The Transcript 11.18.19

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Succinct Summary:  The economic expansion is now in its 11th year. The US consumer remains strong but business investment has been weak. A stat on the real effect of the trade war: Samsonite has taken its supply chain from 90% China production to 67 %, and is intent on reducing it further to 50%. Meanwhile, air flights and India are the final frontiers of the internet.

Macro Outlook:

The economic expansion is now in year 11

“The U.S. economy is now in the 11th year of this expansion, and the baseline outlook remains favorable.” – Federal Reserve Chairperson Jerome Powell

The consumer is strong but business investment is weak

“So, you heard Chairman Powell yesterday talking about his concern over business investment. And I think that’s the issue that we’re facing. The consumer in the U.S., as you see from Walmart and from others, has remained very strong.” – Cisco (CSCO) CEO Chuck Robbins

“…we are cutting right now, these are discretionary CapEx projects, smaller projects across the board. We are not touching on the key projects…So we don’t see that as something that we necessarily need to do. These are discretionary CapEx and something that we will consider going forward, to the extent that the market conditions improve.” – ArcelorMittal (MT) Head, Group Finance & VP Genuíno Christino

Purchase timelines of capital equipment are getting extended

“We see deals getting pushed down, and we see some deals that start out bigger and then get smaller….some of these large customers that, you know, when they start saying, ‘I need one more signature. Let’s add another step into the procurement process,’ they’re just expressing caution that they’re concerned about what’s going on in the macroenvironment.” – Cisco (CSCO) CEO Chuck Robbins

There’s caution around headcount decisions

“Employers are still very cautious about headcount decisions and some companies have chosen to conserve their financial resources and stand on the sidelines if they await guarantee on the economic direction” – 51job (JOBS) CEO Rick Yan

Inventory is being managed tightly

“…our wholesale customers have been buying and managing inventory in a cautious way” – Samsonite (SMSOF) CEO Kyle Gendreau

Some would say that the macroeconomy is not improving

“…let me inform you macroeconomic times are not improving.” – LANXESS Aktiengesellschaft (LNXSF) CEO Matthias Zachert

“I don’t see any catalyst to change momentum right now with the uncertainty and business confidence” – Cisco (CSCO) CFO Kelly A. Kramer

Others would say that the economy is good

“In the United States, the economy is good.” – Brookfield (BAM) CEO Bruce Flatt

International:

Supply chains have dramatically shifted away from China because of tariffs

“…we’re very rapidly accelerating the shifting of sourcing from China for our U.S. business, which means shifting volumes from other regions, so that the U.S. can take volumes outside of trend and shifting that into China. And we’re ahead of schedules what I would say, we were – I think, the last time we’re talking, we were talking getting close to 75% to 70% outsourced from China by the end of the year.  I’m happy to say that for Q3, we’re already at 67%. And as we look to next year, we start to feel like we can get very close to 50% source from China, which for just the core U.S. business was close to 90% just at the start of this year. So, it’s a pretty dramatic shift” – Samsonite (SMSOF) CEO Kyle Gendreau

Some countries in Central and Eastern Europe are seeing strong wage growth

“Clearly, Central and Eastern Europe is outperforming the Western European economies…In some countries, we are seeing wage inflation more than 10% in a year, that’s quite unheard of versus previous records. But at the same time, that translates into disposable income and demand in the marketplace and the business benefits from that for sure.” – Wizz Air (WZZAF) CEO József Váradi

Financials:

The Fed continues to frame policy around a “neutral” interest rate

“With respect to expected real short-term interest rates, one reason investors expect lower future short-term interest rates is that neutral interest rates appear to have declined worldwide and are expected to remain low. This concept of a neutral level for short-term real interest rates is referred to in the academic literature as r* and corresponds to the rate consistent with a level of aggregate demand equal to and growing in pace with aggregate supply at an unchanged rate of inflation.” – Federal Reserve Vice Chair Richard H. Clarida

