Resilient Resilience Free
Goods inflation is trending lower but the Fed is closely watching services inflation
Succinct Summary: The consumer appears to remain resilient and credit card companies don’t see recessionary signals in spending data. Companies are cautious though and manufacturers are dealing with inventory destocking across a variety of industries. These dynamics are leading to a potential split track in inflation. Goods inflation is trending lower, but the Fed is now watching services inflation closely. As long as labor markets remain strong, it will be difficult to bring services inflation back into the Fed’s 2% target zone.
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Macro
The consumer remains resilient
"As you can see, business trends have been remarkably stable. The spend levels just around the world, they've indexed in the mid-140s for almost 4 quarters right now, and there's no evidence of a change in trend...Through the first 3 weeks of January, business trends have remained strong and stable. On a year-over-year basis, U.S. payments volume was up 14% with debit up 13% and credit up 14%" - Visa (V 0.00%↑) CFO Vasant M. Prabhu
"What we’ve generally assumed in our base assumptions that I mentioned when I was delivering my prepared remarks is resilient consumer spending through 2023. I mean, we see a resilient consumer today, and we’re seeing a generally resilient consumer spending pattern going forward in our base case" - Mastercard (MA 0.00%↑) CFO Sachin Mehra
"We aren't seeing recessionary signals...the consumer is really strong, travel bookings are up over 50% vs pre-pandemic….T&E spending is still really strong with the consumer….We're feeling good" - American Express (AXP 0.00%↑) CEO Stephen Squeri
And labor markets are still healthy
“Granted there are some signs of deceleration, layoffs and temp, but the bigger picture is still healthy…Unemployment continues to be very low. Unemployment applications are still at record lows. They're not increasing. So the macro environment continues to be very, very favorable for us, irrespective of some of those headlines that we're seeing” - Automatic Data Processing (ADP 0.00%↑) CFO Don McGuire
"We continue to see an expansion of many businesses that are still hiring, albeit at a slower pace than previous quarters. There's been a general reduction in the number of open positions that companies are looking to fill. While interest rates have increased materially over the past year, we're not seeing a broad-based impact on our customers of the economy yet." - Brown & Brown (BRO 0.00%↑) CEO J. Powell Brown
So even though demand for physical goods is soft…
"Revenue was $4.7 billion, a decrease of 11% sequentially and 3% from the same quarter a year ago. As expected, our results reflect weaker demand in all end markets with the exception of automotive. A component of the weaker demand was customers working to reduce their inventories. In the first quarter, we expect a weaker than seasonal decline, with the exception of automotive, as we believe customers will continue to reduce inventory levels." - Texas Instruments (TXN 0.00%↑) IR head Dave Pahl
"...slower-than-expected growth was due to rapid declines in consumer-facing markets such as consumer electronics and retail, a dynamic that accelerated in December as consumers sharply cut discretionary spending and retailers adjusted inventory levels." - 3M (MMM 0.00%↑) CEO Michael Roman
"Volume continues to be a challenge across the world, as you have heard, I think, throughout the earnings season... Our sense is will see continued pricing in the first half of this year, which we think will have a drag on volumes for the categories that we have seen particularly in the back half of this year" - Colgate-Palmolive (CL 0.00%↑) CEO Noel Wallace
And companies are cautious…
"Organizations are exercising caution, given the macroeconomic uncertainty…Customers are more cautious in their spend..as you heard from Satya, we are seeing customers exercise caution in this environment and we saw results weaken through December." - Microsoft (MSFT 0.00%↑) CFO Amy Hood
“Our enterprise demand declined….businesses are increasingly cautious in their spending, given the economic volatility and uncertainty. And of course, that is impacting our enterprise business too” - Logitech International (LOGI 0.00%↑) CEO Bracken Darell
"As we look forward, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, the capital markets and general economic conditions that may significantly impact our business." - D R Horton (DHI 0.00%↑) VP of IR Jessica Hansen
Inflation expectations continue to be elevated
"Another area where we don't have direct control is the current inflationary environment, which continues to be elevated." - Union Pacific (UNP 0.00%↑) CFO Jeniffer Hamman
