The Newsletter

The Transcript 09.28.20

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Succinct Summary: The economy has improved a lot since the bottom, and headline economic activity is nearing a full recovery.  However, the recovery has not been shared equally.  There have been a small number of big economic winners and a much larger number of economic losers from COVID.  This will help keep the government pushing for more stimulus for a long time.  In the past, this stimulus has tended to help the winners even more.

Macro Outlook:

The economy has improved a lot since the bottom

“Economic activity has picked up from its depressed second-quarter level when much of the economy was shut down to stem the spread of the virus. Many economic indicators show marked improvement..Household spending looks to have recovered about three-fourths of its earlier decline, likely owing in part to federal stimulus payments and expanded unemployment benefits. The housing sector has rebounded, and business fixed investment shows signs of improvement”Federal Reserve Chair Jerome Powell

Consumer spending is holding up well despite the fall in the stimulus

“We were anxious to see what happened to our sales performance in August, after the enhanced unemployment benefits subsided. We are very happy to report that our domestic same-store sales in August, while down some from May through July were still up remarkable 16.5%.” – AutoZone (AZO) CEO Bill Rhodes

“…we’ve seen no fall off with the stimulus. Actually we’re seeing average weekly sales across system improve every single week. So we’re feeling pretty good about that.” – Darden Restaurants (DRI) CEO Gene Lee

“I think we’re a little surprised by the strength in many of these discretionary non-food categories, things for the house and big ticket items. Again, not only furniture for that inside the house, but patio furniture; white goods were particularly strong. Where in some instances we had tried to cut back a few orders back in March and April for seasonal summer goods like patio furniture. Very quickly we were having to scramble for more of those.” – Costco (COST) CFO Richard Galanti

Railcar loadings are solid

“We have seen the economy start to pick up relative to rail loadings…We basically say that if we’re handling 200,000 units a week, that indicates we’re a busy railroad. In 2018, we handled over 200,000 units a week, 41 times that year….In the depth of the pandemic, our rail loadings were actually down to about 150,000 units a week. Now, we have seen that continue to come back. And we anticipate this week we’ll handle somewhere in the neighborhood of mid 195,000-196,000 range,” – BNSF Railway incoming CEO Katie Farmer

We could have a “full recovery” by the end of the year

“Third-quarter GDP growth is projected to show substantial expansion. There is an outside chance that U.S. GDP could reach the 2019 average level by the end of 2020, a form of “full recovery” – Federal Bank of St. Louis President and CEO James Bullard

However, this recovery is not being shared equally

“We cannot expect our employees to accept reduced salaries for that long. So we restored salaries to 100%, and we announced our plans for workforce reductions in the Americas a few weeks ago.” – Steelcase (SCS) CEO Jim Keane

“I think one of the things that happen out of COVID is, the winners win bigger. There’s an awful lot of consolidation. The leaders in a sector are pulling away from the also-rans…we’re in a bit of a world where the winners have access to great amounts of cheap capital.” – Blackstone (BX) Executive Vice-Chairman Tony James

The government will keep broad stimulus in place until everyone has recovered

“…the consensus is we should have more stimulus. I think both parties want more stimulus, the White House certainly wants more stimulus, if nothing else for the election. But absent stimulus, I think the Fed’s gonna feel more pressure to move. Now, short rates are already near zero, so the concern would be that eventually we get some inflation and that would affect long rates. So yes, in a nutshell, I think in the absence of stimulus, the Fed, keeping that yield curve at the long end down, is helpful” – Blackstone (BX) Executive Vice-Chairman Tony James

It could be a long time until we have a full recovery

“We’re talking about a … return to growth that’s going to take a few years, and many countries along the way that are probably going to need assistance…There will probably be a quick rebound as all the restriction measures linked to lockdowns are lifted, but a full recovery will take as much as five years”IMF First Deputy Managing Director Geoffrey Okamoto


Business in China is operating normally 

“Today, about eight months after it started, our orders in China are back to prior year levels. That’s fast. And the prior year was a really good year. So getting back to prior year levels is really terrific. And that’s despite rising political tension between the US and China. People are generally back in the office, and while life is not back to normal, our businesses are operating quite normally. So in China, when the recovery came, it came quickly, and that’s because there was pent up demand. Projects have been delayed, and everyone’s trying to catch up.” – Steelcase (SCS) CEO Jim Keane

“The place where we saw more balanced growth in the quarter was in Greater China, where retail traffic has recovered closer to prior year levels and is approaching prior year levels.” – NIKE (NKE) CEO John Donahoe

“We’re delighted to see that the domestic China business is well on track towards full recovery. Despite pockets of outbreaks and a virus resurgence, our China domestic hotels and air bookings have turned positive growth again, significantly outpacing the industry.” – (TCOM) CEO Jane Jie Sun


Most companies are unlikely to move to fully remote

“While there are still a few articles about companies deciding to have large parts of their workforce permanently working from home, we see very few examples of this. Most of our clients aren’t even considering it, and they’re not interested in even talking about it. We do see examples of companies rethinking their real estate footprint. For example, reconsidering how much should be in the city center versus the suburbs.”Steelcase (SCS) CEO Jim Keane

Offices have changed forever though

“How did the office need to change to support new ways of working that were accelerated during the shutdown? Some things have changed forever. We believe, for example, that many more people will work from home from time to time. And when they do, they will need to connect to meeting rooms in a way that is easy and effective. And most meeting rooms are not designed for that.” – Steelcase (SCS) CEO Jim Keane

Delinquencies and deferrals are down at CarMax 

“Payment extensions are down significantly, delinquencies are trending favorably, and our July ABS transaction was well received. Consequently, in the back half of the quarter, we began originating our normal spectrum of Tier 1 business” – CarMax (KMX) CEO Bill Nash

