The Transcript 07.27.20

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Succinct Summary: The economy was rebounding in May and June, but the recovery seems to have stalled out as infections have rebounded.  CEO commentary was particularly negative last week.  Business leaders are rapidly losing confidence and do not see a V-shaped recovery materializing.  There’s a sense that government stimulus appears to be the only thing propping up the economy and it’s creating distortions in unemployment and financial markets.  Still (perhaps because of this stimulus) the hot housing market suggests that consumers may not actually be in such bad shape after all–just spending on different things.

Macro Outlook:

The economy was rebounding, but activity is slowing with the surge in infections

“We had very strong bookings in place for the third quarter, at the beginning of this month. Then over the last several weeks, with the spike in Covid-19 cases, we’ve seen the bookings slow down dramatically and we’ve also seen an increase in cancellations.” – Southwest Airlines (LUV) CEO Gary Kelly

“…with persistent or accelerating infection levels in many states, we’re seeing some reversals of reopening plans, which will likely reduce the pace of future employment gains while no one knows the exact course of the U.S. economy. It is likely to be slower than anticipated over the next several months as a result” – Blackstone (BX) CEO Steve Schwarzman

Optimism is fading

“I’m less optimistic today than I was 30 days ago. The virus is in so many different markets of the United States.” – Marriott International (MAR) CEO Arne Sorenson

“I have a more cautious view than I did four weeks ago. While the T.S.A. numbers have continued to slowly tick up, the reality is that the cash that people are willing to commit to future travel decisions has stalled. The fear that the virus has created in the South has put people more into a stay-at-home mentality than we’d seen before.” – Delta Air Lines (DAL) CEO Ed Bastian

CEOs are losing confidence in a V shaped recovery

“…most of the companies that we spoke to at the beginning of the pandemic were clearly thinking about this as a V-shaped recovery based on the stimulus and all of the extraordinary actions that governments were taking all over the world. Most of our client conversations today are clearly more around a gradual recovery that is slower. It’s more of a U-shaped recovery.” – ManpowerGroup (MAN) CEO Jonas Prising

“I don’t think it’s going to be a V-shaped recovery where everyone is going to be very comfortable.” – Neogen (NEOG) CEO John Adent

“We believe that talk of a quick recovery is definitely at the optimistic end of the scale. A deep global recession has already started and consumer habits are changing quite dramatically.We’re seeing a rapid rise in unemployment across markets. And even for those with jobs, we know some consumers will choose to save more” – Unilever (UL) CEO Alan Jope

The world has been turned upside down

“So this has turned the world upside down. So we’re in – we’re like a patient in intensive care. And we are working to get out of intensive care, and it’s a 30, 60, 90 kind of a time horizon. We’re debating right now, as an example, what kind of “plan” that it’s worth even working on for fiscal 2021.” – Southwest Airlines (LUV) CEO Gary Kelly

Businesses are breaking

“We spent 12 years building our business and within six weeks, lost about 80% of it. When a business drops that quickly, not only is there this feeling of losing much of what you created, but things start breaking.” – Airbnb (AIRB) CEO Brian Chesky

“We’re in an environment where it’s almost like we’re starting our business from scratch” – Southwest Airlines (LUV) CEO Gary Kelly

And life is unlikely to return to normal until there is a vaccine

“Most C.E.O.s today believe that until there is a more effective treatment or a vaccine, that work and life are not going to go back to normal,” – Accenture (ACN) CEO Julie Sweet

“I don’t think any of us believe that we’re going to get even close to the old demand until there is a vaccine that’s widely spread.” – American Airlines (AAL) CEO Douglas Parker

“…while the search for a vaccine goes on, we will perhaps all need to be prepared for a sort of two steps forward, one step back dynamic in the months ahead” – Unilever (UL) CEO Alan Jope

We’re facing a very, very bumpy ride

“The economic reality s that we are still facing a very, very uncertain economic environment…I think in the next couple of months you’ll see a tamping down of that acceleration, I think you’ll see poorer economic numbers. I think we’re in for a very, very bumpy ride” – Goldman Sachs (GS) CEO David Solomon

