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Notes from this week’s earnings calls: Inflation?

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.

It's increasingly obvious from conference calls that inflation pressures are building in the economy. Management teams in a wide variety of industries are talking about rising input costs and a "very, very positive pricing environment" in 2018. For whatever reason, securities prices suggest that most people don't believe that the inflation will sustain itself, but at some point the weight of the anecdotal evidence should make its way into economic figures. If that surprises the market and policy makers, there could be a very significant reaction.

Note: raw quotes are now being posted to a streaming feed on tumblr and twitter (@avondaleam)

The Macro Outlook:

The global industrial economy is enjoying a broad based boom

"we’re seeing broad-based sales increases across a number of industries in all regions. We continue to see strength in China construction. Onshore oil and gas in North America is also strong. Construction activity in North America was up compared to last year, and we’re seeing increased order activity by mining customers." --Caterpillar (Construction Equipment)

"Industrial demand remains strong...I would say that certainly the demand was broad based. If you look across our product lines, we’ve got 65 to 70 different product lines, and the demand was very strong across those as well as strong across the region. So we had revenue up in three of the four regions year on year in Europe, Asia and the U.S., and it was about even in Japan." --Texas Instruments (Semiconductors)

"clearly we’re seeing clients starting more new projects. They’re spending more money. They have more sense of urgency. Their existing staff has a lean because they’ve held a line so far during this recovery. So, there’s some pent up demand that results from that." --Robert Half (Temp Staffing)

Even the mining cycle has started to turn

"As we have stated previously, the mining cycle has started to turn. The parked fleet has come down from its peak and stabilized for several months" --Caterpillar (Industrial Equipment)

But commodity inflation is becoming more obvious

"I mean obviously we’re in a bit of an inflationary environment for some of the commodities...overall we’ve probably been more challenged on the cost side this year than we’ve seen in a while." --Honeywell (Industrial)

"The core underlying market we’re facing for raw materials is certainly toughening." --3M (Industrial)

"our commodity inflation estimate has increased somewhat from 3 months ago... In terms of the inflationary pressures that we see...it is stronger inflation than we were expecting" --Kimberly Clark (CPG)

"Lumber was on an upward trend even before some of the catastrophic natural disaster events that we’ve seen over the last 60 to 90 days. So that’s the one that I think we all need to be paying attention to for 2018. I think the premiums that are being paid for labor in Houston and Florida that will subside in time. the lumber impacts could be longer lasting." --Pulte Home (Homebuilder)

"We knew we’d see higher pulp cost going into year, these costs have continue to increase beyond initial forecast ranges. Ethylene, propylene, kerosene, and the polyethylene and polypropylene resins have increased recently" --Procter and Gamble (CPG)

Even oil prices could start to rise

"the reduction in global oil inventories in the third quarter clearly demonstrates that the oil market is now in balance, which is creating the required foundation for a further increase in the oil price and the inevitable growth in global E&P investments." --Schlumberger (Oil Service)

Wages too?

"There is some commodity inflation, but the biggest drag that we’re facing right now is related to the labor investments that are being made." --McDonald's (Restaurants)

"The labor market in the U.S. is extremely tight, hard to find people." --Manpower (Temp Staffing)

For now, higher input costs are being absorbed by margins

"we’re now estimating about a $300 million profit hit from higher commodity costs." --Procter and Gamble (CPG)

"scrap price has moved up and we were unable to move plate prices up with scrap prices. So we started to see a margin compression and that’s where we live now. We’re living in a margin-compressed world today." --Nucor (Steel)

But those prices will start to get passed on to customers

"we continue to have a positive view on domestic steel consumption...This will be a solid foundation for a strong pricing environment as the macro market drivers continue to be persuasive...These dynamics could create a tight market and lead to significant price appreciation as we saw at the end of last year...I just see it setting up a very, very positive pricing environment for the first quarter of 2018 and all the way through 2018." --Steel Dynamics (Steel)

Consumers usually don't love higher prices

"we are seeing a little bit of resistance at the higher price points because of affordability and I think that’s a broader concern that affects the entire business." --Pulte Home (Homebuilder)

Except when it comes to the stock market

"fairly broad based retail engagement overall commensurate with literally everybody seems to like new highs" --TD Ameritrade (Broker)

International:

China's economy is also booming

"This revision includes a higher demand forecast in China, driven by strong growth in ultra-high voltage electrical applications, as well as growth in China’s two largest aluminum consuming sectors, transportation and construction." --Alcoa (Aluminum)

Wealthier Chinese consumers are demanding higher quality goods

"I think what is happening as we speak is that the consumers in there and the OEMs, they’re becoming more demanding on performance, on quality, and functionality and brands" --3M (Industrial)

But higher standards lead to a higher cost of doing business

"China has started to really fight pollution as we have said several times that they would do...once the Chinese start to control pollution, one of their most unfair competitive advantages goes away." --Cleveland Cliffs (Iron Ore)

Brexit has made Britain a global laggard

"When we say that we don’t think Brexit is a good idea, in this world of – in this future of work, having access to skilled talent is what’s going to define the competitive advantage for nations and organizations alike, and any country that appears to give the impression that they’re not really interested in people coming to their country and contributing to the growth of their economy and prosperity, that’s not a great sign." --Manpower (Temp Staffing)

Financials:

The credit cycle began to soften at one point, but then recovered

"We saw trends actually flagging over the last year-and-a-half...Since then, we’ve subsequently seen some pullback...So, it feels like it’s settled out a little bit and something that would be consistent more with the middle of the cycle" --Capital One (Bank)

New regulations could lead to a significant contraction in sell side research

"I think the effects [of MiFID II] are going to be a significant contraction and sell-side research providers...We think that especially for some of our larger teams it’s going to end up being a competitive advantage as the amount of information and the amount of sell-side research declines." --Cohen and Steers (Investment Management)

Insurance companies aren't earning their cost of capital

"Loss trend has outpaced rate and exposure for a few years now to a degree that many others in the industry are probably not earning their cost of capital." --Travelers (Insurance)

Disasters should lead to some firming of insurance prices

"given the level of destruction of capital give or take $100 billion vaporizing in a relatively short period of time...it is hard for us to imagine that given the loss activity it is not going to be a definitive wake-up call for market participants and capital providers to focus more deeply or to revisit what is an appropriate risk-adjusted return." --WR Berkley (Insurance)

Consumer:

Consumer packaged goods companies are struggling to find growth in developed markets

"overall demand in Europe remains flat as it has been in for the past few years. And in North America, market growth slowed at the start of this year and has not yet improved" --Unilever (CPG)

"Overall, it’s challenging to find growth right now in several of our large markets." --Kimberly Clark (CPG)

It's hard to get consistent returns on digital ad spend

"The ROIs on traditional media TV advertising are what they are – this narrow band is quite predictable, the ROIs on today’s landscape of search investment, social investments, video, et cetera are – it’s much, much more wide." --Unilever (CPG)

Technology:

Cord cutting isn't really cord cutting

"we are not surprised by what we are seeing around the TV, but I would tell...when you move to over-the-top for your video entertainment, the quality of that broadband connection becomes more important than ever" --Verizon (Telecom)

Smartphone units are still growing 6% worldwide

"We forecast world smartphone long-term unit growth to be 6% compound annual growth rate from 2016 to 2021." --Taiwan Semiconductor (Semiconductors)

But upgrades have slowed

"Revenues continue to be pressured by slow equipment sales and what were legacy services. We’ve had about 2 million fewer phone upgrades so far this year when compared to a year ago" --AT&T (Telecom)

AI is moving to the edge of the network

"AI and ubiquitous computing will be important drivers for long-term world semiconductor growth...AI will continue to proliferate from the cloud to broad based client devices such as smartphones and ADAS in cars, DTVs, set-top box, gaming, surveillance, robot and drone." --Taiwan Semiconductor (Semiconductors)

Some older industries are adopting leading edge technologies

Travelers used drones to evaluate insurance claims

"We conducted more than a thousand inspections with drones, which significantly accelerates the speed and reduces the cost of handling those claims. Again, a better outcome for our customers and more efficient outcome for us" --Travelers (Insurance)

TD Ameritrade is launching AI chatbots

"We launched an AI powered Chatbot on Facebook’s Messenger, a first in our space. Initially the bot was an extension of our client’s service capabilities but this week we’ve enhanced it to include equity and ETF trading, account deposits and additional education capabilities as well...just yesterday I bought 100 shares of Apple on Facebook Messenger" --TD Ameritrade (Broker)

Healthcare:

Illumina expects to be able to map a genome for $100

"From a $100 a genome perspective, we continue to believe that that is attainable with the architecture that we have in NovaSeq." --Illumina (Genetics)

Materials, Energy:

The oil industry may be stabilizing

"Oil and Gas end markets are beginning to stabilize and we expect them to return to growth over the medium term." --Baker Hughes (Oil service)

Production companies are ready to drill again

"the only people that probably talk to more customers than me is my BD group and I talk to the BD group every day. And so, we’re having constructive conversations about 2018 and encouraging discussions. I think the $50 oil through the planning cycle is a great thing...And so, they are absolutely planning to work next year, hedges are getting in place." --Halliburton (Oil Service)

Oil demand continues to be strong

"the growth in oil demand continues to be very strong and importantly the upward growth revisions in 2017 were primarily seen in the OECD countries. The demand growth outlook for 2018 is again expected to be north of 1.4 million barrels per day" --Schlumberger (Oil Service)

What are the long term prospects though?

"we are committed to an all-electric future, and we have announced plans for at least 20 new all-electric vehicles by 2023, including two in the next 18 months." --General Motors (Automobiles)

Miscellaneous Nuggets of Wisdom:

Just keep growing

"In this business, you are growing or you are dying" --BB&T (Bank)

Small returns compound over a long time

"you can be a lot richer if you hold an asset for 10 years earning 12% than if you hold an asset for four years earnings 25%." --Blackstone (Private Equity)

Spend on product over promotion

"As you know, we’d rather spend a dollar on innovation or equity every day the week before we spend money on promotion....And the reason is very simple is because there is nothing proprietary and promotion whereas we can build proprietary advantage with those innovation and equity investments." --Procter and Gamble (CPG)

Full transcripts can be found at www.seekingalpha.com

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Earnings Call Notes: Retail Wasteland

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.

Earnings season is wrapping up and retailers are the last to report. The environment was described as a "perfect storm" and "hyper-competitive" with no signs of slowing down. Retailers are trying to move into omni-channel and putting on a good face, but "the definition of loyalty in the retail business for the consumer is the absence of the better alternative." Consumers will shop wherever they can find the lowest prices at the greatest convenience. At the moment Amazon is the elephant in the room.

Next week begins the summer doldrums for earnings, so we'll likely take the next two weeks off. Be back again in September.

The Macro Outlook:

We are beginning to see some inflation in food

"after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters." --Jack in the Box CEO Lenny Comma (Restaurants)

The transition has been a little more rapid than normal

"the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation...I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along." --Sysco CEO Bill Delaney (Food Distributor)

Millenials are becoming key decision makers in businesses

"Most of our chefs and operators in our customer’s kitchen are millennials. They want different type of equipment." --Middleby CEO Selim Bassoul (Kitchen Equipment)

Financials:

Home Depot feels good about housing markets

"You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation...So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn’t seem to be a concern for us at all." --Home Depot CEO Craig Menear (Home Improvement)

Mall rents are falling

"we think real estate prices a couple years from now are going to be less expensive than they are today. We’re starting to we’re seeing that as we renegotiate leases or relocate stores. The rents are coming down in all but the true A malls. So, if you take a look at the true A malls we actually think rents in those malls might actually go up...because they’re going to be in such high demand" --Dicks CEO Ed Stack (Sporting Goods)

Consumer:

The retail industry is in a perfect storm

"The retail market is currently in flux. The environment is highly competitive and dynamic...It’s a perfect storm right now" --Dicks CEO Ed Stack (Sporting Goods)

CEOs are trying to stay optimistic

"I also know that we operate in an environment of intense and disruptive competition, and that our customer has more shopping options than ever, and we need to provide her with a compelling and a unique proposition. So winning in this environment requires us to act with a great sense of urgency to make changes in how we operate and to move faster. And as we do this, I am confident that Macy’s will win again." --Macy's CEO Jeffrey Gennette (Dept Store)

They argue that omni-channel is essential

"The customer is clearly telling us that brick-and-mortar retail continues to be an essential part of the shopping experience and certainly when it is executed right with the right values. All of this gives us confidence in our long-term global store growth potential." --TJX CEO Ernie Herrman (Off-Price)

Out of sight out of mind

"there is an impact on a market when you have fewer stores in it and share of mind is therefore decreased, and as a result, those areas where we’ve closed stores, the rate of growth in our omnichannel business has been a little less...Everything that we’ve learned from that store closure pilot has been that reinforcing the importance of a great physical footprint. And we’ve said over and over again, and we have seen nothing that doesn’t support this. In fact, I think the thesis is growing stronger." --Kohls CEO Kevin Mansell (Dept Store)

But everyone is trying to match Amazon

"I think we are in the time of hyper competition. People are out there trying to get market share. They are doing things that one typically wouldn’t do in a business. I guess, the elephant in the room there, you know who it is, is doing an awful lot of things without regards of the bottom line and is getting rewarded for it. And so there are an awful lot of other people trying to do the same thing. So yes, I think there is margin opportunity. I think we could get there, but I also am very, very aware of the hypercompetitive space that we are in." --Urban Outfitters CEO Richard Hayne (Apparel)

The price competition is impossible to avoid

"We tried to not be promotional. We didn’t want to be the price leaders in the industry. And as things got competitive and somewhat unpredictable, the consumer told us that they felt that we weren’t priced competitively in the marketplace." --Dicks CEO Ed Stack (Sporting Goods)

Retailers are doubling down on promotions

"when you look at the marketing strategy...number one, we’re going to remain very promotional. And what we’ve spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other. But we’re doing that all the way through the back half and that really is a big focus of ours." --Macy's CEO Jeffrey Gennette (Dept Store)

Consumers are only as loyal as your prices

"We didn’t start the promotion, but we can’t sit around and pretend it doesn’t happen. We need to engage in that. And our customers have told us, you need to engage here in today’s marketplace...I’m a firm believer that the definition of loyalty in the retail business for the consumer is the absence of the better alternative." --Dicks CEO Ed Stack (Sporting Goods)

The competition shows no signs of slowing down

"The pace of change in the consumer and competitive environment doesn’t show any signs of slowing down." --Target CEO Brian Cornell (Big Box Retail)

If anyone can challenge Amazon, it should be Walmart

"We continue to gain traction in e-commerce with Walmart U.S. GMV up 67%...we continue our transformation to become more of a digital enterprise that moves with speed and agility...We’ve seen strong results from the rollout of online grocery...Marc Lore and the team delivered another quarter of robust topline growth" --Walmart CEO Douglas McMillon (Big Box Retail)

Technology:

Home Depot spends half its advertising budget on digital

"Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it’s over half our marketing right now. That’s a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend" --Home Depot EVP Ted Decker (Home Improvement)

Apple products sold well at Target

"on the Apple comments, they weren’t just driven by tablet, they are driven across the board in categories. And we had really strong showing in Q2 on the iWatch which we worked with Apple on clearly. And we have a lot in our plans for Q3 and Q4 with potential new launches as I have outlined." --Target CEO Brian Cornell (Big Box Retail)

Online video has tailwinds to revenue, but headwinds to profitability

"more and more people are watching online video at longer and longer time, on a daily basis...and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing." --Tencent President Martin Lau (Chinese Internet)

Neural Nets are improving at a double exponential rate

"A neural net in terms of complexity is approximately – not quite, but approximately doubling every year. And this is one of the exciting things about artificial intelligence. In no time in my history of looking at computers in the last 35 years have we ever seen a double exponential where the GPU computing model, our GPUs are essentially increasing in performance by approximately three times each year...And...on top of it, the neural network architecture and the algorithms that are being developed are improving in accuracy by about twice each year...And so you’ve got these two exponentials that are happening, and it’s pretty exciting. That’s one of the reasons why AI is moving so fast." --Nvidia CEO Jen-Hsun Huang (GPUs)

The next revolution of AI is at the edge

"The next revolution of AI will be at the edge, and the most visible impactful evidence will be the autonomous vehicle. Our strategy is to build a ground-up deep learning platform for self-driving cars, and that has put us in pole position to lead the charge" --Nvidia CEO Jen-Hsun Huang (GPUs)

Industrials:

All in all there was good industrial activity in the quarter

"positives around oil and gas...infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food...all-in-all, we saw good activity in the quarter" --Applied Industrial Technology CEO Neil Schrimsher (Distributor)

Materials, Energy:

Dry Bulk shippers are starting to feel more positive

"We’re generally positive about the market from the second half 2017 onwards and we believe that every subsequent year will fare better than the year before...environmental regulations will thereafter not only contribute to a transition towards a cleaner environment, but it will also assist shipping in reducing vessel supply and will therefore lead us to better markets as of 2020 onwards." --Star Bulk Carriers CEO Petros Pappas (Dry Bulk)

Miscellaneous Nuggets of Wisdom:

Take care of your customer on their terms

"What we’ve learned is a customer comes with a return, that’s their errand they have to do, and the more efficient, the faster we are in doing that, the more free time we’re giving back to the customer. And oftentimes, they take that free time and start shopping. So we’re really looking to take care of the customer on their terms, and if they have a great experience in our store with a return, we certainly believe that ends up in good news for us." --Nordstrom President Erik Nordstrom (Dept Store)

Full transcripts can be found at www.seekingalpha.com

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Here’s what CEOs said on this week’s earnings calls

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.

Earnings season began to slow back down this week. Most of the important companies have now reported, so this week’s post draws heavily from a handful of calls. The economic picture remains unchanged. There’s still a lot of optimism, but fundamentally GDP growth has been anemic and policymakers haven’t come through on promises.

Among the quotes are two interesting blocks. One is from Charlie Ergen of Dish. He implies that internet companies are seeing more than their fair share of profits from connectivity and that telecom companies (the distributors that make the internet possible) will fight back. Ergen has an ulterior motive in saying this. He owns a large chunk of wireless spectrum and may be trying to get one of those internet companies (Amazon?) to think about buying him.

The other interesting block is from David Seaton of Fluor. He points out that construction markets have never really gotten back to prior peaks. He is optimistic about infrastructure spending though. Even without a large stimulus bill, American infrastructure is probably overdue for some heavy investment.

The Macro Outlook:

Most people are feeling pretty good

“I feel pretty good about the global economy right now. We’ve already experienced, as you’ve seen in our orders the last couple of quarters, this is pretty good activity right now and we look for it to continue.” –Parker Hannifin CEO Tom Williams (Industrial Components)

The original reasons for optimism haven’t materialized but it’s better to be lucky than right

“I guess this is a case of better lucky than right. We expected the market to go up but for different reasons. We thought it would be based on generally positive growth oriented policies enacted by the administration, lower taxes, infrastructure spending, healthcare, reform et cetera, none of these things transpired. But what has transpired has been kind of global synchronized economic growth and a very accommodative global monetary structure. So, I’m happy with the outcome the reason for it was different from what we anticipated, but we’ll take it.” –Third Point CEO Dan Loeb (Hedge Fund)

Profits have rebounded but GDP growth has been anemic

“I think GDP probably is still a better reference point for assessing demand than corporate profits are. Obviously, they’re both averages of lots of economic activity and lots of participants in the economy. But GDP is a broader measure. Obviously, GDP has been quite anemic.” –Marriott CEO Arne Sorenson (Hotels)

Washington is gridlocked

“So one of the frustrations I see, and this is kind of a political commentary…there’s 2,200…candidates have to go through Senate approval. I think the last count was 55. And you’ve got people like Elaine Chao in transportation. You’ve got Rick Perry in energy, Rex in State. These people that we know and know well are sitting there twiddling their thumbs, so to speak, because we haven’t been able – the government hasn’t been able to give their team. So I think that is why you saw things screech to a halt. And I don’t see a whole lot of improvement until that phenomenon is behind us and the efforts that the administration are putting forth in terms of the regulatory reform actually see light of day. A lot of good intent, a lot of good thought and strategies to people that I’ve talked to, including the folks I just mentioned, but until we get those things, done you’re not going to see these permits that are absolutely necessary to go forward actually awarded.” –Fluor CEO David Seaton (Engineering)

But don’t under-estimate the optimism

“Don’t under-appreciate the optimism, which still seems to exist in the market and in corporate America these days. And compare it to the point of view last August, September, and October, you’re talking about a pre-election time. I think there was not a sort of robust optimism. Economy seemed to be producing, again, fairly anemic GDP growth. And I think in some respects, while that fairly anemic GDP growth has continued into 2017, there is still some optimism. You can see it reflected in certainly the equities markets and other places.” –Marriott CEO Arne Sorenson (Hotels)

Inventories are still low

“we are continuing to see a very strong business environment for our products worldwide…Our bookings rate in the June quarter was extremely strong. Our inventories at Microchip as well as at the distributors are towards the low end of the normal range.” –Microchip CEO Steve Sanghi (Semiconductors)

There’s some modest restocking taking place

“On the distribution level, I would say there is some modest restock taking place. There’s been a surge in activity and I have North America mostly in mind when I make that comment.” –Parker Hannifin COO Lee Banks (Industrial Components)

Radical price transparency makes it harder to have inflation

” we’re nearly 80% [occupied] for the full quarter, which is a pretty impressive kind of number. And so, you would expect a little bit more pricing movement. But…you’ve got to remember that we have thousands of franchisees who are pricing their own hotels on a day-to-day basis. And it is a market with radical transparency in pricing. And that may have some impact on our ability to move rates in this cycle compared to prior cycles.” –Marriott CEO Arne Sorenson (Hotels)

Consumer:

Disney is ready to go head to head with Netflix

“It’s been clear to us for a while with the future of this industry will be forged by direct relationships between content creators and consumers…we’re accelerating our strategy to be at the forefront of this transformation…With this strategic shift, we’ll end our distribution agreement with Netflix for subscription streaming of new releases beginning with the 2019 calendar-year theatrical slate.” –Disney CEO Bob Iger (Media)

No other studio gets Netflix’s multiple

“we have Netflix envy, and we try to present our results in a way to give you the ability to value us on an equivalent metric. So we’ll leave the valuation to you guys. We’ll post the results and you tell us what it’s worth.” –CBS CFO Joseph Ianniello (Media)

Food companies are struggling

“clearly not everything went our way in the first half. Canada, India and commodity cost in United States are just a few examples” –Kraft Heinz CEO Bernardo Hees (Packaged Food)

“we’re experiencing a decline in our base volume greater than our previous expectations…Volume softness continues to weigh on the broader food industry.” –Dean Foods CEO Ralph Scozzafava (Dairy)

Technology:

Charlie Ergen made a good point about the relative strength of telecom and internet companies

The $500B tech companies all depend on connectivity

“I think Amazon is one of those $500 billion companies that probably have to think about connectivity in their future…their cloud business doesn’t work unless it’s connected.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

That connectivity may not always be as cheap as it is today

“I think everybody in – the really big companies have always assumed there’s going to be a connectivity network out there that they can piggyback off of. And I think that if net neutrality rules get more define…you’re not going to be quite as confident of that in the future.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

The telecom companies aren’t going to let the internet companies make all the money

“You can’t have all the profits going to three or four companies and have the guys that are – the companies that are providing them the raw material to make that money, not get wake up one day and get a little smarter…at some point, all the money going one direction, a lot of people are enabling that.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

The balance of power always shifts between content and distribution

“They’re going to wake up and say maybe they should get – I’ve been through this business long enough to know that the money ebbs and flows between distribution and content. It’s probably going to continue to do that today. And a lot of the content companies, probably the distribution guys, probably are going to be in position to get a more of it. Then it may go the other direction.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

Industrials:

Construction markets have never fully rebounded

“the current market environment is perhaps the worst I’ve seen in my 30-plus years. The market has contracted since 2014. The good news is that we’re starting to see prospects come back in some of our end markets including mining” –Fluor CEO David Seaton (Engineering)

Infrastructure spending is one brightening spot

“I feel pretty good about infrastructure and what’s going to happen. I would caution though…there is no such thing as a shovel-ready project. But what I’m very eager to see is that at least the dialogue is around…toll roads, bridges, ports, airports…But I believe that our infrastructure group will continue to be a bright spot” –Fluor CEO David Seaton (Engineering)

Infrastructure projects definitely suffer from the regulatory environment

“I think the capital is there. I agree with you 100%. I think the problem is, you got to look at the Purple Line in Baltimore. Project passed all the hurdles environmentally, financially, everything else and then the regulatory environment slowed it down and actually stopped it for a while. So even though the capital is ready, some of the projects, I think, are at least to a point where you get to that next stage. I think the regulatory reform that the government is talking about has to come through before the timing of those things actually improve. And I’d put pipelines in that category.” –Fluor CEO David Seaton (Engineering)

Full transcripts can be found at www.seekingalpha.com

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Here’s what CEOs said on this week’s earnings calls

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.