Individual investors turned bearish

“Optimism among individual investors about the short-term direction of the stock market experienced its biggest weekly percentage-point decline since June 2020. The latest AAII Sentiment Survey also shows higher levels of neutral and bearish sentiment” – AAII Sentiment Survey

There is a case for consolidation in banks in Europe

“…as a very keen observer, I would note that the sector, the segment in Europe is overbanked, that there are many, many banks who are subscale in one form or other and there are some good strong banks who are likely to want to increase their scale through acquisition. So I think the big impediment so far has been regulation. We’ll see whether the regulators are happy to allow some of this consolidation to take place” – Standard Chartered (LON: STAN) CEO Bill Winters


The resumption of housing market demand has been remarkable

“…the resumption of housing market demand that marked our third quarter was remarkable and we are now poised to end the year with much higher revenue and margins than we expected just three months ago” – KB Home (KBH) CEO Jeff Mezger

Land prices are running up

“I think it has in part because prices are running up, it’s the classic. It’s the evolution in a cycle where the urban, the suburban urban areas not necessarily downtown, but the job clusters that ring of city are more desirable, because it’s less of a commuter, there’s more amenities around you. And then the further out you get prices go down because there’s compromises and as prices that lifted in those more desirable areas in the suburbs, it does push the next ring out because affordability is an issue”KB Home (KBH) CEO Jeff Mezger

Home and DIY is doing rather well

“We’ve also benefited from the much-improved sales and products and items for the home, outside of the food area. As people are spending less on travel, air and hotel and dining out, they seem to have redirected some of those dollars to categories like lawn and garden, furniture and mattresses, exercise equipment, bicycles, housewares, cookware, plastics [ph] and the like” – Costco (COST) CFO Richard Galanti

People are embracing fitness

“People are more engaged as sort of this movement toward health and fitness and wellness, which I think started when people being confined to their homes. We are seeing it continue to accelerate. You watch a game on TV and you want to go out for a run right or you go shoot baskets in the driveway and so I think sport is so healthy for the world right now” – NIKE (NKE) CEO John Donahoe

Distance learning has seen greater adoption in Asia

“…the experience in Europe and US on distance education and online education has been pretty poor. Whereas in Asia, consumers have really taken to it and parents have really taken to it. And I think that’s probably due to there being much more specialized companies dealing with it in Asia, and in the US and in Europe, it’s only an emerging opportunity. I think people will become more used to it and I think adoption will pick up over time in the West” – Canada Pension Plan Investment Board CEO Mark Machin


The shift to digital is here to stay

“The accelerated consumer shift toward digital is here to stay…We are accelerating what probably would have happened in the retail environment on a naturally in the next four years to five years, we are going to try to drive it for our business in the next one years to two years.” – NIKE (NKE) CEO John Donahoe

But not everything will be online

“Buying a used car is still a highly considered and complex purchase. Customers don’t want to be forced to interact 100% in-store or 100% online….approximately 50% of our customers progressed their sale remotely, up from about 42% pre-COVID. Most of these customers still chose to come to the store to complete their transaction, and approximately 30% of our customers still opted for an in-store experience only” – CarMax (KMX) CEO Bill Nash

Cloud and cloud security continue to thrive. 75% of enterprises still run their applications on-premises

“Bookings continue to be dominated by strong demand for digital, cloud and security-related services, which we estimate represented approximately 70% of our new bookings.” – Accenture (ACN) CFO Kathleen McClure

“…as you know, enterprises run 75% of their applications on-premise. However, they are being impacted in very profound ways by cloud computing. And so they are now finding themselves at an inflection point.” – NVIDIA (NVDA) Senior Director of Product Management in Data Center Paresh Kharya

Driver assistance tech is demanding even at entry-level

“…the driver assistance computer vision market is no longer a young market. The set of solutions in that space are very rich. And in order to launch a camera on a windshield of a vehicle, you need to have a very comprehensive set of tools and very well tested because of the liabilities of breaking the car based on the camera, et cetera. So saying, it’s not like 2004 where you detected two-lane marks and you had your camera on the windshield. Today it’s a full suite of road detection, vehicles detection, pedestrian direction, cyclists and the list goes on, and traffic signs and whatnot. So the solutions today even at the entry level are becoming more and more demanding” – Intel (INTC) Mobileye Products and Strategy Executive Vice President Erez Dagan


Some green shoots in travel and airlines and as they position themselves for holiday travel

“…on the international business. Overseas market hit the bottom in April and green shoots of recovery have since been observed in many regions. Customers have started to travel domestically and hotel reservation have shown initial signs of recovery” – (TCOM) CEO Jane Jie Sun

“We are seeing some positioning for holiday travel. So, that’s typically what drives the demand in the fall. And then the demand that we see throughout the winter and the spring is getting ready for summer travel. And we are seeing a lot of movement inside the airlines as much as — on the one hand, they want to conserve cash and be conservative. On the other hand, they don’t want to miss out to the extent that there is an increase in bookings and they have the ability to add more routes.” – AAR (AIR) CEO John Holmes

Fewer airplanes have been retired than expected

“…there does seem to be a disconnect out there between announced fleet reductions and actual retirements. We haven’t seen as many actual retirements as we would expect at this point. And therefore, we actually haven’t seen as many aircraft go to part out, as we would expect at this point, but we do anticipate that.” – AAR (AIR) CEO John Holmes


Lumber prices coming back down

“…you’re already seeing lumber come down, the lumber futures that the September futures 60 days ago, we’re at 900 and some, we’re already back down to 600 and some. And it’s a reflection of the product that’s now coming to market. So yes lumber spike. It’s already coming back down, typically won’t get all the way back to where it was. But it’ll come down more from where it is today” – KB Home (KBH) CEO Jeff Mezger

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