Spending Still Strong
Consumer spending strength continues
Succinct Summary:
Omicron continues to sweep through the US and it's causing some disruptions, but consumer spending continues to be strong. Inflation is also strong and inflation expectations are rising. The Fed is expected to raise rates four times this year and that is spooking investors.
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Macro:
We're all just learning to live with Covid
"There's no question that the recent surge in Omicron cases contributed to market volatility. However, I'm encouraged by data that shows that the Omicron wave is less severe and has already peaked in some countries. Therefore, it is expected to have less of an economic impact. My view is that COVID-19 will be endemic and as a society, we will find a way to live with it, supported by the efficacy of vaccines and new treatments." - Goldman Sachs (GS) CEO David Solomon
"When we talk and look at the impacts of COVID-19 and how we think about it on a future basis, we now consider COVID-19 to be merely an ongoing element of our global business environment. And like all of society, we have to learn how to live with it." - Fastenal (FAST) CEO Dan Florness
Consumer spending strength continues
"Just focusing on debit and credit spending, for the holiday period of November and December, spending was up 26% over 2019...And so far this year, that strength continues. For all the spending of all types through January 17, 2022, we have seen it up over 11% versus the start of '21, which is well up over '20 and '19." - Bank of America (BAC) CEO Brian Moynihan
"Demand for our best-performing premium-priced offerings remains very strong as to our market share trends...The consumer is very resilient and very focused on these categories of clean home and health and hygiene," - Procter & Gamble (PG) CFO Andre Schulten
And consumers are accepting price increases
"...in terms of ability to sustain the pricing, we have seen -- for the price increases where we have sufficient read period at this point in time, we have seen a more benign reaction of the consumer. The consumer is healthy generally and is preferring our brands" - Procter & Gamble (PG) CFO Andre Schulten
But inflationary pressures are broad-based
"Transportation and labor markets remain tight, availability of materials remain stretched in some categories and in some markets, inflationary pressures are broad-based with little sign of near term relief. These costs and operational challenges are not unique to P&G, and we won't be immune to the impact." - Procter & Gamble (PG) CFO Andre Schulten
"According to the U.S. Bureau of Labor Statistics, average hourly earnings rose at a nearly 6% annualized rate over the past six months, up from about between 0.5% in the first six months of the year." - Travelers (TRV) CEO Alan Schnitzer
Inflation expectations are rising
"With 7% inflation as the background, stock prices will have to rise by 7% just to retain the relative value. I believe inflation will continue at a high rate. There is very little the Fed can do about it...Inflation is here to stay. We'll have to learn to live with it and margin lending will continue to grow along with it." - Interactive Brokers (IBKR) Director, IR Nancy Stuebe
Janet Yellen's inflation expectations are anchored though
"I expect inflation throughout much of the year 12-month changes to remain above 2%. But if we're successful in controlling the pandemic, I expect inflation to diminish over the course of the year and hopefully, to revert to normal levels by the end of the year, around 2%. There is a lot of uncertainty. We're doing all the things that we can to deal with supply chain issues that are pushing prices up." - United States Treasury Secretary Janet Yellen
Rate hikes are on the way
"Inflation is persisting in many countries, and major central banks are beginning to raise rates. Notably, the Bank of England late last year and the Federal Reserve is now expected by our economists to implement four rate hikes in 2022." - Goldman Sachs (GS) CEO David Solomon
"...this is where the accommodation has to be taken out to bring the inflation down and so rates are going to have to go up. The market says four times, will it be a 50-basis point bump versus 25. All that will be in the mix and we’ll find out more as we proceed through this month" - Bank of America (BAC) CEO Brian Moynihan
Investors are getting worried
I am worried about inflation. Inflation is excessive. For the last 20 years, every country in the world's been trying to get two percent inflation and they haven't been able to do so. A little inflation is good it keeps everything kind of moving but excessive inflation defined as much more than two is not desirable and you know in short for the most part higher inflation means higher interest rates higher interest means lower asset prices uh and that's what's going on right now and higher interest rates could also throttle the economy" - Oaktree Capital Management Co-Founder Howard S. Marks
"I'm extremely worried about much higher interest rates, not because the Fed will move it there, but people will realize that they have to borrow money and leverage in order to keep up with inflation. And so I think that the fed will lose control." - Interactive Brokers (IBKR) Chairman Thomas Peterffy