“The scaling of our revenue growth management capabilities across the organization enabled us to deliver 12.5% pricing growth in the quarter, which was slightly ahead of our Q3 result of 11.5%." - Colgate-Palmolive (CL 0.00%↑) CEO Noel Wallace
…Particularly in services segments
"...it’s hard to point to special circumstances that suggest services inflation will go away on its own. Rather, I see elevated services inflation as a symptom of an overheated economy, particularly a tight labor market, which will have to be brought into better balance for the overall inflation rate to return sustainably to 2%" - Dallas Fed President Lorie K. Logan
The Fed is watching this closely and plans to continue to raise rates
“One of the questions I’m asked most often is: How much more will we do? More specifically, how high will we raise interest rates? Or, as my family used to ask on our road trips back home to Kentucky: Are we there yet? Those of you who have taken family road trips know that, sometimes, the best way to handle this question is not to answer it. The same is true today in monetary policy….My own view is that we will likely need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2% target in a sustainable and timely way." - Dallas Fed President Lorie K. Logan
The Fed’s actions risk crushing equity values
"I'm sure a lot of people on this call understand the fact -- the basic value of a security is a function of the risk-free rate or we'll see how risk-free it really is, but the T-bill rate. So if you've got -- I think the -- if I recall correctly, the S&P 500 has a long-term rate of return of roughly 6%. And so I think the Fed needs to be very cautious about having a fed rate that potentially exceeds 6%. Like if we see deflation, and I think we are seeing deflation, then you would add the deflation number to the "risk-free rate" from the fed. And as that starts to exceed 6%, now you're starting to exceed the long-term return of the S&P 500 and starts to become questionable as to why don't just put your money in T bills or savings account essentially instead of in the S&P 500 if the S&P 500 is variable and the bank interest rate is not? This is -- so basically, the Fed is at risk of crushing the value of all equities. Quite a serious danger." - Tesla (TSLA 0.00%↑) CEO Elon Musk
International
The Bank of Canada has taken a temporary pause on raising rates
"...if economic developments evolve broadly in line with the forecast we published today, we expect to hold the policy rate at its current level while we assess the impact of the cumulative 425-basis-point increase in our policy rate. We have raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2% target…recent developments have reinforced our confidence that inflation is coming down…As a result, we expect that this will be the final rate hike of this cycle..We are talking about a pause. We are trying to balance the risks of over- and under-tightening" - Bank of Canada Governor Tiff Macklem
China appears to be bouncing back quickly
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Sanctions give the Chinese an incentive to develop their own technology
"If they cannot get those machines, they will develop them themselves. That will take time, but ultimately they will get there..The laws of physics in China are the same as here. The more you put them under pressure, the more likely it is that they will double up their efforts..As of today, the export control policy related to lithography equipment has not changed. We are still not able to ship EUV systems to China but are able to ship deep UV as well as metrology and inspection systems to China. As our Prime Minister recently stated, this is a multinational discussion, not only with the U.S. but with several countries." - ASML (ASML 0.00%↑) CEO Peter Wennink
Financials
Consumer credit metrics are normalizing across FICO levels
"So consumer credit metrics remain strong. And of course, as we’ve seen, they’ve been normalizing steadily through 2022 and are approaching pre-pandemic levels…But the other thing we also said and talked to investors about it was more -- normalization was happening everywhere, but it was more pronounced at the lower end of the market. More recently, we’ve actually seen a more uniform trend of normalization across businesses and segments, so, for example, across various FICO ranges and also across income levels. When we index them on credit metrics back to where they were before the pandemic, the sort of rest of the credit spectrum and rest of the income spectrums caught up to, very recently in the last few months, to the lower end." - Capital One (COF 0.00%↑) CEO Richard Fairbank
Blackstone is seeing inflows to its private credit strategies
