What CEOs Said Last Week: "Animal Spirits have returned"
by Scott Krisiloff, CIO, Avondale Asset Management
Each week we read dozens of transcripts from earnings calls and presentations as part of ourĀ 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 Weekās Post: Animal Spirits
Keynesā legendary āanimal spiritsā appear to have returned to the US economy. In many ways itās surprising that Brexit was the catalyst for markets to rebound, but Central Banks are in firm control of investor psychology and there has been upward pressure building in the economy for some time now. A lot of the froth feels like it has burned off and depressed industries like energy may be on the upswing. Still, low interest rates underpinĀ the entirety ofĀ western capital marketsĀ and if the global economy really is improving then interest rates wont be able to stay low for too much longerāone would think.
Special thanks this week to our new contributors: Erick Mokaya, Milan Goyal and Remy Gill. Their work is scattered throughout this weekās piece. Erick has been particularly helpful highlighting events happening in Europe that we otherwise may have missed. If you would like to help contribute quotes to these weekly pieces, please contact us by responding to this email.
The Macro Outlook:
Animal spirits have returned
āthe animal spirits are back in North Americaā āHalliburton CEO Dave Lesar (Oil Service)
The marketās reaction to Brexit has been surprising
āI 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 normalizeā āGoldman Sachs CFO Harvey Schwartz (Bank)
TheĀ quick reboundĀ mayĀ mean that better things are on their way
āso this normalization was so quick that it actually may be something thatās a better harbinger in the near term usually following one of these events for activity levelsā āGoldman Sachs CFO Harvey Schwartz (Bank)
Or it may just be a sign that we are all well trained by Central Bankers
āFollowing the UK referendum on EU membership, our assessment is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience. 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.ā āECB President Mario Draghi (Central Bank)
On the other hand maybe Central Bankers have finally succeeded in breaking the global depression psychology
US consumer confidence is strong
āSpending on big ticket items was especially robust and sentiment survey showed that consumer confidence remains strong. Home sales continue to rise with the second quarter on pace set the strongest quarterly sales volume since 2007.ā āWells Fargo CEO John Stumpf (Bank)
M&A pipelines are strong too
āI think the pipeline remains pretty strong. And actually on the heels of Brexit, we saw actually quite good deal flow. You saw debt capital markets, you saw equity capital markets, you saw M&A getting executed getting announced. So I would say the pipeline for the third quarter remains pretty strong and provided we get reasonable markets. Weāve got an environment in which we can continue to get these things done. So it feels pretty good.ā āCitibank CFO John Gerspach (Bank)
Comerica had a record breaking month in its mortgage business
āsummer home sales combined with the decline in mortgage rates made June a record month in our 50-year history in the Mortgage Banking business.ā āComerica CFO David Duprey (Bank)
GM saw āoutstanding performancesā in North American, China and Europe
āAs I mentioned, our strong quarter was underpinned by outstanding performances in North America, China and Europeā¦We had the best Q2 light truck retail sales in nine years and the best mid-size retail pickup sales in 11 years.ā āGeneral Motors CEO Mary Barra (Automobiles)
Domestic steel markets have been improving
ā2016 has certainly provided a changing landscape to the domestic flat roll market. Several positive macro shifts have resulted in significantly improved flat roll product pricingā¦supply side drivers have led to much improved market dynamics. Our flat roll steel mills operated at full capacity during the second quarter, supported by the automotive and construction sectors.ā āSteel Dynamics CEO Mark Millett (Steel)
Hospital admissions and surgical procedures are up
āwe are seeing a pick up in terms of hospital admissions and surgical procedures. I think hospital admissions are up around 3%. We think the procedures are probably up around 3.5%ā¦if we look at the core growth rate in the medical hospital device area, weāre encouraged by some of the recent trends that weāre seeing.ā āJohnson and Johnson CEO Alex Gorsky (Healthcare)
The toy industry is growing
āIf you look around the world, the industry is growing at quite a good rate. In most markets around the world itās growing from mid to high single digits. In a few markets itās growing as high as double digits, including Spain, Italy, Russia, and Mexico. Our business continues to grow around the world.ā āHasbro CEO Brian Goldner (Toys)
And thereās still room for improvement
Industrial segments are still a little weak
āRelative to the macro environment, the steel-consuming sectors that were weak in 2015 such as energy, heavy equipment, and agriculture will likely remain so in 2016.ā āSteel Dynamics CEO Mark Millett (Steel)
But the oil industry sees the light at the end of the tunnel and that could spark industrial activity