But government stimulus is keeping the economy afloat for now

“If there is not federal relief that is usable and tuned to the needs of these small businesses, they’ll go out of business.” – Eventbrite (EB) CEO Julia Hartz

“…our strong credit performance so far shows that the normal relationship between unemployment and consumer credit has been significantly altered by lending hardship programs and especially by government stimulus, including direct consumer support through the CARES Act.” – Capital One (COF) CEO Richard Fairbank

It’s also creating distortions

“…it’s clear that the level of unemployment programs that exist in the U.S. are making some of the workforce harder to get to come back to work. We are also seeing the flare-ups that we have in various states having some impact” – ManpowerGroup (MAN) CEO Jonas Prising

The biggest distortion of all is probably in financial markets

“This crisis is a human crisis: It has a human toll and a human impact. I think the economic scenario is uncertain [and] concerning, and I think markets are disconnected from that at the moment….Markets are disconnected with that at the moment. They’re responding to the fact that rates are zero and there’s a conviction for more monetary and fiscal stimulus and that’s obviously bolstered asset prices” – Goldman Sachs (GS) CEO David Solomon

A new generation of day traders has been born

“Interactive Brokers is a stay-at-home company, so individuals now that they have the time to do so, want to invest and manage their money. In the second quarter, we brought on more new accounts than we’ve ever added in a full year. This quarter’s growth implies an annualized account growth rate of 60%…historically, we have an account growth rate of slightly over 20%. This quarter, we had – we saw 60%.” – Interactive Brokers (IBKR) Director of IR Nancy Stuebe

Will we finally see inflation?

“The Fed wants us to believe that we should believe that there will be no inflation out of all this and to me that is a vast unknown. We have America’s fasted peacetime money-growth coexisting with the all-time 4,000-year record lows in interest rates. It’s a most curious and troubling juxtaposition there. I think what we have is a monetary moment that is unprecedented and therefore calls for extreme caution and great humility on the parts of all of us” – Grant’s Interest Rate Observer Founder Jim grant

International:

The EU agreed on a historic stimulus package

“…it is important because for the first time, albeit on a temporary basis and to deal with the emergency situation, the 27 member states comprising the European Union have decided to jointly borrow in order to support those member states that were most affected by COVID-19. So, this is clearly a demonstration of solidarity, of transfer to those that need it most, and it’s the first time that, you know, there is such joint borrowing of that magnitude..The total envelope that they’ve agreed is €750 billion, as you say, north of $850 billion, and that’s just for the–what they call the recovery and resilience plan. In addition to that, they’ve also discussed a seven-years budget that is north of a trillion euros.” – European Central Bank (ECB) CEO Christine Lagarde

Financials:

Credit quality has stayed strikingly strong

“Second quarter credit results were strikingly strong, especially in the context of the pandemic. The charge-off rate for the quarter was 4.53%, a 33 basis point improvement year-over-year. The 30 plus delinquency rate at quarter end was 2.74%, a 66 basis point improvement from the prior year.” – Capital One (COF) CEO Richard Fairbank

“In the case of credit card, basically, the delinquency ratio on a Q-on-Q basis has fallen by 0.2%. So, for credit card, all the quality related indicators are quite positive.” – KB (KB) CFO Kim Ki-Hwan

Venture capital funds are sitting on a lot of dry powder

“…venture capital arena as well, it’s still incredible levels there. So, and they are able and willing to deploy and particularly now. ..and starting to adapt and get more comfortable with deploying the dollars out in the marketplace.So, again, they have that dry powder that they can put to work.” – SVB (SIVB) President Michael Descheneaux

M&A activity has been very limited

“M&A, as a percent of total stock market cap, I mean that literally has ranged from all the way back to the 1980s from between 5% and 15%, sometimes a little bit higher percent of total market cap and it’s below 3% right now. I mean it’s never been below 5%” – Greenhill (GHL) CEO Scott Bok

