The Transcript 07.20.20

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Succinct Summary: The economy rebounded strongly in May and June with some important economic figures, like spending on debit and credit cards, being only down low single digits from last year. But the recovery is starting to stall out as infections rise and now everyone is planning for Covid to last longer than initially expected.  The figures are being distorted by massive government stimulus though.  And it’s not clear what happens when that stimulus runs out even as markets seem to be betting on more stimulus.

Macro Outlook:

The economy rebounded in May and June

“A variety of data suggest the economy bottomed out in April and rebounded in May and June. Payroll employment rebounded strongly in May and June. Retail sales jumped 18 percent in May, exceeding market expectations, and real personal consumption expenditures (PCE) are estimated to have increased 8 percent. Consumer sentiment improved in May and June. And both the manufacturing and nonmanufacturing Institute for Supply Management indexes jumped into expansionary territory last month.” – US Federal Reserve Governor Lael Brainard

“Debit and credit sales volume while overall still down has consistently trended upward since the trough in the second week of April to down just 4% year-on-year in the last two weeks of June….April saw the lowest level of loan and lease origination since the financial crisis, but activity rebounded sharply in May and June, and in fact, June ended up the best month for auto originations in our history. And in Home Lending, retail purchase applications after reaching a low in April recovered to well about pre-COVID levels in June, due to a strong and broad market recovery” – JPMorgan Chase (JPM) CEO Jamie Dimon

“We have substantial new bookings and we even have new to cruise bookings, which given the current state of the environment in the world is really a good testament to how strong a vacation experience and value cruising really is”Carnival (CCL) CEO Arnold Donald

“In consumer, based on U.S. Nielsen data, we saw [elective procedures] decline in April by 10%. However, June data suggests those categories declined, but with an improving trend falling just 2% to 3%.” – Johnson & Johnson (JNJ) CEO Alex Gorsky

“As states began to reopen in the past couple months, we saw an improvement in spending levels as customers became more active buying fuel and spending on home projects and eating out…Consumer spending activity has vastly improved since April. Spending by Bank of America consumers during 2019 was a total of $3 trillion, so it’s a sizable sample of U.S. activity. For the month of April that spending was down 26% compared to April of 2019. However, for the month of June that spending was relatively flat to 2019. And so far through the first couple of weeks of July, we’re seeing that total spending actually be above what it was last year.”- Bank of America (BAC) CEO Brian Moynihan

“Since demand bottomed in mid-April at less than 5% of our normal traffic, we’ve seen a small but welcome uptick in passenger volume, being driven almost entirely by domestic leisure travelers or those flying for essential reasons.” – Delta Air Lines (DAL) CEO Ed Bastian

But the recovery is slowing down as infections rise

“More recently, we’ve seen the improvement in overall sales growth across the country flatten out, notably in both states with increasing cases and states with decreasing cases.” – JPMorgan Chase (JPM) CEO Jamie Dimon

“…with an increase in viruses and this uncertainty persisting, I think you’ll see a flattening on that economic pickup and that will slow the progress we make economically from here, So we continue to advise clients to be thoughtful and cautious about that” – Goldman Sachs (GS) CEO David Solomon

“We’ve seen demand growth flattened recently with the rise in COVID-19 cases.” – Delta Air Lines (DAL) CEO Ed Bastian

“We’ve seen that sales growth level off in the wake of the latest rise in infections, and has remained relatively stable in that area.” – Delta Air Lines (DAL) CFO Paul Jacobson

“…we didn’t see any slowdown in momentum all the way through the end of the second quarter. And that was as a number of states and cities around the country were reopening dine-in. But even with that said, those that were reopening were only reopening at 50% and at most 75% capacity. And as we’re all aware some of those things are actually being reversed as we speak and as we another spike unfortunately in COVID-19 cases” – Domino’s Pizza (DPZ)  CEO Ritch Allison

“It is less clear how that increase in infections will affect the pace of reopening. I would characterize the tone in the field to be one of cautious optimism for the third quarter of 2020.” – Fastenal (FAST) CEO Daniel L. Florness

