Optimism Prevails
The supply chain is healing and labor markets are getting slightly better
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Succinct Summary: Markets are feeling more optimistic these days and macro data continues to be strong. There is no sign that rising interest rates have hurt demand and yet there are signs that inflation is trending lower. The supply chain is also healing and labor markets have gotten slightly better too. The Fed remains hawkish though. Several Fed members warned that they are far from done in their fight against inflation.
Macro
The prevailing sentiment right now is optimism
"I would say the prevailing sentiment right now continues to be optimism. I’d say they characterize the financial outlook for their businesses as good or excellent. Obviously, they are mindful of the uncertainties around the overall economy, but they are still investing in growth, and they have confidence in the second half of 2022. I mean backlogs are robust. Demand for services remains high. These supply chain issues have subsided somewhat. And from an economic standpoint, consumer spending is still healthy. We still have a robust labor market and consumer the consumer is still healthy" - STORE Capital (STOR 0.00%↑) EVP, Underwriting & Portfolio Management Craig Barnett
"....special waste is the one leading indicator -- because it's largely industrial-type jobs, and those industrial companies have some discussion as to when they spend a lot of those dollars. And we're not seeing them turn that off. So our special waste was very strong for Q1. It was very strong for Q2, and we continue to be optimistic about special waste. Even when we look at our numbers in the month of July, we still are seeing very positive comparisons in special waste." - Waste Management (WM 0.00%↑) CEO James Fish
There seem to be no signs of a slowdown
"While we are closely monitoring consumer and macroeconomic trends, we have yet to see signs of a slowdown in global lodging demand. On the contrary, the pent-up demand for all types of travel, the shift of spending towards experiences versus goods, sustained high levels of employment and the lifting of travel restrictions and opening borders in most markets around the world are fueling travel." - Marriott International (MAR 0.00%↑) CEO Tony Capuano
"We have not seen evidence of a consumer slowdown in our new consumer acquisition metrics, as new consumers acquired in Q2 2022 were in line with the year-ago period." - DoorDash (DASH 0.00%↑) CEO Tony Xu
"We have seen, so far, no change in consumer behavior, and we have seen, so far, that no slowdown in overall consumer demand." - Hugo Boss (BOSS 0.00%↑) CFO Yves Muller
We haven't yet seen any kind of significant degradation in demand -- We've seen a couple of recently isolated areas of softness, more specifically in areas like crypto, consumer on-demand, social." - Twilio (TWLO 0.00%↑) President of Revenue Elena Donio
Inflation is trending down
"The interesting thing that we are seeing now is that most of our commodities, most of the things that go into a Tesla -- not all, but more than half -- the prices are trending down in 6 months. The trend is down, which suggests we are past peak inflation" - Tesla (TSLA 0.00%↑) CEO Elon Musk
"No, I don't expect that we will see 2% inflation in the coming 12 months. But I can foresee that there will be a significant reduction in inflation in the coming 6 to 12 months and that we might be able to avoid the truly damaging wage-price inflation spiral that was so problematic in the 1970s" - Loews (L 0.00%↑) CEO Jim Tisch
The supply chain is healing
"Today, 2/3 of our customers are industrial companies. And we hear mixed feedback from these customers. When we look at many of these companies have had pent-up demand from their customers where they couldn’t produce enough parts to fulfill open POs that they have from their customers. And as things are easing up in their supply chain they’re actually being able to move product faster, which is leading to stronger demand. Others aren’t seeing that, others are actually seeing softness in demand that is impacting overall how much they’re shipping. But generally, we see the industrial economy very much in recovery, and that’s going to become a tailwind as we get through where things are today." - XPO Logistics (XPO 0.00%↑) President of Less-Than-Truckload
"Please keep in mind that we still saw a significant negative drag of around €600 million from supply chain constraints in the first half of the year, €400 million in Q1, and €200 million in Q2. In the second half, we do not expect a major impact from supply chain constraints anymore.” - Adidas AG ($ADDYY) CFO Harm Ohlmeyer
"To set some context, we continue to see high freight costs impact first quarter profitability. Though we are now seeing signs that supply chain disruptions could find some balance from this point as we move through the rest of the year." - Under Armour (UAA 0.00%↑) CFO David Bergman
Labor availability has gotten a little better