āOil reaching $50 per barrel, even for a brief time, was a critical emotional milestone for our customers as was being able to buy a strip above $50 per barrel. So maybe it can be summed up best by one customer who told me, Dave, itās actually a light at the end of the tunnel and not an incoming train.ā āHalliburton CEO Dave Lesar (Oil Service)
The froth from a year and a half ago appears to be gone
āI think there is just a lot of caution out there. All that frothy, robust enthusiasm of a year and a half ago is definitely not there now. And yet the market is at a near high, but in our businesses that enthusiasm, or at least that attitude, doesnāt seem to be that lit upā āAbbott CEO Mile White (Medical Device)
Corporate clients are still conservative with discretionary spending
āthe largest corporate clientsā¦continues to be a tough segment. I donāt think thereās many of the Fortune 500 who are going on calls like weāre having right now and talking about growing their T&E budgets.ā āAmerican Express CEO Jeff Campbell (Payments)
Hiring softened in tech and financial services
ā I think overall the market for IT is probably slightly softer, but there are segments within that SMB for instance or healthcare that are still strong, and financial markets probably not as strongā āManpower CEO Jonas Prising (Temp Staffing)
Inventories are relatively lean
āSo overall we continue to see inventory levels as being very healthy. I think that the PC, the worldwide PC supply chain has moved towards a stance of being fairly lean and fairly cautious, and we see that continuing.ā āIntel CFO Stacy Smith (Semiconductors)
The housing industry could still build a lot more homes
āGovernment data as of May showing new home sales of 550,000 puts U.S. housing on track to deliver another year of roughly 10% growth. The trend is certainly positive. But after five years of recovery, we still remain well below the 50-year average, which is why we believe the recovery has a few years left.ā āPulte Home CFO Robert OāShaughnessy (Homebuilder)
Interest rates are the lone fly in the ointment. They are sending conflicting signals
ā Markets expressed seemingly inconsistent expectations as the quarter progressed. The 10-year treasury yield declined to 1.5%, suggesting slow growth, disinflation and a flight to safety amidst Brexit concerns. Yet, oil and commodity prices continued to rally. These conflicting signals are hard to reconcileā āCohen & Steers CIO Joe Harvey (Asset Management)
If this is all true then the yield curve cannot possibly stay where it is
āI personally think the flat rate scenario that everybody projecting is overstated. The underlying strength of our economy is not great, but itās 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.ā āBB&T CEO Kelly King (Bank)
International:
Most companies are not expecting a material impact from Brexit
ā when we look at our full view of the year, we donāt see an impact, if you will, that has any real materiality on us.ā āIBM CFO Martin Schroeter (Enterprise Tech)
āwhen we talk to our bankers, if we continue in this low growth environment, they donāt feel sitting here today that Brexit is going to be a headwind but obviously itās going to be a dynamic situation.ā āGoldman Sachs CFO Harvey Schwartz (Investment Bank)
The true impact may unfold over a longer period of time
āThe majority of firms spoken with did not expect a near-term impact from the referendum result on their capital spending. But around one third expected some negative effects over the next twelve months, with reports of a ārisk offā approach to expenditures and some imminent plans for spending slipping.ā āBOE Agents Summary of Business Conditions (Central Bank)
The vote is expected to have a negative effect on hiring activity
āAs yet, there had been few reports of major alterations to businessesā employment intentions. But the vote to leave was expected to have a negative effect overall on hiring activity over the coming twelve months.ā āBOE Agents Summary of Business Conditions (Central Bank)
Deal flow will likely slow as decision makers look for clarity
āIn the near-term transaction activity in the U.K. should be slower as decision-makers for businesses remains uncertain and market participants digest the potential impacts of the many different ways that Brexit can evolve.ā āBlackstone CEO Steve Schwarzman (Private Equity)
Prices will likely rise as a result of currency devaluation
āwhere we see cost going up, take for example the UK with the enormous currency devaluation weāve seen in the British pound, we will look at pricing.ā āUnilever CEO Paul Polman (Consumer Packaged Goods)
There is evidence that consumers are becoming hesitant
āThere had been little evidence of any impact on consumer spending on services and non-durable goods, although there were some reports of consumers becoming more hesitant around purchases of higher-value goods.ā āBOE Agents Summary of Business Conditions (Central Bank)
But there is also evidence that spending has rebounded
āWe did see a noticeable slowdown in this growth in the first several days immediately after the Brexit vote. But that growth has since rebounded to its prior strong levels.ā āAmerican Express CEO Jeff Campbell (Payments)
Franceās terrorism problem has economic impacts too
āI donāt need to remind you of the terrorism weāre dealing with in France, which is not only horrific, but it causes challenges to the social and business environment there, where it gets harder to get people to come and leave their house, and come to a Tupperware Party.ā āTupperware CEO Rick Goings (Consumer Prodcuts)
