The Newsletter

The Transcript 05.11.20

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Succinct Summary: Companies are reporting signs of improvement in the economy. But the rebound is coming off such a low base that these numbers would still be considered very bad in any other environment. The duration of this rebound will depend heavily on whether or not there’s a second wave of infections. Still, even without the virus it probably will take the economy a long time to recover from such a severe shock. 

On an industry basis: private capital markets are searching for price levels; consumers are dreaming of the future; tech is chugging along, and the industrial/energy economy is feeling immense pain.

Macro Outlook:

Companies are reporting signs of improvement

“COVID-19 has had a dramatic impact on Rides with the business down globally around 80% in April. Still, there’s some green shoots driving restrained optimism. We’ve seen week-on-week growth globally for the past three weeks. This week is tracking to be our fourth consecutive week of growth” – Uber (UBER) CEO Dara Khosrowshahi

“The real estate market is predominantly open. And it’s clear that we have passed peak here…but new listings are down which means inventory is low…there are lots of fish biting, but just not a lot of bait in the water…Our challenge now will be to educate the industry and educate sellers on the fact that it is actually pretty interesting time to throw some bait in the water if you want.” – Zillow Group (Z) CEO Rich Barton

“…quite frankly, at – on our retail lots, we had an actually very good week the last week of April. As the situation starts to turn around and we’re able to sell more cars, we certainly will.” – Avis Budget (CAR) CEO Joe Ferraro

“With sales and service beginning to recover from the lows we experienced at the start of April, we’re starting to recall back some of our furloughed employees in the U.S. and anticipate being able to add back approximately 500 U.S. employees by June.” – Group 1 Automotive (GPI) CEO Earl Hesterberg

“So we are seeing that uptick in retail, and we it’s progressive week to week. So if you look at the one April, it was lower, but it has progressed through even last week, and we see that retail increase.” – Malibu Boats (MBUU) CEO Jack D. Springe

But when business was down 90%, -80% looks good

“Week-to-week comparisons showed a third consecutive increase in room demand, which provides further hope that early-April was the performance bottom. TSA checkpoint numbers, up for the second week in a row, aligned with this rise in hotel guest activity, which still remains incredibly low in the big picture. Overall, these last few weeks can be filed under the ‘less bad’ category ” – STR Senior VP of Lodging Insights Jan Freitag

“We’re also seeing good booking activity in June and July. In June, we’re seeing booking activity in the 13% to 15% range in July, it’s significantly higher.” – Host Hotels & Resorts (HST) CEO James F Risoleo

“In addition, we are starting to see double-digit increases in digital traffic and booking activity across all segments. Global occupancy levels have gone from a low point of 13% to 23% currently. Assuming we start to see mobility and we don’t have a significant recurrence, demand should slowly rebuild in the third quarter.” – Hilton (HLT) CEO Chris Nassetta

“We are starting to see improvements in our sales with global same-restaurant sales being down approximately 10% for the week ended April 26 from down approximately 30% the last week of March.” – Wendy’s (WEN) CEO Todd Penegor

The recovery will depend heavily on whether or not there is a second wave

…”hopefully, we will not have a second wave but…requiring to go back to sheltering place…would be the largest risk that we’re seeing because…the factories will be shut down, the demand would be low…That I see as the biggest risk.” – Microchip (MCHP) CEO Steve Sanghi

“I fear 2Ws. W number one is second W is the second wave…If I look to the economic consequences of all that, clearly even without the two Ws, I think we have the most unpreceded economic crisis that we have seen in peacetime, and the damage that is inflicting in our economies around the world is really causing damage to families, to jobs, to the capacity to bounce back, and we simply have no real good sense of how badly economies are affected” – European Central Bank (ECB) President Christine Lagarde

Most people expect that things wont really get back to normal until we have a vaccine

“…at the end of the day, for most people that would mean, they are waiting for the vaccine to feel really comfortable again. And we don’t know when that will be delivered” – Jones Lang LaSalle (JLL) CEO Christian Ulbrich

“…the COVID pandemic crisis will have an end date. Now the end date will be when there is a therapeutic and maybe even a vaccine” – Vornado Realty Trust (VNO) CEO Steven Roth

