The Newsletter

The Transcript 04.27.20

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Succinct Summary: The decline in economic activity has been huge and the recovery may take longer than expected.  However, bulls are betting on massive stimulus in an environment that was already highly liquid prior to the Covid crisis.  Consumers are itching to get back to normal and some hard-hit industries are seeing stabilizing trends.  But the economy is subject to the machinations of non-economic forces: governments and a poorly understood disease.

Macro Outlook:

GDP has likely declined by a very large amount

“US GDP is forecasted to decline by 40% or more in the second quarter. While global GDP is expected to contract meaningfully, for both the second quarter and the full year.” – Baker Hughes (BKR) CEO Lorenzo Simonelli

” When we closed the books on the first quarter, those scenarios assumed the GDP would be down 18% to 25% and the unemployment rate would rise to 9% to 13% in the second quarter with a steady modest recovery after that. It’s important to note that the latest macroeconomic outlook today reflects an even more significant deterioration in U.S. GDP and unemployment than when we closed the books on the first quarter.” – American Express (AXP) CFO Jeffrey Campbell

The question is how long will the decline last?

“our earnings will be driven by the answers to two questions that no one can now – no one yet can answer. First, when and how strongly does spending rebound as the global economy recovers? Second, how long do the challenges of high unemployment levels and small business shutdowns last, perhaps softened by the record levels of government support and what does that mean for our credit losses?” – American Express (AXP) CEO Stephen Squeri

The recovery may take longer than expected

“it’s going to be challenging. The recovery will take much longer than any of us would like to see. But we need to start building back, in a safe way, the operations of our economy….this recovery is going to take several years. It’s going to be a multi-phase. It’s going to be choppy along the way. We’ll have opportunities to test all those species and see what it takes.” – Delta Airlines (DAL) CEO Ed Bastian

” It took seven years to get back to the 2000 highs in 2007. It took 5½ years to get back to the 2007 highs in late 2012. So, is it really appropriate that, given all the bad news in the world today, we should get back to the highs in only three months? That seems inappropriately positive…People are traumatized, and not just because of the performance of their stocks. Everybody’s life is hugely changed. ” – Oaktree Capital Co-founder Howard Marks

The major forces at play are non-economic

“A lot of what will happen in the coming weeks and months will be dictated by governments, medical experts and circumstances that are completely unpredictable and out of our control.” – Moelis & Company (MC) CEO Ken Moelis

Small and middle market businesses have been hit hard

“I think it’s fair to say that the sector that has shown the most immediate stress is small business, right? You shut down small businesses and a savvy business owner is going to say, boy, I need to go into cash conservation mode, and in many ways, what our pandemic relief programs are about is trying to help people through that transition.” – American Express (AXP) CFO Jeffrey C. Campbell

” think the part of this market that people don’t – that might have a longer time coming back is that basic financing, leveraged financing for the middle market company that has to rebuild after, and rebuilding is going to take some time as well.” – Moelis & Company (MC) CEO Ken Moelis

“The bad news is small business will really struggle to recover from this.” – Trust Financial Corporation (TFC) CEO Kelly King

However, the stimulus programs are huge

“There is a lot more that we don’t know than what we know, though, and how things are going to impact. The government’s going to have over $6 trillion of stimulus when it’s all said and done. That’s 3 times more than what they had in the Great Recession. We really don’t know how effective those programs are going to be.” – Trust Financial Corporation (TFC) CFO Daryl Bible

“the federal government pushing all this money out and more and more and more and more, I think eventually, the inflation will enter the picture and the fact you have to do something to counteract that. So I would not, at this time certainly, at this time, would not go further out on the yield curve.” – Interactive Brokers Group (IBKR) Thomas Peterffy

There’s still a lot of liquidity out there

“There’s never been this amount of dry powder. And we also believe that there’s more money that’s coming after this market even behind that. When we’ve talked to limited partners, unlike what we have seen in the past where limited partners are really spooked, we’ve done some channel checks. And what we’ve heard from limited partners is that they’re actually looking at this as an opportunity. And I think that’s a great sign.” – SVB Financial Group (SIVB) CEO Greg Becker