The Dow hit 22,000 this week but the commentary that we're reading is less exuberant than the market would suggest. Many CEOs are relatively subdued about the environment. Considering that nominal GDP growth is below 4%, maybe that shouldn't be too surprising.

A lot has been made of earnings growth this quarter, but it's worth remembering that when the final results are in it's very possible that S&P 500 earnings won't break the quarterly record set in 3Q 2014, almost three years ago. So far earnings have only rebounded from a significant decline. However the S&P 500 has climbed 20% since then.

The Macro Outlook:

If you cut through the noise, US growth is a little softer

"If we look at the macro environment, the economies around the world we’d say are mixed but in aggregate, are okay to good. FX headwinds have subsided. Energy markets have recovered some and certainly stabilized. Raw materials, though, are rising and creating some short-term margin pressure but we believe are manageable over the year...If you cut through the noise, U.S. growth is a little softer." --Ecolab CEO Doug Baker (Business Services)

Activity remains mixed

"Overall, I’d say industrial activity remains weak with mixed activity across the remainder of what we call nonresidential construction segments...growth rates for most construction markets are slowing, and growth in the office construction is also beginning to moderate somewhat. Large industrial project activity continues to be weak. The manufacturing category, as a key indicator of the C-30 report showed through April and May, down some 8.5%. We’re also seeing somewhat slowing growth in housing starts" --Eaton CEO Craig Arnold (Industrial)

Expectations have declined

"Industrial production and retail are still growing, although at a slower pace than originally projected...the forecast for B2B, if you go back earlier in the year to today, is not quite as strong because of retail sales and also because industrial production forecasts were higher even three months ago to where they are today." --UPS (Package Delivery)

Office leasing has been a little weaker than CBRE expected

"Even though the economy is generally doing nicely, there is a couple of things going on. In general, corporations are being very careful about costs. We are doing it and so are the other big corporations around the U.S. and around the world. And secondly, in a few markets, there have been limited circumstances where leases would have otherwise gotten done, but there was inadequate big blocks of space to get them done" --CBRE CEO Bob Sulentic (CRE Broker)

Restaurant spending has been decelerating

"in the U.S. and just about any other market we’ve studied, there’s been a decades-long trend for growth away from home, food and beverage consumption...However, in the past year, we’ve seen some pullback from that trendline." --Starbucks CSO Matthew Ryan (Restaurants)

Not everyone is gloomy though

"Global demand conditions strengthened versus the second quarter. Emerging markets were up low single digits and mature markets grew mid-single digits. Growth was supported by improving end markets in the U.S. and Asia and early signs of improving demand conditions in Canada. Growth in Asia accelerated during the quarter, led by China. Excluding China, the rest of the region also improved, growing at low single digits in the quarter...We’re seeing some improvement from Middle East. If you remember the last call, I was somewhat concerned about the Middle East, but that’s turning right now. Investments are starting to happen." --Emerson CEO David Farr (Industrial Conglomerate)

Lyondell Basel's ethylene crackers are operating at 98% of capacity

"with operating rates of 98% of nameplate capacity across our U.S. and European ethylene crackers. Our polyethylene production operated at 95% of capacity...at our Houston refinery...crude throughput rates increased to an average of 99% of capacity during the second quarter." --Lyondell Basel CEO Bhavesh Patel (Chemicals)

High capacity utilization usually leads to cost pressures

"We do continue to experience commodity cost pressures as we move into the second half...if you take a look at the basket of commodities that are important to our company and you go commodity by commodity, and I’d say almost every commodity today that we purchase is at a higher level than what we originally anticipated. And so I think it’s a pretty broad-based commodity challenge across most of the baskets of commodities that we buy as a company. So it’s pretty broad-based." --Eaton CEO Craig Arnold (Industrial Conglomerate)

It's a low return high risk world

"Markets normally respond to elevated uncertainty with lower asset prices and compensatorily higher returns. But that’s not what we are encountering today. We are living in a low-return, high risk world and an environment where most investors are happy to bear risk." --Oaktree CEO Jay Steven Wintrob (Investment Management)

Complacency leads to surprises

"But the stock market trading at 17x, 18x, or 19x earnings, the fact that interest rates are still as low as they are when we’re seeing economic growth of 2.5%. The fact that there is a lot of complacency in all markets, not just the equity markets, leads me...to the view that this complacency that we’re seeing in the markets can lead to a decline in equity values." --Loews CEO James Tisch (Conglomerate)

International:

Europe's economy is strong

"our economists are reasonably positive on the next 12 to 18 months’ economic outlook. And may I say in particular, in Europe, you have seen the Q2 figures and provided that there is not any extraordinary event, I would say, the economy should carry on doing pretty well on the back of a high level of confidence with more clarity on the political side, et cetera." --SocGen CEO Frederic Oudea (Bank)

Could Europe see inflation?

"In terms of raw materials, they’re biting us in Europe. No doubt about it. We have the same story there. It takes us a while to recover via pricing, but we’re starting to get pricing in Europe as well." --Ecolab CEO Doug Baker (Business Services)

Financials:

Debt markets are as liquid as we have ever seen

"Debt market for New York assets are as liquid and strong as we have ever seen...Given the relative strength in the debt markets, many owners are choosing to refinance rather than to sell." --Vornado CEO Steven Roth (REIT)

Banks feel confident

"The banks feel more confident in their ability to syndicate paper. That is an environment that we’re experiencing now. I think as a result you have seen some smaller — not as many big deals from us because the banks can easily underwrite and distribute paper. We’re hopeful that its slows...banks I think are more careful going into September than perhaps they are going into April" --Ares Capital CEO Kipp deVeer (BDC)

Consumer:

Retailers see the Whole Foods acquisition as a validation of omni-channel

"what we’ve seen over the last few months with Walmart and Jet.com and PetSmart and Chewy and most recently Amazon and Whole Foods, I think this is just, we’re in the nascent stage of these kinds of commercial relationships that are going to elevate the experience of a brick-and-mortar retail company." --Starbucks Chairman Howard Schultz (Restaurants)

Amazon is open to multiple solutions

"we are excited about that acquisition and looking forward to working with the team at Whole Foods...On your larger question about what the place of Amazon Fresh, likely Prime Now and some of our other efforts, I would say we believe there’ll be no one solution, so we’re experimenting with a number of the formats from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and Amazon Fresh." --Amazon CFO Brian Olsavsky (E-Commerce)

Technology:

The shift to the cloud is going to continue

"look, enterprise is going to continue to decline...it’s going be lumpy as we see this shift, but the overall macro shift of enterprise to cloud or traditional on-prem systems to cloud is going to continue." --Intel CEO Brian Krzanich (Semiconductors)

Industrial companies have lots of data they want to harvest

"We’ve got, I don’t know, some 2 million customer sites nearly if you add up all the restaurants, probably collecting data 90%. But we only have a small fraction of it currently connected to the cloud. So, in most instances, our people have to walk into the unit, download via an RF port, and then they have the data to start analyzing how they can further improve the customer’s operation. We know that if we take that and send it to the cloud, do the analytics, send it to our person in advance of them arriving at the front door that we’re going to improve their productivity significantly and improve the amount of time they have for up-selling and for doing other things, even handling more accounts. So, technology, I would say in all industries, we have not yet pushed boundaries in these areas we are going to." --Ecolab CEO Doug Baker (Business Services)

When tech meets old industries there can be a culture clash

"We, like a lot of people, are starting to look at the Insurtech space...It’s a clash of cultures there, I would say. The Insurtech folks are used to things happening lightening fast and with minimal regulatory issues and all that and that’s not insurance. So there almost needs to be a translator between Insurtech folks and standard insurance folks." --Markel CEO Richard Whitt (Insurance)

Apple has created 2 million jobs in the US if you include App developers

"We’ve created 2 million jobs in the U.S., and we’re incredibly proud of that. We do view that we have a responsibility in the U.S. to increase economic activity, including increasing jobs, because Apple could have only been created here...About three-quarters of the 2 million are app developers." --Apple CEO Tim Cook (Consumer Electronics)

Industrials:

The auto market is heading towards continued electrification

"These statements by Volvo by 2025 in the U.K., by 2040, those just seemed to be statements of strategic intent and very much in tune with the consumer psychology at the moment. It’s driven by all this negative press about diesels. But clearly, things are headed that direction and as there is more offerings from the powerful OEMs, I think it will continue to head toward materiality in our business." --Group 1 Automotive CEO Earl Hesterberg (Auto Dealer)

China is likely to lead the world in electrification

"China’s forecasted to lead the global trend in Powertrain electrification, representing over 50% of unit production in 2025, reflecting a 40 fold increase over today’s levels. We remain optimistic about the China market as a result of the underlying macro trends which include increased government focus on emissions regulations, which are increasing demand for China’s new energy vehicles" --Delphi CEO Kevin Clark (Auto Parts)

Musk is confident that Tesla will produce 10k cars per week by the end of next year

"I’m very confident that we will be able to reach a production rate of 10,000 vehicles per week towards the end of next year...what people should absolutely have zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year" --Tesla CEO Elon Musk (Automobiles)

Materials, Energy:

Oil drillers need to replace their equipment eventually

"As two-and-a-half plus years of this downturn have gone on, the stuff that we’ve had out in the marketplace is slowly getting consumed. Those inventories are diminished and depleted and folks have to step back to the table and start ordering more of our products, even at very low activity rates. So we’re seeing some positive signs that give us some optimism in some sustainability of those businesses even in a flattening rig count environment." --National Oilwell Varco CEO Clay Williams (Oil Service)

Australian Iron Ore is being sold to traders, not users

"what these guys are doing, these guys mean, for abundance of clarity, Fortescue, BHP and Rio Tinto, Vale and even the midget, Roy Hill, they sell to traders. And these traders do not have blast furnaces. They buy because it’s cheap to borrow money in Chinese banks. Then they put that iron ore in the ground, not in a blast furnace, at the port. And then they go back to the banks, and say, hey, I have collateral, can I borrow more? And the banker say, yes, and they borrow more, and they buy more for the same idiots...That’s my problem with the business in Australia. Then comes the question, will this be happening forever? Yes or no? Of course, the answer is no. One day, this bubble will burst. And on that day, people will say, oh, we are surprised that we are not seeing iron ore inventories going up." --Cliffs Natural Resources CEO Lourenco Goncalves (Iron Ore)

Miscellaneous Nuggets of Wisdom:

Building a brand requires consistency and saturation

"While the intersection of digital, social, and traditional continues to blur lines, success is now measured in terms of months, weeks and even days. Engagement and intimacy requires consistency, saturation and showing up whenever and wherever a consumer engages our brand." --Under Armour CEO Kevin Plank (Apparel)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

What CEOs said on this week’s earnings calls

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.

Although sentiment has been very positive this year, the hard data hasn't tracked the optimism, at least not yet.  Some of the comments on this week's earnings calls seemed to reflect the fact that this still isn't a robust environment.  Weakness in auto manufacturing is particularly concerning since auto production is typically a late cycle indicator.  It's also disappointing that two consumer products companies called the quarter "challenging."  Consumer weakness is another leading indicator of broader weakness.

Still, there's no sign of a significant change in the economy and optimism usually leads to stronger hard data.  The Fed has been tightening though and that can also portend a shift.  This also could just have been an off week.

The Macro Outlook:

This quarter may have been more challenging than advertised

"this indeed was another challenging quarter and as I think we all know, the industry continues to face global market volatility and we have seen a further slowdown in consumer demand in several key markets, most especially the U.S. Southeast Asia and South Pacific." --Colgate CEO Ian Cook (Packaged Goods)

"while I remain optimistic about our long-term future, the near-term environment has become more challenging than maybe we saw at the beginning of the year. So category growth has slowed broadly in lots of places over the last year or so, and we expect that growth will pick back up over time, but that pickup may not happen quickly." --Kimberly Clark CEO Thomas Falk (Packaged Goods)

Manufacturing has been slow to recover

"I think the outlook is actually stable...in the U.S. and the progress is directionally good, but the speed is not that what we would like of course." --Manpower CEO Jonas Prising (Temp Staffing)

Auto production is weakening

"auto weakening is taking place. There’s no doubt that it’s plateaued...There’s no doubt in my mind that there’s some weakening going to be occurring. It’s only to the effect." --Nucor CEO John Ferriola (Steel)

But companies are sticking to their guidance

"The improvement has been a bit uneven, it’s not happening in a straight line. That said...everybody is standing by their guidance for the third quarter. Where generally speaking the United States included, things are getting a little better." --Robert Half CEO Harold Messmer (Temp Staffing)

Union Pacific is expecting improvement in 3Q

"volume, we think is going to be our friend certainly in the third quarter improving from the second quarter. And we’ll just have to see how the numbers play out." --Union Pacific CFO Rob Knight (Railroad)

There's no sign of a significant change

"however you wanted to describe it, an eroding plateau...we don’t see anything in terms of the economy, the health of the consumer, housing, oil...that would suggest that over the next two...years, that there’s any kind of significant collapse or dramatic change. We do think it’s going to decline. We think it will be a soft gradual decline" --Ford CEO James Hackett (Autos)

But could there be a shift "relatively soon"?

"The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated" --FOMC Statement

International:

There's optimism in Europe, particularly France

"While we continue to be cautious on the UK and as they prepare to exit the EU, we are optimistic about the overall outlook for Europe...We also see...a great deal of optimism in France, as President Macron has a clear mandate for reforms including labor market reform which should benefit that economy and stimulate better employment growth." --Manpower CEO Jonas Prising (Temp Staffing)

Germany is also very strong

"Germany, by definition, which is a big engine in Europe is doing well in the manufacturing side. And our business in Europe, if you look upon the portfolio, Industrial business is very strong." --3M CEO Inge Thulin (Industrials)

There may even be signs of inflation in Europe

"Europe service, inflation is starting to at least be talked a little bit, even though at very small levels. But for many years, there was no discussion of inflation at all. And now at least there is some talk about potentially a little bit of inflation coming through" --United Technologies CFO Akhil Jori (Elevators)

Caterpillar was positive on construction in China

"Construction in China and gas compression in North America were highlights." --Caterpillar CEO James Umpleby (Construction Equipment)

Financials:

Industries are changing faster than banks can keep up

"one of the things that I don’t think banks do that well...on things like Uber story is pull way up across all of our lending businesses and ask what is the impact given that industry after industry is being revolutionized...if we just go and make one loan at a time...we could wake up and have a lot of rude surprises like we did in the taxi kind of business." --Capital One CEO Richard Fairbank (Bank)

Consumer:

The Whole Foods purchase validated omni-channel

"you think about omni-channel and the advantages that brings, and you look at the recent purchase of Whole Foods, and you scratch your head and say why did that happen, I think if you start to envision how omni-channel could play an important role in e-commerce. You could see an unfolding scenario that says there can be successful pure players and successful omni-channel players. And maybe it all gravitates towards omni-channel at some point." --Stanley, Black and Decker CEO James Loree (Tools)

The retail industry still needs to restructure

"I think there’s a fundamental need to rationalize. People want to get larger to fight online and to fight Amazon and retail specifically. And there’ll be restructurings as well. Now the last time I was asked this, this would retail step in for energy? And the answer is I don’t believe it’s going to be as big an opportunity as energy. Energy was a very, very large user of capital in the leverage world...but a lot of those are smaller companies who are just kind of closing stores and shutting down" --Moelis & Co CEO Ken Moelis (Investment Bank)

Consumers buy more premium brands online

"What we observe on eCommerce thus far is that the consumer is actually — tends to buy more premium and even if they’re not buying the premium brands, they tend to buy in multiples. So, in fact the eCommerce behavior is favorable to us from a consumption point of view" --Colgate CEO Ian Cook (Packaged Goods)

Technology:

Data and AI are now the core currency of businesses

"The core currency of any business going forward will be the ability to convert their data into AI that drives competitive advantage." --Microsoft CEO Satya Nadella (Enterprise Tech)

Technology is ultimately just a tool

"Ensure Tech has become sort of the flavor of the day to a certain extent. Having said this...when the day is all done these are just tools and ultimately how effective they are, how helpful they are will be determined by the people who are using them and the expertise that they have" --WR Berkley CEO Robert Berkley (Insurance)

The average Youtube viewer watches for 60 minutes per day

"YouTube now has 1.5 billion monthly viewers and people watch on average 60 minutes a day on their phones and tablets." --Alphabet CEO Sundar Pichai (Internet)

Facebook has 2 billion monthly users (there are 3.7 billion internet users)

"This quarter we reached an important milestone for our community. 2 billion people now use Facebook every month, and more than 1.3 billion people use it daily." --Facebook CEO Mark Zuckerberg (Social Network)

Comcast says there's still room for growth in broadband

" growth…there is significant runway ahead of broadband. And the key to me when you look at this is the upside of the opportunity. We’re sitting at 45% penetration right now. So there’s growth just there. The overall market is growing with only 75% of households subscribing to Internet access" --Comcast EVP David Watson (Cable)

Healthcare:

Birthrates around the world have been disappointing

"So we had kind of projected 2016 was going to be a flat birthrate year. In the second quarter, we got the final fourth quarter numbers that showed it down 2% for the fourth quarter, which brought the full year down 1%...Korea’s birthrate...was down 7%, which is a pretty big, big drop...we don’t really understand it at a deep enough consumer insight level...But a broad trend is that Millennials are having their children a little later." --Kimberly Clark CEO Thomas Falk (Packaged Goods)

Small hospitals need to get bigger by selling into health systems

"We’re seeing more opportunities in the marketplace now. I think as many health systems, again, went through the positive environment from 2015 and early 2016, and now we’re seeing some volume pressures. They're looking, I think, to be part of the bigger system....we’re pleased to see the pipeline more robust than it has been in recent years" --HCA CEO Milton Johnson (Hospitals)

Scale is an advantage in most industries

"The broad story remains the same that it has been domestically, which is larger players taking share from smaller players...I still believe that the longer-term story is the competitive advantage that scale brings to the larger players versus the smaller players." --Dominos CEO J. Patrick Doyle (Pizza)

Industrials:

Construction activity is still well below its prior peak

"if we use 2007 as kind of the peak market, I would say we’re somewhere around 65% of where we were back in 2007. So it’s getting better. It’s continuing to improve… we are still hoping for some news on our infrastructure build, which would prolong the cycle." --Nucor CEO John Ferriola (Steel)

Infrastructure spend is missing

"what has, I’d say, disappointed for the last several years has been a lack of growth in infrastructure investment, which is really, I think, the area that looks prime to need some more investment and some more growth." --Caterpillar CEO James Umpleby (Construction Equipment)

Waxy corn will be DuPont's first CRISPR-developed product

"our CRISPR strategy, I would say, is something that is still emerging. We’ve clearly identified a few early targets. We talked about our waxy corn program....So it will be our first commercial product. We’d expect that by the end of the decade. We’re beginning to work on a few other diseases that we think CRISPR could help us control." --DuPont EVP James Collins (Chemicals)

Materials, Energy:

OPEC is trying to rein in supply

"The OPEC Gulf countries and Russia...remain fully committed to sound and consistent stewardship of their resource base...These countries are...actively supporting the rebalancing of the global oil market by taking a procative role in moderating the current production levels" --Schlumberger CEO Paul Kibsgaard (Oil Service)

But US equity investors are preventing recovery

"U.S. equity investors...are encouraging, enabling and rewarding short term production growth in spite of marginal project economics...In this market the pursuit of equity appreciation outweighs the lack of free cash flow, net income and return on capital employed for both E&P companies and the service industry...their pursuit of short term equity returns from the U.S...is actually preventing the recovery of the oil market" --Schlumberger CEO Paul Kibsgaard (Oil Service)

This wont last forever

"I think if we stay in a $45 to $50 environment. You are going to have a number of the private operators probably lay down some rigs. So we wouldn’t be surprised if we saw a contraction in the rig count by maybe 50 to 100 rigs by the end of the year...They can’t continue to outspend their free cash flow because in our view the equity markets and the debt markets will be much tighter this time around than maybe year or year and half ago" --Core Labs CEO Dave Demshur (Oil Service)

But don't bet against wildcatters' animal spirits

"I said several quarters ago the customer and animal spirits back and they are with a vengeance and they are now running free to North America. Here is my last piece of wisdom for you. Do not bet against the animal spirits that our North America customers embody. I never have and I never will because that is the bet that you will lose." --Halliburton CEO Dave Lesar (Oil Service)

There's a lot of capital sloshing around the world

"there is a lot of capital that’s being raised and has been raised. And in general, there is just a whole lot capital sloshing around the world, looking for returns. " --Blackstone COO Tony James (Private Equity)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

What CEOs said on this week’s earnings calls

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.

The first week of earnings season showed a continued abundance of optimism.  Expectations have definitely risen for the economy.  Curiously though, expectations have not risen for interest rates.  Citigroup's CEO mentioned that he only expects one rate hike per year through 2020.  Banks were prominent this week and credit quality remains strong, but CRE is an area where there appears to be a growing mismatch between risk and reward.