There may be 18 months of ebbs and flows

“What they see is this being at least 18 months of ebb and flows, meaning that you’re going to have spikes. You’re going to have a period of stabilization. You’re going to have periods of deceleration in the virus growth. You’re going to have lockdowns. You’re going to have spikes again. So, it’s this kind of constant periods of stabilization with spikes, lockdowns, spikes, lockdowns. The good thing is there is definitely a finite end to this thing. In 12 to 18 months, we will have a vaccine, and testing is getting better and better so that’s the upside case. The most likely scenario case of 18 months of stabilization and with periods of lockdowns and spikes and virus acceleration. But there’s a finite end to this.” – ONE Championship CEO Chatri Sityodtong

But there’s a strong urge to return to regular life (even if risky)

“…every medical scientist in the world is working 24 hours a day on this problem, and hopefully there will be a medical solution at some finite period. In between, when there is still risk of infection and there is still – there will be – we will just crawl back to regular behavior. And regular behavior will be disrupted. The subways are going to be disrupted. Baseball is going to be disrupted. So I can’t predict what’s going to happen, but I do know that in some finite period of time, we will very quickly revert back like a rubber band back to normal.” – Vornado Realty Trust (VNO) CEO Steven Roth

There is clearly pent-up demand

“There is clearly pent-up demand for activity. If you look at what’s going on in Beijing and Shanghai, the go back to work and resume production campaign that has been launched, there is a lot of activity.” – Wynn Resorts (WYNN) CEO Matt Maddox

“I think that there will be a – when this opens up and the population, which has been shut down, they want to go out, they want to shop, they want to go to restaurants, they want to have their life back. So I think this is not as dire as some of the commentaries I’ve read.” – Vornado Realty Trust (VNO) CEO Steven Roth

Beyond the virus, how long will it take to recover from the sharpest contraction that we’ve ever seen?

“…we’re living through the most severe contraction in activity and surge in unemployment that we’ve seen in our lifetimes. You know, and it’s not a typical downturn.” – Federal Reserve Vice Chairman Richard Clarida

“…in understanding that with 33 million people I think already lost jobs in US alone, I don’t know how many around the world. These people are not going to be buying cars and refrigerators and other stuff that really would have our product.” – Microchip (MCHP) CEO Steve Sanghi


GM China posted sales gains in April

“Following the strongest impact in February, the industry started to pick up in March and GM China sales posted gains in April year-over-year” – General Motors (GM) CEO Mary Barra

But Wyndham’s hotel occupancy is still in the mid-20s

“In China, we now have over 85% of our system back open and we are seeing gradual signs of recovery with recent occupancy levels running in the mid-20s up from low single digits back in March. In Southeast Asia, we are running occupancy in the low-30s and Europe, the Middle East and Canada are all running occupancy in the low-20s, while Latin America is running in the mid-teens.” – Wyndham Hotels & Resorts (WH) CFO Michele Allen

Steel demand has rebounded

“In China, we have seen demand levels rebound in China. And it’s not just auto, clearly we have seen the same in terms of industrial production. For example, we have seen the coal sector also consume similar levels of power. We’ve also seen crude steel production and crude steel demand also move up to a much higher levels than what we saw in February and March and the month of April.” – ArcelorMittal (MT) CEO Lakshmi Mittal

Developers are looking for new opportunities

“What you see in China at the moment, that there is a lot of interest to restart activities. The developers are coming back and they are looking for advice for new developments, because there’s a lot of encouragement by the government to start new developments.” – Jones Lang LaSalle (JLL) CEO Christian Ulbrich

Shanghai Disneyland will be limited to 30% of capacity

“We will take a phased approach with limits on attendance using an advanced reservation and entry system, controlled guest density using social distancing and strict government required health and prevention procedures. These include the use of masks, temperature screening…In terms of Shanghai Disney Resort our capacity tends to be 80,000 a day. The government is putting a limit on that. Roughly they want us to be at about 30% of that. So it’s 24,000 a day.” – Disney (DIS) CEO Bob Chapek


