A More Troubled World
Impact on the supply chain could be in excess of what we observed with COVID
Succinct Summary:
The world is trying to make sense of a senseless and heartbreaking war in Ukraine. The human toll is much more important than the economic one, yet the economic impact could be severe. Russia and Ukraine are significant suppliers of energy and food to the world. Russia is the third-largest oil producer. Combined, Russia and Ukraine supply 25% of the world’s wheat and 30% of the world’s corn. Depending on what happens with the war and sanctions, this could cause a supply chain impact in excess of what we observed with COVID and the resulting inflation could be more widespread.
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Macro:
The world became a lot more troubled in the past few weeks
"...when it looked like things were starting to clear up a bit, you know, Russia went to war...The interesting thing is that there is challenge after challenge we live in a troubled world in that sense, but we've had wars before 56, 68, 80. This isn't the first time, Russia invaded something in the market and the market deals with it but the market doesn't like uncertainty either and that's what we have right now but." - Martinrea International (MRE) Executive Chairman Robert Wildeboer
“Everyone is watching the recent military conflict, or war, between Russia and Ukraine,” - China Banking and Insurance Regulatory Commission Chairman Guo Shuqing
The violence is senseless and heartbreaking
“This is actually very personal for me. I'm sure many of you know that my great grandfather actually immigrated from Kyiv from -- growing up, it was Kiev in our household. And -- but my great grandfather, Isaac Benioff, came to the United States from Kiev. And my grandfather was born here in the United States and then came to San Francisco and met my grandmother who was a second-generation San Franciscan. And that's why I'm here now. I'm a fourth-generation San Franciscan. But looking back and looking at my family now and Ukraine, my heart is really breaking for them. And the senseless pain, the suffering, -- it's just unbelievably difficult to see what is going on in the world -- our heart is continuing to break” - Salesforce (CRM) CEO Marc Benioff
The levels of uncertainty are reminiscent of March 2020
"I might preface the remarks I'm about to make by saying, so I actually went back and read the transcript from what I said in the first week of March 2020. And of course, at that point, I said, yes, this COVID thing it's really impacted China, a couple of countries in Asia. We don't see an impact in the U.S. and Europe yet. We'll have to see. And that truly was how we felt on March 3, 2020, and we all know what happened. So I maybe start with that story just as a warning about everything I'm about to say." - American Express (AXP) CFO Jeffrey Campbell
“Now to start the year, investors are fixated on the inflationary and disrupted supply chain environment that is likely to lead to higher interest rates. COVID-19 never seems to go away, and we have the potential for a Russian invasion of Ukraine which is causing concerns for risk assets. Put simply, it is a market filled with fear. The inflationary supply chain issues are real and are providing a serious headwind for the market and the economy. As you know, I love reading about some of the world's best investors. Warren Buffet once said, "Over time people get smarter but not wiser. They don't get emotionally stable. All the conditions for extreme overvaluation or undervaluation absolutely exist, the way they did 50 years ago. You can teach people all you want, tell them to read Graham's book, you can send them to graduate school, but when they are scared, they really get scared." Well, the markets are presently experiencing extreme volatility and vicious selling. We are living through what appears to be a very “scared” market” - 180 Degree Capital (TURN) CEO Kevin Rendino
The Russian-Ukrainian war adds a new layer of complexity to supply chains and logistics
"This conflict will have an impact on the supply chain and logistics market. We've already seen a few consequences in the early days. The Ukraine ports have closed impacting the flow of goods. Russian forces have destroyed some Ukrainian air cargo freighters, sanctions will likely impact operations at ports and other countries. Airspace has been restricted for Russian air traffic impacting air cargo capacity that's available and the link and cost of flights. Similarly, Russia has restricted access to its own airspace to more than 30 countries. Some companies rely on raw materials from Ukraine or Russia causing some manufacturing factories to close and undoubtedly impacting supply. Various multinationals have suspended or withdrawn from their Russian operations…Russia and Ukraine contribute oil and natural gas to the energy market. And with the supply being curtailed, there could be a meaningful impact on energy prices and the prices of other commodities. Some logistics companies, including FedEx, DHL, and UPS have suspended shipments to Russia. Ocean Network Express, Maersk and MSC have all halted bookings to Russian destinations. All of this could impact renewable trade volumes. And finally, severe sanctions have been placed on businesses and individuals associated with Russia and Belarus impacting supply chains of numerous businesses and where they can sell their products and services. For example, Apple has announced that it stops sales of its products in Russia just a few days ago. All of these factors bring complexity and change to the market." - Descartes Systems (DSGX) CEO Edward Ryan
