What CEOs Said This Week: God Awful Election

What CEOs Said This Week: God Awful Election

by Scott Krisiloff, CIO, Avondale Asset Management

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: God Awful Election

Janet Yellen gave an emphatic speech this week that advocated slower increases in interest rates. Despite the fact that asset prices have recovered, according to Yellen risks remain elevated from where they were in December.

It’s clear at this point that the Fed’s “data dependence” is primarily focused on asset prices. However, higher asset prices really only benefit a small segment of the population. Dollar General made a compelling presentation that its consumers never really exited the recession, and in fact things got worse. Inflation is outpacing wage growth for these low income earners.

While the Fed doesn’t see inflation, these are the forces that are leading to an angry electorate and what Lennar’s CEO called a “God Awful” election season. No doubt that 3 of the top 4 candidates are awful for capital, but their populist messages resonate with labor. If you’re betting on the Fed keeping asset prices high, beware that the Fed may be independent, but the President is still the most powerful person in government and even has the power to force changes at the FRB.

The Macro Outlook:

Coincident economic commentary is relatively positive

Lennar doesn’t see the telltale signs of recession

“We do not see the telltale signs of recession…we saw good sequential improvements throughout the quarter, December being the lightest and clearly February being the strongest month, pretty much spread across every operating territory that we’ve got” —Lennar CEO Stuart Miller (Homebuilder)

3M’s markets are less negative than initially forecast

“in January…we stated that we are expecting first quarter organic growth to be…down slightly. And as the quarter is progressing, we are seeing four of our five businesses tracking either at or above what we were expecting at that time.” —3M CFO Nick Gangestad (Conglomerate)

But the Fed isn’t raising rates any time soon

“the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years…Reflecting global economic and financial developments since December…the pace of rate increases is now expected to be somewhat slower.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen is concerned that longer term inflation expectations are falling

“Since [the 90s], measures of longer-run inflation expectations…have been remarkably stable…Lately, however, there have been signs that inflation expectations may have drifted down…It is still my judgment that inflation expectations are well anchored, but as I will shortly discuss, continued low readings for some indicators of expected inflation do concern me.” —Federal Reserve Chair Janet Yellen (Central Bank)

And it’s easier to raise rates if they need to than to lower them

“caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.” —Federal Reserve Chair Janet Yellen (Central Bank)

They’re not out of ammo if they need it though. They’ll use the same policies that have worked in the past.

“Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that…we used effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.” —Federal Reserve Chair Janet Yellen (Central Bank)

Have the policies really worked though? Not for low income consumers

“our core customer continues to live in a recessionary environment…our customers face much stronger headwinds in this economy than tailwinds.” —Dollar General CFO Jim Thorpe (Retail)

60% of Americans have less than $1000 saved. These individuals have not received a direct benefit from rising capital markets

“This has resulted in the majority of Americans living on the bubble of economic uncertainty. 60% of Americans don’t have a savings safety net of $1000 and 20% don’t have a savings account at all. So as you will see, our customers simply haven’t received the benefit of the economic recovery. Households earning less than $52,000 have experienced negative wage growth…only households in the top fifth quintile have seen any real income growth since the recession and most of that’s being driven by the top 5% of earners. So you can see that our core customers who were financially strapped before the recession are even worse off today.” —Dollar General CFO Jim Thorpe (Retail)

In fact, Fed policies have arguably stoked inflation in key areas that disproportionately impact low wage earners

“inflation is simply outpacing total wages…There were no cost of living increases this year and that particularly hurts our SNAP and Social Security recipients especially hard. And healthcare costs and rents continue to rise which also impacts our customers more than higher income households.” —Dollar General CFO Jim Thorpe (Retail)

Yellen’s attention appears to be elsewhere

“core PCE inflation…was up…somewhat more than my expectation in December. But it is too early to tell if this recent faster pace will prove durable” —Federal Reserve Chair Janet Yellen (Central Bank)

But these are the forces that are causing an election that’s “God-awful” (for capital)

“There have been some questions raised…about the implications of a God-awful election season in the United States… Well, they say that America always gets to the right answer right after we’ve tried all the wrong ones, we’ll see.” —Lennar CEO Stuart Miller (Homebuilder)

And the Fed chair effectively serves at the pleasure of the President. Others have been removed before.