The Macro Outlook:

Optimism abounds

"Main Street continues to rebound. Our confidence is up. I’ve been in 23 of our 26 regions in the last few months...everyone is talking about increased optimism on the part of small- and medium-sized businesses...I’ve had 23 lunches where I’m sitting and talking to six to eight business people over the last few months. I’ve gotten this across our entire footprint...All of that is very, very positive." --BB&T CEO Kelly King (Bank)

CEOs are confident

"I would say the CEOs are confident, the conversations are happening all the time and strategic M&A in the U.S. those discussions are occurring especially in technology and consumer retail and natural resources." --Goldman Sachs CFO Martin Chavez (Investment Bank)

Consumers and investors are bullish on America

"across all the years since the crisis there has been ebbs and flows in customers’ views about where they want to invest and the cash portion of our balances has come up and down. But I think the consumer and the investor are very bullish on America and they continue investing" --Bank of America CFO Paul Donofrio (Bank)

Retail investors are highly engaged with the market

"We are seeing this quarter very broad-based engagement in the market, so everyone from brand-new customers opening their first account to very active traders seem to be engaged in the market. We saw a good activity across pretty much all of our products...So on the other end, the conundrum part is, as we said, we’re at multi-decade lows in the VIX, which tends to drive more trading activity." --TD Ameritrade CEO Tim Hockey (Broker)

Voices of warning are few and far between

"…don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk….Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par." --Janus Portfolio Manager Bill Gross (Investment Management)

Yet the expectation of low yields persists

"while markets have started to anticipate a normalization, a policy in the environment of sustained expansion, negative yields remain a reality in some countries and expectations for a continued low yield environment persists." --Blackrock CEO Larry Fink (Investment Management)

Central banks aren't very hawkish

"The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions…While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics." --ECB President Mario Draghi (Central Bank)

Citigroup is only expecting four more rate hikes through 2020

"we’ve got one more rate hike for the US built in and its December of this year. And quite frankly we’re assuming one more rate hike in ’18, one more rate hike in ’19 and one more rate hike in ’20." --Citigroup CEO Miles Corbat (Bank)

A lot is still riding on a tax cut

"And can I guarantee that all the craziness in Washington will not derail that? No. But I’ll be honest with you as I’ve talked to business people out there, they’re not worried about all this craziness going on in Washington. They’re just focusing on growing their business. Now I will say I think they are expecting a tax reduction deal and, to a lesser degree, they’re counting on infrastructure. But if we get the tax reduction deal, they’ll continue" --BB&T CEO Kelly King (Bank)

International:

Emerging markets have been weak for a long time

"since the financial crises, interest rates, currencies etcetera, we’ve had a prolonged period of about eight, nine years now where we have seen significant weakening of emerging market currencies...you actually see the volume component of these emerging markets continuing to be very, very low, while historically it was all volume-driven growth. I am convinced that that is coming back now." --Unilever CEO Paul Polman (Packaged Goods)

China may be stabilizing

"China for example is actually much more stable than the last 12 to 18 months. I like what I’m seeing in China right now." --Abbott CEO Miles White (Medical Device)

Chinese are still buying international assets

"we’re still seeing the trend of Chinese buying and international assets. " --Goldman Sachs CFO Martin Chavez (Investment Bank)

Financials:

The Fed should start shrinking its balance sheet in September

"So on the balance sheet, it is still the case that we expect to start seeing normalization in the balance sheet, in September, if not in September by the end of this year with the actually calling for the next rate hike in December the market is calling for March of next year." --JP Morgan CFO Marianne Lake

No one knows how it will affect banks

"I mean the Fed has never had a balance sheet of this size. We’ve never been through a situation where they’re talking about reducing a balance sheet. We can talk about history all day long, but since we’ve never been through that, nobody knows exactly what’s going to happen." --Wells Fargo CEO Tim Sloan (Bank)

There will likely be an increase in competition for deposits

"we think as excess liquidity comes out of the market you could expect to see and you will expect to see more competition with respect to deposits, I would also expect that the long end of the curve on a relative basis would be a little bit higher" --US Bancorp CFO Terry Dolan (Bank)

Consumers may not shift deposits until rates are higher

"I think we are a couple of moves away from the Fed before you start really seeing the positive beta shift on the consumer side." --PNC CEO Bill Demchak (Bank)

CRE lenders see unfavorable risk and return

"there’s a fair amount of competition in stabilized commercial real estate projects, I mean there’s lots of liquidity out there. And so this quarter there just happen to be more transactions that we’ve looked at where we said, gosh, another risk return it just isn’t there" --Wells Fargo CEO Tim Sloan (Bank)

"[we] remain cautious in commercial mortgage markets where the competitive environment has created unfavorable conditions from a risk and return standpoint." --US Bancorp CFO Terry Dolan (Bank)

So far credit quality in CRE has remained pristine

"As far as the credit quality within commercial real estate has been pristine...as far as the strength of our commercial real estate portfolios, it’s performing extremely well." --Comerica CCO Pete Guilfoile (Bank)

Technology:

AI is becoming ubiquitous

"AI is going into every segment of our growth sectors. AI is getting to mobile. AI is getting to high-performance computing like deep learning. AI will go into automotive...And AI will go to simple IoT, MCU also...it is ubiquitous." --Taiwan Semiconductor Co-CEO Mark Liu (Semiconductors)

Financial service companies are adopting it

"Technology will impact all aspects of our business...Our investment teams are combining big data and machine learning with traditional fundamental human analysis to generate better sustainable alpha for our clients." --Blackrock CEO Larry Fink (Investment Management)

"We are focused on our digital agenda on advancing the way we leverage data on exploring and piloting smart investments and things like AI and robotics on setting the standard in terms of the experience for our customers and distribution partners and as always on being as productive and efficient as possible." --Travelers CEO Alan Schnitzer (Insurance)

"We have a number of expense initiatives. We are using, for example, artificial intelligence, AI, robotics...we will be going enterprise-wide in terms of finding ways to take these repetitious activities and apply good digitization and artificial intelligence to find more efficient and effective ways to reduce our cost." --BB&T CEO Kelly King (Bank)

Robots are not necessarily that much cheaper than people

"If you look at the average basis points paid from the various robo platforms, they range in general like things from something like 20 to 40 basis points. If you look at the average basis points for a full service advisory like us, just divide our revenue into our assets including everything, you get somewhere in the 70s, low 70 basis points. So the value added of the financial advice and the institutions behind it and the research, the product offering, the new issued calendar you could argue is being put out there for 30 to 40 basis points. It’s not clear to me that, that is such an expensive gap that that’s going to lead to the cannibalization issues" --Morgan Stanley CEO James Gorman (Investment Bank)

80% of the world's data isn't public

"80% of the worlds data is owned by enterprises, it’s not searchable on the worldwide web, it’s customer data, and patient data, clinical data, supply chain data, transaction data and companies want to unlock and exploit that data." --IBM CFO Martin Schroeter (Technology)

John Legere had nice things to say about Masayoshi Son. Trying to butter him up?

"let’s remember that [Masa] is one of the richest, biggest dealmakers in the world and his moves are significantly tracked and I dare any of you to dissect when he is working on vision fund and when he is working on, the guy is one of the biggest players in the world. And what he has been doing makes sense. That’s Masa. Sprint is very lucky to have him as an owner." --T-Mobile CEO John Legere (Telecom)

3G/4G market growth is now just 6%

"For calendar 2017 3G, 4G device shipments, we continue to estimate shipment of 1.75 billion to 1.85 billion devices globally, up approximately 6% year-over-year at the midpoint." --Qualcomm CEO Steve Mollenkopf (Semiconductors)

Industrials:

Manufacturers are trying to increase prices

"we are increasing our price that we are realizing out there in the marketplace...so we are seeing improved pricing versus where we were last year when we said sort of said hey guys enough is enough, we need to start getting some price back into the market...I think it’s moving in the right direction." --Textron CEO Scott Donnelly (Conglomerate)

Transportation markets seem sluggish

"a few of our markets will experience year-over-year volume declines in the third quarter due to market specific headwinds you’re very familiar with. Auto shipments will be impacted by softening production." --CSX CFO Frank Lonegro (Railroad)

"Truckload volume growth has slowed from the second quarter. The holiday timing makes precise comparisons difficult this early in the month but truckload volume growth has been in the low single digits." --CH Robinson CEO John P. Wiehoff (Trucking Logistics)

Miscellaneous Nuggets of Wisdom:

It's ok to fail. It means you're trying.

"Failure is not such a bad thing and if you’re not failing maybe you’re not trying hard enough...you want to be introspective and look at that and say, are we being adventurous enough?" --Netflix CCO Ted Sarandos

Press your winners

"You ask about how we prioritize? Generally, when we see success, we try to add on to that until we reach a point of diminishing returns. And so, if we’re going to see success in some markets, we may up the content budget in those markets." --Netflix CEO Reed Hastings (SVOD)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Earnings Call Digest

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.

Earnings season started this week, but only with a few reports. Many more companies will report next week. A couple of industrial distributors, MSC and Fastenal, confirmed that the industrial economy is holding strong. Prices haven’t moved yet, but probably will if the economy continues to improve.

While there weren’t a lot of companies speaking, a lot of central bankers were. Yellen spoke about balance sheet normalization with Congress, and other central banks around the world are likely to begin normalizing soon too.

Bank of the Ozarks made a comment about commercial construction markets that bears watching though. The regional bank said it expects markets to slow because of high costs of labor, increasing interest rates and satisfaction of pent up demand. If this is true, it’s an interest rate sensitive market that is showing signs of sluggishness. This is a classic late cycle event. We will watch what other bank CEOs say next week for confirmation.

The Macro Outlook:

The industrial economy is showing continued and steady improvement

“Feedback from customers is consistent with the theme of continued and steady improvement…From an end market perspective, aerospace, fabricated metals and machine jobs continued to improve as did oil and gas related business…end markets like heavy truck and agriculture have appeared to bottom and showed some improvement.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

Pretty much all markets are performing well

“In fact, it’s difficult to identify a major market that is acting particularly poorly at this point. And the feedback that we’re getting from our RVPs remains overall very favorable.” —Fastenal CFO Holden Lewis (Industrial Distributor)

Prices still haven’t moved, but that could change

“…even if the commodities have moved and to be honest that’s something that surprised a bit over the last call it 6 months to 12 months these commodities certainly for a while have firmed up and there wasn’t as much manufacturer movement. Now, that could change. We are hearing bits and pieces that that could change as capacity starts to get fueled out by the manufacturers. But really for us the trigger is seeing a manufacturer move their list prices.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

A better economy will eventually allow companies to take price

“if we continue to see demand get better and the environment remains somewhat inflationary, then a window would probably open for us to take advantage of a little bit of pricing if the market affords.” —Fastenal CEO Daniel Florness (Industrial Distributor)

But the Fed continues to expect that interest rates will remain low for the longer run

“the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades.” —Federal Reserve Chair Janet Yellen (Central Bank)

International:

The global economy is strong and central banks are noticing

“for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.” —Federal Reserve Governor Lael Brainard (Central Bank)

If the Fed keeps hiking, the ECB will have to follow

“If the U.S. hikes more than once or two times it is going to be very difficult for the ECB to stay on hold for too long. I think that you don’t want to create too much of an interest rate gap between the between the euro and the dollar.” —UBS CEO Sergio Ermotti (Bank)

Canada is already beginning to raise rates

“Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time” —Bank of Canada

Central bank actions could impact currency markets

“the pace and timing of how central banks around the world proceed with normalization, and the importance of balance sheet policy relative to changes in short term rates in these normalization plans, could have important implications for exchange rates and financial conditions globally.” —Federal Reserve Governor Lael Brainard (Central Bank)

British consumer confidence is currently quite volatile

“the customer is quite volatile and what do I mean by that, they are shopping very much for today…we’re seeing fluctuations on a weekly basis in departments like men’s knitwear from sort of plus 50 to minus 20 on a weekly basis, depending on weathers. So, they’re really are shopping for today…consumer confidence overall, how they feel about themselves, is actually reasonably robust albeit it came down by about 5 or 6% over the last few weeks…In terms of how they feel about the economic environment though, they still feel less robust about that as we move forward” —Marks and Spencer CEO Steve Rowe (Retail)

Financials:

Yellen expects to start winding down the balance sheet “relatively soon”

“If the economy continues to evolve in line with our expectations, it is something we should begin to do this year. To my mind, I would say relatively soon. The exact timing of this, I do not think matters a great deal. It is something we have long been preparing to undertake.” —Federal Reserve Chair Janet Yellen (Central Bank)

Caps will start at $10B per month and rise to $50B over the course of a year

“The cap will initially start at low levels, $6 billion a month for treasuries and $4 billion a month for mortgage backed securities. And over the space of a year we will ramp that up to $20 billion for mortgage backed securities and $30 billion for treasuries.” —Federal Reserve Chair Janet Yellen (Central Bank)

This process could go on until 2022

“I would say this process will play out probably to around 2022, when our balance sheet will probably be shrinking to normal levels…Our balance sheet will end up substantially larger than it was before the crisis, but appreciably lower than it is now.” —Federal Reserve Chair Janet Yellen (Central Bank)

It sounds like the Fed will focus on the Fed Funds rate if the economy deteriorates while normalization is under way

“the Federal Open Market Committee (FOMC) decided to delay balance sheet normalization until the federal funds rate had reached a high enough level to enable it to be cut materially if economic conditions deteriorate, thus guarding against the risk of returning to the effective lower bound (ELB) in an environment with a historically low neutral interest rate.” —Federal Reserve Governor Lael Brainard (Central Bank)

This is the end of an era

“we are at a) the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets, and b) the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.” —Bridgewater Chairman Ray Dalio (Hedge Fund)

The risks may be greater than people think

“We’ve never had QE like this before, we’ve never had unwinding like this before. Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before….When that happens of size or substance, it could be a little more disruptive than people think. We act like we know exactly how it’s going to happen and we don’t.” —JP Morgan CEO Jamie Dimon (Bank)

Consumer:

Consumers want less carbonation and less sugar in their diets

“we continue to transform our beverage portfolio to offer more non-carbonated options and reducing sugar levels across the portfolio.” —Pepsi CEO Indra Nooyi (Beverage)

QSR dining looks much different in China

“If you now come to China and visit a KFC you will be surprised of the number of people not standing in line but actually ordering on their phone just like you would at an airport where you check in at a machine. And also Alipay, WeChat have been very good at expanding their networks and promoting it well. As a result of that we believe China is far ahead of anybody else in terms of mobile payment.” —Yum China CEO Micky Pant (Restaurant)

Technology:

The Youtube Generation still prefers printed textbooks

“Printed textbooks are still the format of choice for most students…While the evolution toward digital solutions has been slower than some originally anticipated, we saw an increasing shift toward a broader adoption of digital solutions in fiscal 2017” —Barnes and Noble Education CEO Max Roberts (Books)

Industrials:

Construction may be starting to slow

“We do have the expectation that construction nationally across all product types and all markets across country is likely to pullback a little bit and whether that number is 10% or 20% I don’t know, but in talking with our customers…they are passing that feedback along to me, cost of labor and materials in some markets are going up significantly. Cost of construction financing is going up…So, it’s costing more…to build things and we are working against a period of years coming out of the great recession, where supply did not keep pace with demand and supply of product and lot of product types has caught up with demand now and lot of submarkets. So, there are lot of markets around the country where you might have had 5 projects coming to market a year ago, but there is really only a need for two more projects coming to market this year and that is slowing the volume to some extent.” —Bank of the Ozarks CEO George Gleason (Bank)

Manufacturers are paying up for productivity

“most of our customers right now they are facing competitive threats, they need more productivity, they need to get product to markets faster, etcetera, etcetera. They are starving for productivity…so what’s actually…happening like if you take our cutting tool portfolio, it’s actually migrating up in quality of products, because in a lot of cases they are going to spend more for the product if they are going to get a much better length of cutter, the length of the tool life and the productivity coming out of the tool. And it’s actually moving the other way towards high performance. So I think our core customers anyway the big lever for them is productivity and getting more output for less dollars” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

Materials, Energy:

One oil company CEO says we could see $60 oil by the end of the year

“my personal view is we will probably edge back in the $60 range by the end of calendar 2017. I think it will be in the high 50s, low 60s….the amount of capital that’s actually come out of spending programs, globally depends on who you read, but its on the order of $1 trillion to $2 trillion, and that capital is not being reinvested in. It will start to cause declines with some point. So while we do have production growth in the Permian and it’s a fantastic resource, I do believe that the supply and other things will have a supply crunch at some point and we’ll see high oil prices.” —TAG Oil CEO Toby Pierce (Energy)

Miscellaneous Nuggets of Wisdom:

It’s better to go slow in the right direction than fast in the wrong one

“I would like to share with you a quote from Simon Sinek, it’s better to go slow in the right direction than to go fast in the wrong direction” —WD-40 CEO Garry Ridge (Industrial supplies)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

The Fed will move in March, right?

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.

The two most powerful people in America, Janet Yellen and Donald Trump, each were in the spotlight this week.  Yellen testified before Congress, where she directly said that the Fed still wants to raise rates three times this year.  She still sounds like she lacks conviction though, which is probably why markets don’t believe that she will actually carry out the plan.

Meanwhile, Donald Trump certainly doesn’t lack conviction.  Most of his news conference was spent sparring with the press, but he did make some comments that started to lay out a timeline for Obamacare and tax reform.  We’re still lacking clear details on both policies though.

Readers should also note John Legere’s comments in this week’s post.  It sounds like he could be signalling deal activity.  Charlie Munger also shared some words of wisdom at the Daily Journal Annual Meeting.

The Macro Outlook:

Yellen continues to say that the Fed could raise in March

“I indicated that at our up coming meetings we will try to evaluate whether or not the economy is progressing, namely labor market conditions and inflation in line with our expectations. And if we find that they are, it probably will be appropriate to raise interest rates further. We’ve indicated that we think a gradual path of rate increases is likely to be appropriate if the economy continues on its current course.” —Fed Chair Janet Yellen (Central Bank)

She is sticking to three rate increases this year

“We last said that…a few increases would be appropriate. The median was three at that time, that means we have eight meetings a year and means at some meetings we would if things remain on course increase our target for the federal funds rate and not act at others. And precisely when we would take an action whether it’s March or May or June…I know people are focused on that. I can’t tell you exactly…It’s our expectation that there will be increased rates” —Fed Chair Janet Yellen (Central Bank)

Inflation expectations have definitely risen

“As we look forward into 2017, in the first half in particular, before we lap the inflation that we saw in 2016, we do expect to see a higher level of low single-digit inflation in commodities. And that combined with our annual pricing outlook will probably result in a bit of pressure on gross margins.” —Pepsi CFO Hugh Johnston (Beverage)

“it appears, we’ve now reached the bottom on commodities and are likely to have to contend with commodity inflation beginning in Q1 of this year…in 2017, when we take a look at the spot and forward rates, we’re likely to see year-over-year inflation. And we’re already seeing that in cheese, coffee, bacon” —Kraft Heinz CFO Paulo Basilio (Packaged Foods)

Companies are thinking about expansion

“Since the election of course there has been a marked shift in the mood around major financial institutions. While that mindset may take some time to be captured in job numbers, there certainly is reason to believe that we may once again see increases in financial services employment here in New York” —Vornado President David Greenbaum (REIT)

Financial markets are wide open

“Turning to the financing markets. After periods of volatility in 2016, we are now open and liquid, especially for blue chip sponsors like Vornado. While the 10-year Treasury is up 60 basis points since the election, CMBS spreads have tightened and risk retention has been the Y2K of real estate finance, a non-event on large loans. Overall, we are seeing active bidding from all types of financing sources. CMBS lenders, life companies, balance sheet lenders and foreign capital all of which is good for borrowers.” —Vornado CFO Michael Franco (REIT)

Yellen still sounds hesitant though

“Right now, the Taylor rule would call for a short-term interest rate somewhere between 3.5 and 4%. Which is obviously a much higher value of the federal funds rate than the FOMC has deemed appropriate given the needs of the economy.” —Fed Chair Janet Yellen (Central Bank)

Meanwhile, Trump sounds pleased

“The stock market has hit record numbers, as you know, and there’s been a tremendous surge of optimism in the business world, which means something different than it used to. Now it means it’s good for jobs. Very different. Plants and factories are already starting to move back into the United States, big league, Ford, General Motors.” —President Donald Trump (Government)

He’s having a great time

“But I’m having a good time. Tomorrow, they will say, Donald Trump rants and raves at the press. I’m not ranting and raving. I’m telling you you’re dishonest people, but I’m not ranting and raving. I love this. I’m having a good time doing it, but tomorrow’s headlines are going to be Donald Trump, rants and rants. I’m not ranting.” —President Donald Trump (Government)

The administration has big plans for next week

“there’s never been a presidency that’s done so much in such a short period of time, and we haven’t even started the big work that starts early next week. Some very big things are going to be announced next week.” —President Donald Trump (Government)

Healthcare is first up, tax reform will be next

“Frankly, the tax would be easier, in my opinion, but for statutory reasons and for budgetary reasons, we have to submit the health care sooner, so well submitting health care sometime in mid-March, and after that, we’re going to come up, and we’re doing very well on tax reform.” —President Donald Trump (Government)

Financials:

Rising interest rates haven’t impacted CRE markets

“[interest rates] may have had a slight impact on the appetite in the pricing, but not a material impact. We still see a lot of capital that wants to go into real estate…institutions are under-allocated to commercial real estate by about 100 basis points relative to where they want to be. So that could be a positive impact.” —CBRE CEO Bob Sulenic (CRE Broker)

The Fed is still planning to shrink its balance sheet someday

“The FOMC has enunciated it is longer run goal is to shrink our balance sheet, to levels consistent with the efficient and effective implementation of monetary policy. And while our system evolves and I can’t put a number on that, I would anticipate a balance sheet substantially smaller than at the current time. We would like to — in addition, we would like our balance sheet to, again, be primarily treasury securities, where as you pointed out, we have substantial holdings of mortgage backed securities…What we would like to do is to find a time when we judge that our need to provide substantial accommodation to the economy in the coming years is minimal, when we have confidence that the economy is on a solid course, and that the federal funds rate has reached levels where we have some ability to address weakness by cutting it. And once we have that confidence, we will try to — we will begin to allow maturing principle from — from our investments to gradually and in an orderly way we will stop reinvestments or diminish them and allow our balance sheet to shrink in an orderly and predictable way. The committee has decided that it will not sell mortgage backed securities, but as principle matures we will begin to allow — allow those assets to run off our balance sheet.” —Fed Chair Janet Yellen (Central Bank)

Consumer:

Not everyone can produce all original content

“And there are more players in the marketplace that are now looking for content, which is great, on the streaming services as well. So it’s really a mixed bag. I think some of the cable operators are coming back to buying off-network product. They realize they can’t do their own all-original content.” —CBS CEO Les Moonves (Media)

The average Candy Crusher plays for 30 minutes a day

“we have more than half an hour of gameplay per player per day, and we think this is an attractive opportunity, a very attractive opportunity for advertisers. It’s a very engaged user base.” —Activision/King Digital CEO Ricardo Zacconi (Video Games)

John Legere is telling cable operators that they won’t get into wireless without buying a carrier

“if you think about what happened, the cable industry has been hoping to use MVNOs on Verizon to get economics to do something in the wireless entry point. However, there’s no possible way they’ll get economics to do unlimited, which has now become the industry standard, and that will compel them. And don’t rule out that part of what Verizon did with their unlimited offer is send a message to the cable industry that you’re not going to ride us to what’s going to happen on your entry into wireless.” —T-Mobile CEO John Legere (Telecom)

