All Eyes on Ukraine
The war is driving inflation. which is becoming a structural problem
Succinct Summary:
All eyes are on Ukraine as the humanitarian crisis there worsens. The war is exacerbating inflation as commodity prices increase rapidly. We have now moved from transitory to structural inflation.
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Macro:
The whole world is watching Ukraine
"Well, Dave, I have to say it really has upset the world in a huge way. And I think we're only on the 11th day of this. It has occupied my time pretty much 24/7. As the week last week went on, I'd actually say it's been crazy. A week ago, Sunday, I was actually at church. I normally don't bring my phone into church, but I did and I got a text message about 10 minutes in that I had to jump out and President Zelinsky was trying to get a hold of me. And that was the initial sign to me about the pressure we would feel relative to then try to pull every stop they could for pressure on the Russian government. I would say that it was probably the middle to the back end of last week, where we're focused more -- starting to focus on Russia." - Visa (V) CEO Alfred Francis Kelly
The humanitarian crisis is awful
"I was taking a woman last week who's got a 3-week old baby and left her husband behind and went to Poland, and we wanted to make sure that she was able to get to a pediatrician and facilitate that, and we've dispatched lots of people to the area. At least to the surrounding countries to try to help…And in fact, unfortunately, we've seen in the last 24 hours that when ceasefire agreed to, the Russians are not ignoring them and therefore, people are wandering and getting hit by a bomb, is just it's an awful, awful situation and how long it goes on and where it stops and where it goes is anybody's guess at this point." - Visa (V) CEO Alfred Francis Kelly
"There are now over 2 million displaced Ukrainians and untold deaths. And as the crisis extends, the numbers will continue to expand." - Greenlight Capital Re (GLRE) Chairman David Einhorn
From an economic standpoint, the war is driving inflation
"Inflation is elevated. With the geopolitical instability that we’re seeing with Ukraine and Russia, you’re seeing oil prices escalate, which will only elevate the expenses around essential goods, so there’s still pressure there." - Macy's (M) CFO, Adrian Mitchell
Inflation is becoming a structural problem
"I think a good bit of the inflation that we're seeing across the country is structural in nature. I think you'll see some soybeans and some wheat and some corn will moderate. Albeit it will remain at higher levels than it has historically. I think we're in a multiyear secular trend higher on oil. But I think wage rates, container cost, import cost, some of those underlying variables, I think we're at a new norm on those. So I think there's a little bit of give and take, but more structural in nature than perhaps other inflationary cycles." - Tractor Supply Company (TSCO) CEO Harry A. Lawton
"I think we would view a lot of this inflation as structural. And some of this is a rebound off of levels that came during COVID. Some of this is an increase in – the increase in biodiesels has driven an increase in talo and soybean oil, palm oil, palm kernel oil, and that will likely stay up. So we tended to view most of the raw material increases as structural, as opposed to temporary." - Colgate-Palmolive (CL) Chief Investor Relations Officer John Faucher
"We believe that inflation is now a structural problem. We already had an inflation problem, which the war is certain to accelerate" - Greenlight Capital Re (GLRE) Chairman David Einhorn
Inflationary psychology has taken hold
"...customers, they may not like seeing a 20% increase, but they know that they’re going to get a 20% increase with anybody that they go to. So we’re using price aggressively to combat inflation." - Waste Management (WM) CEO Jim Fish
Consumers are definitely starting to feel the inflation
"We know from our own surveys and things that you read, that certainly inflation is on people's minds. They're noticing it." - Walmart (WMT) CFO M. Brett Biggs
"The reality is when you start seeing gas at $7 a gallon, which it almost is in Los Angeles, it does impact consumers." - Korn Ferry (KFY) CEO Gary Burnison
"Gas prices are elevated across the country, grocery prices are elevated across the country, people are noticing their ticket, so there’s certainly a segment of customers that are going to be more impacted than not." - Macy's (M) CFO Adrian Mitchell
Discretionary spend could come under pressure
"With inflation, what the consumer is saying is they're going to spend less on discretionary categories and more in the essentials" - United Natural Foods (UNFI) President Christopher P. Testa
"They're going to cut back on trips first, they're going to cut back on going out to restaurants, other discretionary items to your point, like whether it's a payroll or higher ticket items." - Tractor Supply Company (TSCO) CEO Harry A. Lawton
Politicians are noticing
"Today’s inflation report is a reminder that Americans’ budgets are being stretched by price increases and families are starting to feel the impacts of Putin’s price hike. A large contributor to inflation this month was an increase in gas and energy prices as markets reacted to Putin’s aggressive actions,” - US President Joe Biden
But what is the Fed going to do?
