The Transcript 08.12.19

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Succinct Summary: Effects of the weakening global growth can be seen in the hospitality industry where lodging demand has slowed. Fewer companies are intent on hiring or spending on hiring despite the tight labor market. Mortgage prepayments are rising given the lower rates. Further afield,  Germany could be headed for a recession and the Chinese automobile industry is having a tough time. 

Macro Outlook:

Global economic growth has weakened 

“…growth has weakened up a bit…” – BlackRock Capital Investment (BKCC) Interim CEO James Keenan

“Global economic growth is clearly slower than we anticipated when the year began.” – Marriott International (MAR) CEO Arne Sorenson

This is reflected in:

  • Weaker lodging industry demand

“Demand growth for the U.S. lodging industry…reflected the weaker U.S. economy with lodging demand in the quarter up less than 2% year-over-year, about 50 basis points lower than the past couple of quarters…with a relatively higher supply growth in the largest 25 U.S. markets,” – Marriott International (MAR) CEO Arne Sorenson

  • Companies being cautious on hiring and spending

“Companies have been cautious with their spending and recruitment activity in 2019…A wait-and-see mentality persists in the market, and many companies have taken a conservative approach and been less willing to commit to recruitment plans especially small and medium-sized enterprises,” – 51job.com (JOBS) CEO Rick Yan

  • Slowed down demand in the semiconductor industry

“The current slowdown in demand, driven by macroeconomic and geopolitical factors.” – ON Semiconductor Corporation (ON) CEO Keith Jackson

But labor markets are still tight

“We do have obviously very tight construction markets, tight labor markets.” – Marriott International (MAR) CEO Arne Sorenson

We’ll have to see what happens

“We’re talking to China. We’re not ready to make a deal but we’ll see what happens.” – US President Trump

International:

There are challenges in Europe with Germany near a recession

“Our customers and distributors are blaming the weak business conditions in Europe to the effect of very weak exports to China as well as uncertainty due to Brexit. The largest economy in Europe, Germany is near recessionary levels with auto production down significantly.” – Microchip Technology (MCHP) CEO Steve Sanghi

“we are facing the potential effects of expected ECB actions, ongoing trade disputes, Brexit and the current slowdown in the German economy.” – Commerzbank AG (CRZBF) CFO Stephan Engels

The automobile industry in China is having a tough time

“automotive in China continues to have pretty significant year-over-year declines….We have seen a reduction in demand driven by just duties and problems in China economy therefore lot of the luxury car manufacturers are building much, much less. So we have seen demand disruption.” – Microchip Technology(MCHP) CEO Steve Sanghi

No impact from the trade war on Disney’s Chinese business

“we’re fortunate that we’ve not seen a direct impact on our Shanghai business – the theme park, Shanghai Disneyland. Nor have we seen the impact on our movies in the marketplace. What happens in terms of movie access long term, I really – I don’t know. I’m hopeful that there will not be a change. But so far, we’ve not seen an impact in China, from the trade war that seems to be going on right now.” – Walt Disney (DIS) CEO Robert Iger

Elevated inventory levels at Dominos as they prep for Brexit

“We expect the increased inventory level related to Brexit to be maintained into 2020” – Domino’s Pizza (DPUKF)

Financials:

Clients are shifting allocations from equities to bonds

“across the industry, we’re seeing clients reducing their equity exposure and increasing their allocation to bonds” – Man Group (MNGPF) CEO Luke Ellis

The lower rates are driving up prepayment risks

“a sharp move lower in rates led to faster prepayments…we’ve certainly seen an increase in pay-ups and…given the current environment, we expect those pay-ups to persist at these levels” – Invesco Mortgage Capital (IVR) CIO Brian P. Norris

Securities markets are discounting permanently lower rates and the end of inflation

“Any strategy that looks at security valuations relative to historic levels or that isn’t willing to discount the — honestly, seeming end of inflation and the permanently lower rates, had a tough time generating alpha.” – Man Group (MNGPF) CEO Luke Ellis

Private market valuations are elevated

“We continue to see M&A valuations and in particular, private market valuations at high levels.” – Man Group (MNGPF) CEO Luke Ellis

Consumer:

Disney plus takes on Netflix 

“we feel that we can focus more on quality than on quantity….if you compare us to Netflix, we’re going to have far less products than they do, but we’re relying on the strength of our brands and the fervor that fans of those brands have for the product that we make under those brand umbrellas…It is going to be treated as the most important product that the company has launched in, I don’t know, certainly during my tenure in the job, which is quite a long time.” – Walt Disney (DIS) CEO Robert Iger

Advertisers are focusing more on native content

“I think people don’t feel comfortable when their data is used to target them with advertising that they don’t want….Advertising is moving from this third-party pop-up, intrusive environment to something that’s more native and seamless,” he said; “five years from now, advertising will look very, very different than it does today.” – eBay (EBAY) CEO Devin Wenig

Technology:

There are challenges in the semiconductor industry

“current cyclical downturn in the semiconductor industry…ongoing softness in the semiconductor industry” – ON Semiconductor Corporation (ON) Executive Vice President & CFO Bernard Gutmann

But pricing has held up well for Microchip

“the pricing has held up in this environment better than really it has held up in any business cycle before Microchip pricing in general held up in the prior business cycle” – Microchip Technology Incorporated (MCHP) CEO Steve Sanghi

Industrials:

Auto manufacturers are having a tough time

“I think the profit warnings and the challenges the OEMs are facing certainly is real.” – Cars.com (CARS) CEO Alex Vetter

Materials & Energy:

It’s getting harder to put new mines into production

“it’s getting more and more difficult to put new mines into production. You’re getting into more difficult regions so it’s getting more difficult to add tonnes into the market. And if demand keeps growing it should bode well for the price of the commodities going forward” – Glencore (GLCNF) CEO Ivan Glasenberg

Coal, Zinc and Copper facing shortages as demand outstrips supply

“So demand [for coal] is increasing up in a lot of these countries today, and you don’t have new supply coming to the market…Going forward in some of the commodity, zinc even next year, there’s a deficit. Copper not a big deficit” – Glencore (GLCNF) CEO Ivan Glasenberg

 

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