The Transcript 11.09.20

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Succinct Summary: It was hard to pay attention to anything other than politics last week, but we’re trying our best to keep a focus on the economy. Economic activity appears robust from the earnings reports that we’re reading. Even the hardest-hit industries appear to be performing much better than expected. The tech industries that surged may be normalizing though. We’re getting a strong new surge in Covid cases, but people seem to feel more prepared than they did last spring.

Macro Outlook:

We’re past the bottom of the cycle

“Investors and analysts have asked us in the last few months about making a call about the bottom of this cycle. With tremendous uncertainty about COVID-19 situation and the elections, we have not been willing to make the call. Today we are making that call. We expect that June and September quarters were the bottom for this business cycle for Microchip. We are guiding to a much stronger than seasonal December quarter and we expect significant growth in calendar year 2021.” – Microchip (MCHP) CEO Steve Sanghi

Even hard-hit industries are performing better than expected

“With more than 97% of our global hotels open and operating, we estimate the vast majority of those hotels are running at breakeven occupancy levels or better.” – Hilton (HLT) CEO Chris Nassetta

“Despite the volatile environment, we steadily recovered gross bookings throughout the last few quarters with September run-rate gross bookings reaching nearly $65 billion, down just 6% compared to last year. And despite the 50% decline in mobility gross bookings, we ended Q3 with total company adjusted EBITDA only 7% lower than last year” – Uber (UBER) CEO Dara Khosrowshahi

Some companies have seen a significant benefit

“COVID-19 continues to have significant net positive impact to our business with significant growth in both customers and shipping volume. US e-commerce activity remained significantly elevated throughout the quarter and we clearly benefited.” – Stamps.com (STMP) CEO Ken McBride

“We are seeing substantial backlog building up. The backlog for the current quarter is significantly stronger than the backlog for the last quarter. And this is supposed to be a seasonally down quarter…And then, the bookings we’re receiving, which are aging into the next quarter and the quarter after are just very, very large. We’re getting very, very strong bookings.” – Microchip (MCHP) CEO Steve Sanghi

But the Covid surge in tech demand may be normalizing

“…we also saw the work-from-home related markets of computing and data center, as well as medical devices for hospitals, revert to more normal demand patterns as the surge we saw in the June quarter dissipated.” – Microchip (MCHP) CEO Steve Sanghi

“We are seeing moderation from extraordinary levels in Q2 and Q3. So that growth, we would expect to moderate as the economy generally opens up and we have from a wide recession as things open up. So we expect to see continued moderation in growth rates.” – Stamps.com (STMP) CEO Ken McBride

We’re also seeing a new wave of the virus

“Going into the fourth quarter, here, we are having to rethink the COVID resurgence that we are seeing right now with, yesterday, as I said, over 100,000 cases, but we are peaking back up into a third wave. And from everything we can see, the third wave looks more significant than the first two.” – iRhythm (IRTC) CEO Kevin King

And there are some signs that it’s impacting economic activity

“If all I did was look at the data that we have realized to date, we would have no caution in our tone with respect to what we’re seeing. But that’s really not very helpful. Because unless you’re asleep, you’d see the caseloads are increasing daily and to new records in a large number of states in the United States and in Europe. So we’re just anticipating that, that progression, which is upon us. We know the virology and the epidemiology of this virus, this is taking hold and will continue to be an issue for the near term ” – Hyatt Hotels (H) CEO Mark Hoplamazian

“In October, reported room nights declined by about 58% compared to October 2019, and over the last seven days through yesterday, declined by about 70%. We believe this worsening result is driven by increased virus infections and certain governments reimposing public health related restrictions.” – Booking (BKNG) CEO Glenn Fogel

People feel better prepared for this surge though

“…while it’s looking like we’re going to have another wave of some form of potential partial shutdown even in the U.S., I think most of our advertisers are more prepared to think about that and to handle that shutdown in a way that is very different than what they did in Q2, which was panic first and shut everything off and then try to figure things out.” – Cardlytics (CDLX) CEO Lynne Laube

And the Fed is still squarely focused on the downside risk

“Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses” – Federal Reserve issues FOMC statement

We’ve been dealing with this for 9 months now

“November will be the ninth month, most of the world has been impacted by COVID-19.” – Cloudflare (NET) CEO Matthew Prince

Hopefully, the new guy in charge can solve this

“I am humbled by the trust and confidence you have placed in me. I pledge to be a President who seeks not to divide, but to unify. Who doesn’t see Red and Blue states, but a United States. And who will work with all my heart to win the confidence of the whole people.” – President-Elect Joe Biden

International:

Travel in China has fully rebounded

“The recovery in Greater China, especially in mainland China, has been the strongest. Results have improved meaningfully since February, demonstrating the resiliency of travel when the virus is perceived to be firmly under control. Occupancy in mainland China reached 67% in September, a bit ahead of occupancy in September of last year and an extraordinary improvement from 9% occupancy in February.” – Marriott International (MAR) CEO Arne Sorenson

“Travel demand in China also continued to show strength beyond the end of the third quarter. During the Golden Week holiday from October 1 through October 8, over 45% of the population travel, and we realized a 17% increase in RevPAR and a more than 35% increase in spend on food and beverage as compared to the same period in 2019.” – Hyatt Hotels (H) CEO Mark Hoplamazian