Individual investors are very pessimistic

“The level of pessimism among individual investors about the short-term direction of the stock market is at its highest level in more than seven years. The latest AAII Sentiment Survey also shows a drop in optimism and a decline in neutral sentiment.” – American Association of Individual Investors (AAII) survey

Private markets are still trying to find price equilibrium

“On the capital markets side, as I said earlier, there is still the need to find the new kind of matching price between buyers and sellers. It’s not that nothing is happening. Obviously, there are transactions happening, but at a much lower rate than we would have seen before the COVID crisis. And so, that will take time until people have the confidence that they think that this is the right price to buy or to sell.” – Jones Lang LaSalle (JLL) CEO Christian Ulbrich

Vornado’s CEO thinks it’s time to buy

“As cycles go, all of a sudden, it is now surely a better time to buy than to sell. The next few years should be great advantages for investors. So you might say I am ringing the bell.” – Vornado Realty Trust (VNO) CEO Steven Roth


Consumers are planning vacations

“The leisure volume is the one that’s starting to come back sooner as these shelter- in-place orders get lifted, as we’ve seen this past weekend.” – Avis Budget (CAR) CEO Joe Ferraro

“As observed in China and other parts of Asia that are several weeks ahead of the United States. The recovery thus far has been like – been led by domestic leisure stay and drive to destinations.” – Host Hotels & Resorts (HST) CEO James F Risoleo

And planning to move (or at least fantasizing about it)

“Some metrics at the top of the funnel…are more than fully recovered – and are up double-digit percentages year-over-year indicating to us even higher demand to move or at least fantasize about moving than before.” – Zillow Group (Z) CEO Rich Barton

“As we work closely with our customers through the mortgage and closing process, they constantly comment that recent events have only increased their desire to relocate their families to the comfort, space and security that single-family homes offer.” – LGI Homes (LGIH) CEO Eric Lipar

But housing demand could look very different than it did.  Could de-urbanization be a trend?

“We are all rethinking how we live, where we live, the structure of where we live. I am right now in my bedroom, because I have three kids on Zoom school right now at all over the house…I never saw the need for an office. While I see the need now, all of a sudden I have the need…There are people certainly don’t live in the city anymore. They may want to live somewhere else.” – Zillow Group (Z) CEO Rich Barton

This pandemic could finally unstick the housing market

“…we are going to see the great un-sticking of the housing market. The housing market has been stuck since the global financial crisis in this weird artificially low volume liquidity state and it just feels to me like this is going to be the thing that gets it unstuck.” – Zillow Group (Z) CEO Rich Barton

It could also majorly accelerate the rebalancing of the retail industry

“…there are maybe 2 to 3 times as many square feet of retail space in the country as there should be. So I think, as I do the math, there’s 50 square feet per capita, or I think the number should be like less than 20. So – and then I said that it would take, I don’t know, 15 years for that excess space to work off and evaporate. So in a perverse way, and maybe this pandemic is going to get us into alignment much more quickly. So we’ll see.” – Vornado Realty Trust (VNO) CEO Steven Roth

And media too

“I believe that the media landscape has changed forever, starting in the middle of March. Every channel and every participant is in a different position today versus a few months ago because of one dramatic shift: linear TV’s shelf life has shortened and as viewers have moved en masse to CTV. The biggest loser in all this is traditional linear television, and CTV is without a doubt, biggest winner.” – The Trade Desk (TTD) CEO Jeff Green

“It is our view that the traditional TV upfronts will be significantly are being disrupted. I mean the live pictures will be going on now. Most TV networks have flipped that to a virtual presentation. Programming production is paused. A lot of fall programming will not be available.” – Roku (ROKU)  Senior VP & General Manager Scott Rosenberg


Data centers are booming: 90% of the world’s data has been created in the last 2 years!

“I don’t currently expect the data center to weaken and I think 90% of the world data has been created in the last two years. So I just think data center market is very, very strong” – Microchip (MCHP) CEO Steve Sanghi

Commercial real estate brokers say that work from home is not a long term trend (but what else would they say?)