"And the big unknown is ECB and other federal, what exactly is going to be their policy. And I just believe, I’m not an economist, but I think that they’re going to have to back down. I just don’t see the political will, particularly what’s going on. This tragedy – I mean what’s unfolding in Ukraine, I just don’t – I think they’re going to have to back off…Are you going to – are we going to go back to the 70s where we crank up rates to 18% or 19%, that’s really hard for me to imagine that we’re going to get back to that stance politically. I just – that seems pretty far out there." - Korn Ferry (KFY) CEO Gary Burnison
It’s not clear how the trend will reverse
“It’s been a year since prices of various inputs such as metals began rising, and we still can’t foresee when that trend will reverse. We had to, and will need to, ask our customers to share the burden because no single company can absorb the whole impact anymore." - Toshiba Corp (TYO: 6502) Head of Devices unit Hiroyuki Sato
International:
Another round of sanctions may be coming
"We think this thing is headed for another round of sanctions, and in that case, probably a very disorderly underwind out of our business there. And we decided we would be far better off taking a thoughtful wind-down approach to the business." - Visa (V) CEO Alfred Francis Kelly
Ad spend is softening in Europe
"More broadly than just the Russia exposure, we're also experiencing some softness in Europe beyond that as well due to the conflict. It's hard to say whether that is temporary or will persist. But this is another challenge that we hope will be a short-term headwind to the business" - Meta Platforms (FB) CFO David M. Wehner
Omicron is still a problem in Asia
"People in Asia -- or I talked to my colleague's people are, of course, horrified, many, but they are not changing their travel. And they are much more concerned travel right now with the pandemic because Omicron in Asia is still a problem, and there is still significant hindrances to travel there, particularly internationally." - Bank of America
Financials:
The markets are extremely treacherous. Counterparty risk growing
"The markets are extremely treacherous at the moment. There is a lot of uncertainty. There are a lot of clients that are under extreme stress. That creates potentially very significant counterparty risk exposure. And the movements here are extremely significant and playing out in real-time. So I would suffice to say that the full ramifications of the current conditions are still uncertain and unknown at this point." -JPMorgan & Co (JPM) Head of global markets Troy Rohrbaugh
Individual investors are holding firm despite volatility
"While we've been seeing a lot of dialogue and a lot of revisiting of plans, the actual change in underlying portfolios has been pretty limited. We haven't seen either inflows out of equities as volatilities increased, nor have we seen a lot of cash being put to work, it's been relatively steady as you go." - Merrill Lynch (MLWM) President Wealth Management Andy Sieg
What will governments do with digital currencies?
