Succinct Summary: Jerome Powell struck a much different tone last week on inflation and monetary policy. The Fed chair said that the Fed may end asset purchases sooner than initially planned and acknowledged that this inflation is not transitory. Meanwhile, the Omicron variant is demonstrating that Covid may be with us for a long time. The consumer faces a number of headwinds in 2022.
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Macro:
The Fed changed its tone
“The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases - - perhaps a few months sooner” - US Federal Reserve Chair Jerome Powell
They recognize that this inflation may not be transitory
“I think the word ‘transitory’ has different meanings to different people. To many, it carries a sense of ‘short-lived.’ We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean” - US Federal Reserve Chair Jerome Powell
And that it takes a toll on lower-income families
"Today, the economy is expanding at its fastest pace in many years, carrying the promise of a return to maximum employment. Challenges and opportunities remain, as always. The unprecedented reopening of the economy, along with the continuing effects of the pandemic, led to supply and demand imbalances, bottlenecks, and a burst of inflation. We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched" - US Federal Reserve Chair Jerome Powell
“…we obviously know we have a low-end customer and we are seeing that those customers are shopping less frequently, just from the mere fact that they have less disposable income. We're not necessarily a consumable organization, we have about 20%, 22% of our business consumables. We have a lot more in the discretionary side. So, folks who are right now being crunched a little bit with either gas prices, or food prices, they may be selectively making one stop somewhere else, and not coming to as frequently as they used to. And people are still feeling -- the higher income level people are still feeling pretty good. But we do believe that the trade-down effect is coming with the increased pressures are going to continue to feel on the inflationary side, but they have not started trading down. So we're dealing with one side of our business that's getting crunched a little bit more than we'd like to see them at this point, and we're not seeing the trade down because people are still feeling like they have a decent amount of money and they're coming, they're just not here yet” - Ollie's Bargain Outlet (OLLI) CEO John W. Swygert
But the Omicron variant presents new uncertainty
“...I think we're in a difficult position at the minute because omicron has 15 mutations, 30 in the spike protein, mutations that span in alpha, beta, gamma, and delta, some of them are really quite concerning as a virus. It's a concerning virus. But we don't know that much more about it - - what those mutations really translate into, Matt, in terms of severity of disease and immune evasion, while they have features that would suggest it can cause severe disease and it can result in immune evasion. We don't really know yet” - Moderna (MRNA) Chief Medical Officer Paul Burton
Coronavirus is probably going to be with us for a long time
“Today, we've actually modified our hypothesis to say, we believe a post-pandemic world has COVID being endemic. In other words, COVID does not go away. COVID testing does not go away, but it continues on” - Danaher (DHR) CEO & Director Rainer M. Blair
"At last year's Investor Day, we made a few predictions for life post COVID. But now I think we phrased the question inaccurately. We now know there isn't a finite endpoint. Today, we'll talk about life during COVID. The pandemic is now endemic - - There's posturing about the new norm. How much is pent-up emotional spend or pull-forward? Right now, it's not YOLO, but YOULO, "You only unlock once." The pendulum is swing far upon reopening, but it's unlike this day here." - GCI Liberty (GLIBB) CEO Gregory Maffei
“Omicron. I think we -- this is a new variant we're going to have probably other variants. And I think we are just going to have to continue to live as a society, as a world with infections, and we will get through this. I don't think we're going to have the panic that we had in the second quarter of 2020 when in the United States we closed down practices, dental practices, medical practices. I don't think that's going to happen again” - Henry Schein (HSIC) Executive Chairman & CEO Stanley M. Bergman
Consumers face some strong headwinds in 2022
"This year, all retailers have benefited from onetime items like stimulus checks and pent-up demand. As we get into 2022 and lack these items, it seems likely that conference across retail will fall off sharply. On the other hand, it is possible that rising wage rates or further government spending will offset this decline. We have to be ready for either scenario." - Burlington Stores (BURL) CEO Michael O'Sullivan
"Gas prices are a concern. They're a concern not just in this country, but everywhere. They are up dramatically versus a year ago. And the customers had money and at some point, that's going to come to an end. Hopefully, that's a gradual process and hopefully, gas prices come down. We sell a lot of fuel in both Walmart U.S. and Sam’s; we're trying to help keep those prices down." - Walmart (WMT) President & CEO of Walmart US John Furner
“We know that inflation is having an impact on customers as well. 82% of consumers polled across the country are feeling the impact of inflation. And one in four consumers are not confident in their finances right now.” - Kroger (KR) CEO Rodney McMullen
International:
China’s retail sales are slowing
