Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.
A lot of good stuff got left on the cutting room floor this week. Click the links for more from each call.
The Macro Outlook:
Industrial activity has been weak. June was disappointing.
“It’s non-res; it’s oil and gas; ag; manufacturing; and of course the currency….anything that impairs the manufacturing output of this country, impacts us…June was disappointing, there is no question” —Fastenal (Industrial Distributor)
It appears that the weakness may be spreading
“If I look at our top 25 customers, and I took a good hard look at that group of business, 11 of those 25 customers were negative in June; 7 of those 11 were negative double-digit; and 5 of those 11 were negative in excess of 25%. That’s a negative of being directly linked to their business.” —Fastenal (Industrial Distributor)
CSX (NYSE:CSX) saw weaker volume than anticipated
“…the volume environment is not as strong as we had originally anticipated.” —CSX (Railroad)
Delta’s revenue was weaker than expected too. They said it’s not a demand issue, but others are saying it is.
“Softer yields in certain domestic markets resulted in revenues that fell short of our initial expectations…where the weakness is, it is not in corporate demand. It is in the yield that we’re obtaining from corporate demand…I have read it in several reports where people were talking about close in demand deterioration, which is not what Delta has experienced, but we have experienced closing yield deterioration in several key business markets.” —Delta (Airlines)
Intel (NASDAQ:INTC) blamed macroeconomic headwinds for weak growth in enterprise spending
“we do not expect a large recovery of the enterprise as we go through the remainder of this year. You said it. The headwinds are the macroeconomic, companies looking at how do they spend their capital and when do they deploy their capital, being careful about that.” —Intel (Semiconductors)
Blackrock (NYSE:BLK) saw outflows from big international institutions that needed cash for a rainy day
” we saw sizable institutional index equity outflows driven by redemptions from international and official institutional clients…a lot of money that was, in terms of the outflows, was more cash need driven by our clients for rainy day issues and it’s raining in some of the commodity-based economies, and so they’re utilizing some of that.” —Blackrock (Asset Management)
Financial markets activity remains strong though
American consumers and businesses have capacity to carry more debt
“there is a fair amount of capacity to carry more debt by medium size companies, small companies and consumers. Rates are very favorable and most Americans businesses and consumers have de-risked and deleveraged their balance sheet.” —Wells Fargo (NYSE:WFC) (Bank)
And they’re using it: home equity lines are growing again, mostly for home improvements, but also some debt consolidation
“home equity, as I mentioned in my comments, are also strong…people are using their home equity for home improvement and home repairs…Debt consolidation for the first time, Kevin, is starting to show up again in home equity, which I guess, it makes sense later in the cycle as people want to reset one more time, but they are much more prudent than they were before.” —US Bank (Bank)
The home purchase market is really picking up
“look, purchase activity is really picking up; new home construction is up substantially and new home purchases is up; we’re seeing a shift toward high percentage of purchases versus refis. So I think, you can think about it in terms of the steady to up, not dramatic up, steady to up.” —BB&T (NYSE:BBT) (Bank)
Goldman sees continued momentum in M&A advisory
“when we talk to our M&A bankers, the momentum in the advisor side of the business feels very strong…when you see Greece dominating the headlines and lots of volatility in the markets you might see some dip in confidence. But in terms of the degree of conversations we’re having in the activity levels, it feels quite good.” —Goldman Sachs (NYSE:GS) (Bank)
Steve Schwarzman says that public equities are not undervalued but not peaky (SK editorial: 16x PE is not accurate)
“in today’s markets, which the S&P is at about 16 PE, they feel not undervalued, but not peaky either in these equity markets.” —Blackstone (NYSE:BX) (Private Equity)
But even Reed Hastings doesn’t get Netflix’s valuation
“Well, I think it probably shows why at least I should keep my day job and not try to be a stock picker, because when the stock was half this price I described it as euphoric. So it’s a mystery to me. And what we focus on is how to get incredible content, stream it beautifully, market it in every country, grow the member base; and I think I’m out of the stock commentary business.” —Netflix (NASDAQ:NFLX) (Media)
International:
Sluggish PC demand may actually be a sign of global economic weakness
“In general, I think if you look at it, the PC has always had a fairly decent tie to GDP, both for the countries that we sell in. but then I think if you just look at the worldwide GDP, so worldwide GDP growth has slowed, especially in areas like China, where a lot of growth in PCs was occurring. But even in the mature areas like the U.S. and Western Europe, that has caused it to slow down a bit more. I think there has been a little bit of a stall.” —Intel (Semiconductors)
American companies are taking advantage of a low European interest rates to borrow cheaply
“We’ve almost never seen before in the EU, the volume of American companies financing in euro, because it’s cheaper to do that even if you swap back to dollars. So a lot of American companies go to Europe to do that.” —JP Morgan (Bank)