"Underlying labor availability, I'd say that hasn't got worse. That's probably got a little bit better. I mean if you -- again, reading what the tech guys are starting to slow hiring. The auto guys are starting to potentially lay off people. I think that will get better. It's not that we felt it's getting a lot better, yes. But I feel that the labor market is easing a little bit and the reports back from our operating groups in the quarter were not saying I just can't get the people. That wasn't the kind of the primary thing. It was supply chain, inflation, and COVID-driven efficiencies. That was -- they were the key themes." - Moog ($MOG.A) CEO John Scannell
"Well, it's clear to me that full recovery is not this year. I mean we're seeing labor improvement, but I classify it as more of a trickle than a constant flow. It's great that production has increased, but it's increased a minimal amount." - Americold Realty Trust (COLD 0.00%↑) CEO George Chappelle
"...one of the things that I think is interesting is to look at the positions that we’re trying to fill if, for example, normal staffing levels were that we were trying to fill the final 95% to 100% of the positions we needed at the hotel level. Right now, we’re at 93%. So it’s definitely improved. It is not back to where we were in ‘19 in terms of the labor shortage, but we’re definitely seeing steady improvement, and the wage increases have slowed." - Marriott International (MAR 0.00%↑) CFO Leeny Oberg
It would be odd to be in a recession with full employment
"I don't foresee a deep and debilitating recession. Rather, I can imagine that the slowdown will be relatively shallow, which would be consistent with a full employment recession. The reason I've come to this conclusion is that we don't seem to have too many excesses in the economy or our financial institutions. There hasn't been ramping investment in housing and the financial institutions are in reasonably good shape and are seemingly not overextended." - Loews (L 0.00%↑) CEO Jim Tisch
The US is resilient
"The U.S. economy is quite resilient. I can't predict whether there will or won't be a recession, but I do know that we'll get through this." - Goldman Sachs (GS 0.00%↑) CEO David Solomon
But is the market too optimistic?
"One thing about the market, they expect inflation to come down quite rapidly next year, and they've been wrong on this so far. So I think the better bet is that it will take a while for inflation to come back to 2%. It won't be as rapid as what the market expects" - St Louis Fed President Jim Bullard
The Fed doesn’t think that its work is done
"Work on inflation is nowhere near almost done. We are still resolute and completely united on achieving price stability. We have a long way to go on that task." - San Francisco Fed President Mary Daly
The consumer is going to have to stop spending soon
"The consumer, which is the backbone of the U.S. economy, well, he may still be spending but this confidence is the lowest point it's been in decades and it's even worse in Europe. So there's no question that the consumer will stop spending the way he has spent in my mind. And you can't look backward, you have to look forward at what you're facing and he's facing dwindling savings rates because he's spending his money on gas, food, rents and housing prices, and interest expense. I don't see the offset" - Starwood Property Trust (STWD 0.00%↑) CEO Barry Sternlicht
International
Global Q3 and Q4 GDP numbers won't be good
"There's no question that Europe is going to have a very tough winter and it's already in recession. German industrial production has to be cut back. China is growing very slowly. So there will be no way to pull the global economy forward, and as you know, global growth rates have been reduced -- all the estimates have been reduced. So I wouldn't be surprised if the third quarter and fourth quarter GDP numbers were bad." - Starwood Property Trust (STWD 0.00%↑) CEO Barry Sternlicht
Green shoots of recovery in China even though the consumer is still cautious
"In China, mobility restrictions and limits on in-store dining continue to significantly impact the business. However -- we are beginning to see green shoots of recovery with sales and comps coming out of the quarter, reflecting sequential improvement" - Starbucks (SBUX 0.00%↑) CEO Howard Schultz
"...we are still seeing very cautious consumer behavior due to the ongoing volatile situation in imminent risk of new lockdowns. Taking all of these considerations into account, own retail traffic remains well below normal levels, as you can see from the data displayed on the right-hand side. After seeing trends somewhat improved in June compared to the month before, own retail traffic actually worsened again in July, still being down 21% year-over-year, which is also indicative of the trend development in franchise stores. At our Q1 results released back in May, we had called out several forward-looking assumptions regarding the business development in Greater China." - Adidas AG ($ADDYY) CEO Kasper Rorsted
