No Rate Hike
The Fed left rates unchanged but expect to hike in March
Succinct Summary:
It was tech earnings week last week and big tech shrugged off the supply chain, Omicron, and inflation worries to post record quarterly results. Meanwhile, the Fed left rates unchanged but expect to hike in the next meeting in March. Some companies don’t see inflation abating soon and we note a few companies that don’t see inflation as a bad thing.
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Macro:
The Fed met last week
“...against a backdrop of elevated inflation and a strong labor market, our policy has been adapting to the evolving economic environment, and it will continue to do so.” - US Federal Reserve Chair Jerome Powell
They held rates steady but are expecting to increase in March
“I would say that the Committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so. We have our eyes on the risks, particularly around the world. But we do expect some softening in the economy from Omicron, but we think that should be temporary.” - US Federal Reserve Chair Jerome Powell
They haven’t made any decisions about the pace of increases, but the economy is much stronger than it was in 2015
“...at this time, we haven't made any decisions about the path of policy - - We know that the economy is in a very different place than it was when we began raising rates in 2015. Specifically, the economy is now much stronger. The labor market is far stronger. Inflation is running well above our 2 percent target, much higher than it was at that time. And these differences are likely to have important implications for the appropriate pace of policy adjustments. Beyond that, we haven't made any decisions.” – US Federal Reserve Chair Jerome Powell
They can move faster than last time
“...the economy's much stronger, and inflation is much higher. So -- and I think that leads you to -- and I said -- I've said this, being willing to move sooner than we did the last time and also perhaps faster. But, beyond that, it's really not appropriate for me to speculate exactly what that would be.” – US Federal Reserve Chair Jerome Powell
They do want to shrink the balance sheet and expect to begin after raising rates
“The Committee views changes in the target rate for the federal funds rate as its primary means of adjusting the stance of monetary policy. So, we do want the federal funds rate, we want to operationalize that. And we want the balance sheet to be declining in a predictable manner, and we want it to be declining primarily by adjusting reinvestments.” – US Federal Reserve Chair Jerome Powell
What they really care about is keeping inflation expectations anchored at 2%
“What we're trying to do is get inflation, keep inflation expectations well anchored at 2 percent. That's always the ultimate goal. And we do that in the service of having inflation -- we get to that goal by having inflation average 2 percent over time. And if inflation doesn't average 2 percent over time, then it's not clear why inflation expectations would be anchored at 2 percent.” - US Federal Reserve Chair Jerome Powell
Companies don’t expect inflation to slow any time soon
"...inflation is really the highest in the U.S. And look, it might be at the highest point in the U.S. right now, I don't necessarily see it going down in the second part of the year." - Mondelez International (MDLZ) CFO Luca Zaramella
"It is fair to say, to your point that, there is commodity pressure going into 2022. Just to give a perspective, in 2021 in the U.S., our food and paper costs were up about 4% for the year. If we look forward to 2022, our expectation is that will be about double or in high single digits increases for 2022" - McDonald's (MCD) CFO Kevin Ozan
But even though markets are jittery, economic activity remains strong
"While markets continue to self-correct, the macro backdrop is favorable. Supply chain issues will ease, inflationary pressures will abate, saving rates remain high, cash remains on the sidelines and demand remains pent up for the markets we serve." - United States Steel (X) CEO David Burritt
"The macroeconomic outlook remains positive with a few areas that we're monitoring...Although there has been a recent surge in COVID cases, there are signs that these may be peaking. By each of these areas' merit monitoring, underlying spending trends remain strong as consumers, businesses and governments have become more adaptable to a changing environment. In the U.S., economic growth remains solid with low unemployment and healthy consumer confidence.” - Mastercard (MA) CEO Michael Miebach
"A few comments on our trends through the first three weeks of January. On a year-over-year basis, U.S. payments volume was up 13%, with debit up 4% and credit up 25%." - Visa (V) CFO Vasant Prabhu
Inflation isn’t necessarily bad for companies
"I'm not pessimistic about inflation killing demand. Honestly, inflation has always been a positive for our business, and over the last 30 years, when the Fed raises interest rates, that typically tends to drive outperformance in our sector versus the other sectors. And so, I think commodities pull is very strong right now, whether it's in petrochemicals or whether it's in minerals and mining for all of the things that we need for EVs and alternative energy." - Dow (DOW) CEO Jim Fitterling
