The Newsletter

The Transcript 10.21.19

Welcome to The Transcript, your weekly digest of quotes from earnings calls.

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Succinct Summary:  Q3 earnings season kicked off in earnest this past week with several banks reporting. Most companies noted that the US consumer is doing very well. Consequently, the US economy has a solid grounding, despite the slowed down global growth. The surprise move to zero brokerage commissions was unexpected by some. The impact has been accelerated flows into ETFs and brokers adjusting to the reduced revenues by trying to cut costs to maintain margins.

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Macro Outlook:

There is some growth even though it’s slower

“…broadly speaking, while it’s slower growth, it’s still growth” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“…and we continue to see slow, steady economic expansion.” – Comerica (CMA) CEO Curtis Farmer

“The overall nature of global growth, while a little bit decelerated from a year ago, is still okay. It’s still solid.” –  Goldman Sachs (GS) CEO David Solomon

“…from all of my conversations with our clients,…this very much feels like a slower growth environment, and it does not feel like an acceleration into a more broad-based recession….the consumer is still involved in driving growth. So, it looks like a slow growth environment is truly uneven, but not an acceleration into a recession, at least at this point.” – ManpowerGroup (MAN) CEO Jonas Prising

Heightened uncertainty making investors move to safety 

“The simultaneous rise in historical safe assets alongside riskier equities in the third quarter highlights investor’s uncertainty..clients preferences has favored lower risk assets” – BlackRock (BLK) CEO Laurence D Fink

“…industry flows slowed in the quarter and clients continue to rebalance and derisk favoring fixed income and cash over equities. Even within equities, investors demonstrated caution shifting from momentum to value and favoring high dividend and low volatility funds.” – BlackRock  (BLK) CFO Gary Shedlin

“…we observed a meaningful shift in retail investor sentiment during the quarter as our customers were net sellers of securities for the first time since 2016.” – E*TRADE  (ETFC) CEO Michael Pizzi

The US economy is in solid shape

“The U.S. economy is on solid footing. And while global growth is slowing, the U.S. consumer remains healthy.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“The[re] are tangible examples that the U.S. economy is still in solid shape, despite the worries and concerns about trade wars, capital investment slowdowns or other global macro conditions” – Bank of America (BAC) CEO Brian Moynihan

“In discussing business trends with our U.S. clients, we’re still hearing of solid demand in many sectors” – ManpowerGroup (MAN) CEO Jonas Prising

“The U.S. economy is in a good place, and the baseline outlook is favorable.” – Federal Reserve Vice Chair Richard Clarida

“…there is still a sense where despite all the naysaying and all the news and all the pundits, the reality is the U.S. economy is in good shape and the consumer balance sheets are in good shape.” – Morgan Stanley (MS) CEO James Gorman

The US consumer is strong and is giving the economy strength

“…consumers continue to show resilience and remain a meaningful source of strength in the U.S. economy.” – Goldman Sachs (GS) CEO David Solomon

“…in terms of the U.S., but when you globally look at the consumer, consumer’s in fine shape.” – Citigroup (C) CEO Mike Corbat

“…the U.S. consumer is incredibly strong. Consumer spending is strong. Sentiment is strong, so the consumer credit is good.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“…the U.S. consumer continues to benefit by strong employment prospects…commercial customers continue to fare well.” – Bank of America (BAC) CEO Brian Moynihan

“We continue to see a healthy U.S. consumer…While consumer confidence recently moderated a bit, overall levels are near the highest they’ve been over the past two decades” – Ally Financial (ALLY) CEO Jeff Brown

“…the consumer right now is performing extremely well, we’ve got 50 employment. Debt servicing levels are actually at a 39-year low. They’re under 10%, and so ability to pay continues to be strong” – Ally Financial (ALLY) CFO Jenn LaClair

And overall consumer and business sentiment is positive

“…customer sentiment remains positive…The tone of recent conversations I’ve had and I have had with customers and colleagues across our markets is optimistic, and we continue to see slow, steady economic expansion.” – Comerica (CMA) CEO Curtis Farmer

“…strong labor markets, low inflation and healthy wage growth. Economic conditions have also been bolstered by the Fed’s two mid-cycle rate cuts. Importantly, in monitoring the data, consumers continue to show resilience and remain a meaningful source of strength in the U.S. economy.” – Goldman Sachs (GS) CEO David Solomon

Manufacturing clients have reduced demand

“…the U.S. production growth rate has declined for the last eight months and it is expected to drop further in 2020 as a result of the reduced activity this year.” – Schlumberger (SLB) CEO Olivier Le Peuch

