Company Notes Digest 1.23.15

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

The Macro Outlook:

Larry Fink spells it out: global markets are hooked on accommodative monetary policy

“Anemic global growth has led to an over-dependence on politicians to implement reforms to rebuild the global economies. But we have seen limited action globally from politicians and as a result, we continue to rely on accommodative Central Bank policies whether we’re talking about Europe, China, Japan, and even at this moment even the United States.” ($BLK)

Central banks are in uncharted territory

“The Fed and the Fed equivalent across the globe, they’ve done some behaviors that are certainly not [orthodox] and they are not things that we all learned in school.” ($USB)

Other than that the economy is back to a non-new normal

“it’s really back to normal, not a new normal” ($JCI)

Retail investors are generally bullish

“retail investors right now are generally bullish…trades are up and logins are up…whether it’s margin loans, net buying, everything continues to say our client base is pretty A, engaged and B relatively bullish.” ($AMTD)

TD Ameritrade’s clients are 85% invested

“Client cash balances ended the quarter at 14.4% as our clients remained invested in the markets.” ($AMTD)

Credit quality is still very strong for banks

“the stability of our credit portfolio right now is the strongest I’ve ever seen” ($USB)

“credit quality continued to be strong.” ($CMA)

“Our credit quality remains extremely strong.” ($MTB)

“I think what’s going on the books today is some of the most pristine credit quality we’ve had in a long time” ($RF)

Credit quality is even still strong in the energy space, but banks are making provisions just in case

“Specifically related to energy, while we have not yet seen adverse trends in our portfolio, our allowance now contains an allocation to reflect the recent fall in oil and gas prices.” ($CMA)

Lower oil prices will hurt some but help others

“I have to believe that over the course of the year we’ll see the most positive side for us arching much more towards the consumer side than the risk on the energy side” ($STI)

Larry Fink thinks that people are underestimating how much the energy revolution is going to change the world

“[The decline in oil prices] is leading to a global redistribution of wealth, which people underestimate how this is going to transform the world.” ($BLK)

Still, the benefit to the consumer may be somewhat overstated. The stimulus from the oil decline will be about the same as a tax refund to the consumer

“our consumers will see sort of that increase in tax refund equivalent of fall in oil prices.” ($STI)

Is it possible that the international economy is bottoming out?

Europe started out weak for JNJ but then got better

“in Europe we saw contraction initially then Europe actually performed better’ ($JNJ)

IBM saw some improvement in China

“In fact, four of our five largest banking clients in China added substantial new mainframe capacity. Overall BRIC performance was consistent with last quarter with the improvement in China offset by weaker performance in Brazil.’ ($IBM)

The strong dollar is a material headwind for international companies

“The dramatic dollar strengthening started in September and has continued at a rapid pace…At current spot rates, we would expect a significant impact to revenue and profit in 2015.” ($IBM)


The working assumption is still that rates will rise mid year

“I think like a lot of our peers, we’ve adopted the Fed’s interest-rate scenario which starts to move up in the middle of the year. If that happens, that’s awesome.” ($USB)

Rising rates will give banks a chance to shine

“The next opportunity for us to perform is when the rates pick up because the markets picked up and to show that the Bank is repositioned now to be as strong as it ever was when it was on defense and be better than anyone else on offense’ ($USB)

The short end is what matters to banks

“The long rate is less impactful to us. We’re most impactful at the very short end’ ($USB)

It’s all just a matter of “patience”

“if Fed with their announcement in March takes the word patience out, you’re going to see LIBOR rates start to increase in the second quarter. What you’re going to see that starting to flow through in the net interest income in the second quarter just by LIBOR rates increasing.’ ($BBT)

Banks are still highlighting a competitive environment

“as I look at this quarter, talking to every single region, the one thing that’s become common is that there is consistent competitive pressure’ ($MTB)

Community banks have been particularly aggressive

“a lot of pressure that we’re seeing is coming from the smaller community banks ‘ ($MTB)

The economy isn’t quite ready for 8-10% loan growth quite yet

“tempting as it might be to tell you guys we’re going to move to 1.5% to 2% linked quarter or 8% to 10% year-over-year, the economy doesn’t warrant that yet” ($USB)

It’s a big deal that mortgage volume is growing again

“We should have had the applause because that is a long anticipated moment where we’re starting to grow mortgage again on a year-over-year basis.’ ($USB)

As M&A in banking starts to pick up, it’s imperative that acquirers have the right systems in place or regulators wont let deals go through