Inflation was already bad
"Even before the Russia-Ukraine conflict brought uncertainty of the economic conditions, the economy was dealing with a bunch of inflationary pressure. This seems like a somewhat logical consequence with so much new money being pumped into the system during the pandemic to aid with recovery." - Descartes Systems (DSGX) CEO Edward Ryan
"We are also experiencing some of the highest levels of inflation that we've seen in several decades." - BJ's Wholesale Club (BJ) CFO Laura Felice
And this could make it even worse
“...a return to more normal inflation rates is likely several quarters away or even longer, especially in the event of rising oil prices or other impacts related to the Ukraine crisis” - Logitech (LOGN) CFO Nathan Olmstead
Consumer spending still hasn’t changed
"...the larger question for us is what potential larger or longer-term impacts are there on the global economy. As I sit here today, and now I'm starting to get flashbacks to March of 2020, Sanjay, as I say what I'm about to say. But as I look at our daily results today, spending around the globe, on travel, spending on goods and services, so I look at travel bookings. We run a really large travel agency. You don't see any inflection point outside of Russia and Ukraine in recent days. But that's obviously what we all will be watching as time goes on here." - American Express (AXP) CFO Jeffrey Campbell
But increased inflation could change that
"...we see the potential for inflation risks that were originally driven by the pandemic, increasing even further as a result of the conflict in Eastern Europe. Persistent high inflation would likely have a negative effect on discretionary spending throughout the year. With that said, we have line of sight to 20% year-over-year growth for Q1 of 2022." - Cardlytics (CDLX) CFO Andrew Christiansen
Lower-income consumers are starting to feel pinched
"Our customer, last year, as you know, they were -- they had a lot of stimulus dollars in their hands between the stimulus dollars, the child tax credit and then the food stamp environment and then the extra unemployment, and many of those are going away. So, not only are they going away, but then on the other side, it's the highest inflation you've seen in 40 years. So they are starting to see pressure on their rent bills, their heating bills, their gas bills, their utilities, and their food bills." - Dollar Tree (DLTR) CEO Michael Witynski
Will the Fed still tighten?
"I do think it’s going to be appropriate for us to proceed along the lines we had in mind before the Ukraine invasion happened. In this very sensitive time at the moment, it’s important for us to be careful in the way we conduct policy simply because things are so uncertain and we don’t want to add to that uncertainty." - US Federal Reserve Chair Jerome Powell
We all hope for a quick resolution of the conflict
"...like everyone else, we're troubled by the awful events of the Ukraine-Russia conflict and are hoping for a quick and peaceful resolution that will save the unnecessary loss of so many lives." - Descartes Systems (DSGX) CEO Edward Ryan
International:
China will not join in sanctions
“Regarding financial sanctions, we do not support that. China won’t join such sanctions.” - China Banking and Insurance Regulatory Commission Chairman Guo Shuqing
The Chinese economy slowed down in Q4
“China's market economy slowdown…the fourth quarter of 2021 China's GDP grew 4% while total retail sales rose 3% year-over-year. Both decelerated from the previous quarter due to the confluence of COVID price increase of raw materials and other factors” - Alibaba (BABA) CEO Daniel Zhang
Financials:
Visa, Mastercard, and Amex have stopped transactions in Russia
"We're in the process of complying with all the applicable global sanctions issued by different jurisdictions. And as part of that compliance we've suspended access to visa for certain clients." - Visa (V) President Ryan McInerney
"...we have decided to suspend our network services in Russia. This decision flows from our recent action to block multiple financial institutions from the Mastercard payment network, as required by regulators globally. With this action, cards issued by Russian banks will no longer be supported by the Mastercard network regardless of where they’re used - inside or outside of Russia. And, any Mastercard issued outside of the country will not work at Russian merchants or ATMs” - Mastercard (MA)
“In light of Russia’s ongoing, unjustified attack on the people of Ukraine, American Express is suspending all operations in Russia. We are also terminating all business operations in Belarus.” - American Express (AXP)
There’s not a significant financial impact of the sanctions on Visa or Amex
