The Transcript 08.03.20

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Succinct Summary: There were a lot of major data points about the economy last week but the biggest news of all seemed to be just how well tech companies did despite the massive economic dislocation.  In a quarter where GDP fell at a 33% annualized rate, Apple managed to grow revenue by 11%!  Stimulus probably played some role in tech companies’ strong performance, but beyond the stimulus is the fact that COVID has pushed everyone to spend even more time at home and on the internet.  The behavioral shifts appear to be long-lasting too.  20 years after the dot com bubble, the internet is still not done reshaping society.

Macro Outlook:

The current economic downturn is the most severe in our lifetime

“The current economic downturn is the most severe in our lifetimes…We went from the lowest levels of unemployment we had in 50 years to the highest levels we’ve had in 90 years and we did it in the space of two months” – US Federal Reserve Chair Jerome Powell

“Real gross domestic product (GDP) decreased at an annual rate of 32.9 percent in the second quarter of 2020” – US Bureau of Economic Analysis

“The COVID-19 pandemic continues to severely impact the global marketplace.” – Cboe Global Markets (CBOE) CEO Edward Tilly

Earnings reports are showing that many companies are under intense pressure

“…our financial performance declined across the board in the quarter…we saw revenue down 20% organically due to lower volume across all businesses.” – General Electric (GE) CEO Lawrence Culp

“…going forward, again, as I mentioned, the solvency risks, I think are in front of us, not behind us. And so, that may create some challenges in the back half of the year as we start seeing additional bankruptcies.” – Honeywell (HON) Greg Lewis

But tech and payments companies are booming

“We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double-digits and revenue grew in each of our geographic segments, reflecting the broad base of this success.” – Apple (AAPL) CEO Tim Cook

“Demand is still super high. What we’re seeing on – it’s driven by Prime members and Prime member engagement. They’re shopping more often. They have larger basket sizes.” – Amazon (AMZN) CFO Brian Olsavsky

“Q2 GMV growth accelerated to its highest level since before our 2015 IPO, driving Shopify’s cumulative GMV to over $200 billion. Stores selling on Shopify sold 1.5 times what they did in Q4 of last year, the seasonally strongest quarter of the year, and that number of stores is growing all the time” – Shopify (SHOP) COO Harley Finkelstein

“Three months ago, the idea that our PayPal-branded experiences would enjoy TPV growth for an entire quarter at a level consistent with and only previously seen during high-velocity holiday selling days like Black Friday and Cyber Monday was bold and even somewhat inconceivable” – PayPal (PYPL) CFO John Rainey 

And housing is booming too

‘We’ve never seen such a sharp increase in home buying intent…bidding wars have strung up in places where they were once uncommon because market conditions and customer loads have swung wildly from February to July…Now we’re scrambling to capture demand. Blowing out our financial projections from just a few months ago. We’re running naked through the jungle with a Bowie knife clenched between our teeth, which is the way Redfin was born to be.” – Redfin (RDFN) CEO Glenn Kelman

“…housing market conditions are strengthening for commutable suburban locations” – Boston Properties (BXP) CEO Owen Thomas

“Clearly, there’s demand for Apartments.com and rentals of all types big and small…Traffic to our Apartments.com and LoopNet marketplaces rose to new record levels exceeding pre-pandemic levels.” – CoStar (CSGP) CEO Andy Florance

“…the housing market appears to be relatively healthy and has recovered faster than the rest of the economy…To give you an idea about how remarkable the recovery in home buying has been: it took 10 years for purchase demand to fully recover from the great recession. In this crisis it did so in 10 weeks.” – Freddie Mac’s (FMCC) Senior Vice President-External Relations and Corporate Communications Jeffrey Markowitz

The economy has continued to improve in July

“…what we’ve seen through the first three weeks of July, where we continue to see improvement in spending levels relative to June and the second quarter.” – Mastercard (MA) CFO Sachin Mehra

“The U.S. has continued to see improving comp sales through July, with comps” – McDonald’s (MCD) CFO Kevin Ozan