He’s hinting that a deal could go down after the spectrum auction is over

“I couldn’t be more excited about the period that’s going to come up when this auction is over, while we continue to do what we just announced and then engage in understanding what the future of this industry is going to be, which is fascinating.” —T-Mobile CEO John Legere (Telecom)

Technology:

With technology one minute you’re a market leader, the next minute you’re washed-up

“the global watch market has experienced significant disruption over the last couple of years. Prior to that, we were clearly positioned as the competitively advantaged leader in a growing category. However, with the introduction of technology into wrist devices, traditional watches came under pressure and we were disadvantaged. We didn’t have the technology capabilities to compete with smartwatches, leading to a decline in our addressable market.” —Fossil CEO Kosta Kartsotis (Watches)

Avis doesn’t see an impact from ride-sharing

“as we continue to update our analysis of car-hailing or ride-hailing impacts on our business…they don’t really change that much across the country basis. It’s just not that big of a part of our business to begin with. As we’ve said, our average rental is four days and 450 miles, so those kind of short mileage and short length of rental type transactions are not a big part of our volume.” —Avis Budget CEO Larry De Shon (Rental Cars)

NVIDIA says that deep learning is a breakthrough in AI

“deep learning is a breakthrough technique in the category of machine learning, and machine learning is an essential tool to enable AI, to achieve AI. If a computer can’t learn, and if it can’t learn continuously and adapt with the environment, there’s no way to ever achieve artificial intelligence. Learning, as you know, is a foundational part of intelligence, and deep learning is a breakthrough technique where the software can write software by itself by learning from a large quantity of data. Prior to deep learning, other techniques like expert systems and rule-based systems and hand-engineered features, where engineers would write algorithms to figure out how to detect a cat, and then they would figure out how to write another algorithm to detect a car. You could imagine how difficult that is and how imperfect that is. It basically kind of works, but it doesn’t work…well enough to be useful. And then deep learning came along…deep learning has proven to be quite robust. It is incredibly useful, and this tool has at the moment found no boundaries of problems that it’s figured out how to solve.” —NVIDIA CEO Jen-Hsun Huang (GPUs)

Healthcare:

Pharma companies are trying to blame PBMs for rising drug costs

“I’ve never seen more misinformation and absence of facts in the dialog about our role…Drug companies set drug prices and over the last eight years those list prices have increased by more than 200%…Drug makers set prices and we exist to bring those prices down” —Express Scripts CEO Tim Wentworth (Pharmacy Benefit Manager)

Materials, Energy:

Cliffs Natural says that sanity has returned to iron ore markets

“The most important point I would like to make today, we finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value. Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case. For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not, nor will it ever be normal.” —Cliffs Natural CEO Lorenco Goncalves (Iron Ore)

But stockpiles are building in China

“Every time we felt that iron ore stockpiles are very high. The Chinese would buy more. And when we felt that they didn’t have enough, for some reason they would stop buying. So unfortunately, it’s unpredictable. Their criteria have to do more with how they view the cost of acquiring iron ore and the prospect of utilizing it in their steel industry. So from here onwards what we are looking at is pretty high stockpiles admittedly. But that is not sufficient in itself to make us draw the conclusion that the Chinese are not going to continue buying iron ore, if they feel that it is a opportunity to do so for them.” —Diana Shipping President Anastasios Margaronis (Dry Bulk Shipping)

Miscellaneous Nuggets of Wisdom:

Investing has gotten much harder over the years

“In the old days, what we did was shoot fish in a barrel. It was so easy, we didn’t want to shoot fish while they were moving, so we waited until they slowed down and then we shot them with a shotgun. It was just that easy. It’s gotten harder and harder and harder…Think of the hooey we built up over the years: we don’t understand it, it’s outside our circle of competency, the worst business in the world is airlines – and what appears in the holdings? Apple and a bunch of airlines. Have we gone crazy? I think the answer is, we’re adapting reasonably to a business that’s gotten much more difficult…Things have gotten so difficult in the investment world that we have to be satisfied with the type of advantage we can get…Indexes have created absolute agony among investment professionals because 95% of people have no chance of beating it over time…most people handle that with denial…I think the people who are worried and fretful are absolutely right. I would hate to manage $1 trillion in the major indexes.” —Berkshire Vice Chair Charlie Munger (Buffett’s Partner)

Engage life

“My hero is Maimonides. All that philosophy, all that writing he did after working all those hours a day as a practicing physician all his life. He believed in the engaged life. I recommend that you engage life. If you spend all your time on how some politician wants it this way or that way and you’re sure you know what’s right – you’re on the wrong track. You want to do something every day where you’re coping with reality.” —Berkshire Vice Chair Charlie Munger (Buffett’s Partner)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Here’s what CEOs said on this week’s earnings calls

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.

For most of this bull market bearish sentiment has been consensus. Even while the market has risen, it's been easy to hold a negative view, and most people did (including me). Recently those negative voices have been fading though. In fact, they have been so drowned out that when I saw a CEO warn about the state of capital markets this week it actually felt genuinely contrarian. That doesn't mean that the bull market is over, but it does mean that one of its greatest assets, pessimism, is slowly melting away.  For now though, animal spirits are running strong.

The Macro Outlook:

The industrial economy has some momentum

"I think that what we’re seeing is the increased investments going on from a – just from pent-up – a situation for many years. We’re starting to see some of that flow … So I see a pretty steady recovery here. I don’t see a snap. As I’ve said, I’ve always felt that 2017 would be a good year of building that foundation and see a improvement. I see a much stronger 2018 than I see 2017. But I see right now, based on what I’m seeing from the customer base, based on what I’m hearing from some of our customers and what they’re saying they’re going to spend on capital next year, overall, I think the pressure is upward." --Emerson CEO David Farr (Industrial Components)

Some manufacturers can't keep up with orders

"Our inventories definitely on the lighter side…But every quarter we have been kind of beating the numbers and honestly not been able to build the inventories we set a target where the inventory would slightly grow and then we ship it all and the inventory does not grow. " --Microchip CEO Steve Sanghi (Semiconductors)

This has now become a truly contrarian perspective:

“I’ve been around long enough to have lived through all sorts of markets. I’ve learned to respect markets, while at the same time being skeptical of conventional wisdom. I’ve lived through a bond bear market and a gargantuan bond bull market. I’ve seen bond yields above 15% and below 2%. I’ve seen inflationary spirals, I’ve seen deflationary threats, I’ve seen deregulation and reregulation. I’ve seen the S&P 500 trade as high as 30 times earnings and I’ve seen the S&P trade as low as 7 times earnings. With all this experience, that comes with age I might add, here is what I’m seeing in the markets today. In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get a loan to buy a fleet of zeppelins at this point in time. With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from its recent lows, but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it’s a major disconnect, and it concerns me…The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more…To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely. So why am I sharing these thoughts with you? Because I know that some of you have wondered why we brought back relatively few Loews shares in 2016 or why Loews hasn’t made an acquisition…It’s a tough market in which to be a disciplined buyer.” –Loews CEO James Tisch (Insurance)

But should it be contrarian?

The world is still unusually uncertain

"Looking forward, our continuing view is that the world is unusually uncertain, and perhaps even more so given the regime change in Washington and the questions surrounding the administration’s proposed agenda. " --Oaktree Chairman Howard Marks (Asset Management)

The consumer isn’t showing the same pep as industry

“I think October was a little slower and then early November was good and it kind of leveled out again. So it’s kind of up and down by weeks. Some of it’s the way the calendar falls for us this year with the coming off the 53-week year, but I would just tell you it’s a little slower out there right now” –Sysco CEO Bill Delaney (Restaurant Supplier)

The downturn in CRE in the UK is exceeding JLL's worst expectations

"it is fair to say that the Brexit vote, in particular, hasn’t created an environment which encourages our clients to take long-term decisions around their real estate portfolios...Now we are staying very close to the situation in the UK, but though the development has been clearly exceeding our most negative expectations which we got for the Brexit but at the end of the day, we are very hopeful that pragmatism will take over and that things will play out fine for the UK going forward." --Jones Lang LaSalle CEO Christian Ulbrich (CRE Broker)

Tax reform may take longer than expected

"So I’m looking for clarity by late summer, early fall and that gives me time, as I get into execution later this year, early 2018 based on if I have to change anything." --Emerson CEO David Farr (Industrial Components)

Companies are looking before they leap

“I honestly just think it’s too early to start to speculate. And we’re certainly not building anything into our plans positively or negatively for that matter related to any policies that might come out. But I can assure you that we’re watching it very closely.” –Visa CEO Alfred Kelly (Payments)

Excitement can quickly turn to animosity

"Obviously the President has said that his top priority is to stimulate growth and get people working and expand the economic pie…I can’t say what the President’s view is going to be in the future…So I can’t – I can only – I could only speculate but I don’t have obviously the crystal ball that permits me to give an accurate answer to that question. Reinforces my view that I’ve long held that I hate politicians." --Kilroy CEO John Kilroy (REIT)

If trade stops, war starts

"If trade stops, war starts…We have to actively prove that trade helps people to communicate. And we should have fair trade, transparent trade, inclusive trade." --Alibaba CEO Jack Ma (E-commerce)

Invariably there will be another down cycle someday

"Every year that goes by logically increases the probability, but there are times, like today, when people say, oh, you know, we’re in a virtuous circle. We have an accommodative Fed, we have expanding – well, the Fed’s accommodative, but not too much, and the economy is expanding, but not too much that it has to be reined in, and corporations are doing well in piling up cash, and debt has been refinanced and paid down, and they’ll give you a hundred reasons why there’s not going to be another down cycle again, but invariably there is." --Oaktree Chairman Howard Marks (Asset Management)

Not necessarily in the near term though

"There is a tremendous amount of leverage paper in the world. There is a business cycle and we feel very good about the restructuring group and what the next three years look like. But that’s not to say that I characterize it as growth in the very short-term." --Moelis and Co CEO Ken Moelis (M&A Advisory)

International:

On the one hand, Mario Draghi sounds slightly more optimistic

"On the one hand, the evidence suggests that the acute deflation risks have disappeared and that inflation is set to pick up over the coming years. And contrary to a widespread perception, euro area economic conditions have also been steadily improving…And in the last quarter, the recovery has been broadening across sectors and across countries." --ECB President Mario Draghi (Central Bank)

But on the other, not much has changed

"Looking ahead, risks to the euro area outlook remain tilted to the downside and relate predominantly to global factors. Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration." --ECB President Mario Draghi (Central Bank)

Central bankers are on their way out anyways

"In many respects we’re coming to the last seconds of central bankers’ fifteen minutes of fame which is a good thing… In general it’s a much better balance than the only game in town being central banks and monetary policy. This is positive." --Bank of England CEO Mark Carney (Central Bank)

Financials:

M&A thrives in loose regulatory environments

"There’s a feeling that you can achieve the goals you set out that the government will not get in your way if you have a strategy to implement something and I think that’s rifling through all industries, people call it animal spirits but I think it’s the optimism that they can envision a creative way to create value and that the government might not get in their way and that’s going to motivate people to attempt and try things that will be exciting for everyone. That’s what I think is going to drive the M&A market." --Moelis and Co CEO Ken Moelis (M&A Advisory)

Consumer:

Amazon is opening more physical stores

"Probably more advanced and further along are the Amazon Bookstores. We have three physical stores; Seattle, San Diego, and Portland right now. We see adding five more this year. So we’re still in that phase where we’re testing and learning and getting better, even on the bookstore. I would say there’s other things that are physical in nature, the pop-up stores and college pickup points that we learn from as well, and think creates a great value particularly at the college pickup points." --Amazon CFO Brian Olsavsky (E-Commerce)

Nobody really worries about Wal-Mart anymore

"we were ignored for most of our history. Nobody paid any attention to us. And – but we continued to expand and grow and we got more and more successful, and then kind of the conventional supermarkets, they were – I think they were really pre-occupied with Walmart, and trying to be competitive with Walmart for a long time..." --Whole Foods CEO John Mackey (Grocery)

Over-the-top video packages could be at a tipping point

"it seems like we’re on the cusp of some significant growth for new entrants in the multi-channel marketplace. And what we like about them is they are mobile friendly or mobile first, their user interfaces tend to be very strong, and their pricing is priced substantially lower than the expanded basic bundle that most of the MVPDs are offering...we think that this wave that we’re seeing is really a signal of what is to come and what the future will be" --Disney CEO Bob Iger (Media)

Content creators benefit from more downstream competition

"we think that that proliferation of downstream competition is really, really healthy for content creators and for brands like ours that robust, that are differentiated, that can really deliver content that works for customers...we do believe that it can reverse some of these overall declines in subscriber trends in the total MVPD universe and have that go forward." –21st Century Fox CEO James Murdoch (Media)

OTT hasn't really exploded yet though

"I’d say OTT is growing at a very solid pace. It hasn’t exploded. At times people think that might happen, but that’s not taken place." --Akamai CEO Tom Leighton (Content Delivery Network)

Technology:

China has adopted digital payments faster than anyone

"I have not, from the experience around the world, seen a single country where the adoption of digital technology is at a higher level than China. It’s extraordinary how people’s lives revolve around digital technology. And particularly impressive is the transition of almost over two years from zero credit card or anything other than cash to suddenly, in some stores, cashless payment being a majority of our sales...you go to stores in China now and regularly, you will see people paying with their cell phones in a variety of retail formats." --Yum China CEO Micky Pant (KFC)

Healthcare:

Drug companies are pointing fingers at others for high prices

"If you look at the University of [California] Berkeley data showing that of $100 paid to an innovative drug company at list, only $63 on average makes it through to the company. That’s $37 out of the $100 are being paid to non-innovators in a system which thinks it’s paying high prices for innovation. So that’s really, that’s something that’s going to have to start to be addressed." --Glaxo Smith Klein CEO Andrew Witty (Pharmaceuticals)

Drug distributors are taking issue with that

"any suggestion that PBMs are causing drug prices to rise is simply erroneous. We are the solution and not the problem. And that’s why both public and private payers continue to count on PBMs as indispensable partners that help to manage their drug trend." --CVS CEO Larry Merlo (Pharmacy)

Industrials:

The best application of the internet of things is in the industrial marketplace

"So I think we’ve always believe that the industrial market is where the true strength of a IoT fits. It’s where there are very strong business models for the investments that are required in the IoT infrastructure that’s going to be put in." --Microchip CEO Steve Sanghi (Semiconductors)

Materials, Energy:

The oil industry is optimistic that the worst is behind it

"Frankly, I’m glad 2016 is behind us...we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief. I attribute my gray hair to the many previous downturns I’ve been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful." –National Oilwell Varco CEO Clay Williams (Oil Service Equipment)

Miscellaneous Nuggets of Wisdom:

Downturns are an opportunity to become better

"downturns are an opportunity to become better...The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet, how to improve cost per barrel, again, a necessity to survive and again invention followed. I credit the downturn of the 1980s with the inventions of measurement-while-drilling [MWD] systems, logging-while-drilling systems, top drives, rotary steerables, horizontal drilling technology, and PDC bits technologies that frankly enabled the shale revolution. It’s not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s." –National Oilwell Varco CEO Clay Williams (Oil Service Equipment)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Here’s what CEOs said on this week’s earnings calls

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.

Optimism is running high and animal spirits are real, but economic activity hasn't caught up quite yet. Still, businesses are making plans to invest and spending can't be far behind. Corporate America is positive on Trump.  Is that positivity enough to spark inflation?

The Macro Outlook:

The animal spirits are real

"the animal spirits are real, there is no doubt about it...when you have the whole herds thinking about slow global growth and that’s just the way it is and that’s just the way it’s going to work, well, it becomes self-reinforcing because we all act that way...but right now the feelings are better than I’ve seen them in long time and that could be enough to get the herd moving in the direction of saying, I’d better not miss this moment as oppose to just hunker down and keep waiting it out." --Honeywell CEO Dave Cote (Conglomerate)

There's a lot to be optimistic about, but activity hasn't picked up quite yet

"client sentiment has clearly and markedly improved. With that said when you look at their actual activity levels...There is a little sense of urgency...they are waiting to see more activity in their business before their hiring activity reflects that...I think that the good news is the optimism is up as they start seeing more activity and so forth among their own clients, I think their hiring levels will pick up...so if you want to be an optimist there is a lot to be optimistic about." --Robert Half CEO Harold Messmer (Temp Staffing)

We've moved from sparks to smoke

"I think the best way to sum it up, too, I was talking to one of our key partners in oil and gas, and he said, Lee, 60, 90 days ago, I would have said we see sparks, and today I am starting to see smoke. And so there is just things happening out there, which are positive." --Parker Hannifin CEO Tom Williams (Industrial Components)

Companies continue to try to see the best in Trump

"And you know in spite of the headlines, and there’s been quite a few, President Trump is really not against trade agreements. Now, he’s made it very clear he wants trade agreements to be fair from a U.S. perspective. And he also has made it clear that versus multilateral agreements, that he’s much more focused on bilateral agreements." --UPS CEO David Abney (Logistics)

"I do believe like everybody else that in the corporate world, there are a lot of us have built our business on the freer flow of cross-border trade, data and people. If that were to change over time, that would be a problem, but I don’t believe that that’s what the administration wants to do. They want to grow the economy." --Mastercard CEO Ajay Banga (Payments)

A lot of companies are saying that a border adjusted tax wouldn't have much effect on them

"Without knowing the exact policy changes, if the policy that came in was something along the lines of a border adjustment tax, we believe the impact on us would not be significant, since we are balanced if you total up our imports. And we’ve recently been looking in some detail at this just to make sure we fully understand the numbers." --Eaton CEO Richard Fearon (Industrial Components)

"We’re a net exporter, so on balance it would benefit us from a tax standpoint." --Honeywell CEO Dave Cote (Conglomerate)

Inflation probably isn't far off

Inventories are lean

"No, I would not characterize the channel as inventory heavy at all. And you know some [distributors] that were tied to oil and gas did get stuck with some inventory. I would say, by and large, that’s not 100% gone, but it’s burned off quite a bit. So I don’t consider the channel heavy at all." --Parker Hannifin CFO Lee Banks (Industrial Components)

The US job market continues to tighten

"All indications are that the U.S. job market continues to tighten. Unemployment for college -degreed workers 25 years and older is just 2.5% today. This is placing pressure on the labor supply, particularly at higher skill levels." --Robert Half CEO Harold Messmer (Temp Staffing)

Commodity costs have gone up

"we think, today there is a lot of speculation built into the expectations of global growth, and hence the demand for commodities or the price of commodities have really been fluctuating quite significantly...really it’s almost across the board where we’ve seen commodity inflation creep into the system...for the most part, we’ve seen most of our commodity input costs go up over the last 90 days or so." --Eaton CFO Craig Arnold (Industrial Components)

International:

The Indian government launched a transformative demonetization program in November

"In India, the government has recently implemented a plan to address its parallel economy and to help drive the shift from cash to electronic forms of payment. Given the heavy reliance on cash in that economy, this is expected to soften consumer spending in the short term, but could well fuel economic growth and modernize the payment system in the long term...When the demonetization happened, the two biggest currency notes were taken out of circulation, the INR 500 and the INR 1,000 notes constituted 86% of the currency notes in circulation...I think the Prime Minister is to be credited for his willingness to take it on, because in the medium to long term, this could be transformative for the way India’s economy operates in the recognizable formal economy, as compared to the informal economy, where it’s denied taxation and denied credit and denied insurance. I think he’s really trying to do something pretty brave here." --Mastercard CEO Ajay Banga (Payments)

It sounds like Brazil's economy may not be improving

"In Brazil, rising unemployment and reduced consumer confidence meant that the contraction of consumer spending power and down-trading accelerated through the second half of the year. In fact, in the fourth quarter, market volumes declined by almost 10%." --Unilever CFO Graeme Pitkethly (Packaged Goods)

France's economy may not be too healthy either

"Well clearly, France category is turning negative was not a pleasant or expected event. I think there is public information out there that says that some retailers in France have suffered from the same problem which is to say consumer purchasing weakness in France. So, you’re certainly seeing deflation in France and indeed in some categories, volume reduction" --Colgate Palmolive CEO Ian Cook (Packaged Goods)

Financials:

Repatriation could lead to more M&A

"If a lot more cash comes back in, you could see more M&A from larger corporations as they now are flush with a lot of liquidity and now they’re going to be willing to put that for growth, that’s clearly a possibility." --SVB Financial CEO Greg Becker (Bank)

"I am optimistic given what I'm hearing that there would likely be some sort of tax reform this year, and it does seem like there are people in both parties that would favor repatriation as a part of that. So I think that's very good for the country and good for Apple. What we would do with it, let's wait and see exactly what it is. But as I said before, we are always looking at acquisitions." --Apple CEO Tim Cook (Consumer Electronics)

Tax reform could have a major impact on Bermuda-based insurance companies

"Many companies that participate in the US P&C market have benefited from being outside of the United States and the question will be whether that benefit will continue going forward or whether that is something that perhaps may change or be impacted by decisions and actions coming out of Washington." --W.R. Berkley CEO Robert Berkeley (P&C Insurance)

Blackstone's CEO is close to the White House and would really like to see a specific regulation changed

"I’m not a member in the administration. I am chairing a committee...We will have regular meetings with the President and supposed to be every month"...

