The Newsletter

The Transcript 11.04.19

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Succinct Summary:  The Fed cut interest rates for the third time but sees a relatively strong economy.  Is political pressure driving Federal Reserve policy? No comment.

Macro Outlook:

The Fed lowered rates

“Today, we decided to lower the interest rates for the third time this year. We took this step to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks.” – US Federal Reserve Chair Jerome Powell

And expects these levels to remain appropriate for some time

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective” – US Federal Reserve Chair Jerome Powell

The Fed lowered rates even though members see the economy as relatively strong

“By many metrics, the U.S. economy is in a good place. The current economic expansion, now in its 11th year, is the longest on record, and the economy continues to advance at a moderate pace..Growth has been supported by the continued strength of household consumption, underpinned, in turn, by a thriving labor market.” – US Federal Reserve Vice Chair Richard H. Clarida

“…from our Fed Listens events that we’ve been hearing from people who live and work in low- and moderate-income communities that this is the best labor market they’ve seen in their lifetime.” – US Federal Reserve Chair Jerome Powell

Most earnings calls confirmed that consumer spending remains strong

“That is that consumer spending remains relatively strong with some moderation versus 2018.” – MasterCard  (MA) President & CEO Ajay Banga

Maybe there’s an elephant in the room that’s leading the Fed to lower rates?

“You know, I’m going to maintain my long-time practice of not commenting on anything any elected official would say. But, thank you. Thanks very much.” – US Federal Reserve Chair Jerome Powell

Market participants must think the elephant has plenty of weight, because consensus expects rates to continue to fall despite the Fed’s messaging

“The expectation now is that interest rates will continue to fall” – Standard Chartered  (SCBFF) CFO Andy Halford

The elephant’s trade wars have certainly had some impact on the economy

“The trade wars have really made people think very carefully around investment and also supply chain.” – Lazard (LAZ) CEO Kenneth Jacobs

“The global economy is still slightly growing but at a slower pace than previously expected.” – Standard Chartered (SCBFF) CFO Andy Halford


Rates are negative out to 30 years in Europe

“…you had the entire yield curve for a few markets, the German market and the French market, a few weeks ago, the entire yield curve from overnight to 30 years was negative.” – S&P Global (SPGI) President & CEO Douglas L. Peterson

British spending on automobiles is under pressure

“The combination of industrywide pressures including Brexit have created a challenging environment for car dealers in Europe, particularly in the U.K.” – W. P. Carey (WPC) CEO Jason E. Fox

Chinese consumer spending is also weak

“In China we see the slowdown in the consumer spending is still persisting. And it’s really put pressure on productivity in our studios. And in addition with the worsening economy there’s also more caution I would say for entrepreneurs to invest in new studios.” – Tupperware (TUP) CEO Patricia A. Stitzel

Chicken prices are up

“…we’ve seen significant price increase in protein in China, driven by the African swine flu and that is likely going to continue…Chicken prices, as far as we know, up almost 20% to 30% year-over-year in China this year…. margin pressure from continued elevated chicken prices.” – Yum China Holdings (YUMC) CFO Andy Yeung


ESG is a booming investment area

“…just anecdotally, I was in the IMF meetings in Washington a couple of weeks ago and every single meeting that I had, we talked about ESG. So just – I know that’s anecdotal, but it’s a really booming area.” – S&P Global (SPGI) President & CEO Douglas L. Peterson 

“…something to keep an eye on is ESG this has become a factor, which is very important in Europe, in investors’ minds. It is increasingly becoming more pervasive in the U.S., obviously, we’re seeing it in our asset management business, and you can see the investments we’ve made there. I think increasingly, this is becoming a topic for boardroom discussions.” – Lazard (LAZ) CEO Kenneth Jacobs

The ESG space is quite fragmented

“When we’re looking at the ESG space..we’re looking at a much more fragmented market than some of the core markets that we operate in. So there are large number of competitors. There are not a lot of established standards. There is a move toward standards that I think is going to be helpful for the ESG sector.And looking at ESG, I think it’s very important obviously, to separate out the E from the S from the G.” – Moody’s (MCO) CEO Raymond W. McDaniel, Jr

M&A is okay

“I think the market for M&A is OK. It’s not great. It’s not awful. It’s OK.” – Lazard (LAZ) CEO Kenneth Jacobs