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Companies are worried about rising inflections in Europe
"...In Europe, we do need to watch a little bit the trends right now. There's some concern in Europe that infections are climbing. You saw the Netherlands announced a lockdown. Austria is doing some vaccinated -- a lockdown for the unvaccinated. But these things will happen. All in all, I mean, the momentum of the domestic front is very good. The momentum on cross-border e-commerce has been excellent. You saw that it's trending way above pre-COVID levels, and it has stayed that way. " - Visa (V) CFO Vasant M. Prabhu
"I mean we are seeing it now in Europe, a number of cases going up. So there is more uncertainty, and you don't want to run into a situation where you need to reduce, but you're constrained by your commitment." - Trivago (TRVG) CFO Matthias Tillman
"...ongoing uncertainty with regards to the pandemic. So something that, in particular now in Europe, we are a little bit worried when we look at the number of infections, which is rising again. You may have already heard that some smaller markets in Europe like Austria, Netherlands, but also Russia, for example, have reentered into some type of local lockdowns." - Hugo Boss (BOSS) Senior Head of IR & Corporate Communications Christian Stoehr
International travel has been slow to recover
"...during the summer holiday season in Europe, we have seen a strong recovery also international trips within Europe. But in general, international travel has been slow to recover, and in particular, intercontinental travel is only at the beginning of the recovery." - Trivago (TRVG) CFO Matthias Tillman
“Domestic travel is nearing pre-COVID levels, while international travel, although steadily improving is still significantly lagging” - Woodward (WWD) CEO Thomas Gendron
Financials:
These financial markets are even crazier than the dot com era
“Some of the valuations we saw in the dot-com boom were higher - - But overall, I consider this as being even crazier than the dot-com boom, which blew up in 2000.” – Berkshire Hathaway (BRK.B) Chairman Charlie Munger
If interest rates move up it could take some exuberance out of the markets
"I think markets generally, when I step back and I think about my 40-year career, there have been periods of time when greed has far outpaced fear. We were in one of those periods of time and generally speaking my experience says that you know those periods are not long-lived. Something will rebalance it and bring a little bit more perspective certainly given that it feels like inflation's rubbing above trend. Chances are interest rates will move up and if interest rates move up, that in and of itself will take some of the exuberance out of certain markets " - Goldman Sachs (GS) CEO David Solomon
Consumer:
Retailers posted strong comps in Q3
"During the quarter our brick-and-mortar stores comped up approximately 15% versus last year and delivered a 31% sales increase when compared to 2019. Importantly, our stores continue to be the hub of our omnichannel strategy, enabling over 90% of our total sales and fulfilling approximately 70% of our online sales in Q3. " - DICK'S Sporting Goods (DKS) CEO Lauren Hobart
"I'll begin with Walmart U.S. Comp sales of 9.2% or 15.6% on a two-year stack is remarkable growth." - Walmart (WMT) CEO Doug McMillon
The holiday season is off to a good start
“We are pleased with the strong start to Q4, including the Black Friday weekend” - Five Below (FIVE) CEO Joel Anderson
“As reported in our release, net sales for November came in at $18.13 billion, an increase of 15.7% from $15.67 billion last year” - Costco (COST)
"While there will continue to be inventory challenges across the marketplace, our fourth quarter is off to a strong start, and we feel that we are well-positioned within our industry this holiday season." - DICK'S Sporting Goods (DKS) CEO Lauren Hobart
"November is off to a strong start, at both Free People and Movement," - Urban Outfitters (URBN) COO Frank Conforti
"We're off to a good start for the holiday season and a good position to continue delivering strong results." - Walmart (WMT) CFO Brett Biggs
Retailers say that they have enough inventory for the holiday season
“As of today, we believe we have sufficient inventory on-hand and receipts coming in to support fourth-quarter sales growth." - Urban Outfitters (URBN) COO Frank Conforti
"...customers with confidence can shop with us and know that it's going to be under the tree at the appropriate time for everybody on their gift list " - Macy’s (M) CEO Jeff Gennette
”Bottom line, based on the incredible efforts of our team, we feel good about our inventory levels heading into the holiday season." - Target (TGT) Chief Growth Officer Christina Hennington
"We are satisfied with our inventory position as we head into holiday. While we are better positioned than most retailers due to our primarily domestic supply chain, we are not immune to challenges." - Bath & Body Works (BBWI) CEO Andrew Meslow
Work has been deprioritized as the hallmark of identity
"Work has been deprioritized as a hallmark of identity. Among boomers, more than 3 million Americans retired early, partly driven by rising home prices and stock market gains. And a younger workforce perhaps has a different mindset toward their jobs. 63% of millennial workers say they plan to look for a new position at some point over the next year, more than double baby boomers. We understand that the workplace has forever changed. But how do we determine what is old school and what is hype train? And how do we create an optimal environment? If you look at Gen Z, I'm sure many of you saw this headline. Many from this younger cohort, fed up with traditional work, took to more flexible outlets and accelerated the gig and creator economy. According to a recent Twitch leak, the top 81 streamers on the platform each earned over $1 million from 2019 to date, and the top 5 earned over $5 million. Surely, this is unattainable for everyone, and it seems like a hype train. Right now, employees hold the cards." - GCI Liberty (GLIBB) CEO Gregory Maffei
