The Transcript 12.02.19

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Succinct Summary:  The trade war has been weighing on the economy for most of the year.  Businesses have been hesitant to invest due to the uncertainty and have been trying to mitigate the impact of tariffs.  Still, the consumer has been remarkably resilient.  Overall the economy is stable but not quite as strong as it was a couple of years ago.

Macro Outlook:

The trade war has been weighing on the economy for most of the year

” I would say over the course of the last year trade uncertainty has been a major theme and we see it in the decline in business investment, we see it on exports and we see it in the manufacturing sector so trade uncertainty has been a major factor weighing on the economy for the past year. ” – Fed Governor Lael Brainard:

Businesses have been hesitant

” we still hear from our business conflicts – contacts that they’re sitting on the sideline waiting for some of this uncertainty to be resolved. I don’t think the expectation is for a major deal, but even a truce would be a significant reduction in uncertainty for a lot of businesses around the country that are sitting on the sidelines in terms of investment.” – Fed Governor Lael Brainard:

Companies are working hard to offset tariff impacts

” we have offset from what would be not theoretical, the actual SKU level buildup of tariff impacts. We have offset well over half. So out of the gate there is no impact on well over half of the potential tariff impact to our business, again working closely with our supplier partners and with the balance of the impact that is a manageable set of actions we’re taking across the portfolio” – Home Depot (HD) CEO Craig Menear

But the US consumer has proven enormously resilient

“I know with what’s going on in Washington this week, it’s hard to believe. But it is the American customer, at least in our opinion, is really feeling really good.” – Sirius XM (SIRI) CEO Jim Meyer

“The consumer has proven enormously resilient if you look at retail sales, if you look at consumer sentiment the u.S. Consumer continues to feel good about the job market and the job market continues to be strong. Most of the businesses that we talk to that are consumer facing continue to be quite upbeat.” – Fed Governor Lael Brainard

Overall the economy is stable but maybe not as strong as it was two or three years ago

“the economy is stable, but I wouldn’t say it is as strong as it was two or three years ago ” –Oaktree Specialty Lending Corporation (OCSL) CEO Armen Panossian

International:

International protests are a drag on Abercrombie’s international business

“Our international business faced a number of escalating macro headwinds in our key markets, including the uncertainty around Brexit continuing to negatively impact sales in the UK, which is our largest international market. Beyond Brexit, ongoing protest in Europe and Asia also negatively impacted results. Specifically, Hong Kong continue to be a drag with intermittent store closures throughout the quarter” – Abercrombie & Fitch (ANF) CEO Fran Horowitz

Financials:

Markets remain borrower-friendly

” the market remains very competitive and borrower friendly. We continue to see tight spreads in both the direct lending and broadly syndicated loan markets, with spreads in the direct lending market tightening relative to the broadly syndicated loan market.” – Oaktree Specialty Lending Corporation (OCSL) CEO Armen Panossian

Consumer:

Apparel retailers face a favorable fashion cycle

“In terms of the fashion cycle, I think that we are still in the very early stages of what I would call a classic silhouette shift. It’s sort of inversion as it were from big over little to grow over big. As such, it started with the bottoms and now it’s morphing not only with bottoms but into tops. And both of those categories are selling briskly at I think all of our brands…I expect this favorable fashion climate to last at least several more years. I’ve never seen a silhouette shift go for less than let’s say six years, and it’s about a year and a half, two years old right now. So I think we’re in good shape. ” – Urban Outfitters (URBN) CEO Richard Hayne

It’s hard to sell fresh groceries online

“Doing food, especially fresh, in an environment where you don’t have store traffic is really hard because if you don’t sell that fresh product, it’s got to be thrown away, which is obviously wasteful and also expensive. And so now we’ve got this situation where these supercenters can be leveraged with a flow.” –  Walmart (WMT) CEO Doug McMillon CEO

Technology:

The future of gaming is in mobile

“When games became available on phones, the market exploded, and the audience size went from a few hundred million to billions of potential consumers. And so we have these great franchises that have evolved over long periods of time.Many of those franchises, though, are not on phones yet. So, we launched our game Call of Duty for the first time on a mobile phone in October. In a month, we signed up 100 million consumers. And so you realize that as these franchises go from consoles to PCs to phones, the growth in the audience is going to be staggering.” – Activision Blizzard (ATVI) CEO Bobby Kotick

Many people still aren’t ready for full electric cars

“not everybody is ready to go full battery electric. Many of you are not ready to full battery electric, maybe you’re afraid of range, maybe a whole bunch of other host of things. It really doesn’t matter. Maybe you live in one of the apartment buildings here and there’s nowhere to charge. We see opportunities by doing all of them.” – Ford Motor Company (F) Global Director of Electrification Ted Cannis

Industrials:

The used car market is doing well

“what we’re seeing, kind of for what we saw in October and then my contacts in the car industry are still fairly bullish, the used market is really good now.” – Sirius XM (SIRI) CEO Jim Meyer

Miscellaneous Nuggets of Wisdom:

Ruthless prioritization

” there was a moment in time where we had a very large shareholder that was a French company….It was my first board meeting there, and they asked the same question: What is it that you’ve done to be able to sustain and grow the business for this long period of time that other video game companies have been unable to do? And the chairman of the company…said: You know, Bobby, you can please for me to tell those board member how you make the success over this long time. So I said: Well, you know, it’s not that complicated.We are ruthless prioritizers of opportunity; we don’t get distracted; and we know what our business is; we find the best talent, and we make sure that we keep our talent focused and not distracted; and we really do a great job of prioritization.” – Activision Blizzard (ATVI) CEO Bobby Kotick

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