2016 Year in Review

This will be our last full post for 2016, so we decided to do a year end wrap-up.  The work below draws from all of the posts that we made this year and uses quotes from management to tell the story of 2016.  Click here to join our weekly email list.

We started this year with the economy deteriorating and finished it with the second interest rate increase in ten years.  There were a lot of ups and downs along the way, but ultimately 2016 was defined by three key story-lines:  1) Brexit 2) The Presidential Election 3) Fed Policy.

The first two events were votes that shocked the world.  The stock market’s reaction to each was arguably even more shocking.  If someone had told you in January that Britain would vote to leave the EU and Donald Trump would be president,would you have ever guessed that the Dow would be poised to break 20,000?  Some people view this as a lesson in the unpredictability of markets.  I would argue that the full story just hasn’t been written yet.  These were major political changes that are likely to have enduring effects on the global economy.

In terms of Fed policy, there were two key moments during the year.  The first was in February when the stock market’s decline caused the Fed to change its outlook that it would raise rates twice in 2016.  That helped spur the market’s rebound.  The second key moment was in June.  The markets had fully recovered by then but that’s when Janet Yellen began to adopt a philosophy that “neutral rates” were going to be low for a long time.  This shift in philosophy is probably the reason that we only saw one rate increase this year.

I’m proud to point out that careful readers of our work could have picked up some great insights throughout the year not only on the economy, but also for individual companies.  The best piece of information that we published was on January 29.  We picked up two quotes from Steel Dynamics and Cliff’s Natural Resources highlighting how government policy had helped stabilize domestic steel prices.  Those two stocks were up 114% and 507% respectively from that date.  We also did a great job tracking the industrial cycle, noticing that inventories were running leaner by February.

Our best call was highlighting that “animal spirits have returned” in our July 22 post.  In that same post we also wrote that interest rates likely couldn’t stay low.  The 10 year treasury yield was at 1.56%.  Throughout the year we also highlighted management teams who argued that the end of the election would provide a catalyst for the economy, that there were a lot of people sitting in cash and in our October 21 post, we noted that tax reform was likely no matter who wins.

We did publish some red herrings, but I must say that as I went through the posts week by week I was impressed by how much we got right and how accurately we told the story of the year.  I wish that we could take credit for this, but unfortunately we can’t.  The real credit goes to the process.  We just publish what the business leaders are saying.  It’s amazing how much great information you can get when you listen for it.  Tune out the journalists, the analysts and the pundits.  CEOs and government leaders are the ones with the best information and the means to turn their opinions into reality.  As Eric Schmidt said at Google’s annual meeting: “the best way to predict the future is to invent it.”  

We spent 2016 tracking the people who are inventing the future for our readers, and we hope that you enjoyed the work.  We definitely enjoyed providing it and especially enjoyed positive feedback from our readers.  That helps keep us going, but of course feedback alone isn’t enough.  If our weekly piece helped you to navigate markets this year (particularly if an insight here made you money!), please show your support by making a donation.  If a donation is too much, keep forwarding this to your friends so that we can grow our readership. Click here to join our weekly email list.

Especially in a world that is starved for thoughtful, information rich content, we believe that we are doing something special here and hope to continue and expand on our work in 2017.  We depend on your support to do that.

Happy Holidays!

January 7

The year began with the industrial economy deteriorating

“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.” —MSC Industrial Direct CEO Erik Gershwind (Distributor)

But the consumer was still holding up

“Our holiday sales results were solid…We started off strong as we said at the third quarter announcement, but our performance continued to become stronger and stronger closer to the end of the holiday.” —Signet Jewelers CEO Mark Light (Jewelry)

January 15

Jamie Dimon emphasized that he did not see signs of recession

“We’re not forecasting a recession. We think the U.S. economy looks pretty good at this point…obviously, market turmoil we all look at it every day but I’m not sure most of the 143 million Americans look at it that much who have jobs and you have a big change in the world out there. People are getting adjusted to China slowing down…hopefully this will all settle down. It’s not the beginning of something really bad.” —JP Morgan CEO Jamie Dimon (Bank)

But a “psychological movement towards caution” was spreading as the stock market fell

“we’re seeing a little bit of a slowdown, or a psychological movement towards caution – that’s definitely happening, and that translates into maybe a little more down, in fact, and a little less robust bidding.” —First Republic Bank CEO James Herbert (Regional Bank)

January 22

Banks confirmed that the markets were overreacting

“There’s been a lot written and said over the last few weeks about the issues in the stock market. We believe there’s a lot of overreaction going on. It’s like you woke up January 2nd, all of a sudden everybody decided the world’s falling apart and we reject that. We don’t see any fundamental structural changes between the first part of December and the first part of January. The world just doesn’t happen that fast.” —BB&T CEO Kelly King (Regional Bank)”

Lower oil prices were viewed as stimulative to the economy

““in this instance, cheap oil is a net stimulative impact on U.S. growth. A WorldCom fraud was not beneficial for everybody else in the U.S. Telecom didn’t get cheaper. But fuel has gotten cheaper which is good for consumers” —Wells Fargo CFO John Shrewsberry (Bank)

January 29

Even though the markets were in turmoil, most indicators continued to look strong

“there has obviously been turmoil in the markets recently…Having said that, most indicators of the real economy at least in the US continue to look pretty strong…from our own portfolio direct indicators of consumer behavior like payment rates and purchase volume, and from leading edge credit indicators like delinquency flow rates. These indicators all look consistent…they are not giving us cause for concern.” —Capital One CEO Richard Fairbank (Bank)

Steel companies were calling out positive momentum. (Note: STLD +114%, CLF +507% since the date of these comments)

““Well, I think there’s positive momentum, generally. I’m sure Dick can speak to some of it, but the inventory overhang, there’s continued destocking there and it’s becoming balanced. It’s still relatively high, particularly in hot band. But in coated products, in coated sheet, I think it’s getting into a good position. And you speak to a seasonal uptick. I think we’re seeing that as well…On cold roll sheet and coated, I sense a tightness forming in that arena.” —Steel Dynamics CEO Mark D. Millett (Steel)

“I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China…The impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.” —Cliffs Natural Resources CEO Laurenco Goncalves (Iron Ore)

February 5

Industrial companies had been in a recession for almost a year already

“we are now basically in our fourth quarter of the recession…I see at least one more quarter, maybe another quarter.” —Emerson CEO David Farr (Industrial Components)

Inventory depletion was near its bottom (Note: XLI +25% from this date)

“I would say what my knowledge is right now, inventory levels within the channel including ourselves, our levels that, they are pretty good levels, low…I don’t see much of a downward draft on that now. I think it’s pretty well over with, probably very minor downward draft.” —Emerson Electric CEO David Farr (Industrial Components)

February 12

Business leaders continued to say that the economy was doing better than Wall Street thought

“I mean, it’s funny if you turned off the stock market, you’d go these are great days around here…in all areas tenant demand, tenant attitude deal flow…rental rates etcetera up, up and up all good…What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.” —Douglas Emmett CEO Jordan Kaplan (REIT)

But risk aversion was back

“Risk aversion is back after a five-year hiatus” —Oaktree Chairman Howard Marks (Asset Management)

And capital markets were shutting down

“Look, the financing market is very difficult. I think in certain industries it is almost completely shut down in the non-investment grade market and I think the lower end, triple C lower single B rating market is very difficult to access than the public markets.” —Moelis and Co CEO Ken Moelis (Investment Bank)

However, Janet Yellen told Congress that she did not think the Fed needed to act

“We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.” —Federal Reserve Chair Janet Yellen (Central Bank)

February 19

The Fed did not believe that financial conditions reflected the economy

“a number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments.” —FOMC Minutes

But also signaled that they would take a wait-and-see approach to further tightening

“they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook…Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent” —FOMC Minutes

February 26

By late February many were viewing the stock market decline as a buying opportunity

“I go back to what Buffett says…he’s nervous when people are greedy, and he’s greedy when people are nervous. Well, right now people are nervous.” —Fluor CEO David Seaton (Engineering and Construction)

March 4

Business leaders continued with a relatively positive tone into March

“Business, I would say, is a little softer in many places, than people than I anticipated say four or five months ago…But, you know…overall the economy’s just kept movin’ up around 2%.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)

As long as interest rates stayed low, stock prices could continue to go up 

“It does have the effect of making all assets more valuable. I mean, interest rates are like gravity in valuations. I mean, if interest rates are nothing, you know, values can be almost infinite.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)

But election risk began to come into focus too.  Trump would sink the country into a prolonged recession.

“If Donald Trump’s plans were ever implemented, the country would sink into a prolonged recession…His proposed 35% tariff-like penalties would instigate a trade war that would raise prices for consumers, kill export jobs, and lead entrepreneurs and businesses to flee America. His tax plan, in combination with his refusal to reform entitlements and to honestly address spending would balloon the deficit and the national debt. So even as Donald Trump has offered very few specific economic plans, what little he has said is enough to know that he would be very bad for American workers and for American families.” —Mitt Romney (Son of former American Motors President, George Romney)

March 11

The consumer kept on spending despite stock market volatility

“In the US, park attendance, advance bookings all very strong, the advertising marketplace is much stronger than we expected it would be…we gave some numbers that were certainly indicative of either a consumer or an economy that was stronger than a lot of people had considered. So, we’re feeling actually fairly bullish about our business prospects in this market” —Disney CEO Bob Iger (Magic Kingdom)

March 18

The Fed decided not to raise rates in March even though it believed that risks had diminished

“let me say that, in recent weeks, I think the Committee certainly thinks that risks to the outlook have diminished…Our decision to keep this accommodative policy stance reflects both our assessment of the economic outlook and the risks associated with that outlook.” —Federal Reserve Chair Janet Yellen (Central Bank)

It began to feel like rates would stay low forever

“We believe that when the Fed started quantitative easing, it entered Hotel California. As the classic Eagles song concludes, “you can check out any time you like, but you can never leave.”” —Alleghany CEO Weston Hicks (Insurance)

March 25

By the end of March the market was getting back on track

“There’s nothing that would suggest that we’re imminently ready to go into a recession here in the U.S…I think the market is starting to recognize as well. So, things seem to be getting back on track in terms of even a market perception. So, I think that everything is being set up of for the type of year that we had thought it would be, in terms of the U.S.” —Ford CFO Bob Shanks (Automobiles)

Businesses were seeing a “resurgence of confidence”

“we saw some signs of a slowing down in our industry over the last several quarters, particularly as we got into December and January, but now we are feeling some resurgence of confidence, at least a flattening out of that trend. So hopefully that was a moment and hopefully we’ll see some growth develop in the quarters to come.” —Steelcase CEO James Keane (Office Furniture)

April 15

Still, growth was relatively uninspiring

“I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth.” —CSX CFO Frank Lonegro (Railroad)

“I think we still feel we’re…in the same low growth…environment that we’ve been operating in for a couple of years, not enough to make it feel like rates are going to move as a result of it but not enough to feel like we’re stalling either.” —Wells Fargo CFO John Shrewsberry (Bank)

“to me the outlook is less about any sort of explosive growth. The word I would use is potential for stabilization. So things have been at a low level.” —MSC Industrial CEO Erik Gershwind (Industrial Distributor)

April 22

Caution abated, but the environment still felt fragile

“many of the factors that were impacting the market in the first quarter…seem to have abated and although the market feels a little fragile from all that, it feels like – for the most part, that’s behind us. But we’ll see how the year progresses.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

April 28

The oil industry was experiencing a “full scale cash crisis”

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels…our industry is now in the deepest financial crisis on record…This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns” —Schlumberger CEO Paal Kibsgaard (Oil Service)

The market was focused on Brexit and a possible July Fed hike

“I think that the market is now pricing, that the Fed go probably in July and there is a high probability of that, that is being priced in the market and the market is not pricing a lot about the Brexit, so a negative event could really produce some correction in the market.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

May 6

The economy was not rebounding as much as hoped

“The one surprise we had is in the last couple months we’ve seen the U.S. spending rate come back down again, which bothers us…I feel a little bit more worried about sales because of the U.S. marketplace in particular…this slow to start turning that nose up really bothers me.” —Emerson Electric CEO David Farr (Industrial Components)

May 13

Retailers reported poor results

“All of us have been reading the stream of negative news stories about various retailers over the past several weeks. Clearly, our industry is in something of a rough patch. We know we are not alone. But the consumer seems to be doing okay…We’re frankly scratching our heads. We see the same economic data you all see and it would point to a customer that would be spending more.” –Macy’s CFO Karen Hoguet (Mall Retailing)

May 20

But it appeared that it was an industry specific problem

“Obviously, the retail industry is going through a rather painful period of rationalization. Rarely have I read so many negative articles about our industry. Unlike much of what has been written, I don’t believe the consumer is the problem. I think our customer is in relatively good shape.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

May 27

Mastercard confirmed that consumer spending was still healthy

“I don’t think we see anything different really than what we said back when we had our last earnings call in our first quarter earnings call in April, right, I guess. So from a U.S. perspective…We don’t see that the consumer had a step-down in spend.” —Mastercard CFO Martina Hund-Mejean (Payments)

Brazil was the only place where the sky was falling

“I travel around the world a lot with our customers and I have seen nothing personally or heard of on my team that makes me think the sky is falling again anywhere but Brazil.” —Linkedin Head of Sales Mike Gamson (Social Network)

June 3

Capital markets began to reopen by June

“Capital markets have started to re-open a bit after a period of substantially lower activity.” —Goldman Sachs COO Gary Cohn (Investment Bank)

“I think there is some signs of recovery, if I look at the — month of IPO in the second quarter is larger than the total amount of IPOs in the whole first quarter.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

June 10

But Janet Yellen was still shaken

“Over the past few months, financial conditions have recovered significantly…Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.” —Federal Reserve Chair Janet Yellen (Central Bank)

June 17

In mid June Yellen capitulated on long term interest rates

“I’ve often…talked about headwinds that reflect lingering effects of the financial crisis…I think many of us expect that these headwinds would gradually diminish overtime and that’s a reason why you see the upward path for rates. But there are also more long lasting or persistent factors that may be at work that are holding down the longer-run level of neutral rates. For example, slow productivity growth…and we have an aging, aging societies in many parts of the world that could depress this neutral rate.” —Federal Reserve Chair Janet Yellen (Central Bank)

She started talking more about a low “neutral rate” and a new normal

“The sense that maybe more of what’s causing this neutral rate to be low are factors that are not going to be rapidly disappearing but will be part of the new normal.” —Federal Reserve Chair Janet Yellen (Central Bank)

Meanwhile, Silicon Valley was entering a “post unicorn” era

“I think we’re entering the post unicorn era and what I mean by that is when the market corrects, you have a shift from growth to all costs to a back to the basics and a focus on profitability. The scorecard changes.” —Dropbox CEO Drew Houston (Cloud Storage)

June 22

Yellen struggled with the economy’s long term prospects throughout June

“although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.” —Federal Reserve Chair Janet Yellen (Central Bank)

July 4

We were travelling over July 4th so we compiled presidential quotes to help celebrate

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” –Theodore Roosevelt, 26th President of the United States

July 8

We came back to a world in which Britain had Brexited.