And some hard hit industries are seeing trends stabilize

“Delivery and carryout mix are holding relatively steady on average. Weekday sales have been significantly up, while weekends have generally been more pressured. Lunch and dinner dayparts are up, while late night had been more pressured, and we are seeing larger order sizes throughout the week.. we’re finding, at Domino’s, and I think some of our peers in the restaurant industry are finding, people are ordering extra food to have leftovers around also, which is a really interesting dynamic in the market today.” – Domino’s Pizza (DPZ) CFO Jeffrey D. Lawrence

“I’m pleased to report that only about 100 restaurants are fully closed at this time. These are mainly inside malls and shopping centers as well as 17 locations in Europe, while the rest of our restaurants remain open…as COVID-19 restrictions became more prevalent, our comps deteriorated and ended up declining 16% for the month, with the week ending March 29 being the trough at down 35%…April has seen our comps improve with the most recent week adjusted for Easter being in the negative high-teens range.” – Chipotle (CMG) CEO Brian Niccol

“Thus far through April, our in-patient admissions are running about 30% below the prior year. Our emergency room visits are running about 50% below prior year as our in-patient surgeries. Our hospital based outpatient surgeries are running about 70% below our prior year as most elective procedures have been deferred. We have started to see these volume declines stabilize over the past week.” – HCA Healthcare (HCA) CFO Bill Rutherford

Consumers will certainly get tired of life in quarantine and return to their old ways

“As time goes forward, people start to get a bit tired of cooking and eating the same thing. Some of the pantry loading that they’ve done, it starts to bleed down a bit over time.  I also think, we and I suspect the rest of the industry, probably are seeing some near-term impacts here from some of the stimulus dollars that have gone out” –  Domino’s Pizza (DPZ) CEO Richard E. Allison

“We don’t know how long this pandemic will last, but we are confident that travel and tourism spending in each of our markets and around the world will eventually recover. As surely as day follows night, people will travel again, shop again, come together again to enjoy entertainment and social interaction, to exchange ideas and to conduct business.” – Las Vegas Sands (LVS) CEO Sheldon Adelson


COVID-19’s impact on developing countries will be severe

“Lockdowns and economic recession are expected to lead to a major loss of income among the working poor. Overseas remittances will also drop sharply ..The loss of tourism receipts will damage countries such as Ethiopia, where it accounts for 47% of total exports. The collapsing oil prices in lower-income countries like South Sudan will have an impact significantly, where oil accounts for 98.8% of total exports. ..The economic and health impacts of COVID-19 are most worrisome for communities in countries across Africa as well as the Middle East, because the virus threatens further damage to the lives and livelihoods of people already put at risk by conflict.” – UN World Food Programme (WFP) Executive Director David Beasley


The biggest issue right now is liquidity; we’ll worry about leverage later.

“Today, it’s about liquidity. I think, down the road, it will be about leverage…In the very short term, it’s a liquidity crisis. If there’s a substantial amount of companies out there that either have zero EBITDA and some have zero revenue and so how much cash becomes a problem and therefore the solution is capital or something immediate.You don’t have enough time to fix the balance sheet. All you’re trying to do is fix the cash position” – Moelis & Company (MC) CEO Ken Moelis

“it’s really belts and suspenders, as we’re going through an unprecedented time something that comes along once every 100 years and we’re in a situation when we were in March when the markets were very volatile, the short-term funding markets obviously had tightened up substantially. And honestly, in a position like this, it’s just a matter of having liquidity is a very good thing to have, and it just allows us to sleep well at night.” – Nasdaq (NDAQ) CFO Michael Ptasznik

Big companies feel better about liquidity.  The credit line draws have have stopped.