“Q: Mr President, what prompted you to replace Mr. Eccles with this Philadelphia Republican?
The President: That is my prerogative. I decided to make the change without anybody’s request or influence…The President has a right to do that if he wants to do that.”

—Harry Truman January 1948 (after removing Marriner Eccles as Chair of the FRB for raising interest rates)

There are signs that the pendulum may already be starting to swing away from capital in favor of labor

Restoration Hardware sees a softening at the higher end

“I think that we still feel that there’s a general softening at the higher end of the market.” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

Labor markets are tight in homebuilding

“Land and labor shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand…we’re not really seeing a recovery on the labor picture” —Lennar President Rick Beckwitt (Homebuilder)

Wage inflation should be 3-4% at restaurants thanks to minimum wage laws

“We experienced wage inflation of approximately 3% during the fourth quarter, primarily due to the higher minimum wage rates in both California and New York. As we look ahead we are projecting wage inflation of approximately 3% to 4% in 2016 which is higher than the 2.5% experienced in 2015.” —Dave and Busters CFO Brian Jenkins (Restaurant)

International:

There’s a belief that economies follow a pre-set path of development

“as you know, in all economies, you have the evolution of infrastructure coming first, followed by manufacturing, after that, safety coming in place, then you have retail and then finally healthcare is the evolution of all economies and it’s true for all economies around the world. This is the way it goes.” —3M CEO Inge Thulin (Conglomerate)

Urbanization continues to be assumed to be a demographic megatrend

“Every day 180,000 people move to urban areas. By 2050 cities will be home to 2.5 billion more people than today, generating a need for more apartment buildings, airports and mass-transit systems” —United Technologies CEO Greg Hayes (Conglomerate)

Governmental change has been a positive for economic sentiment in India

“As I had mentioned last year, the decisive mandate in the general elections was a very positive development for the economy. The immediate impact was felt in the form of a strong improvement in sentiment…Over the last year, the Government has taken a number of important steps. There has been a focus on improving governance; enhancing the ease of doing business; creating a conducive environment for investment by both international and domestic participants; and adopting a stable and prudent fiscal policy. At the same time, the Government has sought to bring about the engagement of more and more people in the economic mainstream. While the impact of these measures will be seen over the medium term, the steps taken are clearly in the right direction.” —ICICI Bank CEO Chanda Kochhar (Indian Bank)

Financials:

The Fed is pleased with the way that markets are reacting to data

“Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important “automatic stabilizer” for the economy.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen acknowledged that real interest rates are already negative

“the evidence on balance indicates that the economy’s “neutral” real rate–that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential–is likely now close to zero. However, the current real federal funds rate is even lower, at roughly minus 1-1/4 percentage point” —Federal Reserve Chair Janet Yellen (Central Bank)

Americans are increasingly choosing to rent rather than buy homes

“relative to the empty nesters rethinking their living conditions, there has been some movement in the direction of rental versus homeownership there as well. So we’ve seen that the rental option, the reduction in homeownership rate is something that is broader than just affordability, it reflects also appetites and desires that have evolved since the recession. And we think that some of those trends will continue.” —Lennar CEO Stuart Miller (Homebuilder)

Insurance companies are prime beneficiaries of advancements in big data

“The tools and techniques of big data continue to increase in affordability and utility. Simply put, information is king. Every transaction and data point continues to become more robust and informative about what the ultimate risk and outcome will be. Technology and digitization change the tools used in the task, not the task itself.” —Markel CEO Tom Gaynor (Insurance)

Torchmark has repurchased 78% of its outstanding shares over the last 30 years

“We have been conducting our share repurchase program for thirty years now. During that time…we have spent $6.5 billion to repurchase 78% of the outstanding shares of the Company.” —Torchmark CEO Gary Coleman (Insurance)

Consumer:

Malls are shifting emphasis from shopping to entertainment

“malls are not dead. Actually our mall stores are performing well…I think that mall developers are pivoting towards a bit more entertainment as they are going after trying to replace these folks” —Dave and Buster’s CEO Steve King (Restaurants)

