by Scott Krisiloff, CIO, Avondale Asset Management
Optimism continues to run high even though the hard data isn’t reflecting it yet. It’s very likely that the hard data will eventually follow the optimism, but remember that securities prices are forward looking, so by the time hard data shows up, markets may already be on to the next thing.
The Macro Outlook:
Companies love tax reform
“at the highest level, we’re a big supporter of tax reform. It’s going to drive jobs. It’s going to drive the U.S. economy, broadly speaking. And it’s going to allow us to compete in any, whether – doesn’t matter what industry you’re in. If you’re a global company, it’s going to allow you to compete on a global platform.” —Boeing CFO Gregory Smith (Aerospace)
It’s driving a lot of optimism, but the real impact wont come until 2018
“We believe business optimism, which may be contributing to elevated quoting and ordering activity in North America, is partially a reflection of the benefits of pro-business policy in regards to infrastructure and tax reform. However, we don’t expect to see any meaningful impact from these changes until 2018.” —Caterpillar CFO Bradley Halverson (Construction Equipment)
GDP growth was actually quite low in Q1
“You had a fairly anemic GDP growth rate this first quarter. The projections are for great improvement coming up and we hope that’s the case.” —Robert Half CEO Harold Messmer (Temp Staffing)
April may have been a little slow too
“April frankly is slowing a little bit. I don’t know what that means.” —Procter & Gamble CFO Jon Moeller (Consumer Packaged Goods)
But the data should follow the optimism eventually
“you read almost every day and you see in the press virtually every day…the gap between hard data and soft data, sentiment optimism on the one hand and actual levels of activity on the other. But the good news for us …our people are moderately more optimistic. And so they’ve actually seen some signs of improvement at least for 1 month” —Robert Half CEO Harold Messmer (Temp Staffing)
There is room for inventories to grow
“without a doubt, the inventory levels, as you mentioned, are extremely low. Our sheet products are about 1.8 months on hand. I can’t — frankly, I can’t remember the last time they were that low…I guess, part of it has been that the service center industries have been waiting to make sure that what they’re seeing today…wasn’t one of those short pops.” —Nucor CEO John Ferriola (Steel)
Might that lead to inflation?
It’s a tight labor market
“So now for the U.S. specifically, I would say that, it’s a tight labor market. So we are seeing some wage inflation.” —Manpower CEO Jonas Prising (Temp Staffing)
Raw material prices have inflated
“We are experiencing raw material inflation at higher levels than we expected in January” —Whirlpool COO Marc Bitzer (Appliances)
International:
The Euro area economy is increasingly solid
“Incoming data since our meeting in early March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished.” —ECB President Mario Draghi (Central Bank)
Chinese consumption has picked back up after Xi’s anti-corruption drive
“The suppression of the VIP market was something that was the result organically of a process that the administration of President Xi Jinping thought was appropriate for the country, the elimination of corruption. And it had secondary effects on high-end products like shopping, and automobiles, and gaming was part of that. But having made a corrective move in China there comes a point when the corrective move, it sort of finishes. And although corruption is still a major item in the PRC, the initial impact has softened, because so much of the work that they thought had to be done, was done. And so people begin to return to normal spending habits, and they are not so strongly influenced by public policy issues that involve public officials. So the people are settling back into routines that they’re comfortable with, and that includes going to Macau and buying a new car or shopping at Louis Vuitton” —Wynn CEO Steve Wynn (Casinos)
The UK market is showing softness
“we’d note that, the UK market is getting a little bit soft during the numbers of areas. And I think, we’re starting to see our clients react to that and especially the bigger clients that we have.” —Manpower CEO Jonas Prising (Temp Staffing)
Financials:
Capital One saw a slight uptick in credit card charge offs
“Based on portfolio dynamics and industry conditions we observed in the first quarter, we now expect that the full-year Domestic Card charge-off rate will be in the high 4%s to around 5%, with quarterly variability. That is up from our prior expectation of the mid 4%s.” —Capital One CEO Richard Fairbank (Bank)
M&A activity is solid in middle markets
“Last year, I said we might experience an increase in middle market activity particularly with the sale of private businesses. In fact the number of global market completions was up 13% year-over-year for transactions size between $500 million and $2 billion and the number of announcements was up 25%. And we are benefiting from this activity” —Moelis & Co CEO Ken Moelis (Investment Bank)
Consumer:
Consumers actually expose themselves to fewer brands online
“From an assortment standpoint, if you actually look at shopping behavior, a typical shopper exposes themselves to a lower, smaller assortment online than they do offline. When they go to the store, they’re exposed to what’s ever there. Very few shoppers click through to the third or fourth page of a search, and what typically shows up on the first page of a search are the more popular offerings, the larger offerings. And then there are tools, whether it’s subscription or other tools that allow us to increase the loyalty of those consumers to our brands.” —Procter & Gamble CFO Jon Moeller (Consumer Packaged Goods)
Industrials:
Airline traffic is strong
“we’re continuing to see strong passenger traffic growth in particular. It’s only one quarter, but 8.8% passenger growth in the first quarter this year, again just speaks to the fundamental strength of the marketplace” —Boeing CEO Dennis Muilenburg (Aerospace)
Auto production is leveling out
“As we think about some of the headwinds, we think that auto production is clearly flattening out, and we think for the rest of the year relatively flat.” —CSX CFO Fredrik Eliasson (Railroad)
Defense contractors are counting on a new appropriations bill
“At this time, government spending remains limited by the continuing resolution that is set to expire on April 28…Discussions are underway to extend the CR as Congress continues to debate the regular appropriations bills. We are hopeful that these discussions result in an approved FY 2017 Defense Appropriations Act” —Lockheed Martin CEO Marillyn Hewson (Defense)
Materials, Energy:
There’s been underinvestment in energy exploration
“we are heading towards a third year of significant underinvestment, which increases the likelihood of a medium-term supply deficit as produced reserves are not replaced in sufficient volume…The current level of underinvestments is most visible in exploration, where the record-low investments, including both drilling and seismic, led to a total amount of industry discoveries of less than 5 billion barrels in 2016 versus a produced volume of over 30 billion barrels, dropping the industry-wide reserves-to-replacement ratio to 32%.” —Schlumberger CEO Paal Kibsgaard (Oil & Gas)
Miscellaneous Nuggets of Wisdom:
There is an informational advantage that comes with size
“There’s also an information advantage that comes with size…We’re basically in the intellectual capital production business. Assuming that our people are equally as smart as the best qualified investors in the world but have a more informed view, then logically, we should be able to produce better results. As Blackstone grows larger, our access to information increases and our returns benefit…This ability to generate and evaluate information is a key structural advantage at Blackstone.” —Blackstone CEO Steve Schwarzman (Asset Management)
Full transcripts can be found at www.seekingalpha.com
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