Businesses are beginning to plan for this to last much longer than initially expected

“I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us, and it’s a rosy path ahead. We don’t want people leaving the call simply thinking the world is a great place and it’s a V-shaped recovery…In some areas, the cases are still rising and some areas are rising less. Economic predictions have been revised and the forward path has deteriorated from last quarter. Baseline projections now extend the length of the recessionary environment into 2022 deep into 2022” – Bank of America (BAC) CEO Brian Moynihan

“Given the increased uncertainty of the macroeconomic outlook…we’ve put more meaningful weight on the downside scenario this quarter. now that we’re looking at a more protracted downturn, we’re reserved for a much more broad-based impact across sectors.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“I think that people need to be cautious because the economic repercussions of this will play out over the medium term. And this is not going to be in my opinion, a quick resolution.” – Goldman Sachs (GS) CEO David Solomon

“We are in a completely unpredictable environment for which the models have no cycles to point to. The pandemic has a grip on the economy and it doesn’t seem likely to loosen until vaccines are widely available” – Citigroup (C) CEO Michael Corbat

“Our view of the length and severity of the economic downturn has deteriorated considerably” – Wells Fargo (WFC) CEO Charles Scharf.

“Based on the actions we’ve taken to date, our fleet will not return to 2020 second quarter capacity levels until 2022, at the earliest” – Carnival (CCL) CEO Arnold Donald

“We’re also very clear that you’re going to have a much murkier economic environment going forward than you had in May and June and that — you have to be prepared. You’re going to have a lot of ins and outs. People get scared about COVID. They’re going to get scared about the economy, small businesses, the companies, bankruptcies, emerging markets. So, it is just going to be murky, which is why, if you look at the base case, adverse and extreme adverse case, they’re all possible”-  JPMorgan Chase (JPM) CEO Jamie Dimon

Government stimulus has softened the impact of a major blow to the economy but what happens when it runs out?

“This is not a normal recession… in the normal recession, unemployment goes up, delinquencies go up, charges go up, home prices go down. None of that’s true here. Incomes go down, savings go down. Savings are up, incomes are up, home prices are up. So, you will see the effect of this recession. You’re not going to see it right away because of all the stimulus and the fact, 60% or 70% of the unemployed are making more money than they were making when they were working. So, it’s just very peculiar times.” – JP Morgan (JPM) CEO Jamie Dimon

“…there’s a fourth factor I think will be more important going forward, which is disposable income in the economy and that’s related to unemployment and that’s related to how much money that governments are putting back into the economy. And that is – it hasn’t impacted the U.S yet. It is impacting some of the other countries around the world, as the governments don’t have the muscle to put so much money back into the economy.” – PepsiCo (PEP) CEO Ramon Laguarta

“Earlier-stage delinquencies are also improving given the additional liquidity and the impact of relief efforts” – Citigroup (C) CFO Mark Mason

The moment of truth is approaching quickly

“The visibility on what we’re dealing with is very, very low, because we’re not seeing right now what you would typically expect to see, given a recession…May and June will prove to be the easy bumps in terms of its recovery. And now we’re really hitting the moment of truth, I think in the months ahead.” – JP Morgan (JPM) CFO Jennifer Piepszak

“…there is still significant uncertainty around the timing of the economic recovery and how customers will perform once these relief and stimulus programs start to roll off” – Citigroup (C) CFO Mark Mason

“And while government stimulus programs provided a safety net for many, they are scheduled to run off, raising the possibility of more economic hardship ahead.” – Wells Fargo (WFC) CEO Charlie Scharf

“If a lot of companies are not able to survive … you’ll have this million-dollar question of how do you deal with these ‘zombie companies. Do you keep putting money … using public finances to support companies or do you let creative destruction happen a la Schumpeter? This is going to be a real challenge particularly in the SME space around the world, I suspect this will be a big, big challenge next year” – DBS Group CEO Piyush Gupta

Markets are betting on more stimulus

“Stimulus round 2 two came on the table. It seems to be bipartisan, and so it’s likely we’re going to get more from that. I think those things give us – I won’t say comfort, but give us, I think, a good view based on what we’ve been through in terms of the consumer, in particular, to be able to withstand some of these variations in contagion rates as we go forward.” – Citigroup (C) CEO Mike Corbat