"While the fundraising environment remains challenging, we are in a differentiated position with LPs globally. We're seeing the greatest demand today for private credit strategies, including from insurance clients and for infrastructure. In credit, the current environment is favorable for deployment given the significant increases in base rates and wider spreads…That's leading to robust growth in this area, with $8 billion of inflows in Q4 from our large insurance mandates, bringing platform AUM to $160 billion. And we have a line of sight to over $250 billion over time from existing clients alone." - Blackstone (BX 0.00%↑) President Jonathan D. Gray
Catastrophe insurance markets are in significant turmoil
"From an insurance standpoint, certain markets have been and remain in significant turmoil. Pricing for CAT property, both commercial and residential was under pressure through the third quarter, then Ian slammed into Florida…We expect CAT property rates to be up 10% to 40% or more for at least the first half of the year as well as capacity to potentially be constrained…availability of capacity in this market is unlike anything I've ever seen. I've only been in the insurance industry for 33 years now. So there's a lot more to go. But I've not ever seen anything like this…if you have an entity and they're paying $800,000 for their property and their renewal is $1.8 million and they say, what can we buy for $1 million. We just can't buy any more insurance. We can't afford it." - Brown & Brown (BRO 0.00%↑) CEO J. Powell Brown
Consumer
Tesla isn’t experiencing a slowdown in demand
"The most common question we've been getting from investors is about demand. Thus far -- so I want to put that concern to rest. Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production. So I mean that -- it's hard to say whether that will continue twice the rate of production, but the orders are high. And we've actually raised the Model Y price a little bit in response to that. So we think demand will be good despite probably a contraction in the automotive market as a whole." - Tesla (TSLA 0.00%↑) CEO Elon Musk
SMEs are slowing ad spend
“Our SMEs have recently started to slow down spending in service categories such as digital advertising, so we continue to monitor spending trends...The only thing that we saw in the fourth quarter was small business, some decrease in spend, not as much growth in spending, really in digital advertising, so we're going to watch that. I'm not sure what that's really a function of right now - whether it's a function of the economy or of confusion on where to advertise right now… there is a lot going on in technology right now. We're going to watch that" - American Express (AXP 0.00%↑) CFO Jeffrey C. Campbell
LVMH optimizes the company for “brand desirability”
"Although the brand does indeed attract hugely we've managed to improve the desirability. That's our key criterion, the brand desirability every quarter. And that desirability in no way suffers from the size of the company. Will it become exclusive? Is it not too big? I've heard this since I was appointed. CEO of LVM. It was back in 1989, 13th of January…What counts above all is quality. Today, products selling incredibly well while being difficult to find. If today, if you want to yellow cruise bag in the on des Champs-Élysées, well, it's quite simply out of stock and I'm not at all worried about that." - LVMH (LVMH) CEO Bernard Arnault
Secondhand purchases create a counterfeiting problem for luxury retailers
"...we see the people who bought these products secondhand products, but they're not all secondhand, they're fakes. They come and you have to be very diplomatic to solve that with the people who come to Vuitton and say, we're very sorry, Madam, but we can't repair your bags because it's a fake. But we don't do what Rolex is doing because Rolex in that case, you know what they do. A customer arrives and says, my watch is no longer working, and needs to be repaired. Very good, madam, sir, we'll take your watch. And if it's a fake watch, they never return it. We could try that. That might be a solution" - LVMH (LVMH) CEO Bernard Arnault
Technology
Microsoft is leaning hard into AI
"The next major wave of computing is being born as we turn the world's most advanced AI models into a new computing platform....we're going to lead in the AI era, knowing that maximum enterprise value gets created during platform shifts...The age of AI is upon us and Microsoft is powering it.... Just last week, we made our Azure OpenAI service broadly available, and already over 200 customers from KPMG to Al Jazeera are using it. ...So I think over time, obviously, I think every app is going to be an AI app. That's, I think, the best way to think about this transformation...All of this innovation is driving growth across our Azure AI services. Azure ML revenue alone has increased more than 100% for 5 quarters in a row with companies like AXA, FedEx and H&R Block choosing the service to deploy, manage and govern their models." - Microsoft (MSFT 0.00%↑) CEO Satya Nadella