“Looking specifically at the comps of the 3,100 U.S. stores that remained open throughout the entire quarter, those stores improved sequentially from minus 14% comp in May to minus 1% in June to a positive 2% comp for July month-to-date.” – Starbucks (SBUX) CEO Kevin Johnson 

“Just last week, we asked our economist to look at the markets where infections are soaring to see if demand there had faltered compared to other markets. But even the earliest demand indicators still show that buyers are mostly unfazed.” – Redfin (RDFN) CEO Glenn Kelman

“Based on our estimates from the end of June through last quarter, there has been a modest improvement in July” – Alphabet (GOOG) CEO Sundar Pichai 

“But we’ve started to see some early signs of improvement in June and July” – General Electric (GE) CEO Lawrence Culp

Thank you government stimulus

“…probably some pick up because of the economic stimulus that hit different countries at different points in time.” – Apple (AAPL) CEO Tim Cook 

“We do know that stimulus is probably applying to some extent through to our business.” – Facebook (FB) CEO Mark Zuckerberg 

“…we probably got a little bit of a bump up with stimulus checks coming in” – Snap-on (SNA)  CFO Aldo Pagliari

“The government moratorium on US foreclosures about 4.1 million loans or nearly 8% of US loans are in forbearance…because widespread forbearance will extend at least in the spring of 2021, we don’t express to stress sales to dampen home prices in 2020.” – Redfin (RDFN) CEO Glenn Kelman 

“Due to ongoing COVID-related sheltering in place, retail store closures and changes in U.S. consumer spending fueled by the economic stimulus, we experienced unprecedented demand and record high volume levels” – United Parcel Service (UPS) CEO Carol Tomé

“…so the government stimulus, I think, undoubtedly played a positive role in the second quarter in terms of helping customers in our portfolio,” – On Deck Capital (ONDK) CEO Noah Breslow

However, the economy is still in a deep, deep hole

“This is the first four months of a crisis in which there’s now 30 million unemployment. I don’t think it’s over financially.” – Moelis & Company’s (MC) CEO Ken Moelis

“The failure thus far to contain the virus in the U.S., recent increases in unemployment and historic declines in GDP, among other key events continue to drive elevated levels of market uncertainty.” – Cboe Global Markets (CBOE) CEO Edward Tilly

“The pandemic has created significant job losses and other recessionary effects …Many companies are looking to cut costs, CEOs are hesitant to invest capital in new space and leasing volumes have slowed considerably” – Boston Properties (BXP) CEO Owen Thomas 

And COVID could continue to be with us for a while

“COVID-19 infection rates remain at elevated levels in the U.S. as many Americans appear to be less willing to follow the health safety protocols mandated by the CDC and local governments. As a result, COVID-19 will likely linger in the U.S. and around certain regions of the world for some time” – Boston Properties (BXP) CEO Owen Thomas

The Fed has pledged to be with us even longer though

“I said earlier or a while back, we’re not even thinking about raising rates…we’re going to continue to assume that our facilities are needed, that our policies are needed, and that the public needs the support that we’re giving the public until shown otherwise…I wouldn’t look for us to be sending signals about cutting back on facilities or anything like that for a very long time. We’re in this until we’re well through it, and I think the picture is you have the lockdown. Then you have the reopening. But there’s probably going to be a long tail where a large number of people are struggling to get back to work, because those heavily affected areas of the economy are going to be challenged, really, to employ the millions of people who are now out of work. I think 14 million people are now out of work who were working in February, something like that. So that’s going to take a while, I think, in everyone’s reckoning, and everyone should know that we’re going to be there for all of that.” – US Federal Reserve Chair Jerome Powell

Even inflation won’t stop the Fed

“I know there is a lot of discussion about how this might lead to inflation over time, but we’re seeing disinflationary pressures around the world, going into this…I do think for quite some time, we’re going to be struggling against disinflationary pressures, rather than against inflationary pressures” – US Federal Reserve Chair Jerome Powell

International:

Even in China, people are still cautious about COVID

“if you’re looking at Institutional specifically within China, we’ve also seen significant improvement over the period of time as well as COVID has abated there somewhat, the restaurants are reopened and travel is reopened.With that said, it is not been a stampede back onto airplanes, into hotels, nor into restaurants. People are still waiting for I think, finality for this thing, which I think is in the form of a vaccine ultimately. And we don’t believe until then that you’re going to see complete market recovery in industry’s most hard hit by COVID. Now, it’ll improve but we don’t think improve completely”-  Ecolab (ECL) CEO Doug Baker

“…in China, recovery has been somewhat uneven, as consumers remain cautious on resuming pre-COVID routines, especially in light of resurgence concerns.” – McDonald’s (MCD) CEO Chris Kempczinski

Financials:

The Fed is paying more attention to “non-standard high-frequency data”

“…what we’re seeing is that we monitor quite a lot of what we think of as sort of non-standard high frequency data. That’s become a very important thing, even more important than usual in the work that we do and what that data shows on balance is that the pace of the recovery looks like it has slowed since the cases began, that spike in June.” – US Federal Reserve Chair Jerome Powell

“Governments are also increasingly talking to us in terms of looking for information that we have in terms of trends, because they’re trying to understand what’s happening in their economies, and in many ways we could get them real time picture of what’s going on faster than they can get it themselves” – Visa (V) CEO Al Kelly

M&A activity is heating up

“People are saying, look, we need to buy quality assets. We are going to buy them. And if we have to over equitize for a while, we don’t mind, doing that, we want to own them for 10 years. We think the current environment is temporary. So I’m pretty bullish on the amount of activity that we have and that we are accumulating a backlog” – Moelis & Company’s (MC) CEO Ken Moelis

“…we expect to see increasing M&A activity as the year progresses. Client dialogues are improving in both the U.S. and Europe. We also expect to see increase restructuring activity in Europe as Central Bank and governments scale back their economic support programs.” – Lazard (LAZ) CEO Kenneth Jacobs

“…we see our pipeline growing. We also saw recent announcements of M&A transactions. So from that perspective, I think momentum is building” – Credit Suisse (CS) CEO Thomas Gottstein

Investment-grade companies created fortress balance sheets for themselves earlier this year

“This rush to liquidity also helped to explain the dichotomy between the performance of the economy and capital markets as many issuers took advantage of low rates to create fortress-like balance sheets ..after a record first half, we expect total issuance to moderate. Many issuers have fulfilled their near-term funding needs, some having come to market multiple times” – Moody’s (MCO) CEO Ray McDaniel

“During the second quarter, global bond issuance, increased 36%,…US led the way with quarterly records for both investment grade and high yield issuance. Companies poured into the market to enhance their cash positions or it’s not unusual for large banks to tap the bond markets several times during the quarter, it’s unusual for corporates to do so” – S&P Global (SPGI) CEO Doug Peterson

Consumer:

McDonald’s has assembled a marketing war chest

“…we’ve amassed a sizable marketing war chest to invest in the back half of 2020. During Q2 most major markets significantly reduced their marketing spend and value activities. As an example in the U.S., marketing spend was down 70%, as we chose to conserve our resources until the situation stabilized. These funds will now be reinvested in Q3 and Q4.” – McDonald’s (MCD) CEO Chris Kempczinski

There’s a lot of pent up demand building for travel

I think it speaks to humanity’s demand and desire to travel. And then when they can, and when the opportunity avails itself and when they feel safe, and there are no restrictions, they all are really dying to travel, and we’ve seen that this summer” – Expedia (EXPE) CEO Peter Kern

“Many, many Canadians write to us and tell us that they want to travel” – Air Canada (ACDVF) CEO Calin Rovinescu

Technology:

Covid is propelling long term behavioral shifts towards e-commerce

“The shift to online is profound. We see people engaging a lot, doing newer things than they did before. People’s interests have – are broadening, I would say, across the board. And so for example, we are – for me, I’m looking at different types of user journeys and making sure each of them is getting deeper and better” – Alphabet (GOOG) CEO Sundar Pichai