We happened to be travelling in London.  Here was our view of the scene:

“For what it’s worth, I attended a wedding outside of London last week and the political-mood was dour. The wedding was between two Oxford alums, so the guests were mostly well educated millennials. Almost everyone who gave a toast cited the “uncertain times” that we live in. The tone of the conversations that I had were pretty similar to what one might expect to hear in the US if Trump were to be elected in November (disbelief and distress). One cab driver that I had said that he might as well “light himself on fire” because “it would be less painful than the slow death his business will suffer” as a result of the vote. Still, hopefully any British readers can take solace in the fact that Britain has seen much worse times than these. Everything will turn out ok. It may just be a bit of a painful transition.”

People realized pretty quickly that Brexit was a process, not an event

“The situation is very volatile at this time. For sure, the period of uncertainty will be quite long whatever happens because even if the U.K. will leave the Euro, it cannot happen overnight, it will take at least two years. And the consequence of it will be much longer than two years. So, I believe that once the emotional impact is gone, things will settle down and we will have an idea of what is happening, but for now really — it’s really too early, too soon we have seen in the stores days — very good days, bad. So in a few months probably we will be able to say something.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

July 15

Brexit would likely lower British GDP but it was primarily a source of uncertainty

“So number one, we do think [Brexit] will reduce the GDP of the U.K. and the EU a little bit…Number two, we know that it is going to create uncertainty for an extended time period…We are hoping that political leaders are very sensible…I am not really worried about it. It would be nice if it doesn’t create a huge turmoil. So I am hoping the EU is sensible” —JP Morgan CEO Jamie Dimon (Bank)

July 22

The markets did not wait for resolution.  They took off like a rocket.

“I think you could have sat there those couple days after Brexit and if you were forecasting the next month of activity, I think you might have been surprised if we could have known in advance that equity markets would rebound so strongly, there would be a rebound in currencies, and the world would sort of normalize” —Goldman Sachs CFO Harvey Schwartz (Bank)

Animal spirits had returned

“the animal spirits are back in North America” —Halliburton CEO Dave Lesar (Oil Service)

Had Central Bankers had finally succeeded in breaking the global depression psychology? 

“The announced readiness of central banks to provide liquidity, if needed, and our accommodative monetary policy measures, as well as a robust regulatory and supervisory framework, have all helped to keep market stress contained.” —ECB President Mario Draghi (Central Bank)

We surmised that If this is true then the yield curve cannot possibly stay where it is. (10 Yr Treasury Yield: 1.56%)

“I personally think the flat rate scenario that everybody projecting is overstated. The underlying strength of our economy is not great, but it’s good. Fed, I believe, clearly knows they need to raise rates, and I think they will the minute they see a window, which could still easily happen at least one rate increase towards the fall.” —BB&T CEO Kelly King (Bank)

July 29

The reaction of markets to Brexit left everyone pleasantly surprised

“I think we were all pleasantly surprised…by how the markets have performed post-Brexit…I think we’ve probably…settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote.” —Lazard CEO Ken Jacobs (Investment Bank)

Companies saw very little impact

“As I said, we have no strong signs of Brexit so far.” —Volvo CEO Martin Lundstedt (Automobiles)

In fact, many companies were benefiting from a weaker pound

“With the recent weakening of the pound, exchange is forecasted to be a significant tailwind in fiscal 17.” —Diageo CFO Kathryn Mikels (Beverage)

August 5

Shortly after the dust settled we began to focus on our own elections

“going into the Presidential election, there’s a lot of uncertainty, there seems to be a lot of uncertainty around the world…So, I’m a little bit with you, I actually don’t think it’s going to be a huge finish to the year…I do look at the election as something that’s holding activity back quite a bit” —Ares Capital CEO Kipp deVeer (Business Development Company)

Election uncertainty kept everyone cautious

“we are look at a marketplace right now where people are being very cautious, they are being very careful with what they’re spending money on and they are very uncertain relative to what’s going on around the world from a political standpoint relative to just a business environment standpoint and where things are heading.” —Emerson Electric CEO David Farr (Industrial Components)

August 12

In mid August it looked like Clinton would almost certainly win

“We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election.” —Third Point Reinsurance Chairman Dan Loeb (Hedge Fund/Insurance)

The end of the election would be a positive catalyst for the economy

“Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however, it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and honestly probably for a lot of other markets as well, so that I would look for.” —Sothebys CEO Thomas Smith (Art Dealer)

August 18

In late August the industrial economy appeared to pick up

“around July…I think many [customers] had preventative maintenance productivity-type projects going…Now, as they’re back up and running…we see that brake fix demand coming through. And then…for those that would have planned downtimes…towards the end of the calendar year, they would be slating projects that would positively impact their uptime and their productivity.” —Applied Industrial Technologies CEO Neil Schrimsher (Distributor)

We also began to notice companies’ pricing power improving

“the pricing environment remains challenging…We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies.” —Nestle EVP François Roger (Packaged Food)

August 26

The Fed began to feel more confident that inflation was increasing

” Employment has increased impressively over the past six years since its low point in early 2010…core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

September 8

And began to signal that it could raise rates in September

“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting.” —Atlanta Fed President Dennis Lockhart (Central Bank)

Even the oil industry was on the road to recovery

“I think the headline reads on the road to recovery. You have to look hard, but if you look at the headline, you’ll see on the road to recovery. But at the same time, I would describe this as sorting through the wreckage of the worst downturn that we’ve ever seen. We see the after-effects just about everywhere that we look.” —Halliburton President Jeff Miller (Oil Service)

September 16

But less than a week later Fed Governor Brainard squashed expectations for a September hike

“In today’s new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness. This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” —Fed Governor Lael Brainard (Central Bank)

September 23

Lo and behold the Fed didn’t raise rates

“We judged that the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward our objectives” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen relied on her “new normal” assessment to justify staying put

“we’re struggling with difficult set of issues about what is the new normal in this economy and in the global economy more generally which explains why we keep revising down the rate path.” —Federal Reserve Chair Janet Yellen (Central Bank)

She again cited a low neutral rate

“We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That’s based on our view that the neutral nominal federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–is currently quite low by historical standard” —Federal Reserve Chair Janet Yellen (Central Bank)

Most companies continued to see an improving outlook though

“The good news for the Americas is that we had stronger orders in August and those have continued through the first three weeks of September…our backlog of high confidence opportunities in the Americas has strengthened for the second half of the year…we’ve seen recessions before in our industry and they are characterized by significant and sustained drops in order patterns. And that’s not really what we’re seeing this time.” —Steelcase CEO James Keane (Office Furniture)

September 30

The economy was getting closer to full employment

“businesses are getting closer to full employment and we are seeing the checks per client slow, but we expect that frankly for the last couple of years as people came back from recession.” —Paychex CEO Martin Mucci (Payroll Processing)

And inventory destocking was complete

“I think largely the destocking has occurred. And I think what will happen is the dealers and the larger distributors wind up having more line of sight to more demand. They are going to bring more inventory in…So, I really think as we move through ‘17, we are going to see some improvement in that general industrial market.” —Actuant CEO Randy Baker (Industrial Components)

October 7

Central Bankers continued to argue that they were not to blame for low rates

“Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis…the level to which real interest rates can eventually return when the economy strengthens is not determined by monetary policy. Instead, it depends on the economy’s long-term growth prospects. Productivity and demographics play a decisive role in this, and the development of these factors has not been favourable in Europe in recent years.” —ECB President Mario Draghi (Central Bank)

But voters were running out of patience

“the impatience with economic stagnation, especially among middle and lower income earners, is leading to dangerous populism and nationalism.” —Bridgewater CEO Ray Dalio (Asset Management)

October 13

We continued to see signs that pricing power was firming

”pricing has been low or negative for the past few years as a result of the benign commodity cost environment…As commodities have stabilized and start to turn up, we are seeing a return to more normal price inflation or in the case of Europe reduce deflation in some markets.” —Unilever CFO Graeme Pitkethly (Consumer products)

Meanwhile the Fed continued to ponder academic theory on neutral rates

“Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest–or r*–including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth.” —FOMC Meeting Minutes (Central Bank)

October 21

There was a lot of anxiety leading up to the election

“I saw report a couple of days ago that 60%, or slightly less, but about 60% of the market it is really, really anxious about the elections. And I suppose we quite understand that. And so I think when all this subsides, however it goes, it will be less uncertainty and less anxiety, I think that will in still a bit more confidence then people will be a little bit more willing to invest, and make acquisitions and borrow money.” —BB&TCEO Kelly King (Bank)

And there were a lot of people sitting with cash

” people are being a lot more conservative than they have been in the past. They’re sitting on a lot of cash. They’re in a good financial position and as things begin to pick up…our customers will begin to invest more in the future as well as some of the new products and services.” —Comerica CEO Ralph Babb (Bank)

Investors were expecting a greater emphasis on fiscal policy and tax reform no matter who won

“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth.” —Blackrock CEO Larry Fink (Asset Management)

“I can tell you that I visit in Washington often and speak with members of the House Ways and Means Committee and the Senate Finance Committee and the tax staffs are busily working and working very collaboratively with U.S. multinationals on an appropriate tax reform package. We think there is more bipartisan support now than there has been in the past…we think that overall the climate for international tax reform post the election, quite frankly, is more positive than it’s been in the last year or so.” —Johnson and Johnson CFO Dominic Caruso (Healthcare)

However, one President was expected to bring more change than the other

“I also think a new President which is undoubtedly going to happen, has a slight variation one way or the other. I won’t talk about which one I think does which, but one gets a little more uncertain and causes us to stand back a little bit and wait to see how things settle. The other one is a lot more of the same and probably, whether we like it or not, is something we can manage because it’s the devil we know.” —US Bank CEO Richard Davis (Bank)

October 28

The economy definitely slowed in the weeks leading up to the election

“Yes. I’d just add that I spend a lot of time talking to executives of other companies and many of our clients and the elephant in the room probably is the election. Nobody really knows exactly what the impact is. They just know it is much different.” —Robert Half (Temp Staffing)

November 4

Businesses were waiting to see what would happen

“from many of our customers, we’re hearing wait-and-see and that’s pretty typical in an election year. I mean, that’s the one new thing I’d call out over the last quarter and it’s typical that it builds as you get close to November. So, I don’t make much of it either way. I don’t think any of our customers have a sense of what it’s going to mean for after. The only thing I think it means is that, we always say our visibility is low, it’s probably even a bit lower just because of the cautious perspective that many of our customers have.” —MSC Industrial Direct(Industrial Distributor)

Here’s what we had to say before the election:

I know that there’s a large contingent of investors who believe that the President doesn’t matter to markets, but if you study history, you know that nothing could be further from the truth.  Almost all the significant turning points in market history have coincided with policy changes that were actively or passively set by POTUS.

November 11

Then, for the second time in 2016, there was a massive electoral surprise

“Last night, like so many of you, I watched the election returns with family and friends. And like so many of our fellow Americans – both Democrats and Republicans – I am stunned.” —Starbucks CEO Howard Schultz (Coffee)

A frustrated electorate wanted change

“We are going through a period of profound political and economic change around the world, and American citizens showed that deep desire for change in voting to elect Donald Trump as the 45th President of the United States. We have heard through democratic processes in both Europe and the United States the frustration that so many people have with the lack of economic opportunity and the challenges they face. We need to listen to those voices.” —JP Morgan CEO Jamie Dimon (Bank)

The result was expected to cause panic, but instead the market rallied

“We are definitely prepared to intervene in an emergency. What that will really look like, we must wait and see.” —ECB Governing Council member Ewald Nowotny (Central Bank)

Buying pressure had built up before the election

“the summer was a little bit of a pattern of the doldrums. Coming out of the summer there was a little bit more confidence…And there is a sense in the art market from lots and lots of consigners that we’ve had a long sort of not very exciting patch during the art market, and that they are looking for an opportunity to buy.” —Sotheby’s CEO Thomas Smith (Art Dealer)

Certainty provided a catalyst

“I think our experience over a long period of time is things that are distracting like the election, once there’s an outcome, certainty is a good thing. So from a positive perspective, having certainty on that is probably a good thing looking into the holiday.” —Kohls CEO Kevin Mansell (Apparel)

Here were our thoughts:

For the past eight years we have obsessed over the effects of ZIRP, NIRP and QE. Those days are now over…For now, most are expecting lower taxes, less regulation and infrastructure spending. However, while we can speculate about what is to come, it will simply take time for a clearer picture to emerge. The true framework of a Trump Presidency wont be discernible for at least several months. We’ll help chart that path as it emerges.

November 18

The end of the election unleashed a huge amount of pent up demand

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)

December 2

The year ended with a lot of positive hype

“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)

But it’s all speculation at this point

“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)

December 9

The stock market has continued its remarkable run

“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)

And that has helped boost business sentiment.  Companies are ready to get down to business.

“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

Donald Trump sounds pleased

“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)

December 17

Trump loves the bounce

“I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue” —President Elect Donald Trump (Government)

But will he love Yellen? She doesn’t want to engage him but probably disagrees with his policies.

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy.” —Federal Reserve Chair Janet Yellen (Central Bank)

Her #1 concern is protecting the Fed’s independence

“I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on.” —Federal Reserve Chair Janet Yellen (Central Bank)

In 2017 Trump will take office.  Everyone is focusing on the “carrot” of his policies, but there will be a “stick” too

“we’re being stripped of our jobs…we’ve got to stop it… we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy…But when a company wants to move to Mexico…or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax…not going to happen that way. And the way you stop it is by imposing a tax…Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all…You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.” —President Elect Donald Trump (Government)

Company Notes Digest 12.17.16

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This week’s piece is a short one, all macro.  We have a larger year end piece in conjunction with this one.