Meta is throwing shade
"In terms of underlying techniques, ChatGPT is not particularly innovative. It's nothing revolutionary, although that's the way it's perceived by the public. It's just that, you know, it's well put together, it's nicely done. OpenAI is not particularly an advance compared to the other labs, at all. It's not only just Google and Meta but there are half a dozen startups that basically have very similar technology to it. I don't want to say it's not rocket science, but it's really shared, there's no secret behind it if you will. You have to realize, ChatGPT uses Transformer architectures that are pre-trained in this self-supervised manner. Self-supervised learning is something I've been advocating for a long time, even before OpenAI existed...Are we going to see this from Meta? Yeah, we're going to see this...You might ask the question, Why aren't there similar systems from, say, Google and Meta? And the answer is, Google and Meta both have a lot to lose by putting out systems that make stuff up" - Meta (META 0.00%↑) chief AI scientist Yann LeCun,
Tesla’s AI strategy could ultimately leapfrog competitors
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AI can bring extreme good and/or extreme harm to society
"I think the best case is so unbelievably good that it's hard for me to even imagine. I can sort of imagine what it's like when we have just, like, unbelievable abundance and systems that can help us resolve deadlocks and improve all aspects of reality and let us all live our best lives. But I can't quite. I think the good case is just so unbelievably good that you sound like a really crazy person to start talking about it. The bad case — and I think this is important to say — is, like, lights out for all of us. 'm more worried about an accidental misuse case in the short term. So I think it's like impossible to overstate the importance of AI safety and alignment work. I would like to see much, much more happening" - OpenAI Cofounder and CEO Sam Altman
Intel is lost at sea
"...as you put all of those things together, yes, we realize that we stumble, right? We lost share. We lost momentum. We think that stabilizes this year, and we're going to be building a road map that allows us to regain leadership for the long term in this critical market." - Intel (INTC 0.00%↑) CEO Pat Gelsinger
Chipmakers are still investing in new capacity
"...our customers indicate that they expect the market to rebound in the second half of the year. Considering our order lead times and the strategic nature of lithography investments, demand for our systems, therefore, remains strong." - ASML (ASML 0.00%↑) CEO Peter Wennink
Tech layoffs may not be as negative as they appear
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Healthcare
COVID vaccines were a 5-point headwind for JNJ’s topline
"Operational sales growth…increased 0.9%…Excluding sales from the COVID-19 vaccine, operational sales growth was 4.6% worldwide" - Johnson & Johnson (JNJ 0.00%↑) VP of IR Jessica Moore
COVID testing volumes are declining
"We anticipate lower testing volumes to continue through the first quarter of 2023 before gradually recovering through the balance of the year." - Danaher (DHR 0.00%↑) CEO Rainer M. Blair
Industrials and Transport
Inventories are contracting in many industries
"I would say as we began Q4, overall inventory looked to be in pretty good shape. And that was with the notable exception of Consumer. Everyone was working to reduce the inventory, and we saw a lot of destocking efforts in Consumer. As I said, we're starting to see some destocking in industrial. I would say, Asia and China, where we are seeing weaknesses in consumer electronics driving some of that. And as I mentioned earlier, some specialty markets like construction and a few other areas like even packaging, we're seeing some reduction of inventory as we start the new year" - 3M (MMM 0.00%↑) CEO Michael Roman
"Near term, the PC ecosystem continues to deplete inventory. For all of the calendar year '22, our sell-in was roughly 10% below consumption...We expect some of the largest inventory corrections literally that we've ever seen in the industry taking place that's affecting the Q1 guide in a meaningful way" - Intel (INTC 0.00%↑) CEO Pat Gelsinger
"Looking back on 2022, we see demand slowdown accelerate in major product groups on the heels of worsening macro environment, resulting in year-long inventory correction in downstream industries" - LG Display (LPL 0.00%↑) CFO Sunghyun Kim