Consumer:

Housing is one of the hottest sectors in the economy

“I am very pleased to report that the recovery in new home demand that we experienced over the course of the second quarter was nothing short of outstanding. Our second quarter results show a remarkable rebound in demand as April net new orders fell 53% from last year, only to see year-over-year orders increased 50% for the month of June. Led by strong demand among first-time buyers, we saw meaningful improvement across all buyer groups and geographies as the quarter advanced. This improvement culminated in June orders increasing 77% for first time, 48% for move up and 21% for active adult over June of last year…buyer demand is clearly experienced a dramatic recovery in the quarter and has remained strong through the first three weeks of July.” – PulteGroup (PHM) CEO Ryan Marshall

“…we continue to see good mortgage activity in the U.S. In fact, in the second quarter, we saw mortgage growth, and we actually had record mortgage loan balances at the end of the quarter ” – UBS (UBS) CFO Kirt Gardner

“I am optimistic, because the combination of low mortgage rates, still in under supplied markets and the broader nesting trend which we see across consumers, I think spells good news for the builder channel” – Whirlpool (WHR) CEO Marc Bitzer

High demand and low supply is resulting in increased home prices

“The combination of strong demand and limited inventory has also allowed us to raise prices across many of our communities. In fact, more than half of our divisions report raising prices in 50% or more of their communities. The typical price increase is in the range of 1% to 3% and includes changes in base price and/or reductions in incentives” – PulteGroup (PHM) CEO Ryan Marshall

A trend towards de-urbanization may be beginning

“…you’re seeing less density of mobile data in cities, and you’re seeing more density in suburbia and even more density than past in rural. And when we look at our customers and these new customers and reacquired customers, we’re seeing that it’s people have left the cities where we don’t have stores. They’re moving into suburbans – they’re moving out of the suburbs, so they’re moving out to the rural communities” – Tractor Supply (TSCO) CEO Harry Lawton

“…there will be some changes in terms of how we work in terms of some people working more from home, the ability to have people working remotely, potentially a shift to suburban and rural settings” – Hershey (HSY) CEO Michele Buck

“After America has been quarantined and sheltered in place for three or four months, people are starting to realize that they want to have a bigger house, or a house with a backyard. They see the parks, the lakes, the amenities, the fantastic school districts, and 3% interest rates [on mortgages], and they realize they can have that quality…I think the pandemic has given people that push to make a change and think differently about how they’re living, and go to quality.” – Howard Hughes (HHC) CEO Paul Layne

People want swimming pools

“As consumers sheltered in place, interest in and demand for new pools picked up significantly. But as consumers soon found out, many people had the same idea which quickly soaked up builder capacity in this labor-constrained industry. This was further exacerbated by the already compressed building season resulting from the COVID-related delays. At the same time, homeowners were turning to other ways to turn their backyard into a recreational oasis seeking up above ground pools and spas. Early on, these products were readily available, but with the unpredicted surge in demand, they quickly became scarce as the supply chain was stretched beyond its capacity.” – Pool (POOL) CEO Peter Arvan

There’s huge demand for travel, just not the same type of travel

“And we’re seeing restaurants come back obviously faster than you see airlines or hotels coming back, but I also think what you’re seeing is there is an unbelievable demand for people to travel. They may not be the same types of travel, but you are seeing people driving to different locations, and albeit when they come back quarantining, but they are driving to different locations.” – American Express (AXP) CEO Steve Squeri

Technology:

COVID is driving a massive surge in digital adoption

“The last months have accelerated the shift to digital, which was already underway..” – eHealth (EHTH) CEO Scott Flanders

“…we’ve seen an acceleration in adoption rates of technology initiatives with multiple years of consumer adoption being compressed into 10 or 12 weeks’ time.”  – Tractor Supply (TSCO) CEO Harry Lawton