The Macro Outlook:

The Fed raised by 1/4 point

“Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen said that they remain accommodative

“And this we said in our statement, policy remains accommodative. The degree of accommodation I would characterize as moderate. As I’ve emphasized and said in the statement, we currently judge the neutral level of the federal fund’s rate to be pretty low. So there is some accommodation.” —Federal Reserve Chair Janet Yellen (Central Bank)

She does not believe that the Fed is behind the curve

“inflation is still operating below our objective. So, I do not judge that we are behind the curve. I’ve– My judgment is that we’re in a good path to reaching our objectives. But of course the outlook is uncertain.” —Federal Reserve Chair Janet Yellen (Central Bank)

There were a lot of questions about Trump, but Yellen was evasive

“I’m not going to offer the incoming president advice about how to conduct himself in policy.” —Federal Reserve Chair Janet Yellen (Central Bank)

“…But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy” —Federal Reserve Chair Janet Yellen (Central Bank)

“I don’t want to weigh in. I don’t intend to weigh in. I haven’t weighed in on either fiscal policy specifics of evaluating policies. I’m not going to weigh in either on the details of particular trade policies.” —Federal Reserve Chair Janet Yellen (Central Bank)

She did question whether more fiscal stimulus was needed

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.” —Federal Reserve Chair Janet Yellen (Central Bank)

Her top concern is protecting the Fed’s independence

“I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on.” —Federal Reserve Chair Janet Yellen (Central Bank)

The Fed shares everyone’s uncertainty

“I really can’t tell you what the Fed’s response would be to any policy changes that are put into effect. I wouldn’t want to speculate until I– we’re more certain of the details and how they would affect the likely course of the economy.” —Federal Reserve Chair Janet Yellen (Central Bank)

“we’re operating under a cloud of uncertainty at the moment and we have time to wait to see what changes occur and to factor those into our decision-making as we gain greater clarity.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen was also evasive about the stock market

“So, you know, I really don’t want to comment on the level of stock prices. They may have been boosted by expectations about tax policy, possible cuts in corporate tax rates that have been much discussed, or by expectations about growth, possible reductions and downside risk to the economy…But I don’t– I don’t want to offer a view as to whether they’re appropriate” —Federal Reserve Chair Janet Yellen (Central Bank)

Donald Trump loves the stock market’s bounce though

“So I want to add that I’m here to help you folks do well. And you’re doing well right now and I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue” —President Elect Donald Trump (Government)

Everyone is focusing on the “carrot” of Trump’s policies, but there will be a “stick” too

“we’re being stripped of our jobs…we’ve got to stop it… we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy…But when a company wants to move to Mexico…or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax…not going to happen that way. And the way you stop it is by imposing a tax…Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all…You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.” —President Elect Donald Trump (Government)

The US doesn’t operate in a vacuum though

“Because we fly the American flag, because we are domiciled in the United States, we are a beneficiary or victim of America’s foreign policy and position in the world. And therefore, wherever we go, the first thing they talk to us is about the United States. What I worry about is that there might be discrimination against American companies overseas, if there is protectionism in the United States” —Pepsi CEO Indra Nooyi (Beverages)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 12.8.16

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This week’s post has a slightly different format than usual because I spent this week at the LD Micro conference in LA meeting with the management teams of a few dozen Microcap companies. The conference is hosted by Chris Lahiji and his team. They always do a great job of putting together under-followed and under-loved companies with market caps less than $100m. The Macro part of the post still comes from the usual large cap companies, but everything else in the post draws from our meetings with the micro-caps.

It is always eye opening to meet with these small companies. The CEOs are scrappy and tenacious–always looking to sell investors on a dream. There is deep skepticism that most of these companies will survive and the valuations reflect that. There have also been structural shifts in the brokerage community that has made it particularly hard for these companies to raise money. That decreases the chance of survival, but also may create opportunities for savvy investors. Still, I’ll make the usual disclaimer that micro-cap stocks are highly speculative, so invest at your own risk.

The Macro Outlook:

Obviously the stock market has done unbelievably well since the election

“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)

Even Italian elections couldn’t shake the market’s confidence

“I don’t think there is reason to talk about a euro crisis. The Italians have a lot of experience dealing with such situations and that’s why I’m not concerned.” —German finance minister Wolfgang Schaeuble (Government)

Donald Trump sounds pleased

“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)

The business community is certainly more optimistic

“To start the third quarter up through the date of the election, global November new business remained slow. But after the date of the election, we saw new business ramp up in both North America and in Europe…November, in Europe, we had our best month of new business in probably two years. Asia was also incredibly strong…I would say that the conversation is certainly more optimistic than it was in May and June, no doubt about that. Now, we’ll see if that turns into increasing levels of business in early calendar 2017.” —Korn Ferry CEO/CFO (Executive Search)

Companies are getting down to business

“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

The consumer is healthy

“We see a fairly healthy consumer. And so if you look at macroeconomic data, home prices, the consumer balance sheet, debt service ratios, the number of people working, wages going up, etcetera, we see that pretty healthy. We see a mirror of that inside JPMorgan. So we have reporting quarter-after-quarter, credit card sales, deposits, new household accounts, all those types things are doing quite well and we expect that to continue.” —JP Morgan CEO Jamie Dimon (Bank)

Millenials are buying houses

“With the millennial generation now entering their thirties and forming families, we are starting to benefit from the desire for home ownership from the affluent leading edge of this huge demographic wave. In fiscal year 2016, approximately 22% of our settlements included one primary buyer 35 years of age or under.” —Toll Brothers CEO Douglas Yearley (Homebuilder)

But other consumer spending may still be a little choppy

“the four weeks of November was choppy frankly, particularly the week of the election. I think it was worse than a snowstorm in terms of nobody wanting to go out and buy stuff and that’s what I read about other retailers as well. And again, over the last few months it’s been a little choppy a little more in November and a little weaker and so at least, what we can tell you at this point is the first couple of weeks have been okay. And again, traffic has seemed to have stabilized until something changes there, who knows” —Costco CFO Richard Galanti (Retail)

Commercial Real Estate is late in its cycle

“The one area where you look at and you might say, oh my god, there is a little bit of issue, there is commercial real estate…We are cautious. It’s probably getting later in the cycle for some of that. And we don’t do what I would consider we don’t do now and we have never done the riskiest type of lending. So we have always been cautious in real estate.” —JP Morgan CEO Jamie Dimon (Bank)

[Note: now entering microcap land]

And markets can get ahead of themselves

Sometimes market excitement gets beyond clinical reality…(but that’s not the case with us!) —Vistagen Therapeutics (Pharma/Biotech)

International:

A Chinese steel distributor had interesting thoughts on China, but asked to remain anonymous

The Chinese real estate market will eventually have to correct

The Chinese government needs to sustain the real estate market but they cannot. Real estate prices in Shanghai are now higher than they are in New York City. That is unsustainable. Developments in 3rd and 4th tier cities are sitting empty. That is unsustainable. —Chinese Steel Distributor

Xi Jinping is looking to increase his power

Xi Jinping is a powerful guy, he could be as powerful as Donald Trump. He’s going to consolidate his government team. He already has been…The Chinese people have a love hate relationship with Xi. They love that he cleaned up corruption big time, but hate that because of it spending from corrupt officials got turned down big time. —Chinese Steel Distributor

Business leaders expect the RMB to be devalued by at least 25%

The Chinese government needs to deal with the currency situation. The currency will be depreciated. The government tried to put controls on the currency but they really couldn’t stop capital from leaving the country. The Central Bank did not really support the currency. Most people expect that the RMB will depreciate by at least 25% and so they are trying to get their capital out of the country. Public companies that are listed in the US are one way to do that. If you buy shares of a local subsidiary with shares traded in North America, you can get money out of the country —Chinese Steel Distributor

Financials:

The world has changed for microcap companies

The market is so different. Guys like you are so different than they were 20 years ago. The OTC, so many investors don’t want to invest purely because we’re OTC. Investors wont invest like they would before. You can’t even give your stock certificate to most brokers if you’re OTC. Investors themselves are far less willing to put money into a deal that is pre-profitable. —Pressure Biosciences (Laboratory Instruments)

Consumer:

These days the sexy growth companies generally aren’t public

Who is to say that there aren’t molecules out there that can be engineered that are more efficient at powering our bodies than today’s natural foods? —Soylent VP Brandon Mackie (Meal Replacement Drinks)

Microcap companies are swinging for their own fences

Cannabis companies have different strategies on how to cash in on the “green rush”

Our strategy was to design and build greenhouses to grow cannabis and rent them to licensed growers, but not obtain a license ourselves. We made the decision not to cross the “green line.” —Americann (Greenhouse Developers)

I had a partner who made a lot of money in a buyout who put all his money into gold in 1995. You know how much money he made on that? I always remembered that and said I wouldn’t let that pass by. When everything started happening with pot I said to myself gold rush, green rush. I’m in. I don’t know how to grow but I do know how to make mobile games. —First Harvest Corp (Mobile Gaming)

Technology:

Many companies were birthed in different market environments but are still standing

UGE was born in the “inconvenient truth” years to install solar on commercial buildings

“In 2007 solar installation costs were $8-$10 per watt. Now it’s $1-$2 per watt depending on the market. Panels were $4 per watt back then compared to less than $0.40 now.” —UGE International (Solar Panel Installation)

Some telecom companies are still living off capital raised in the late 90s

“I call it the original sin of telecom. In the late 90s the industry became so overcapitalized and so many smart people came into the industry, attracted by salaries and government incentives. There’s still enough capital around to pay salaries, but it’s not what people expected. You’d be surprised how many PhDs are working in customer service today.” —MRV Communications (Internet Infrastructure)

Healthcare:

Microcap biotech companies raise lots of money for expensive trials

“The cost per patient for a trial in cancer is about $50-100k per patient. Cardio vascular is cheaper–$15-20k per patient, maybe $40k. It will cost you $1 million the minute you decide you want to do a clinical trial.” —Gemphire Therapeutics (Anti-cholesterol drug)

The companies are all trying to prove that their molecules can hit their “end points”

“25% of Americans have a diagnosed mental disorder. 16% will go through a major depressive disorder in their lifetime” —MYND Analytics (Pyschiatric Testing)

“For years addiction was treated as a personal failure. Today addiction is treated as a disease that can be compared to diabetes. It is not curable, it has to be managed for the time of a person’s life.” —BioCorRX (Anti-Addiction Drug Delivery)

“The leading cause of birth defects in the United States is CMV, higher than down syndrome, but not many people know about it” —VBI Vaccines (CMV Vaccine)

“I hope that the incoming administration lives up to its promise to help vets return to civilian life” —Tonix Pharmaceuticals (PTSD drug)

Industrials:

There aren’t as many small manufacturing companies as there would have been in past eras, but that could change

“The Trump thing was nothing more than something that was happening anyways. Manufacturing was coming back anyways. Today the labor cost advantage in China is being offset by the benefits of local production for US markets” —Uniroyal Global CEO Howard Curd (Synthetic Leather Manufacturer)

Materials, Energy:

There are lots of junior mining companies looking to finance exploration projects

“In mining, you have operations guys and project guys. Project guys want a crisis and if they don’t have one they’ll create one.” —Uranium Resources (Uranium Miner)

Capital is scarce for pretty much everyone in the space

“Public capital markets have been closed to shipping for at least 2 years” —PYXIS Tankers (Product Tankers)

Miscellaneous Nuggets of Wisdom:

If you want to succeed with limited capital, the key is to focus

“The best way to succeed in business is maniacal focus, not a shotgun approach” —Pure Bio-science CEO Hank Lambert

Your employees depend on your success

“At Westpoint they teach you a concept of no excuse. There’s no excuse for not taking your hill because troops’ lives depend on you doing what you say you’re going to do. In business it’s not lives that depend on you, but it is livelihoods” —New Age Beverages CEO Brent Willis

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 12.2.16

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 Trump transition is still the most important story of this week and is likely to stay that way for at least the next few months. The policies set by the administration will have a big impact on the path of the economic cycle. Those policies won’t be totally clear until after inauguration; however, elements of the policies are starting to emerge. Trump’s most important economic cabinet members were chosen and emphasized pro-business policies in interviews. That has investors excited, but interest rates are also rising with inflation expectations. If interest rates normalize there will be big shifts in capital values.

The Macro Outlook:

There’s a lot of positive hype right now

“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)

But it’s all speculation at this point

“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)

There’s optimism but no orders yet

“As we talk to our mining customers, we clearly see that they have some increased optimism certainly with commodity prices improving…Yet this has not yet translated into any tangible machine sale increases for Caterpillar.” —Caterpillar Resources Industries President Denise Johnson (Construction Equipment)

Change could come more slowly than expected

“I think we will make the assumption that 2017 with regard to patients and how they achieve their healthcare is probably stable. I don’t think you could disrupt it from where it is now without massively, without causing a massive amount of unhappiness across the US population…if you are going to unwind healthcare, it has to be a couple of year process of getting things ready to transition people to something new and I just don’t see how it could happen in 2017.” —Gilead CEO John Milligan (Biotech)

Challenged industries will stay challenged for the time being

“We expect challenging market conditions to continue into fiscal year 2017. Weak growth in developed markets, geopolitical issues and uncertain commodity prices will continue to impact some of our end-markets.” —Jacobs Engineering CEO Steve Demetriou (Construction)

“I think there is a basis to become very positive about the market after 2018, 2019. I think we will see a very strong market after that. But for 2017, I don’t see the reason to be that positive.” —Star Bulk CEO Petros Pappas (Dry Bulk Shipping)

“As expected, deflation persisted during the third quarter. And as we’ve said before, transition periods create a difficult operating environment. This is the third time we’ve had deflation in 30 years. And in previous instances, deflation lasted from three to five quarters in a row. We’re in the middle of the cycle right now and it’s not fun.” —Kroger CEO Rodney McMullen (Grocery)

But we do have some good things going for us

“the customer is still in good shape, consumer confidence is strong, interest rates, although a risk of increasing are still at relatively very low levels…you know these are all positive–gas prices still relatively really low that’s all positive for the industry” —Ford VP Mark LaNeve (Automobiles)

Tax reform looks like it will be favorable to corporations

“This will be the largest tax change since Reagan. We’ve talked about this during the campaign. Wilbur and I have worked very closely together on the campaign. We’re going to cut corporate taxes, which will bring huge amounts of jobs back to the United States…We’re going to get to 15 percent and bring a lot of cash back into the U.S.” —Treasury Secretary Designate Steve Mnuchin (Government)

The administration will likely try to keep rates low while it restructures the debt

“I think interest rates are going to stay relatively low for the next couple of years. We’re in a period time of low interest rates. I think we’ll stay there. And interest rates have come up a little bit, which I think makes sense. I think we’re going to be looking at the Treasury all different types of opportunities. We will look at potentially extending the maturity of the debt because eventually we are going to have higher interest rates, and that is something this country is going to need to deal with.” —Treasury Secretary Designate Steve Mnuchin (Government)

International:

Tariffs would be a last resort, not a first step

“Everybody talks about tariffs as the first thing. Tariffs are the last thing. Tariffs are part of the negotiation. The real trick is going to be increase American exports. Get rid of some of the tariff and non-tariff barriers to American exports” —Commerce Secretary Designate Wilbur Ross (Government)

Many companies may have already restructured to offset a strong dollar

“I think, that we sort of figured out probably three or four years ago is, we were probably in a strengthening dollar environment for the foreseeable future. And that was after 10 years, where currency was the wind that most businesses back. And three or four years ago that changed and it changed hard. So we have completely internalized that we have to have a cost structure that allows us to win in a challenging foreign exchange environment.” —Hewlett Packard Enterprise CEO Meg Whitman (Enterprise Tech)

Draghi: the European recovery is “robust”

“The recovery – albeit modest – is robust. We are growing and inflation is improving. Europe’s GDP has returned to its pre-crisis level, although this has taken seven and a half years…The main drivers behind this recovery have been low oil prices and our monetary policy. This recovery is stronger than past ones because it is based on the increase in consumption and domestic demand, and not only on exports.” —ECB President Mario Draghi (Central Bank)

Financials:

The administration wants banks to lend

“the number one problem with the Volcker Rule is it’s too complicated and people don’t know how to interpret it. So we’re going to look at what to do with it, as we are with all of Dodd-Frank. The number one priority is going to be make sure that banks lend.” —Treasury Secretary Designate Steve Mnuchin (Government)

Mnuchin sent mixed messages on Yellen

“You know, look. I think she’s done a good job at the Fed…I’m not going to comment on whether she should or she shouldn’t [serve out her term]…But I will say we do have two [Fed] governor spots to fill, and that will be high on the priority list” —Treasury Secretary Designate Steve Mnuchin (Government)

Companies that already pay low effective tax rates will still benefit from statutory tax decreases

