The Newsletter

The Transcript 01.27.20

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Succinct Summary: It’s hard not to be happy about the economy. The consumer is strong and business sentiment has turned positive. Recession fears have abated thanks to the actions of central banks and a trade truce with China. Markets are feeling optimistic.

Macro Outlook:

It’s hard not to be happy about the economy

“…it’s hard not to be happy with the economy…the markets are expensive. But the economy is doing well.” – Morgan Stanley (MS) CEO James Gorman

“The economy is doing fine 2020 just began but the consumer is strong. 70% of the GDP is the consumer and the balance sheet is in great shape. Housing is in short supply confidence is way up and wages are up jobs are up” – JPMorgan Chase (JPM) CEO Jamie Dimon

“…there’s no question that things feel relatively good…” – Goldman Sachs (GS) CEO David Solomon

Specifically, the consumer is strong

“What we see inside our customer base is the customer spent, through last year, increasing during the year. And it’s started off to good shape in January as we see the reports coming out weekly. So, if the U.S. consumer is in good shape that usually bodes well for the rest of the U.S. economy, just because of that sheer volume. And we see about $3 trillion a year in spending go through our customer accounts, and just see that rise about 5% year-over-over, plus” – Bank of America (BAC) CEO Brian Moynihan

“…the underlying strength of the consumer continues to be very, very strong. That’s making up or carrying the economy through some weakness on the manufacturing side, where capital investment has been a little bit slower than we would like to see.” – Goldman Sachs (GS) CEO David Solomon

Business sentiment has turned positive

“We are blessed to be in some great markets, I would say business optimism, if anything is slightly better now than it was” – United Community Banks (UCBI) CEO H. Lynn Harton

“The tone of recent conversations I’ve had with customers and colleagues across our markets is optimistic, and we continue to see slow, steady economic expansion.” – Comerica (CMA) CEO Curtis C. Farmer

“As we start the year, while the macroeconomic and geopolitical situation remains uncertain, positive market sentiment persists. We also see higher activity from our clients, supporting the typical first-quarter seasonality.” – UBS Group (UBS) CEO Sergio Ermotti

“I think we saw at the end of the year, a little bit of an acceleration. And so, we head into this year with some optimism.” – Goldman Sachs (GS) CEO David Solomon

…as recession fears fade

“The imminent global recession fears have abated with the help of economic easing from the leading central banks.” – Halliburton (HAL) CEO Jeff Miller

“Over the last couple of quarters, recession fears are kind of fading away” – United Community Banks (UCBI) CEO H. Lynn Harton

“Late in the year [2019], recession concerns in the U.S. abated and investor sentiment improved, supported by progress on global trade discussions and Brexit, while U.S. equity markets reached all-time highs” – UBS Group (UBS) CEO Sergio Ermotti

The US-China deal is a big deal

“…since 1949 when the People’s Republic was established in China, the U.S. hasn’t done a bilateral deal. And so, I think it is really important that that’ occurred…These two together countries together, depending on how you do your numbers, comprise 35% to 40% of the entire world’s economy. There are over 200 countries. And so, when these two don’t have it right, it is a big deal.” – Blackstone (BX) CEO Stephen Schwarzman

“…many sources of uncertainty that accumulated through 2019, such as China, Mexico and Canadian trade agreements, have been or may soon be resolved” – Comerica (CMA) CEO Curtis C. Farmer

Small businesses are more aggressive in hiring

“Small businesses, which are exposed to the U.S., and the U.S., they are aggressive and going out and hiring people and doing good things and spending.” – Bank of America (BAC) CEO Brian Moynihan


No need to worry about Middle East tensions

“…what’s going on in the Middle East. You know, it’s almost like a second Arab Spring coming through in Lebanon and Iran. I think, you know, the Middle East has been in our lifetime a problem from decade to decade. But, that’s a worry. Listen, the markets are expensive. But the economy is doing well. So, do I worry about that? Not excessively” – Morgan Stanley (MS) CEO James Gorman


E*TRADE Clients are trading more as a result of zero commissions

“…we are seeing clients trade more and I think that falls into a couple of different categories. One is clients breaking up their trades in the smaller sizes. That’s not necessarily adding a whole lot of value if any, but also just clients trying to trade intraday more, position more, the active traders taking more advantage of the lower commission rate, that is a more sustained effect in terms of the overall volume level. I think that’s probably something that’s here to stay, but probably not going to grow too much from these levels as clients have pretty much adjusted to their trading styles to what’s going on.” – E*TRADE (ETFC) CEO Michael Pizzi

What was the impact of Wework not IPOing? 