"It's difficult to reasonably estimate the full potential financial impact of the situation to visa right now. But we did release yesterday that in 2021 total net revenues from Russia, including revenues driven by domestic as well as cross-border activities into or out of the country, were approximately 4% of our global net revenues and total net revenues from Ukraine, where approximately 1% and that as things evolve, we gain more insight and more clarity." - Visa (V) President Ryan McInerney
"I would say sort of the very complex web of sanctions that regulators around the globe, not just in the U.S., are asking us to implement, which we believe were very compliant with…if the end result of all those things was that we had to really just completely wind down overnight our business in Russia, you could have a write-off in the kind of low single-digit pennies of EPS. It's not a material number. But we'll have to see." - American Express (AXP) CFO Jeffrey Campbell
War in Ukraine means lower mortgage rates in the US
"The war in Ukraine has rattled the global economy, causing mortgage rates to fall after weeks of increases. The dip in mortgage rates should buoy homebuying demand temporarily, fueling continued price gains. But demand may drop off if the Federal Reserve raises interest rates again as expected.” - Redfin (RDFN) Deputy Chief Economist Taylor Marr
Consumer:
Advertising spend hasn’t caught up to time spent streaming
"The 18 to 49-year-olds in the U.S. are spending about 45% of their TV time streaming, which is up from about 40% in the prior year. But the TV ad budgets haven’t moved over as fast so about 18% of the TV ad budgets are focused on streaming versus the traditional side of the coin and so, that gap in the viewership trends is well ahead of the actual spend." - Roku (ROKU) CFO Steve Louden
Cord-cutters are now spending more than they were before
“Recent studies show that cord-cutters and cord-nevers are spending an average of $142 a month between high-speed internet access and up to 11 subscriptions, a higher price tag now than Pay TV. In a recent Deloitte survey, 40% of respondents said they'd be canceling at least one service…There's just so much new premium content, in fact, tens and tens of billions of dollars worth of it. And yet, according to Nielsen, the most popular shows on streaming services are actually the network shows, still available for free over the air” - E.W. Scripps (SSP) President, CEO & Director Adam P. Symson
Disney+ is set to Introduce an ad-supported subscription offering in late 2022
“Expanding access to Disney+ to a broader audience at a lower price point is a win for everyone - consumers, advertisers, and our storytellers. More consumers will be able to access our amazing content. Advertisers will be able to reach a wider audience, and our storytellers will be able to share their incredible work with more fans and families.” - Disney (DIS) Chairman, Disney Media and Entertainment Distribution Kareem Daniel
Is there still room for movie theaters?
"There is so much conventional wisdom floating around that movie theaters cannot coexist and cannot thrive in a world of streaming. What a load of cow dung [ph] there." - AMC Entertainment (AMC) CEO Adam Aron
Domino’s has a new CEO
"I’m at the point in my life now where my wife and I are ready to go back home to North Carolina -- and I’ll tell you that I feel really good about doing that because the company is in such a fantastic place right now,” - Domino’s (DPZ) Outgoing CEO Ritch Allison
There’s a crime epidemic in California
"So the things that we think have played, clearly, in California, there's a major crime epidemic going on, enforcement of penalties or shoplifting have been largely kind of abandoned there. And certainly, you've heard of other retailers essentially even closing stores because they can't operate them viably. So we saw California spike pretty significantly. And relative to what we were seeing as late as June or July and our last round of physical inventories, there was a significant step up there." - Big Lots (BIG) CFO Jonathan Ramsden
A microcap company got a big boost from the US government
"Turning to slide 5, the news we were all waiting for came through on December 23rd when the FDA granted its first MRTP authorization for a combustible tobacco product for our VLN King and VLN Menthol King reduced nicotine content cigarettes. FDA granted all of our requested claims, including 95% less nicotine, which helps reduce your nicotine consumption and greatly reduces your nicotine consumption. The FDA also took the extraordinary step of granting us an additional unrequested claim of Helps You Smoke Less and requiring that we included on every pack of VLN and on every advertisement to tell adult smokers exactly what VLN is for and how it can help them. Take a moment to think about that. The FDA has required us to tell smokers that VLN is a cigarette that helps you smoke less. We thank the FDA for being so forward-thinking and supportive of the work we're doing." - 22nd Century Group (XXII) COO Mike Zercher
Technology:
This war is also a cyberwar