“the tax rate is established by reference to statutory rates that are in place at the time and then there is deducts from that. So for example as an example we participate in various community reinvestment activities that are subject to tax credits etcetera and so those tend to be deductions that get you to your effective tax rate. So if the overall tax rate would reduce, then yes we would have benefits come up.” —Toronto Dominion CEO Bharat Masrani (Canadian Bank)

Consumer:

Retailers may step up promotions this Christmas

“We haven’t seen any pullback in the promotional environment. As Julie said, we think in fact because of some people having more inventory than they like, that it could get more promotional. The customers are smart, they are looking for the best value” —Williams Sonoma CEO Laura Alber (Home Goods)

Retailers’ margins are going up in e-commerce but down in brick and mortar

“as DTC increases, it does deleverage delivery expense and logistics expense but it does then provide for some offset opportunity in store property.” —Urban Outfitters CFO Frank Conforti (Apparel)

Technology:

Tech companies are focusing on data centers and automobiles over PCs and smartphones

“When you look at where our big investments are going right now, we’re going down in SOCs for things like phones; we’re going down in the PC segment of the business; we’re going up in the data center; we’re going up in IoT specifically and automotive” —Intel EVP Stacy Smith (Semiconductors)

A voice driven world could up-end internet business models

“one thing that we are all clear about is the days of three top text ads followed by 10 organic results is a thing of the past in the voice driven world. So we are very much keeping an open mind on what this needs to be and focusing much more on what’s the consumer experience, it’s scale, we’ll figure that as we talk about.” —Google SVP Sridhar Ramaswamy (Internet)

Data-sets are becoming so large that only cloud/AI can interpret them

“the amount of data that our clients have already and quite frankly the amount of data they’re creating everyday…is creating an opportunity for us where…nobody can any longer just program a computer to find relationships that you’re looking for. It’s just too much data and so in a world where a system has to learn about the data, you have to find a way to interact with it…cognitive will influence and affect every decision that companies will make over time….Now all of that requires an amount of compute and amount of power that is not available for everyone to invest in, but that’s where the cloud comes in and so there is obviously an economic element to moving into a cloud environment, but more importantly for our clients, we see an ability for access to these kinds of cognitive applications as well as an agility that you get from your business and running in a cloud environment.” —IBM CFO Martin Schroeter (Enterprise Tech)

AI algorithms have been around for a long time, but deep learning and neural networks are recent innovations

“machine learning has been an integral part of the ad system pretty much since the time I joined. And gosh that was like 2003. And as new ways of machine learning whether it is algorithm based on boosting or more recently algorithm based on deep learning and neural network have been developed. We are often either an early adopters of this technology.” —Google SVP Sridhar Ramaswamy (Internet)

Healthcare:

Some of Trump’s healthcare priorities:

“the President-elect has laid out a number of markers, as we talk about expanding HSAs, allowing folks to be able to buy insurance across state lines, administering Medicaid at the state levels.” —Trump Transition Team Communications Director Jason Miller (Government)

Industrials:

The Steel industry is confronting structural headwinds

“We do see clear cyclic silver lining but to be clear, you should not confuse cyclic improvement with structural weaknesses of an industry. The pressure from imports from raw materials, especially in coking coal, from excess capacities and from current and especially threatening cost decrease related to the European trading scheme, remains high.” —Thyssen Krupp CEO Heinrich Hiesinger (Steel)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.18.16

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 end of the presidential election appears poised to unleash a huge amount of pent up demand. The end of uncertainty is a good enough reason for companies to put dry powder to work. Even better for the stock market, the business community appears to have adopted a favorable view of Trump. However, the business community’s gain could come at the expense of workers. Trump was elected in a wave of populism, and if he enacts pro-corporate policies, that could ultimately make the people even angrier.

The Macro Outlook:

The end of the election may have unleashed a huge amount of pent up demand

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)

Business leaders are viewing Trump as a positive

“Post-election I think that, most CEOs that I talk to we are pragmatic about the result…I think that President-elect Trump appears to be very business oriented and is very focused on driving the US economy and anytime the US economy improves, that’s certainly good for us” —Cisco CEO Chuck Robbins (Switches & Routers)

Disney is already building statues in his likeness

“It’s also a good thing I think for the market and for most businesses that the transition is already off to what appears to be a fairly smooth start…I think smooth transitions are good. I will say on the smooth transition front, we’re going through a smooth transition as well. We’ve already prepared a bust of President-elect Trump to go into our Hall of the Presidents at Disney World.” —Disney CEO Bob Iger (Media)

Optimism alone can boost economic activity

“I do truly feel that if the optimism we’ve seen this week in the stock market continues giving that feeling of optimism in the economy I would expect that to raise all boats in our campus switching side.” —Cisco CFO Kelly Kramer (Switches & Routers)

Even a normalized environment would be a big improvement

“large parts of the world have been in negative interest rate territory for a while and in very low rate policy…we don’t want to view that policy…as normal and so to the extent to which we can get back to a more normalized rate environment…that should positively correlate for us. And we root for growth…the extent to which the policies are supportive of growth, it should translate quite well.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

But are the expectations of Trump’s policies accurate?

Trump rode a wave of populist anger into the White House

“I think we find ourselves in the midst of populism. It makes complete sense, because the middle class – whether it is in the US, Europe, or almost any democracy – has not had a good experience, particularly since the financial crisis. As a result of that, they’re unhappy, they’re angry…When half the population can’t marshal $400, one pay check, they should be scared. They should feel insecure, they should be unhappy with their government that has failed them – which is what they think – it is all logical.” —Blackstone CEO Steve Schwarzman (Asset Management)

Trump’s expected policies are not populist

“The Trumpian Fox has entered the Populist Henhouse, not so much by stealth but as a result of Middle America’s misinterpretation of what will make America great again…in voting to deny Hillary Clinton the Henhouse, they “unwittingly” (lack of wit), let Donald Trump sneak in the side door. His tenure will be a short four years but is likely to be a damaging one for jobless and low-wage American voters. They were the force for Trump’s flipping the Midwest into a Republican Electoral College victory. But while the Fox promised jobs and to make America great again, his policies of greater defense and infrastructure spending combined with lower corporate taxes to invigorate the private sector continue to favor capital versus labor, markets versus wages, and is a continuation of the status quo.” —Janus Portfolio Manager Bill Gross (Formerly PIMCO)

That could make the people even more angry

“Unless the worker’s share of GDP reverses its downward trend, and capital’s share peaks, then populists worldwide will reject establishment parties in almost every future election – initiating in some cases growth-negative policies revolving around trade, immigration, and yes, in Trump’s case, lower taxation that may lower GDP growth, not raise it.” —Janus Portfolio Manager Bill Gross (Formerly PIMCO)

It’s still too early to tell what changes will come

“I think it’s really too early to speculate about what the changes in Washington are going to mean for our business or for businesses. We have, though, been exhorting Washington both the executive and the legislative branches to take a look at the current tax policy of the United States, particularly the corporate tax rate, and to close more loopholes but lower the corporate tax rate. We are no longer competitive with the rest of the world in that regard and that must be addressed.” —Disney CEO Bob Iger (Media)

But big changes are coming

“You have to look at the election of Donald Trump, given his comments about immigration and comments about trade policy, as a major step in another direction from the policy of the G20 over the last 70 years. This is a very major move whether you think it’s positive or negative. The establishment has failed to articulate a narrative that free trade and global integration is good for them.” —Barclays CEO Jes Staley (Bank)

Meanwhile, nothing has changed in Janet Yellen’s world

“The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate–meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–appears to be currently quite low by historical standards…gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.” —Federal Reserve Chair Janet Yellen (Central Bank)

Legacy policymakers are still fighting the ghost of the financial crisis

“It is clear that the financial crisis has had a long tail and that the world economy remains in a precarious state. Many people are struggling with unemployment or low paying jobs and are concerned about broader changes in the economy. These concerns demand a concerted response from governments and the international community.” —WTO Director-General Roberto Azevêdo (GSE)

International:

Currency shifts will have some impact on corporate results

“clearly in the last two weeks we have seen the few big shifts. I wouldn’t say big shifts but we have seen some shifts and the bulk of the shifts have been in currencies as it relates to our business. In a week the world’s economy can’t change but currencies did move and that does have an impact on our business.” —Visa CFO Vasant Prabhu (Payments)

UK consumers remain optimistic

“there is actually a fair degree of optimism in the country at the moment and there was a big bounce back after the Brexit vote. It tailed off and then came back…We talk to lots of customers…And they’re saying they feel optimistic and they’re looking forward to a good Christmas.” —Marks and Spencer CEO Steve Rowe (UK Retail)

The Chinese government has acted to cool real estate markets

“In early October, when the Chinese real estate market was experiencing a meaningful development, the local governments in about 20 cities announced the tightening measures designed to cool a market with escalating prices…we believe the goal of the government’s restriction policy is to maintain healthy and stable development of the market by cooling down escalating prices in certain cities” —Xinyuan Real Estate CFO Yuan Zhang (Chinese Real Estate Developer)

It’s very difficult for foreign companies to compete in China

“remember that we don’t operate in China today. We have a nice business in China that is a cross broader business, but we have no real domestic business in China. Visa cards are really not prevalent in most of China, because there was a government monopoly there and we’re not allowed to participate in the domestic market.” —Visa CFO Vasant Prabhu (Payments)

Financials:

Home equity has increased by 95% since 2011

“Since 2011, homeowners have seen a 95% increase in their home equity. That’s come about because of rising prices as well as if you have a mortgage, you’ve been making mortgage payments since 2011.” —Home Depot CFO Carol Tome (Home Goods)

We are definitely at the later stages of the real estate cycle

“Look, there’s no question, we are at later stages of the real estate cycle. I mean we watch it very, very carefully. We look at every component of every geography…at very granular level and there are parts of the United States where there’s been a tremendous amount of new construction. I think multifamily specifically, I think what you should be most worried about is construction financing for high-end luxury condos.” —JP Morgan Commercial Bank CEO Doug Petno (Banking)

Consumer:

Expect the holidays to remain promotional

“is the promotional environment this year likely to be more subdued, short answer is no. I think it’s always promotional and our category as we all know is used by certain players as a way to attract traffic.” —Best Buy CEO Hubert Joly (Electronics Retail)

Unseasonable weather hurts retailers

“the third quarter was clearly challenging from a top line perspective given the headwinds we faced primarily from the unseasonably warm weather in September” —JC Penney CFO Edward Record (Apparel)

But retailers are starting to extend their seasonal windows

“We sold short sleeve product all the way through, I would say, the end of October, to be honest with you. And we are seeing more and more retailers are looking at carrying short sleeve product much longer than they have in the past.” —Perry Ellis CEO Oscar Feldenkreis (Apparel)

Technology:

Target said that Apple product sales have improved

“in the third quarter, we were encouraged to see a meaningful improvement in sales of Apple products driven by their introduction of several new product innovations.” —Target CEO Brian Cornell (Retail)

NVIDIA says that Tesla is 5 years ahead of the competition in self driving cars

“self-driving cars is probably the most single most disruptive event – the most disruptive dynamic that’s happening in the automotive industry. It’s almost impossible for me to imagine that in five years’ time, a reasonably capable car will not have autonomous capability at some level, and a very significant level at that. And I think what Tesla has done by launching and having on the road in the very near-future here, a full autonomous driving capability using AI, that has sent a shock wave through the automotive industry. It’s basically five years ahead. Anybody who’s talking about 2021 and that’s just a non-starter anymore.” —NVIDIA CEO Jen Hsun Hwang (Semiconductors)

The key to AI is having unique data

“when people tell you they do AI, the first thing you’ve got to wonder is do they have unique data, do they have unique signals. In Office we have billions and billions of data points…They are signaling us. When I share a document with you, Brent, that’s a signal. If I e-mail if somebody sends me e-mail and I dwell seven or eight minutes on that e-mail versus my typical minute or two, that’s a signal…Then we bring in machine learning and AI techniques and natural language processing to give back the end user or the customer unique insights.” —Microsoft Office EVP Rajesh Jha (Enterprise Software)

IBM sees blockchain as transformational

“blockchain to me is a great technology to embrace, because it in of itself is transformational…specific use-case I’ll give you is one around supply chain. And I see a lot of the logistics in the supply chain capabilities being transformed by blockchain. Anything that takes a long time to do settlements today and takes multiple players and where I can benefit from having this audit trail and being able to do faster hand-offs, I think is a great example of what we can do with blockchain.” —IBM Systems SVP Tom Rosamilia (Enterprise Tech)

Industrials:

Kitchen equipment maker Middleby raised prices to offset rising steel costs

“we did institute some price increases on the commercial side…we talked about the impact of 0.5% to 1% on margins and you saw margins come down slightly relative to the second quarter, but I think as we go into next year, I believe we think that pricing will largely offset that.” —Middleby CFO Tim Fitzgerald (Kitchen Equipment)

Miscellaneous Nuggets of Wisdom:

If you don’t re-invest in your business, you’re borrowing from the future

“No, when I go in front of Jamie, it’s more of a conversation about like what’s not in your investment pipeline that should be in there and tell me why you took it out, and I think our point of view is that self-disruption innovation is all about bringing more value to our client. We have the financial wherewithal to do it…So, his point of view is, if you’re taking it out to dress up your P&L, you are borrowing from your future and you better be explaining to me why you’re doing it, and those are not the easiest conversations to have because you obviously are mindful of near term performance, but as I said, it’s very often the case that you’re going to borrow from your future if you under-invest today.” —JP Morgan Commercial Bank CEO Doug Petno (Banking)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.11.16

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.

Every so often markets undergo a paradigm shift in which the most important themes of the day shift radically almost over night. Frequently, these paradigm shifts come around the election of new Presidents. FDR, Eisenhower and Reagan are all examples of Presidents who ushered in new economic eras. This week we probably embarked on a new era of our own. For the past eight years we have obsessed over the effects of ZIRP, NIRP and QE. Those days are (dear God please) now over.

The market’s convulsions this week reflect investors’ attempts to make sense of our new world. As we alluded to last week, the ramifications of a Trump Presidency are real. Washington creates winners and losers and capital will change hands.

For now, most are expecting lower taxes, less regulation and infrastructure spending. However, while we can speculate about what is to come, it will simply take time for a clearer picture to emerge. The true framework of a Trump Presidency wont be discernible for at least several months. We’ll help chart that path as it emerges.