“When you combine quality grocers and off-price retailers with many of our service oriented tenant businesses including medical services, restaurants, fitness centers and other e-commerce resistant uses, you have a winning formula” —Kimco Chairman Milton Cooper (REIT)

Grocery and off-price concepts drive traffic to malls

“the grocer has by definition an advantage over a traditional retailer of discretionary items…a quality grocer will generate consistent traffic in any economic cycle. Similarly off-price retailers with their constantly changing merchandise and appeal to treasure hunting consumers, dominate the retail landscape today and drive traffic to our centers.” —Kimco Chairman Milton Cooper (REIT)

There is a lot of real estate available for big box concepts

“There is a lot of sites available right now especially for our size…there are things like kind of sears coming online and saying they are going dispose a 100 stores…some Macy’s have come online, sports authority declared bankruptcy, so there is a lot of real estate coming online in our size.” —Dave and Buster’s CEO Steve King (Restaurants)

Campbell Soup intends to spend 40% of its media budget on digital this year

“In fiscal 2016, we plan to spend nearly 40 percent of our overall media budget on digital media. We also remain focused on growing our e-commerce capabilities, as this is becoming increasingly important to our consumers and our customers.” —Campbell CEO Denise Morrison (Packaged Food)

Technology:

Micron said that PC markets should continue to be weak but others are stronger

“Relative to PCs, yes, it continues to be weak. We think maybe down mid single-digits for the year…But once you get outside of PCs…and mobile growing maybe right around the market supply for DRAM. You got all these other segments that we think will out strip supply growth servers, automotive, etcetera, etcetera.” —Micron CEO Mark Durcan (Semiconductors)

Alexander Graham Bell invented wireless telephony in 1880

“Bell once said his “greatest invention” was the photophone, patented in December 1880. Six months earlier, he had used this device to transmit a voice message between 2 buildings…wirelessly!” —BCE Annual Report (Canadian Telecom)

Materials, Energy:

The Texas economy hasn’t exactly improved

“Yes. Just on the Texas question…our fourth quarter we were positive. It was not 6% positive, it trailed the overall change but it was still…I would not say that trend has improved.” —Dave and Busters CFO Brian Jenkins (Restaurants)

Renewable power generation is pushing utilities to transform electric grids

“There is a shift towards renewables, which is accelerating despite the low oil price…In power generation, renewables are transforming the energy mix…and dramatically increasing grid complexity. The future grid will be far more complex with multiple feed-in points from traditional power plants to large-scale renewables on the supply side, and a coexistence of traditional demand patterns and microgrids and nanogrids on the demand side. Managing this complexity will require intelligently automated, digital power grids that can anticipate demand and supply patterns, while routing and transporting power to the ever-increasing number of consumption points of electricity.” —ABB CEO Ulrich Speishoffer (Electrical Equipment)

Miscellaneous Nuggets of Wisdom:

Strong companies are often built during downturns

“I believe that strong companies are often built during downturns and our approach is to view this difficult period as an opportunity and a challenge.” —Suncor CEO Steve Williams (Integrated Oil)

There’s value in simplicity

“Simplification has made us more transparent and easier to value. First off, we have fewer properties overall. These properties are higher quality, are located in major US metro markets and are managed by Kimco. Moreover, by reducing both the number of joint ventures and assets under JV control, we have unlocked considerable value in properties that some analysts and investors viewed as “encumbered” and ascribed discounts to their value.” —Kimco Chairman Milton Cooper (REIT)

Don’t repeat the errors of the past

“It is often said that those who ignore the errors of the past are doomed to repeat them. As the economy shows signs of decelerating, our strong balance sheet will be the foundation upon which Kimco can act on opportunities rather than sit idly by.” —Kimco Chairman Milton Cooper (REIT)

Expect for your plans to be wrong

“by the way, any plan in my entire career I’ve ever been associated with or developed is some degree of wrong. So we expect to be some degree of wrong and that’s why we have a lot of what if scenarios and kind of backup plans in place.” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

Full transcripts can be found at www.seekingalpha.com

This post was originally published at Avondale Asset Management