The Newsletter

The Transcript 01.25.21

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Succinct Summary: The US got a new President last week, and the new administration is pledging more stimulus.  The economy continues to chug along though and there are signs of tight capacity in some segments, especially transportation networks. Could additional stimulus lead to higher-than-expected inflation?

Macro Outlook:

A new President was inaugurated

“This is democracy’s day. A day of history and hope of renewal and resolve through a crucible for the ages. America has been tested anew and America has risen to the challenge. Today, we celebrate the triumph not of a candidate, but of a cause, the cause of democracy. The people, the will of the people, has been heard and the will of the people has been heeded. We’ve learned again that democracy is precious. Democracy is fragile. At this hour, my friends, democracy has prevailed” – US President Joe Biden

The administration is calling for more stimulus

“Neither [the president], nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time,” – US Treasury Secretary Nominee Janet Yellen

But the economy has remained strong

“…the month of December was felt really good. It actually felt like kind of pre-COVID environment.” – Comerica (CMA) CEO Curtis C. Farmer

“Throughout the quarter, we have seen real-time consumer and business spending data that’s been encouraging. For example, for the month of December, our customers debit card spending was 11% more than a year ago month of December and credit card spending which has often been negative when compared to the year-ago period, went down in part by travel and entertainment spending was slightly positive from the same month a year ago” – Zions Bancorporation (ZION) CEO Harris Simmons

“Total payments in the month of December hit a high of $304 billion up 8% year-over-year driven by a record volume of holiday spending. Full-year payments reached a new high of $3.1 trillion, up 2% year-over-year.” – Bank of America (BAC) CEO Brian Moynihan

Even hard-hit industries have held up better than expected

“…at-risk industries, they have actually held up I think better than what we would have expected coming into this.” – Comerica (CMA) Executive VP & Chief Credit Officer Melinda Chausse

And companies are increasingly optimistic as vaccines are rolled out

“We’re getting increasing comfort that with the vaccinations, with the stimulus that the economic outlook is improving, and that we will have recovery next year. So I wouldn’t — that may have been a big worry in 2020. I think it’s less worry today going down the elevator.” – Citizens Financial Group (CFG) CEO Bruce Van Saun

“There is enormous fiscal stimulus. Our rates remain very low. I think the global economies are recovering. And I think the vaccine; if we get in the U.S. to a million doses a day for the next 150 days would be spectacular.” – Morgan Stanley (MS) CEO James Gorman

“As we all know there’s one priority and that’s to get everyone vaccinated so the healthcare crisis is behind us and therefore the economy can regain its strength.” – Bank of America (BAC) CEO Brian Moynihan

Analysts are looking towards a normalized world

“I know that everybody’s very concerned about if things normalize, that we’re going to lose all that safety business, we don’t lose all of it, lose some of it. But let’s not lose sight of the fact that…If COVID gets resolved, we may — we have that tough comp in safety but we have really easy comps in everything that’s not safety which is a bigger part of our mix, right?” – Fastenal (FAST) CFO Holden Lewis

Stimulus + High Activity = Inflation?

“I will tell you, I think the shipping costs are showing every indication of probably moving up as we get towards the end of first quarter into second quarter. And so I think there’s a pressure there.” – Fastenal (FAST) CEO Dan Florness

“We believe 2021 will present opportunities for us to make progress on the margin front. Costs on all fronts, dray, rail and productivity have all come at us at a fast pace in 2020, and this New Year presents our opportunity to price those costs into our business. We must find growth opportunities that complement our network and provide balanced benefits while also increasing core pricing that reflects the current cost to serve our market.” – J.B. Hunt (JBHT) Intermodal President Darren Field

“Oil prices are back to pre-pandemic levels driven by global vaccine distribution and unfolding demand recovery, OPEC+ discipline and a declining production base.” – Halliburton (HAL) CEO Jeff Miller


The Biden administration will bring a change for international relations

“…we all understand the world is watching, watching all of us today. So here’s my message to those beyond our borders: America has been tested and we’ve come out stronger for it. We will repair our alliances and engage with the world once again. Not to meet yesterday’s challenges, but today’s and tomorrow’s challenges. And we’ll lead, not merely by the example of our power, but by the power of our example.” – US President Joe Biden