“I think ensuring that you have all of your key processes in order to participate in acquisitions is important.” ($RF)

There was a lot of pressure on credit markets in 4Q

“When you see that much pressure on credit markets, in terms of the ability as a market maker on the course of the quarter, to manage liquidity, I don’t think its particularly surprising, particularly the stress that came under high-yield as a result of the energy decline.” ($GS)

Clearly liquidity was an issue in credit markets last quarter, but it’s tough to say if that’s due to structural changes

“clearly liquidity played a role in terms of the degree of price movement. But I wouldn’t say at this stage you could draw any firm conclusions from that in terms of any long-term structural changes.” ($GS)

A big question for asset managers is how to manage a portfolio for an income oriented investor

“How does an income oriented investor whether its an insurance company, a retiree who is struggling to meet the income needs of the – this is where we are in much greater dialogue.” ($BLK)

Asset allocators are pairing low cost beta strategies with higher conviction alpha strategies

“Barbelling continues to be a key theme, as institutional clients pair cost effective beta exposure with alternatives and other high conviction alpha solutions, to achieve uncorrelated returns.” ($BLK)

Many companies are taking the opportunity provided by high asset prices to defease their defined benefit plans

“why have we seen elevated pension closeouts because you’ve had significant rallies in U.S. equities over the last five years. Companies have been closer to meeting their liabilities…Some of the firms have used annuities and working with insurance companies.” ($BLK)

Travelers thinks the insurance cycle has permanently flattened

“Advanced analytics and a more demanding regulatory and oversight environment have also meaningfully contributed…we continue to believe that the amplitude of the cycle has narrowed substantially.’ ($TRV)


Reed Hastings sees internet video in every US home

“if you step back and you say is Internet video going to be in every home in America in 10 years, that’s a pretty clear yes. So, tons of potential there and we’re very excited about just continuing to improve our service.’ ($NFLX)

About 30-40% of Netflix is consumed on personal devices, the rest still on TVs

“We’ve said personal devices PC, tablet phone that varies by market some sort of 30%-40% of viewing and TV based viewing being the large screen share doing being the majority of it.’ ($NFLX)

We appear to be on the verge of regulating broadband as a utility, which would be good for Netflix

“what’s been great for Netflix is the general idea of the Internet as a utility open to all not for discriminatory use, as it really take whole…we appear to be on the edge of enacting Title II and generally codifying the idea that at least in the U.S. the Internet is a utility for broad social good and wide open access.’ ($NFLX)

Verizon threatens that Title II classification will affect network investment

“first of all, this is not of an issue about Internet rules. It’s about an issue of FCC reclassifying Broadband to Title II service. And this will absolutely affect us and the industry on long-term investment in our networks…that can be seen factually as to what happened in the rest of the world where you have high regulation, the networks are not invested in” ($VZ)

Verizon: Title II is an extreme and risky path

“Title II is an extreme and risky path that will jeopardize our investment and the development of innovation in Broadband Internet and related services.” ($VZ)


Verizon activated an “unprecedented” number of smartphones in Q4

“Total postpaid device activations in the fourth quarter were unprecedented, totaling 15.3 million, up nearly 34% over last year. More than 13 million were phones, driven by iconic smartphone launches from both Apple and Samsung…In total about 9.8% of our retail postpaid base upgraded to a new device in the fourth quarter.” ($VZ)

Verizon sees Google as just another competitor in mobile

“listen MVNOs or resellers or people leasing the network from carriers has been around for 15 years. It’s a complex issue. You have to deal directly with the consumer. There is a whole infrastructure that’s needed to do that…it’s just another competitor as we look at it.” ($VZ)

x86 is likely to dominate the server market for a long time to come

“So when we look at ARM and x86, I would say, you know, the majority of the — the majority of the [server] market will still be x86 for quite some time because of all of the legacy applications that exist. ARM offers a new opportunity in some of the dense server markets, and so we continue to look at that as a growth opportunity where new business will grow.” ($AMD)


United Healthcare isn’t seeing any material changes in utilization trends

“with December behind us and the majority of January behind us as well, we’re not seeing any indication or evidence of an increase in utilization.’ ($UNH)

Healthcare is expected to be 21% of US GDP by 2020

“healthcare, which by 2020 is expected to account for 21% of the GDP in the United States, nearly 11% in the European Union and 6% in China.’ ($JNJ)

So far exchanges haven’t eaten into small group business

“I think the growth in the exchanges both in ’14 and in ’15 are really driven by the uninsured and that expansion through the subsidy. So we have not seen a significant erosion of our small group business” ($UNH)