The Macro Outlook:

Just when everyone was getting comfortable with lower for longer…

“As we move into 2017, I remain concerned that this…lower for longer mindset on the commodity prices – is starting to distort the E&C contracting market… When you think about our oil and gas customers as well as our mining customers, I think they’ve gotten their head around the fact that the commodity prices are going to be maintained at current levels for a long, long time; and they have in fact changed their business model to deal with a lower for longer” —Fluor CEO David Seaton (Engineering and Construction)

…Something unexpected happened

“Last night, like so many of you, I watched the election returns with family and friends. And like so many of our fellow Americans – both Democrats and Republicans – I am stunned.” —Starbucks CEO Howard Schultz (Coffee)

A frustrated electorate wanted change

“We are going through a period of profound political and economic change around the world, and American citizens showed that deep desire for change in voting to elect Donald Trump as the 45th President of the United States. We have heard through democratic processes in both Europe and the United States the frustration that so many people have with the lack of economic opportunity and the challenges they face. We need to listen to those voices.” —JP Morgan CEO Jamie Dimon (Bank)

The result was expected to cause panic, but instead we got a rally

“We are definitely prepared to intervene in an emergency. What that will really look like, we must wait and see.” —ECB Governing Council member Ewald Nowotny (Central Bank)

Buying pressure had built up before the election

“the summer was a little bit of a pattern of the doldrums. Coming out of the summer there was a little bit more confidence…And there is a sense in the art market from lots and lots of consigners that we’ve had a long sort of not very exciting patch during the art market, and that they are looking for an opportunity to buy.” —Sotheby’s CEO Thomas Smith (Art Dealer)

Certainty provided a catalyst

“I think our experience over a long period of time is things that are distracting like the election, once there’s an outcome, certainty is a good thing. So from a positive perspective, having certainty on that is probably a good thing looking into the holiday.” —Kohls CEO Kevin Mansell (Apparel)

There’s still a lot that needs to be worked out and prices will be impacted

“I’m sure various of the securities will be impacted in different ways based upon whatever the outcome of the election is.” —Greenlight RE Chairman David Einhorn (Hedge Fund)

Washington picks winners and losers

“Washington is something you don’t really have much control over and Washington does make decisions and they pick winners and losers and so I think you have to be pretty flexible as a company to deal with that.” —Dish CEO Charlie Ergen (Satellite)

Congress will have a big say in the outcome

“it isn’t just about the president obviously who wins is going to impact the part I think equally important is what happens in the house in Senate. So we will be looking at both congress and the race for president to determine what kind of actions we take after the election.” —Third Point Reinsurance CEO Dan Loeb (Hedge Fund)

People now expect infrastructure spending, lower taxes and less regulation

“you’re probably going to see bipartisan support for infrastructure. You’re probably going to see a more rational tax code, particularly as it relates to corporate taxes and particularly as it relates to maybe bringing overseas money back which then can pay for infrastructure. So I think those are all potentially big positives for business in general. I think you’re going to see lighter regulation, which I think could help GDP…in general, I think there’s going to be more flexibility in M&A transactions, right?” —Dish CEO Charlie Ergen (Satellite)

Will these policies work in the long run?

“you could have significant infrastructure spending, you could have that drop in corporate tax rates and while we think that might work in the short term in the long, we still have questions about that…We recognize and we’ve said to you there is too much debt in the United States and in the rest of the world. All of the monetary policy QE 123 all haven’t worked in any significant way.” —Faifax Financial CEO Prem Watsa (Insurance)

Either way, old policies are likely on their way out

“there’s no question in my mind that the main thing that the low rates has done is boost asset prices and increase inequality in the country. I don’t think those are particularly useful objectives in any event, so I really think their policy is misguided. Whether it’s based on their own economic views, whether it’s based on politics, whatever it’s based on, I think they’re plain wrong.” —Donald Trump Economic Adviser Wilbur Ross (Rumored Commerce Secretary)

“The bad results of the Fed’s ZIRP and QE policies have been clear for years. Business investment, the explicit target of the QE theory of low bond yields, has been notably weak. With U.S. growth stuck at an abysmal 2% or so, many parts of the world are sliding into recession and economic failure.” —Donald Trump Economic Adviser David Malpass

“What I object to about the Federal Reserve is that these are un-elected people. I think that it’s a threat to representative government that we’ve put so much power into the hands of one person.” —Donald Trump Economic Adviser Stephen Moore

International:

The US election will impact the international community

“Of course, the events of last night (the results of the US election) also may have some bearing on what happens next, so there are so many uncertainties it’s really difficult to predict.” —J Sainsbury CEO Mike Coupe (UK Grocery)

China has been put on notice

“I think the first thing he’s gonna do…he’s gonna expect the counterparties…to honor these agreements. If you look at China, China is not honoring many aspects of the WTO. If you look at NAFTA, there are specific areas of NAFTA that are not being honored.” —Donald Trump Economic Adviser Steve Mnuchin (Rumored Treasury Secretary)

“It would appear from this analysis that the answer to the question leading off this chapter — How likely is war with China, based on historical record? — is very ‘likely’ indeed” —Donald Trump Economic Adviser Peter Navarro

Very few US companies have succeeded in China, but maybe that could change

“There are countless examples over the last decade of western companies and consumer brands that have tried but failed to achieve relevance in China. Not only has Starbucks cracked the code in China…we have created partner pride and a deep emotional connection among our customers and our partners in the Starbucks brand in China that rivals any market in the world.” —Starbucks CEO Howard Schultz (Coffee)

Financials:

Mortgage markets still haven’t loosened all the way

“To the extent there’s been any loosening, it’s been very modest…Any loosening has been very modest. Nothing that’s moved the needle significantly in the market, but we would certainly expect that over time, probably, we continue to see a little bit more loosening, as the economy improves, as the mortgage market continues to improve.” —DR Horton CFO Bill Wheat (Homebuilder)

Macy’s saw worse than expected credit performance

“The credit performance has been worse than we had expected, so that’s one piece of the reason for the increase [in SG&A]” —Macy’s CFO Katherine Hoguet (apparel)

Consumer:

All companies have to understand technology to succeed in the new world

“there’s old world merchandising companies and new world. We are very quickly moving into the new world. We spent a lot of time over the last couple of years…reinventing, being a New World company, especially as it comes to technology both on bringing out technology products and wearables, et cetera, but also getting better at all things digital retailing, social media, omnichannel, e-commerce, et cetera.” —Fossil CEO Kostas Kartosis (Watches)

Many retailers will go out of business

“There’s no doubt that over the next five years or so, we are going to see a dramatic level of retailers not be able to sustain their level of core business as a traditional bricks-and-mortar retailer, and their omni-channel approach is not going to be sustainable to maintain their cost of their infrastructure. And as a result of that, there’s going to be tremendous amount of changes with regard to the retail landscape.” —Starbucks CEO Howard Schultz (Coffee)

Were NFL ratings just impacted by the election? We’ll find out soon.

“Look, as I mentioned, primetime is down a lot across the board. Sunday night is down a lot. Monday night is down. Thursday night is down…It’s half a season…there are a lot of factors. It’s a little early, and obviously the election has been mentioned. Let’s see what happens a little bit down the road.” —CBS CEO Les Moonves (Media)

Technology:

The new administration may re-evaluate net neutrality

“it’s possible that – it certainly is possible that with the election and with the leadership in Congress that all of net neutrality might get another look. That’s certainly possible.” —Dish CEO Charlie Ergen (Satellite)

Materials, Energy:

The oil industry needs $60 crude to meet demand growth

“Over the long-term we believe oil in the 40s will not sustain enough production to meet demand worldwide…we believe that US industry as a whole needs to sustain $60 oil prices and extended lead time to provide a moderate level of growth. Worldwide Base decline rates are slowly reducing supply and consensus view is the current large inventory overhang could return to normal levels by late 2017.” —EOG CEO Bill Thomas (Oil and Gas)

Miscellaneous Nuggets of Wisdom:

No matter who you were rooting for, we are all on the same team

“We have just been through one of the most contentious elections in memory, which can make it even harder to put our differences aside. But that makes it more important than ever to bind the wounds of our nation and to bring together Americans from all walks of life. Recognizing that our diversity is a core strength of our nation, we must all come together as fellow patriots to solve our most serious challenges.” —JP Morgan CEO Jamie Dimon (Bank)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 11.4.16

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.

By the time we write next week’s post, we’ll finally know who is the next President of the United States.  Leading up to the election, the economy is quiet but stable. The race is close enough that it’s tough to know who is going to win, and it’s even harder to know what that person is going to do once in office.  However, the path of the next four years will depend in large part on what happens Tuesday.  The trends that we’re seeing below may change significantly.

I know that there’s a large contingent of investors who believe that the President doesn’t matter to markets, but if you study history, you know that nothing could be further from the truth.  Almost all the significant turning points in market history have coincided with policy changes that were actively or passively set by POTUS.  There’s a reason that the Great Depression bottomed in 1933 when FDR called a banking holiday, that the bull market of the 50s took off when business-friendly Eisenhower took office and that the 60s bull ended in 1969 when Nixon came into office with a “gameplan” to tighten monetary conditions.  The President sets the course of the US economy.

The Macro Outlook:

The environment has stayed slow and steady

“Our perspective of the economy remains largely unchanged since last quarter…the U.S. is on a steady growth path with consumer confidence, unemployment, and wages holding firm. Of course, unless something unforeseen our growth coming out of the upcoming elections, but basically the U.S. had a steady growth path.” —Mastercard (Payments)

The economy is fully healed even if it’s not setting new records

“We are in a fully healthy environment for the type of services we are delivering. Even if it’s not a record year from volumes in most markets around the globe, it is still on a very high level” —Jones Lang LaSalle (Commercial Broker)

Conditions are still pretty difficult for industrial companies, but turning up

“As you may have noticed, MBI readings have ticked up over the past two months posting over 48 for both August and September. While these levels still denote contraction in metalworking end markets, the readings are nonetheless a significant improvement over the trends of the past year. If they sustain, it would bode well for our future prospects and indicate a potential leveling in the metalworking industry. That said, for now we remain cautious.” —MSC Industrial Direct (Industrial Distributor)

Still, there’s a pervasive sense of uncertainty

“we do think the thematic message that cuts through all these conversations is uncertainty, and if you think about any person running a business today and making a long-term capital commitment in the face of an economic environment and a presidential election that’s been as noisy as this one with as much uncertainty around the environment that we’re going to be dealing in, it’s, while disappointing, a little bit understandable that companies are basically pausing and waiting to see how things play out before they make a decision around major capital multi-year commitments.”–Eaton (Industrial)

CEOs are waiting to see what happens in the election

“from many of our customers, we’re hearing wait-and-see and that’s pretty typical in an election year. I mean, that’s the one new thing I’d call out over the last quarter and it’s typical that it builds as you get close to November. So, I don’t make much of it either way. I don’t think any of our customers have a sense of what it’s going to mean for after. The only thing I think it means is that, we always say our visibility is low, it’s probably even a bit lower just because of the cautious perspective that many of our customers have.” —MSC Industrial Direct (Industrial Distributor)

Companies are setting strategic plans that assume weakness

“broadly speaking, our view is that markets…continue to be weak and while we may see some bottoming, we don’t have an instigator for a significant growth directly in front of us. So our view is, given that we get in this for a couple of years now, the right posture for the company to take is to assume relatively weak markets, set our cost structure accordingly, find opportunities for cost savings, productivity gains, and then continuing to invest in those opportunities where we think markets could improve and we will be able to gain share and gain business accordingly” —Cummins (Truck Engines)

The consumer has been slowing

“I think some of the industries that we do participate in where I think folks would generally say there’s weakness, definitely retail. And retail is tough these days, brick and mortar retail, in particular with just changes in the way consumers and buying patterns are working in terms of online retail. Restaurants inevitably I think see the weak consumer, if the consumer is slowing down, which I think consensus is they are. You’re seeing a little bit of weakness there.” —Ares Capital (Business Development co)

But energy and currency are moving from a headwind to a tailwind

“FX is easing. So in our first quarter, FX was a 14% headwind, and it’s roughly a 1% headwind in Q4…I think the story on Energy is it’s been a dramatic headwind for us…We’re now starting to enter a period where…it’s going to quickly move from a headwind to a tailwind…If you don’t believe oil is going to decline further from here, all it does is stabilize. I think it’s accretive. If it happens to start picking up, it’s going to be more accretive as we go forward” —Ecolab (Business Services)

Inventories are much leaner than they have been

“the steel buyers, particularly the service centers, have decided to keep their inventories dangerously low… I see a lot of service centers working with inventories below two months…you can’t operate a service center business with inventories that low. Service centers are in the business of carrying inventory. If they don’t want to carry inventory, they’re in the wrong business…So don’t get distracted by this temporary weakness in prices in the US domestic market because these service centers that are working with less than three months of inventory, two months of inventory on hand, they will have to restock ” —Cliff’s Natural Resources (Iron Ore)

And pricing pressures are building

“I fundamentally believe right now we are about as close as we’ve been for a while relative to this price cost pressures…our price-cost ratio pressures are going to build…I’ve told people at the Fed this same issue. There is inflation brewing…material deflation is slowing down if not starting to come up…in order to hold our margins…next year, we’re going to have to come up with more stronger discretionary cost savings because I think price-cost will be working against us. That’s my call. I’m sure you’ve not heard that from anybody, but that’s my call” —Emerson Electric (Industrial)

International:

Capital flows to the US could reverse at some point

“Among the risks is the chance that the market is leaning the wrong way by assuming capital flows into U.S. assets will remain strong. Those flows could reverse, of course, if central banks outside the U.S. begin tapering asset purchases or, in other ways, start trimming their monetary stimulus.” —Oaktree (Asset Management)

A weaker pound should spark UK inflation

“Largely as a result of the depreciation of sterling, CPI inflation is expected to be higher throughout the three-year forecast period than in the Committee’s August projections. In the central projection, inflation rises from its current level of 1% to around 2¾% in 2018” —Bank of England (Central Bank)

“The depreciation of the British pound has had a negative impact, although the intention is to mitigate that through price increases.” —Electrolux (Appliances)

Travel to Europe slowed late in the summer

“International inbound volumes in Europe softened significantly as the summer progressed. Industry fleet levels turned out to be loose relative to demand in August and September, and pricing was negatively impacted. Whether this was due to security concerns, Brexit, the Olympics, the economy or some combination of these items, it’s hard to tell.” —Avis (Rental Cars)

A few companies highlighted China as an area of strength

“Hugo Boss continues to operate in a challenging market environment. In Europe, in particular, trends in the premium apparel industry continued to soften. The US market remained under pressure and highly promotional. And while the Chinese mainland has started recovering somewhat, other Asian markets still face considerable challenges industrywide.” —Hugo Boss (Apparel)

“Yeah, we too have seen the strength that other companies have talked about in China. We had a pretty strong Q3 overall in terms of our order bookings in China and we saw that in our Hydraulics business. We saw that in our Electrical business as well. So certainly, the government stimulus programs are helping. Their monetary policy is helping. Whether or not these structural improvements will continue into the future, I think it’s once again another one of these points of uncertainty. And they put the stimulus programs in effect for a reason. So they had some underlying concerns. But at this point we think China has certainly stabilized.”  —Eaton (Industrial)

Financials:

Companies are masking slow growth with acquisitions

“So if this thing keeps going and gets sloppy, then we’re going to have to add to our acquisition pool…to feed our chance to reposition and restructure and derive top-line growth through acquisitions, because the core economic growth we do not see coming through for the next couple of years.” —Emerson Electric (Industrial)

Commercial real estate never fully priced in low interest rates

“As rates rise, obviously, cap rates will sneak up but the drop in rates was not fully passed through on cap rates. In other words, a spread over base rates came up. So as rates rise, some of that will be absorbed we think by a return to more normal spreads.” —Blackstone (Asset Management)

Cap rates could still compress further

“we haven’t seen cap rates back up in any of our markets, if anything we’ve seen added cap rate compression, because of what’s going on now there are good number of assets that are being bought by companies that…in their host countries they can borrow at 1% and then get a 3.5% coupon on the lease transaction or the sale transactions that they buy and that’s a massive spread. So if anything for great stuff, I think cap rates could compress further” —Kilroy (REIT)