Janet Yellen wants to end the race to the bottom on corporate taxes

“We look forward to actively working with other countries … to try to stop what has been a destructive global race to the bottom on corporate taxation. In that context, we would assure the competitiveness of American corporations, even with a somewhat higher corporate tax.” – US Treasury Secretary Nominee Janet Yellen

Odds favor less market activity in 2021, but the year has started strong

“…there’s a lot of market activity I think in the reasonable near-term. Whether it is at the level of 2020, I mean you’d have to bet against that just on pure odds, less than 50%, I think. But who knows, I mean the year has started off strong…the markets are active, the economies are recovering globally, new administration has come in. It looks like we had a peaceful transition hopefully today. So, I am quite optimistic about it.” – Morgan Stanley (MS) CEO James Gorman

Margin balances at Interactive Brokers are up 26% y/y

“Average margin loan balances rose 19% and finished the year 26% over the year ago quarter, as investors displayed an increased appetite for risk…clients grew more comfortable with putting money into the market and taking on leverage, leading to client trading levels increasing and our margin loan balances recovering” – Interactive Brokers (IBKR) CFO Paul Brody

Goldman Sachs warned of the risks in SPACs

“I do think SPACs is a good use case, versus a traditional IPO, and advantages for sellers and for investors and looking at this ecosystem. But the ecosystem is not without flaws. I think it’s still evolving. I think the incentive system is still evolving. One of the things we’re watching very, very closely is the incentives of the sponsors, and also the incentives of somebody that selling. And while I think these activity levels continue to be very robust, and that they do continue as we head into 2021 continue to be very, very robust. I do not think this is sustainable in the medium term…things I certainly think is the case is you have something here it’s a good capital markets innovation. But like many innovations, there’s a point in time as they start, where they have a tendency, maybe to go a little bit too far, and then need to be pulled back or rebalanced in some way. And that’s something my guess is we’ll see over the course of 2021 or 2022, with SPAC” – Goldman Sachs (GS) CEO David Solomon

Public market strength is trickling down into private markets

“When I think about where the risks are, so you’ve got a public market that is very strong, valuations are high, and that’s trickling down into private markets…if public markets all of a sudden valuations dropped substantially in tech and healthcare companies and IPO slowdown dramatically and valuations take a hit that will trickledown into private markets. Now as I said, why don’t I believe that will happen? I believe that won’t happen, because there are very few places for that money to be deployed. Growth is being driven in these markets. And I expect that to continue.” – SVB (SIVB) CEO Greg Becker

Yellen has her eye on Bitcoin

“Cryptocurrencies are a particular concern. I think many are used – at least in a transaction sense – mainly for illicit financing. And I think we really need to examine ways in which we can curtail their use and make sure that money laundering doesn’t occur through those channels.” – US Treasury Secretary Nominee Janet Yellen

“…the current market capitalization of all of Bitcoin is something like $597 billion, or thereabouts. And in relation to bond market, it doesn’t even rise to around the year. So basically, you have…$82 trillion of assets in United States, 82 trillion versus $597 billion…So to be equal 1%, let’s say 1% we regard that is not a rounding error, or some people would say, at 82 trillion” – FRMO (FRMO) CEO Murray Stahl


Our hygiene habits may have changed forever

“We will serve what will likely become a forever altered cleaning, health and hygiene focus for consumers who use our products daily or multiple times each day.” – Procter & Gamble (PG) Vice Chairman, COO & CFO Jon Moeller

Paper towel usage is up 15%

“In the U.S., as an example, cleaning and sanitizing frequency is up 30%, dishwashing frequency is up 15%, air freshening frequency up 20%; in-home paper towel usage, up 15%.” – Procter & Gamble (PG) Vice Chairman, COO & CFO Jon Moeller

Netflix expects to be cash flow breakeven in 2021

“We have turned this corner where now we can, as we talked about, with $8 billion of cash on the balance sheet, projecting to be cash flow about breakeven in 2021 and then positive thereafter, we want to return excess cash to our shareholders. So we won’t build up a bunch of excess cash.” – Netflix (NFLX) CFO Spencer Neumann


