC cuts have affected supply/demand dynamics and the drawdown of that inventory. So we’re about there, but we just need a little bit more time on that” —EOG CEO William Thomas (Oil & Gas)

But oil producers are not taking chances on oil prices

“Over the past several weeks, we have entered into put option contracts providing a floor of $50 WTI and $51 Brent for most of our second half 2017 oil production. With this protection in place, we will move forward with our Permian Basin capital program knowing that any price weakness will not cause a funding shortfall.” —Apache CFO Stephen Riney (Oil & Gas)

People are getting more positive on the mining sector

“Sure, I think what you see are articles about the actual mining operators and producers like the Rio Tintos of the world coming out a little more positive on their balance sheet recovery et cetera, and so that’s getting people more positive about the mining sector.” —Donaldson CEO Tod Carpenter (Industrial Components)

Miscellaneous Nuggets of Wisdom:

Don’t sell people things they don’t need

“I remind my sales people, do not oversell, because if we oversell something and it doesn’t work, I will take it back from our customer, I will take it back. And that’s been a commitment from me, morally I’m not here to sell people things they don’t need.” —Middleby CEO Selim Bassoul (Kitchen Equipment)

Only the strong survive

“I‘ve been around for 30-some years and I always would tell you that we’ve always felt that the next five years are going to be more competitive than the last five. I would definitely agree with that comment today. We definitely believe the next five will be more competitive than the last five because only the strong survive.” —Kroger CEO Rodney McMullen (Grocery)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 2.17.17

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.

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

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

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

The Macro Outlook:

Yellen continues to say that the Fed could raise in March

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

She is sticking to three rate increases this year

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

Inflation expectations have definitely risen

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

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

Companies are thinking about expansion

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

Financial markets are wide open

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

Yellen still sounds hesitant though

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

Meanwhile, Trump sounds pleased

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

He’s having a great time

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

The administration has big plans for next week

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

Healthcare is first up, tax reform will be next

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

Financials:

Rising interest rates haven’t impacted CRE markets

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

The Fed is still planning to shrink its balance sheet someday

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

Consumer:

Not everyone can produce all original content

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

The average Candy Crusher plays for 30 minutes a day

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

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

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

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

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

Technology:

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

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

Avis doesn’t see an impact from ride-sharing

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

NVIDIA says that deep learning is a breakthrough in AI

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

Healthcare:

Pharma companies are trying to blame PBMs for rising drug costs

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

Materials, Energy:

Cliffs Natural says that sanity has returned to iron ore markets

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

But stockpiles are building in China

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

Miscellaneous Nuggets of Wisdom:

Investing has gotten much harder over the years

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

Engage life

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

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 2.10.17

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.

For most of this bull market bearish sentiment has been consensus. Even while the market has risen, it’s been easy to hold a negative view, and most people did (including me). Recently those negative voices have been fading though. In fact, they have been so drowned out that when I saw a CEO warn about the state of capital markets this week it actually felt genuinely contrarian. That doesn’t mean that the bull market is over, but it does mean that one of its greatest assets, pessimism, is slowly melting away.  For now though, animal spirits are running strong.

The Macro Outlook:

The industrial economy has some momentum

“I think that what we’re seeing is the increased investments going on from a – just from pent-up – a situation for many years. We’re starting to see some of that flow … So I see a pretty steady recovery here. I don’t see a snap. As I’ve said, I’ve always felt that 2017 would be a good year of building that foundation and see a improvement. I see a much stronger 2018 than I see 2017. But I see right now, based on what I’m seeing from the customer base, based on what I’m hearing from some of our customers and what they’re saying they’re going to spend on capital next year, overall, I think the pressure is upward.” —Emerson CEO David Farr (Industrial Components)

Some manufacturers can’t keep up with orders

“Our inventories definitely on the lighter side…But every quarter we have been kind of beating the numbers and honestly not been able to build the inventories we set a target where the inventory would slightly grow and then we ship it all and the inventory does not grow. ” —Microchip CEO Steve Sanghi (Semiconductors)

This has now become a truly contrarian perspective:

“I’ve been around long enough to have lived through all sorts of markets. I’ve learned to respect markets, while at the same time being skeptical of conventional wisdom. I’ve lived through a bond bear market and a gargantuan bond bull market. I’ve seen bond yields above 15% and below 2%. I’ve seen inflationary spirals, I’ve seen deflationary threats, I’ve seen deregulation and reregulation. I’ve seen the S&P 500 trade as high as 30 times earnings and I’ve seen the S&P trade as low as 7 times earnings. With all this experience, that comes with age I might add, here is what I’m seeing in the markets today. In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get a loan to buy a fleet of zeppelins at this point in time. With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from its recent lows, but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it’s a major disconnect, and it concerns me…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. So why am I sharing these thoughts with you? Because I know that some of you have wondered why we brought back relatively few Loews shares in 2016 or why Loews hasn’t made an acquisition…It’s a tough market in which to be a disciplined buyer.” –Loews CEO James Tisch (Insurance)

But should it be contrarian?