Goldman doesn’t expect the Chinese stock market crash to have a long term effect on liberalization policies
“our early read of all this is that it’s not going to have a big – when we talk to our research folks, it’s not going to have a big impact on the local economy, and we don’t expect a major change in sort of the focus on liberalization.” —Goldman Sachs (Bank)
Yum hasn’t seen a big boost from the Modi government in India
“I think that we did expect – I think with the Modi government change that there might be a sort of perceptible change in consumer perception and I guess that probably hasn’t had, we haven’t seen that.” —YUM! (Restaurants)
Financials:
Janet Yellen seems to be the only person who believes that she will raise rates this year
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy…But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise rates at any particular time” —Federal Reserve (Benevolent Overlord)
No matter what happens to the short end, Wells Fargo expects the long end to be lower for longer
“it’s our expectation that the longer-end of the curve, that we are going to be lower for longer than we would have thought six months ago, a year ago, or a couple of years ago and how we are managing the balance sheet is a reflection of that.” —Wells Fargo (Bank)
2.5% is really attractive compared to what else is going on in the world
“I would say, what’s happened with rates around the world has been a big reminder that a 2.5% US ten year is a really attractive asset and could be for a really long time. So that’s why I say regardless of what’s happening with Fed funds, we are preparing ourselves for a long march on – at the longer end of the curve.” —Wells Fargo (Bank)
JP Morgan thinks that deposits may not be sticky when rates rise
“we are expecting retail deposit to reprice higher and faster in this cycle than in previous rising rate cycles, given the competition so good high quality LTR compliant retail deposit, given the advancements in mobile banking, given the awareness in the general environment around low rates and the desire to participate in rising rates.” —JP Morgan (Bank)
The world changed for banks in 2008
“The world changed after 2008. We began to adapt to this new world immediately, and particularly to comply with new regulations.” —Goldman Sachs (Bank)
The cost of compliance is finally hitting a high water mark
“it’s not coming down, so let’s put it that way. But I don’t see any material increases either. What’s happening here is the cost of compliance is at its high watermark.” —US Bank (Bank)
Regulations may actually give banks the ability to raise prices to cover their cost of capital
“makes balance sheet at one point, depending on the metric, and capital itself more expensive. And so, I don’t know if it’s an intended or unintended consequence in terms of the regulation, but the regulation does reprice things…so we’re starting to see repricing come through now…this is going to be a – this will be a long process.” —Goldman Sachs (bank)
Technology is changing the face of bank branches
“60% of our sales are all digital now. There are about 10,000 appointments scheduled in the mobile device a week at the branch, that allows us to have a more efficient branch structure, even though we may have less, we may have bigger branches because you have more sales going on in them” —Bank of America (NYSE:BAC) (Bank)
And giving PNC the potential to scale without increasing expenses
“historically our challenge was we couldn’t scale our activity without scaling the cost along with it, because we had much more manual process than we otherwise wanted. A big part of what we are building out in technology through automation is the ability to scale without adding variable cost associated with it…Once completed we could do material more – volume than we are doing today, importantly without adding the personnel costs that typically comes along with that and that is what we are building into this plan.” —PNC (Bank)
Wells Fargo could get into the Robo investment advisory business
“it could even include service or capability that competes with some of the sort of the robo advisory people out there today who rely primarily on technology to construct portfolios and make offerings to customers.” —Wells Fargo (Bank)
Most people are using ETFs for tactical allocation. “Beta” is being used for “alpha”
“People use beta as a place holder of a tactical allocation, I mean that’s one thing that people still don’t understand how much beta products are being utilized now for alpha. And there are many enterprises are tactically allocating whether overweighting or underweighting using beta products.” —Blackrock (Asset Management)
Active ETFs are not likely to be a large part of the ETF space
“I think there’s way too much emphasis on [Active ETFs]. We have said that we believe the ETF industry is going to go from a $3 trillion to $6 trillion industry. Active ETFs will be a component of it, but it will be dwarfed by the industry’s growth in traditional beta products…If there is growth in it, it’s going to be growth that’s going to be taking away more growth from traditional mutual funds.” —Blackrock (Asset Management)
Blackstone’s CFO says that public markets will probably only give 4-5% returns, which could lead to a retirement crisis for non-boomers