“…if you look at the ISM surveys, both manufacturing and nonmanufacturing, they were recently disappointing. So I would say, no doubt, cautionary signs, but credit remains very good, and there’s still very healthy business activity.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“U.S. manufacturing clients have recently reduced demand, driven by trade-related uncertainty.” – ManpowerGroup (MAN) CEO Jonas Prising

“Business fixed investment has slowed notably since last year, exports are contracting on a year-over-year basis, and indicators of manufacturing activity are weakening.” – Federal Reserve Vice-Chair Richard Clarida

“…it’s very clear that the slowing growth environment is heavily driven by the concerns around the trade wars and tariffs to be implemented or having been implemented in many parts of the world. And that clearly is the main driver of the slowing of the manufacturing sector, which in turn is driving the slowing of global growth” – ManpowerGroup (MAN) CEO Jonas Prising

And the markets are pricing in rate cuts

“While recent economic data has been mixed, the markets are expecting the fed to cut rates again” – Comerica (CMA) Executive VP James Herzog

“…with much uncertainty on several fronts, the market is currently pricing in rate cuts.” – Comerica (CMA) CEO Curtis Farmer


Tariffs would shrink global GDP by 0.8% by 2020

“By 2020, tariffs already imposed or announced would shrink global GDP by 0.8% that’s the equivalent of the economy of switzerland” – IMF Managing Director Kristalina Georgieva

Companies are rerouting trade away from China

“I think we see less trade in movement today…we’ve also seen the rerouting of trade. And the example…China is not necessarily consuming less soy. It’s just getting its soy from different places in the world.” – Citigroup (C) CEO Mike Corbat

“I did speak to many of our customers in different regions. And many of them have planned – they already hit the better plan, including moving production facility from China to Vietnam and Cambodia and also diversify their sourcing and also buying from other supplier in different countries to avoid these tariffs. So, since then, most customers already have some plans.” – Cathay General Bancorp (CATY) CEO Pin Tai

“And as an example, what we’ve seen out of the China mix is trade routes with Vietnam and India being a couple of the beneficiaries of that.” – Citigroup (C) CEO Mike Corbat

Argentina is not doing well

” In Argentina, though, a worsening economic situation and higher inflation has affected consumer spending” – Coca-Cola (KO) CEO James Quincey

Growth is decelerating in Europe

“In Europe, growth is decelerating in part due to trade and manufacturing weakness with notable challenges in Germany.” – Goldman Sachs (GS) CEO David Solomon

“In countries like Germany and Sweden, we continue to experience reduced manufacturing-related demand, a trend also reflected in September’s manufacturing PMI” – ManpowerGroup (MAN) CEO Jonas Prising


The move to zero commissions is hitting the top line of brokers

“The impact from eliminating retail commissions for online U.S.-listed stock, ETF and options trade is roughly $300 million per year, assuming the most recent quarter’s trading activity. We plan to offset a material portion of this forward on revenue through a host of revenue and expense initiatives.” – E*TRADE (ETFC) CFO Chad Turner

“…we’re not taking the commission cuts lying down. We’ve redoubled our efforts on the expense front.” – E*TRADE (ETFC) CEO Michael Pizzi

The swift response from competitors was unexpected

“We did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while, and will attract some customers and then eventually, other people will start reducing and maybe all go to zero. So this – this very swift reaction was a surprise to us” – Interactive Brokers (IBKR) Chairman Thomas Peterffy

“I was surprised at the timing, frankly. I think, given the backdrop with where rates are, it was curious timing, but it is what it is.” – Morgan Stanley (MS) CEO James Gorman

The move has accelerated ETF flows

“So commission-free trading is actually accelerating ETF flows in the two fastest-growing U.S. wealth channels, one is the U.S. RIA and that represents $5 trillion market, that has grown at a 10% compound annual growth rate. The other area is the U.S. direct investors and they represent $7.5 trillion in market that has grown at a 10% compound annual growth rate.” – BlackRock (BLK) President Robert S. Kapito

The IPO market is in a bit of trouble

“One segment of private companies are having problems and that’s more growth-oriented technology companies that are having problems going public, I don’t see the overall market is that – is in much trouble” – BlackRock (BLK) Chairman and Chief Executive Officer Laurence Fink