[unrelated comment:] "in life you have to have a dream. And one of the dreams is our desire and the market’s need to have more access at retail to alternative asset products." --Blackstone CEO Steve Schwarzman (Asset Management)

Consumer:

Leveraged Buyouts have killed more retailers than the internet

"What’s hurt our business in retail, frankly, is that there has been too many leverage buyouts with too much debt, and we all know no matter how good a retailer you are, you’re going to run into ebbs and flows. And lo and behold, when you run into that scenario, you’ve got a balance sheet that can’t withstand it. I can’t tell you how much pressure is because of that as opposed to because of the Internet." --Simon Property Group CEO David Simon (Mall REIT)

Consumers have never been more demanding

"The fact of the matter though is that the consumer, they expect more today. They expect speed and convenience and best price and value, and they expect it the next day." --Under Armour CEO Kevin Plank (Apparel)

Technology:

VCs are looking at 2017 as a year for liquidity

If 2015 was the year of funding and 2016 was the year of recalibration, we believe 2017 has the potential to be the year of liquidity...As we enter into 2017, the exit markets are looking promising. In addition to the 20 or so venture-backed companies that are formally registered for IPOs, we are aware of a growing pipeline of other companies that have filed confidentially or are planning to file for an IPO." --SVB Financial CEO Greg Becker (Bank)

Industry has moved to the public cloud faster than Intel expected

"I think that certainly some of that is, that it’s moving to the public cloud, it’s moving to those areas at a faster rate than I think we expected. It’s also been a little bit slow about developing private cloud" --Intel CEO Brian Krzanich (Semiconductors)

An example of how one of Microsoft's customers uses the cloud:

"Mars is using Office 365 and Windows 10 to transform how its 80,000-strong global workforce collaborates while staying secure. And more recently, they have begun running mission-critical workloads on Azure with hundreds more on the way, including inventory management using Azure IoT" --Microsoft CEO Satya Nadella (Enterprise Tech)

Computing is moving from mobile-first to AI-first

"computing is moving from a mobile-first to AI-first with more universal ambient and intelligent computing that you can interact with naturally, all made smarter by the progress we are making with machine learning." --Google CEO Sundar Pichai (Internet)

AI will make sure that we never view objectionable content on Facebook

"Another area where I’m really excited about this is our ability to keep the community safe, right? So there’s an increasing focus on objectionable content, right, and a lot of unfortunate things, right, that people share on Facebook...ultimately the best thing that we can do is build AI systems that can watch a video and understand that it’s going to be problematic and violate the policies of our community and that people aren’t going to want to see it and then just not show it to people before bad experiences happen" --Facebook CEO Mark Zuckerberg (Social Media)

Facebook investors should note that revenue growth will slow and expense growth will rise this year

"we continue to expect that our ad revenue growth rate will come down meaningfully in 2017...we expect that 2017 will be an aggressive investment year...we expect that full year 2017 total GAAP expenses will grow 40% to 50% compared to the full year 2016." --Facebook CFO David Wehner (Social Media)

Healthcare:

Whatever the result of healthcare reform, we're probably not going back to old levels of uninsured

"if there is a repeal there will be a replacement. What that replacement will look like and how many lives it’ll cover...we don’t know. But I’ll say I don’t see it’s going back up to the...percentage of population uninsured that we had in 2014" --HCA CEO Milton Johnson (Hospitals)

Healthcare reform can't change underlying pressures on the system

"we have a new administration advocating for health care reform and we expect the U.S. regulatory and legislative environment to be dynamic. That said, the core issues that have pressured health care markets more broadly...arise from the same market forces and pressures that pressure...health care systems...across the globe. More specifically, aging populations, eroding health status and the rise of chronic conditions all pose challenges for health care consumers individually as well as society at large." --Cigna CEO David Cordani (Health Insurance)

Industrials:

If manufacturing comes back to the US it will likely be automated

"As it relates to businesses or types of operations, there are certainly more automated-type manufacturing processes [in Mexico], which you could conceivably see coming back to the – or coming to the U.S. Some of these were never in the U.S. We’ve grown them in Mexico or started them in Mexico...But it would have to be much more of the – sort of the automated-type manufacturing operations, just given the difference – the labor differential there." --Delphi CEO Kevin Clark (Auto Supplier)

Materials, Energy:

Oil supply probably wont rise significantly until 2018 or 19

"I don’t think even with the rigs that are all starting to stand up, particularly in the Permian, and if you look even at what ExxonMobil has said about it this week, you couple that together, and it’s not like in 2017 you’re going to see a tremendous supply response that will dwarf the improving demand. I think that’s really more something to look at in 2018 and 2019. And it’s a little fuzzier when you look into the crystal ball at that point." --Anadarko CEO RA Walker (Oil Prospector)

Mining companies probably wont increase CapEx this year either

"mining customers, our estimates and what we’ve read, we’re not seeing – we’re seeing better sentiment, for sure, but we’re not seeing expectations for a big increase in CapEx in 2017, although it does look like that could occur in 2018." --Caterpillar CEO Michael DeWalt (Construction Equipment)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Here’s what CEOs said on this week’s earnings calls

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.

The Dow broke through 20,000 and optimism is the mood of the moment. Last week US Bank said that optimism hasn’t translated to action quite yet. But comments this week from Cullen Frost Bank suggest that it’s only a matter of time. Companies are eager to invest in growth and are moving forward with plans that they had delayed. There doesn’t seem to be much standing in their way at the moment. The new president loves that the Dow is at a new record and although he talked about bubbles on the campaign trail now he wants it to keep going “up, up, up.” Presidents often get their way.

The Macro Outlook:

The industrial economy is seeing a broad based improvement

“it was broad-based growth in Industrial, both in terms of the businesses and in terms of the geographical area…And if you look upon PMI, the United States had a PMI of 54.7% in the quarter, China 51.4%, and Germany 55.6%. If you think about that in terms of big economies that will help us as we move forward, and as I said, it was broad-based.” —3M CEO Inge Thulin (Conglomerate)

Customers are moving forward with plans they had delayed

“As I have gone around the state, visiting all our locations during the month of December, one thing it was a consistent message was how many customers particular I would say mid and small customers are moving forward with plans that they had, had delayed, right? Somebody had a piece of equipment they want to put in and they can wait for six months, after they got the clarity from the political situation, the word was let’s move forward, let’s move forward now. So I think you are definitely seeing just general optimism in the market moving forward…I think we are seeing momentum increase. I would expect loan growth to be better than 2016 for sure.” —Cullen Frost CEO Phillip Green (Bank)

The housing market is solid

“The market therefore is a very solid market…we continue to see good sales trends in January, very early into spring.” —DR Horton CEO David Auld (Homebuilder)

The Hawaiian economy remains “pretty darn strong”

“the economy remains pretty darn strong. There really aren’t any factors at this point pointing to a softening or a downturn in the local economy. So I think that’s, if you will, the tailwind that we are looking at from a loan perspective and a deposits perspective” —Bank of Hawaii CEO Peter Ho (Bank)

Even energy producers are excited again

“Customers are excited again, and our conversations have changed from being only about cost control to how we can meet their incremental demand.” —Halliburton CEO Dave Lesar (Oil Service)

Texas’ economy never faltered

“Despite lingering low oil prices in the first half of 2016, the Texas economy grew faster than the national average and all other energy states. The service sector and the I-35 corridor remain strong throughout the downturn. According to the Texas Workforce Commission, Texas added 210,000 jobs last year. The unemployment rate in December was 4.6%.” —Cullen Frost CFO Jerry Salinas (Bank)

Corporations can’t wait for lower taxes

“Obviously our new administration is pro-business, but there’s a lot of moving parts in that…I think we’re all waiting to see if there’s a tax reform package that would allow us the ability to access overseas cash and repatriate cash…I think that would make a big difference for a lot of multinationals” —Abbott Labs CEO Miles White (Healthcare)

“I think all of us recognized we’ve got a new administration in Washington which has an agenda to be friendly to business and I think, we’re anxious to see how all of that will play out certainly tax reform is the biggest single item that we’re focused on this year.” —United Technologies CEO Greg Hayes (Conglomerate)

“I think what GE wants and what we think is most important to competitiveness for U.S. companies is essentially a competitive tax rate, something that looks more like the OECD averages, which is just roughly 21%, 22%.” —GE CEO Jeff Immelt (Conglomerate)

“we also are advocating for the modernization of the US tax codes. As both sides in the aisle in the Washington have noted, the US tax code for business is outdated and in many cases makes the US a more costly place to do business leaving US workers and the US economy at a disadvantage. We are very encouraged by the proposals currently in discussion and we will support business tax policy that is competitive with most developed countries and encourages innovation and growth.” —Johnson and Johnson CEO Alex Gorsky (Healthcare)

But in theory, lower corporate tax rates increase WACC

“if the risk free rate goes up, cost of equity goes up. If the tax rate goes down then our after-tax cost of borrowing theoretically goes up…if you just started with those two simple assumptions, you would look at that and say, gee, if the risk free rate goes up and if the tax rate goes down, you would speculate that our overall cost of capital would go up.” —Travelers CEO Alan Schnitzer (Insurance)

Still, Trump couldn’t be more pleased

“The Dow on top of it just hit 20,000. First time in history. I’m very proud of it. And now we have to go up up up. We don’t want it to just stay there. That’s gonna be the challenge, but its gone up a lot since I won. Don’t forget when I won people thought maybe it will go down, but the business world doesn’t think that. The business world knows me, they don’t think that. And it was a steady climb and now we just hit a record and a number that’s never been hit before, so I was very honored.” —President Donald Trump (Government)

International:

US optimism hasn’t translated to international optimism yet

“I think outside the U.S., I really haven’t seen much change in interplay, post the election in terms of what our customers are saying and how to think” —General Electric CEO Jeff Immelt (Conglomerate)

Many companies remain positive on China though

“China continues to be a very attractive opportunity. This is a market that is among the highest growth rates across the world on a sustained basis and that really hasn’t changed.” —Procter and Gamble CFO Jon Moeller (Packaged Goods)

“performance was driven by strong results in China…Notably, China had a strong quarter with comparable sales of 7.9%” —McDonald’s CEO Steve Easterbrook (Fast Food)

“Looking ahead in the China market, we expect another year of significant volume growth. Category demand should remain strong” —Kimberly Clark CEO Thomas Falk (Packaged Goods)

China is posturing for free trade

“In a world with a plethora of uncertainties, China offers an anchor of stability and growth with its consistent message of support for reform, openness, and free trade. The times may be difficult. But that’s all the more reason not to lose sight of these principles, which have stood China—and the world—in good stead.” —Chinese Premier Li Keqiang (Government)

Financials:

The credit window wont stay open forever

“I think this window is still open but…you know this thing won’t stay open forever…You know after a number of years post the great recession where the growth of revolving debt was near zero or even negative, it has crept up in the last couple of years and now it is running at a 7% year-over-year rate and obviously that’s a faster growth rate than the economy is doing. And if you look at this growth it is broad-based although subprime growth has picked up and is now growing faster than prime…So our primary point has been – look in the end this is physics. The year after year just amazingly low losses…this has to be the bottom, things are going up from here.” —Capital One CEO Richard Fairbank (Bank)

Rate-increase expectations are low

“we are projecting just one rate increase and we are projecting that in November of this year.” —Cullen Frost CEO Phillip Green (Bank)

Technology:

AI requires unique data sets

“Yes, we have world-class cognitive technology, but that’s table stakes. We are building datasets by industry that we either own, or we partner for. Importantly, we’ve designed Watson on the IBM Cloud to allow our clients to retain control of their data and their insights, rather than using client data to educate a central knowledge graph.” —IBM CFO Martin Schroeter (Enterprise Tech)

The next frontier for automation is the back office

“if you think about a customer transaction, if we could take the customer’s order, get the price exactly right, the quantity shipped on the date they wanted it with the correct terms. So it flies right through our system and their system without any additional [human] intervention that’s a big opportunity and it takes friction out of everyone’s transaction costs. But we still got a long way to go to get to that.” —Kimberly Clark CEO Thomas Falk (Packaged Goods)

Healthcare:

ACA didn’t drive significant volumes so it may not be missed

“We did not see any significant impact uptick in business as a result of the implementation of the Affordable Care Act…So therefore, any change going in the opposite direction, we don’t think will be negative.” —Johnson and Johnson CEO Alex Gorsky (Healthcare)

Industrials:

Auto production is likely to decline in 2017

“As we look at 2017, most industry sources are predicting a minor decline in North American automotive production rates of about 1% to 3% compared to 2016, but this comes after the all-time record year of 2016. So even if such decline would indeed materialize, we would still anticipate another solid year in the automotive market.” —AK Steel CEO Roger Newport (Steel)

Defense budgets could increase

“there appears to be bipartisan support for eliminating sequestration. As I’ve said in the past, we have a lot of independent dialogues with various members of Congress, every one I’ve ever spoken to [Technical Difficulty] they don’t think it’s good policy and they want to get rid of it…there’s also a strong discussion around increasing defense spending” —Lockheed Martin CEO Marillyn Hewson (Defense)

Energy:

Oil service companies are looking for a V shaped recovery

“As we projected earlier this year, our third quarter results established the bottom of the expected V-shaped recovery that we believe will continue into 2017. We believe that the global crude oil market is currently undersupplied.” —Core Labs CFO Dick Bergmark (Oil Service)

US oil companies got a jump start from outside capital

“growth in E&P investments will be led by the North America land operators who appear to remain unconstrained by years of negative free cash flow as external funding seems more readily available and the pursuit of shorter-term equity value takes precedence over a full cycle return” —Schlumberger CEO Paal Kibsgaard (Oil Service)

International may take longer to recover

“Most people agree that the U.S. is now the world’s swing producer and it has demonstrated its ability to ramp up production quickly at a price that may make it difficult for deepwater projects to compete…Therefore, we do not expect to see an inflection in the international markets until the latter part of 2017.” —Halliburton CEO Dave Lesar (Oil Service)

We may actually be looking at a supply shortage

“I think the key here is that we look at 2017 as a starting point of a new multiyear cycle, where the main challenge is actually going to be reverse the effect of several years of Global E&P underinvestment and then try to mitigate the pending supply shortage that we see unfolding.” —Schlumberger CEO Paal Kibsgaard (Oil Service)

Only 4 billion barrels of new oil were discovered last year but 55 billion were consumed

“operators discovered less than 4 billion barrels of new oil in 2016, while the globe consumed over 55 billion barrels. Therefore Core believes crude markets more than rationalized in late 2016 and price stability followed by price increases, some occurring as we speak, are returning to the energy complex. Remember, the immutable laws of physics and thermodynamics mean that the crude oil production decline curve always wins and it never sleeps.” —Core Labs CEO Dave Lesar (Oil Service)

Materials:

Freeport McMoran is in a dispute with the government of Indonesia

“We have the rights to pursue claims against the government in the form of international arbitration. And our legal team advises us that our case is very strong in doing that. We have consistently represented to the government that we don’t want to do that, I don’t believe that would be advantageous for us, but I also think it would be very negative for the Government of Indonesia.” —Freeport McMoRan CEO Richard Adkerson (Mining)

Miscellaneous Nuggets of Wisdom:

It’s about the journey, not the destination

“You never want to characterize something as an ultimate vision because when you get there, there’s always more that you want to do.” —Netflix CEO Reed Hastings (SVOD)

Uncertainty creates opportunities to talk to clients

“it creates more uncertainty which actually creates an opportunity for us to talk with our clients about options and how they can think about it and attack it going forward particularly based on whatever is the outcome of the changes.” —Brown and Brown CEO Powell Brown (Insurance Broker)

Please don’t text and drive!

“The deterioration [in losses] is primarily driven by an increase in the trend towards more severe accidents. Some of the factors that lead us to this observation are a higher percentage of claims involving distracted driving, more accidents involving higher speeds and more accidents on highways and at intersections. This is also consistent with recent industry data. For example, the National Safety Council report of significantly higher traffic fatalities in 2015 and 2016, a two year trend that we haven’t seen in decades.” —Travelers COO Brian Maclean (Insurance)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Here’s what CEOs said on this week’s earnings calls

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.

Earnings season started this week with a heavy emphasis on banks. The quarter was relatively good for financial services companies, and economic optimism is high. For now though, the immediate state of the economy feels less important than understanding the role that the incoming administration will have in shaping it.

Two key players in the administration’s economic policy testified before Congress this week: Steve Mnuchin and Wilbur Ross. We picked out some key policy points from their testimony. Aside from tax reform, we think that Mnuchin’s second most important job could be housing reform. He is confident in that area and Fannie and Freddie need to be resolved in some way. He gave some high level thoughts on Fannie and Freddie before Congress. His most important comment in our opinion is that he wants to ensure that capital is still available to support the mortgage market in some way.

Janet Yellen also spoke this week and seems to want to continue to operate as if nothing has changed. She is communicating three rate increases this year, but also says that the Fed’s foot is still on the gas.

The Macro Outlook:

The optimism is palpable

“The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. We will have to see how these topics play out, but we are optimistic.” —Bank of America CEO Brian Moynihan (Bank)

There’s a lot of optimism but not a lot of action

“there’s more optimism and positive commentary for a lot of our business customers. But we haven’t seen a significant change in utilization or actually take down of credit yet. So while the talk is there, the actual action is not yet shown itself.” —US Bank COO Andy Cecere (Bank)

“What I’m cautious about is nothing has actually happened yet, other than there has been a move in rates, right, and it changes sentiment. And I think we need to start seeing some of confirmations get through. We need to see real progress on tax reform. We need to see real progress on infrastructure, spending bills of state and local, and then all of a sudden, this thing takes flight, but right now, it’s just people talking about it.” —PNC CFO Rob Reilly (Bank)

Businesses may just be gearing up

“It’s really a big deal. Optimism is up. I have been talking a lot to clients and to our RPs, regional presidents in the last several weeks, including yesterday, and clearly, CEOs are optimistic. They are making plans to invest and we really think this is going to kick into a meaningful improvement in investment and job growth as we head into the second and third and fourth quarter…I met with some regional Presidents in person yesterday and got a real current update and the message was very, very consistent. They gave me a number of anecdotes in terms of individual companies that were already requesting loans to buy trucks to expand their plan to expand their inventory, etcetera. So it is, in fact, happening. It’s across the footprint.” —BB&T CEO Kelly King (Bank)

The administration wants growth

“The most important issue we have is economic growth…In 1984, we had 7% and in 1998 we had 5% and in 2005 we had 3%. That was the last time we had appropriate growth rates. I share the president-elect’s concern of low growth. Our number one priority from my standpoint is economic growth” —Treasury Secretary Nominee Steve Mnuchin (Government)

Growth means that the Fed may pull back faster than anticipated

“The Fed’s decision to raise rates in December and the signal of additional hikes in 2017 suggest that the long period of accommodative monetary policy in the U.S. may finally subside at a faster rate that many have had anticipated.” —Blackrock CEO Larry Fink (Asset Management)

“if fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid than otherwise, with the conditions the FOMC has set for a cessation of reinvestments of principal payments on existing securities holdings being met sooner than they otherwise would have been.” —Federal Reserve Governor Lael Brainard (Central Bank)

A lot of banks are only counting on two rate increases this year

“we have built into our plans two rate increases in 2017, one in June and one in December both 25 basis points.” —PNC CFO Rob Reilly (Bank)

“I know there is a lot of work out there that have a June, September, December, we’re just using June, December projections right now.” —US Bank CEO Richard Davis (Bank)

But Yellen is saying “a few”

“as of last month, I and most of my colleagues–the other members of the Fed Board in Washington and the presidents of the 12 regional Federal Reserve Banks–were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 percent.” —Federal Reserve Chair Janet Yellen (Central Bank)

Growth probably also means more inflation

“I do think that if the economy holds out, which we are forecasting today that it will and business continues to travel which we are forecasting it will, that the opportunity to raise fares in that environment with a lower level of capacity offering from the industry is significant” —Delta EVP Glen Hauenstein (Airline)

“Inflationary pressures are expected to have an impact on annual merit, staff insurance, occupancy and marketing.” —Comerica CEO Ralph Babb (Bank)

“As for inflation, we expect 2017 inflation will be around 3%, which will equate to a cost that is significantly higher than the inflation was in 2016.” —Union Pacific CFO Rob Knight (Railroad)

But the Fed is still pressing on the gas pedal

“Right now our foot is still pressing on the gas pedal, though, as I noted, we have eased back a bit. Our foot remains on the pedal in part because we want to make sure the economic expansion remains strong enough to withstand an unexpected shock, given that we don’t have much room to cut interest rates.” —Federal Reserve Chair Janet Yellen (Central Bank)

International:

The administration is NOT going to push for a border tax

“He’s not suggesting a border tax. What he’s suggested is that for certain companies that move jobs, ok, that there may be repercussions to that. He’s not suggested in any way an across-the-board 35% border tax…he’s in no way contemplated a broad 35% border tax that couldn’t be further from anything that he’d possibly consider” —Treasury Secretary Nominee Steve Mnuchin (Government)

Trump’s comment about the strong dollar was not meant to be taken as a long term policy objective

“I think when the president-elect made a comment on the U.S. Currency, it was not meant to be a long-term comment. It was meant to be that perhaps in the short term, the strength in the currency as a result of free markets and people wanting to invest here may have had negative impacts on our ability in trade, but I agree with you, the long-term strength over long periods of time is important” —Treasury Secretary Nominee Steve Mnuchin (Government)

Wilbur Ross wants fair, sensible trade

“I am not anti-trade, I am pro trade but I’m pro sensible trade, not pro trade that is to the disadvantage of the American worker and the American manufacturing community. I think we should provide access to our market to those countries who play fair, play by the rules and give everybody a fair chance to compete. Those who do not should not get away with it, they should be punished and severely.” —Commerce Secretary Nominee Wilbur Ross (Government)

Ross talked tough on China

“China is the most protection protectionist country of very large countries. They have both very high tariff barriers and very high non-tariff trade barriers to commerce. So they talk much more about free trade than they actually practice. We would like to levelize that playing field and bring the realities a bit closer to the rhetoric.” —Commerce Secretary Nominee Wilbur Ross (Government)

Financials:

Financial services reform is probably not high on the new administration’s agenda

“based on what I understand, the administration that’s going to take office in a few days. The number one issues are health care reform, taxes and infrastructure and somewhere in the top five might be financial services, but it’s not the top three, a lot of financial services issues I think will be dealt with in the early part of the year but with some implications later.” —US Bank CEO Richard Davis (Bank)

Regulators have compiled a huge body of work over the last eight years

“the body of work that’s been created by the regulators whether it’s Basel capital ratios, the implementation of CCAR, stress testing broadly globally, the leverage ratios, the requirements around liquidity, all those things that were designed to address points to systemic risk, clearing, margin requirements, all of that data reporting, I think sometimes gets lost in the narrative and have to step back and look at the past eight years and realize that and it’s an incredible body of work that regulators, the industry participants and the clients have actually created.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

The two areas that Mnuchin wants to re-evaluate are the Volcker Rule and regulatory burden on small banks

“The concept of proprietary trading does not belong with banks with — the Federal Reserve put out its own report that that rule has completely limited liquidity in many markets and the federal reserve is concerned that the interpretation of the Volcker rule does not allow banks to create enough liquidity for customers. That is something I would absolutely want to look at” —Treasury Secretary Nominee Steve Mnuchin (Government)

“My biggest concern and I fully support regulation for banks with FDIC insurance but my biggest concern is that this regulation is killing community banks, we are losing big community banking business.” —Treasury Secretary Nominee Steve Mnuchin (Government)

Mnuchin considers himself an expert on Fannie and Freddie and wants to see housing finance reform

“My comments were never that there should be recap and release. I have been around the mortgage industry for 30 years and I have seen this for a long period of time. This is an area I believe I have expertise in. For very long periods of time I think Fannie and Freddie have been well run without creating risk to the government and they played an important role…I believe these are very important entities for liquidity…What I have said and believe, we need housing reform…We need housing reform and a solution. The status quo is not acceptable of just leaving them there. There are two extremes on this and it is something I look forward to sitting down and talking with you. One, we don’t put the taxpayers at risk and two, we don’t eliminate capital for the housing market. I’m very concerned that middle of income people who need mortgage loans have access to the capital.” —Treasury Secretary Nominee Steve Mnuchin (Government)

Even if regulations go away the extra costs probably don’t

“There’s also a lot of regulatory costs that probably were missing from the industry historically. I’m thinking about to build an AML costs…I’m thinking about general compliance with consumer laws…We are done investing in that by and large, but I don’t think those costs go away, no matter nor should they, no matter what really happens to the regulation.” —PNC CEO Bill Demchak (Bank)

“Our compliance costs in the entire company are now in terms of FTE, there are over 7000 people of our 70,000 and that’s up more than twice what it was a few years ago…it’s not going to go back to where it was, it’s going to stay much higher because that’s the cost of running a high-quality bank.” —US Bank CEO Richard Davis (Bank)

Technology:

Wilbur Ross recognizes that technology is an important factor in the employment equation

“I think more research and development, more encouragement of technological breakthrough, is clearly an important thing, but at the same time, we need to protect our existing industries because they really are very much labor intensive. And I think we also are going to have to cope with the challenge that combined with the opportunity of some of the technological advances. For example, driverless cars are probably a very good thing. They seem to be, in any event, an inevitable thing, but that presumably will also lead to driverless trucks. Well, there’s something like 3 million american adults who depend on over-the-road trucks for their livelihood and it’s a pretty good livelihood…So I think what we have to do is to figure out how to make sure we get the benefits of the improved technology and yet cope with the dislocation that it inevitably will produce in certain of the industries. So I think that’s going to be a real balancing act.” —Commerce Secretary Nominee Wilbur Ross (Government)

Activity in high tech industries is coming back after pausing in 2016

“the high-tech sector, I think after maybe pausing a little bit in 2016, it seems to be coming back at the year activity, etcetera, the California market, real state values remained strong in California both in Northern and Southern California.” —Comerica CFO Dave Duprey (Bank)

AI is a new computing architecture and that levels the playing field for new players

“AI is – this is new, so the all the algorithm or the architecture, they are all new. So the computing…basically it’s the playing field is level. It’s not as before, where the high component is computing. It has to be a certain architecture to get into this field. This is a leveling playing field, so many players are into this field. That is where the massive innovation can come.” —Taiwan Semiconductor CEO Mark Liu (Semiconductor Fab)

Healthcare:

Healthcare is driving labor cost inflation

“you heard the $35 million inflation on labor…it’s not really on the wage side of things, it’s on health and welfare side so medical inflation obviously there’s always going to be a little bit, little bit higher than we would like.” —CSX CFO Frank Lonegro (Railroad)

Industrials:

Low interest rates facilitate Trump’s infrastructure plans

“I think we’re fortunate to be coming to grips with infrastructure in a relatively low interest rate environment because that will facilitate getting a lot of projects done that could not be done in a lower interest rate environment because there would be a crowding out effect.” —Commerce Secretary Nominee Wilbur Ross (Government)

General industrial companies are still challenged

“We listen to our Regional Vice Presidents and what they’re seeing in the marketplace…what I would tell you is, the general industrial companies on our lists, they’re still challenged…if you sort of listen to some of our RVPs talk about energy there definitely is more of an enthusiasm”–Fastenal CEO Dan Florness (Industrial Distributor)

Materials, Energy:

The worst of the energy cycle is believed to be behind us

“We expect our provision to be lower in 2017 as we believe the worst of the energy cycle is behind us. Assuming energy prices continue to be stable, we expect non-accruals and charge-offs to remain manageable.” —Comerica CEO Ralph Babb (Bank)

Wilbur Ross wants to boost the fishing industry

“One of the things I’d like to try to help correct is we believe it or not, have a trade deficit in fishing of some $11 billion a year. Given the enormity of our coastlines and enormity of fresh water, I would like to try to figure out how we can become much more self-sufficient in fishing and perhaps even a net exporter of fishing.” —Commerce Secretary Nominee Wilbur Ross

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Tax reform could transform the economy

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.