“Gavin and I took that trip to Europe, talked to over 60 customers. And really interesting to see a wide range of industries going through different issues, whether it's the supply chain or the Great Resignation. But there's one theme in all those conversations. Every customer reinforced that work is not somewhere you go, but something you do. Every single company I spoke with is building their digital headquarters because they know their teams need to be successful from their home or from this office in this new era of hybrid work” - Salesforce (CRM) COO Bret Steven Taylor
Technology:
Interest in the Omniverse is high
"Last week we announced general availability of Omniverse enterprise, a platform for simulating physically accurate 3D world and digital [Indiscernible]. Initial market reception to Omniverse has been incredible. Professionals at over 700 companies are evaluating the platform including BMW, Ericsson, [Indiscernible], and Sony Pictures. More than 70,000 individual creators have downloaded Omniverse. Since the open beta launch in December. There are approximately 40 million 3D designers in the global market. " - NVIDIA (NVDA) CFO Colette Kress
Cybersecurity is a major challenge for most businesses
“Cybersecurity is one of the fundamental challenges of our times, and the pandemic has even brought that to real focus. In our context, we are investing $20 billion in core R&D across the next 5 years to make sure that we build that end-to-end Zero Trust architecture, right?” - Microsoft (MSFT) Chairman & CEO Satya Nadella
“But from a high level, it's been a very challenging threat environment. The threat actors are more sophisticated. There are more of them. And the reason that's the case is that it's profitable and it's easy. You've got ransomware as a service. Anyone can have it. It can be flighted with dashboards. It's a line item for organized crime. I mean it goes on and on. And I think that some of these high-profile breaches that we've seen, they drive the conversation at the Board and CIO level. I mean companies are definitely rethinking their approach to security” - CrowdStrike (CRWD) CFO Burt W. Podbere
Industrials and Transport:
Supply chain challenges may have eased slightly
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But there are still significant disruptions
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There are no magic bullets to sort out these issues
“I think that through the next year, demand is going to far exceed supply. We don’t have any magic bullets in navigating the supply chain. We have the support of our suppliers. We’re fortunate that we’re multi-sourced and that our supply chain is diverse and our company is quite large so we have the support of a large ecosystem around us,” he added." - Nvidia (NVDA) CEO Jensen Huang
Materials & Energy:
Commitment to zero carbon is real
“I think the world is coming to terms with the fact that we all have to be investing in the future and if we don't invest in the future if we don't plan and think about how we're going to transition our businesses, that ultimately we put our businesses at great risk and our society at great risk and is this only because we're seeing the economic recovery and things are looking brighter and the markets are going higher or do you think there's real commitment to go through this transition no matter what? I think the commitment's real. I don't think this is a function of the market environment. I think the commitment's real " - Goldman Sachs (GS) CEO David Solomon
“While the pandemic has been the defining issue of the past 1.5 years, the climate crisis is the challenge of our lifetime. This year, we reduced our carbon emissions by 587,000 metric tons and purchased the removal of 1.3 million metric tons of carbon. We committed to matching 100% of electricity consumption with 0 carbon energy purchases 100% of the time by 2030. And with the Microsoft Cloud for Sustainability, we are creating a new business process category to help customers reduce their own carbon emissions” - - Microsoft (MSFT) Chairman & CEO Satya Nadella
Nuggets of Wisdom:
Understand what is driving cancellation
“It was critical for me to understand what had happened every time. This allowed us to take a step back and keep improving the product with each canceled subscription." - Zoom (ZM) CEO Eric Yuan
Low cost of capital is a threat to incumbents
"If you have capital that's willing to settle for very low returns, it's a big threat. I mean, the biggest threat has always been the guy, the stupid guy with a lot of money coming into your business because they may not end up with much profitability, but they sure as hell can damage the profitability of the incumbent and I believe the vulnerability of incumbents varies very much from market to market depending on specifics, depending on just how cheap it is to overbuild and just how cheap it is for the incumbent to upgrade. So, you could well be in a situation where the incumbent is forced to expend capital that it otherwise wouldn't or does it early in order to repel a competitive overbuilder. The whole - - the long experience of overbuilders in our cable industry was quite negative. The ultimate returns were very poor." - Liberty Media (LSXMB) Chairman John Malone