The Newsletter
The Transcript 10.26.20
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Succinct Summary: The economy continues its two-speed recovery, but there are some signs that growth may be slowing. Even companies that benefitted from the pandemic, like Netflix, are seeing the after-effect of demand that was pulled forward to earlier in the year. Elections will be a key source of uncertainty in the coming weeks. And COVID infections are stubbornly high. But consumers are going crazy at home.
Macro Outlook:
We are seeing a two-speed recovery
“With our global perspective across industries, we see more of a two-speed recovery, some industries and in-demand roles bouncing back faster than others, like technology, some manufacturing, professional services and construction, while others including aviation, travel and hospitality impacted for the medium to long-term.” – ManpowerGroup (MAN) CEO Jonas Prising
The higher skilled workforce is recovering faster than the lower skilled
“Looking at labor demand, we believe we’ll see a two-speed recovery also here, with the higher skilled workforce recovering quicker than the lower and unskilled workforce, exacerbated by the impact of COVID-19 pandemic has had on some industries that employ lower skilled service workers.” – ManpowerGroup (MAN) CEO Jonas Prising
But the general pace of improvement may be slowing
“To look at Q3, the biggest impact was really the first half of the year and that giant pull-forward in subscriber additions in the first half of the year with COVID. When we have that much pull-forward, we expected and knew there’d be some level of slowdown, and we tried to project it as best we could.” – Netflix (NFLX) CFO Spence Neumann
“I’d say the comments about slowing that applies to the US as well. So great improvement during the third quarter, but that kind of improvement continuing but slowing and that’s factored into our overall guidance” – ManpowerGroup (MAN) CFO Jack McGinnis
“…in the last couple of weeks, we do notice some moderation in activity and which would be expected in — as we come up to the election.” –Interactive Brokers (IBKR) Chairman Thomas Peterffy
It looks like the pandemic will be with us into 2021
“…you know, even six weeks or so after the analyst meeting, we’re really in the same boat with actually more cases in Europe and a lot of increases in the pandemic. That usually adds to the view that there’s going to be more durability to this going into ’21, but we’ll know more as we get into the year.” – Thermo Fisher Scientific (TMO) CEO Marc Casper
“The timing of when vaccines become available to the public, the therapeutic measurements improve, we believe, as most, that there’s some level of normalcy that may return back to the consumer spending and the consumer behavior. And it’s very hard to tell when. As we try to plan, we plan that, that may be mid- to late 2021.” – Tractor Supply (TSCO) CEO Harry Lawton
And elections are causing policy uncertainty. If taxes go up it will affect the economy and asset prices.
“Taxes are an input in the income statement, like any other expense, and so it flows through the models. Yes, so that would be one of the many things that gets factored into our pricing. Obviously it wouldn’t just impact us, it would impact the economy more broadly…But for sure, it will be an input into what the pricing environment needs to be going forward.” – The Travelers (TRV) CEO Alan Schnitzer
“I think it will pick up when the results come up, especially if the Senate goes to Democratic, I expect that people will start taking the long-term gains because of the expected 43% long-term capital gains tax rate. And then of course, we are looking further on the road more and more expanding and that will result in asset inflation, including higher and higher stock prices.” Interactive Brokers (IBKR) Chairman Thomas Peterffy
The uneven recovery will probably lead to more stimulus
“The recovery remains highly uncertain and highly uneven — with certain sectors and groups experiencing substantial hardship. These disparities risk holding back the recovery,” – US Federal Reserve Board of Governors Member Lael Brainard
International:
Unemployment has not yet hit a peak in the UK
“We saw card balances decline a lot and then plateau. We’re still seeing that plateauing effect. I think it will take some time for both balances to recover. I think in the U.K., we haven’t really hit peak unemployment yet. So we’ve probably got to go through that.” – Barclays (BCS) CEO Jes Staley
Financials & Real Estate:
High trading activity is probably not sustainable
“I think it is not sustainable at these levels, but it will certainly not go back to the levels of early in the year. So I think it will probably end up somewhere about halfway in between. That’s what I would expect.” – Interactive Brokers (IBKR) Chairman Thomas Peterffy
Bank credit performance has been strikingly strong
“…consumers continue to behave cautiously, spending less, saving more and paying down debts…this cautious behavior is also a key driver of the most impactful domestic card headline in the quarter, strikingly strong credit results…our delinquency inventories are at really, really low level, so we’re starting at a place where, it’s going to take a while for losses to actually manifest” – Capital One (COF) CEO Richard Fairbank