There’s a big disconnect between markets and the current reality.  (But remember markets discount the future)

“…one of the things that people struggle with today is the disconnect in some ways between where the market is in some ways and actually where we are in terms of this health pandemic and the number of questions that are out there” – Citigroup (C) CEO Mike Corbat

The US election cycle is not playing a big role yet

“While the election is certainly something that I think will get a lot of attention over the next five months. It’s still five months away and I think that the healthcare crisis and the economic crisis as a result of the healthcare crisis is at a much bigger impact on engagement levels than the election, as to how the election starts to impact decision-making. I can see it in some ways being an accelerant and in some ways, potentially creating uncertainty and slowing things down. But I don’t think the election cycle is yet playing a big role in client engagement.” – Goldman Sachs (GS) CEO David Solomon


Economic recovery in very different stages across regions

“…the global economy, the global health pandemic is not all in the same place. We didn’t enter it at the same time. We didn’t have the same response either from a health or from a fiscal or monetary perspective. And therefore, we’re going to see exit and exit rates different, and we’re going to actually see the numbers in terms of resurgence of COVID in some areas in different ways. I would describe right now that broadly in the world, we are somewhere between containment and stabilization.” – Citigroup (C) CEO Mike Corbat

China has rebounded strongly

“We thought with the Chinese construction market, obviously what we’re seeing a quarter two is partly related to the pent-up demands in China, mostly in heavy restrictions during quarter one…Chinese payers have been acting strongly. Not at least the wheel loaders for a long time, but also in excavators.So there we are very pleased with the development of volumes in our organization” – AB Volvo (VOLAF) CEO Martin Lundstedt

“Aluminum demand is starting to show some signs of recovery based on monthly data for some key end-use sectors, particularly in China. For example, Chinese passenger vehicle production was up more than 11% in both May and June when compared with the same months last year. The most recent data on construction activities in China are also better than the monthly levels in May of 2019.” – Alcoa (AA) CEO Roy C. Harvey 


Banks are significantly increasing loan loss provisions and reserves

“…we’re prepared and have reserved for something worse than the base case.” – JPMorgan Chase (JPM) CEO Jamie Dimon

“…in the first quarter, when we were really looking at a deep but short-lived downturn, we were really very much focused on the most impacted sectors. And now that we’re looking at a more protracted downturn, we’re reserved for a much more broad-based impact across sectors.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“The increase in the reserve was related to changes in risk ratings and deterioration in economic conditions, driven by the impact of COVID-19 on the U.S. and global economies and our expectation that credit losses and non-performing assets will increase from current levels. The increase in the allowance for credit losses considered our best estimate of the impact of slower economic growth and elevated unemployment, partially offset by the benefits of government stimulus programs as of June 30th.” – US Bancorp (USB) CFO Terrance R. Dolan

But the wave of credit losses hasn’t hit yet

“Credit loss rates generally trended upward this quarter as a result of the macroeconomic slowdown, although…it is still too early to see a pronounced impact from COVID-19 on our net credit losses. 90-plus-day delinquency rates improved in the U.S. despite the lower balances as reduced spending, combined with the benefit of significant government stimulus and our own customer relief efforts, has generated liquidity, which has been used to pay down debt, even into the later delinquency buckets.” – Citigroup (C) CFO Mark Mason

“Consumers have benefited from direct stimulus and deferrals on loan payments from banks, such that delinquencies are far lower than what would be predicted in an 11% unemployment scenario. Consumers have more money in their accounts” – Bank of America (BAC) CEO Brian Moynihan

“As the economic environment brought on by COVID negatively impacts our customers and clients, it will filter through to our results, primarily in the form of outsized credit losses and compressed net interest margins” – Wells Fargo (WFC) CEO Charlie Scharf