"Our threat research team detected and started protecting endpoints in Ukraine against a new data wiper, effectively a form of malware that wipes and destroys data on your end systems that we started to observe in Ukraine, and we were able to protect endpoint there and we were very proud of that kind of work that we're doing. In December, we discovered a new malware type called Blister that was again attributed to some Russian crime groups. So we're doing a tremendous amount of work." - Elastic (ESTC) CEO Ashutosh Kulkarni
"I’ve talked to a lot of banks recently, a lot of senior executives, and they’re concerned. They’re very concerned about what might happen here, and they should be. Unfortunately, 85% of the infrastructure is owned by private companies, and when we think about that critical infrastructure, it isn’t always up to the level we would like from a cybersecurity perspective. We’ve seen that with some of the pipelines. Part of the challenge in cyber is there really aren’t norms. I think a lot of the norms have been violated here in conventional warfare. but there are no norms in cyber, so what happens with this escalation is really going to be interesting." - CrowdStrike (CRWD) CEO George Kurtz
Consumer electronics replacement cycles are shortening
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Industrials and Transport:
Automobile inventories may be starting to recover
“...we have been seeing some improving trends, right when it comes to inventory from November to December, December to January, just even when we look at the number of listings that we have on our own site. That being said, the pickup is just a little bit more gradual than we had expected. So we are expecting inventory to begin to recover on a more meaningful basis in the second half of the year” - Cars.com (CARS) CFO Sonia Jain
Semiconductor supply may also be getting slightly better
"Results did improve sequentially over Q3, as we saw a slightly lower level of chip-related OEM production shutdowns and customer call-offs during the quarter. It was encouraging to see but we're not out of the woods yet. We continue to face volume cost supply challenges that have hampered our progress over the last year. We are seeing signs of these challenges easing in the early part of 2022. We expect Q1 to be notably better than Q4 with the results expected to continue to improve over the course of the year as the supply chain issues gradually sort out and our launch activity normalizes." - Martinrea International (MRE) CEO Frank Patrick D’Eramo
Materials & Energy:
Russia is the third-largest oil producer in the world
“Russia is the third-largest oil producer in the world. There's enormous concern about pressure on oil supply” - ASX (ASXFF)
That supply disruption will be very difficult to make up
"If there is a significant supply disruption with respect to Russian crude - - that will be very difficult for the market to make up and therefore that will lead to, I think, significantly higher prices,” - Exxon (XOM) CEO Darren Woods
It could be enough to spark a recession
“...then the flip side of oil prices going up is it can shock the economic system. And so we want to see how that plays out, particularly on the continent of Europe as that may affect volumes going forward” - FLEETCOR Technologies (FLT) CFO & Company Secretary Charles Richard Freund
Can the west afford to impose sanctions?
“...when it comes to oil, Russian oil, I was on the phone yesterday with the President and other members of the cabinet on exactly this subject, and we are now talking to our European partners and allies to look in a coordinated way at the prospect of banning the import of Russian oil while making sure that there is still an appropriate supply of oil on world markets. That’s a very active discussion as we speak” - US Secretary of State Antony Blinken
Ukraine is also a major food producer
“You've got the invasion on Ukraine and what is playing out there has shocked the markets dramatically and the concern now is that inflation will be much, much higher than expected towards noting that Ukraine is a major food producer. They are the fourth-largest producer of potatoes in the world - things you learn when you start ratings on them. There is going to be pressure not just on oil and gas, which is coming from Russia and a massive issue for Europe in particular, but also on foodstuff things like sunflower oil which has the world's largest producer” - ASX (ASXFF)
“...when 30% of the world's wheat is exported from Russia and Ukraine and 25% of the world's corn comes out of that region. And you're a Ukrainian farmer today and the diesel depots have been blown up or you're going to have access to diesel even to plant? And where is that fertilizer going to come from? And are you going to take your cash and put that into a crop that's going to be harvested months later, but you're not sure if a tank will roll through your farm or not. So there are so many questions right now outside of just export bans and restrictions and costs and risks that I think are driving today's grain market, which then puts North and South America in a very solid position and need to produce at maximum rates, which will then drive fertilizer demand” - CF Industries (CF) CEO & Director Anthony Will President