The world is still unusually uncertain

“Looking forward, our continuing view is that the world is unusually uncertain, and perhaps even more so given the regime change in Washington and the questions surrounding the administration’s proposed agenda. ” —Oaktree Chairman Howard Marks (Asset Management)

The consumer isn’t showing the same pep as industry

“I think October was a little slower and then early November was good and it kind of leveled out again. So it’s kind of up and down by weeks. Some of it’s the way the calendar falls for us this year with the coming off the 53-week year, but I would just tell you it’s a little slower out there right now” –Sysco CEO Bill Delaney (Restaurant Supplier)

The downturn in CRE in the UK is exceeding JLL’s worst expectations

“it is fair to say that the Brexit vote, in particular, hasn’t created an environment which encourages our clients to take long-term decisions around their real estate portfolios…Now we are staying very close to the situation in the UK, but though the development has been clearly exceeding our most negative expectations which we got for the Brexit but at the end of the day, we are very hopeful that pragmatism will take over and that things will play out fine for the UK going forward.” —Jones Lang LaSalle CEO Christian Ulbrich (CRE Broker)

Tax reform may take longer than expected

“So I’m looking for clarity by late summer, early fall and that gives me time, as I get into execution later this year, early 2018 based on if I have to change anything.” —Emerson CEO David Farr (Industrial Components)

Companies are looking before they leap

“I honestly just think it’s too early to start to speculate. And we’re certainly not building anything into our plans positively or negatively for that matter related to any policies that might come out. But I can assure you that we’re watching it very closely.” –Visa CEO Alfred Kelly (Payments)

Excitement can quickly turn to animosity

“Obviously the President has said that his top priority is to stimulate growth and get people working and expand the economic pie…I can’t say what the President’s view is going to be in the future…So I can’t – I can only – I could only speculate but I don’t have obviously the crystal ball that permits me to give an accurate answer to that question. Reinforces my view that I’ve long held that I hate politicians.” —Kilroy CEO John Kilroy (REIT)

If trade stops, war starts

“If trade stops, war starts…We have to actively prove that trade helps people to communicate. And we should have fair trade, transparent trade, inclusive trade.” —Alibaba CEO Jack Ma (E-commerce)

Invariably there will be another down cycle someday

“Every year that goes by logically increases the probability, but there are times, like today, when people say, oh, you know, we’re in a virtuous circle. We have an accommodative Fed, we have expanding – well, the Fed’s accommodative, but not too much, and the economy is expanding, but not too much that it has to be reined in, and corporations are doing well in piling up cash, and debt has been refinanced and paid down, and they’ll give you a hundred reasons why there’s not going to be another down cycle again, but invariably there is.” —Oaktree Chairman Howard Marks (Asset Management)

Not necessarily in the near term though

“There is a tremendous amount of leverage paper in the world. There is a business cycle and we feel very good about the restructuring group and what the next three years look like. But that’s not to say that I characterize it as growth in the very short-term.” —Moelis and Co CEO Ken Moelis (M&A Advisory)

International:

On the one hand, Mario Draghi sounds slightly more optimistic

“On the one hand, the evidence suggests that the acute deflation risks have disappeared and that inflation is set to pick up over the coming years. And contrary to a widespread perception, euro area economic conditions have also been steadily improving…And in the last quarter, the recovery has been broadening across sectors and across countries.” —ECB President Mario Draghi (Central Bank)

But on the other, not much has changed

“Looking ahead, risks to the euro area outlook remain tilted to the downside and relate predominantly to global factors. Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration.” —ECB President Mario Draghi (Central Bank)

Central bankers are on their way out anyways

“In many respects we’re coming to the last seconds of central bankers’ fifteen minutes of fame which is a good thing… In general it’s a much better balance than the only game in town being central banks and monetary policy. This is positive.” —Bank of England CEO Mark Carney (Central Bank)

Financials:

M&A thrives in loose regulatory environments

“There’s a feeling that you can achieve the goals you set out that the government will not get in your way if you have a strategy to implement something and I think that’s rifling through all industries, people call it animal spirits but I think it’s the optimism that they can envision a creative way to create value and that the government might not get in their way and that’s going to motivate people to attempt and try things that will be exciting for everyone. That’s what I think is going to drive the M&A market.” —Moelis and Co CEO Ken Moelis (M&A Advisory)

Consumer:

Amazon is opening more physical stores

“Probably more advanced and further along are the Amazon Bookstores. We have three physical stores; Seattle, San Diego, and Portland right now. We see adding five more this year. So we’re still in that phase where we’re testing and learning and getting better, even on the bookstore. I would say there’s other things that are physical in nature, the pop-up stores and college pickup points that we learn from as well, and think creates a great value particularly at the college pickup points.” —Amazon CFO Brian Olsavsky (E-Commerce)

Nobody really worries about Wal-Mart anymore

“we were ignored for most of our history. Nobody paid any attention to us. And – but we continued to expand and grow and we got more and more successful, and then kind of the conventional supermarkets, they were – I think they were really pre-occupied with Walmart, and trying to be competitive with Walmart for a long time…” —Whole Foods CEO John Mackey (Grocery)

Over-the-top video packages could be at a tipping point

“it seems like we’re on the cusp of some significant growth for new entrants in the multi-channel marketplace. And what we like about them is they are mobile friendly or mobile first, their user interfaces tend to be very strong, and their pricing is priced substantially lower than the expanded basic bundle that most of the MVPDs are offering…we think that this wave that we’re seeing is really a signal of what is to come and what the future will be” —Disney CEO Bob Iger (Media)

Content creators benefit from more downstream competition

“we think that that proliferation of downstream competition is really, really healthy for content creators and for brands like ours that robust, that are differentiated, that can really deliver content that works for customers…we do believe that it can reverse some of these overall declines in subscriber trends in the total MVPD universe and have that go forward.” –21st Century Fox CEO James Murdoch (Media)

OTT hasn’t really exploded yet though

“I’d say OTT is growing at a very solid pace. It hasn’t exploded. At times people think that might happen, but that’s not taken place.” —Akamai CEO Tom Leighton (Content Delivery Network)

Technology:

China has adopted digital payments faster than anyone

“I have not, from the experience around the world, seen a single country where the adoption of digital technology is at a higher level than China. It’s extraordinary how people’s lives revolve around digital technology. And particularly impressive is the transition of almost over two years from zero credit card or anything other than cash to suddenly, in some stores, cashless payment being a majority of our sales…you go to stores in China now and regularly, you will see people paying with their cell phones in a variety of retail formats.” —Yum China CEO Micky Pant (KFC)

Healthcare:

Drug companies are pointing fingers at others for high prices

“If you look at the University of [California] Berkeley data showing that of $100 paid to an innovative drug company at list, only $63 on average makes it through to the company. That’s $37 out of the $100 are being paid to non-innovators in a system which thinks it’s paying high prices for innovation. So that’s really, that’s something that’s going to have to start to be addressed.” —Glaxo Smith Klein CEO Andrew Witty (Pharmaceuticals)

Drug distributors are taking issue with that

“any suggestion that PBMs are causing drug prices to rise is simply erroneous. We are the solution and not the problem. And that’s why both public and private payers continue to count on PBMs as indispensable partners that help to manage their drug trend.” —CVS CEO Larry Merlo (Pharmacy)

Industrials:

The best application of the internet of things is in the industrial marketplace

“So I think we’ve always believe that the industrial market is where the true strength of a IoT fits. It’s where there are very strong business models for the investments that are required in the IoT infrastructure that’s going to be put in.” —Microchip CEO Steve Sanghi (Semiconductors)

Materials, Energy:

The oil industry is optimistic that the worst is behind it

“Frankly, I’m glad 2016 is behind us…we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief. I attribute my gray hair to the many previous downturns I’ve been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful.” –National Oilwell Varco CEO Clay Williams (Oil Service Equipment)

Miscellaneous Nuggets of Wisdom:

Downturns are an opportunity to become better

“downturns are an opportunity to become better…The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet, how to improve cost per barrel, again, a necessity to survive and again invention followed. I credit the downturn of the 1980s with the inventions of measurement-while-drilling [MWD] systems, logging-while-drilling systems, top drives, rotary steerables, horizontal drilling technology, and PDC bits technologies that frankly enabled the shale revolution. It’s not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s.” –National Oilwell Varco CEO Clay Williams (Oil Service Equipment)

Full transcripts can be found at www.seekingalpha.com