Earnings season really kicks off next week, but there were a few companies that reported this week that had interesting things to say. We also reached back into last week for some calls that we missed while we were on hiatus.

Overall optimism about the economy is running high. Corporations and the stock market are especially excited about the prospect of lower corporate taxes. However, not as many people are focused on the other side of tax reform. House Republicans have proposed a “border adjustment” tax as part of their tax plan. The border adjustment tax would prevent companies from deducting foreign COGS from their taxes. If it passes it could be a major paradigm shift for the current structure of the economy and redesign the global supply chain. However, it could take some time before tax reform is addressed. Obamacare is apparently up first.

The Macro Outlook:

Companies are excited about tax reform

“I could spend all day on tax reform. Maybe I’ll hit two of the things that obviously we find very, very positive in terms of some the items being proposed now…the lowering of the corporate tax rate would be a good thing…And then the other one is obviously what they’re talking about relative to overseas earnings and repatriation…For us, this is potentially a really big positive…It gives us huge capital firepower as a corporation for all of the things that we talked about, to return capital to shareholders; to do strategic business development; to invest in our business. It’s a huge potential positive for us.” —Pfizer CFO Frank D’Amelio (Pharma)

All things equal, lower taxes mean higher valuations

“I hope everyone walks away and has the same concept that we do that lower taxes are definitely a good thing in relation to our company and the valuation of our company. The base concept that a…lower tax rates drive higher future net income and enhance cash flows is a very solid concept and should lead to an increase in value.” —KB Home CEO Jeff Mezger (Homebuilder)

But there are going to be other taxes too

“You want to move your plant and you think, as an example, you’re going to build that plant in Mexico and you’re going to make your air conditioners or your cars or whatever you’re making, and you’re going to sell it through what will be a very, very strong border — not a weak border like it is — we don’t even have a border. It’s an open sieve. But you’re going to sell through a very strong border — not going to happen. You’re going to pay a very large border tax. ” —President Elect Donald Trump (Government)

Republicans have already proposed a “border adjustment” tax

“One specific aspect of a proposed Republican tax reform plan called border adjustability could potentially disallow a deduction for foreign sourced COGS or cost of goods sold…we are told that other companies that should be concerned about this are just waking up to the whole matter” —Constellation Brands CEO Robert Sands (Beverage)

This would be a major change

“this sort of tax reform really isn’t about just setting up back office accounting departments to manage the new tax code. This kind of tax reform would require a time horizon that would allow companies to change their entire supply chain.” —Constellation Brands CFO David Klein (Beverage)

A huge percentage of many companies’ COGS are foreign sourced

“right now our U.S. based component of our beer COGS, inclusive of freight, is about 40%. I mean 60% of the COGS is from Mexico.” –Constellation Brands CEO Robert Sands (Beverage)

“about 12% to 15% of our cost of goods sold comes directly from outside the U.S. And we believe that…U.S. purchases that are actually foreign sourced it’s roughly about 40%.” –MSC Industrial CFO Rustom Jilla (Industrial Distributor)

You could turn the whole supply chain on its head

“Some of the things being talked about are pretty exciting in terms of the combination of tax and incentives for exports. So you could just turn the whole supply chain around and it could be a big win for some companies that have experienced in international trade.” —Greenbrier Companies CEO Bill Furman (Railcars)

Ultimately it’s too early to say what the tax system will look like

“In any case we will not have a new tax system tomorrow morning, it will take months and we will have time to see how this will shape over time…now it’s too early to distract how people – to do things, which should probably will never happen before the end, the mixture will be completely different.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

Obamacare is probably going to be prioritized over tax reform anyways

“I mean it’s probably a year off at best…We can only tell you what our legislators have been telling us, right. But the first thing that’s going to happen in Congress, which you are seeing right now is Obamacare…So Congress has a lot on its plate right now. And to work through all of the details and get [tax] legislation like that passed, well, Congress is telling us it’s going to be a while in any event. And it is clear cut and again this is literally what we have been told by the leaders that Obamacare is the first thing on their plate…And that’s going to take a while.” —Constellation Brands CEO Robert Sands (Beverage)

Meanwhile the industrial economy continues to stabilize

“the environment…is showing potential signs of stabilizing. We’ve also seen increased optimism from our customers over the past couple of months” —MSC Industrial CEO Erik Gershwind (Industrial Distributor)

“I think since the election, there is a lot more activity in positioning by major customers who might have been on the sidelines” —Greenbrier Companies CEO Bill Furman (Railcars)

The improvement is broad based and a long time coming

“It has been at least three years since we’ve seen anything resembling this…This stabilization has been pretty broad…machine and equipment folks, primary metals, metal fabrication. All of those are seeing an improvement over the last couple of months. I think some of that is driven by oil and gas” —MSC Industrial CEO Erik Gershwind (Industrial Distributor)

Trump wants to create jobs

“We’re going to create jobs. I said that I will be the greatest jobs producer that God ever created. And I mean that, I really — I’m going to work very hard on that. We need certain amounts of other things, including a little bit of luck, but I think we’re going to do a real job. And I’m very proud of what we’ve done.” —President Elect Donald Trump (Government)

But labor markets have tightened

“One of the major issues in America will be the labor pool. If we create more jobs in America where will the labor come from, because many factories in America today are having trouble filling slots for workers.” —Greenbrier Companies CEO Bill Furman (Railcars)

Tight labor markets are a precursor to inflation

“The industry continues to face cost pressures due to a shortage of labor within a subcontractor base. For 2016, our cost to build increased about 4.8% versus the prior year, roughly $5,000 per house. And we were able to cover most of these cost increases with higher prices” —KB Home CEO Jeff Mezger (Homebuilder)

International:

Rex Tillerson sees China as sometimes a friend, sometimes and adversary

“China’s economic and trade practices haven’t always followed commitments to global agreements. It steals our intellectual property and is aggressive and expansionist in the digital realm….China has proven a willingness to act with abandon in the pursuit of its own goals which at times put it in conflict with American interests…but we need to see the positive dimensions in our relationship with China as well. The economic well being of the two nations is deeply intertwined…We should not let disagreements over other issues exclude areas for productive partnership” —Secretary of State Nominee Rex Tillerson (Government)

British consumers are feeling fine about themselves, but down about the economy

“The consumer Brexit I think I’ve said over the last quarter has been sort of fairly stable at the top level. It’s bubbling around, consumers have actually felt quite good about themselves. But what I think is interesting, I think GfK highlighted this, is that what happened during the course of November and December was consumer confidence in the forward-looking economy came down substantially. And I think that there is this discrepancy in how they feel about themselves versus the economy and we’re not sure how that’s going to mature, but you will expect that much to mature over the next quarter.” —Marks and Spencer CEO Steve Rowe (UK Retail)

Financials:

Higher interest rates have not affected real estate markets yet

“Rates did pick up in November, they’ve kind of paused right now from that initial 50 basis point. And I heard some anecdotes about buyers moving to lock quickly that hadn’t locked. I’ve heard one story of a buyer who purchased now because of concerns that rates would go up. But in terms of our overall backlog…we really haven’t seen or heard anything yet on the rates having an impact yet.” —KB Home CEO Jeff Mezger (Homebuilder)

Consumer:

E-commerce customers tend to be more loyal

“Yes, our experience so far with our e-commerce customers is that they buy more, they have bigger baskets and they shop more often…and they also skew higher on our private label assortment that it really goes to the loyalty of that shopper.” —Supervalu CFO/CEO (Grocery Store)

Technology:

Monsanto hopes to have gene edited (CRISPR) products by the middle of the next decade

“So, I think first of all as you recognize there is a variety of gene editing tools. There is protein base. There is nucleic acid base. And just in the last few weeks, there has been a couple of publications on two brand new gene editing systems that have been discovered. In any case, what these tools allow you to do is to go in and precisely change basically any base pair or any gene in the crop. And so there are very powerful tool for making precise changes…I think they will allow us to further accelerate that rate of gain…we are now fully utilizing these tools and certainly by the beginning or middle of the next decade we will see these gene-editing products work their way into the marketplace. Really an exciting technology” —Monsanto CTO Robb Fraley (Agriculture)

Healthcare:

Trump singled out the Pharma industry in his press conference

“We’ve got to get our drug industry back. Our drug industry has been disastrous. They’re leaving left and right. They supply our drugs, but they don’t make them here, to a large extent. And the other thing we have to do is create new bidding procedures for the drug industry because they’re getting away with murder. Pharma, pharma has a lot of lobbies and a lot of lobbyists and a lot of power and there’s very little bidding on drugs. We’re the largest buyer of drugs in the world and yet we don’t bid properly and we’re going to start bidding and we’re going to save billions of dollars over a period of time.” —President Elect Donald Trump (Government)

But there’s no need to panic

“probably the outcome will be quite rational and at that time we will be able to organize ourselves and prepare our business to respond to the new environment. We don’t have to be taken by panic, just because the rules, mainly rules – the rules are changed. We have to wait for the changes and after rationally we will decide how to react without panicking.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

Pfizer’s CFO argues that our drug spending isn’t that out of step with other countries

” we don’t anticipate any major changes in how we do drug pricing…if you look at healthcare as a percentage of GDP, in the U.S. it’s about 17%. Of that 17%, about 2% is prescription drugs. If you compare that to the OECD countries, healthcare as a percentage of their GDP is about 6% to 7%, 1.5% of that is prescription drugs. There is not some big disconnect or big difference between what we spend on prescription drugs as a percentage of…GDP and what the OECD countries do.” —Pfizer CFO Frank D’Amelio (Pharma)

Industrials:

GM expects auto sales to plateau here

“we expect to see another strong year in 2017 from a US industry perspective. We had another record year in 2016. We think we are going to plateau at these kinds of strong levels. I think the fundamental drivers of what’s been driving the industry may change a little bit from a kind of credit driven tailwind into more of economic growth GDP type growth tailwind over the next number of years. Is there upside to the industry? Perhaps” —GM CFO Chuck Stevens (Automobiles)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

CEOs give their take on 2016

Each week we compile quotes from management teams about the economy.  This will be our last full post for 2016, so we decided to do a year end wrap-up.  The work below draws from all of the posts that we made this year and uses quotes from management to tell the story of 2016.  Click here to join our weekly mailing list.

We started this year with the economy deteriorating and finished it with the second interest rate increase in ten years.  There were a lot of ups and downs along the way, but ultimately 2016 was defined by three key story-lines:  1) Brexit 2) The Presidential Election 3) Fed Policy.

The first two events were votes that shocked the world.  The stock market’s reaction to each was arguably even more shocking.  If someone had told you in January that Britain would vote to leave the EU and Donald Trump would be president,would you have ever guessed that the Dow would be poised to break 20,000?  Some people view this as a lesson in the unpredictability of markets.  I would argue that the full story just hasn’t been written yet.  These were major political changes that are likely to have enduring effects on the global economy.

In terms of Fed policy, there were two key moments during the year.  The first was in February when the stock market’s decline caused the Fed to change its outlook that it would raise rates twice in 2016.  That helped spur the market’s rebound.  The second key moment was in June.  The markets had fully recovered by then but that’s when Janet Yellen began to adopt a philosophy that “neutral rates” were going to be low for a long time.  This shift in philosophy is probably the reason that we only saw one rate increase this year.

I’m proud to point out that careful readers of our work could have picked up some great insights throughout the year not only on the economy, but also for individual companies.  The best piece of information that we published was on January 29.  We picked up two quotes from Steel Dynamics and Cliff’s Natural Resources highlighting how government policy had helped stabilize domestic steel prices.  Those two stocks were up 114% and 507% respectively from that date.  We also did a great job tracking the industrial cycle, noticing that inventories were running leaner by February.

Our best call was highlighting that “animal spirits have returned” in our July 22 post.  In that same post we also wrote that interest rates likely couldn’t stay low.  The 10 year treasury yield was at 1.56%.  Throughout the year we also highlighted management teams who argued that the end of the election would provide a catalyst for the economy, that there were a lot of people sitting in cash and in our October 21 post, we noted that tax reform was likely no matter who wins.

We did publish some red herrings, but I must say that as I went through the posts week by week I was impressed by how much we got right and how accurately we told the story of the year.  I wish that we could take credit for this, but unfortunately we can’t.  The real credit goes to the process.  We just publish what the business leaders are saying.  It’s amazing how much great information you can get when you listen for it.  Tune out the journalists, the analysts and the pundits.  CEOs and government leaders are the ones with the best information and the means to turn their opinions into reality.  As Eric Schmidt said at Google’s annual meeting: “the best way to predict the future is to invent it.”  

We spent 2016 tracking the people who are inventing the future for our readers, and we hope that you enjoyed the work. Especially in a world that is starved for thoughtful, information rich content, we believe that we are doing something special here and hope to continue and expand on our work in 2017.  We depend on your support to do that.  

Happy Holidays!

January 7

The year began with the industrial economy deteriorating

“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.” —MSC Industrial Direct CEO Erik Gershwind (Distributor)

But the consumer was still holding up

“Our holiday sales results were solid…We started off strong as we said at the third quarter announcement, but our performance continued to become stronger and stronger closer to the end of the holiday.” —Signet Jewelers CEO Mark Light (Jewelry)

January 15

Jamie Dimon emphasized that he did not see signs of recession

“We’re not forecasting a recession. We think the U.S. economy looks pretty good at this point…obviously, market turmoil we all look at it every day but I’m not sure most of the 143 million Americans look at it that much who have jobs and you have a big change in the world out there. People are getting adjusted to China slowing down…hopefully this will all settle down. It’s not the beginning of something really bad.” —JP Morgan CEO Jamie Dimon (Bank)

But a “psychological movement towards caution” was spreading as the stock market fell

“we’re seeing a little bit of a slowdown, or a psychological movement towards caution – that’s definitely happening, and that translates into maybe a little more down, in fact, and a little less robust bidding.” —First Republic Bank CEO James Herbert (Regional Bank)

January 22

Banks confirmed that the markets were overreacting

“There’s been a lot written and said over the last few weeks about the issues in the stock market. We believe there’s a lot of overreaction going on. It’s like you woke up January 2nd, all of a sudden everybody decided the world’s falling apart and we reject that. We don’t see any fundamental structural changes between the first part of December and the first part of January. The world just doesn’t happen that fast.” —BB&T CEO Kelly King (Regional Bank)”

Lower oil prices were viewed as stimulative to the economy

““in this instance, cheap oil is a net stimulative impact on U.S. growth. A WorldCom fraud was not beneficial for everybody else in the U.S. Telecom didn’t get cheaper. But fuel has gotten cheaper which is good for consumers” —Wells Fargo CFO John Shrewsberry (Bank)

January 29

Even though the markets were in turmoil, most indicators continued to look strong

“there has obviously been turmoil in the markets recently…Having said that, most indicators of the real economy at least in the US continue to look pretty strong…from our own portfolio direct indicators of consumer behavior like payment rates and purchase volume, and from leading edge credit indicators like delinquency flow rates. These indicators all look consistent…they are not giving us cause for concern.” —Capital One CEO Richard Fairbank (Bank)

Steel companies were calling out positive momentum. (Note: STLD +114%, CLF +507% since the date of these comments)

““Well, I think there’s positive momentum, generally. I’m sure Dick can speak to some of it, but the inventory overhang, there’s continued destocking there and it’s becoming balanced. It’s still relatively high, particularly in hot band. But in coated products, in coated sheet, I think it’s getting into a good position. And you speak to a seasonal uptick. I think we’re seeing that as well…On cold roll sheet and coated, I sense a tightness forming in that arena.” —Steel Dynamics CEO Mark D. Millett (Steel)

“I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China…The impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.” —Cliffs Natural Resources CEO Laurenco Goncalves (Iron Ore)

February 5

Industrial companies had been in a recession for almost a year already

“we are now basically in our fourth quarter of the recession…I see at least one more quarter, maybe another quarter.” —Emerson CEO David Farr (Industrial Components)

Inventory depletion was near its bottom (Note: XLI +25% from this date)

“I would say what my knowledge is right now, inventory levels within the channel including ourselves, our levels that, they are pretty good levels, low…I don’t see much of a downward draft on that now. I think it’s pretty well over with, probably very minor downward draft.” —Emerson Electric CEO David Farr (Industrial Components)

February 12

Business leaders continued to say that the economy was doing better than Wall Street thought

“I mean, it’s funny if you turned off the stock market, you’d go these are great days around here…in all areas tenant demand, tenant attitude deal flow…rental rates etcetera up, up and up all good…What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.” —Douglas Emmett CEO Jordan Kaplan (REIT)

But risk aversion was back

“Risk aversion is back after a five-year hiatus” —Oaktree Chairman Howard Marks (Asset Management)

And capital markets were shutting down

“Look, the financing market is very difficult. I think in certain industries it is almost completely shut down in the non-investment grade market and I think the lower end, triple C lower single B rating market is very difficult to access than the public markets.” —Moelis and Co CEO Ken Moelis (Investment Bank)

However, Janet Yellen told Congress that she did not think the Fed needed to act

“We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.” —Federal Reserve Chair Janet Yellen (Central Bank)

February 19

The Fed did not believe that financial conditions reflected the economy

“a number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on U.S. economic developments.” —FOMC Minutes

But also signaled that they would take a wait-and-see approach to further tightening

“they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook…Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent” —FOMC Minutes

February 26

By late February many were viewing the stock market decline as a buying opportunity

“I go back to what Buffett says…he’s nervous when people are greedy, and he’s greedy when people are nervous. Well, right now people are nervous.” —Fluor CEO David Seaton (Engineering and Construction)

March 4

Business leaders continued with a relatively positive tone into March

“Business, I would say, is a little softer in many places, than people than I anticipated say four or five months ago…But, you know…overall the economy’s just kept movin’ up around 2%.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)

As long as interest rates stayed low, stock prices could continue to go up

“It does have the effect of making all assets more valuable. I mean, interest rates are like gravity in valuations. I mean, if interest rates are nothing, you know, values can be almost infinite.” —Berkshire Hathaway CEO Warren Buffett (Conglomerate)

But election risk began to come into focus too.  Trump would sink the country into a prolonged recession.