Financials:
Banks are giving up on interest rate increases
āAt the time of our January call, the forward rate curve was implying two actions by the Fed in calendar year 2016. There now appears to be a little prospect for even one increase this year, perhaps not even until mid-next year to late next yearā¦Our ability to maintain a stable year-over-year margin will be impacted by that changed interest rate outlookā āM&T Bank CFO Darren King (Bank)
Lower rates will have a meaningful impact on bank profitability
āThe lower long-term rates will have an impact on our second half results, if the rates remain at these low historic levels. ā āUS Bank CEO Richard Davis (Bank)
Banks are racing to cut costs to try to maintain margins
āThe economy is relatively slow. We project a relatively low flat yield curve for a period of time. And as a result, we are accelerating our focus on expense reductions.ā āBB&T CEO Kelly King (Bank)
ācan we grow earnings without rates improving? We believe we surely can. We can do that by continued success on things like expense managementā āBank of America CEO Brian Moynihan (Bank)
Generating operating leverage is becoming much harder though
āWeāre not giving up on positive operating leverage, but itās getting a lot harder.ā āUS Bank CEO Richard Davis (Bank)
āLook itās a simple statement to make that it is tougher to get to positive operating leverage without helpā¦from interest rates.ā āPNC CEO Bill Demchak (Bank)
Low rates arenāt just impacting banks, they are compressing margins across all of financial services
āthereāre a lot of forces here that are compressing margins generally. And the RIAs arenāt immune to that.ā āTD Ameritrade President Timothy Hockey (Broker)
Insurance companies are trying to drive profits by reaching for market share
āwe continue to see a tremendous amount of capital in the marketā¦in a market like this where you can see carriers do some really squirrely things in terms of pricing sometimes you just see crazy things, they just ā right they do pricing that just doesnāt make sense where they blow something out of the water and we donāt know how long thatās going to last or if its real or whatever the case may be but sometimes you lose a little bit of business like that.ā āBrown and Brown CEO Powell Brown (Insurance Broker)
Hedge fund managers are excited when their redemptions are lower than their peers
āMy guess is that our redemptions that weāve received as a percentage of capital are probably among the lowest in the industry, and thatās really because we benefit from a very stable capital base and thatās because our investors have been incredibly supportive of us.ā āPershing Square CEO Bill Ackman (Hedge Fund Manager)
Financial services firms that are undersized may have to seek strategic alternatives
āAs I have indicated previously, our board and management team are committed to evaluating all opportunities to enhance shareholder valueā¦We know we must earn our right to remain independent.ā āComerica CEO Ralph Babb (Bank)
If we can manage through this we can manage through anything
āIf we can manage through these very worse time which is continued zero interest rate increases and very, very low ten year. We can manage through just about anythingā āUS Bank CEO Richard Davis (Bank)
Consumer:
China has moved rapidly to an e-commerce economy
āItās very hard to read the Chinese marketā¦because the rapid shift to e-commerce is confusingā¦You can go to China now and really see empty stores when you go into hypermarkets and supermarketsā¦itās frightening the speed at which this is changing, just like they leapfrogged the landline and moved to mobile phoneā¦None of the millennials go to a store anymore. So, the speed with which this is changing is mind-boggling, and I think not many people predicted itā āUnilever CEO Paul Polman (Consumer Packaged Goods)
The problem for brick and mortar retailers is that all of their profitability was generated byĀ the sales that they are losing
ābecause of the phenomena of the e-commerce, the rest of the retail is struggling. And although thereās still 80% of the people buying in the rest of the retailersā¦itās the gearing that theyāre missing, itās the incremental sales that was giving them the profitability that is disappearing.ā āUnilever CEO Paul Polman (Consumer Packaged Goods)
Technology:
The PC market is a little better than many thought it would be
āthe PC market was a little bit better than we thought. And particularly in developed markets, the PC growth was better than we thought.ā āMicrosoft CFO Amy Hood (Enterprise Software)
5G cellular networks may start to get deployed sooner than expected
āI think in general, if youād have asked me that question, a year ago, I would have said that it would have happened closer to 2020. Certainly over the last year and accelerating here over the last quarter there has been a real pull to push that in or to pull that in closer to 2018/2019 timeframe depending on what the deployment is.ā āQualcomm CEO Steve Mollenkopf (Semiconductors)
Large increases in data consumption will continue to drive cloud growth