UK inflation to hit 13%
"Higher energy prices are one of the main reasons why the rate of inflation is so high.. Russia’s invasion of Ukraine has led to large increases in the price of gas. Since May, the price of gas has doubled. We think those price rises will push inflation even higher over the next few months, to around 13%. Higher prices for the goods we buy from abroad have also played a big role." - Bank of England
Financials
Credit quality of loans remains strong
"...the weighted average income of our borrower is 160,000 with an average FICO score of 748, and we're seeing really good trends in terms of overall delinquency. For our personal loans business, 90-day delinquencies were at 21 basis points in the quarter, and that's roughly in line with where we were a year ago, which was at 18 basis points. And then in terms of overall charge-off rates, our personal loans business, was at 1.25% annualized, again, which is roughly in line with where we were a year ago at 1.2%, and both of those metrics are well below where we were prior to COVID." - SoFi Technologies (SOFI 0.00%↑) CFO Chris Lapointe
But that may be changing
"With the supportive policies of the pandemic mostly in the past, there are pockets of borrowers who are beginning to show some distress on their debt. Upticks in delinquency transition rates are visible in aggregate. While overall credit profiles thus far remain resilient, the recent uptick in delinquencies in some households suggests that many communities or individuals are experiencing the economy differently. We are seeing a hint of the return of the delinquency and hardship patterns we saw prior to the pandemic" - New York Fed Report
"...we're seeing no tightening whatsoever. When you think about the asset class performed very well in 2008 and '09. And when I talked to the head of these finance companies, as I said they're seeing some delinquency increases on the lower end but it’s back to pre-COVID levels. But I think the reassuring part of that is losses are at historic lows and the appetite for car loans is robust. So, we have not lost any car business because of the availability of credit -- There's a lot of discussion about delinquencies and we've seen some of the delinquencies kind of return to pre-COVID levels but when you look at charge-offs and what's happening in the marketplace, there's still a healthy appetite for lending" - Group 1 Automotive (GPI 0.00%↑) SVP, Manufacturer Relations, Financial Services, and Public Affairs Peter DeLongchamps
Institutions want access to crypto assets
"Our institutional clients are increasingly interested in gaining exposure to digital-asset markets and are focused on how to efficiently manage the operational life cycle of these assets," - BlackRock (BLK 0.00%↑) Head of strategic ecosystem partnerships Joseph Chalom
Consumer
Consumers are trading down
"The latest retail trends place an emphasis on consumer choice and passion-driven spending – they’re hunting for deals, shopping across channels and ultimately still spending on experiences and goods that make them feel good. As retailers grapple with excess inventory and supply chain constraints, it’s likely that the promotional activity seen in July will continue to be an important strategy for retailers.” - Mastercard (MA 0.00%↑) Senior Advisor Steve Sadove
"So, we're seeing at least the start of some trade down on the Rent-A-Center side" - Rent-A-Center (RCII 0.00%↑) CEO Mitch Fadel
"We are observing some trade-down behavior within various classes at home. And the vast selection of our catalog ensures that we meet our customers' needs regardless of price point or style. It's not that specific types of goods are getting traded down, other types of goods aren't. It's more a little bit across the board" - Wayfair (W 0.00%↑) CEO Niraj Shah
Airbnb thinks that remote work is here to stay
"...in April, we announced that Airbnb employees can live and work anywhere. And why do we do this? Well, there are a couple of reasons. Number one, we have the most productive 2 years in our company history. And those 2 years were 2 years when we rebuilt the company from the ground up, fixed our cost base, and accelerated growth. And all of this was done on Zoom. And so it's very clear to me that like the most productive we have ever been is on Zoom. And so I thought there was no question that we can maintain that productivity. Additionally, I think a really good way to predict the future is to look at what young companies do, right? 20 years ago, young companies had open floor plans and they had a lot of perks on-site, and that became the dominant way that people worked in offices around the world. If you look at a lot of young companies today, they have a lot of flexibility. They're embracing remote work. And so I think this is a really good leading indicator of what the office space -- office players office environment of the future will look like in the next 10 years." - Airbnb (ABNB 0.00%↑) CEO Brian Chesky
College students are thinking about school as a year-round endeavor
