by Erick Mokaya, Avondale Asset Management
Editorâs note: Please note that this weekâs post was compiled by Erick Mokaya. Â Erick has been helping out on our weekly piece for about a year now and has consistently done excellent work. Â Heâs an incredibly strong young analyst and we feel very fortunate to have him working with us.
The US and the global economy are both experiencing gradual improvement. The US economy in particular is seen as resilient and in good shape even though the last quarter experienced slow economic growth. The energy sector is bouncing back as rig counts increase but we may have to wait awhile before new ones can be built. Meanwhile, car inventories are building up as sales slowdown and AI and machine learning are increasingly playing a bigger role in the development of tech companies.
The Macro Outlook:
Nothing much has changed in the economy
âbroadly speaking, not much has changed since the last quarter. Weâve seen modest pickup in global growth, in part due to market-specific fiscal stimulus, although uncertainty about the direction of trade policies continues to be a concern.â âMastercard CEO Ajay Banga (Financials)
Any economic weakness is likely transitory
âInformation received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowedâŠ.The Committee views the slowing in growth during the first quarter as likely to be transitoryâ âThe Federal Reserve
US industrial sectors are in âgood shapeâ
âThe part of the world that you should be focused on at this point is the United States of America, because our economy is growing. All sectors are in good shape. Some sectors are surprisingly strong at this point like agriculture, like non-residential construction. Automotive has not come down. Actually, we are seeing automotive turning back up. And we have a limited amount of domestically generated steel available for all these uses.ââCliffs Natural Resources CEO C. Lourenco Goncalves (Iron Ore)
Inflation is likely to rise
âWe are seeing increases from suppliers. So I think as we work through calendar 2017, we will see a few more supplier increases, and likely have some moderate inflation as we go forward.â â Applied Industrial Technologies CEO Neil Schrimsher (Industrials)
â⊠for the full year we still see overall inflation in that 3% range which is obviously higher than what we ended up with last year.â â Union Pacific Corp CEO Lance M. Fritz.
â⊠just as people start to talk about rates potentially moving up and inflation maybe starting to move a little bit, youâre starting to see loss cost trend, which makes sense.â âMarkel Co-CEO Thomas Gayner
But there are also pockets of deflation
ââŠIf I look at our spending year-to-date where we track this every month, we are still net deflation year-to-date as a company. So weâve certainly experienced more deflation in our costs after the first quarter in 2017 versus 2016 and there is a mix there.â âConocoPhillips Vice President Alan J. Hirshberg
Optimism is still running high
ââŠthe new US administrationâs proposed policies of reducing corporate taxes to 15% rolling back regulationâŠand significant infrastructure spending has the potential of boosting economic growth significantly in the United States. Already sentiment among small businesses has improved dramatically and animal spirits in the United States are being revived.â â Fairfax Financial Holdings CEO Prem Watsa (Insurance)
But conviction has ticked lower
âThis quarter it feels like conviction for tax and regulatory reform is more mutedâŠ. This was a quarter that was defined by low volatility, a lack of conviction with our clients. One of the things I would say is our business is definitely weighted, or levered, to times when our clients have a lot of conviction. One of the things that happened is that conviction sort of ebbed.â â Goldman Sachs President David Solomon
The administration is trying to manage expectations. Stronger growth is still two years away.
âIn our projections it will probably take two years to get up to three percent growth and then we can have a sustained level.âŠâ âU.S. Treasury Secretary Stephen Mnuchin.
International:
A strong US economy means a strong global economy
âWhen the US economy, which is approximately 20 trillion, does well much of the world does well. To us this means our concerns of China or Europe precipitating a worldwide recession depression have been significantly reduced, but not delaminated. Also the trade policies of the US could precipitate a collapse in world trade.â â Fairfax Financial Holdings CEO Prem Watsa (Insurance)
Economic growth in the Eurozone is solid
âgrowth is improving. Things are going better. And you remember in 2013 we were speaking of a recovery which was fragile and uneven, and now itâs solid and broad.â âECB President Mario Draghi.