Asian investors don’t have a problem with Brexit or low rates

“From a continental European perspective, there’s tremendous concern around what will happen to the UK…The further you move away from the UK, and particularly to Asia, the Chinese, the Malaysians, the Indonesians who have been investing heavily in the UK, they are not too concerned about the UK breaking away from the EU. So their interest is still very, very strong, and I would put the Americas somewhere in the middle of the two with regards to their interest.” —Jones Lang LaSalle (Commercial Broker)

Venture Capital valuations have come down

“We’re seeing valuations in venture come down. We’re seeing that the next round of equity capital, which is typically our take-out, take longer. So I think that business is a little bit choppier. We’ve added a non-accrual or two over the course of the year. And I think that’s representative…I think venture is going through a time where you need to be more cautious and be paying attention to the fact that valuations are coming down and capital isn’t flowing quite the way it was maybe 12 months ago.” —Ares Capital (Business Development co)

Consumer:

Only 22% of NY Times’ revenue comes from print advertising

“Print advertising is a much smaller part of our business today than it once was, accounting for just 22% of total revenue in the quarter.” —NY Times (Newspaper)

Facebook revenue growth is going to slow

“we do expect that as you get to mid-2017, ad load will be a less significant factor contributing…I do think that as we slow ad load growth, we’re going to have a slowing in revenue as well. So that’s our expectation” —Facebook (Social Media)

Alibaba wants to help retailers online and offline

“The most important opportunity on horizon is helping traditional business to upgrade into a new retail model and not continuing to grow online business in isolation. Online and offline will be a single seamless experience, not just in consumer interaction, but also in the entire business operation and execution.” —Alibaba (China e-commerce)

Technology:

Amazon is stepping up its investment pace

“The investment that we are seeing is a step-up versus what we have experienced in particularly the first half of this year and the last half, the second half of last year which I mentioned. But we have said investments are going to be lumpy. They are going to be high sometimes and they’ll be moderated at other times. We are right now, the second half of this year looks like a big step-up compared to the first half and it is.” —Amazon (Ecommerce)

No one has digital security figured out

“anybody who will tell you that they figured it out of safety and security. It’s probably somebody you should run a mile from, because there is no such right answer. There is a continuous effort of people break into everyone systems. You read that all the time.” —Mastercard (Payments)

Healthcare:

Branded pharmaceutical pricing power has softened

“[pricing] softness became much more pronounced in our second quarter, first around brand inflation and later, around customer pricing.” —McKesson (Pharma Distributor)

Doctors’ offices are consolidating

“there has been tremendous change. I think, as everybody’s aware in just sort of how healthcare is being delivered, the smaller practices, the two, three, four doctors, they’ve been forming bigger practices, been joining hospital groups, so the landscape has changed.”–Markel (Insurance)

Industrials:

25-30% of cars may be electrified by 2025

“at the Paris Auto Show, vehicle electrification was front and center, as customers look to close regulatory gaps on CO2 emissions and improve fuel economy. Industry experts and even some of our customers are now forecasting 25% to 30% of vehicles to be electrified by 2025” —Delphi (Auto Parts)

Materials, Energy:

OPEC is producing oil at near its maximum levels

“The 2.2 million barrel per day decline in non-OPEC production since 2014 has been fully offset by rising OPEC production which achieved record levels this summer along with Russian production which achieved record levels in September. Overall, we believe OPEC to be producing at near maximum levels with little remaining excess capacity cushion which has delayed the inevitable rebalancing of the world oil markets.” —National Oilwell Varco (Oil Service)

It’s still not worth investing in natural gas

“Well you know, I’ve been a natural gas bear for quite a while. I think we always thought that gas would find its way up around $3 and it would find a ceiling there. And to a large extent, that’s been correct. I mean we’ve always believed around $3, that there was just an impediment from a demand standpoint for now…I think our view is that it would take natural gas to approach $6 before it would probably displace our interest investing in oil. And I don’t see that happening.” —Anadarko (Oil and Gas)

The race to the bottom in iron ore prices is over

” In the third quarter, we witnessed some remarkable stability in iron ore pricing with the index trading within a tight range for the entire quarter. Once again, the analysts who predicted that iron ore prices would fall off a cliff were wrong. Wrong again. As I always say, iron ore is not your typical commodity as the vast majority of the supply is controlled by a small number of producers. For some time, iron ore prices were going down because a few executives in positions of power with the major iron ore producers were working very hard to drive these iron ore prices down. However, after the Boards of Directors of the Australian producers took action and all but one of these executives were let go from their respective jobs, these companies under new management are now generating better margins and more decent returns for their shareholders. No more race to the bottom. The Australian-Brazilian championship of stupidity is over. Check the box.”  —Cliff’s Natural Resources (Iron Ore)

Miscellaneous Nuggets of Wisdom:

A company built through acquisition looks different from one built from scratch

“we built this company for the most part through a series of acquisitions. And when you acquire companies, you always acquire excess capacity in manufacturing. And if you’d said, do you have the ideal footprint, if you could start from a clean sheet of paper and redraw it, you never end up in that place if you grow a company through acquisition.” —Eaton (Industrial)

More isn’t better, only better is better

“When you then migrate over to original programming, I’ve said this before, it’s absolutely true, more isn’t better, only better is better. We’re not trying to just spend money. We’re trying to spend money thoughtfully to differentiate high-quality programming and build more consumers and build more addicts across our subscriber base.” —Time Warner (Media)

“So in terms of scale, look I think as we’ve often said, this is an industry and a business that thrives on scale. But at the same time, scale for scale sake is you know are not something that we think should be pursued.” —21st Century Fox (Media)

Don’t fear your opponent, make your opponent fear you

“It makes me remember a famous quote from the Civil War when Ulysses S. Grant took over the Union Army. He was always getting criticized. He was always hearing from his generals about what Robert E. Lee was going to do. Robert E. Lee is doing this. What are you going to do about that? And one day Grant said, you know, I’m so sick and tired of hearing what Lee is going to do. Well, Lee needs to worry about what we’re going to do. And I think that’s how I feel about our competitors. They need to worry about what Whole Foods is going to do.” —Whole Foods (Grocery)

Don’t be bullish with other people’s money

“All right. So just one thing. I’m not bullish. You can be bullish. I can’t. Because if I’m bullish and I’m wrong, we are going to hurt a lot of people, a lot of investors. A lot of money will be lost, money that’s mine, money that’s not mine, from my investors. So I’m never bullish. I’m always very, very, very protective over our thing. That’s the reason we have been so successful because I play with a lot of caution – with a lot of cushion in our forecasts.”  —Cliff’s Natural Resources (Iron Ore)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 10.28.16

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.

When I first sat down to compile this week’s quotes, I thought that the picture was going to be a positive one.  However, as I assembled the piece, I realized that the commentary from this week was mixed at best.  In particular, comments from consumer facing businesses are somewhat troubling.  Robert Half’s commentary about temp staffing trends is also not encouraging (you should click through on that post, there’s more there).

Capital markets CEOs are optimistic for next year though.  After the election, some uncertainty may be lifted and activity could pick back up.  Capital markets do tend to lead the rest of the economy, so one would expect these CEOs to have the most forward looking commentary.  If that’s true then 2017 should be an improvement on 2016.

The Macro Outlook:

Global growth remains modest

“global growth has continued to be modest. In the U.S., consumer fundamentals remain healthy and account for most of the economic expansion while the outlook for industrial production remains weak..” —UPS (Logistics)

2% GDP growth would be an improvement

“if the world believes we’re going to get 2% plus GDP in 2017, we would see that as an improvement not a decline”  —Robert Half (Temp Staffing)

There was some troubling commentary about the consumer

Visa said that the global economy is not improving

“On the negative side, the global economy is not improving. Geopolitical tensions are high. The U.S. election is a wild card, and we continue to watch the impact of Brexit. ” —Visa (Payments)

McDonald’s also sees weak consumer confidence

“I think there are broader macroeconomic issues of consumer confidence and just uncertainty of wage increases, the slight squeeze on discretionary spend with gas prices aging back up and healthcare costs going back up. So, I think those are sort of things that we see affecting customers and basically the spare cash they have in their pocket” —Mcdonald’s (Fast Food)

The casual dining segment is broadly challenged

“Just as we said last quarter, these continue to be challenging times across casual dining. We’re already seeing some of the weaker players struggle with their viability in this choppy environment… there are some examples of concepts that are shrinking.” —Brinker (Chili’s (Baby Back Ribs))

Du Pont sees slightly slower housing and auto markets next year

“I mean, it looks like all forecasts say that housing is dropping off…not significant, but it looks like there’s a little bit of a rollover off of kind of that 1.1 million to 1.2 million starts…And then on the auto side of the business, it looks like auto builds are going to be down in the couple percent range going into next year.” —DuPont (Chemicals)

Caterpillar still sees weakness for its construction equipment

“the decline for construction is particularly North America…The problem we find ourselves in, I think, is the larger projects, the infrastructure, the infrastructure spending is maybe not quite as robust as housing would be right now, and that’s a bigger sweet spot for us.” —Carterpillar (Construction Equipment)

Robert Half waved a red flag for the service sector

“in September, we didn’t see the lift we typically get, instead, it was sequentially about flat. And then again, traditionally we get even more lift yet again in October and we didn’t see that lift either…clearly [clients] remain cautious with little sense of urgency. It’s in part due to macro uncertainty, in part due to election uncertainty. They cite budget pressures, they cite cost control measures… the general trends that I described also apply to tech…which is where we had seen most of our growth, that’s now where our growth is most under pressure…I’d say Accountemps we saw more softness in the accounting operations positions and those are the ones that are typically more client demand sensitive, more client volume sensitive. So it’s consistent that if you were to see softness in accounting due to macro conditions you’d see it in accounting operations” —Robert Half (Temp Staffing)

Activity in commercial real estate is down

“I would say around the world…There is significant activity, but against the backdrop from last year where we and the market grew dramatically. It seems fairly muted…there is uncertainty in the marketplace which is putting pressure on the results relative to what they were a year ago.” —CBRE (Real Estate Broker)

But advertisers are still spending

“So let me just start by saying the advertising market remains very strong. Scatter is as strong as it’s been really in a long time, and that’s a continuation. Really, we’ve had quarter-after-quarter of very strong scatter, and we had a super strong upfront in May.” —Comcast (Media Conglomerate)

And capital markets CEOs are optimistic

Venture Capital markets are regaining health

“Overall, the markets for us and our clients are healthy, despite some lingering impact from the VC market recalibration in the first half of 2016. Venture capital continues to perform strongly, although activity remains concentrated on larger funds and larger later-stage investments…In spite of an emphasis on later-stage companies, early-stage investing is alive and well, although it has been dominated for the last few quarters by a growing group of angels and micro-funds making seed investments.” —Silicon Valley Bank (Bank)

Moody’s expects that debt issuance will be strong next year

“Looking out into 2017, we think that issuing conditions are probably going to be attractive and that may encourage pull forward from 2018 and beyond. Part of the reason why we are optimistic about the current outlook for issuance conditions is driven by the fact that we think the default rate in the speculative grade arena is probably peaking right about now over the next month or so…So even if official rates are moving up somewhat, we think there is an opportunity for spread tightening and an attractive issuance environment.” —Moody’s (Credit Ratings)

Slow growth is helping M&A

“My commentary on the market is similar to what we discussed last quarter. While there have been declines in M&A volumes across the board, our M&A dialogue remains healthy. Fundamentals remain in place for continued activity and the current steady low growth environment is actually very conducive to M&A.” —Moelis & Co (Investment Bank)

The industrial economy is still weak but recovering

“we saw a decelerating rate of decline in sales on a year-over-year basis…North America is still weak but slowly recovering…order rates reinforced our previously communicated view that we’re progressing towards stabilization in many of our key markets.” —Parker Hannifin (Industrial Components)

“I’m very positive that we, now we start to see Industrial turning the corner as we move forward. And we will see the first quarter happen here in Q4.” —3M (Diversified Industrial)

Inventories are running leaner

“So if we look into the distribution channel inventory is actually decreased by about a half a week and it’s currently very, very low levels at about four weeks and that’s pretty similar to what we saw a year-ago.” —Texas Instruments (Semiconductors)

Capacity utilization is rising

“with industry wide capacity utilization now moving up from the mid to the upper 80s and supply-chain inventories as Mike had mentioned remained very well, we think, lumber prices are well supported here.” —Potlatch (Lumber)

That should lead to price increases

Rising commodity prices will be passed through to end customers

“Well, we’re still working those price increases…but for sure we’ve talked with our marketing teams about monitoring the steel price increases, and understanding that we need to make sure our pricing offsets that completely next year.” —AGCO (Agriculture Equipment)

If not then they eat away at companies’ gross margins

“Commodities were a modest hurt to gross margin in the quarter. Feedstock costs for propylene, ethylene, and tropical oils are up as much as mid-teens since we set our initial budgets for the year. Wage inflation is also an increasing challenge in many developing markets.” —Procter and Gamble (Consumer Products)

Eventually we will have to get inflation because it’s the only real way to repay our debt

“I am concerned about inflation, because ultimately, the only solution to repayment of deficits for governments is inflation.” —WR Berkley (Insurance)

This election will probably impact on how fast we get there

“Yes. I’d just add that I spend a lot of time talking to executives of other companies and many of our clients and the elephant in the room probably is the election. Nobody really knows exactly what the impact is. They just know it is much different.” —Robert Half (Temp Staffing)

International:

The strong dollar eventually becomes the new normal

” we’re a company that generates two thirds of our revenues outside the United States…at some point, the strong dollar becomes the new normal and we need to work with that”  —Apple (Consumer Electronics)

Brexit has had little impact on the UK economy

“In terms of our business trend see the referendum, there has been no significant impact in any of our consumer markets. In the corporate sector, we have seen some impact as businesses have deferred elements of their investment and borrowing both pre-and post-referendum, given the uncertainty. However, the aggregate volume effect has been relatively limited.” —Lloyds Banking Group (British Bank)

British companies feel that the government is communicating adequately

“in terms of the UK government position, I think first of all there is a very good dialogue going on between the industry and government. Of course, the overall strategic framework of the UK’s exit from Europe is not clear or defined, so inevitably there is an absence of black and white decisions and clarity if I can put it that way.” —GlaxoSmithKline (Pharmaceuticals)

Manpower saw pickup in Northern Europe

“in Northern Europe, there is some slight acceleration on an organic constant currency basis into the fourth quarter…we are anticipating underlying growth to pickup” —Manpower (Temp Staffing)

Tax credits are boosting the Chinese auto industry, but they may expire next year

“Obviously, this year the industry is running stronger than we expected, because of some uncertainty around the purchase tax incentive, if that was to end and the government was to announce an end to that, our planning assumption would be that – there could be some volatility in maybe the first quarter and second quarter of next year” —General Motors (Autos)

Elevator sales for Otis are down 10% in China

“new equipment orders on a sales basis in China were actually down 10% in the quarter. A tough market right now” —United Technologies (Conglomerate)

Things change quickly there

“To give you one example, a very small example, but it’s symptomatic of how fast China can change. If you go to the cafe channel in China, there are all the noodle shops up and down the streets. People go there at lunchtime. Last year, they were packed with people. This year, you go, they’re a third empty. You go, okay, maybe the economy has slowed down. No, that’s not what’s happening. The explosion of online to offline ordering and the availability of lots of people on motorbikes to deliver stuff” —Coca Cola (Soft Drinks)