"The simple answer is, so far, we do not see any major concerns about price elasticity. The demand continues to remain strong and robust. And frankly, right now, the most recent increase we put out there, we don't see that as the #1 constraint. So again, it comes back to the overall theme, consumer right now is not our prime concern. It is on the supply side. Of course, you could argue that belong were public talk about inflation at one point. The broader context about expected inflation could impact consumer confidence. But so far, we don't see that yet. The actual price elasticity is -- I mean, -- right now, we don't see a big impact coming from any of the previous price increases" - Whirlpool (WHR) CEO Mark Bitzer
"In terms of inflation as it relates to our revenues, as you know, our service fees, cross-border, et cetera, are denominated primarily in basis points on ticket size. So to the extent that there's inflation, driving up ticket size, clearly, it's beneficial to us…So net-net, I mean we are a beneficiary of inflation." - Visa (V) CFO Vasant Prabhu
International:
Different countries are having different experiences with inflation
"In terms of inflation, where it is mostly acute these days, it is in places where we have seen currencies weakening versus the dollar. It is in places like Russia. It is in places like Brazil. But overall, if you look around the world, in terms of inflationary pressure, I would say there are, yes, somewhere some peaks. But overall, it is fairly even, I would say. There are certain commodities that are more impacted than others. Cocoa, for instance, is a little bit more benign in 2022 than it has been in 2021." - Mondelez International (MDLZ) CFO Luca Zaramella
"...wage and commodity pressures are being felt certainly all across the globe. But as I mentioned earlier, I think these pressures are being felt much more acutely here in the U.S. The experience internationally varies from region to region." - Restaurant Brands International (QSR) CEO José E. Cil
There are wage pressures around the world
"We're seeing more of an impact internationally or across the different regions and markets. We're seeing more of an impact on the wage side. As examples, we've seen wage inflation in China. Our master franchisee has shared some of those circumstances there. Collective bargaining agreements are being negotiated in some markets like France, which essentially is for the entire industry. It's not unique to a brand. It's how they manage their wage and salaries in those particular markets." - Restaurant Brands International (QSR) CEO José E. Cil
Some don’t expect International travel to return to normal until 2023/24
"The only area that remains a bit more challenging is everything that concerns international travel that hasn't fully resumed yet. I don't believe that they will fully resume before the year 2023 or possibly even 2024." - LVMH Moët Hennessy - Louis Vuitton, Société Européenne (LVMHF) CEO Bernard Arnault
Financials:
Private markets have not been impacted by the decline in public markets
"I couldn't be more confident in our momentum despite the significant correction underway in the global markets. The average stock in the S&P has declined 17% from its recent peak, while the average Nasdaq stock is down 44%. The alternative manager stocks have not been immune to these pressures - - I would say the good news is from our teams on the ground, seeing stocks off materially has definitely engaged more conversations with us and companies out there." - Blackstone (BX) Stephen Schwarzman
Trading activity was down in 2021 on Robinhood but possibly ticking up lately
"In these first few weeks of the New Year, we’re seeing trading activity below what we saw in Q4 of 2021. However, in the few days leading up to our call, we’ve seen some higher levels of engagement, net deposits, and trading versus the start of the year. It’s too soon to say whether what we’ve seen these last few days will be a sustained trend or not." - Robinhood Markets (HOOD) CFO Jason Warnick
Consumer:
Travel bookings are back up after falling in December
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Business travel has changed
“People are skeptical about business travel because of all the remote workforce. In fact, I think business travel is going to be completely different. And I think as you have more people in more remote locations, they may need to get together 3, 4, maybe 5 times a year to come to headquarters or to come to locations where they never had to come to before. And let's face it, we all realize that there's nothing better than sitting in front of your customers. And I just -- did just came back from an opportunity at the Amex Golf Tournament to sit in front of a lot of my customers. So when we look at these secular tailwinds, that's why we believe it's not only doable but sustainable as we move forward." - American Express (AXP) CEO Stephen Squeri
Consumers are looking to buy products they are familiar with
"An interesting thing that we've learned through the pandemic and just the latest on consumer sentiment, the vast majority of consumers, call it, still 80% or so of consumers in our top markets, are saying that they are still looking to buy products that they are familiar with. And so that consumer psyche, I think, plays well to our global core menu." - McDonald's (MCD) CEO Christopher Kempczinski
The housing market is strong but how will rising mortgage rates impact it?