The CIS region is an important supplier of silicon, ferroalloys, and manganese
“The heartbreaking developments in Ukraine over the past week are being monitored very closely as Russia, Ukraine, and the broader CIS region are important to the silicon, ferroalloys, and manganese alloys industry. The conflict has already had an immediate impact in driving oil and global energy prices higher” - Ferroglobe (GSM) CEO & Executive Director Marco Levi
In the long term, Europe will have to move away from reliance on Russian oil
"I mean, the reality on energy is Europe has got to come up with a solution really quickly to get gas from someone other than Russia…On a long-term basis, the very interesting thing here is, Europe's going to have to pivot from relying on Russian energy. And the long term will be good for energy costs." - Martinrea International (MRE) Executive Chairman Robert Wildeboer
It’s not so easy to move to renewables in the near term
“For some time now, the sentiment towards all traditional forms of energy, especially in political circles has been very negative. Many said that the world should pull the plug on traditional energy as soon as possible and completely devote our capital and efforts toward renewable energy. Without a doubt, this was always naive. The world now realizes that an overnight transition to renewable sources of energy is not at all possible…Over 1/3 of the world lives in energy poverty, mainly in developing countries. Europe's energy policies have now made energy poverty a reality in first-world countries. As an oil analyst said, energy is the economy.” - Enterprise Products (EPD) Co-CEO & Director A. James Teague
Oil and gas capex will likely ramp up
“Look to comments made by a variety of sources, everyone from the IEA to the Head of Saudi Aramco, members of the European Union, and even the U.S. Energy Secretary. Ultimately, they all message the same thing. Investment in oil and gas needs to ramp up sharply in order to provide the badly needed baseload traditional sources of energy that will be needed alongside low carbon fuels and green energy to meet the world's growing demand.” - Enterprise Products (EPD) Co-CEO & Director A. James Teague
Even Deepwater could recover
“Deepwater is showing signs of recovery as well. And given the new outlook on much lower U.S. shale growth production compared to the years from 2014 to 2019, we believe deepwater activity will be key to support oil and gas demand for years to come. Considering that the 2021 global active drillship rig count was 58% below the 2014 to 2015 peak, there is considerable deepwater growth potential at current oil and gas prices” - TETRA Technologies (TTI) President, CEO & Director Brady M. Murphy
Wisdom:
Building a results-focused culture
“You have all heard me say multiple times we expect you to do nothing but judge us on our results. A results-focused culture is necessary to truly impact profound change. And compensation is a key tool that allows companies to reinforce and reward the right performance and behaviors. And like everything, that starts at the top. So in a break from over 25 years of tradition, and the upcoming proxy, you will notice a marked change to executive compensation at Digimarc. All executives will have a large percentage of their compensation at risk if we don't perform against the aggressive goals we have set for ourselves. But they will also enjoy an upside if we outperform. The question I am most often asked is now that I've been CEO for 10 months, am I more excited or less excited than I was on the outside looking in. You will soon notice in the proxy I have chosen to put 100% of my compensation at risk, and if it pays out, I'm going to take 100% in stock” - Digimarc CEO, President & Director Riley Young McCormack
Prototypes are easy, production is hard
“There's been a lot of sizzle in the EV space over the last 3 years or 4 years, not just from Workhorse. You can go look at all the stock prices of some SPACs, et cetera, typically are down somewhere between 60% and 85%. So doing something on a PowerPoint and doing something in a factory, it's 2 different worlds. Putting a rendering of a drawing of a vehicle up there and actually doing the design, the sourcing, and the testing, where you PPAP all your parts, you homologate your vehicle, you crash test it, winter testing, summer testing, dynamometer testing, that's hard work…Hard work in the auto industry. And I used the quote last time from Elon Musk, who said, prototypes are easy, production is hard.” - Delphi Technologies CEO Richard F. Dauch
Learning from the great disruptors
“If you study the innovators to the slide that the team put up earlier (slide below) during the earnings call, you'll see it takes patience, right, to do these things right. And if you look at these great disruptors, there's a tough period. If you do the right thing, you keep your head down, you focus on IP, you find a way to do it differently and make sure that it's great for the consumer and/or the industrial users of your product and your partners, you're going to come out ahead. So you got to kind of figure that out” - Canoo Executive Chairman, CEO & Investor Anthony Aquila
