The Newsletter

The Transcript 02.01.20

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Succinct Summary: Markets went haywire last week thanks (so the story goes) to some retail traders in a Reddit forum led by a man named Roaring Kitty.  It was hard to pay attention to much of anything else in capital markets, but it was also a busy week for earnings. Industrial companies said that demand was “very, very, very strong” and there was an abundance of commentary on price pressures. Jerome Powell isn’t worried though. Game on!

Macro Outlook:

If you didn’t know what Wall Street Bets is, now you do

“/r/wallstreetbets is a community for making money and being amused while doing it. Or, realistically, a place to come and upvote memes when your portfolio is down…Like 4chan found a bloomberg terminal.” – Reddit r/wallstreetbets

Wall Street is concerned that this will end badly

“It is not surprising when you think about how much liquidity is in the system, how much policy has fueled asset prices in recent weeks and months,This looks like pockets of frothiness, some irrationality undoubtedly, some nonsense undoubtedly.” – BlackRock (BLK) Vice Chairman Philipp Hildebrand

“All you need is a correction in the market and that’s not going to look like such a great idea. There’s a bunch of people in for a very rude awakening at some point here. I don’t know if its going to happen tomorrow or next week or next month. But it will happen and that will pass.” – Morgan Stanley (MS) CEO James Gorman 

“We are concerned about the ability of the market and the clearing systems, through the onslaught of orders, to continue to provide liquidity. And we are concerned about the financial viability of intermediaries and the clearinghouses…The broker stands between these customers and the clearing house. So when some option holders make money, the clearing house has to give us the money to give it to our customers while other option holders, sellers or buyers on their own side lose money we have to collect money from them and give it to the clearinghouse. If our customers are unable to pay for their losses we have to put up our own money.” – Interactive Brokers (IBKR) Chairman Thomas Peterffy 

But this is now about the People vs. Wall Street

“I didn’t expect this…this story is so much bigger than me” – Keith Gill aka Roaring Kitty aka DeepF–ingValue

“Maybe they are all just individuals but I doubt that because this requires a lot of money” – Interactive Brokers (IBKR) Chairman Thomas Peterffy 

Regulators seem to be siding with the people

“The Commission is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days…The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” – Securities and Exchange Commission Public Statement 

 “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.” – US Congressional Representative Alexandria Ocasio Cortez 

The Fed doesn’t think it shares any responsibility

I don’t want to comment on a particular company or day’s market activity or things like that. It’s just not really something that I would typically comment on…I would say that financial stability vulnerabilities overall are moderate…if you look at what’s really been driving asset prices really in the last couple of months, it isn’t monetary policy. It’s been expectations about vaccines…I think, you know, I think that the connection between low interest rates and asset values is probably something that’s not as tight as people think, because a lot of different factors are driving asset prices at any given time.” – US Federal Reserve Chair Jerome Powell

Game on

“You know, in terms of tapering, it’s just premature. We just created the guidance. We said we’d want to see substantial further progress toward our goals before we modify our asset purchase guidance. It’s just too early to be talking about dates, which we should be focused on progress. We’ll need to see actual progress. And when we see ourselves getting to that point, we’ll communicate clearly about it to the public. So nobody will be surprised when the time comes. And we’ll do that well in advance of actually considering what will be a pretty gradual taper.” – US Federal Reserve ChairJerome Powell


Business in China has recovered fully

“I’m proud to say today, our business in China recovered in Q1 in line with our expectations” – Starbucks (SBUX) CEO Kevin Johnson 

“…in China, things are back to normal, by and large, other parts of Asia, pretty darn close. Europe, North America, not so much.” – Chevron (CVX) CEO Mike Wirth

“Impact to supply chain is something everyone dealing with except if produce in Asia…it impacts pretty much everyone producing in the Americas, producing in Europe, it is less, almost no impact if you produce in China or Asia.” – Whirlpool (WHR) CEO Marc Bitzer 

“In the fourth quarter, we really saw China sort of having inter-country, if you will, travel be pretty significant. They’re moving – they’re moving around quite a bit and getting back at it.” – Danaher (DHR) CFO Matt McGrew 


Options trading is booming

“The record fourth quarter helped make 2020 the most active year for options trading ever averaging 27.7 million contracts traded a day, a 58% increase over 2019.” – Nasdaq (NDAQ) CEO Adena Friedman 

Banks are conservatively reserved

“…our credit reserves assume a very conservative economic outlook. And so, you have to see more bad stuff happen in the economy, small businesses going bankrupt, lots of consumers being laid off. You have to expect more bad things like that to happen for all of those reserves to be needed.” – American Express (AXP) CFO Jeff Campbell 