PC Demand is high 

“You’re also seeing tremendous demand in PCs, well above our expectations, obviously, contributing to the beat in Q4, continuing into Q1 and actually we think continuing strongly into the first half and that’s largely small core type devices” – Intel (INTC) CFO George Davis

IBM seems to be the only tech company with macro headwinds

“Our performance reflects the fact that our clients continue to deal with the effects of the pandemic and broader uncertainty of the macro environment. This put additional pressure on larger software transactions this quarter, and project delays in some services engagements. Just want to point that out” – International Business Machines Corporation (IBM) CEO Arvind Krishna 


The US is lagging at monitoring COVID mutations

“I think the chances are high because the reality is, in the U.S. we’re doing very little genomic surveillance. In the U.K., they sequence about 10% of the cases they see—and you want to sequence about 5% to get a good view of what’s happening in your community. Here in the U.S. currently we sequence about 0.3% of positive cases. So we’re not getting a great picture. It’s encouraging to see the early work coming out of the Biden administration. It seems like there is a recognition that we need something like this. But clearly, we’re behind.” – Illumina (ILMN) CEO Francis deSouza

Let’s hope, we don’t get a variant that evades the vaccine

“…if we vaccinated the population, and then you got in a new variant that evaded the vaccine, then we’d be back to square one.” – UK Health Secretary Matt Hancock

Covid may not be going away any time soon

“SARS-CoV-2 is not going away. We are going to live with this virus, we think, forever” – Moderna (MRNA) CEO Stéphane Bancel

Telehealth use has petered out some but is here to stay

“We saw a huge spike at the beginning of real high telehealth access back in April. It sort of petered out throughout the course of the year. I’m not sure where it’s going to ultimately end, but clearly it’s here to stay and it’s going to be an important part of healthcare going forward… What’s fascinating is not all telehealth offerings are created equal, and we have found that not surprisingly patients really appreciate being connected to their own personal providers.” – UnitedHealth (UNH) UnitedHealthcare CEO Dirk McMahon

Patients like being connected to their own providers

“What’s fascinating is not all telehealth offerings are created equal, and we have found that not surprisingly patients really appreciate being connected to their own personal providers.” – UnitedHealth (UNH) OptumHealth CEO Wyatt Decker

Industrials and Transport:

Transport networks are tight

“So far in January, volume demand remains extremely strong, and the cost to serve our customers remains elevated. Rail velocity and congestion has improved for now, but labor challenges and increased demand will continue to impact rail velocity as the year goes on.” – J.B. Hunt (JBHT) Intermodal President Darren Field

Materials & Energy:

The oil industry is optimistic that the worst is behind them

“As we start the new year, we believe that the worst is behind us and look to the future with optimism.” – Halliburton (HAL) CEO Jeff Miller

“The energy portfolio, although it has the most stress credit metrics, actually has stabilized quite nicely and certainly prices at $50 a barrel, supply demand dynamics have changed.” – Comerica (CMA) EVP & Chief Credit Officer Melinda Chausse

Drilling activity may pick back up

“I do think if oil and gas prices stay where they are and maintain some stability there, I think, you are going to see increased drilling and you will see greater utilization of lines of credit.” – Zions Bancorporation (ZION) President and COO Scott McLean

Schlumberger hopes that the industry will see full recovery by 2023

“…assume that the oil demand will go back to the 2019 level by 2023, and some are predicting earlier by 2022, I think, this will create the condition to — for the budget spend internationally to actually match the 2019 by the 2023, 2025 latest horizon. Hence, it matches our hypothesis that we can return EBITDA of 2019 in the period of 2023 to 2025” – Schlumberger (SLB) CEO Olivier Le Peuch

China helped lead a recovery in aluminum markets

“China, supported a resurgence in the fourth quarter an aluminum demand, with the price rally reinforced by a weakening U.S. dollar as prices ended 2020 higher than a year earlier…in China, where 2020 consumption exceeded 2019 levels, we expect consumption to grow again this year by about 5% year-on-year. In a world ex-China where consumption contracted in 2020, we expect 2021 consumption to grow by about 10% year-on-year. This will be only the second time we have seen double-digit growth in the past 20 years.” – Alcoa (AA) CEO Roy Harvey

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