"I don't know where crypto is going to go. It certainly feels like a great application in emerging markets where cash is dangerous. And there aren't a lot of options for acceptance. I don't know what role it really plays in Canada or in the U.S. to be perfectly honest. I've actually asked the Fed in the United States, what problem are we trying to solve. And it's not clear to me what that is. I'm not sure it's 100% clear to them as well. And you can see, you might have seen this morning, I haven't got sense to read it yet, but President Biden signed some executive act trying to brain crypto, and I don't know where all of that's going to lead as well." - VIsa (V) CEO Alfred Francis Kelly
Consumer:
Retail comps are coming back down to more normalized levels
"The 3% comp that we talked about is on top of a pretty big number. We've added a significant sales volume to the U.S. over the last couple of years. Walmart U.S. is [like a] 15% 2-year stack over 2 years." - Walmart (WMT) Executive VP & CFO M. Brett Biggs
"It looks like we have reverted back to the pre-COVID trend line in terms of gradual increase that we've seen in e-commerce as a percentage of total retail. So that big surge that we saw when the COVID lockdowns went into place has pulled back to the trend as life has returned to normal." - Meta Platforms(FB) CFO David M. Wehner
There’s a trend towards science-driven nutrition
"And then on top of that, we have seen the pendulum swing back towards science, right? So the pendulum swung pretty far towards natural and organics, right? Your Chihuahua is a wolf and needs a 100% protein diet. We’re seeing that come back towards science and balance nutrition and Hill’s can help drive that. And that’s a big competitive advantage for us." - Colgate-Palmolive’s(CL) Chief Investor Relations Officer John Faucher
Eating at home has stayed elevated
"Certainly, we're seeing food at home trends remain elevated by most estimates, it's around 52% of total food spend. That's above pre-COVID levels. And it seems to have plateaued there. In other words, it remains really, really strong."- United Natural Foods, (UNFI) PresidentChristopher P. Testa
Inflation isn’t impacting home improvement spending
"Obviously, in historic pattern -- in the past when gas prices have gone up, demand in this sector has kind of gone down a little bit. But I think what has changed -- what not -- there’s not nearly as many miles being driven, because there’s so much work-from-home. So I think the effect of that might be somewhat more muted in this environment than maybe what it has been historically. So I don’t know if you can draw the same or draw the same parallels there." - Lowe's Companies (LOW) CFO David Denton
Disney is seeing strong demand for advertising on Disney+
"We have also had an incredible amount of advertiser demand ever since the launch of Disney+ and as you can see from our results in addressable advertising out of our Hulu business, we have more demand than supply.… And it's also going to be great for the advertisers because we have a very unique audience here. It is a family audience, we will be very careful about the ads we take, how we put them into our content. And we've learned a lot over the last couple of years about what kind of content lends itself to natural breaks...We're going to be very careful about making sure the -- any advertising is consistent with the content; what people are watching. So, it's not going to be something that's going to be jarring an off-topic or off-brand... I suffice it to say the advertising community was extremely pleased with this announcement." - The Walt Disney Company (DIS) CFO Christine McCarthy
Netflix is not planning an ad-supported tier for now
"Now for us, it's not like we have religion against advertising to be clear. I mean we're -- we said we're focused is on building optimizing for long-term revenue, big profit pools. And we want to do it in a way that is a great experience for our members, great for. So we lean into consumer experience, consumer choice and what's great for our creators and storytellers. So if at some point, we determine something that we have the right to kind of player within the space and it meets those dimensions, then great. But that's not something that's in our plans right now." - Netflix (NFLX) CFO Spence Neumann
Twitter has a hard time retaining new users
"We don’t have trouble getting people to sign up for Twitter. What we have trouble with is retaining those customers” - Twitter (TWTR) Head of consumer design Anita Butler
Podcasts are a strong growth area
"We've seen the percentage of our MAU who engage with podcasts continue to tick up every quarter. We're seeing the stream share of podcasts relative to other forms. Continue to tick up every quarter. We've seen the monetization come." - Spotify Technology (SPOT) Chief Financial OfficerPaul Vogel
Staffing issues are getting a bit easier
"On the staffing side…we’re starting to see things ease a little bit, what we're hearing from our teams are, things are getting a little bit better, I don't want to overstate it, but things are moving in the right direction, and are getting a little bit better." - McDonald's Corporation (MCD) CFO Kevin M. Ozan
Technology:
Cyberspace is now the fifth dimension of warfare
"As the nation's state events of the past few weeks have demonstrated, cyberspace is center stage joining land, air, sea, and space as the fifth dimension of warfare. There are no borders in cyberspace and the cyber blast radius has no bounds, putting every organization and government at risk as attacks can extend far beyond their intended targets as we saw with NotPetya." - CrowdStrike Holdings (CRWD) CEO George Kurtz
