The Newsletter
The Transcript 06.22.20
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Succinct Summary: Demand continues to bounce back but there are signs that a second wave of Covid may be bubbling up.
Macro Outlook:
Demand continues to bounce back
“We’ve been pleasantly surprised how demand has come back…We’re cautiously optimistic as we see demand resuming.” – General Motors (GM) CEO Mary Barra
“Recently, some indicators have pointed to a stabilization and in some areas of modest rebound in economic activity.” – US Federal Reserve Chair Jerome Powell
“…what we’re now looking at is while us and the rest of the industry, the comp sales numbers are encouraging and that they’re getting – you’re showing a real improvement there, the traffic numbers in the industry are still down” – McDonald’s (MCD) CEO Chris Kempczinski
“Our parcel business is up strong double digits right now. We are seeing the e-commerce demand flow through to our rail business.” – Union Pacific (UNP) CEO Lance Fritz
“Since hitting a trough in early April, we have seen our sales progressively improve, as stores reopen, occupancy restrictions start to ease and customers begin to reengage in car buying. Looking at more recent performance, we’re encouraged by the trends we experienced in late May and early June. Web traffic is up year-over-year and reaching new highs” – CarMax (KMX) CEO Bill Nash
“The reality is we are getting bookings for (2021), and it’s at a great pace”- Carnival (CCL) CEO Arnold Donald
But uncertainty about the future is still very high
“There is extraordinary uncertainty about both the depth and the duration of the economic downturn. Because the course of the economy will depend on the course of the virus and the public health policies put in place to mitigate and contain it, there is an unusually wide range of scenarios for the evolution of the economy that could plausibly play out over the next several years” – US Federal Reserve Vice-Chair Richard Clarida
The drop in Q2 GDP may have been the most severe on record
“The decline in real gross domestic product (GDP) this quarter is likely to be the most severe on record.” – US Federal Reserve Chair Jerome Powell
“The data we’re seeing suggests that the de facto lockdown in the U.S. has continued for longer than we had anticipated back in April, at the time of our last set of forecasts, even as government restrictions on mobility have been rolled back. This is likely to mean the contraction in the second quarter will be deeper than we had anticipated previously, and that the pace of recuperation, may be slower.” – IMF Director of the Communications Department Gerry Rice
A huge number of people are still unemployed
“During the pandemic, more than 80 million people in the U.S. lost their jobs and applied for unemployment benefits and/or food assistance. Many more families are struggling to put food on the table today” – The Kroger (KR) CEO Rodney McMullen
Travel restrictions will probably remain in place for a while
“I don’t think there’s going to be an immediate pullback for those kinds of [travel] restrictions…I would hope to get to some degree of real normality within a year or so. But I don’t think it’s this winter or fall,” – US National Institute of Allergy and Infectious Diseases Director Dr. Anthony Fauci
And there are signs that a second wave may be building
“China, I think is an interesting country. It’s up and down. As you’ve seen, some cities are getting kind of a second wave of COVID and are shutting down and reopening.” – McDonald’s (MCD) CEO Chris Kempczinski
“These are outbreaks. We’re seeing doubling times now falling under 10 days. These are on the cusp of getting out of control. I think these states still have a week or two to take actions to try to get these under control” – Food and Drug Administration Former Ex-Commissioner Dr. Scott Gottlieb
International:
Government assistance programs have supported economies around the world
“What you do have though is a wide range by country in government assistance programs and social programs that help the companies and their employees when there are closures. So a lot of the markets in Europe even when they closed, the employees at least were receiving a high percentage of their normal pay from government and social assistance programs. So there wasn’t the same level of concern for how employees were going to survive as there may have been even in the U.S. at the beginning. So in a lot of those European markets, our businesses have been able to withstand a couple of months of closures and not have severe financial impacts.” – McDonald’s (MCD) CEO Chris Kempczinski
Europeans investors are cool on London
“The real trend is a real reduction in European buyers. It used to be about 4% to 5% for us and it has dropped down to 1%. Brexit effectively has meant that London is not seen as a place where Europeans want to invest at the moment.” – Berkeley Group (BKG) CEO Rob Perrins
IMF lending to Sub-Saharan countries has increased ten-fold during the crisis
“In an average year our lending to Sub-Saharan Africa would be about $1 billion in an average year. As I just mentioned, so far this year, and actually within the last just several months, we have committed $10 billion to Sub-Saharan Africa, so that’s ten times the average lending to Sub-Saharan Africa, average annual lending to Sub-Saharan Africa this year alone, and we are half-way through the year, so there is more to come.” – IMF Director of the Communications Department Gerry Rice