"What makes this environment all the more encouraging is that there is by nearly all accounts a multimillion unit housing deficit that is accumulated over the past decade. Of course, when demand strength meets supply constraints there are going to be consequences and we are clearly seeing several of these including, rising home prices, material and labor availability issues, and cost increases. And no discussion of the challenges our industry faces would be complete without an acknowledgment that for the first time in at least a decade the likely direction of mortgage rates is higher in the coming year - - So in our view that leaves home affordability as the most significant and the most likely long-term risk to industry outcomes." - Beazer Homes USA (BZH) CEO Allan Merrill
Technology:
Tech companies like Microsoft and Apple had record quarters
"It was a record quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $22 billion in revenue, up 32% year-over-year. We are living through a generational shift in our economy and society. Digital technology is the most malleable resource at the world's disposal to overcome constraints and reimagine everyday work and life." - Microsoft (MSFT) CEO Satya Nadella
"Today, we are proud to announce Apple's biggest quarter ever. Through the busy holiday season, we set an all-time revenue record of nearly $124 billion, up 11% from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices. We set all-time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply-constrained." - Apple (AAPL) CEO Tim Cook
“Q4 was a tremendous finish to a transformational year where we beat expectations on both the top and bottom line. We exceeded our guidance for the quarter by over $1 billion on the top line, finishing with our best quarter and our best full-year revenue ever. We had a record quarter for DCG, where we grew 20% year-on-year and where we continue to be the partner of choice for cloud and data center customers” - Intel (INTC) CEO Pat Gelsinger
The first iPhone debuted 15 years ago
"A few weeks ago, we marked the 15th anniversary of the day Steve revealed the iPhone to the world. We knew that we had the beginnings of something fundamentally transformative, though none of us could have predicted the incredible and meaningful impact it would have on all of our lives." - Apple (AAPL) CEO Tim Cook
The economics of gaming franchises is becoming software-like
"And we see the intensity of usage and the business model diversity around games that increasingly, the economics of gaming franchises is also radically becoming much more software-like. So we sort of overall see good demand signal across the stack." - Microsoft (MSFT) CEO Satya Nadella
LVMH is not interested in the metaverse
"At this stage, we are very much in the real world, selling real products - - We are not interested in selling virtual sneakers for 10 euros. We’re not into that." - Louis Vuitton, Société Européenne (LVMHF) CEO Bernard Arnault
Healthcare:
Staffing remains a challenge in hospitals
"The staffing challenge is a real one that certainly. It seems to be much more pronounced in periods of high COVID infection rates. Obviously, as those nurses are either doing other things are, in fact, impacted themselves from a COVID standpoint. So we certainly do expect the staffing challenge to remain throughout the rest of this year." - Stryker (SYK) VP of IR Preston Wells
Robotics surgery is becoming standard of care
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Expecting COVID test demand to fall in 2023
“As we think about the year 2023 and COVID testing, we see that going from 50 million in 2022 to perhaps 2023, 30 million. But that's a number that, of course, there's a lot of dynamic." - Danaher (DHR) CEO Rainer Blair
Industrials and Transport:
Supply chains aren’t improving much
"In 2022, the supply chain will continue to be the fundamental limiter of output across all factories. So, the chip shortage, while better than last year, is still an issue. And yes, so that's -- there are multiple supply chain challenges." - Tesla (TSLA) CEO Elon Musk
Productivity has been significantly hampered by Omicron
"We continue to experience significant productivity headwinds in our factories due to shorter production runs and more frequent production changeovers throughout the quarter as we focused on serving our customers. As forecasted at the start of last year, we also had higher year-on-year compensation and benefits costs." - 3M (MMM) Chief Financial and Transformation Officer Monish Patowala
Automobile dealer inventory is 60% lower than normal
"Automotive sector steel consumption should grow year-over-year as the chip shortage eases, fueled by an extreme lack of dealer inventory, which is 60% lower than normal, and strong pent-up demand. The automotive sector operated at production rates lower than normalized levels in 2020 and 2021, around about 13 million units and is expected to grow to 15 million units this year and 17 million units in 2023." - Steel Dynamics (STLD) CEO Mark Millett