Materials, Industrials, Energy:

Oil companies clearly have a difficult year in front of them

“we clearly have a challenging year in front of us” ($SLB)

E&P Capex budgets are forecast to be down 25-30%

“I think if you look at 2015 activity in North America and you look at the third party spend surveys, it indicates about 25%, 30% reduction.” ($SLB)

“Capital expenditure budgets from our customers remain fluid, but so far an average have been reduced 25% to 30%” ($HAL)

“[customers] are telling us that at this time CapEx plans for 2015 are being cut, in some cases as small as 20% and some cases as large as 50%” ($CMA)

Oil down cycles happen once or twice a decade

“our industry is clearly in the early stages of a down cycle. The same sort of cycle we enter once or twice a decade.” ($BHI)

The first quarter of a downturn is the hardest to predict

“The first quarter of any severe downturn is almost always the most challenging quarter to predict, because pricing concessions usually impact our results in real time.” ($HAL)

TD Ameritrade’s clients started to rotate into oil and gas stocks last quarter, maybe early?

“Our client base – we’ll have an orientation towards the tech and growth stocks, but also there’s been a huge – they tend to be contrarians and they moved into the oil and gas stocks with the big dividend yields and lots of capital to do dividends and buyback shares, they moved into them pretty good” ($AMTD)

It could take until the second half of the year to see US production decline

“Depending on the ultimate trajectory of the rig count declines and the backlog of well completions, we believe that North America crude production could begin to respond during the back half of the year.’ ($HAL)

Don’t expect prices to firm until there are clear signs of supply contraction

“we don’t expect the oil prices to improve significantly until there are signs of weakening supply, and the weakening supply will either first come from North America or from international.” ($SLB)

Are oil markets really out of balance though?

From a capacity standpoint, oil supply and demand are still relatively well balanced

“Looking at the supply side, the growth in global oil production capacity of around 1 million barrels per day over the past year matches the growth in demand. So the overall oil market is still relatively well balanced from a capacity standpoint…the significant drop in oil prices is not driven by over capacity” ($SLB)

The fall in oil prices is about higher “marketed” supply (SK note: I’m not sure what that means)

“The dramatic fall in oil prices is instead a result of higher marketed supply in the second half of 2014 from North America and also from OPEC who have shifted focus from protecting oil prices to protecting oil prices to protecting market share.” ($SLB)

Because capacity is still relatively balanced, if investment is put on hold we could see a large increase in oil prices

“Consequently, we believe that any sustained period of under investment due to reduced operator spending could lead to an increase in commodity prices. And this largely ignores the possibility of short-term disruptions due to geopolitical issues.” ($HAL)

Delta thinks it can generate an extra $2 B in cash next year from fuel savings

“There’s a tremendous opportunity in front of us from lower fuel prices. We will drive these savings to the bottom line with strong revenue growth and yield preservation regardless of fuel prices. At current fuel prices, we expect to capture over $2 billion in fuel savings benefit in 2015 net of our hedges.” ($DAL)

Lower fuel costs do create an element of headwind to revenue though, since competitors will likely lower airfare

“there’s no question there’s a correlation as fuel prices come down there’s an industry supply macro that you need to think about so we weren’t talking about any specific headwinds other than the fact that as fuel prices come down you can expect to see some pricing pressure broadly.’ ($DAL)

Miscellaneous Nuggets of Wisdom:

Stay true to your margin requirements. Don’t give away business.

“we would rather stack the equipment than operate at [a margin] level that is unacceptable.” ($SLB)

You don’t have to be the biggest to be the best

“We are big enough, we do not need to be any bigger, but we are driven about returns, driven by them.” ($TRV)

When times are tough you have to keep investing in the things you can control

“Until we can see a stronger economy, we’ll add the compliance, operating risk areas, audit areas where we think we continue to need to make sure we’re at the right level of support” ($USB)

“I know on my experience that you have to invent through these things. You want to keep your business franchise strong.” ($HAL)

Reminder to the shorts: good management teams adjust course in negative environments

“Our customers are obviously aware of what’s going on. They are going to make the appropriate adjustments” ($CMA)

It’s damn hard to merge two companies together

“I’m not naïve how hard it is to put two companies together. It’s damn hard.” ($HAL)

People always underestimate the power of technology

“The technology revolution that most people always underestimate is so evident in the oil industry…” ($BLK)

Full transcripts can be found at