“I have the view that the hidden crisis in America that no one is talking about is what’s going to happen with all of these 20, 30, 40-year-olds who no longer have corporate pension funds of defined benefit, so they have got 401(k)s and they are making little contributions in there, which is earning very, very little. When they retire at 65 and they don’t have enough to live on and it’s an entire generation, maybe two generations of people, we are going to go, oh my God, what happened? And if they can’t invest money at higher returns than 4% to 5%, which is all the public markets are going to give you, we are going to be in trouble as a country.” —Blackstone (Private Equity)
Consumer:
It sounds like Netflix is going to start focusing more on driving higher prices
“Over the last year, we’ve raised ASP about 5%. We’d like to keep that moving. So we’re going to continue to have incentives for people to move up in the plans as suits their usage pattern, but we want to take it very slow.” —Netflix (Media)
What is the price elasticity of Netflix though? Hulu stumbled in Japan because $20/month was too high
“[Hulu’s] initial missteps, where pricing was too high, it was ¥2,000 or about $20 at that time a month, had no local content. So it seems pretty substantial missteps. In contrast, our pricing will be more aggressive than theirs was. We’ll have a local content, we may have some local originals.” —Netflix (Media)
Technology:
Intel admitted that Moore’s law may be slowing. It is moving from a “tick-tock” cadence to a “tick-tock-tock” cadence for new chips
“The last two technology transitions have signaled that our cadence today is closer to 2.5 years than two. To address this cadence, in the second half of 2016 we plan to introduce a third 14-nanometer product, code named Kaby Lake, built on the foundations of the Skylake micro-architecture but with key performance enhancements. Then in the second half of 2017, we expect to launch our first 10-nanometer product, code named Cannonlake.” —Intel (Semiconductors)
However Intel says it will not lose its lead in pushing technology forward
“we believe, even with this 2017, our lead in Moore’s Law will not change dramatically. We believe we’ll continue to lead with roughly the same leadership position that we have today. We base that on, one, what really counts when I talk about 2017, that’s not samples, that’s not small volume. That’s converting over to Cannonlake and producing a large percentage of our CPUs in volume in the second half of 2017. So there’s a bit of definition. When we say second half of 2017 we’re talking about millions of units and large volumes.” —Intel (Semiconductors)
Healthcare:
Consolidation in the healthcare industry is putting pressure on medical device prices
“as we look at this market, the ongoing consolidation among health systems and within the insurance industry is continuing to create pressure on pricing.” —Johnson and Johnson (Medical Device)
United Healthcare sees medical cost trends increasing at *just* 5.5-6.5%
“The 2015 commercial medical cost trend outlook continues to be biased towards the lower portion of our 5.5% to 6.5% full-year forecast and we continue to expect a full year consolidated care ratio of 80.8%, plus or minus 50 basis points.” —United Healthcare (Health Insurance)
Technology is reshaping the healthcare landscape
“technology is reshaping the entire healthcare landscape…wearables and mobile apps…big data, analytics…Artificial intelligence, machine learning …I have been in healthcare long enough to have heard over and over again that technology was going to disrupt the industry beyond recognition. But today, maturing technology, scientific advances and global healthcare reform are combining to make disruption a reality.” —Johnson and Johnson (Medical Device)
Materials, Industrials, Energy:
The oil industry has adjusted very quickly to falling prices
“the market is acting very rationally. The market is acting very quickly. The opportunists are arriving at the door and trying to work things out, create business combinations and take advantage of the situation to resolve it…this is my third or fourth cycle I remember doing workouts in this business in the early 80s. This one is different in that – the energy participants…reacted much more quickly than I have seen in the past cycles.” —Wells Fargo (Bank)
2016 could be another rough year for coal
“I think there is probably more downside to the coal volume next year than there is upside. If the current — if gas prices stay, and the exports markets kind of remain challenging.” —CSX (Railroad)
Miscellaneous Nuggets of Wisdom:
One day Jamie Dimon isn’t going to be here anymore 
“Before you all go, I just want to tell you one of these days I’m not going to come in this call. I’m not doing it because I want to avoid it, I don’t like it. And obviously if anything is important or really bad, I’m not going to ever try to avoid bad news here, because we like to tell the whole truth, nothing but the truth, the good, bad, and ugly. But Marianne has started to do such a good job that I’ve become unnecessary to be in all of them and I can obviously go do other things. So don’t be surprised if one of these days I don’t show up, don’t read anything into it.” —JP Morgan (Bank)
Focus on clients, people and long term trends
“our management team isn’t overly focused on any one quarter or, for that matter, any six month period. Our focus is on the strength of our global client franchise, the quality of our people, and the long term trends driving our businesses.” —Goldman Sachs (Bank)
When you own an asset for the long term you have to have conviction on what’s actually going to happen to it
“Once we buy an asset, we own it for a long, long time. So you got to have – you got to be able to develop conviction around what’s really going to happen” —Blackstone (Private Equity).