SPACs bring positives and negatives

“I think the SPAC market…I think it’s a good development long term to open up access to capital to public companies. We’ve seen a reduction in the number of public companies by 50% over the last 25 years, and the SPACs have led to the highest number of IPOs in more than 20 years now. So I think that’s positive. Now that being said, I think there are challenges around alignment of interest, when sponsors earn their economics, what the size of those economics are. And I think some of that will change over time.” – Blackstone (BX) COO Jon Gray 


McDonalds has strong comps in the US but weak comps internationally

“In the U.S. comp sales increased 5.5% for the quarter…turning to January trends, in the U.S. sales comps continue to be strong and are expected to be up high single-digits with continued growth across all day parts and assisted by consumers receiving government stimulus checks. [International] comp sales are projected to be down low double-digits” – McDonald’s (MCD) CFO Kevin Ozan 

Tesla’s free cash flow may be better than you’d expect

“So — and full year, we achieved free cash flow of nearly $2.8 billion after spending more than $3 billion on building new factories and other expenditures.” – Tesla (TSLA) CEO Elon Musk 

Pandemic driven consumption habits may persist

“We believe that many of the consumer behaviors that we’ve seen over the last 9 months will continue through most or all of 2021. These trends we’ve mentioned before, but they include rural revitalization, trip consolidation, omnichannel adoption, self reliant lifestyle movement, consumer spending that’s shifting from travel and entertainment to home and land and an all-time high pet ownership” – Tractor Supply (TSCO) CEO Harry Lawton 

“That behavioral trend is not going to go away. And also in the context of how people talk about future work, you should assume that going forward, the average consumer spends more time at home than before. It’s just going to be that way.” – Whirlpool (WHR) CEO Marc Bitzer 

But Australia’s experience suggests that people will go back to offices

“Australia has some of the fewest number of cases. And so I would argue they’re most along post pandemic and they’ve been surprised how much people want to come in and don’t want. They work remotely. And in fact they talk about is, 92% to 95% of the staff want to come back into the office. That surprises me. Whether that’s sustainable in Australia itself or whether you can replicate that other places, I don’t know. But that’s what they report.” – Robert Half International (RHI) CEO Keith Waddell 


Apple, Microsoft had another incredible quarter

“Our revenue reached an all-time record of $111.4 billion, an increase of nearly $20 billion or 21% from a year ago. We grew strong double digits in each of our product categories, with all-time records for iPhone, Wearables, Home and Accessories and services as well as a December quarter record for Mac. We also achieved double-digit growth and new all-time records in each of our five geographic segments and in the vast majority of countries that we track.” – Apple (AAPL) CEO Tim Cook 

“It was a record quarter driven by our commercial cloud which surpassed $16 billion in revenue up 34% year-over-year. What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. Digital capability is key to both resilience and growth. It’s no longer enough to just adopt technology.” – Microsoft (MSFT) CEO Satya Nadella

Apple and Facebook are feuding

“Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own.” – Facebook (FB) CEO Mark Zuckerberg 

“If a business is built on misleading users, on data exploitation, on choices that are no choices at all, it does not deserve our praise. It deserves scorn. At a moment of rampant disinformation and conspiracy theories juiced by algorithms, we can no longer turn a blind eye to a theory of technology that says all engagement is good and the longer the better,” – Apple (AAPL) CEO Tim Cook 

Verizon says 5G is rolling out faster than 4G 

“I think we actually are — this is going faster than the 4G cycle. It’s just that our memories are so short, so we don’t remember that.  But clearly, this is equal to, too better than what we saw in the 4G cycle that happened some 10 years ago, which I refer to myself when I talk about my memory, so nobody else.” – Verizon (VZ) CEO Hans Vestberg 

It’s a big leap between driver assist and fully autonomous

“One thing we do believe is that it’s a discontinuous step function b/t a driver assist system and a fully autonomous system. So the idea that you can just someday magically leap from one to another is a big leap of judgement and faith. Again just based on the experience we’ve had, understanding what’s required from a sensing and perception standpoint compared to the sort of capabilities that are in the very basic and rudimentary driver assist systems that we see on the road today – it’s orders of magnitude difference in terms of sensor capabilities and sensor robustness.” – Tesla (TSLA) CEO Elon Musk  


We’re still in the midst of a pandemic

“Vaccines are on the rise, but our country is still very much in the midst of a pandemic. Given the pace of the vaccine rollout, it will be at least fall, before we’re back to some form of normality.” – Tractor Supply (TSCO) CEO Harry Lawton 

Moderna’s vaccine does work against new SA strain, just not as well

“For the South African strain, we still see a very high level of antibody, but it is indeed lower than the traditional strain and B117 and so, we believe our vaccine will be protective in the short term. What is unknowable right now is what will happen in six months in twelve months, especially to the elderly because as you know they have a weakened immune system and the immunity might go down over time.” – Moderna (MRNA) CEO Stephane Bancel