This trend is continuing in Q1
"First, three weeks into January, we are seeing a continued slowing in organic sales volume as we start the year. This slow start is driven by the same weakening end market trends that impacted the finish to 2022. We expect soft consumer discretionary spending, along with retailer destocking to continue into the first quarter." - 3M (MMM 0.00%↑) CFO Monish Patowala
Manufacturers are scrutinising costs
"We have implemented strict control of hiring and discretionary spending. Today, we announced that we will reduce approximately 2,500 global manufacturing roles, a necessary decision to further align with adjusted production volumes. In addition to the actions we are taking to respond to the macroeconomic environment, we are taking a deeper look at everything we do as we prepare for the Health Care spend." - 3M (MMM 0.00%↑) CEO Michael Roman
“We anticipate price adjustments will gradually, throughout the year, offset nonraw material cost inflation, and the pattern will be similar to the quarterly pattern seen in 2022, with limited positive effects in the first quarter and gradually more as the year progress. This trajectory will be further supported by improvements from strict cost control” - Autoliv (ALV 0.00%↑) CEO Mikael Bratt
Supply chains are improving
"Our expectations reflect the slowing in demand we are seeing as we start 2023. Supply chains are improving. However, we still see headwinds from material availability and inflation, albeit at a lower level. We are not satisfied with our progress or performance." - 3M (MMM 0.00%↑) CEO Michael Roman
Automotive markets are an exception to other manufacturing industries
“Automotive volumes were strong in the quarter as inventory replenishment continued across the industry. We did, however, see some weakness expand in other segments in the fourth quarter...Automobiles are still in a tight supply situation, but this is changing with higher interest rates as well as part shortages” - Canadian National Railway (CNI 0.00%↑) CMO Doug MacDonald
SouthWest is struggling to recover from its December troubles
"Thus far in January 2023, the Company has experienced an increase in flight cancellations and a deceleration in bookings, primarily for January and February 2023 travel, which are assumed to be associated with the operational disruptions in December 2022. As a result, the Company currently estimates a negative revenue impact in the range of $300 million to $350 million in first quarter 2023" - SouthWest Airlines (LUV 0.00%↑)
Travel bookings are strong into the summer
“We very much see it in bookings. It's -- we started seeing it, frankly, in Q4 of last year. In Q1, we see continued strength across all of the geographies that we have and that's continuing out into the summer. So we are very encouraged by the trends that we're seeing, all the more encouraged because it is coming often at a lower cost of sale, and we're still filling business class cabins and things like that” - American Airlines (AAL 0.00%↑) CCO Vasu Raja
Materials & Energy
Oil companies like Chevron had a record year
"Free cash flow stood a record, beating our previous high in 2021 by more than $15 billion, enabling a strong dividend increase and the buyback of almost 4% of our shares…With a breakeven Brent price of around $50 per barrel to cover our CapEx and dividend and with excess balance sheet capacity, we're positioned to return more cash to shareholders in any reasonable oil price scenario..we're now at an all-time high with the rate of repurchases" - Chevron (CVX 0.00%↑) CEO Mike Wirth
Oil and Gas companies are bullish on industry supply/demand dynamics
"...we maintain a positive outlook for the energy sector. With years of underinvestment now being amplified by recent geopolitical factors, global spare capacity for oil and gas has deteriorated and will likely require years of investment growth to meet forecasted future demand. For this reason, we continue to believe that we are in the early stages of a multiyear upturn in global activity and are poised to see a second consecutive year of solid double-digit increases in global upstream spending in 2023" - Baker Hughes (BKR 0.00%↑) CEO Lorenzo Simonelli
“It's clear to me that oil and gas is in short supply and only multiple years of increased investment in both stemming declines and reserve additions will solve short supply” - Halliburton (HAL 0.00%↑) CEO Jeffrey Allen Miller
China reopening is a major variable in the energy demand outlook