“…plumbing’s broken, although I do think that you’ve pointed to two places where there are certainly adjustments and changes in evolution. There’s no question that the short-term funding markets experienced a combination of factors that led to the need for some intervention. I would say some of this is market structure and kind of supply and demand, the liquidity in the market and some of it is the impact of regulatory change over a period of time combining with those things” – Goldman Sachs (GS) CEO David Solomon

Goldman Sachs thinks the impact of direct listing is overstated

“…market or potentially disrupting the economic opportunity for the leading banks like ourselves and a handful of others in the IPO market is overstated at this point, but I do think that they will continue to be evolution in these processes and there are ways that we can so clients better or find ways to get them to market more efficiently…whether a direct listing or a traditional IPO process, we benefit from both those channels.” – Goldman Sachs (GS) CEO David Solomon

They still have a bit of room on the WE company

“…the [We] company in particular because it obviously got quite a bit of notoriety in the press….the revaluation there was in the neighborhood of $80 million in terms of our loss. Our carry value there, I should point out, is approximately $70 million, which I would tell you is meaningfully higher than where our embedded cost is in that particular name. So, if there was further downdraft, there’s still embedded profit in the name itself, but I called that out just given the nature of the press and the notoriety around the name itself” – Goldman Sachs (GS) CEO David Solomon


Strong consumer demand for no sugar drinks

“…revenue growth – organic revenue growth is up 2% year-to-date. This growth was largely driven by continued strong consumer demand for No Sugar versions of some of our best known sparkling soft drink brands as well as for smaller packages with less sugar per serving” – Coca-Cola (KO) CEO James Quincey

Pricing tailwinds for Nestle

“There is a little bit of tailwind coming from pricing and this is more specific to the U.S. but it was very good to see that it came without any negative elasticity or negative impact on volume because I mean when we see the quality of the growth in the U.S. and elsewhere, it’s a good combination of volume, pricing and mix. And mix is largely the consequence of premiumization.” – Nestlé (NSRGY) CFO Francois Rodgers.


Adoption of 5G has acceelrated

“Since the middle of this year, we’ve been seeing an acceleration in the worldwide 5G development. This will speed up the introduction and deployment of 5G network in smartphone in several major market around the world, which leads to the increase of our CapEx for this year. We expect the faster ramp of 5G smartphones as compared to 4G with the penetration rate of 5G smartphones to reach mid-teens percentage of the total smartphone market in 2020. Meanwhile, we expect the silicon content of 5G smartphones will be substantially higher than that of 4G smartphones. That is due to the increase in functionalities and additional ICs for more camera, RF circuit, modem, power management IC etcetera.” – Taiwan Semiconductor Manufacturing (TSM) CEO Dr. C. C. Wei


The healthy consumer is driving up car purchases

” …[the] healthy consumer has sustained car purchases, high demand, as well as the fact that — while the rate is up compared to a couple of years ago, we are well below the average from a historic time period. And so, the overall interest rate on the car relative to payment income and debt income level continues to be absorbed.” – Ally Financial (ALLY) CFO Jenn LaClair

“While industry off lease volume of 4 million plus units is at the highest level in 20 years, the consumer has continued to exhibit strong demand for used vehicles. We see this as a reflection of their healthy overall financial position, improved quality and durability of used vehicles, and an increasing difference in average transaction price between new and used cars, which recently exceeded $13,000, a 50% increase versus 2011.” – Ally Financial (ALLY) CEO Jeff Brown

Materials & Energy:

Aluminium consumption may be flat YoY

“…global primary aluminum consumption maybe flat and possibly contract year-over-year in 2019. This is mostly driven by weaker primary aluminum demand in the world, ex-China, where scrap used and Chinese imports have been rising, while reduced manufacturing activity has started to translate into lower product order volumes…In our markets, we continue to project a global aluminum deficit for the year, but we’re reducing our global aluminum demand estimate due to macroeconomic headwinds and trade tensions.” – Alcoa (AA) CEO Roy Harvey

The deepwater and shale industries are having a slow recovery

“…the offshore market is a market that doesn’t compact and expand on a monthly or on a quarterly basis. It’s more steady and it is more longer – long cycle and that’s partially true for deepwater. So we have seen growth because we slow recovery of deepwater for the last 18 months. We have seen the faster recovery of the shale in the last 12 months.” – Schlumberger (SLB) CEO Olivier Le Peuch

The steel market is weak

“…the global steel markets continue to weaken with the industrial slowdown and some of the sourcing issues in Europe impacted obviously the benchmark prices” – CSX (CSX) Executive VP of Sales and Marketing Mark Wallace

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