Financials/Real Estate:

Consumer credit trends have been stable

“…tenant performance has been good. That’s across the board. So that collections are better, payment patterns have accelerated, move-outs are down, length of stays are extending and new customer demand is solid.” – Public Storage (PSA) CEO Joe Russell

“The good news is that consumers came into this recession with strong balance sheet, and they do appear to be behaving prudently with increased savings rates and a focus on paying down their debts. We are therefore seeing encouraging stabilization of credit performance across consumer asset classes” – LendingClub (LC) CEO Scott Sanborn

The shared office model is fundamentally challenged

“The idea of lots of sharing by people who don’t know each other of office space or conference space or canteen or cafeteria, we don’t subscribe to that and it’s highly unlikely. We think the shared office model is challenged fundamentally and specifically in COVID.” – Equity Commonwealth (EQC) CEO David Helfand

Consumer:

We’ve become a world of germaphobes

“We’re seeing consumers in the U.S. and around the world, cleaning much more frequently, cleaning new surfaces and of course cleaning both in and outside of the home and that is true for business customers as well, where they’re having to welcome people back to their businesses, with safe environment. From our research with consumers, they are telling us that they expect many of these behaviors to stick, regardless of whether or not, there is a vaccine or how long COVID goes on, because it’s a way to reassure their health and wellness and for them to feel safe.” – The Clorox Company (CLX) CEO Linda Rendle

Automobile traffic has recovered back to 77% of normal from 29%

“The decrease in April was 71%. I’m going to give you US numbers. If there were 100 cars out and about on the road, there were only 29. driving around — I’m going to give you U.S. There was no traffic and no one was out because we were supposed to be on lockdown. At the very end of October, if there were 100 cars driving around pre-pandemic, it would have been 77. So the decrease then was 23%. So we’ve seen marked shifts in miles driven from pre-pandemic to what was then peak of pandemic to where we are this fall.” – Waze Managing Director Suzie Reider

People are flying too

“…it’s noteworthy that TSA data for October 18 showed over 1 million travelers in a single day for the first time since March 16 this year.” – Hyatt Hotels (H) CEO Mark Hoplamazian

The housing market may stay strong through 2021

“Mortgage rates are 2.8% a record low. The number of homes for sale in September was down 23% to a record low 34% of September sales were for above the asking price compared to 23% last September. 48% of listings accepted an offer within two weeks of their debut up from 35% last September. In October is likely to be even more intense. September pending sales increased 33% year-over-year, while home sales increased less 18%. Millennials who grew up by textbooks on Amazon have common Home Buying age.”..what is most likely is that the housing market stays strong heading into 2021.” – Redfin (RDFN) CEO Glenn Kelman

The linear TV market is collapsing

“Marc Pritchard, Chief Brand Officer at P&G, the world’s largest advertiser, dropped a bombshell at the ANA conference a few weeks ago. He said that P&G would be moving away from the upfront model of TV ad buying. With TV advertising going digital, it makes no sense to make massive uninformed bets just because that’s the way it’s been done for decades. Now they can apply data to those decisions and be more deliberate ” – The Trade Desk (TTD) CEO Jeff Green

“I would say, what — for TV marketers, their primary reason to come to Roku is the loss of reach within the linear pay TV ecosystem. There are just whole classes of consumers that are simply no longer reachable through linear television ad buys. About half of TV time for adults 18 to 34 has moved to streaming. Those users are just not reachable anymore.” – Roku (ROKU) CEO Anthony Wood

So are movie theaters

“Overall, domestic attendance was 97 percent below the previous quarter and our international attendance was 82 percent below the prior year, third quarter…even as theaters reopened with a scarcity of big new titles, attendance levels in the US hovered between 10 and 20 percent of last year’s levels” – AMC Entertainment (AMC) CEO Adam Aron

Technology:

Central banks are interested in digital currencies

“My conversations with central banks, with the regulators, with a number of folks in the crypto field, there’s no question that digital currencies are going to be rising an importance, having increasing functionality and increasing prominence CBDCs, from my perspective and all my conversations, are a matter of when and how they’re done, not AF” – PayPal (PYPL) CEO Dan Schulman

A new EU regulatory framework is coming up for the digital economy

“The European Commission is working on a new regulatory framework for the digital economy, which, among other things, proposes to designate some large online companies who operate across Europe as gatekeepers and to establish rules and regulations for these businesses. The criteria for being a gatekeeper and the associated rules and regulations are in development. So the potential impact is difficult to estimate at this time” – Booking (BKNG) CEO Glenn Fogel

Industrials:

Tesla hasn’t really created a real business yet

“I am hesitant to say this — Tesla’s business, if you want to use the analogy, is like that of a kitchen and a chef. They have not created a real business in the real world yet. They are trying to trade recipes. The chef is saying ‘Our recipe is going to become the standard of the world in the future!’ At Toyota, we have a real kitchen and a real chef too, and are creating the dishes already. There are customers, who are very picky about what they like to eat, sitting in front of us, and eating our dishes already.” – Toyota President Akio Toyoda

Automotive inventories rebuilding

“The automotive business now from this point on kind of looks normal. Cars are selling the inventory is low so they’re rebuilding their inventory” – Microchip (MCHP) CEO Steve Sanghi


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