"Overall gasoline demand, I'll start there. Still, just a touch below pre-pandemic levels, the fourth quarter of 2022 may be 2% or 3% below the fourth quarter of 2019. If you look at diesel, demand is pretty flat versus pre-pandemic. Jet recovering, but still below and so at the highest level, we're kind of still flattish to recovering from pre-COVID. I think that's why there is concern that as China's economy really does come through and return to a more normal level, that we could see increased demand start to pull on these markets again." - Chevron (CVX 0.00%↑) CEO Mike Wirth
Europe has successfully built energy inventories
"...in Europe, the successful build of inventories for this year and the reduction of industrial demand have both resulted in an outlook that is less dire for the European economies, than it may have looked like several months ago. And so I think the market reflects all of that. You also have the fact that China has been -- the economy has been slow throughout the year, which is -- looks to be turning around." - Chevron (CVX 0.00%↑) CEO Mike Wirth
Coal demand is still strong
“So we expect coal demand to remain strong through 2023 with commodity pricing staying favorable. Energy shortages are keeping demand strong, and the backlog in autos and development in Asia will underpin net coal demand” - Canadian National Railway (CNI 0.00%↑) CMO Doug MacDonald
Real Estate
Real Estate markets are showing positive activity in January
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Warehouses are the strongest segment of commercial real estate
"Logistics is the largest exposure across Blackstone, comprising approximately 40% of the entire real estate portfolio. Fundamentals globally remain extraordinarily strong. In recent months, re-leasing spreads, and the increase in rents as expiring leases roll over were 65% in our U.S. holdings, accelerating to a record 75% in December; approximately 50% in the U.K.; and 30% in Europe overall; 20% in Australia; and 100% in Canada. At the same time, construction starts for warehouses along with most types of real estate are now falling sharply, which is further tightening and already constrained new supply pipeline." - Blackstone (BX 0.00%↑) President Jonathan D. Gray
Nuggets of Wisdom
An example of brutal honesty
"Every investment we make, we destroy value...we underperform every key competitor out there...It is at a level it cannot continue...We do have a burning platform...Given everything I know talking to investors, this is our last chance" - Rolls Royce (LON: RR) CEO Tufan
Down cycles eventually turn up. Plan for the long term.
"...I've been in finance for over 50 years, and I'm frankly quite surprised by the intense external focus on the flows for BREIT at a time of cyclical lows in stock and bond markets. For those of us that build and create businesses, what's going on is highly predictable. It should be expected that flows from high-net-worth individuals would decline for nearly all types of new investments in this environment. Having navigated 5 major market declines in my career, I've learned that focusing just on what's happening at the bottom of cycles, this leads the public regarding likely future trends for appreciation and growth in well-constructed and historically high-performing products. My experience is these market bottoms often last for relatively short periods of time and are followed by a resumption of historic trends..we are focused on the long term, not next month. And rather than simply counting balls and strikes, we're working to win the World Series. And as we all know, not all World Series are won 4 games to 0. All people remember is who won the World Series, and that is our intention" - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
"...the reality is, is that if we were running this business quarter-to-quarter, which we don’t, you would pull back. But the reality is, as Jeff said, after every recession, there is a recovery. And the last thing you want to do is retrench in such a way that you are not going to be able to take advantage of the recovery. And that retrenchment, looks – it looks like layoffs that don’t make sense and pulling back on marketing and trying to hit an EPS number for a quarter or for a year that is irrelevant. What’s relevant is for a 172-year-old company to continue to grow over the medium and long term. And the way you do that is you invest judiciously and you invest smartly. And in times when things are bad, you invest in your infrastructure, you invest in your people because you are going to need great people through when a recession is over, and your infrastructure is going to need to do that. And where companies make mistakes is let go of great people, and also do not invest in those things, they are going to need six months to nine months from now when the recession is over." - American Express (AXP 0.00%↑) CEO Stephen Joseph Squeri