Lower interest rates driving higher allocations to alternatives

” If this low interest rate environment continues which, at the moment, it looks like it will, we think that capital will increasingly be allocated to alternatives as a means of meeting required return targets. We think that many institutional investors will continue a push towards holding allocations of up to 60% in alternatives. And as you know, some of the leading groups are at that level, but more and more push towards increased allocations.” – Brookfield (BAM) CEO Bruce Flatt

The Fed views financial leverage as low

“The core of the financial sector appears resilient, with leverage low and funding risk limited relative to the levels of recent decades.” – Federal Reserve Chair Jerome Powell

Consumer:

Disney+ got off to a strong start

“Disney+…has already reached a major milestone, achieving a remarkable 10 million sign-ups since launching (a day earlier)” – Walt Disney (DIS) Press Release

There may be slowing remodel activity in US housing markets

“…softer U.S. housing market and slowing remodel activity” – Spectrum Brands (SPB) Executive VP & COO Randal Lewis

Technology:

Technological progress is being led by new forms of data generation and processing

“…we are in a period of transition as major new growth drivers emerge in the form of IoT, Big Data, and Artificial Intelligence. Over the next decade, we expect hundreds of billions of edge devices to be deployed, an explosion of data generation, and new approaches to computing to sustainably process and create value from all the data that’s available.” – Applied Materials (AMAT) CEO Gary E. Dickerson

Deep learning is being deployed in the backbone of the internet

“As you know, recommendation systems is the backbone of the Internet, whenever you do shopping, whenever you’re watching movies, looking at news, doing search, all of the personalized web pages, all of just about your entire experience on the Internet is made possible by recommendation systems because there’s just so much data out there…For the very first time, we’re seeing recommendation system based on deep learning throughout the world.” – NVIDIA (NVDA) CEO Jensen Haung

Two final frontiers of the internet:

  • In-flight

“The London School of Economics issued a report called Sky-High Economics that’s available online and that sized this total ecosystem for in-flight online as growing from roughly $4 billion in 2018 to $67 billion in 2028. Now that $67 billion value.” – Viasat (VSAT) Mark Dankberg

  • And India

“India now has 600 million Internet users, but what is shocking is this is only 40% of the population, implying a sustained and continued growth in the future.” – Brookfield (BAM) CEO Bruce Flatt

Telecoms are focused on 5G

“…in the U.S., I think it’s pretty clear if you just follow what’s going on with the major players here is..that they’re currently focused on building out their trials and in their broader consumer-based 5G services, and that’s an area that – frankly they’ll run most of that traffic across your existing networks.” – Cisco (CSCO) CEO Chuck Robbins

Industrials:

Automotive and industrial production is weak around the world

“Demand in our core markets, Europe and the U.S. has remained weak, reflecting depressed manufacturing activity and continued weakness in automotive markets,” – ArcelorMittal (MT) – Head of Investor Relations Daniel Fairclough

“The market environment was especially challenging in some key segments particularly automotive and to a lesser extent electronics and general industry.” – Henkel (HENKY) CEO Hans Van Bylen

“China’s automobile industry has been negatively affected by lackluster consumer demand in the domestic market, pressure from the newly issued and more stringent emission standards and a slash in subsidies to alternative energy vehicles.” – China XD (CXDC) Chairman, CEO & President Jie Han

The demand environment for automobiles continues to deteriorate

“…we are prepared for stagnation in the automotive industry and even erosion.” – LANXESS Aktiengesellschaft (LNXSF) CEO Matthias Zachert

“…the demand environment throughout this year has been very weak, and we have seen sort of an ongoing deterioration, particularly in that automotive market.” – ArcelorMittal (MT) Head of Investor Relations Daniel Fairclough

TV markets are slow

“…there’s a bit of inventory build on the TV side…our customer conversations also confirm this dynamic. And so as we look forward into 2020, we think there’s going to be some incremental softness on the TV side” – Applied Materials (AMAT) CEO Gary E. Dickerson

Miscellaneous Nuggets of Wisdom:

The larger the purchase, the more important the service component

“People may not care about a service when they buy a RMB 0.99 petty item because they can just throw it away. But when they are buying large ticket products, they definitely care” – JD.com (JD) CFO Sidney Huang

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