Prices increasing in US casualty insurance

“With respect to U.S. casualty, there is unambiguously increased pricing. I think it’s hitting different sectors differently.” – Swiss Re AG (SSREF) CFO John Dacey

Recent IPO dynamics are part of a normally functioning market

“…the IPO market is marketed windows. And it always has been in and they’re going to be times when the market feels more accessible than others. So remembering that current dynamics overall don’t really feel all that out of the ordinary, and when investors are pushing back, I think from our standpoint, that can be a sign of a healthy functioning market. the IPO window was not shut…So investor is may be more selective at the moment. But again, the window is not shot.” – KKR & Co LP (KKR) Head of Investor Relations Craig Lawson


As content proliferates, it’s harder to buy people’s attention

“…marketing remains one of the largest challenges that the music industry has. As there is more and more content, it’s harder and harder to get your music out there and get exposed.” – Spotify (SPOT) CEO Daniel Ek

China has massive potential for coffee consumption

“…the coffee consumption in China,…now sits at less than four cups per year, per person, compared to 300 in the US, this is a huge opportunity” – Starbucks (SBUX) President John Culver

And is more digitally savvy than other markets

“…what you see is the consumer base in China is much more digitally savvy than any other market in the world.” – Starbucks (SBUX) CEO Kevin Johnson


AR/VR adoption has taken longer to materialize

“On VR and AR, you’re right. This is taking a bit longer than we thought. And I’m still optimistic…Obviously, the fact that it’s taking a little longer than we thought, it cuts both ways. On the one hand, that of course means that the future might be a few years further out and that it might be more expensive to develop because we’ll be funding this for a bit longer until it gets there.” – Facebook (FB) Chairman & CEO Mark Zuckerberg

Direct shopping is coming to Instagram

“We think there is a big opportunity over the long run here because 90% – more than 90% of Instagram users are following a business. …We started testing in Q3 shopping ads, the idea that shoppers can tap on ad, see a product description page and can purchase from the business’ mobile site” – Facebook (FB) COO Sheryl Sandberg

Google claims quantum supremacy

“To demonstrate supremacy, Google’s 53-cubic quantum machine Sycamore successfully performed a test competition and just 200 seconds that would have taken the most powerful supercomputers much longer time to accomplish. Its the Hello World moment we’ve been waiting for and represents a distinct milestone in our effort to harness the principles of quantum mechanics to solve computational problems” – Alphabet (GOOG)  CEO Sundar Pichai


GM is feeling the impact of the strike

“The recent strike is obviously had a negative impact on our financial performance in Q3 and more so in Q4, we estimate the calendar year EPS diluted adjusted impact to be approximately $2 per share and adjusted automotive free cash flow impact to be approximately $5.5 billion, including the impact of working capital unwind.” – General Motors (GM) CFO & Executive VP Dhivya Suryadevara

Materials & Energy:

Oil demand slowing down

“On the demand side, global crude oil demand appears to be slowing due to a number of factors, most notably trade tensions, which are beginning to manifest into slower growth and weaker manufacturing data in some of the major economies around the world.” – Baker Hughes (BKR) CEO Lorenzo Simonelli

Chemical margin to remain under pressure for Exxon Mobil

“Chemical margins will likely remain under pressure in the fourth quarter as the market continues to work through supply length from recent industry capacity additions.” –  Exxon Mobil (XOM) VP:Investor Relations/Secretary Neil Hansen

Weak polyethylene industry margins

“…if you look at polyethylene industry margin, they are relatively steady versus the second quarter, but they absolutely remain weak due to industry supply length. And that has continued to be the issue. We don’t expect that current market environment to improve certainly before the end of this year, but we are starting to see some competitors delay or cancel investment plans.” – Exxon Mobil (XOM) VP:Investor Relations/Secretary Neil Hansen

Miscellaneous Nuggets of Wisdom

*Plug for the Transcript* Earnings calls are predictive of future performance

“We published two papers, which provide empirical evidence that the stock price of companies, whose executives exhibited the most positive sentiment or provided the most transparency during their earnings calls, outperform the broad U.S. equity market by at least 2% per year between 2010 and 2017. Our analysis shows that the Textual Analytics derived from earnings call, such as positive versus negative words, language complexity, analysts selected for Q&A etc., provide additional stock selection power…Conference calls with more complex language are generally associated with either poor results or other negative issues.” – S&P Global (SPGI) CEO Douglas L. Peterson.

Full transcripts can be found at Seeking Alpha, the Motley Fool and CNBC.