"...we believe students are increasingly thinking about their academic journey as a 12-month endeavor in order to better balance work, course load, and family throughout the year. In fact, 38% of students surveyed are extending college so they can make more money now. They can do this because schools are going increasingly online, making summer school more convenient and accessible." - Chegg (CHGG 0.00%↑) CEO Dan Rosensweig
Phones are your biggest necessity after food and water
"...the big picture is phones necessity and your wireless connections necessity. So it's after food and water and shelter, it's just about next in line." - DISH Network (DISH 0.00%↑) Co-Founder & Executive Chairman Charles Ergen
Travel spend is still robust
"...while there is uncertainty surrounding the economy at large, we have not seen it. Travel is robust, and our key indicators support this certainly throughout the summer as customers, both leisure and commercial are dedicating their share of wallet to us." - Avis Budget Group (CAR 0.00%↑) CEO Joseph Ferraro
"...yes, we see that there is been some moderation, but I will repeat, July gross bookings, 35% on a constant currency basis. That’s pretty strong. And yet we know that the recovery is not fully done yet" - Booking (BKNG 0.00%↑) CEO Glenn Fogel
Business travel is steadily rebounding
"...we hear anecdotally from our corporate clients. We’re seeing more and more return to the office, which is driving business demand. And when we look at some of the big major markets that I think are decent indicators for us, you look at New York, for instance, that had an 86% occupancy in the quarter. You look at San Francisco, 78%; Washington, D.C., 76%; Los Angeles, 80%. You are seeing steady volumes of demand recovering in many of those markets that were trailing the leisure destinations." - Marriott International (MAR 0.00%↑) CEO Tony Capuano
Ridesharing is up
"We saw increased demand in Q2. Active Riders and rides both hit post-COVID highs with rideshare rides up 27% year-over-year. Travel came roaring back. The airport use case reached an all-time historic high at 10.2% of total rideshare rides in Q2 and managed Lyft business bookings more than doubled, up 105% year-over-year." - Lyft (LYFT 0.00%↑) CEO Logan Green
Technology
Technology sales cycles are lengthening
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Some semiconductor companies forecasted greater growth than materialized and now are suffering consequences
"Amidst widespread supply constraints during the second quarter of last fiscal year, we entered into a capacity reservation agreement with a silicon foundry supplier. Ongoing events, including COVID mitigation efforts in China, the war in Ukraine, global supply chain disruptions, and other factors have negatively impacted the global demand environment within a short period of time. Consequently, customer demand no longer supports the minimum purchase commitments for the agreement. We believe this situation is not normal and does not accurately reflect the performance of our ongoing business." - Qorvo (QRVO 0.00%↑) Interim CFO & VP of Treasury Grant A. Brown
Microchip has seen some push on backlog but not significant
"We’re also aware that there is some inventory build at our customers as can be seen in their balance sheet, some of which we believe is due to strategic buffer inventory builds and some of which is due to incomplete kits or the infamous golden screw effect. While we have seen sporadic requests to push our backlog, these requests are a small fraction of the very large unsupported backlog we have over multiple quarters and hence, have not had a material impact on our business." - Microchip Technology (MCHP 0.00%↑) CEO Ganesh Moorthy
Governments around the world are incentivizing new semiconductor manufacturing capacity
"Yes on the CHIPS Act right, it just needs to get signed off by the President. So that's going forward with, you know, what is it 54 or $54 billion in grants and loan guarantees and 25% investment tax credits for the semiconductor manufacturing, industry, and specialized tooling equipment as well in the semiconductor manufacturing process -- And we're seeing the business lines telling me that we're seeing other governments outside the US following our lead, if you will, with incentives. We think about Germany and Italy, countries like that, where we'll see semiconductor manufacturing, picking up so we were bullish on it." - Fluor (FLR 0.00%↑) CEO David Constable
While Intel falters, AMD is flourishing
"This was an excellent quarter for our business as we delivered record revenue and profitability based on our strong execution, leadership product portfolio, and diversified business model. Each of our segments grew significantly year-over-year, led by higher data center and embedded sales as we continue expanding our presence across a broader set of markets and customers. Revenue grew 70% year-over-year to a record $6.6 billion. We also expanded gross margin 6 percentage points year-over-year to 54% and set records for operating and net income, both of which more than doubled from the prior year" - Advanced Micro Devices (AMD 0.00%↑) CEO Lisa Su