“If Donald Trump’s plans were ever implemented, the country would sink into a prolonged recession…His proposed 35% tariff-like penalties would instigate a trade war that would raise prices for consumers, kill export jobs, and lead entrepreneurs and businesses to flee America. His tax plan, in combination with his refusal to reform entitlements and to honestly address spending would balloon the deficit and the national debt. So even as Donald Trump has offered very few specific economic plans, what little he has said is enough to know that he would be very bad for American workers and for American families.” —Mitt Romney (Son of former American Motors President, George Romney)

March 11

The consumer kept on spending despite stock market volatility

“In the US, park attendance, advance bookings all very strong, the advertising marketplace is much stronger than we expected it would be…we gave some numbers that were certainly indicative of either a consumer or an economy that was stronger than a lot of people had considered. So, we’re feeling actually fairly bullish about our business prospects in this market” —Disney CEO Bob Iger (Magic Kingdom)

March 18

The Fed decided not to raise rates in March even though it believed that risks had diminished

“let me say that, in recent weeks, I think the Committee certainly thinks that risks to the outlook have diminished…Our decision to keep this accommodative policy stance reflects both our assessment of the economic outlook and the risks associated with that outlook.” —Federal Reserve Chair Janet Yellen (Central Bank)

It began to feel like rates would stay low forever

“We believe that when the Fed started quantitative easing, it entered Hotel California. As the classic Eagles song concludes, “you can check out any time you like, but you can never leave.”” —Alleghany CEO Weston Hicks (Insurance)

March 25

By the end of March the market was getting back on track

“There’s nothing that would suggest that we’re imminently ready to go into a recession here in the U.S…I think the market is starting to recognize as well. So, things seem to be getting back on track in terms of even a market perception. So, I think that everything is being set up of for the type of year that we had thought it would be, in terms of the U.S.” —Ford CFO Bob Shanks (Automobiles)

Businesses were seeing a “resurgence of confidence”

“we saw some signs of a slowing down in our industry over the last several quarters, particularly as we got into December and January, but now we are feeling some resurgence of confidence, at least a flattening out of that trend. So hopefully that was a moment and hopefully we’ll see some growth develop in the quarters to come.” —Steelcase CEO James Keane (Office Furniture)

April 15

Still, growth was relatively uninspiring

“I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth.” —CSX CFO Frank Lonegro (Railroad)

“I think we still feel we’re…in the same low growth…environment that we’ve been operating in for a couple of years, not enough to make it feel like rates are going to move as a result of it but not enough to feel like we’re stalling either.” —Wells Fargo CFO John Shrewsberry (Bank)

“to me the outlook is less about any sort of explosive growth. The word I would use is potential for stabilization. So things have been at a low level.” —MSC Industrial CEO Erik Gershwind (Industrial Distributor)

April 22

Caution abated, but the environment still felt fragile

“many of the factors that were impacting the market in the first quarter…seem to have abated and although the market feels a little fragile from all that, it feels like – for the most part, that’s behind us. But we’ll see how the year progresses.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

April 28

The oil industry was experiencing a “full scale cash crisis”

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels…our industry is now in the deepest financial crisis on record…This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns” —Schlumberger CEO Paal Kibsgaard (Oil Service)

The market was focused on Brexit and a possible July Fed hike

“I think that the market is now pricing, that the Fed go probably in July and there is a high probability of that, that is being priced in the market and the market is not pricing a lot about the Brexit, so a negative event could really produce some correction in the market.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

May 6

The economy was not rebounding as much as hoped

“The one surprise we had is in the last couple months we’ve seen the U.S. spending rate come back down again, which bothers us…I feel a little bit more worried about sales because of the U.S. marketplace in particular…this slow to start turning that nose up really bothers me.” —Emerson Electric CEO David Farr (Industrial Components)

May 13

Retailers reported poor results

“All of us have been reading the stream of negative news stories about various retailers over the past several weeks. Clearly, our industry is in something of a rough patch. We know we are not alone. But the consumer seems to be doing okay…We’re frankly scratching our heads. We see the same economic data you all see and it would point to a customer that would be spending more.” –Macy’s CFO Karen Hoguet (Mall Retailing)

May 20

But it appeared that it was an industry specific problem

“Obviously, the retail industry is going through a rather painful period of rationalization. Rarely have I read so many negative articles about our industry. Unlike much of what has been written, I don’t believe the consumer is the problem. I think our customer is in relatively good shape.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

May 27

Mastercard confirmed that consumer spending was still healthy

“I don’t think we see anything different really than what we said back when we had our last earnings call in our first quarter earnings call in April, right, I guess. So from a U.S. perspective…We don’t see that the consumer had a step-down in spend.” —Mastercard CFO Martina Hund-Mejean (Payments)

Brazil was the only place where the sky was falling

“I travel around the world a lot with our customers and I have seen nothing personally or heard of on my team that makes me think the sky is falling again anywhere but Brazil.” —Linkedin Head of Sales Mike Gamson (Social Network)

June 3

Capital markets began to reopen by June

“Capital markets have started to re-open a bit after a period of substantially lower activity.” —Goldman Sachs COO Gary Cohn (Investment Bank)

“I think there is some signs of recovery, if I look at the — month of IPO in the second quarter is larger than the total amount of IPOs in the whole first quarter.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

June 10

But Janet Yellen was still shaken

“Over the past few months, financial conditions have recovered significantly…Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.” —Federal Reserve Chair Janet Yellen (Central Bank)

June 17

In mid June Yellen capitulated on long term interest rates

“I’ve often…talked about headwinds that reflect lingering effects of the financial crisis…I think many of us expect that these headwinds would gradually diminish overtime and that’s a reason why you see the upward path for rates. But there are also more long lasting or persistent factors that may be at work that are holding down the longer-run level of neutral rates. For example, slow productivity growth…and we have an aging, aging societies in many parts of the world that could depress this neutral rate.” —Federal Reserve Chair Janet Yellen (Central Bank)

She started talking more about a low “neutral rate” and a new normal

“The sense that maybe more of what’s causing this neutral rate to be low are factors that are not going to be rapidly disappearing but will be part of the new normal.” —Federal Reserve Chair Janet Yellen (Central Bank)

Meanwhile, Silicon Valley was entering a “post unicorn” era

“I think we’re entering the post unicorn era and what I mean by that is when the market corrects, you have a shift from growth to all costs to a back to the basics and a focus on profitability. The scorecard changes.” —Dropbox CEO Drew Houston (Cloud Storage)

June 22

Yellen struggled with the economy’s long term prospects throughout June

“although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.” —Federal Reserve Chair Janet Yellen (Central Bank)

July 4

We were travelling over July 4th so we compiled presidential quotes to help celebrate

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” –Theodore Roosevelt, 26th President of the United States

July 8

We came back to a world in which Britain had Brexited.

We happened to be travelling in London.  Here was our view of the scene:

“For what it’s worth, I attended a wedding outside of London last week and the political-mood was dour. The wedding was between two Oxford alums, so the guests were mostly well educated millennials. Almost everyone who gave a toast cited the “uncertain times” that we live in. The tone of the conversations that I had were pretty similar to what one might expect to hear in the US if Trump were to be elected in November (disbelief and distress). One cab driver that I had said that he might as well “light himself on fire” because “it would be less painful than the slow death his business will suffer” as a result of the vote. Still, hopefully any British readers can take solace in the fact that Britain has seen much worse times than these. Everything will turn out ok. It may just be a bit of a painful transition.”

People realized pretty quickly that Brexit was a process, not an event

“The situation is very volatile at this time. For sure, the period of uncertainty will be quite long whatever happens because even if the U.K. will leave the Euro, it cannot happen overnight, it will take at least two years. And the consequence of it will be much longer than two years. So, I believe that once the emotional impact is gone, things will settle down and we will have an idea of what is happening, but for now really — it’s really too early, too soon we have seen in the stores days — very good days, bad. So in a few months probably we will be able to say something.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

July 15

Brexit would likely lower British GDP but it was primarily a source of uncertainty

“So number one, we do think [Brexit] will reduce the GDP of the U.K. and the EU a little bit…Number two, we know that it is going to create uncertainty for an extended time period…We are hoping that political leaders are very sensible…I am not really worried about it. It would be nice if it doesn’t create a huge turmoil. So I am hoping the EU is sensible” —JP Morgan CEO Jamie Dimon (Bank)

July 22

The markets did not wait for resolution.  They took off like a rocket.

“I 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 normalize” —Goldman Sachs CFO Harvey Schwartz (Bank)

Animal spirits had returned

“the animal spirits are back in North America” —Halliburton CEO Dave Lesar (Oil Service)

Had Central Bankers had finally succeeded in breaking the global depression psychology?

“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.” —ECB President Mario Draghi (Central Bank)

We surmised that If this is true then the yield curve cannot possibly stay where it is. (10 Yr Treasury Yield: 1.56%)

“I personally think the flat rate scenario that everybody projecting is overstated. The underlying strength of our economy is not great, but it’s 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.” —BB&T CEO Kelly King (Bank)

July 29

The reaction of markets to Brexit left everyone pleasantly surprised

“I think we were all pleasantly surprised…by how the markets have performed post-Brexit…I think we’ve probably…settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote.” —Lazard CEO Ken Jacobs (Investment Bank)

Companies saw very little impact

“As I said, we have no strong signs of Brexit so far.” —Volvo CEO Martin Lundstedt (Automobiles)

In fact, many companies were benefiting from a weaker pound

“With the recent weakening of the pound, exchange is forecasted to be a significant tailwind in fiscal 17.” —Diageo CFO Kathryn Mikels (Beverage)

August 5

Shortly after the dust settled we began to focus on our own elections

“going into the Presidential election, there’s a lot of uncertainty, there seems to be a lot of uncertainty around the world…So, I’m a little bit with you, I actually don’t think it’s going to be a huge finish to the year…I do look at the election as something that’s holding activity back quite a bit” —Ares Capital CEO Kipp deVeer (Business Development Company)

Election uncertainty kept everyone cautious

“we are look at a marketplace right now where people are being very cautious, they are being very careful with what they’re spending money on and they are very uncertain relative to what’s going on around the world from a political standpoint relative to just a business environment standpoint and where things are heading.” —Emerson Electric CEO David Farr (Industrial Components)

August 12

In mid August it looked like Clinton would almost certainly win

“We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election.” —Third Point Reinsurance Chairman Dan Loeb (Hedge Fund/Insurance)

The end of the election would be a positive catalyst for the economy

“Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however, it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and honestly probably for a lot of other markets as well, so that I would look for.” —Sothebys CEO Thomas Smith (Art Dealer)

August 18

In late August the industrial economy appeared to pick up

“around July…I think many [customers] had preventative maintenance productivity-type projects going…Now, as they’re back up and running…we see that brake fix demand coming through. And then…for those that would have planned downtimes…towards the end of the calendar year, they would be slating projects that would positively impact their uptime and their productivity.” —Applied Industrial Technologies CEO Neil Schrimsher (Distributor)

We also began to notice companies’ pricing power improving

“the pricing environment remains challenging…We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies.” —Nestle EVP François Roger (Packaged Food)

August 26

The Fed began to feel more confident that inflation was increasing

” Employment has increased impressively over the past six years since its low point in early 2010…core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

September 8

And began to signal that it could raise rates in September

“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting.” —Atlanta Fed President Dennis Lockhart (Central Bank)

Even the oil industry was on the road to recovery

“I think the headline reads on the road to recovery. You have to look hard, but if you look at the headline, you’ll see on the road to recovery. But at the same time, I would describe this as sorting through the wreckage of the worst downturn that we’ve ever seen. We see the after-effects just about everywhere that we look.” —Halliburton President Jeff Miller (Oil Service)

September 16

But less than a week later Fed Governor Brainard squashed expectations for a September hike

“In today’s new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness. This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” —Fed Governor Lael Brainard (Central Bank)

September 23

Lo and behold the Fed didn’t raise rates

“We judged that the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward our objectives” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen relied on her “new normal” assessment to justify staying put

“we’re struggling with difficult set of issues about what is the new normal in this economy and in the global economy more generally which explains why we keep revising down the rate path.” —Federal Reserve Chair Janet Yellen (Central Bank)

She again cited a low neutral rate

“We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That’s based on our view that the neutral nominal federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–is currently quite low by historical standard” —Federal Reserve Chair Janet Yellen (Central Bank)

Most companies continued to see an improving outlook though

“The good news for the Americas is that we had stronger orders in August and those have continued through the first three weeks of September…our backlog of high confidence opportunities in the Americas has strengthened for the second half of the year…we’ve seen recessions before in our industry and they are characterized by significant and sustained drops in order patterns. And that’s not really what we’re seeing this time.” —Steelcase CEO James Keane (Office Furniture)

September 30

The economy was getting closer to full employment

“businesses are getting closer to full employment and we are seeing the checks per client slow, but we expect that frankly for the last couple of years as people came back from recession.” —Paychex CEO Martin Mucci (Payroll Processing)

And inventory destocking was complete

“I think largely the destocking has occurred. And I think what will happen is the dealers and the larger distributors wind up having more line of sight to more demand. They are going to bring more inventory in…So, I really think as we move through ‘17, we are going to see some improvement in that general industrial market.” —Actuant CEO Randy Baker (Industrial Components)

October 7

Central Bankers continued to argue that they were not to blame for low rates

“Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis…the level to which real interest rates can eventually return when the economy strengthens is not determined by monetary policy. Instead, it depends on the economy’s long-term growth prospects. Productivity and demographics play a decisive role in this, and the development of these factors has not been favourable in Europe in recent years.” —ECB President Mario Draghi (Central Bank)

But voters were running out of patience

“the impatience with economic stagnation, especially among middle and lower income earners, is leading to dangerous populism and nationalism.” —Bridgewater CEO Ray Dalio (Asset Management)

October 13

We continued to see signs that pricing power was firming

”pricing has been low or negative for the past few years as a result of the benign commodity cost environment…As commodities have stabilized and start to turn up, we are seeing a return to more normal price inflation or in the case of Europe reduce deflation in some markets.” —Unilever CFO Graeme Pitkethly (Consumer products)

Meanwhile the Fed continued to ponder academic theory on neutral rates

“Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest–or r*–including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth.” —FOMC Meeting Minutes (Central Bank)

October 21

There was a lot of anxiety leading up to the election

“I saw report a couple of days ago that 60%, or slightly less, but about 60% of the market it is really, really anxious about the elections. And I suppose we quite understand that. And so I think when all this subsides, however it goes, it will be less uncertainty and less anxiety, I think that will in still a bit more confidence then people will be a little bit more willing to invest, and make acquisitions and borrow money.” —BB&TCEO Kelly King (Bank)

And there were a lot of people sitting with cash

” people are being a lot more conservative than they have been in the past. They’re sitting on a lot of cash. They’re in a good financial position and as things begin to pick up…our customers will begin to invest more in the future as well as some of the new products and services.” —Comerica CEO Ralph Babb (Bank)

Investors were expecting a greater emphasis on fiscal policy and tax reform no matter who won

“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth.” —Blackrock CEO Larry Fink (Asset Management)

“I can tell you that I visit in Washington often and speak with members of the House Ways and Means Committee and the Senate Finance Committee and the tax staffs are busily working and working very collaboratively with U.S. multinationals on an appropriate tax reform package. We think there is more bipartisan support now than there has been in the past…we think that overall the climate for international tax reform post the election, quite frankly, is more positive than it’s been in the last year or so.” —Johnson and Johnson CFO Dominic Caruso (Healthcare)

However, one President was expected to bring more change than the other

“I also think a new President which is undoubtedly going to happen, has a slight variation one way or the other. I won’t talk about which one I think does which, but one gets a little more uncertain and causes us to stand back a little bit and wait to see how things settle. The other one is a lot more of the same and probably, whether we like it or not, is something we can manage because it’s the devil we know.” —US Bank CEO Richard Davis (Bank)

October 28

The economy definitely slowed in the weeks leading up to the election

“Yes. I’d just add that I spend a lot of time talking to executives of other companies and many of our clients and the elephant in the room probably is the election. Nobody really knows exactly what the impact is. They just know it is much different.” —Robert Half (Temp Staffing)

November 4

Businesses were waiting to see what would happen

“from many of our customers, we’re hearing wait-and-see and that’s pretty typical in an election year. I mean, that’s the one new thing I’d call out over the last quarter and it’s typical that it builds as you get close to November. So, I don’t make much of it either way. I don’t think any of our customers have a sense of what it’s going to mean for after. The only thing I think it means is that, we always say our visibility is low, it’s probably even a bit lower just because of the cautious perspective that many of our customers have.” —MSC Industrial Direct(Industrial Distributor)

Here’s what we had to say before the election:

I know that there’s a large contingent of investors who believe that the President doesn’t matter to markets, but if you study history, you know that nothing could be further from the truth.  Almost all the significant turning points in market history have coincided with policy changes that were actively or passively set by POTUS.

November 11

Then, for the second time in 2016, there was a massive electoral surprise

“Last night, like so many of you, I watched the election returns with family and friends. And like so many of our fellow Americans – both Democrats and Republicans – I am stunned.” —Starbucks CEO Howard Schultz (Coffee)

A frustrated electorate wanted change

“We are going through a period of profound political and economic change around the world, and American citizens showed that deep desire for change in voting to elect Donald Trump as the 45th President of the United States. We have heard through democratic processes in both Europe and the United States the frustration that so many people have with the lack of economic opportunity and the challenges they face. We need to listen to those voices.” —JP Morgan CEO Jamie Dimon (Bank)

The result was expected to cause panic, but instead the market rallied

“We are definitely prepared to intervene in an emergency. What that will really look like, we must wait and see.” —ECB Governing Council member Ewald Nowotny (Central Bank)

Buying pressure had built up before the election

“the summer was a little bit of a pattern of the doldrums. Coming out of the summer there was a little bit more confidence…And there is a sense in the art market from lots and lots of consigners that we’ve had a long sort of not very exciting patch during the art market, and that they are looking for an opportunity to buy.” —Sotheby’s CEO Thomas Smith (Art Dealer)

Certainty provided a catalyst

“I think our experience over a long period of time is things that are distracting like the election, once there’s an outcome, certainty is a good thing. So from a positive perspective, having certainty on that is probably a good thing looking into the holiday.” —Kohls CEO Kevin Mansell (Apparel)

Here were our thoughts:

For the past eight years we have obsessed over the effects of ZIRP, NIRP and QE. Those days are now over…For now, most are expecting lower taxes, less regulation and infrastructure spending. However, while we can speculate about what is to come, it will simply take time for a clearer picture to emerge. The true framework of a Trump Presidency wont be discernible for at least several months. We’ll help chart that path as it emerges.

November 18

The end of the election unleashed a huge amount of pent up demand

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)

December 2

The year ended with a lot of positive hype

“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)

But it’s all speculation at this point

“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)

December 9

The stock market has continued its remarkable run

“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)

And that has helped boost business sentiment.  Companies are ready to get down to business.

“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

Donald Trump sounds pleased

“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)

December 17

Trump loves the bounce

“I’m honored by the bounce. They’re all talking about the bounce, so right now everybody in this room has to like me at least a little bit, but we’re going to try and have that bounce continue” —President Elect Donald Trump (Government)

But will he love Yellen? She doesn’t want to engage him but probably disagrees with his policies.

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy.” —Federal Reserve Chair Janet Yellen (Central Bank)

Her #1 concern is protecting the Fed’s independence

“I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on.” —Federal Reserve Chair Janet Yellen (Central Bank)

In 2017 Trump will take office.  Everyone is focusing on the “carrot” of his policies, but there will be a “stick” too

“we’re being stripped of our jobs…we’ve got to stop it… we’re reducing taxes very substantially for companies so they’re not going to have to leave because of taxes. We’ll be reducing regulations. Now those are the nice ways of doing it and everyone loves it and everyone’s happy…But when a company wants to move to Mexico…or another country and they want to build a nice, beautiful factory and they want to sell their product through our border, no tax…not going to happen that way. And the way you stop it is by imposing a tax…Now, I’ve come up with a number of 35%. There is no tax if you don’t leave. There is no tax at all…You know what’s going to happen?…Nobody’s going to move. They’re not going to move. They’re not going to leave. They’re going to stay here.” —President Elect Donald Trump (Government)

[skrisiloff]

Behind the Scenes with Penny Stocks

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 has a slightly different format than usual because I spent this week at the LD Micro conference in LA meeting with the management teams of a few dozen Microcap companies. The conference is hosted by Chris Lahiji and his team. They always do a great job of putting together under-followed and under-loved companies with market caps less than $100m. The Macro part of the post still comes from the usual large cap companies, but everything else in the post draws from our meetings with the micro-caps.

It is always eye opening to meet with these small companies. The CEOs are scrappy and tenacious–always looking to sell investors on a dream. There is deep skepticism that most of these companies will survive and the valuations reflect that. There have also been structural shifts in the brokerage community that has made it particularly hard for these companies to raise money. That decreases the chance of survival, but also may create opportunities for savvy investors. Still, I’ll make the usual disclaimer that micro-cap stocks are highly speculative, so invest at your own risk.

The Macro Outlook:

Obviously the stock market has done unbelievably well since the election

“obviously, the stock has done unbelievably well since the election and I think it’s based upon the hope…that the Trump administration will be very good for kind of unleashed business per se and maybe improve the GDP and allow banks to do their lending and the banks will benefit a little bit both from higher rates and higher economic activity and possibly some reduced regulation. So, hopefully that will turn out to be true.” —JP Morgan CEO Jamie Dimon (Bank)

Even Italian elections couldn’t shake the market’s confidence

“I don’t think there is reason to talk about a euro crisis. The Italians have a lot of experience dealing with such situations and that’s why I’m not concerned.” —German finance minister Wolfgang Schaeuble (Government)

Donald Trump sounds pleased

“[The Washington post says companies are unnerved…well] they’re so unnerved that the stock market is at an all time record since I’ve been elected…after I won the election, you see what happened. In the history of our country, there’s never been an up this big after an election, so I don’t know how somebody says that people are unnerved, it’s just the opposite. And frankly I think we’re going to go up. We have tremendous room, tremendous margin in our country, but we have to do things right.” —President Elect Donald Trump (Government)

The business community is certainly more optimistic

“To start the third quarter up through the date of the election, global November new business remained slow. But after the date of the election, we saw new business ramp up in both North America and in Europe…November, in Europe, we had our best month of new business in probably two years. Asia was also incredibly strong…I would say that the conversation is certainly more optimistic than it was in May and June, no doubt about that. Now, we’ll see if that turns into increasing levels of business in early calendar 2017.” —Korn Ferry CEO/CFO (Executive Search)

Companies are getting down to business

“the feel before the election was — it was materially slowing out there…All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs…look if we truly are going to have tax reform that is really good…And we feel like every customer we touched since…they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling…it does feel like people are just down to business now and down to business is a good thought for us.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

The consumer is healthy

“We see a fairly healthy consumer. And so if you look at macroeconomic data, home prices, the consumer balance sheet, debt service ratios, the number of people working, wages going up, etcetera, we see that pretty healthy. We see a mirror of that inside JPMorgan. So we have reporting quarter-after-quarter, credit card sales, deposits, new household accounts, all those types things are doing quite well and we expect that to continue.” —JP Morgan CEO Jamie Dimon (Bank)

Millenials are buying houses

“With the millennial generation now entering their thirties and forming families, we are starting to benefit from the desire for home ownership from the affluent leading edge of this huge demographic wave. In fiscal year 2016, approximately 22% of our settlements included one primary buyer 35 years of age or under.” —Toll Brothers CEO Douglas Yearley (Homebuilder)

But other consumer spending may still be a little choppy

“the four weeks of November was choppy frankly, particularly the week of the election. I think it was worse than a snowstorm in terms of nobody wanting to go out and buy stuff and that’s what I read about other retailers as well. And again, over the last few months it’s been a little choppy a little more in November and a little weaker and so at least, what we can tell you at this point is the first couple of weeks have been okay. And again, traffic has seemed to have stabilized until something changes there, who knows” —Costco CFO Richard Galanti (Retail)

Commercial Real Estate is late in its cycle

“The one area where you look at and you might say, oh my god, there is a little bit of issue, there is commercial real estate…We are cautious. It’s probably getting later in the cycle for some of that. And we don’t do what I would consider we don’t do now and we have never done the riskiest type of lending. So we have always been cautious in real estate.” —JP Morgan CEO Jamie Dimon (Bank)

[Note: now entering microcap land]

And markets can get ahead of themselves

Sometimes market excitement gets beyond clinical reality…(but that’s not the case with us!) —Vistagen Therapeutics (Pharma/Biotech)

International:

A Chinese steel distributor had interesting thoughts on China, but asked to remain anonymous

The Chinese real estate market will eventually have to correct

The Chinese government needs to sustain the real estate market but they cannot. Real estate prices in Shanghai are now higher than they are in New York City. That is unsustainable. Developments in 3rd and 4th tier cities are sitting empty. That is unsustainable. —Chinese Steel Distributor

Xi Jinping is looking to increase his power

Xi Jinping is a powerful guy, he could be as powerful as Donald Trump. He’s going to consolidate his government team. He already has been…The Chinese people have a love hate relationship with Xi. They love that he cleaned up corruption big time, but hate that because of it spending from corrupt officials got turned down big time. —Chinese Steel Distributor