“Our credit metrics continue to be excellent with delinquencies and net write-offs at the lowest levels we’ve seen in a few years.” – American Express (AXP) CEO Stephen Squeri
Loan loss reserves are probably too high
“…in an economy that goes kind of sideways or doesn’t worsen much or if we get stimulus, I think there’s some upside in the allowance” – Capital One (COF) CEO Richard Fairbank
“After the fast reaction in the first half of the year, no further increase of credit provision was necessary in quarter three. Actual credit losses were at a normal level. The current level of credit reserves provides adequate coverage for projected net credit losses, taking market and economic uncertainties into consideration.” – Daimler (DDAIF) Board of Management Member Harald Wilhelm
Insurance companies have had favorable effects from COVID
“…generally what we saw was favorable loss activity primarily related to COVID, and so think people staying home, less economic activity, lower levels of frequency.” – The Travelers (TRV) CEO Alan Schnitzer
Consumer:
It’s the golden age of housing
“…there’s a reason why some people start referring to the golden age of housing, because there is a lot of positive trends coming together. And we do not see restructured demand trends and refocus on home and nesting going away short term. COVID, hopefully, at one point will be behind us, these trends will stay.” – Whirlpool (WHR) CEO Marc Bitzer
“I can tell you the latest number I’ve heard is up to 100,000 new pools, and that they’re coming off of 75,000 last year…I mean I was speaking to dealers in the seasonal markets in the last few weeks and their backlogs are huge, and they’re hoping to get as many of those pools as they can in the ground before the snow flies.” – Pool (POOL) CEO Peter Arvan
80% of office workers are still working from home
“We’re still as a portfolio right around the city average of probably 15% to 20% back to work – back to office work. And that’s out of a 1.5 million office workers. So that means 80%, 85% of the people that work in office buildings are still home and that’s frustrating” – SL Green Realty (SLG) CEO Marc Holliday
But staying indoors is driving people crazy
“…look, I don’t know about you, but I’m going a little bit crazy just sort of staying in my house and not traveling and not being on a road seeing customers and partners and colleagues or taking vacations with my family. And so, there is a pent up demand certainly for consumer travel and you’re seeing a little bit more of that very, very small right now, but there is going to be a big pent up demand” – American Express (AXP) CEO Stephen Squeri
People are going to want to go back to restaurants at some point
“Certainly people are going to go or some people are going to want to go and sit down in a restaurant again. And I’m one of those people for sure.” – Domino’s Pizza (DPZ) CEO Ritch Allison
Many independent restaurants may not make it through this
“I’ll preface it by saying, none of us want to see independent pizza restaurants close due to the pandemic….But the reality is, if you were operating an independent pizza restaurant with a significant amount of your business dine in, and if you were relying on beverage mix and alcohol to bring a good bit of margin to your business. If that business has now been shifted to where you have to do most of it off-prem and if most of that has to come by paying very high fees to third party aggregators, it’s just a really difficult operating environment.” – Domino’s Pizza (DPZ) CEO Ritch Allison
Demand for pets at an all-time high
“…the COVID pandemic is here, we think the longer, the more structural a lot of the trends are that we’re seeing. If you think about as an example, year-to-date, we’ve sold 11 million birds. Pet adoption and ownership at an all-time high. Those are annuity streams that are going to continue on. Work from home and kind of this investment in your home, because you’re there more frequently, that’s going to continue even post COVID.” – Tractor Supply (TSCO) CEO Harry Lawton
Gen Z watches sports on Snapchat
“As Evan talked about, last month, more than 40% of the U.S. Gen Z population watch premiums sports content on Snap, specifically. And the NBA highlights channel saw over 20% more engagement so far this season than last year, if that helps speak to the trends.” – Snap (SNAP) Chief Business Officer Jeremi Gorman
Technology:
Netflix has ramped back up content production
“…since the COVID shutdowns, we’ve completed production on over 50 productions, and we expect another 150 before the year is over. So all that ramp up puts us back to nearly fully operational in most parts of the world. Those productions may go a little slower than we had planned. But materially, we are back in business in production in most places of the world, including in North America that have come on slower. So I think we’re looking at the ’21 slate, everything that we forecast for ’21, we expect to hit in ’21 with a few minor exceptions and some maybe a little more back-weighted than we had planned for earlier — last year, but we planned it all coming out.” – Netflix (NFLX) Co-CEO Ted Sarandos
Gaming is a core part of Microsoft’s long term strategy