Financials:
Coronavirus could accelerate the demise of cash
“A lot of people have been wrong predicting the death of cash, but I definitely feel we are going to see an acceleration in the demise of cash. We already see 60% of our users would prefer not to handle cash” – PayPal (PYPL) CEO Daniel Schulman
The SEC is warning of risks in the high level of individual investors trading
“Our favorite kind of retail investor is your long-term retail investor who builds their wealth over time through investing. There is risk in being a short-term, market-timing participant, and it does make me nervous. People are perfectly able to do it. We let them do it. But just remember, there is risk in short-term market movements.” – Securities and Exchange Commission (SEC) Jay Clayton
Individual investors are increasingly bearish
“Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 9.7 percentage points to 47.8%. Bearish sentiment is above its historical average of 30.5% for the 17th consecutive week. Optimism is back at an unusually low level (more than one standard deviation below its historical average). Pessimism is back at an unusually high level” – American Association of Individual Investors (AAII) Investor Sentiment Survey
Consumer:
Consumers are not stocking up on groceries at the same levels as in March/April
“Customers remain focused on health and safety and are still stocking up, but to a lesser degree than during the shutdowns. We are also starting to see a return to some splurge an impulse buying. Customers are still cooking more at home even with the eating restrictions and identical sales so far in the second quarter are trending in the mid-teens.” – The Kroger (KR) CEO Rodney McMullen
“Although we haven’t seen a dramatic shift back into that early pantry loading, we are trying to do the best we can to be ready for whatever may unfold here in the next couple months.” – Campbell Soup (CPB) CEO Mark Clouse
Housing has been a big beneficiary of Covid
“I do think there is this notion around making sure that your home in this current situation of COVID is – I’ll say somewhat fortified in the sense that is it. You need to make sure that the air conditioning is appropriate. The air filtrations appropriate, that you – the last thing you want to have happen during this pandemic is something within your home to break and then requiring someone to be in your homes. So, I think there’s been this uber focus back into the home and invest in the home… think people are shifting more into their home, because now not only was it a place to live, now it’s a place to work. So, I think disproportionately people are looking at that environment and saying, hey, I want to make this as comfortable as possible.” – Lowe’s (LOW) CFO Dave Denton
Consumer wallet share has shifted
“…you’ve also seen folks who normally would be allocating a portion of their income to, let’s say, travel and entertainment, a lot of that income has been freed up and disproportionately that’s gone into – that share of wallet has gone into the home space” – Lowe’s (LOW) CFO Dave Denton
Cruising will probably take a while to get back
“Every destination is not going to (reopen) at the same time, and so at the beginning there will be fewer ships by a lot than there were when we shutdown. It’s going to take us some time to get back to the level of cruising where we were before. Cruise at its essence is social gathering, so when society is starting to social gather again, then we can begin to talk about cruise” – Carnival (CCL) CEO Arnold Donald
But when it does rebound demand may outstrip supply
“When we start sailing again, more than likely because there is going to be fewer ships out, and people are … anxious to cruise, there is going to be more demand than supply initially” – Carnival (CCL) CEO Arnold Donald
Dine-in and drive through are very important
“I think, no surprise; the greater your exposure to dine-in and the lower your drive-through development from a competitor standpoint, the more challenged you’re going to be. And certainly with an IEO, the dine-in casual dine sector, I think, is going to be in at least the short to medium term under a lot of pressure. And if you don’t have a very well-developed drive-through component, I think that’s also going to be a challenged sector for a period of time here.” – McDonald’s (MCD) CEO Chris Kempczinski
Kroger: It takes 3 years to profitability with customers who switch to online
“…when a customer first switches to online, it typically takes three or four years before that customers profitability is the same as when they shop in the store. But what we find is we get a significantly higher share of that customer’s total household spend. And there isn’t anything that we’ve seen that wouldn’t cause us to believe that the new e-commerce shopper doesn’t feel that way and a lot of those customers are telling us they intend to continue to shop more e-commerce than before.” – The Kroger (KR) CEO Rodney McMullen
Technology:
AI development has shifted more to NLP
“Three years ago, we would have been talking about image detection and image categorization, and that would have been an important use of a certain overall framework. What we’re looking at right now, which is a very hot overall workload, is the focus on conversational AI and the focus on recommendator engines. Very different overall frameworks, very different models that have been built to overall process, natural language understanding. And the combination of these two together represent more than 50% of the type loads and workloads that have been done.” – NVIDIA (NVDA) CFO Colette Kress