Patient volumes at hospitals are stable

“Across hospital and reference labs, patient volumes remained steady as elective procedures and wellness checks continue at a similar pace as we saw through Q4. We’re closely monitoring patient activity in areas that have recently implemented new lockdowns, but we’ve not seen any material impact at this point.” – Danaher (DHR) CEO Rainer Blair 

Industrials and Transport:

Demand is very, very, very strong

“…it’s intriguing to me that there’s concern about the strength of the market because right now, it is absolutely incredible. I know the supply side tightness, but demand is very, very, very, strong. Automotive recovered, and it’s going to be 16 million units or so this year and probably more” – Steel Dynamics (STLD) CEO Mark Millett 
And supply chains are tight

“First off, people are struggling with in-stocks, and I think you’re going to see more of that as we get into the spring with the supply chain disruption that’s out there.” – Tractor Supply (TSCO) CEO Harry Lawton 

“…our supply chain constraints…are fundamentally pandemic-driven, i.e., you have absenteeism in factories, you have labor shortage, you have component shortages, which have been significant, and we have transportation bottlenecks…we’re still having a fairly significant back order situation, slightly better than at the end of Q3, but only slightly.” Whirlpool (WHR) CEO Marc Bitzer 

“…we did have some supply constraints as we ended the year..The industry does need to increase the overall capacity levels. And so we do see some tightness through the first half of the year, but there’s added capacity in the second half.” – Advanced Micro Devices (AMD) CEO Lisa Su 

This is leading to inflationary pressure

“…we do expect some significant cost inflation in the year…The top two inflation drivers for this year are expected to be pulp and polymer based materials. Together those two input costs represent more than half of the inflation outlook.” – Kimberly-Clark (KMB) CFO Maria Henry 

“We expect prices to be positive based on all the inflation that we are seeing.” – 3M (MMM) CFO Monish Patolawala 

“…toward the end of the year, we saw ethylene start to tighten up and ethylene margins improve. And so that led to some pretty sharp increases in the fourth quarter.” – Dow (DOW) CEO James Fitterling 

“Customer demand remained strong throughout the fourth quarter, and higher steel selling prices began to be reflected in our average selling prices.” – United States Steel (X) CEO David Burritt 

“…the transportation market is very tight. Spot market rates have increased by more than 30%…And just a bit more color on commodities…we see headwinds on our major commodities right now. But not only on our major commodities, but some of the smaller purchases of raw and packing materials that we use across the rest of our business.” – Church & Dwight (CHD) EVP-Global Operations Rick Spann 

“…we are starting to see a little bit of inflationary pressure, particularly around freight and a little bit in the supply chain as well.” – Danaher (DHR) CFO Matt McGrew 

Eventually industrial inflation makes its way to consumer products

“…in general terms, the knowing of there is raw material pressure, knowing that particular China transportation costs are rising rapidly, I’m not quite sure the promotional pressure will increase so rapidly as some people assume…as I mentioned before, our back order level is still significant. I don’t need to promote back orders. I just deliver them. So there’s no promotional pressure on the back order resolving that.” – Whirlpool (WHR) CEO Marc Bitzer 

Materials & Energy:

Sweeping executive orders from the new administration are making energy companies think

“As we look at some of the announcements of this week and developments that seem to be unfolding here in the U.S., it’s early days to understand exactly how these will play out. The executive order was sweeping and broad, but it also lacked some specificity.” – Chevron (CVX) CEO Mike Wirth 

Companies are exploring alternative energy sources for the industrial processes

“…we are looking to alternatives, wind and solar, to replace current capacity. And those are cost competitive today. And so we have made a big move in that direction. We have about 580 megawatts of alternative energy under a contract. And we are increasing every year. Our goal is to have 750 megawatts or more by 2025…The second thing I would say is in the crackers, we are looking at a combination of things, not just electrification. We have a partnership with Shell going on right now to try to prove out electric cracking.” – Dow (DOW) CEO James Fitterling 

“…think about hydrogen, our industry is big consumers and producers of hydrogen and we really understand it. I think hydrogen moving into transportation fuels in big way is probably decades out. But we’ll continue to build a pathway around hydrogen for the longer-term” – Phillips 66 (PSX) CEO Greg Garland

“So we have got several technologies that we are looking at, and we are also looking at blue hydrogen also as a way to try to get a more concentrated CO2 stream so that we can combine that with carbon capture and sequestration to be able to reduce carbon emissions.” – Dow (DOW) CEO James Fitterling

Miscellaneous Nuggets of Wisdom:

Adversity can strengthen

“…something Ray Kroc once said, adversity can strengthen you if you have the will to grind it out.” – McDonald’s (MCD) CEO Chris Kempczinski

Elon Musk’s advice on building startups

“If you need encouraging words, don’t do a startup. Doing a startup is like eating glass and staring into the abyss for a long period of time”” – Tesla (TSLA) CEO Elon Musk  

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