“I would say, in the last five months is that digital technology is no longer viewed as just new project starts, but it’s becoming perhaps the most key for business resilience.” – Microsoft (MSFT) CEO Satya Nadella

This is exacerbating a shortage in some skills

“…we are also already seeing evidence that this crisis is accelerating the technical and soft skills transformations that we have been tracking and predicting for some time. Acute skills shortages in tech, cyber security, software development, and data analysts for example continue unabated, reinforcing that the need for skills revolution is here in force” – ManpowerGroup (MAN) CEO Jonas Prising

Gaming is another area that is seeing accelerated growth

“It is simply a breakthrough quarter for gaming. We saw record engagement and monetization led by strength on and off-console as people everywhere turned to gaming to connect, socialize, and play with others..we think in the long run [this] is going to be a much bigger addressable market.” – Microsoft (MSFT) CEO Satya Nadella

Demand in the semiconductor industry remains strong

“The semiconductor market remained a bright spot in the second quarter as demand continued to improve steadily compared to the first quarter of 2020. Our outlook remains positive for both the OEM and project-based portion of this market across the various geographies that we service.” – Reliance Steel & Aluminum (RS) CEO James Hoffman

Intel found issues with their 7nm chips

“We have identified a defect mode in our 7-nanometer process that resulted in yield degradation. We’ve root-caused the issue and believe there are no fundamental roadblocks, but we have also invested in contingency plans to hedge against further schedule uncertainty.” – Intel (INTC) CEO Bob Swan

A 5G iPhone will be a catalyst for 5G adoption

“So, that’s why a 5G phone from Apple is a very important event. And especially if you have built a network like us, where it’s so transformative that so many customers will be able to feel that transformation and that difference in usage of the network compared to some other networks that will not be a big difference.” – Verizon (VZ) CEO Hans Vestberg

Industrials:

Some cuts in business travel may be permanent

“We know there will be some level of travel that will resume after we get through this crisis, but we have been harnessing all the great technology that we have put in place prior to the crisis…We do think there will be more permanent savings as a result of that…there are clearly portions of it that will be permanent” – ManpowerGroup (MAN) CEO Jonas Prising

“I don’t think we’ll ever get back entirely to where we were in 2019 on the volume of business traffic” – Delta Air Lines (DAL) CEO Ed Bastian

Businesses are being austere and favouring opex over capex spending

“…we are feeling the impact of austerity measures that businesses have put in place to preserve cash and capital. Our software and services results reflect this reality. Many clients continued to delay projects, defer purchases and favor opex over capex spending in this environment. This pause in large purchases and discretionary spending was most evident in our perpetual software licenses and project-oriented services.” – IBM (IBM) CEO Arvind Krishna

Materials & Energy:

North American oil production is likely to remain structurally lower

“We believe that North America production is likely to remain structurally lower in the foreseeable future and has slower growth going forward. The shrinking demand for shale oil and limited access to capital markets, the inevitable rationalization will continue, and we expect to see a more disciplined market with stronger operators and service companies.” – Halliburton (HAL) CEO Jeff Miller

Cattle and dairy markets are suffering greatly

“…it’s not good. I mean, the cattle markets are bad, the swine producers are losing $10 a head. I saw something the other day where in the U.S. we euthanized 400,000 market weight animals, because we couldn’t get them slaughtered. They estimate lightweight animals over 1 million were euthanized, swine producers are losing $10 a head..So dairy in the U.S. is kind of the same story we’ve been repeating.I don’t know if you saw the news articles about the dairy producers dumping milk because the processors wouldn’t take.” – Neogen (NEOG) CEO John Adent

Healthcare:

Hospitals in Europe are in better shape financially

“In Asia, Europe, hospitals are more easily backed up by governments and therefore the financial challenges can be overcome, whereas in the U S some hospitals our really weakened by the COVID crisis without an immediate backstop from insurers or government, right? So there is uncertainty in the U S market when it comes to CapEx.” – Koninklijke Philips (PHG) CEO Frans van Houten


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