“The COVID crisis has also significantly accelerated the secular shift to e-commerce” – Visa (V)  CFO Vasant Prabhu 

“…we’ve seen the COVID-19 pandemic fundamentally shift the way businesses and consumers interact. It has catalyzed e-commerce, introducing major changes in buyer behavior and pulling forward what retail would look like in 2030 into 2020” – Shopify (SHOP) COO Harley Finkelstein

“And in terms of penetration of e-commerce in our business, we have progressed this last 10 weeks as much as we did in the past –in the previous three of four years” – L’Oréal S.A.(LRLCF) CEO Jean-Paul Agon

“By many estimates, the pace of e-commerce penetration has accelerated by several years in a single quarter.” – PayPal (PYPL) CFO John Rainey

“…businesses see this as a shifting point for them to think about, like, how they think about their IT investments.” – Zendesk (ZEN) CEO Mikkel Svane

“…what we’re seeing is that increasingly businesses of all sizes, but including small businesses have to sign up customers online, people aren’t walking into stores as much, have to find new ways to deliver products, like curbside pickup, like shipping. So, they are increasingly moving online” – Facebook (FB) CFO Sheryl Sandberg

“…e-commerce saved us in April, frankly. It was our strongest performing vertical across the board. It was actually going up and most everything else was going down.” – XPO Logistics (XPO) CEO Brad Jacobs

Video gaming is also benefitting from the boom

“…social interactions in our world are moving from physical to digital, and second, the consumption of sports and entertainment is moving from linear to interactive.We’ve seen both of these trends accelerate during the COVID period. Tens of millions of new players have come into our games, and we also have many players returning to our franchises after some time away. In addition to higher engagement from our existing players, these new and returning players are now deeply engaged in our live services, establishing new play patterns and building new friendships in our games.” – Electronic Arts (EA) CEO Andrew Wilson

“…there’s certainly winners in this area right now, things like video conferencing, gaming, remote learning and entertainment.” Amazon.com (AMZN) CFO Brian Olsavsky

Healthcare:

Long term Hygiene standards increasing in every market

“…while the short-term pain from COVID-19 is obvious, the long-term impact is becoming clear. Hygiene standards will increase in every market we serve, they have Industrial Healthcare, Life Sciences, Institutional and Specialty. New opportunities are presenting themselves every day in large space disinfecting and hand care and water safety and clean rooms and data centers, et cetera.” – Ecolab (ECL) CEO Doug Baker

We’re going to see hand sanitizer everywhere for a long time

“…in total, in Healthcare alone, you’ve got a market that’s going to probably triple and then settled down at doubling on a long-term basis. We’re going to see hand sanitizer everywhere for a long period of time. In hand sanitizer, sales, if you can make it, you can sell it at this point in time.” – Ecolab (ECL) CEO Doug Baker

Real Estate:

The de-urbanization continues for individuals, but so far, not for companies

“I think there’s a long-term trend not just to the suburbs but to outlying areas….We hear from our agents in outlying areas that more workers each month are getting permission from their employers to move far from the office. As a result, buyers are flooding into markets like Phoenix, Sacramento, Fresno, Bridgeport, Vegas and Detroit” – Redfin (RDFN) CEO Glenn Kelman 

“There’s also been speculation about corporate movement from city to suburban locations. This does appear to be true for residential demand, as housing market conditions are strengthening for commutable suburban locations. But we have yet to see evidence of companies looking to move their offices to suburban locations as a result of the pandemic” – Boston Properties (BXP) CEO Owen Thomas

Miscellaneous Nuggets of Wisdom:

Jeff Bezos operates under a regret-minimization framework

“When I’m 80 and reflecting back, I want to have minimized the number of regrets that I have in my life. And most of our regrets are acts of omission—the things we didn’t try, the paths untraveled. Those are the things that haunt us. And I decided that if I didn’t at least give it my best shot, I was going to regret not trying to participate in this thing called the internet that I thought was going to be a big deal” – Amazon CEO Jeff Bezos


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