What CEOs Said Last Week: Valuations should be at a discount, not a premium

by Erick Mokaya, Avondale Asset Management

Consumption was weak in Q1 but the global economic recovery is expected to continue in Q2. Some signs indicate that we may be in a bubble but rest assured nobody knows when it will burst. All in all, companies and customers alike are positive.

The Macro Outlook:

Although the first quarter was weak, signs still suggest that the industrial economy is improving

ā€œWhile first quarter economic data has been relatively soft, we continue to believe a gradual recovery of our markets is underway, driven by improvements in the global economic activityā€¦all indications are that this unprecedented contraction in the capital spending of our customers is coming to a close and optimism is there. Our industry has always been a late cycle industry and this cycle is no different.ā€ ā€”Fluor Corp. CEO David Thomas Seaton

Inventories are low, lead times are extending and capacity is narrowing

ā€œinventories at Microchip as well as at our distributors are towards the low-end of the normal range, therefore we are starting to see some lengthening of our lead times. Weā€™re starting to see challenges in fab, foundry, probe, assembly and test capacity. We have increased wafer starts in our three internal fabs and weā€™re adding capacity in our three back-end facilities. Despite all this, we are seeing significant business that weā€™re not able to support by the customer requested dates.ā€ ā€”Microchip CEOĀ Steve Sanghi

This recovery is long in the tooth, but most see it continuing

ā€œweā€™re comfortable with US growth and European growth and even though it does ā€“ even though this recovery is long in the tooth, we see it continuing for the time being.ā€ ā€“ Third Point LLC CEO Daniel Loeb

Still, itā€™s not a good sign thatĀ the consumer appears to be a laggard around the world

ā€œAggregate demand slowed markedly in 2017 Q1ā€¦The slowdown appears to be concentrated in consumer-facing sectorsā€¦.consumption growth will be slower in the near term than previously anticipated before recovering in the latter part of the forecast period as real income picks up.ā€ Bank of England

ā€œPrivate consumption, the main growth driver in recent years, expanded at its fastest pace in 10 years in 2016 but is set to moderate this year as inflation partly erodes gains in the purchasing power of households.ā€ European Commission

ā€œOne reason is that much of the weakness in the first quarter was related to consumption, yet personal income and wealth have continued to rise, and consumer confidence indices remain quite positive. So my expectation is that consumption will re-emerge in the second quarter and we will continue to have a consumption-led recovery.ā€ ā€“ Federal Reserve Bank of Boston President Eric Rosengren

And there are some signs we are in a bubble

ā€œThe enthusiasm for Tesla and other bubble basket stocks is reminiscent of the March 2000 dot-com bubble as of the case then, the bulls have rejected conventional valuation methods for a handful of stocks that seemingly can only go up. While we donā€™t know exactly when the bubble will pop, it eventually will.ā€ David Einhorn ā€“ Chairman Greenlight Capital Re

Low volatility periods like this historically precede a shake up

ā€œThe low volatility itself might be a kind of bubble of confidence, but we wonā€™t know until we knowā€¦Every time I get accustomed to low volatility like we were towards the end of the Greenspan era, and we think we have all the levers under the control and thereā€™s low risk in the world and the world is awash with liquidity that pounces on every aberration in the market so things go in. Something erupts to remind us of our ā€“ that that idea that anybody is in control of anything is hubris and the world doesnā€™t perform like that for long periods of timeā€¦.this is not a normal resting state.ā€ Goldman Sachs Chairman and CEO Lloyd Blankfein

Valuations should be at a discount, not a premium

ā€œThe Fed has borrowed more from future consumption than ever before. If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations.ā€ Ā ā€“ Stan Druckenmiller of Duquese Family Office

International:

Japan is no longer in deflation

ā€œWe are not in a deflationary situation anymoreā€¦.two factors ā€“ output gap, inflation expectations ā€“ both of them would converge and contribute to raising wages and prices.ā€ Haruhiko Kuroda, Governor, Bank of Japan on CNBC

And business is good in China and India

ā€œWe were obviously very, very happy with our business in China and Indiaā€¦.our activities in China are really, really strong, people are upbeat. And the same applies to India.ā€ Christian Ulbrich ā€“ Jones Lang LaSalle, Inc.