“I think drawdowns have pretty much come to a halt in the last week or so, but I think we are going to see migration impacts, as credit ratings and rating agencies catch up with the events of last month and start to make estimates of what we’re going to see economic wise over the next quarter or so.” – Credit Suisse (CS) CFO David Mathers

Banks will continue to increase loan loss reserves

” the scale of the adverse economic impact of the COVID-19 crisis is still difficult to assess and I would caution that we might see a further reserve build in the coming quarters” – Credit Suisse (CS) CEO Thomas Gottstein

“If those forecasts were to hold or even worsen by the time we close the books on the second quarter, we would expect to have another large reserve build.” – American Express (AXP) CFO Jeffrey C. Campbell

It’s tough to do M&A in this environment

“you cannot buy a company if you cannot underwrite to some level of certainty the next 12 months of operations or even the 12 months after that, right now you couldn’t do either…Even if you’re going to swap your own stock and you think your stock is low, you do have to do due diligence and become comfortable with the other person’s business prospects, which is very hard to do in this environment. So that’s difficult.” – Moelis & Company (MC) CEO Ken Moelis

And IPO candidates are waiting and watching

“The flip side impact of the volatility and economic uncertainty however, is the effect on IPOs…the vast majority of IPO candidates are waiting to see if market conditions stabilize.” – Nasdaq (NDAQ) CFO Adena Friedman

“Obviously, they’re doing some IPOs, but the number of IPOs are going to be much, much, much fewer. You saw that toward the tail end of the quarter. And although, again, April had some activity, it’s just going to be slower” – SVB Financial Group (SIVB) CEO Greg Becker


Miles driven are way down

“With all of the stay-at-home orders, consumers have just not been driving their vehicles at all in a lot of markets. So miles driven we feel like is going to be significantly drawn down” – O’Reilly Automotive (ORLY) CEO Gregory Johnson

Netflix is impressed by Disney+

“I’ve been so impressed with the Disney+ execution. Over 20 years of watching different businesses, incumbents, like Blockbuster and Walmart and all these companies, I’ve never seen such a good execution of the incumbent learning the new way and mastering it. And then to have them achieve over 50 million in six months, it’s stunning. So to see both the execution and the numbers line up, my hats off to them.” – Netflix (NFLX) CEO Reed Hastings


Working from home may be the new normal

“I think many people are stepping back now and realizing that we are not going to get back to a more normalized environment until vaccines are widely distributed around the globe. So that becomes quarters or even years…this environment will continue to be a secular change that’s very good for our business. In fact, Gartner just released a survey a few days ago, pointing out that 74% of companies believe that they’re going to expand remote work once the crisis has passed.” – Citrix Systems (CTXS) CEO David Henshall

In some ways WFH is great for productivity

“so the calls are fairly immediate and actually not being there in person is much less of a barrier, not having that personal interaction.And then on top of that, we’re able to get calls and work done extremely quickly because, as I said, nobody is at their kid’s ballgame or out for dinner or on an airplane or at a Board meeting. When we’ve gotten calls to come up with ideas and help people, we had everybody on the phone, just five or 10 minutes later. It’s a stunning efficiency.” – Moelis & Company (MC) CEO Ken Moelis

But it’s tough to close a big deal over Zoom

“with new investments is really hard, right? And it’s going to be very difficult for somebody to get excited about investing $50 million over a Zoom video call. So that’s something I think you have to think about logistically. Now what would happen is if they have an existing investment and try to continue to support that, so you could see investments continue going down that aspect” – SVB Financial Group (SIVB) President Gregory W Becker

There maybe less air travel as people adopt online meetings

“I think we’ve all learned in this environment how to work virtually. It is amazing and we don’t use Zoom, but we do use WebEx, but it is amazing to see everybody on the WebEx screen, and quite honestly, I think there’ll be more of that. There’ll be less of those trips that are needed. And so I think you will see an inevitable decline in probably air travel. You’ll still see people making trips in cars, you’ll still see people going to restaurants, albeit restaurants will probably be reconfigured in the short term, but in the long term, I think it comes back pretty much to normal” – American Express (AXP) CEO Stephen Squeri

PC demand has benefitted

“Near term PC demand has increased due to work-from-home and online learning. But the second half demand picture is more uncertain” – Intel (INTC) CEO Robert H. Swan