“I actually think the impact is positive for our market for the following reason. I think it caused companies to take a look back and say, let’s look at our fundamental business and the path to profitability, which I think is a healthy thing and actually created more sustainability for the continuation of this kind of trajectory that we’re on, because if we were headed – continue to head down that path, and again, my bias, if WeWork would have gone public and seen a massive valuation, I actually think you would have started to see more bubble-ish type of valuations happening.” – SVB (SIVB) CEO Gregory Becker

The 2020 IPO market expected to be robust

“…we had about a handful of IPOs or potential IPOs that didn’t work. But when you look at the overall performance of IPOs last year, the basket was up 34%, which is strong performance versus obviously excellent market performance. The market is still open and receptive. I think there’s a little bit more focus on earnings and long-term business models and profitability, the sustainability of profitability in businesses and little bit less focus on growth. I actually think that’s healthy. But I would expect to see, if the environment stayed as benign as it is, I would expect to see a relatively robust IPO market this year.” – Goldman Sachs (GS) CEO David Solomon

Goldman Sachs will only take companies public that have diverse board membership

“I look back at IPOs over the last four years and the performance of IPOs where there’s been a woman on the board in the U.S. is significantly better than the performance of IPOs where there hasn’t been a woman on the board. So, starting on July 1st in the U.S. and Europe, we’re not going to take a company public unless there’s one diverse board candidate with a focus on women and we’re going to move toward 2021 requesting two.” – Goldman Sachs (GS) CEO David Solomon


Netflix growing even in the US despite the increased competition and churn

“The great thing is, first off, we’re growing in Q4 including in the US even with some of those noise from competitive launches. And ultimately what drives our business is increasing member satisfaction and viewing. And what you also see in the US, what we saw across the board is that our viewing, our per membership viewing grew not just globally, but in the US through Q4 and continues. So that bodes well for our long-term opportunity as long as we keep getting better.” – Netflix (NFLX) CEO Reed Hastings

“I think it’s useful to start with just noticing that our revenue in the United States is up 23% year-over-year in Q4. So we’re still seeing a pretty significant growth there.” – Netflix (NFLX) Chief Product Officer Greg Peters


The memory business has changed over the last few years

“The Memory business is quite different than it was a couple of years ago. I mean six players in 3D NAND, three in DRAM. So those patterns will also be a function of the composition of that market, and individual position of those companies in that market. So, it is really difficult to use historical rates as a proxy for what’s going to happen now.” – ASML Holding (ASML) CEO Peter Wennink


Scrap steel supply should outpace demand

“Longer term, with steady scrap supply from the manufacturing base and the potential for additional scrap substitute production in the United States, we believe scrap supply will outpace demand, creating a positive steel mill – steel margin environment.” – Steel Dynamics (STLD) CEO Theresa Wagler


Energy as a share of S&P 500 has decline to 4% today

“As a share of the S&P 500, the energy business has declined from 16% at its high point in 2008 to about 4% today.” – Kinder Morgan (KMI) Executive Chairman Richard D. Kinder

US energy industry is facing a tough time

“The US shale industry is facing its biggest test since the 2015 downturn with both capital discipline and slowing leading-edge efficiency gains weighing down activity and production. As expected in the fourth quarter, customer activity declined across all basins of North America land…The rig count in US land contracted 11% sequentially, and completed stages had the largest drop we have seen in recent history. While holidays and weather were the usual factors, other reasons for this air pocket inactivity included our customers’ free cash flow generation commitment and an oversupplied gas market” – Halliburton (HAL) CEO Jeff Miller

“…there is no doubt that with gas prices where they are, the dry gas producers are under some strain and they are being very careful and thoughtful about how they are managing their business…there are more discussions about making sure that we continue to have adequate credit support…the dry gas plays are more challenged” – Kinder Morgan (KMI) Executive Chairman Richard D. Kinder

Natural gas prices in the US are below breakeven levels

“Gas prices in the US are below breakeven levels. US drilling and completions activity may be biased lower due to the consolidation and restricted access to capital.” – Halliburton (HAL) CEO Jeff Miller

Equipment attrition beginning

“In the fourth quarter, the market saw clear public evidence of the long-awaited equipment attrition. This is just the beginning. We believe a lot more equipment will exit the market as lower demand, increasing service intensity and insufficient returns take their toll. As service companies cannibalize idle equipment for parts and use sidelined pumps to beef up working fleets, the available horsepower supply in the market may be smaller than some think.” – Halliburton (HAL) CEO Jeff Miller

Some believe that natural gas will play a key role in a lower carbon future

“Our view remains that in almost any scenario, natural gas will be the key transition fuel and perhaps even a destination fuel for a lower carbon future. As a result, we believe that natural gas demand will grow at more than twice the pace of oil over the next 10 years and that LNG demand growth will be higher still at an annual rate of 4% to 5%.” – Baker Hughes (BKR) CEO Lorenzo Simonelli

Miscellaneous Nuggets of Wisdom:

Nuggets on company culture from two books, one about Netflix (That Will Never Work) and the other about Disney (The Ride of a Lifetime), that we have been reading

“A company’s culture is shaped by a lot of things, but this is one of the most important—you have to convey your priorities clearly and repeatedly. In my experience, it’s what separates great managers from the rest. If leaders don’t articulate their priorities clearly, then the people around them don’t know what their own priorities should be. Time and energy and capital get wasted. People in your organization suffer unnecessary anxiety because they don’t know what they should be focused on. Inefficiency sets in, frustration builds up, morale sinks.” – Disney (DIS) CEO Robert Iger

“Now, of course, Netflix’s culture is famous…it wasn’t the product of meetings or careful planning or roundtable discussions. It arose organically, through a shared set of values among a team of people who had been through their fair share of offices—startups, major corporations, and everywhere in between. Netflix, for all of us, was an opportunity to work at the kind of place we’d always dreamed about. It was a chance to do things truly our way. Culture isn’t what you say. It’s what you do.” – Netflix (NFLX) Co-founder & Former CEO Marc Randolph


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