Industrials and Transport
Companies with excess inventories are working through them
"Now, in the past two years, to navigate the supply chain disruption, we have to build this extra safety stock and we have been carrying that extra eight weeks or call about $40 million. Now, as I said, because of the signs of improvement over time, I think that you're going to see this inventory level come down and converted back to cash -- I think over the next, call it, six to 12 months, you're going to see some of that inventory revert back to cash, and us carrying less inventory to support this level of business." - CarParts.com (PRTS 0.00%↑) CEO David Meniane
"In this environment, our suppliers are looking to move product as quickly as possible and have transitioned from having a dearth of product to having to deal with excess goods on hand. So suppliers basically have too much inventory. And so what we're seeing happen is our inventory availability levels have gone up. Suppliers have too much and they want to sell that inventory. So what do we see them do? We see them using some of the pricing tools we have on our platform to basically allow them to control their price to be aggressive where they want to move inventory, that creates value for the end customer, drives up conversion." - Wayfair (W 0.00%↑) CEO Niraj Shah
Truckers will keep rates well above pre-pandemic levels for the rest of 2022
"You’ll see rates hold up for the remainder of the year. Our cost increases are real. Our customers understand that - - We’re talking large scale successful winning brands like [Walmart and Target] and many others that know the reliance on their carrier is a competitive advantage. They want good quality transportation, on time, every time safely. To do that they work with large well-capitalized carriers." - Werner Enterprises (WERN 0.00%↑) CEO Derek Leathers
Supply chains will take a while to be fully healed
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Freight rates declined slightly
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Materials & Energy
Oil and gas prices to remain elevated
"During the second quarter, Brent averaged $114 per barrel, up from $102 per barrel in the first quarter. This was driven by reduced spare global capacity and inventory levels significantly below the five-year average. Looking ahead, we expect these factors to keep oil prices elevated during the third quarter. Turning to gas prices -- The outlook for global gas prices is heavily dependent on Russian pipeline flows. We expect prices to remain elevated and volatile during the third quarter, due to a lack of supply to Europe." - BP (BP 0.00%↑) CFO Murray Auchincloss
Interesting business: Coolants for EV batteries
"I think between 60% and 70% of the vehicle manufacturers in the EV space are recommending and filling Castrol coolants into the system on day one, 60% to 70% in this new emerging market of coolants for batteries. It's a pretty extraordinary number, and I think it says a lot about what the team has done, which is why we're doubling down on the R&D in that space. Because obviously, it's a source of growth. And we're seeing that in the EV charging business." - BP (BP 0.00%↑) CEO Bernard Looney
Real Estate
Buyers are responding to slightly lower mortgage rates
“The good news is that buyers are already responding to drops in prices and mortgage rates. The market-wide data on sales closed in July and August will reflect how far demand fell in June, but now demand has modestly improved in the second, third, and fourth weeks of July. It may improve further, as mortgage rates dropped this week to around 5% from a peak north of 6% in June. If the housing market and the overall economy can stabilize, many, many Americans still want to move, and we’re here to help them, with low fees and the best service in the brokerage industry." - Redfin (RDFN 0.00%↑) CEO Glenn Kelman
But housing prices are declining
"On the downside, I mean rates are going up and prices are coming down. It takes time. And that is the period of time or a period that we are in. We are seeing inventories expand. We are seeing the length of time that homes are on the market. We are seeing national homebuilder’s inventories increase. And it's -- we've been seeing this over the last two to three months. It's only been in the last two to three weeks, and we have actually seen any price declines. We have seen price declines" - American Homes 4 Rent (AMH 0.00%↑) CEO David Singelyn
"The percentage of homes that had a price drop in June doubled, from 9% in 2021 to 18% in 2022, a trend that we expect to accelerate when the dust settles on July numbers. In pandemic markets like Denver, more than half of all listings had a price reduction. In Boise, that number was 62%. From March to mid-July, year-over-year price growth slowed from 16% to 9%, but the value of most homes probably fell further. The reported numbers reflect sales prices only for homes that old when we know the market has become more selective: beautiful homes on corner lots still sell readily, but the homes with funky layouts now don’t sell at all." - Redfin (RDFN 0.00%↑) CEO Glenn Kelman