Uncertainties are expected to persist as elections are held

ā€œthere is going to be a level of anxiety around each of these elections throughout the year and they are spaced out throughout the yearā€¦weā€™re going to be having periods of relative optimism and then periods where market participants pull back, awaiting the outcome of these various elections.ā€ Mark E. Almeida ā€“ Moodyā€™s Corp

The French president-elect has a pro-globalization agenda though

ā€œIā€™ll work to rebuild the link between Europe and the people it is made up of, between Europe and citizens.ā€ Emmanuel Macron ā€“ French president-elect

Some see potential in emerging markets.

ā€œThe valuation of emerging markets is half the valuation of the S&P 500ā€¦I just think EM has more potential upside than ever.ā€ Jeffrey Gundlach Doubleline Capital

Financials:

Loan origination is up

ā€œAnother sign of good commercial activities is, of course, the loan originationā€¦The production is up by 28% compared with last year. Production on housing loan also is very variant. The production turned that volume up of ā‚¬5.9 million, an increase of 63% on a year-on-year basisā€¦ā€ Philippe Heim ā€“ Chief Financial Officer Societe Generale

It is a good time to issue and refinance debt

ā€œit is a good opportunity for issuers to be in the market, whether itā€™s refinancing or new money or upping their outstanding debt. These are attractive conditions and looking ahead to potential interest rate increases going forward.ā€ Raymond W. McDaniel, Jr. ā€“ Moodyā€™s Corp.

Even Valeant was able to refinance

ā€œBy refinancing the debt, we now have a very manageable debt paydown schedule for the next several years. We shifted to about 75% fixed versus floating rate debt and, finally, we substantially improved our covenant positionā€ Paul S. Herendeen ā€“ Valeant Pharmaceuticals International, Inc.

GSE reform could have a big impact on real estate markets

ā€œA potential and significant shock to this sector of the commercial real estate market could occur if proposals require the GSEs to reduce their holdings of multi-family loans.ā€ Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston

Technology:

AI may represent a radical shift in software

ā€œAI is going to infuse all of software. AI is going to eat software. Whereas Marc [Andreessen] said that software is going to eat the world, AI is going to eat software, and itā€™s going to be in every aspect of software. Every single software developer has to learn deep learning. Every single software developer has to apply machine learning. Every software developer will have to learn AI. Every single company will use AI. AI is the automation of automationā€ Ā Jen-Hsun Huang ā€“ NVIDIA Corp.

MobileĀ continues to take market share in media consumption

ā€œAlmost 80% of the people who connect with ESPN each month access the content on mobile devices. In Q2, ESPNā€™s suite of mobile apps reached a monthly audience of almost 23 million unique users who collectively spent more than 5.2 billion minutes engaging with ESPN on those platforms during the quarter. Mobile is clearly going to play a major role in the future of media Robert A. Iger ā€“ The Walt Disney Co.

Snapchatā€™s core users canā€™t be reached byĀ television

ā€œā€¦Nielsen found that 45% of 18- to 34-year-olds in the U.S. are reached by Snapchat on any given day. This is nine times more than the average daily reach of the top 15 TV networks and nearly 5 times more than the top TV network. 87% of our U.S. daily active users between the ages of 18 and 34 cannot be reached by any top 15 TV network.ā€ Imran Khan ā€“ Chief Strategy Officer Snap

Miscellaneous Nuggets of Wisdom

Thereā€™s a difference between forecasting and risk management

ā€œI always differentiate forecasting what do you think will happen from the exercise of risk management. In risk management, I donā€™t care what anybody thinks. I donā€™t care what I think. Iā€™m just preparing for contingencies. On the other hand, in our trading businesses and trying to anticipate flows and what clients want to accomplish, there I have to try to guess the future and where thing are going. So those are two different exercises.ā€ Goldman Sachs Chairman and CEO Lloyd Blankfein

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