"I also believe that we could see more volatility as these easing policies are unwound, which will likely have an impact on economic growth, asset prices and client activity." - Goldman Sachs (GS) CEO David Solomon
It's been a long time since there was a prolonged slowdown
"You really have to go back and look at 2010 to say when there was really a pause or slowdown. And when I talk to limited partners, when I talk to investors, the one mistake I think most of them would say is they didn't put money to work more quickly, they waited too long to jump back in. If you combine those things with just the innovation market growing very fast domestically and globally, could there be a prolonged slowdown? It's possible. I just think the likelihood is a lot less than it has been in prior significant cycles." - SVB Financial Group (SIVB) CEO Greg Becker
International:
Foreign exchange rates are becoming a headwind for earnings
"Foreign exchange rates have also moved against us since our last guidance, we now expect FX to be a $200 million after-tax headwind to earnings for the fiscal year." - Procter & Gamble (PG) CFO Andre Schulten
Financials:
It was an unbelievably good year for banks
"Our goals last year, our 2-year goals was ROTCE of 14% to 16%. We happen to hit 20% this year. It was an unbelievably good year -- we had a blowout year." - Morgan Stanley (MS) CEO James Gorman
"We produced record earnings per share, of $8.35. Average deposits grew 19%...As a result of strong capital generation, we returned $1.1 billion to common shareholders through dividends and the repurchase of what 9.5 million or 7% of total shares; in summary, a strong performance, an ROE of over 15%, and an ROA of 1.3%." - Comerica (CMA) CEO Curt Farmer
Credit remains stellar
"Credit remains stellar through 2021. Charge-offs consistently improved each quarter. Our commitment to responsible growth remains well placed. We are growing faster than market and keeping credit costs in check. The economic improvement and our strong credit allowed us to release much of the reserves we built in 2020." - Bank of America (BAC) CEO Brian Moynihan
"Credit quality was exceptional and we released reserves." - Comerica (CMA) CEO Curt Farmer
VC activity isn't slowing despite the selloff in public markets
"...our channel checks in talking with their clients, in talking with venture capital, it's still very active. And I think you have to -- could there be a little bit of a slowdown, it's possible. Again, we haven't seen it yet. But you have to remember, there's so much money that was raised last year. There was so much dry powder, and they need to put it to work." - SVB Financial Group (SIVB) CEO Greg Becker
Consumer:
Netflix grew slower than planned
"Retention was strong. Churn was down. Viewing was up. But on the margin, we just -- we didn't grow acquisition quite as fast as we would have liked to see on our large subscriber base. A small change in acquisition can have a pretty big flow-through in paid net adds. And again, our acquisition was growing, just not growing quite as fast as we were perhaps hoping or forecasting." - Netflix (NFLX) CFO Spencer Neumann
The company may be facing a post COVID overhang
"...we're trying to pinpoint what that is. It's tough to say exactly why our acquisition hasn't kind of recovered to pre-COVID levels. It's probably a bit of just overall COVID overhang that's still happening after two years of a global pandemic that we're still unfortunately not fully out of" - Netflix (NFLX) CFO Spencer Neumann
On price increases at Netflix, consumers seem willing to pay more for good content
"...we largely are seeing in the price changes we've done most recently and for the earliest indications that we have in the U.S., which is still premature because we actually haven't actually rolled it out to any customers yet. What we've seen over the last couple of years, which is that sort of core theory that we have that if we've done a good job investing, the members’ subscription fees that they paid us into better stories, more great storytelling, bigger movies, more variety. Then when we come back and ask them occasionally for a little bit more to keep that sort of cycle going, then they're generally willing to do that. And we don't see any significant disruption to the business otherwise in that regard. And I would say generally when we look at that sort of core theory and we look at also the competitors, if you look at Disney+ as an example, the other streaming services out there as well. And their ability to grow even as we've been growing as well, I think it's a really strong endorsement for the core idea that consumers around the world are willing to pay for great entertainment. And it encourages us to continue that investment and to try and deliver more entertainment value and earn more of that share." - Netflix (NFLX) COO Greg Peters
Auto insurance rates may be on the rise
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Technology:
3 billion people play video games
"Today, 3 billion consumers around the world play games, and we expect this number will reach 4.5 billion by 2030, as new generations turn to gaming for entertainment, community and a sense of achievement." - Microsoft (MSFT) CEO Satya Nadella
Example of AI being deployed in insurance
"We've developed and trained AI to evaluate those roofing characteristics using aerial imagery and are integrating that intelligence into our underwriting segmentation and pricing." - Travelers (TRV) CEO Alan Schnitzer
Healthcare:
Omicron is causing people to delay elective procedures
"As you suggested, and as we had reiterated in our opening comments, Omicron obviously emerging here in December and I think John Rex said it well. While there's certainly some differences in contagiousness and severity, the impact of abatement following these swells and infections is consistent with what we've seen in Delta and other strains prior, double-digit declines in both physician visits as well as specialist visits. So we're continuing to see that dynamic play out." - UnitedHealth (UNH) CFO UnitedHealth Employer & Individual Brian Thompson
Industrials and Transport:
Omicron impacted business and international travel
"The recovery of international and business travel slowed late in the fourth quarter, given the Omicron variant" - American Airlines (AAL) President Robert Isom
Supply chains are still not getting much better
"During the quarter, the supply chain environment became more challenging and remains highly dynamic...we saw the supply chain environment actually get worse in Q4, and we highlighted that we actually had some, as I call it, minor constraints in our ability to fulfill customer demand. You have a set of metrics there in the supply chain. One example we've given is on-time delivery from our suppliers was worse in Q4 as compared to Q3. As you look forward, I'd say that at this point, visibility is still not great, kind of the best that we have is the Q1 will be similar to Q4, but I think we have to see -- wait and see what the impact of Omicron might be on our suppliers and just broadly." - Intuitive Surgical (ISRG) CFO Jamie Samath
There may be some slow improvement
"Now, remember, we've got a backlog of ships out there on the water, so that's got to get sorted out...So it's going to be a slow, gradual increase to us, but we're talking to our customers. And we expect more improvement as we go throughout the year." - Union Pacific (UNP) Executive VP of Marketing & Sales
"Our ability to supply is relatively stable, it's stable actually. If you look at our on-shelf availability, for example, in the U.S., Last quarter, we reported that was around 94%. We're still running at around 94%, which is not where we want to be, which would be more in the 98%, 99% range, but good relative to peer group and good given, again, the overall challenges the industry is seeing, the retail environment is seeing. So -- and that is true around the world." - Procter & Gamble (PG) CFO Andre Schulten
But it's tough to be optimistic
"...although I would like to be optimistic, I think this latest strand of COVID has caught everyone by surprise. So I can't say that I feel optimistic about the supply chain challenges going away in the near term -- I'm not certain what lies ahead." - J.B. Hunt (JBHT) Chief Commercial Officer Shelley Simpson
[Management change catalyst. Subscribe to read.]
It's a strong market for logistics real estate
"So the numbers for this year look very strong market environment, 375 million to 400 million square feet of both delivery and net absorption in our 30 markets, that will leave the market vacancy rate at an ultra-low all-time record, 3.4%, 3.5% vacancy. So very low. Now, this is especially true in our U.S. global markets, where we have an overweight strategy. In those markets, the under-construction pipeline is just 3% of stock and is 70% pre-leased. 2021 net absorption, so demand was 14% higher than that under-construction pipeline. Now, by comparison, our regional markets have 4.8% of their markets under construction. So our global markets are 180 basis points better. 2021 demand, that net absorption was 12% below this under-construction pipeline in the regional markets. So our global markets are 25% better." - Prologis (PLD) SVP & Head of Research Christopher Caton
Materials & Energy:
Oil companies are talking about demand recovery by year-end
"We believe the continuing broader macro recovery will translate into rising energy demand in 2022, with oil demand likely recovering to pre-pandemic levels by the end of the year." - Baker Hughes (BKR) CEO Lorenzo Simonelli
Expect to see an increase in capital spending, even in deepwater
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Can oil companies get to net zero?
"This was also a pivotal year for us in terms of our commitment to sustainability. We announced our comprehensive 2050 net-zero commitment, inclusive of Scope 3 emissions, and launched the Transition Technologies portfolio to focus on the decarbonization of oil and gas operations with much success." - Schlumberger (SLB) CEO Olivier Le Peuch
Aluminum prices in Europe are up 200-400% between Jan and Dec 2021
"An interesting case study lies in the latest market dynamics in Europe. In this important aluminum market, average spot power rates increased between 200% and 400% between January and December of 2021 driving cuts in smelting capacity across Europe." - Alcoa (AA) CEO Roy Harvey
Nuggets of Wisdom:
Trust your team
"I think my life experience tells me that normally, the best knowledge is in the room, so I’m always looking for different opinions for a variety of insights for discussion to get to the right decision. Those sole decisions from the stomach -- and I’ve experienced some of those -- are often wrong. I believe in good team decisions, in a competition for the best ideas. That really works. You have the competence in the team room." - Volkswagen (VWAGY) CEO Herbert Diess