The Transcripts

The Transcript 02.15.2020

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Succinct Summary: Animal spirits are driving momentum across the economy, especially in capital markets. There are hundreds of billions of dollars waiting to be invested via vehicles like SPACs. Valuations are extreme, yet they are justified by low interest rates. Meanwhile, demand is exceeding supply in industries like semiconductors, housing, and transport. Companies are citing inflationary pressures. But the Fed and Treasury are united behind continued stimulus. “We have the tools to deal with that risk.”

Macro Outlook:

Vaccines continue to roll out

“…we’ve delivered about 225,000 shipments, about 36.5 million vaccines at service levels at 99.99%.” – United Parcel Service (UPS) CEO Carol Tome

Animal spirits are driving momentum

“Stock market performance low interest rates, really the animal spirits of the market I think just kept the momentum going as M&A continued to accelerate. By the way, restructuring had a very good year too, but it was pretty much in line with our percentages in all other years. It was just that both were having good years.” – Moelis & Company (MC) CEO Ken Moelis

Companies are seeing some inflation

“…we are seeing the same inflation. We’re also seeing the inflation that you’re seeing, and coming from non-commodities – non-key commodities, ingredients, especially packaging in transportation in the U.S. And we think that the level and the type of inflation that we are seeing, it’s manageable,” – Kraft Heinz (KHC) CFO Paulo Basilio

“We’ve also seen some recent inflationary pressure in our freight costs, largely due to a shortage of drivers. In our international and export businesses, these freight dynamics are manifesting themselves through increased container costs.” – Tyson Foods (TSN) CFO Stewart Glendinning

But Yellen says that there’s no reason to worry

“My predecessor has indicated that there’s a chance that this will cause inflation to rise. And that’s also a risk that we have to consider. I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materializes, but we face huge economic challenge here and tremendous suffering in the country. We would have a long, slow recovery like we had after the financial crisis, but this package is going to really speed recovery and analysis by Moody’s and economists at the Brookings Institution show that very clearly we will get people back to work much sooner with this package. There’s absolutely no reason why we should suffer through a long, slow recovery.” – US Treasury Secretary Janet Yellen

And Powell said that the U.S. is “a long way” from where it needs to be

“Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity. Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared” – US Federal Reserve Chair Jerome Powell 

Are we in for a new roaring 20s?

“People will be happy to go out again, to socialize. This will be like the Roaring 20s, there will be a fiesta in makeup and in fragrances” – L’Oreal (LRLCF) CEO Jean-Paul Agon

Things are changing quickly

“I’ve never seen the business community in that short a period rethink everything about what they’re doing.” – Moelis & Company (MC) CEO Ken Moelis

Markets are humbling

“…if you’re going to try to get me out there on a quote like while the music is playing you got to keep dancing, I am not giving you that one. So again I’m going to say that markets are humbling. They — there’s a lot of good things going on right now. Low interest rates, recovery, government is putting a lot of money into the economy, liquidity.” – Moelis & Company (MC) CEO Ken Moelis


Europe is showing steady strength

“The US is as usual in something like a COVID environment amazing how fast the US innovates and comes back. But we’re seeing in Europe, a very steady strength. We’re also — we’re starting to see strength back in Asia for a while there.” – Moelis & Company (MC) CEO Ken Moelis


Valuations are high

“In terms of adding a new subsidiary, I think valuations are still too damn high.” – Loews (L) CEO Jim Tisch

“When you have such an extreme infusion of liquidity and fiscal stimulus globally in any market, you’re going to create a situation where, with rates at zero, capital is looking for investments and you’re going to have some overvaluations in certain assets. It’s not just about the growth stocks that did very well through Covid, but also value has broken out. Now there are, with very few exceptions, no sectors that are cheap.” – JPMorgan (JPM) COO Daniel Pinto

SPACs need to invest a few hundred billion dollars over the next two years

“…why the increase in the number of SPACs? It’s a lot of capital looking to find a place to be invested. The SPAC is no more than another avenue for that…The last time I checked there was close to a hundred billion dollars of money waiting to be invested to find a target. They have two years to do it.” – JPMorgan (JPM) COO Daniel Pinto

“…there’s about $300 billion or $350 billion of SPAC money now. I think that, if you think about returning the number of stocks back to where it was 20 years ago you can see a pretty interesting market develop and we invested in our capital markets and our coverage model, because we think it’s real.” – Moelis & Company (MC) CEO Ken Moelis

There’s lots of money going into real estate still too

“This is an extremely competitive environment where the demand for real estate investments exceed supply. On the demand side, there’s a global search for yield. By some estimates, there’s a record amount of dry powder, around $300 billion of equity looking for real estate. Interest rates are near historical lows and attractive financing is available for better assets and businesses.” – Equity Commonwealth (EQC) CEO David Helfand 

Capital is being allocated away from hedge funds

“Over the last three years, CNA has reduced its investments in hedge funds by half and as of year-end 2020, the portfolio only had about $800 million invested in hedge funds. We expect these funds to report normal January returns.” – Loews (L) CEO Jim Tisch

Companies are having to give an opinion on Bitcoin now

“…we don’t have any plans to invest in bitcoin, so full stop there. This is something we’ll monitor and we’ll evaluate. And if there’s strong customer demand for it in the future, there’s nothing that precludes us from doing that. So taking your question very seriously, that’s my answer.” – General Motors (GM) CEO Mary Barra


Covid has led to a “great reshuffling” of housing demand

“Many Americans untethered from their commutes and offices have begun to reevaluate how and where they want to live. This cultural trend, which we have been calling the great reshuffling, along with our continued technology improvements, resulted in 9.6 billion visits to our mobile apps and websites over the course of 2020. That is 1.5 billion more visits than in 2019.” – Zillow (Z) CEO Rich Barton