Construction markets are slowing down
"On the good note in the real estate markets, there's a benefit to rising rates and increasing the cost of capital and that is construction. We would expect construction to drop significantly, and many of the permits that have pulled many of those projects will never get built and that will help things like the apartment market. Obviously, the hotel market as many of these projects are shelved may never get built because not only is it more expensive because your construction loan is, you can get one is more expensive, but also labor costs have continued to rise. And the value of your bill and you probably don't think you're going to sell it at the cap rate that you expected when you announced you were building that building. So if I were thinking I would sell my apartment for the 3.5 years, maybe the market's moving to 3.75 or 4 or maybe 4.25, it's not clear. But you thought you were building this to a 5.5 unlevered and now you're building it to 4.75 because it's costing more taking longer and material prices, obviously, component prices have gone up dramatically, too. So I think you'll see a drop in construction structure, which, by the way, falls into the category of a slowing economy. Construction and capital spending is a big part of GDP." - Starwood Property Trust (STWD 0.00%↑) CEO Barry Sternlicht
"...we are seeing the national homebuilders significantly reduce their land acquisition as they are slowing down and seeing their sales orders slow down. So, we've already seen some price reductions. We have been opportunistic in being able to get some very attractive deals so far. The volume of what we have done over the last couple of months is a little bit less than what we saw at the beginning of the year but no different than the MLS, and what we are seeing is more opportunities coming our way." - American Homes 4 Rent (AMH 0.00%↑) CEO David Singelyn
And homebuilder cancellation rates are rising
"Buyers’ remorse and rejection shortly after a contract is made grows. Buyers of public developers are nervous about a potential recession, struggling to come to terms with higher payments, or expecting home prices to drop," - JBREC SVP Jody Kahn
Homes are still selling though
"We had long anticipated a slowdown in transaction volumes and an HPA from record levels. However, the pace with which this occurred was faster than anticipated. While the absolute level of transactions has moved lower, it remains in line with 2018 and 2019 and above the 2014 and 2017 levels. In other words, homes are still selling, but at a slower pace than the record high sell-through rates seen in Q1 and early Q2." - Opendoor Technologies (OPEN 0.00%↑) CFO Carrie Wheeler
Nuggets of Wisdom
whenever we’re not in a recession, we’re heading toward one
"When asked whether we’re heading toward a recession, my usual answer is that whenever we’re not in a recession, we’re heading toward one. The only questions are “when?” and “how bad?” Does the fact that there’s a recession ahead mean we should reduce our investments or alter our portfolio allocation? I don’t think so. Since 1920, there have been 17 recessions as well as one Great Depression, a world war and several smaller wars, multiple periods of worry about global cataclysm, and now a pandemic. And yet, the S&P 500 has returned about 10.5 percent a year on average over that century-plus. Would investors have improved their performance by getting in and out of the market to avoid those problem spots or would doing so have diminished it? Importantly, even if we think we know what’s in store in terms of things like inflation, recessions, and interest rates, there’s no way to know whether market prices have correctly incorporated those expectations, or whether prices are too high or too low." - Oaktree Capital Management Co-Founder Howard Marks
Focus on the things that really matter in the long term
"One of the biggest changes I’ve witnessed in my career is the incredible shortening of investors’ time horizons. But one quarter’s or one year’s performance is meaningless at best and a harmful distraction at worst. No strategy — and no level of brilliance — will make every quarter or year a successful one. Strategies become more or less effective as the environment changes and their popularity waxes and wanes. Often poor performance will be due to unforeseen and unforeseeable developments. So no one should change strategies based on short-term results. If you wait at a bus stop long enough, you’re guaranteed to catch a bus. But if you run from one stop to the next, you may never catch a bus. Thus, my suggestion to you is to depart from the investment crowd and to instead focus on the things that really matter." - Oaktree Capital Management Co-Founder Howard Marks