The Newsletter
The Transcript 08.05.19
Avondale’s digest of earnings calls has been relaunched as The Transcript.
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Succinct Summary: The Federal Reserve cut rates this week while suggesting that this may be a one-off cut. The US economy is healthy with the economic expansion expected to continue.
Macro Outlook:
The US economy is healthy
I see the US outlook as being a positive one…there’s no segment or sector that’s really boiling over and overheating, nothing like that. It’s within the economy. It’s healthy.” – Fed Chair Jerome Powell
“In the US, we are seeing continued growth, low unemployment, healthy consumer confidence – Mastercard (MA) CEO Ajay Banga
“as we look at the overall picture actually the U.S. consumer remains relatively healthy” – Ralph Lauren Corporation (RL) CEO Patrice Louvet
“economic growth is relatively stable” – Rio Tinto Group (RIO) CEO Jean-Sébastien Jacques
“Wages are rising. Real disposable income rising. Unemployment is low across the board. I mean, I think it’s a pretty good picture.” – US National Economic Council Director Larry Kudlow
Yet the Fed cut interest rates
“the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.” – The US Federal Reserve
And the President wants more
“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle” – US President Trump
“there’s an expectation of the market that the Fed will do a rate decrease maybe one step or potentially a second step until year-end.” – Deutsche Börse Aktiengesellschaft (DBOEY) Gregor Pottmeyer
Low interest rates are likely to support high valuations
“we expect low-interest rates will continue to support above-average valuations going forward.” – Goldman Sachs (GS) chief U.S. equity strategist David Kostin
and are driving a search for yield
” investors that are trying to figure out how to position their portfolio on a negative-yielding environment. So, we’re seeing more flows into things like private credit infrastructure, real estate and anything that has a yield coming from the illiquidity private markets. We’re finding a lot of interest” – KKR (KKR) Scott Nutall
There is no reason why expansion can’t keep going
“There is really no reason why the expansion can’t keep going,” – Fed Chair Jerome Powell
International:
Growth in the UK is softening because of Brexit uncertainties
“underlying growth appears to have slowed since 2018 to a rate below potential, reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade. Evidence from companies, up to the middle of July, suggests that uncertainty over the United Kingdom’s future trading relationship with the European Union has become more entrenched.” – The Bank of England
“we are seeing continued uncertainty, which is leading to some additional softening in business confidence and in international economic indicators.” – Lloyds Banking Group (LYG) CEO Antonio Horta
The UK to remain choppy if no clarity on Brexit
“until there’s a clear path forward on Brexit, it’s probably going to remain a bit choppy” – Group 1 Automotive (GPI) CEO Earl Hesterberg
Financials:
Low rates are not good for banks
“We have also seen global growth softening and the interest rate curves flatten in the second quarter, which is a less supportive environment for retail and commercial banks” – Lloyds Banking Group (LYG) CEO Antonio Horta
European payments are still dominated by cash
“Europe is a cash dominant market in large parts of the continent even now and therefore the opportunity to convert cash in personal payments remains strong and healthy.” – Mastercard (MA) CEO Ajay Banga
Banks are lending aggressively
“So, it’s an aggressive market out there. There’s a lot of people who are still lending very aggressively. One of the things I think is a little crazy is, pricing is still — is very aggressive out there…I guess banks are just willing to take lower margins or more fixed interest rate risks than we are at times.” – CVB Financial Corp. (CVBF) CEO Chris Myers
Consumer:
Food delivery customers often pay 30-40% of order value in fees
“diners on other third-party platforms are often paying 30% to 40% of the total order value in fees and markups on every transaction. And looking at the total cost of ordering, diners need to look at delivery fees, service fees and menu markups” – GrubHub (GRUB) CEO Matthew Maloney
Technology:
No one is safe from Amazon
“So the Amazon and Realogy deal, nobody is more afraid of Amazon than me. I mean, those guys are animals. What they’re doing here I’m not sure is a really serious move into the real estate market..If Amazon were to get out of putting goods in boxes and shipping them to your doorstep to deliver soft services like real estate, I think that would be a different kind of challenge. But it is well outside their strikes zone” – Redfin Corp (RDFN) CEO Glenn Kelman
Smartphone inventories in China are bloated
“In China, through the June quarter, while device shipments from handset makers into the carriers and retailers was down only 5%, the device sell-through from carriers and retailers to consumers was more pronounced, down approximately 20% year-over-year, reflecting in part a pause by consumers ahead of 5G and an uncertain macro environment. As a result, we have seen a meaningful build in channel inventory during the first half…Over the next two quarters, we expect a significant impact on device shipment as sell-in and sell-through growth rates realign and channel inventory levels are drawn down in China.” – QUALCOMM (QCOM) Interim CFO Dave Wise
Electric cars don’t have lower service costs
“there is an assumption out there amongst certain investors that battery, electrics, whether they’re hybrids or pure battery electrics have lower service dollars associated. The data that we have…doesn’t really support that hypothesis. What we see is the battery electrics basically have about the same dollars per unit as what a gas engine would have.”- Group 1 Automotive (GPI) John Rickel
Industrials:
Manufacturing is weak
You see manufacturing being weak all over the world. Business investment is weak and I wouldn’t lay all of that at the door of trade talks….trade policy uncertainty has also been I think more elevated than we anticipated.” – Fed Chair Jerome Powell
The steel industry has experienced a severe downturn
“The steel industry is inherently cyclical. Market conditions were buoyant for the majority of 2018. However, since October last year we’ve seen a severe market downturn, the speed and extent of which has been surprising.” – ArcelorMittal (MT) CEO Lakshmi Mittal
Auto sales are down
“an environment of slowing new vehicle sales in both our U.S. market where industry retail sales declined 2% and the UK where the overall industry was down 5%.” – Group 1 Automotive (GPI) CEO Earl Hesterberg
The automotive industry in China to remain weak in H2
“Industry in China deteriorated further in Q2 and the market experienced significant pricing pressures…as we look into the second half of the year, a slightly weaker industry an uncertain price environment” – General Motors (GM) Dhivya Suryadevara
Expect more airline failures and consolidations
“I think we’re going to see more airline failures and consolidation over the next number of months. The current high fuel environments…is going to cause a significant problem. The airlines start to get over peak cash flow when we move into winter. And again, they’re going to see the cash for June. They’re going to see the credit card companies holding back more and more cash to the carriers.” – Ryanair Holdings (RYAAY) CEO Michael O’Leary
Materials & Energy:
Rio Tinto has a positive outlook for Iron ore prices
“We’ll continue to see a positive outlook for iron ore on the back of strong demand and supply disruptions globally.” – Rio Tinto Group (RIO) CEO Jean-Sébastien Jacques
Oil prices are expected to remain volatile
“We expect prices to remain volatile as continued supply growth, notably in the U.S. onshore, competes with slowing demand growth, along with ongoing concerns around the possible impact of geopolitical tensions, especially in Iran and Venezuela.” – BP (BP) CEO Robert Dudley
Full transcripts can be found at Seeking Alpha