The UK is bouncing back
âin general the UK is making a nice comeback. I mean we are seeing good activity there. I think we had a recent survey of clients that showed that London once again was the favored destination for international capital among all major markets around the world.â âCBRE President Robert Sulentic
But companies are still keeping watch for the impact of Brexit
âBrexit is not over yet, so I would say everyone is still waiting to figure out what the actual rules will be and thereâs no question it will put some pressure on both the manufacturers and the retailers and, I think, thatâs a piece of the uncertainty there.â âMondelez International CEO Irene B. Rosenfeld (Packaged Food)
Companies are seeing opportunities in China
âcontinued growth opportunities for us do exist in ChinaâŠ. just 40% of the Chinese customers do finance their cars. That is, I think pretty good snapshot number for the marketâŠthis number with a 40% has come up significantly over the last five, six, seven years, so the market is normalizing and this is certainly other than the growth of our brands are expecting in China a huge opportunityâVolkswagen Head of Group Sales Fred Kappler
Brazil is looking up as it recovers from a recession
âBrazil is showing signs of emerging from its two-year recession⊠the international markets have in the last, I would say not just this quarter, over the last six to nine months, things have been moving up in the international marketsâŠBrazil is turning the corner.â âMastercard CEO Ajay Banga (Financials)
ââŠ.we talked briefly about Brazil, a market which has almost collapsed. We expect the market to recover over time maybe starting as early as the second half, but slowly but surely from very low levels.â âVolkswagen Head of Group Sales Fred Kappler
Things still have not normalized in India since demonetization
âif you spoke to consumer product companies that are large in India, a Unilever kind of company, they would tell you they still see an impact on total consumer volumes and downsizing of inventory in the retail system because of some non-availability of adequate cash for transaction capabilityâŠ.Youâre seeing more electronic. Youâre seeing a little more cash, still not back to where it was, but itâs headed in the right direction.â âMastercard CEO Ajay Banga (Financials)
Financials:
Startup capital has become more scarce
âRaising money was the top challenge identified by startup executives in our recent annual Startup Outlook Survey. Fortunately, there is continued investor appetite and capital for good companies, especially those that can demonstrate growthâŠ.we believe there is sufficient capital to fuel the innovation ecosystem and that good companies will continue to get funding.â âSVB Financial CEO Gregory Becker
Investors are still allocating capital to commercial real estate though
âcapital rising has been very, very strong for us and I would say continues to be on a fairly consistent basis. We are seeing maybe as that investor just being careful and thinking about where theyâre investing in aware of the fact that were weâve been in a slow but longer economic recovery than prior cycles that this cycle feels a bit different, but the flows of capital into our investment management business have continued quite strong.â CBRE CEO Robert Sulentic (Commercial Real Estate)
Technology:
Artificial Intelligence is of increasing importance
âour testing platform now employs artificial intelligence, where we crawl through the claims and look for anything thatâs unusual. And so that has resulted in what I think have been very successful welcome seasons over the last several years.â âCVS Health Corp CEO Larry J. Merlo (Health Care).
âIâm really happy with how we are transitioning to an AI-first company. The Google Assistant is one of our first steps towards that futureâŠAdvances in machine learning are helping us make many Google products better.ââGoogle CEO Sundar Pichai
âOver time, the AI tools will get better. Right now there are certain things that AI can do in terms of understanding text and understanding whatâs in a photo and whatâs in a video. That will get better over time. That will take a period of years, though, to really reach the quality level that we want.â âFacebook CEO Mark Zuckerberg
Microsoft says that whatâs happening at the edge is the most exciting part of cloud
âwhen everyoneâs talking about the cloud, the most interesting part is the edge of the cloud. Whether itâs IoT, whether itâs the auto industry, whether itâs whatâs happening in retail, essentially compute is going where the data gets generated, and increasingly data is getting generated at the volumes in which itâs drawing compute to it, which is the edge.ââMicrosoft CEO Satya Nadella
Too much demand is bad if you donât have inventory to meet it
âone of the things that we did not get right was the mix between the iPhone 7 and the iPhone 7 Plus. It wound up that demand was much stronger to the iPhone 7 Plus than we had predicted. And so it took us a little while to adjust all the way back through the supply chain and to bring iPhone 7 Plus into balanceâ âApple CEO Timothy Cook
Mobile ad revenue is now 85% of Facebookâs ad revenue
âMobile ad revenue was $6.7 billion, up 58% year over year, and was approximately 85% of total ad revenue⊠More businesses around the world are shifting to marketing on mobileâŠ. I think increasingly, the question is not if you can do without TV, but itâs if you can do without mobileâ âFacebook CFO Sheryl Sandberg
Industrials:
Car inventories are piling up and need to be reduced
âU.S. new vehicle inventory stood at 29,800 units, which equates to a supply of 86 days, consistent with a year ago but far too highâŠ. we must adjust our inventory level downward in the second quarterâŠweâre not the only dealers in these oil patch markets who have found themselves with too much inventory based on a further slowdown of sales.â âGroup 1 Automotive CEO Earl J. Hesterberg (Car Dealer)
âpassenger car inventory remains heavy and we have been working to bring that down to more appropriate levels by cutting production, and we remain committed to match supply and demand. We expect to endâŠwith significantly reduced passenger car levels.â âGeneral Motors CFO Chuck Stevens
Materials, Energy:
Oil companies are putting rigs back to work at an âastonishingâ rate
âour North American customers are demonstrating that their economics work even at current oil prices in many North American basins by putting rigs back to work at an astonishing rate âNational Oilwell Varco CEO Clay C. Williams
The steel industry is in good hands with Wilbur Ross
âJust to give an idea, Mr. Wilbur Ross was the guy that put together Bethlehem Steel and LTV Steel just after the debacle of the two companies around 2001, 2002. And that was a result of trade case. So, Wilbur Ross knows trade cases very well. So, I donât know what youâre concerned aboutâ
â Cliffs Natural Resources CEO C. Lourenco Goncalves
Full transcripts can be found at www.seekingalpha.com
Copyright © Avondale Asset Management