“I think gaming has seen a real rise under Satya inside the company. I report to Satya, I think gaming for really the first time that I can think of inside the company is part of our earnings calls, it’s part of our strategy discussions, I sit in every senior leadership team meeting the company has every Friday as we’re going through the company’s strategy. When Satya and I are talking about it, at the core we understand the need for Microsoft to have strong engagement with consumers, it’s just important to the long-term success of the company. Gaming is a massive market. Three billion people play video games, $200 billion top line revenue when you look at the gaming business, both of those growing by double digits. Globally, nearly half of the world plays video games.” – Microsoft (MSFT) Vice-President of Gaming Phil Spencer
Industrials & Transports:
People are starting to get more comfortable with flying
“We do remain confident that over time passengers will become comfortable with the safety measures airlines are implementing, and supportive of this. TSA passenger screenings have increased dramatically since March, and we believe, it will continue to rise in the fourth quarter. Additionally, recent data show that the risk of transmission of COVID-19 on an aircraft is quite low…we’re optimistic that some of the news we’ve seen recently is going to reinforce the fact that airline travel is very safe. I think, I saw something today that the air is changed in the plane every six minutes through HEPA filters and other type of filtration devices. So, I think, it’s just a question of passengers getting comfortable and once we get over that tipping point it should pick up pretty rapidly.” – Carlisle (CSL) CEO Chris Koch
“…they’re starting to see an uptick in more localized days, where people can drive to a hotel and not travel, and even Delta is starting to see a little bit of a pickup as well…I think you’re looking to see a tick up in consumer behavior from a travel perspective, sort of towards the end of the year first quarter next year, but I think we’re all consistent in terms of how we feel about business travel, which is probably not going to be until late 2021 or early 202” – American Express (AXP) CEO Stephen Squeri
Auto demand has been higher than expected
“Demand from our customers was significantly higher than we had expected earlier. Despite the COVID-19 pandemic, deliveries from July through September benefited from a recovery in many markets. This increased demand was met even at short notice in particular by reducing dealer inventories.” – Daimler (DDAIF) Management
There is a tight truck market as driver shortages persist
“…so we are seeing a tight, obviously it’s a tight truck market out there. Things are, on the intermodal side, clearly there is capacity has been constrained, replenishments have been going on. There has been some driver shortages in several markets like Southern California, Chicago, et cetera.” – CSX Corporation (CSX) Executive Vice President of Sales and Marketing Mark Wallace
Healthcare:
There has been a surge of interest in infectious disease research
“…there’s such interest now in infectious disease, the pandemic, the importance, like in the U.S., of how NIH has played a huge role here. Those things are going to really, for the midterm, be very positive on a funding environment. Even short-term we’re seeing quite a bit of interest from governments, and then obviously academic institutions, their own situation is probably much more impacted by their own economics, so that’s going to be somewhat of a headwind, but that historically has been a low to mid-single-digit growth market, and it’s good to see we’re already back to low single-digit growth there.” – Thermo Fisher Scientific (TMO) CEO Marc Casper
The bio/pharma supply chain has not seen bottlenecks
“It seems pretty steady. I mean if think about manufacturing across the industry not our customers, has been smooth sailing through this period of time, right. Companies have been able to produce their medicines and develop their products for — through the development process. So, we haven’t seen COVID-related disruptions on the manufacturing side of biotech and pharmaceutical. It continues to grow very substantially” – Thermo Fisher Scientific (TMO) CEO Marc Casper
Materials & Energy:
The big oil service companies have generated positive free cash flow this year
“…we generated approximately $730 million of free cash flow through the first three quarters of this year and are on track to generate over $1 billion in free cash flow for the full year.” – Halliburton (HAL) CEO Jeff Miller
“I was again very pleased with our cash flow generation. During the quarter, we generated $479 million of cash flow from operations and $226 million of free cash flow” – Schlumberger (SLB) CFO Stephane Biguet
Oil companies are trying to diversify away from oil
“…we continue to develop our New Energy portfolio with progress in our hydrogen technology venture, Genvia, and the creation of a geothermal project development company, which complements our low-heat geothermal venture, Celsius Energy. These exciting ventures represent a mix of unique opportunities for Schlumberger to create a differentiated market position through the energy transition.” – Schlumberger (SLB) CEO Olivier Le Peuch
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