Brazil and Argentina’s economies may be gaining steam

“Market conditions in South America have been difficult during the first nine months of 2016. More recently demand is starting to stabilize in Brazil where solid farm fundamentals are beginning to overcome previous weakness caused by political and economic challenges. More supportive government policies in Argentina have also contributed to higher sales in that market”  —AGCO (Agriculture Equipment)

Emerging markets in general may be picking up pace

“emerging markets are doing significantly better than mature markets. In those markets we are seeing a stronger growth, mainly high interest rates that allow us to generate a better revenue stream or growing revenue stream that is much more difficult to get in what we so call mature markets.” —Banco Santander (Bank)

Financials:

Legal battles are still materializing eight years after the financial crisis

“As we disclosed in today’s earnings release, on September 29 we received a letter from the Department of Justice indicating that it is preparing a civil complaint against Moody’s alleging violations of the Financial Institutions Reform, Recovery and Enforcement Act in connection with ratings MIS assigned to RMBS and CDOs leading up to the 2008 financial crisis.” —Moody’s (Credit Ratings)

Those legal battles are causing big problems for some companies

“the quarter was clearly overshadowed by the attention paid to our negotiations concerning the US Department of Justice’s initial settlement proposal relating to RMBS matters. This has created uncertainty. Uncertainty that affects the market’s view of Deutsche Bank as an investment. Uncertainty that affected some clients’ view of Deutsche Bank as a counterparty” —Deutsche Bank (Bank)

Compliance costs are not likely to abate

“But in terms of overall regulatory and compliance costs, if I look forward, John, I don’t think that in the short- to medium term I would think of regulatory costs in general abating or declining…I don’t see realistically that anybody in the industry is going to see regulatory and compliance costs fall off.” —Suntrust (Bank)

Credit card lenders are re-entering subprime markets

“So, at times I think you hear from some players, subprime we don’t do that. Well, all I’m saying is 31% of all the growth is subprime, and somebody is doing it. And so, yeah, that has our attention.” —Capital One (Bank)

Consumer:

Many retailers chased e-commerce at the expense of their brick and mortar locations

“I think what unfortunately what I think a number of retailers, they’ve not invested in their product, okay. Or they’ve chased the holy-grail of internet sales to the determent of what they should be doing with the physical product, as still people want to go physical shopping. And when they go physical shopping, you’ve got to have a nice physical environment.” —Simon Property Group (Mall REIT)

Returns are bad for e-commerce retailers, but good for UPS

“when you look at the ecommerce market, it could be one in five or one out of every six packages that are shipped to a consumer get returned…Those packages are highly profitable. First of all, many of those packages get dropped off and don’t have to be picked up because the consumer finds it more convenient to drop them off at UPS stores or UPS Access Points or hand them to a UPS driver. So there’s very little cost when it comes to pick-up. And then obviously, the deliveries are going back to businesses, and we could be delivering tens or hundreds of packages back to these businesses. So it’s a highly profitable B2B delivery with very little pick-up cost.” —UPS (Logistics)

90% of Canadian McDonald’s have self service kiosks

“In Canada…We now have dual point service and self-order kiosks in almost 90% of our traditional restaurants” —McDonald’s (Fast Food)

Twitter now thinks of itself as a news network

“we’re focused on building the most useful open and comprehensive news network on the planet” —Twitter (News)

Technology:

John Legere trolled AT&T’s purchase of Time Warner

“if you look and you compare and contrast their earnings and what’s happening, for example, with ours, you understand why they are trying to do a vertical integration…An interesting factoid for you, which is when they announced in Q2 of 2014 the DIRECTV acquisition, they have not added a postpaid phone customer ever since. So one of the things pertinent to T-Mobile is, I would say, the great news is that they’re going to be further defocused than they are now, and the upside opportunity to continue to acquire business in this space for us is tremendous.” —T-Mobile (Telecom)

Smartphone growth in India has been stifled by infrastructure, but that’s changing

“The smartphone has not done as well in India in general. However, one of the key reasons for that is the infrastructure hasn’t been there. But this year or this year and next year, there are enormous investments going in on 4G and we couldn’t be more excited about that.” —Apple (Consumer Electronics)

Ride share platforms will be the first home for autonomous vehicles because they can be geo-fenced

“As we look at launching autonomous into the marketplace, we believe it will first happen in a controlled environment, in a ride-sharing environment…that’s because it will be geo-fenced, you’re going to have limitations with speed and other limitations, and that’s why the ownership will stay with the company in these first models as we continue to learn.” —General Motors (Autos)

Don’t question Elon Musk’s autonomous driving solution

“First of all, I would separate what Tesla says from, say, some supplier of ours is issuing, bullshit. Okay? The blog that I wrote was very clear that radar is moving from a supplemental to also a primary sensor. It is not to the exclusion of vision, but it is also a primary sensor…Much as a person who might take action based on whether you hear something or you see something, but you don’t need to both hear it and see it…There are obviously skeptics out there. Well, I suggest that they do not bet against us.” —Tesla (Autos)

Healthcare:

The election will impact Medicaid expansion

“Gary, I think most everyone would agree, if the Republicans gain control of the White House and what have you, there will be pressures and probably less opportunities for states to expand Medicaid. If the Democrats are in place there, I do believe that there will be consideration, hopefully. Maybe see some additional incentives, maybe a little more flexibility in bringing some states to bear.” —HCA (Hospitals)

Industrials:

Wide body aircraft orders are slow, but narrow-body orders are strong

“there’s hesitation in the wide body marketplace right now as we think through a number of factors around the world. Slow GDP growth around the world, hesitation in cargo traffic, geopolitical questions. There are a number of factors that are causing our customers to be somewhat hesitant in wide bodies in particular…while again it’s all in the context of some broad global economic concern, the ordering activity and the robustness of narrow body growth continues to be very clear, fueled by traffic growth” —Boeing (Aerospace)

The defense department is shifting to address “near peer” threats from counter-terrorism

“The third bucket is really coming directly from the Department of Defense, obviously for all regions in the global area to be able to essentially come up from 20 years of fighting wars of insurgency to now dealing with near-peer threats that potentially have capabilities that are at or potentially in some cases maybe better or perceived to be better than what the U.S. has, and so it’s a big catch up area there.” —Raytheon (Defense)

Materials, Energy:

Schlumberger is confident that we’ve reached the bottom of the energy cycle

“After seven quarters of unprecedented activity decline, the business environment stabilized as expected in the third quarter, confirming that we have indeed reached the bottom of the cycle… the period of oversupply and inventory build is over and that market segments should soon change, paving the way for an increase in oil prices and subsequently E&P investments. ” —Schlumberger (oil service)

A sustainable recovery requires mid to upper $50s oil though

“we continue to believe that oil prices in the mid to upper 50s are required for a sustainable recovery in North America. Our customers also need to be more confident on the durability of those oil prices before making any significant change to their spending patterns.” —Baker Hughes (Oil Service)

Other commodity markets are still weak

“we don’t think commodity prices are still quite good enough to drive substantial sales increases next year. We would like to see commodity prices rise more next year. And if that happens, that, we think, logically would be upside for the second half of next year; if that doesn’t happen, probably not upside then” —Carterpillar (Construction Equipment)

Miscellaneous Nuggets of Wisdom:

Your operating leverage is only as good as your top line

“Prior to last year’s issues, Chipotle had the strongest economic model in the industry. Of course, this model has been weakened due to lower sales volumes that we’ve seen this year. While it’s critical to fully restore sales volumes and keep improving them from there, we also know that we need to improve our economic model now so that we can provide healthy returns even at lower volumes.” —Chipotle (Burritos)

Businesses move up in weight class as they grow

“our growth now gives us opportunities to move up in weight class and we find ourselves well-positioned at this moment in time to compete for long-term relationships with athletes, teams and league affiliations that we previously could not justify.” —Under Armour (Apparel)

It takes time to realize the benefit of any investment

“In terms of payout on sampling…the lifetime benefit from that relatively modest investment can be significant, but it is a lifetime benefit. A consumer will take a period of time just to use the product that you’ve sampled them with. And so that’s not an investment endeavor that we typically see immediate returns in.” —Procter and Gamble (Consumer Products)

“A salesperson really isn’t productive enough in his first year on the job…when you hire salespeople there’s training and familiarization that has to go on. So they’re not immediately productive. It’s the sort of thing that shows up in the future.” —Honeywell (Conglomerate)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 10.21.16

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 picked up its pace this week, and commentary was a bit stronger this week than last week. The first week of earnings is always filled with banks and most reported good results. Their performance is especially impressive given how difficult it is for financial services companies to operate in this low interest rate environment.

The election is also front of mind for many CEOs. Almost everyone expects that the end of the presidential race will lift a cloud of uncertainty over the economy. Whether or not the election will be a lasting catalyst though depends in large part on what the next President actually does. Either way, a new President will bring change, but perhaps one more than the other.

The Macro Outlook:

Segments of the economy are showing signs of life

“The macroeconomic environment still has its challenges…However, certain segments of the economy are showing signs of life.” —Union Pacific CEO Lance Fritz (Railroad)

The US consumer is generally pretty healthy

“US consumer health is generally good…charge-offs have receded. Other commercial credit remains very strong…We feel good about loan growth, the economy feels good.” —Bank of America CEO Brian Moynihan (Bank)

Healthcare spending was strong in September

“once September hit, the data showed quite a rebound from the summer months, and the rate of growth in September was actually faster than what we saw in the first quarter, which was the highest growth quarter year-over-year in terms of penetration….So overall, I’d say we’re now in a stable environment in hospital procedures.” —Johnson and Johnson CFO Dominic Caruso (Healthcare)

Banks were firing on all cylinders last quarter

“all of our businesses did really quite well this quarter. So, not to overuse the phrase, firing on all cylinders but it really was pretty consistent. ” —JP Morgan CFO Marianne Lake (Bank)

Commercial bankers see demand for loans

“I guess from speaking with our commercial bankers across the region before coming on the call, they are feeling good about the demand that’s out there. You know, as I mentioned before, our pipeline is very, very strong. It’s in line with what we’ve seen in prior quarters. I think there is a little bit of a pause and I expect there will be a pause this quarter, as we go through the election cycle and people digest what that means and with the change in administration.” —M&T Bank (Bank)

Capital markets activity is ready to pick back up

“So the pipeline feels pretty good when you talk our M&A team. And the backlog sequentially was up, not down…I mentioned before that…a meaningful portion of the year’s IPO volume actually occurred in September. So it does feel like we are starting now again into a market where a lot of that activity that got pushed from the first quarter into the second quarter that that still exists.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

The industrial economy is still weak but hasn’t seen a leg down

“Yes. Well, first of all, I think we have seen – while not the beginnings of growth on the industrial side, I think we haven’t seen – we have not seen another leg down. In other words, we have seen some stability.” –Danaher CEO Tom Joyce (Conglomerate)

There are positive things happening in the energy sector

“There is a lot of positive things happening in energy right now. Prices have been stable. Capital markets are improving. Asset sales remain very robust. We’re getting a lot of pay downs on our criticized credits and of course this quarter our charge-offs where down as well.” —Comerica CEO Ralph Babb (Bank)

There are a lot of people still on the sidelines

” people are being a lot more conservative than they have been in the past. They’re sitting on a lot of cash. They’re in a good financial position and as things begin to pick up…our customers will begin to invest more in the future as well as some of the new products and services.” —Comerica CEO Ralph Babb (Bank)

“We’ve done studies to show that globally there’s 50 plus trillion that’s sitting in cash…depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion.” —Blackrock President Robert Kapito (Asset Management)

People expect that the end of the election will be a catalyst

“I saw report a couple of days ago that 60%, or slightly less, but about 60% of the market it is really, really anxious about the elections. And I suppose we quite understand that. And so I think when all this subsides, however it goes, it will be less uncertainty and less anxiety, I think that will in still a bit more confidence then people will be a little bit more willing to invest, and make acquisitions and borrow money.” —BB&T CEO Kelly King (Bank)

Either President is going to bring change, but maybe one more than the other

“I also think a new President which is undoubtedly going to happen, has a slight variation one way or the other. I won’t talk about which one I think does which, but one gets a little more uncertain and causes us to stand back a little bit and wait to see how things settle. The other one is a lot more of the same and probably, whether we like it or not, is something we can manage because it’s the devil we know.” —US Bank CEO Richard Davis (Bank)

Investors are expecting a greater emphasis on fiscal policy

“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth.” —Blackrock CEO Larry Fink (Asset Management)

Some sort of international tax reform is likely

“I can tell you that I visit in Washington often and speak with members of the House Ways and Means Committee and the Senate Finance Committee and the tax staffs are busily working and working very collaboratively with U.S. multinationals on an appropriate tax reform package. We think there is more bipartisan support now than there has been in the past…we think that overall the climate for international tax reform post the election, quite frankly, is more positive than it’s been in the last year or so.” —Johnson and Johnson CFO Dominic Caruso (Healthcare)

International:

Currency is becoming a modest tailwind to growth

“for the first time in quite a while currency was a modest tailwind to revenue growth.” —IBM CFO Martin Schroeter (Enterprise Tech)

Brexit could be an overhang for a while

“Article 50 won’t be invoked until March of next year. That then starts to clock on a 2-year window. And I think it’s our own belief, based on a series of elections in Europe, the combination of France and Germany, that information is probably going to be more back-end loaded than front-end loaded.” —Citigroup CEO Mike Corbat (Bank)

The uncertainty alone is enough to weigh on the UK’s economy

“In the UK it’s still just mostly suffering from uncertainty, I don’t think the markets particularly weak, but uncertainty is never good for consumer confidence, which is the main driver of auto sales.” —Group 1 Automotive CEO Earl Hesterberg (Auto Dealership)

The ECB may keep its asset purchases going for a while too

“Regarding non-standard monetary policy measures, we confirm that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” —ECB President Mario Draghi (Central Bank)

The rapid shift to e-commerce in China is leading to inventory imbalances in traditional channels

“There’s some pretty rapid channel shift from traditional channels…the speed and magnitude of it, I think, has hit China differently than what you would see in the U.S. or other countries…In the process of that, what’s happened is, some inventories have piled up in, let’s say, traditional channels while the market’s needs have been satisfied by e-commerce channels.” —Abbott CEO Miles White (Medical Device)

Financials:

Banks are not going to wait for rates to rise anymore to pursue growth

“We are not relying on a significantly better economic environment or a substantial increase in interest rates. We have already begun to execute our plan and many of our larger initiatives have been completed or are well underway.” —Comerica CEO Ralph Babb (Bank)

“But if rates are flat, you’ve seen us grow our core loans and our loan balances pretty strongly, pretty consistently across businesses. And while we may not be able to replicate 15% core loan growth forever, certainly we can continue to grow our loans.” —JP Morgan CFO Marianne Lake (Bank)

They are extending the duration of their balance sheets as they accept lower rates for longer

“we don’t have high hopes for a lot of rate increases, but we do expect or hope for one in December. And so if lower-for-longer continue to persist, we’ll look for opportunities to continue to chop away at our asset sensitivity, while also remaining – also keeping that optionality if rates do rise.” –First Horizon CFO BJ Losch (Bank)