Companies must realize that to get the best talent they need to give talent flexibility

“The real estate tailwind that’s kind of been catalyzed mainly by the pandemic, freeing people from their commutes and freeing them to move and rethink their homes, that’s a real one. And I believe that that’s going to play out over a long period of time, too. It takes a long time for people to decide to move, and it takes a long time for companies though they are catching up. It’s going to take a long time for companies to grapple with the fact that in order to compete for the best talent, they have to give that talent flexibility.” – Zillow (Z) CEO Rich Barton

Homes are sitting on the market for a shockingly low amount of time

“…having homes sit on the market for 25 fewer days than they did a year ago in December 17 days total is fairly shocking. That is the headline for this market right now is velocity. And so I have no doubt that Econ 101 comes into play with supply and demand.” – Zillow (Z) CEO Rich Barton

Pool companies have huge backlogs

“If you were somehow able to hire Michelangelo to paint a picture of the perfect quarter, it would look a lot like our fourth quarter….As we turn the page to 2021, builders report large backlogs in virtually every market that you carry us through the first half of the year and perhaps beyond.” – Pool Corporation (POOL) CFO Mark Joslin

People want delivery for more than just food

“We’ve seen our business accelerate in January to over 150% year-on-year growth as the delivery continues to provide a natural hedge and lockdown. It’s become clear that the pandemic has increased consumers’ appetite for on-demand delivery of not just food, but all goods,” – Uber (UBER) CEO Dara Khosrowshahi

Topgolf revenue is 80-85% of 2019 levels

“Topgolf’s overall results exceeded expectations in Q4…Despite 2021 starting out with more COVID restrictions than we expected, strong walk-in traffic is allowing this business to continue to perform at a level consistent with achieving our total venue full year same venue sales target of 80% to 85% of 2019 levels.” – Callaway Golf (ELY) CEO Oliver Brewer

Expedia’s booking trends are headed in the right direction too

“…booking trends in the fourth quarter pretty much near the third quarter at about down 60% for total gross lodging bookings, net of cancellations that did moderate towards the holiday season. And the end of the quarter, and we saw that moderate into the high 50s down. And that has – that improvement has seemed to continue through January. And in the latter part of January, we’ve seen down in the high 40s. So, the trends are generally good, although, very bad or for all, going in the right direction.” – Expedia (EXPE) CEO Peter Kern


Semi-conductor shortages are impacting supply chains

“We have seen in the short term, the automotive industry has been very adversely affected,”” Bryce Johnstone, director of automotive segment marketing at chip designer Imagination. This stems from their just-in-time production methodology and their incredibly complicated supply chains. If the chip that powers the in-car dials or automatic braking are delayed, then so will the rest of the vehicle,” – Imagination Technologies Automotive Segment Marketing Manager Bryce Johnstone

“…our mitigation efforts, the semiconductor shortage will impact GM production in 2021. Semiconductor supply for the global auto industry remains very fluid. Our supply chain organization is working closely with our supply base to find solutions for our suppliers’ semiconductor requirements and to mitigate impacts on GM.” – General Motors (GM) Management

“…the level of demand by customers is so high for PS5, therefore, for various devices, we try to procure larger volume. However, we have to look at the global shortage of semiconductors. When we try to increase our capacity, we face difficulties because of this global situation. However, we are doing our best to exceed the original plan in terms of shipment.” – Sony (SNE) Management

“…as the auto and industrial markets begin to rebound in the second half of the year, the available foundry capacity was largely sold out. As a result, we and others are experiencing significant increases in lead times, and in certain cases, increased cost from suppliers. Taken that altogether, the setup indicates a really robust demand environment combined with a very challenging supply situation, which we anticipate may continue for several more quarters,” – NXP Semiconductors (NXPI) CEO Kurt Sievers

“…if you look at the IC level, that’s getting tighter and tighter. And we’ve kind of seen this coming a little bit with 5G and cloud rollout, but we certainly didn’t expect the rise in consumer electronics from the last 12 months. So, semiconductor lead times, in many cases, have run out from 10 weeks to 20 weeks, in some cases to 40 weeks or 50 weeks.” – Corsair Gaming (CRSR) CEO Andy Paul

Industrials and Transport:

EV demand is high

“…we are looking forward to retail EV growth, where we are seeing encouraging signs for demand. We’re really excited about the launch of the GMC Hummer EV this fall. When we revealed that in Q4, it was the most watched auto reveal in history with 1.3 billion impressions and 370 million views. And it created the highest website traffic of any GM model ever.” – General Motors (GM) CFO Paul Jacobson

There could be shortages of EV cells

“I’m worried about the battery shortage. What we’re seeing is in the next few quarters or couple of years, the potential for real serious supply/demand imbalance on EV cells…You rightly point that it’s one of the reasons why we’re investing in our own cell manufacturer. And as I kind of alluded to in my opening remarks, there’s more coming than what we’ve announced already. So we want to be in control of our own destiny, not only from making sure we have the ability to have the cells that we need but also to work on cost improvements and technology improvements.” – General Motors (GM) Morgan Stanley Analyst Adam Jonas

Materials & Energy:

Natural gas prices have improved

“In the U.S., the improved natural gas prices are driving increased E&P gas directed interest.” – Precision Drilling (PDS) CEO Kevin Neveu

Miscellaneous Nuggets of Wisdom:

Don’t underestimate the potential for innovation

“Never discount the amount of innovation that can be in the future. We’ve got things going on in our labs that are mind-blowing. To use a baseball analogy, we are in the early innings.” – Apple (AAPL) Tim Cook

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