āif you look out into 2020, that average person will generate about 1.5 gigabytes a day of data offā¦your posts and pictures and all that kind of information. If you take a look at the average autonomous car in 2020, the estimates right now are it will throw off about 40 gigabytes a minute of data. ā¦If you take something like our replay technology that is filming in virtual reality, a basketball game or a football game, itās throwing off 200 gigabytes a minuteā¦So itās that growth in data and the need to both process it at the edge and then through the data center and into the cloud, to be able to store it, to be able to apply machine learning to all of those applications. Those all tell me that the cloud is going to continue to grow.ā āIntel CEO Brian Krzanich (Semiconductors)
Technology is a means to solve real world problems
āYou canāt get so locked up on the technology itself that you lose focus on what type of problem the customer is trying to solve. The customer is not trying to get cloud, theyāre not trying to get software defined network but rather they are trying to solve business issues that theyāre trying to get at. Weāre going to remain agnostic on the technology, whatever our customers need, weāre going to do.ā āCisco CEO Chuck Robbins (Enterprise Tech)
Healthcare:
There is likely to be more consolidation among healthcare providers
āI think weāve been pretty consistent in our thinking and in our projections about the likely increase in consolidation among providers and hospitalsā¦And as systems feel continuing pricing pressure, we think that will manifest itself by them having consolidationā¦we do believe that that will be a longer secular trend thatās going to continueā āJohnson and Johnson CEO Alex Gorsky (Healthcare)
Medical costs are growing at 6% per year
āCommercial medical trend remains consistent with the original outlook of 6% plus or minus 50 basis points.ā āUnited Health CEO Stephen Hemsley (Medical Insurance)
Insurance for small employers has increased in cost much faster than for larger companies
āSimilar to previous quarters management of healthcare cost remains front and center for our customers, as small employers are generally experiencing rate increases of 8% to 12% while larger employers are seeing rates, rates that are generally flat up slightly.ā āBrown and Brown CEO Powell Brown (Insurance Broker)
Energy:
Halliburton is calling the bottom for oil activity
ābased on the recent improvements to North American activity, I believe that this second quarter will mark the trough for our earnings.ā āHalliburton CEO Dave Lesar (Oil Service)
Oil companies feel like they have survived the storm and have a spring in their step
āI spent a large amount of time with customers late in the quarter taking their pulse and I can tell you there was a growing survivor mentality out there, and you canāt underestimate the positive change in attitude that weāre seeing in our North American customers. There is a spring in their step that I didnāt see earlier in the year and in almost every case, they are talking about adding rigs, buying assets or doing something value accretive. In short they are getting back to business.ā āHalliburton CEO Dave Lesar (Oil Service)
The credit picture appears to be stabilizing
āthis quarter we had no material energy charge-offs, in fact we have nice recovery on one of our credits. So we feel like weāve gotā¦the energy issue behind us. ā āUS Bank CRO P. W. Parker (Bank)
āAlso noteworthy is that, 100% of these non-accrual loans are fully current on interest payments, including the nine loans we have in bankruptcy. The reserve for Energy loans is over 8%. And remember, those reserves may not turn into ultimate lossesā āComerica CFO David Duprey (Bank)
āIn the past quarter, credit defaults amounted to about 0.3% of budgeted revenue annualizedā¦Weāve got a strong and diversified customer base, which includes integrated energy majors, utilities and end-users. So the credit picture is stabilizing.ā āKinder Morgan CEO Steve Kean (Pipelines)
Oil demand remains strong
āOn the demand side, if we look at the crude oil market, the IEA has increased demand in 2016 to approximately 1.4 million barrels of oil per day. The U.S. is now using over 10 million barrels per day of gasoline. These are near record levels. Recent Chinese export coupled with strong demand out of India are at near all-time highs. Supply and demand will balance as they have in all past market disruptions.ā āCore Labs CEO David Demshur (Oil Service)
We need to find twoĀ Saudi Arabias worth of oil in the next fiveĀ years
āthe last 2 years has been a period of significant under investment, where global CapEx has been reduced by nearly $400 billion. As a result, the industry will have to find a lot of new barrels in the next 5 yearsā¦most agree we will need between 18 and 22 million barrels per day of new production by 2021. Meaning we have to find nearly 2 Saudi Arabias worth of production in the next 5 years.ā āHalliburton CEO Dave Lesar (Oil Service)
Agriculture:
A lot of corn was planted this year that wont be able to be stored
āif you look at the crop there was something like 6 million more acres of corn planted this year and itās still dependent upon kind of the weather and the harvest, but right now it looks like itās going to be pretty decent yields from the current crop. And so if you look at the pretty decent yields from the current crop if you look at the high storage levelsā¦it suggests that thereās going to be opportunity to move grain in the second half of the year at a higher run rate than what we saw in the first half.ā āUnion Pacific CMO Eric Butler (Railroad)
Full transcripts can be found at www.seekingalpha.com
Copyright Ā© Avondale Asset Management