Apple app store model is coming under fire
“Apple, please just give your developers the choice! Let us bill our own customers through our own systems, so we can help them with extensions, refunds, discounts, or whatever else our own way. It’s our business, not your business…Money grabs the headlines, but there’s a far more elemental story here. It’s about the absence of choice, and how Apple forcibly inserts themselves between your company and your customer.” – Basecamp CEO Jason Fried
“[App stores] impose requirements that increasingly say there is only one way to get on to our platform and that is to go through the gate that we ourselves have created. In some cases they create a very high price per toll – in some cases 30% of your revenue has to go to the toll keeper.” – Microsoft (MSFT) President Brad Smith
“The European Commission has opened formal antitrust investigations to assess whether Apple’s rules for app developers on the distribution of apps via the App Store violate EU competition rules.” – The European Commission
Demand for 5G is very high
“The race to 5G, I think the race is already underway, but we’re moving along here. Absolutely, there’s just this insatiable demand out there for bandwidth, as we all know. I’ll tell you, even at home, I have young children. Even having our AT&T Fiber 1-gigabit service, even for my 8-year-old, it’s not enough. So you can imagine in the wireless space, we see more and more demand. And so obviously, spectrum is going to be very important.” – AT&T (T) President Andre Fuetsch
Industrials
Load factors for airlines are improving
“Month-to-date load factor for June is running in the mid-40s, but that’s growing as the month goes on. We are looking at today’s schedule, and I think today’s load factor is booked at 50%. Of course, we have a 60% cap on flights, and that limits our load factors, so the numbers are a bit lower as compared if we had an uncapped load factor. And the benefit of the capped load factor is making certain that our customers as well as our employees are safe onboard and have space.” – Delta Air Lines (DAL) CEO Ed Bastian
International demand may be picking back up
“We’ve seen a big appetite for domestic travel.people are looking further afield than just domestic travel for 2020” – True Luxury Travel CEO Henry Morley
People are preferring to rent personal transportation when they travel
“Industry observers believe as the economy opens up personal vehicles will be the main choice of transportation. In addition, industry reports indicate that personal vehicles will be the preferred mode of transportation for vacations in the foreseeable future” – Motorcar Parts of America (MPAA) CEO Selwyn H. Joffe
And used car sales are outpacing new car sales
“We are already seeing a significant increase in used car sales versus new car sales, which indicates that consumers are electing a less expensive alternative to car replacement.” – Motorcar Parts of America (MPAA) CEO Selwyn H. Joffe
Materials & Energy:
Oil demand to remain under pressure
“Transportation fuels are projected to be under pressure during 2020 as lockdowns in various countries particularly the US, Europe, India and the Middle East reduce demand for gasoline and jet fuel, as air travel and distances travelled anticipated to significantly decline compared with a year earlier. Furthermore, decreased manufacturing activities, compared with the previous year, will limit industrial fuel requirements.” – OPEC June Monthly Oil Market Report
Real Estate:
Rent collections have been stable for some
“So far, our cash collections for the month of June on our active portfolio were 76%, up substantially from 64% in the month of May. The increase in rent collections from May to June was led by health clubs, full-service restaurants and family entertainment. In addition, the improvement between May and June primarily took place in states that were among the first to reopen. And we expect that the other highly impacted sectors will also show improved rent collections as they continue to reopen based on local government mandates.” – STORE Capital (STOR) COO Mary Fedewa
“I would say early shot of education is also going to be slower to open. So for this month, we had sort of uptick in rents from family entertainment, fitness clause, casual dining, which really sort of gave you the delta between, let’s say, May and June, which is a pretty big delt” – STORE Capital (STOR) CEO Christopher Volk
Why are housing prices are stable?
“I think, you continue to see really low supply. You’re seeing that low supply support at least maintain housing prices kind of around the nation for the most part. I would say that also again this whole notion of people now not only living at home, but working from home has disproportionately had consumers think about what’s the next investment I want to make in the home so that I can be more comfortable as I live and work there and actually support my family there, because I’m not only there by myself.” – Lowe’s (LOW) CFO Dave Denton
Rethinking the amount of office space companies need
“Maybe we don’t need all the offices that we currently have around the world” – Mondelēz (MLDZ) CEO Dirk Van de Put Mondelez