“In a crisis like this to work from home is easy because the alternative is not to work at all. But if we are back to a very normal environment, then you will see the difference in productivity. And I’m not talking about technology…the interaction with your colleagues, the inspiration you’re getting when you’re working in an office, is driving better results compared to people sitting at home….But I don’t expect a massive, massive shift from people in an office to working from home in the future. Everybody has seen now that it can work. And that it is helpful, but they also have learned very immediately, the negative aspects from working from home.”  – Jones Lang LaSalle (JLL) CEO Christian Ulbrich

“While we are now working from home, we do not believe working from home will become a trend that will impair office demand and property values. The socialization and collaboration of the traditional office is the winning ticket.” – Vornado Realty Trust (VNO) CEO Steven Roth

The gaming industry fairs well in downturns

“…you can look at least back to the past two market dislocations in 2001 and 2008 for at least some directional indication of how gaming has performed in challenging economic times. And what we’ve seen is the consumer recreational spending in the US for example was fairly resilient during those downturns. And if you hone in a little more specifically on entertainment, the global gaming industry – gaming industry fared extremely well and actually grew low-to-mid single-digits in these time periods, whereas broader consumer recreational spending declined low-single-digits, and we think that’s driven by the low cost per hour of gaming, which makes it a great value versus other forms of entertainment.” – Activision Blizzard (ATVI) CFO Dennis Durkin 


The air industry is experiencing devastation; it’s worse than 9/11

“No adjectives can adequately describe the pandemic’s cataclysmic effect upon our industry nor can numbers fully quantify the extent of the financial devastation the global airline industry is experiencing and will continue to experience for some time…We’re now living through the darkest period ever in the history of commercial aviation, significantly worse than the aftermath of 9/11, SARS, or the 2008 global financial crisis…And there is little doubt that we are not yet out of the trough. IATA is now forecasting that the industry will lose CAD450 billion or US$314 billion in passenger revenue in 2020, a 55% decline from 2019.” – Air Canada (ACDVF) CEO Calin Rovinescu

But planes may actually be safer than most people think

“…the public confuses this because it looks like a confined space. But the air on an airplane in the fuselage and in the flight deck gets replaced between every two and three minutes. And the air that recirculates is filtered in that same cycle through a HEPA filter, which is the equivalent of the filter in many ICUs. So, believe it or not, that environment is an amazingly safe environment, with respect to aerosol impacts. And with masks, you’re correct. And that prevents that – that proximity question. So, it really is a much safer environment than most of the public understands.” – Boeing (BA) CEO Dave Calhoun 

Vehicle manufacturers and their supply chains are suffering too

“…we expect an even greater impact in Q2 because of the production stoppage, a phased restart and what we believe will be lower market demand.” – General Motors (GM) CEO Mary Barra

“Many of these companies have robust business models, but they just don’t have the liquidity to cope with a longer shutdown” – Daimler (DDAIF) CEO Ola Kallenius.

“Suppliers invested in manufacturing facilities for large volumes. Now there are depreciations, while the overhead costs remain and they can’t be reduced overnight” – Volkswagen (VLKAF) Board member for procurement Stefan Sommer

But inventory levels are very low

“…our inventory in the US dropped down to something like [Indecipherable] something like 470,000 units, something like that. And I have not seen inventory levels that low for – well, I can’t remember when” – Fiat Chrysler (FCAU) CEO Michael Manley

Materials & Energy:

The oversupply in oil is unprecedented

“It’s much more an unprecedented situation because in ‘15 we were facing inventories growing from 58 days to 70 days.Today we have jumped to 90 days. And this is of course the most difficult part for all of us is that not only we could face shortage of inventories but more fundamentally that means, that it will take time before to be able to decreases these inventories,” – Total (TOT) CEO Patrick Pouyanne

The current challenges are immense

“The current challenges our industry is facing are immense. We are experiencing an extraordinary confluence of supply and demand shocks, the likes of which we have never seen. The impact to global oil demand, in particular, is unprecedented with a global health crisis essentially shutting down U.S. and global economic activity.While market forces are currently at work and global oil supply is headed in the right direction, the only real answer to the current commodity crisis is for the world to get healthy and back to work again…once demand does recover, capital discipline, especially from the U.S. will be necessary for any sustained price improvement.” – Marathon Oil (MRO) CEO Lee Tillman

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