As the economy improves banks’ reputation should improve too

“when times are good banks are doing more positive things. People are healthier. The economy is moving more quickly. People want us and need us and we can say yes more often. When the world gets a little bit better, we can just say yes more often; we’re more popular and we’re more effective. When times are tough, actually we move on to defense and we’re there to protect people from things that could get them in harm’s way. That’s a less attractive position. People don’t like to watch defensive games either, because it’s low-scoring. At the end of the day, at the very end, it really does matter. So I do think it’s a noble occupation. I’m very proud of what we do and very proud of the people that do it across this country.” —US Bank CEO Richard Davis (Bank)

Technology is significantly lowering the cost of banking

“I would emphasize this shift to self-serve…18% of our deposit transactions are now completed through mobile devices, that’s better for customers, it’s also better for our shareholders. It’s one-tenth the cost of walking into a branch” —Bank of America CFO Paul Donofrio (Bank)

And opening new channels for white glove institutions

“Last week we launched a new online personal loan platform Marcus by Goldman Sachs. Marcus’ goal is to enter the consumer credit market and provide a product that is simple, transparent, flexible and provides consumers with real value.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

Schwab now has $10B in its robo advisor

“Client assets enrolled in Intelligent Portfolios surpassed the $10 billion mark at month-end September, just 19 months after launching in March 2015.” —Schwab CEO Walt Bettinger (Brokerage)

DOL rules are going to have a material impact on the asset management industry

“Regulatory changes have a material impact on the retail ecosystem…We are likely to see a historical shift on how assets are being managed and invested…we do believe, as it moves more towards managed portfolios, utilizing more of the centralization of models and corporate and asset allocation, it’s going to move quite a bit of money more towards passive strategies, utilization of ETFs. We do believe it’ll systematically move assets away from active” —Blackrock CEO Larry Fink (Asset Management)

Active managers are not prepared to win the race to zero fees

“I think most active managers are not prepared or equipped to win the race to zero, and fees are going to go to zero in many passive strategies and we’re not equipped and we’re not interested in competing in that business.” –Cohen & Steers CEO Robert Steers (Real Estate Asset Management)

Consumer:

Reed Hastings is ok with you using your parents’ Netflix login

“No plans on making any changes there. Password sharing is something you have to learn to live with because there’s so much legitimate password sharing, like with sharing with your spouse, with your kids.” —Netflix CEO Reed Hastings (SVOD)

Technology:

Technology prices could start to rise

“a lot of discussions that I’ve had with the channel recently have been fairly positive around PC ASP increases next year. And part of this is the mix towards enterprise as consumer mix down. But others are pointing to sort of an inflection in ultrabooks, thin and light. So let’s say we got a massive ASP increase in laptops, like they’re up 10% or something like that…” –Analyst on Intel Call

Verizon sounds like it wants out of its Yahoo deal

“So on yahoo…We are still evaluating what it means for this transaction. This was an extremely large breach that has received a lot of attention from a lot of different people. So we have to assume they will have a material impact on Yahoo. Lawyers had their first call yesterday with Yahoo to provide us information but as I understand that’s going to be a long process.” —Verizon CFO Fran Shammo (Telecom)

Healthcare:

Medicaid has been ACA’s biggest success

“Medicaid has been a very significant success of the ACA and wherever that has played out, those markets have actually been more stable and better performing.” —UnitedHealth Group CEO Stephen Hemsley (Health Insurance)

Industrials:

Auto OEMs are cutting back production as dealer inventories are too high

“OEMs have now reacted and reduced production. It is true that we’re still very sensitive to our inventory levels and they’re still not quite where we’d like them to be…But they are coming into line and I think you’ve probably read about many of the production cuts that the OEMs are making. So I think the entire industry understood the problem, and we’re working together to get it back in line” —Group 1 Automotive CEO Earl Hesterberg (Auto Dealership)

And they’re getting a little less aggressive with leasing

“with used car values likely having peak sometime in the past, my impression is the OEMs are starting to become a little more prudent about how aggressive they get in pushing higher levels of leasing” —Group 1 Automotive CEO Earl Hesterberg (Auto Dealership)

Auto sales probably wont be able to sustain this level

“light vehicle sales are forecasted to finish 2016 at 17.4 million, down less than 0.5% from the 2015 record rate of 17.5 million…We remain cautious with respect to auto sales sustaining at these levels.” —Union Pacific CEO Lance Fritz (Railroad)

Materials, Energy:

Animal spirits are still alive in the oil industry

“Our customers’ animal spirits remain alive and well in North America even though for some they may feel caged in a bit by cash flow constraints in the short-term. The average U.S. rig count increased 14% over the quarter” —Halliburton CEO Dave Lesar (Oil Service)

Credit quality of energy loans is improving. There may even be some reserve releases

“Barring any dramatic changes in energy prices, we believe the majority of the energy-related credit pressures we’ve experienced in 2016 have largely subsided.” —PNC CFO Robert Reilly (Bank)

“If the environment remains broadly consistent with today, we would not expect further significant builds in the fourth quarter for energy…you see further reserve releases for oil and gas” —JP Morgan CFO Marianne Lake (Bank)

But US oil production is likely to be down again in 2017

“we actually don’t see a change in the trajectory of downward U.S. production. I would say at current levels, probably into second half of next year, maybe fourth quarter” —Core Labs CEO Dave Demshur (Oil Service)

Productivity in the Bakken has declined significantly since 2014

“the decline curve always wins and never sleeps…the average productivity for Bakken producing well is down 26% since peaking in 2014.” —Core Labs CEO Dave Demshur (Oil Service)

Meanwhile new supply is needed just to outrun the decline curve

“worldwide crude oil supply and demand markets are close to balancing, and will balance by the end of 2016…the net crude oil production decline curve is currently at approximately 3.3%…means that the planet will need to produce approximately 2.8 million new barrels by this date next year to maintain current worldwide production capacity.” —Core Labs CEO Dave Demshur (Oil Service)

Miscellaneous Nuggets of Wisdom:

There’s nothing wrong with selling

“I want to make sure it’s clear, though, for this industry, selling is not bad. It’s not bad anywhere, as long as you’re selling to people’s needs and you’re making it clear what advantages you have to provide them at the time that they want them.” —US Bank CEO Richard Davis (Bank)

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 10.13.16

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 began to trickle in slowly this week and I will admit that the commentary was a little weaker than I was expecting. This is a very small sample, but most CEOs were still talking about a weak environment. I was expecting to hear a little more optimism. The verdict isn’t in yet though. The deluge comes over the next few weeks.

The Macro Outlook:

It looks like its still a tough business environment

“you all watch the news, I am not sharing a secret here. It’s not a great environment to do business in. But that’s the world we live in and that’s the world we need to contend with. And there is a lot of uncertainty.” —Fastenal CEO Dan Florness (Industrial Distributor)

Economic fundamentals remain weak and volatile

“Overall, it is fair to say that the economic fundamentals remain weak and volatile…We are not expecting improvement in market conditions in the fourth quarter and indeed markets are likely to remain volatile and hence challenging for a while yet” —Unilever CFO Graeme Pitkethly (Consumer Products)

There were not a lot of changes in September

” we didn’t see a lot of changes in September. We might be lapping some of the issues around the energy side, but …We will see how that plays out through fourth quarter…regionally, we indicated the U.S. was a little bit weaker than the international.” —Fastenal CFO Holden Lewis (Industrial Distributor)

Everyone’s longer term growth expectations have come down

“oming into this year, we sort of took it for granted that we grow mid single-digits and plan to invest around that. I am not sure that we are making…any such assumption about the go forward market given that we haven’t seen any meaningful improvement in the markets. And so we are not necessarily going to assume that we are going to make those same investments for that same level of growth.” —Fastenal CEO Dan Florness (Industrial Distributor)

Perhaps with good reason

“Revenues of 3.4 billion, that’s down 1% year-over-year…we’ve seen large commercial aircraft deliveries up 3%. The growth year-to-date is kind of flat and so we believe that the year 2016 is more likely to come out at the low end of the range and the range being 0 to plus 3%…So let’s move on to automotive and let’s go to North America. We believe it’s going to grow 1% to 2%.” —Alcoa CEO Klaus Kleinfeld (Aluminium)

“Revenue declined 8% in the quarter, consistent with an overall volume decline of 8% which included a 21% decline in coal volume.” —CSX CEO Michael Ward (Railroad)

“the biggest challenge we face as a company is the persistent decline of unit revenues. This quarter our RASM was down 6.8%.” —Delta Airlines President Glen Hauenstein (Airline)

Pricing power may be turning up though

” pricing has been low or negative for the past few years as a result of the benign commodity cost environment…As commodities have stabilized and start to turn up, we are seeing a return to more normal price inflation or in the case of Europe reduce deflation in some markets.” —Unilever CFO Graeme Pitkethly (Consumer products)

“in terms of overall same store sale pricing we’re obviously very transparent…There is clearly more difficult sale environment and it’s been there for a period of time as we see a significant amount of excess capacity…As the market turns, and it will turn…and if the economy continues to expand and unemployment stays low that should lead to a much better environment as we get into late ‘17 and that will be helpful.” —CSX CFO Frank Lonegro (Railroad)

“if you look back at history, significantly lower fuel ultimately translates into lower fares. That’s kind of a very high correlation over a long period of time, higher fuel turns into higher fares. The exact lag can vary, but it’s usually in the 3 to 5 month category. And as Paul says, we’re facing higher fuel. And so we would expect…for that to work its way back into the pricing structure, that it is right around the corner, we feel.” —Delta Airlines CFO Paul Jacobson (Airline)

If interest rates do rise it could have massive implications for the global economy

“Global debt levels in the combined corporate and household sectors rose to 327% of GDP at the close of last year, based on our analysis. By comparison, this figure was 227% on the eve of the financial crisis…These rising debt loads are even more worrying when juxtaposed against declining or negative productivity, declining marginal efficiency of capital, and declining returns on investment. The low interest rate environment has depressed the costs of servicing this debt, but when rates rise these costs are going to be a heavy burden.” —Institute of International Finance CEO Tim Adams (Trade Organization)

Meanwhile the Fed is pondering the theory of starred r’s

“Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest–or r*–including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth.” —FOMC Meeting Minutes (Central Bank)

International:

The long term consequences of Brexit may be starting to be revealed

“While in Washington I spoke to large American businesses and banks. Until now their question was whether Brexit will happen or might it take longer than expected. That’s over. They are telling us clearly that there will be a transfer of activity. It’s no longer a question of if but when. I don’t know to what extent or which ones. That’s the inevitable consequence whatever the outcome of the Brexit negotiations.” —French Finance Minister Michel Sapin

New York may actually be a big winner

“The big winner for Brexit will be New York; you’ll see more business moving to New York.” —Morgan Stanley CEO James Gorman (Investment Bank)

Jamie Dimon thinks Brexit raises the odds that the Euro Zone wont survive

“Brexit makes the chance of the euro zone not surviving 10 years from now five times higher.” —JP Morgan CEO Jamie Dimon (Bank)

At least the UK should get some inflation out of it

“We are taking price increases in the UK and that is a normal devaluation-led cycle” —Unilever CFO Graeme Pitkethly (Consumer products)

China showed more strength than some expected

“On China, we actually believe that it’s going to be better than what we saw in the last quarter, 6% to 8% we see here up from the 3% to 5% that we saw before. Production is up almost 11%, sales up 11%, and some of the legislation is helping us to get boosted. So that’s the picture on automotive.” —Alcoa CEO Klaus Kleinfeld (Aluminium)

It’s tough to say if this is the start of a trend

“With regard to Hong Kong and Mainland China, there was some improvement there, particularly in Mainland China…whether this is a start of a new trend, I absolutely don’t know. We’ve seen in the past already some quarters in which the Chinese nationals were doing much better than in the preceding quarters and it was short lived.” —LVMH Management (Luxury Brands)

Brazil may be bottoming out

“we think that Brazil has bottomed and I’d say we saw that based on the fundamentals of the businesses we have there in February or March of 2016, this year, and it’s going to be a slow way back but we think it’s slowly coming back.” —Brookfield Asset Management CEO Bruce Flatt (Private Equity)

Financials:

Low interest rates are reshaping the entire global banking industry

“We’re clearly aware of the need to adjust our business models. We’re managing a transition that’s tough…This new world of low interest rates and even negative interest rates is something that is very difficult…It is a game changer, not just for banks but for the whole financial industry.” —Societe Generale SA CEO Frederic Oudea (Bank)

“Crisis is the wrong word. We are in the middle inning of the reshaping of the financial landscape.” —Blackrock Senior MD Mark McCombe (Asset Management)

If you want higher growth you have to let banks do what they do

“If you want higher growth, you have got to let banks do what they do. This is an industry which is essential to global economic growth.” —Morgan Stanley CEO James Gorman (Investment Bank)

A large CRE lender was defensive about negative articles written about CRE markets

“Because we are one of the largest and most active CRE lenders in the country, we have received attention in recent articles regarding CRE…You have got all these articles and a lot of these articles are self propagating articles. One person writes an article about CRE that causes another person to write an article about CRE and you have this whole litany of articles about CRE written by people who, by and large, don’t understand the market. And in many cases, some do, but many don’t. And the result of that is you end up with a lot of commentary about the markets that are just not consistent with the reality that’s occurring in the market.” —Bank of the Ozarks CEO George Gleason (Regional Bank)

Hurricane Matthew didn’t do too much damage, but there will be some insurance losses

“our resorts on the East coast of Florida were reopened over the weekend sustaining minimal damage and have begun their efforts to get back to normal operations… we do obviously have business interruption insurance…that covers everything from COAs and the on-site locations in our properties as well as marketing and sales disruptions” —Marriott Vacations Worldwide CEO Steve Weisz (Timeshares)

Consumer:

The highest end consumer brands may not need ecommerce or Amazon

“on eCommerce you know our feeling on eCommerce, which we don’t view in itself as a big opportunity. We believe very much in the digital content of the selling experience…we also believe a lot in e-marketing…but in itself we don’t expect these to become a big, big channel…on Amazon, I would say that no, not really…we believe that the existing business of Amazon doesn’t fit with our — doesn’t fit our luxury full stop…there is no way we can do business with them for the time being.” —LVMH Management (Luxury Brands)

The Chinese love e-commerce

“In China…The market channel structure is shifting rapidly to e-commerce. Two years ago, this was just 3% of our sales, today it’s over 10%.” —Unilever CFO Graeme Pitkethly (Consumer Products)

Technology:

Alibaba’s cloud hosts 1/3 of all websites in China

“Today, Alibaba Cloud hosts 35% of total websites in China while also providing clients with cloud computing and big data services. Alibaba Cloud is a company with cutting-edge technology and an extensive range of products and now ranks among the world’s top three cloud computing companies.” —Alibaba CEO Jack Ma (Amazon clone)

Industrials:

More international cargo is coming to the east coast but not necessarily because the Panama Canal has been widened

“we’re seeing and have been seeing is a continued shift towards more East Coast internationally intermodal coming in versus West Coast….We have seen the shift for an extended period of time…we have not seen a significant change in the amount of volume coming in since the Panama Canal got widened. ” —CSX CFO Frank Lonegro (Railroad)

Full transcripts can be found at www.seekingalpha.com