The cloud is performing great in this crisis

“through this crisis, the world’s cloud and network infrastructure has delivered massive scaling to support vital workloads for businesses and consumers…We scaled our cloud and communication service provider businesses by 53% and 33% year-over-year, respectively, to help our customers meet these growing needs.” – Intel (INTC) CEO Robert H. Swan


Delta is operating at less than 5% of normal passenger load

“The challenge in the business right now is demand. With all the stay-at-home orders and the challenges with respect to travel, it’s well-documented. We’re operating at less than 5% of a normal passenger load. I think today we’re operating about 30,000 passengers on our books. And the important thing to note is that those are essential passengers..We’ve got 600 planes are grounded at the present time. We’re only flying about 10%, 15% of our schedule at the present time. ” – Delta Air Lines (DAL) CEO Ed Bastian

Customers have to feel safe before they can travel again

“there’s no question that until customers feel safe traveling, this business, in terms of air travel, is going to return at scale” – Delta Airlines (DAL) CEO Ed Bastian

Airlines will have to make longer term changes

“we’ve doubled down and in fact, tripled down on sanitation, hygiene, cleanliness, making certain every aircraft we’re on is fogged every day. The facilities, the social distancing practices on our planes, making certain people are at least six feet away throughout the cabin, giving – changing the boarding practices. We now board from the back first, to make sure people are not walking past customers sitting in first class.” – Delta Airlines (DAL) CEO Ed Bastian

Construction, which usually lags market downturns, is still going strong

“Automotive is going to come back again, one doesn’t necessarily know exactly when, but the expectation is late this month and through May, but the bright spot is certainly is construction…construction tends to lag market downturn, you know we saw it in 2015, we saw it in 2008, 2009. It tends to lag the downturn in the market by about four to six months, because operations or projects tend to be pre-funded and we are seeing that” – Steel Dynamics (STLD) CEO Mark Millett

Materials & Energy:

The oil industry is another industry getting crushed

“The market in North America is experiencing the most dramatic and rapid activity decline in recent history. Our customers continue to revise their capital budgets downwards as they swiftly adjust spending levels in response to the lower commodity price. Right now, North American E&P CapEx is trending towards a 50% reduction year-on-year in 2020. Since mid-March U.S. land rig count has fallen 34% and is expected to continue declining from here. With prices at the wellhead near cash breakeven levels, we expect activity in North America land to further deteriorate during the second quarter and remain depressed through year-end impacting all basins.” – Halliburton (HAL) CEO Jeff Miller

It could take a while for the industry to rebalance

“this is certainly different, unprecedented when you put the combination of the two things, the OPEC Plus falling apart on March 6th, together with COVID crushing demand. When you look at the OPEC Plus situation, if — even with a return to normal economic activity, if the coalition, if you will, doesn’t hold together and the market is forced to balance on just fundamentals of supply and demand, that could take longer or that could be a more lasting impact, which would have an impact on the shales and the near term, additional gathering and production investment that we would otherwise have planned to make. That could last longer, unless a deal is put together in a better economic environment than what we’re experiencing today.” – Kinder Morgan (KMI) CEO Steven Kean

Other commodity markets are oversupplied too

“While aluminum demand is likely to have decreased in the first quarter of 2020, in particular in China, primary aluminum smelters continued to produce without significant interruption for most of the quarter. This resulted in an over two million ton increase in global inventories largely seen so far in China…this year’s increase in inventories was likely three times to four times the size of the Chinese stock build we saw during the first quarter of 2019. Given these dynamics, aluminum and alumina prices decreased over the quarter…that the current market is in an oversupply situation.the longer that we remain in oversupply condition, the longer we build up inventories, the longer that the pricing issues could continue.” – Alcoa (AA) CEO Roy C. Harvey


It won’t be easy to make billions of doses of vaccines

“The debate has been about vaccines. We’re confident that we will get there. There hasn’t been enough debate about ability to make billions of doses. And for the record, we have 10,000 people producing over a billion doses right now of our own vaccine portfolio. This is not easy to do.” – Sanofi (SNY) CEO Paul Hudson

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