M&A activity is down as CEO confidence sinks

“And we’ve always said this, the number one thing that drives M&A activity is CEO confidence. And there’s no question in this environment given the high level of uncertainty, it’s much harder to see those same levels of confidence as a result of that as we highlighted in our opening commentary that M&A volume – M&A announced M&A transactions in the second quarter were down 75%. And so as you would expect, we saw withdrawal of activity.” – Goldman Sachs (GS) CEO David Solomon

..But it may pick up in 2 to 4 quarters

“We have seen over the course of the last six weeks or so as economies around the world have started to reopen, or reengagement by clients and CEOs in their forward strategic view. I would say that the dialogue levels right now are particularly robust. I don’t believe that we’ll see short-term activity but I would expect over the course of the next 2 to 4 quarters, those activity levels will build, as we have a clear understanding as to the overall direction of the healthcare issue that we all face, and the overall economic impact that comes out of this.” – Goldman Sachs (GS) CEO David Solomon

“A lot of M&A deals now getting signed up which is interesting that sets up you know the pipeline for next year we won’t see those revenues in the back half of this year, but we’re going to see them next year and you know you know somebody said recently, M&A doesn’t go away. It just takes it takes a hiatus in times of absolute uncertainty because CEOs don’t want to commit as the economy continues to strengthen and as hopefully we get past the worst of COVID although the outbreaks in the south and western parts of this country a troubling. M&A will come back more strongly” – Morgan Stanley (MS) CEO James Gorman

Actual uptake of Fed Credit facilities has been low

“Since the announcements and rollouts of the various facilities, we have seen a significant improvement in the pricing and availability of credit. Somewhat paradoxically, despite the clear effect that these facilities have had on the availability of credit, actual take-up of the facilities has been relatively low.” – New York Fed President John C. Williams


Reality TV has moved to streaming services 

“The big motivation to invest in reality and unscripted is not the cost savings of production, but the love that people have for this programming and how important it becomes in people’s lives. So if we’re trying to be more and more your go-to destination for entertainment, not to ignore an area of programming that kind of dominates broadcast, it would be silly of us. So we’ve been dabbling in unscripted reality. We kind of got very, very accomplished in the documentary space and then have moved that over and – to expand that to unscripted. And then now the competition space, which – this is only our – it was only our third or fourth show really in the competition space that we’ve dabbled into. But the motivation really is consumer love for the programming, not the marginal cost savings.” – Netflix (NFLX) CEO Reed Hastings

Consumers are adapting well to the environment

“It appears consumers are demonstrating they’re quickly adapting to the environment by changing shopping habits and moving back and forth between physical and online as needed and are doing the same in delivery and takeout restaurants as restrictions change” – Bank of America (BAC) CEO Brian Moynihan


Demand for semiconductors remains strong

“Regarding changes to the U.S. export rules that went into effect at the end of June, we expect minimal impact to our business. Regarding the impact of recent U.S. restrictions, it’s difficult to determine how near-term dynamics will evolve, but when you look at the end market demand and the growing digital economy with secular growth drivers like 5G, AI and high-performance compute, the demand for semiconductors for these products will continue and it will fuel future innovations. Wafers and products to support this technology and innovation will be produced somewhere in the world, and it will certainly require advanced lithography.” – ASML Holding (ASML) CEO Peter Wennink

Inventory buildup on the way

“Let me answer that. The inventory level of our fabless customers that we track exited first quarter above the seasonal level. We expect a further increase in second quarter, and then stay at the high level in the second half as the supply chain is making efforts to ensure supply chain security and our customers are in high anticipation and preparing for new 5G smartphone product launches in the second half of this year. We cannot rule out the possibility of an inventory correction sometime down the road. We observe the supply chain active, making efforts to ensure the securities, and active preparation for 5G smartphone launches. We will just have to wait and see how the sell-through goes.” – Taiwan Semiconductor Manufacturing (TSM) CEO Dr. C. C. Wei


Air travel is still way below normal

“We’re expecting our overall revenue for the September quarter will be only 20% to 25% of what we saw last summer. And we’ve seen demand growth flattened recently with the rise in COVID-19 cases. We’re watching trends closely and have pared back our capacity plans for August. ” – Delta Air Lines (DAL) CEO Ed Bastian


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