Business leaders expect the RMB to be devalued by at least 25%

The Chinese government needs to deal with the currency situation. The currency will be depreciated. The government tried to put controls on the currency but they really couldn’t stop capital from leaving the country. The Central Bank did not really support the currency. Most people expect that the RMB will depreciate by at least 25% and so they are trying to get their capital out of the country. Public companies that are listed in the US are one way to do that. If you buy shares of a local subsidiary with shares traded in North America, you can get money out of the country —Chinese Steel Distributor

Financials:

The world has changed for microcap companies

The market is so different. Guys like you are so different than they were 20 years ago. The OTC, so many investors don’t want to invest purely because we’re OTC. Investors wont invest like they would before. You can’t even give your stock certificate to most brokers if you’re OTC. Investors themselves are far less willing to put money into a deal that is pre-profitable. —Pressure Biosciences (Laboratory Instruments)

Consumer:

These days the sexy growth companies generally aren’t public

Who is to say that there aren’t molecules out there that can be engineered that are more efficient at powering our bodies than today’s natural foods? —Soylent VP Brandon Mackie (Meal Replacement Drinks)

Microcap companies are swinging for their own fences

Cannabis companies have different strategies on how to cash in on the “green rush”

Our strategy was to design and build greenhouses to grow cannabis and rent them to licensed growers, but not obtain a license ourselves. We made the decision not to cross the “green line.” —Americann (Greenhouse Developers)

I had a partner who made a lot of money in a buyout who put all his money into gold in 1995. You know how much money he made on that? I always remembered that and said I wouldn’t let that pass by. When everything started happening with pot I said to myself gold rush, green rush. I’m in. I don’t know how to grow but I do know how to make mobile games. —First Harvest Corp (Mobile Gaming)

Technology:

Many companies were birthed in different market environments but are still standing

UGE was born in the “inconvenient truth” years to install solar on commercial buildings

In 2007 solar installation costs were $8-$10 per watt. Now it’s $1-$2 per watt depending on the market. Panels were $4 per watt back then compared to less than $0.40 now. —UGE International (Solar Panel Installation)

Some telecom companies are still living off capital raised in the late 90s

I call it the original sin of telecom. In the late 90s the industry became so overcapitalized and so many smart people came into the industry, attracted by salaries and government incentives. There’s still enough capital around to pay salaries, but it’s not what people expected. You’d be surprised how many PhDs are working in customer service today. —MRV Communications (Internet Infrastructure)

Healthcare:

Microcap biotech companies raise lots of money for expensive trials

The cost per patient for a trial in cancer is about $50-100k per patient. Cardio vascular is cheaper–$15-20k per patient, maybe $40k. It will cost you $1 million the minute you decide you want to do a clinical trial. —Gemphire Therapeutics (Anti-cholesterol drug)

The companies are all trying to prove that their molecules can hit their “end points”

“25% of Americans have a diagnosed mental disorder. 16% will go through a major depressive disorder in their lifetime” —MYND Analytics(Pyschiatric Testing)

“For years addiction was treated as a personal failure. Today addiction is treated as a disease that can be compared to diabetes. It is not curable, it has to be managed for the time of a person’s life.” —BioCorRX (Anti-Addiction Drug Delivery)

“The leading cause of birth defects in the United States is CMV, higher than down syndrome, but not many people know about it” —VBI Vaccines (CMV Vaccine)

“I hope that the incoming administration lives up to its promise to help vets return to civilian life” —Tonix Pharmaceuticals (PTSD drug)

Industrials:

There aren’t as many small manufacturing companies as there would have been in past eras, but that could change

“The Trump thing was nothing more than something that was happening anyways. Manufacturing was coming back anyways. Today the labor cost advantage in China is being offset by the benefits of local production for US markets” —Uniroyal Global CEO Howard Curd (Synthetic Leather Manufacturer)

Materials, Energy:

There are lots of junior mining companies looking to finance exploration projects

“In mining, you have operations guys and project guys. Project guys want a crisis and if they don’t have one they’ll create one.” —Uranium Resources (Uranium Miner)

Capital is scarce for pretty much everyone in the space

“Public capital markets have been closed to shipping for at least 2 years” —PYXIS Tankers (Product Tankers)

Miscellaneous Nuggets of Wisdom:

If you want to succeed with limited capital, the key is to focus

“The best way to succeed in business is maniacal focus, not a shotgun approach” —Pure Bio-science CEO Hank Lambert

Your employees depend on your success

“At Westpoint they teach you a concept of no excuse. There’s no excuse for not taking your hill because troops’ lives depend on you doing what you say you’re going to do. In business it’s not lives that depend on you, but it is livelihoods” —New Age Beverages CEO Brent Willis

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Trump’s team will determine the path of the economy

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.

The Trump transition is still the most important story of this week and is likely to stay that way for at least the next few months. The policies set by the administration will have a big impact on the path of the economic cycle. Those policies won’t be totally clear until after inauguration; however, elements of the policies are starting to emerge. Trump’s most important economic cabinet members were chosen and emphasized pro-business policies in interviews. That has investors excited, but interest rates are also rising with inflation expectations. If interest rates normalize there will be big shifts in capital values.

The Macro Outlook:

There’s a lot of positive hype right now

“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)

But it’s all speculation at this point

“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)

There’s optimism but no orders yet

“As we talk to our mining customers, we clearly see that they have some increased optimism certainly with commodity prices improving…Yet this has not yet translated into any tangible machine sale increases for Caterpillar.” —Caterpillar Resources Industries President Denise Johnson (Construction Equipment)

Change could come more slowly than expected

“I think we will make the assumption that 2017 with regard to patients and how they achieve their healthcare is probably stable. I don’t think you could disrupt it from where it is now without massively, without causing a massive amount of unhappiness across the US population…if you are going to unwind healthcare, it has to be a couple of year process of getting things ready to transition people to something new and I just don’t see how it could happen in 2017.” —Gilead CEO John Milligan (Biotech)

Challenged industries will stay challenged for the time being

“We expect challenging market conditions to continue into fiscal year 2017. Weak growth in developed markets, geopolitical issues and uncertain commodity prices will continue to impact some of our end-markets.” —Jacobs Engineering CEO Steve Demetriou (Construction)

“I think there is a basis to become very positive about the market after 2018, 2019. I think we will see a very strong market after that. But for 2017, I don’t see the reason to be that positive.” —Star Bulk CEO Petros Pappas (Dry Bulk Shipping)

“As expected, deflation persisted during the third quarter. And as we’ve said before, transition periods create a difficult operating environment. This is the third time we’ve had deflation in 30 years. And in previous instances, deflation lasted from three to five quarters in a row. We’re in the middle of the cycle right now and it’s not fun.” —Kroger CEO Rodney McMullen (Grocery)

But we do have some good things going for us

“the customer is still in good shape, consumer confidence is strong, interest rates, although a risk of increasing are still at relatively very low levels…you know these are all positive–gas prices still relatively really low that’s all positive for the industry” —Ford VP Mark LaNeve (Automobiles)

Tax reform looks like it will be favorable to corporations

“This will be the largest tax change since Reagan. We’ve talked about this during the campaign. Wilbur and I have worked very closely together on the campaign. We’re going to cut corporate taxes, which will bring huge amounts of jobs back to the United States…We’re going to get to 15 percent and bring a lot of cash back into the U.S.” —Treasury Secretary Designate Steve Mnuchin (Government)

The administration will likely try to keep rates low while it restructures the debt

“I think interest rates are going to stay relatively low for the next couple of years. We’re in a period time of low interest rates. I think we’ll stay there. And interest rates have come up a little bit, which I think makes sense. I think we’re going to be looking at the Treasury all different types of opportunities. We will look at potentially extending the maturity of the debt because eventually we are going to have higher interest rates, and that is something this country is going to need to deal with.” —Treasury Secretary Designate Steve Mnuchin (Government)

International:

Tariffs would be a last resort, not a first step

“Everybody talks about tariffs as the first thing. Tariffs are the last thing. Tariffs are part of the negotiation. The real trick is going to be increase American exports. Get rid of some of the tariff and non-tariff barriers to American exports” —Commerce Secretary Designate Wilbur Ross (Government)

Many companies may have already restructured to offset a strong dollar

“I think, that we sort of figured out probably three or four years ago is, we were probably in a strengthening dollar environment for the foreseeable future. And that was after 10 years, where currency was the wind that most businesses back. And three or four years ago that changed and it changed hard. So we have completely internalized that we have to have a cost structure that allows us to win in a challenging foreign exchange environment.” —Hewlett Packard Enterprise CEO Meg Whitman (Enterprise Tech)

Draghi: the European recovery is “robust”

“The recovery – albeit modest – is robust. We are growing and inflation is improving. Europe’s GDP has returned to its pre-crisis level, although this has taken seven and a half years…The main drivers behind this recovery have been low oil prices and our monetary policy. This recovery is stronger than past ones because it is based on the increase in consumption and domestic demand, and not only on exports.” —ECB President Mario Draghi (Central Bank)

Financials:

The administration wants banks to lend

“the number one problem with the Volcker Rule is it’s too complicated and people don’t know how to interpret it. So we’re going to look at what to do with it, as we are with all of Dodd-Frank. The number one priority is going to be make sure that banks lend.” —Treasury SecretaryDesignate Steve Mnuchin (Government)

Mnuchin sent mixed messages on Yellen

“You know, look. I think she’s done a good job at the Fed…I’m not going to comment on whether she should or she shouldn’t [serve out her term]…But I will say we do have two [Fed] governor spots to fill, and that will be high on the priority list” —Treasury Secretary Designate Steve Mnuchin (Government)

Companies that already pay low effective tax rates will still benefit from statutory tax decreases

“the tax rate is established by reference to statutory rates that are in place at the time and then there is deducts from that. So for example as an example we participate in various community reinvestment activities that are subject to tax credits etcetera and so those tend to be deductions that get you to your effective tax rate. So if the overall tax rate would reduce, then yes we would have benefits come up.” —Toronto Dominion CEO Bharat Masrani (Canadian Bank)

Consumer:

Retailers may step up promotions this Christmas

“We haven’t seen any pullback in the promotional environment. As Julie said, we think in fact because of some people having more inventory than they like, that it could get more promotional. The customers are smart, they are looking for the best value” —Williams Sonoma CEO Laura Alber (Home Goods)

Retailers’ margins are going up in e-commerce but down in brick and mortar

“as DTC increases, it does deleverage delivery expense and logistics expense but it does then provide for some offset opportunity in store property.” —Urban Outfitters CFO Frank Conforti (Apparel)

Technology:

Tech companies are focusing on data centers and automobiles over PCs and smartphones

“When you look at where our big investments are going right now, we’re going down in SOCs for things like phones; we’re going down in the PC segment of the business; we’re going up in the data center; we’re going up in IoT specifically and automotive” —Intel EVP Stacy Smith (Semiconductors)

A voice driven world could up-end internet business models

“one thing that we are all clear about is the days of three top text ads followed by 10 organic results is a thing of the past in the voice driven world. So we are very much keeping an open mind on what this needs to be and focusing much more on what’s the consumer experience, it’s scale, we’ll figure that as we talk about.” —Google SVP Sridhar Ramaswamy (Internet)

Data-sets are becoming so large that only cloud/AI can interpret them

“the amount of data that our clients have already and quite frankly the amount of data they’re creating everyday…is creating an opportunity for us where…nobody can any longer just program a computer to find relationships that you’re looking for. It’s just too much data and so in a world where a system has to learn about the data, you have to find a way to interact with it…cognitive will influence and affect every decision that companies will make over time….Now all of that requires an amount of compute and amount of power that is not available for everyone to invest in, but that’s where the cloud comes in and so there is obviously an economic element to moving into a cloud environment, but more importantly for our clients, we see an ability for access to these kinds of cognitive applications as well as an agility that you get from your business and running in a cloud environment.” —IBM CFO Martin Schroeter (Enterprise Tech)

AI algorithms have been around for a long time, but deep learning and neural networks are recent innovations

“machine learning has been an integral part of the ad system pretty much since the time I joined. And gosh that was like 2003. And as new ways of machine learning whether it is algorithm based on boosting or more recently algorithm based on deep learning and neural network have been developed. We are often either an early adopters of this technology.” —Google SVP Sridhar Ramaswamy (Internet)

Healthcare:

Some of Trump’s healthcare priorities:

“the President-elect has laid out a number of markers, as we talk about expanding HSAs, allowing folks to be able to buy insurance across state lines, administering Medicaid at the state levels.” —Trump Transition Team Communications Director Jason Miller (Government)

Industrials:

The Steel industry is confronting structural headwinds

“We do see clear cyclic silver lining but to be clear, you should not confuse cyclic improvement with structural weaknesses of an industry. The pressure from imports from raw materials, especially in coking coal, from excess capacities and from current and especially threatening cost decrease related to the European trading scheme, remains high.” —Thyssen Krupp CEO Heinrich Hiesinger (Steel)

Full transcripts can be found at www.seekingalpha.com

[skrisiloff]

Pent up demand may soon be unleashed

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.

The end of the presidential election appears poised to unleash a huge amount of pent up demand. The end of uncertainty is a good enough reason for companies to put dry powder to work. Even better for the stock market, the business community appears to have adopted a favorable view of Trump. However, the business community’s gain could come at the expense of workers. Trump was elected in a wave of populism, and if he enacts pro-corporate policies, that could ultimately make the people even angrier.

The Macro Outlook:

The end of the election may have unleashed a huge amount of pent up demand

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)

Business leaders are viewing Trump as a positive

“Post-election I think that, most CEOs that I talk to we are pragmatic about the result…I think that President-elect Trump appears to be very business oriented and is very focused on driving the US economy and anytime the US economy improves, that’s certainly good for us” —Cisco CEO Chuck Robbins (Switches & Routers)

Disney is already building statues in his likeness

“It’s also a good thing I think for the market and for most businesses that the transition is already off to what appears to be a fairly smooth start…I think smooth transitions are good. I will say on the smooth transition front, we’re going through a smooth transition as well. We’ve already prepared a bust of President-elect Trump to go into our Hall of the Presidents at Disney World.” —Disney CEO Bob Iger (Media)

Optimism alone can boost economic activity

“I do truly feel that if the optimism we’ve seen this week in the stock market continues giving that feeling of optimism in the economy I would expect that to raise all boats in our campus switching side.” —Cisco CFO Kelly Kramer (Switches & Routers)

Even a normalized environment would be a big improvement

“large parts of the world have been in negative interest rate territory for a while and in very low rate policy…we don’t want to view that policy…as normal and so to the extent to which we can get back to a more normalized rate environment…that should positively correlate for us. And we root for growth…the extent to which the policies are supportive of growth, it should translate quite well.” —Goldman SachsCFO Harvey Schwartz (Investment Bank)

But are the expectations of Trump’s policies accurate?

Trump rode a wave of populist anger into the White House

“I think we find ourselves in the midst of populism. It makes complete sense, because the middle class – whether it is in the US, Europe, or almost any democracy – has not had a good experience, particularly since the financial crisis. As a result of that, they’re unhappy, they’re angry…When half the population can’t marshal $400, one pay check, they should be scared. They should feel insecure, they should be unhappy with their government that has failed them – which is what they think – it is all logical.” —Blackstone CEO Steve Schwarzman (Asset Management)

Trump’s expected policies are not populist

“The Trumpian Fox has entered the Populist Henhouse, not so much by stealth but as a result of Middle America’s misinterpretation of what will make America great again…in voting to deny Hillary Clinton the Henhouse, they “unwittingly” (lack of wit), let Donald Trump sneak in the side door. His tenure will be a short four years but is likely to be a damaging one for jobless and low-wage American voters. They were the force for Trump’s flipping the Midwest into a Republican Electoral College victory. But while the Fox promised jobs and to make America great again, his policies of greater defense and infrastructure spending combined with lower corporate taxes to invigorate the private sector continue to favor capital versus labor, markets versus wages, and is a continuation of the status quo.” —Janus Portfolio Manager Bill Gross (Formerly PIMCO)

That could make the people even more angry

“Unless the worker’s share of GDP reverses its downward trend, and capital’s share peaks, then populists worldwide will reject establishment parties in almost every future election – initiating in some cases growth-negative policies revolving around trade, immigration, and yes, in Trump’s case, lower taxation that may lower GDP growth, not raise it.” —Janus Portfolio Manager Bill Gross (Formerly PIMCO)

It’s still too early to tell what changes will come

“I think it’s really too early to speculate about what the changes in Washington are going to mean for our business or for businesses. We have, though, been exhorting Washington both the executive and the legislative branches to take a look at the current tax policy of the United States, particularly the corporate tax rate, and to close more loopholes but lower the corporate tax rate. We are no longer competitive with the rest of the world in that regard and that must be addressed.” —Disney CEO Bob Iger (Media)

But big changes are coming

“You have to look at the election of Donald Trump, given his comments about immigration and comments about trade policy, as a major step in another direction from the policy of the G20 over the last 70 years. This is a very major move whether you think it’s positive or negative. The establishment has failed to articulate a narrative that free trade and global integration is good for them.” —Barclays CEO Jes Staley (Bank)

Meanwhile, nothing has changed in Janet Yellen’s world

“The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate–meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–appears to be currently quite low by historical standards…gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.” —Federal Reserve Chair Janet Yellen (Central Bank)

Legacy policymakers are still fighting the ghost of the financial crisis

“It is clear that the financial crisis has had a long tail and that the world economy remains in a precarious state. Many people are struggling with unemployment or low paying jobs and are concerned about broader changes in the economy. These concerns demand a concerted response from governments and the international community.” —WTO Director-General Roberto Azevêdo (GSE)

International:

Currency shifts will have some impact on corporate results

“clearly in the last two weeks we have seen the few big shifts. I wouldn’t say big shifts but we have seen some shifts and the bulk of the shifts have been in currencies as it relates to our business. In a week the world’s economy can’t change but currencies did move and that does have an impact on our business.” —Visa CFO Vasant Prabhu (Payments)

UK consumers remain optimistic

“there is actually a fair degree of optimism in the country at the moment and there was a big bounce back after the Brexit vote. It tailed off and then came back…We talk to lots of customers…And they’re saying they feel optimistic and they’re looking forward to a good Christmas.” —Marks and Spencer CEO Steve Rowe (UK Retail)

The Chinese government has acted to cool real estate markets

“In early October, when the Chinese real estate market was experiencing a meaningful development, the local governments in about 20 cities announced the tightening measures designed to cool a market with escalating prices…we believe the goal of the government’s restriction policy is to maintain healthy and stable development of the market by cooling down escalating prices in certain cities” —Xinyuan Real Estate CFO Yuan Zhang (Chinese Real Estate Developer)

It’s very difficult for foreign companies to compete in China

“remember that we don’t operate in China today. We have a nice business in China that is a cross broader business, but we have no real domestic business in China. Visa cards are really not prevalent in most of China, because there was a government monopoly there and we’re not allowed to participate in the domestic market.” —Visa CFO Vasant Prabhu (Payments)

Financials:

Home equity has increased by 95% since 2011

“Since 2011, homeowners have seen a 95% increase in their home equity. That’s come about because of rising prices as well as if you have a mortgage, you’ve been making mortgage payments since 2011.” —Home Depot CFO Carol Tome (Home Goods)

We are definitely at the later stages of the real estate cycle

“Look, there’s no question, we are at later stages of the real estate cycle. I mean we watch it very, very carefully. We look at every component of every geography…at very granular level and there are parts of the United States where there’s been a tremendous amount of new construction. I think multifamily specifically, I think what you should be most worried about is construction financing for high-end luxury condos.” —JP Morgan Commercial Bank CEO Doug Petno (Banking)

Consumer:

Expect the holidays to remain promotional

“is the promotional environment this year likely to be more subdued, short answer is no. I think it’s always promotional and our category as we all know is used by certain players as a way to attract traffic.” —Best Buy CEO Hubert Joly (Electronics Retail)

Unseasonable weather hurts retailers

“the third quarter was clearly challenging from a top line perspective given the headwinds we faced primarily from the unseasonably warm weather in September” —JC Penney CFO Edward Record (Apparel)

But retailers are starting to extend their seasonal windows

“We sold short sleeve product all the way through, I would say, the end of October, to be honest with you. And we are seeing more and more retailers are looking at carrying short sleeve product much longer than they have in the past.” —Perry Ellis CEO Oscar Feldenkreis (Apparel)

Technology:

Target said that Apple product sales have improved

“in the third quarter, we were encouraged to see a meaningful improvement in sales of Apple products driven by their introduction of several new product innovations.” —Target CEO Brian Cornell (Retail)

NVIDIA says that Tesla is 5 years ahead of the competition in self driving cars

“self-driving cars is probably the most single most disruptive event – the most disruptive dynamic that’s happening in the automotive industry. It’s almost impossible for me to imagine that in five years’ time, a reasonably capable car will not have autonomous capability at some level, and a very significant level at that. And I think what Tesla has done by launching and having on the road in the very near-future here, a full autonomous driving capability using AI, that has sent a shock wave through the automotive industry. It’s basically five years ahead. Anybody who’s talking about 2021 and that’s just a non-starter anymore.” —NVIDIA CEO Jen Hsun Hwang (Semiconductors)

The key to AI is having unique data

“when people tell you they do AI, the first thing you’ve got to wonder is do they have unique data, do they have unique signals. In Office we have billions and billions of data points…They are signaling us. When I share a document with you, Brent, that’s a signal. If I e-mail if somebody sends me e-mail and I dwell seven or eight minutes on that e-mail versus my typical minute or two, that’s a signal…Then we bring in machine learning and AI techniques and natural language processing to give back the end user or the customer unique insights.” —Microsoft Office EVP Rajesh Jha (Enterprise Software)

IBM sees blockchain as transformational

“blockchain to me is a great technology to embrace, because it in of itself is transformational…specific use-case I’ll give you is one around supply chain. And I see a lot of the logistics in the supply chain capabilities being transformed by blockchain. Anything that takes a long time to do settlements today and takes multiple players and where I can benefit from having this audit trail and being able to do faster hand-offs, I think is a great example of what we can do with blockchain.” —IBM Systems SVP Tom Rosamilia (Enterprise Tech)

Industrials:

Kitchen equipment maker Middleby raised prices to offset rising steel costs

“we did institute some price increases on the commercial side…we talked about the impact of 0.5% to 1% on margins and you saw margins come down slightly relative to the second quarter, but I think as we go into next year, I believe we think that pricing will largely offset that.” —Middleby CFO Tim Fitzgerald (Kitchen Equipment)

Miscellaneous Nuggets of Wisdom:

If you don’t re-invest in your business, you’re borrowing from the future

“No, when I go in front of Jamie, it’s more of a conversation about like what’s not in your investment pipeline that should be in there and tell me why you took it out, and I think our point of view is that self-disruption innovation is all about bringing more value to our client. We have the financial wherewithal to do it…So, his point of view is, if you’re taking it out to dress up your P&L, you are borrowing from your future and you better be explaining to me why you’re doing it, and those are not the easiest conversations to have because you obviously are mindful of near term performance, but as I said, it’s very often the case that you’re going to borrow from your future if you under-invest today.” —JP Morgan Commercial Bank CEO Doug Petno (Banking)

Full transcripts can be found at www.seekingalpha.com