Cloudflare is helping to defend the Ukrainian government’s cyberinfrastructure
"We see a lot of traffic. The teams have been incredibly busy over the last 2 weeks to onboard the Ukrainian infrastructure on our network in order to help them protect and stand up with north of 30 Ukrainian government sites now on our network and a significant part of their financial infrastructure." - Cloudflare (NET) CFO, Thomas Josef Seifert
Chip shortages haven't abated
“The sense of shortages hasn’t changed at all. We expect the current tight supply will last until March next year” at the earliest." -Toshiba Corp (TYO: 6502) Head of Devices unit Hiroyuki Sato
“Looking forward, we expect demand to remain soft in the first quarter, as the semiconductor chip shortage continues to impact a broad range of our customers” - NN (NNBR) CEO Warren A. Veltman
Healthcare:
COVID testing is falling fast
"talked about the testing headwind here, stepping down from 60 million to 50 million tests here in 2022. So if you look at that, you look at our fall through that is re-rated higher from a historical 30% to 35% to now 35% to 40%, we think we're really very well positioned here for the near term and the long term." - Danaher Corp (DHR) CEO Rainer Blair
Industrials and Transport:
The supply chain is improving
"What I would say is I think we feel pretty good about how things are moving and how things are improving. So we think we should – as we progress, we think we should get out of some of this logistics tightness that you’re hearing, not just from us, but from other companies as well. And again, it is predominantly a U.S. issue." - Colgate Palmolive (CL) Chief Investor Relations Officer John Faucher
But it may be a while until it’s back to normal
"the supply chain will continue to be challenged. We really do believe that that will continue to be a challenge through 2022, and likely into the early part of 2023. Now, the supply chain challenges are easing - pre-holiday, you had easily over 100 vessels off the coast of California, today it’s probably about half of that, so it’s definitely easing but there’s still pressure…but we also have to recognize overseas where there is a much lower level of vaccinations and zero-tolerance policy on COVID, that there could be more shutdowns in factories and also at ports, where we’re actually getting products from." - Macy's (M) CFO Adrian Mitchell
The new WFH/WFO dynamic is starting to take shape
"We haven't really even turned the corner yet on true hybrid work models. We're just getting there, right, where a lot of people are just now going back to the office two days to three days a week. So what does that mean? That means for a lot of people, you have a complete office setup. You have a complete home setup. On Monday, Friday, you might need the home setup. On Tuesday through Thursday, you're going to need the office setup. And actually, a lot of those devices need to play nicely together." - Best Buy (BBY) CEO Corie Barry
"Well, the fact that we haven't been together in person for two years, I'd say we're still kind of searching a little bit for what normal is exactly going to look like post-COVID, and we're still working our way through that." - Netflix (NFLX) CFO Spence Neumann
Business travel spend may balance back at 50% of pre-COVID
"If you remember before the pandemic, we were spending $11 million or $12 million a quarter on [travel] year-to-date. We’re probably averaging in the, say, $2 million, $2.5 million a quarter range. I expect that that will increase. I think it will probably end up somewhere between the midpoint of zero and the 11 to 12 that we were at over the long haul." - Korn Ferry's (KFY) CEO Gary Burnison
Uber’s volume has almost fully recovered
"Mobility bookings have been recovered to about 95% of 2019 pre-COVID levels. We're even seeing travel trends getting at kind of the 90 -- close to the 90% gross bookings level. February was 12% above January in terms of mobility, gross bookings as well." - Uber Technologies (UBER) CEO Dara Khosrowshahi
Combustion engines are probably going away
"Well, we think that we're building the cars of the future. This is the way we're going to get around in the future. We don't think combustion engines are part of that at all. And so all of our systems are optimized for electric vehicles." - GM Cruise Holdings(GM) Co-Founder Kyle Vogt
"Electrification is the way to go, and that's not going to change. I think the speed of change will really depend on much more than just the oil price. It's a factor. But it's also, as I just said, it's really how can our customers solve the puzzle of which use case needs what vehicle." - Ford Motor Company (F) General Manager Hans Schep
Materials & Energy:
Even Elon Musk thinks it is time to increase oil and gas output
"Hate to say it, but we need to increase oil and gas output immediately. Extraordinary times demand extraordinary measures. Obviously, this would negatively affect Tesla, but sustainable energy solutions simply cannot react instantaneously to make up for Russian oil and gas exports” - Tesla (TSLA) CEO Elon Musk
Nuggets of Wisdom:
Having some quiet time is important
“I really value quiet time in the morning. It’s the only time where I get to step back and reflect. Monday morning is particularly the time when I really try to think about the important things I want to get done for the week, or for deeper thoughts. I have a notepad and a pen and I often write down the three to five things I want to get done that week.” - Google (GOOGL) CEO Sundar Pichai