The war for talent continues
"I don't want to be too dramatic here, but we believe there's a war for talent out there, not just at the corporate level, but at the restaurant level as well and that's key. Staffing and retention is key to driving exceptional guest experiences. And so we're doing everything we can, understanding that it's not just the wage and benefits issue. It goes far beyond that." - Restaurant Brands International (QSR) CEO José E. Cil
"Beginning in early January, we experienced a very difficult environment due to rapidly rising COVID cases and a decrease in available staffing levels. It’s amazing when in the first three weeks we had roughly 5,000 employees test positive for COVID, with employee cases roughly 2.5 times what they were during the Delta variant. The resulting staffing shortage combined with winter weather caused a spike in flight cancels and significant disruption to the operation” - Southwest Airlines (LUV) Incoming CEO Bob Jordan
Some companies are reporting improvements though
"...as of this week, we are now down to only about 1% of our restaurants in the U.S. are operating with limited hours. So franchisees have been able to make significant progress in ensuring that they've got the staffing that they need." - McDonald's (MCD) CEO Christopher Kempczinski
“I’m pleased to report though that over the last few weeks, the operation and staffing have stabilized, and we’ve seen performance even better than during the holidays. Yesterday, for example, we were 95% on time, which I’m just usually proud of." - Southwest Airlines (LUV) Incoming CEO Bob Jordan
Maybe things will get better in the second half of 22?
"...the supply chain impact will be visible in '22. I would say right now, there's reason to be slightly more optimistic in the back half, but in the first half, I don't expect a significant improvement. As a result of this one, we would love to build some inventory, to be very clear. I don't think it will happen in the first half. Depending on how the situation in the supply chain, we may be able to build some inventory levels to manageable working capital levels by the end of the year." - Whirlpool (WHR) CEO Marc Bitzer
"We think that even though automotive is a little bit constrained right now because of semiconductor chip shortages, we expect that's going to ease throughout the year and especially in the second half is going to be better." - Dow (DOW) CEO Jim Fitterling
“I would not say that I would expect the supply chain issues to be completely worked out by the end of this year. I do not expect them and I have not expected them.” - US Federal Reserve Chair Jerome Powell
Intel’s inventory is just starting to normalize
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Real Estate:
Exceptional demand for logistics real estate
“Logistics real estate continues to be the favored asset class among investors” - FIBRA Prologis (FIBRAPL14) Chairman & CEO Luis Enrique Gutiérrez Guajardo
"...the rents are growing 2 to 3x the rate of inflation. And not only are the market rents growing, in many cases, the rents, of course, in place are well below the market rents. And because we're in this inflationary environment and there are supply chain challenges, it's hard for new supply to respond as quickly as one would expect. In fact, in logistics, we think in some markets between landing cost -- replacement cost has gone up close to double. I'd say aggregately in the asset classes we like, it's probably up more than 30% in the last couple of years. So owning these kinds of short-duration, hard assets with pricing power is very positive - - In my 30-year career, I've never seen real estate fundamentals in the sectors where we are focused as strong as they are today." - Blackstone (BX) President Jonathan Gray
"Fourth quarter demand was exceptional in the logistics sector with 122 million square feet of absorption, about similar to last quarter and the third-highest quarter on record. Demand exceeded supply by about 40 million square feet, which dropped national vacancy rates to an all-time record low of 3.2%, which is over 300 basis points below long-term historical averages. For the full year demand was 433 million square feet compared to completions of 268 million feet" - Duke Realty (DRE) COO Steve Schnur
Nuggets of Wisdom:
Quality of a product matters
"But we decided to sell one of these watches up for auction. And for our charity and you may have heard, I think it's also $5 million with one watch. So and that's how much it fetched at an auction. But of course, all that comes is the quality of the product. And then of course people will pay the price they deem worth it." - Louis Vuitton, Société Européenne (LVMHF) CEO Bernard Arnault