Cost Pressures Falling
Some companies are signalling that inflation pressures are falling 📉
Succinct Summary: The companies that we follow are clearly signaling that inflation pressures are coming down. As price pressures come down, there are some signs of consumer weakness but overall the economy is performing quite well. Housing markets may even be rebounding. But will loosening financial conditions will lead us right back to overheating?
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Macro
Costs are coming down
"We are seeing, as Mark mentioned in his prepared remarks, some green shoots, where costs are already coming down, including fuel, including food costs, that's strong" - Norwegian Cruise Line (NCLH 0.00%↑) CEO Frank Del Rio
"We're seeing some moderation in the input cost. So commodity costs are coming down, some freight costs at least on a spot basis are coming down. Those take some time to flow through the system, usually about 4 -- a quarter or 2, 4 to 6 months. But as those costs that come down, that's helpful for us because we tend to hold on more in pricing in the short term. So we have better incremental or decremental margins depending on the direction of the revenue in those times where costs are coming down." - Cummins (CMI 0.00%↑) VP Christopher Clulow
"As we look at the future, I mean, you know that in cost of sales, fuel is coming down. We know that. We know that freight is coming down. We're in that every day of our lives. We know that ocean freight is coming down. We know that we've been able now to really diminish the amount of materials that we're having to airfreight to keep the wheels moving with product that's coming out of the U.S. with concentrates. We know that AFF is producing and up and running in Ireland. We know that the percentage of aluminum cans is coming down. We know that aluminum costs are coming down." - Monster Beverage (MNST 0.00%↑) Co-CEO Hilton Schlosberg
Labor markets are less tight
"As folks have worked on savings rates and start to look for their next opportunity is, we have seen the applicant flow continue to pick up. We've seen our staffing in our restaurants continue to improve. And importantly, as we get folks in, we're seeing 30-day turnover and longer day turnover numbers improve dramatically, which means we're bringing them back. And we're keeping them, which means a much better experience for the customers. We're going to have better speed of service and better overall service as we get a lot of reps with folks that have been with us for more than a few days serving our customers food. So that's all positive. And I think that lends into our optimism that there would be a little less labor inflation in the back half of the year." - Wendy’s (WEN 0.00%↑) CEO Todd Penegor
Companies have prepared for a recession
"I think most customers are preparing to be in a recession. I think there's a chance you could have a technical recession, but I don't think it'll be long-lived. " - ServiceNow (NOW 0.00%↑) CEO Bill McDermott
"Will efforts to slow inflation lead to recession and unemployment. While no one knows the future, we do expect a significant slowing of the economy and a worse-than-normal macro for the next year and beyond. " - Upstart (UPST 0.00%↑) CEO David Girouard
"As far as the macro environment, the -- this has been a very clear disparity we've seen so far. And the presumption is that corporations are ahead of the consumer on this, meaning they're expecting the consumer to get worse and, therefore, preparing for that. We don't know if that ends up being the case or not. But being prepared just means that we're being much tighter on expenses and being much more focused on margins so that we have that flexibility if consumers start spending less, and that's entirely possible. It also means thinking about our products in the context of what that means in the consumer spending less." - IAC/InterActivecorp (IAC 0.00%↑ ) CEO Joseph Levin
But the economy is still surprisingly strong
"Look our second quarter results really strong -- If you look at our origination metrics. If you look at the performance of the portfolio. It continues really really strong so in terms of what we're actually seeing. -- Top importance to US right now one is consumer spending and specifically spending on an auto so -- Again, it's hard to tell with the continued supply constraints, but everything seems strong there -- Those are really really positive signs that we're seeing " - Ford Motor (F 0.00%↑ ) Credit CFO Brian Schaaf
Could easing financial conditions lead the economy back to overheating?
I have been thinking about the economy post-employment report. The report confirms that the economy is unsustainably hot with every kind of underlying inflation measure—core, wages, median, trimmed mean, sticky price sectors, unit labor costs running way above target. Yes there will be disinflation coming from gasoline and other commodity prices. Even though it influences, as it should, expectation measures because they are for the full CPI, it does not mean inflation is coming under control. In the face of core inflation above 5 percent and accelerating, the Fed has recently generated a significant easing of financial conditions. The Fed remains behind the curve in its actions and, if the last press conference is any guide, way behind in its assessments" - Former US Treasury Secretary Lawrence Summers
We’re probably not ever going back to pre-pandemic price levels
"General price levels are higher so I don't. It's declining modestly I don't think its normalizing to the levels that we were at pre pandemic and again I think that's probably true of everything we're buying as we look at inflation and price inflation hopefully. The rate of inflation declining we're not all seeing expecting prices to go back to what they were pre-pandemic and I think auction values used vehicles will follow a similar trend " - Ford Motor (F 0.00%↑) Credit CFO Brian Schaaf
International:
Americans can travel internationally more easily
"The elimination of the testing requirement to get back into the country was huge. Americans simply didn't want to take the chance to be stuck in Europe should they contact COVID. That's had an impact over the short, medium term. " - Norwegian Cruise Line (NCLH 0.00%↑ ) Frank Del Rio
High energy prices will likely impact consumer behavior in Europe
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Financials:
Upstart has seen rising delinquency trends among its borrowers
"Industry data shows a general rise in delinquencies across all segments of unsecured credit, disproportionately impacting the higher risk tiers that is comprised a significant component of our borrower base. The impact of this dynamic on the credit performance of Upstart loans can be seen in the supplemental credit performance information that was released today together with our investor materials. The macro uncertainty and the impact of economic stress on consumer delinquencies have led to a decrease in available funding for loans on our platform which has become the operating constraints of the business." - Upstart (UPST 0.00%↑) CFO Sanjay Datta
Public markets are much more attractive than the private markets for M&A
"looking at M&A is very much something that we'll be active in. And I still think that the public markets, as far as opportunities, are much more attractive than the private markets. It just takes time for the private markets to catch up, and they haven't really yet. So the companies raised enough money, but they don't have to worry about it for a little while. And so I think the opportunities are certainly much more in the public markets today. " - IAC/InterActivecorp (IAC 0.00%↑) CEO Joseph Levin
Masayoshi Son is feeling self critical
When we were turning out big profits, I became somewhat delirious and looking back at myself now, I am quite embarrassed and remorseful" " - Softbank ($SFTBY) CEO Masayoshi Son
VC money has dried up
"Obviously, in the start-up landscape, a lot of the VC money has dried up and it's dried up in a dramatic fashion. " - Marqeta (MQ 0.00%↑) CEO Jason M. Gardner
Consumer:
There are some signs of softening with the consumer
"I think everyone in the industry has seen a little bit of softening or tightening with the consumer. " - Portillos (PTLO 0.00%↑) CEO Michael Osanloo
"Consumer sentiment declined in the quarter to record lows as elevated inflation, and talk of a looming recession weighed on consumer psychology. While we understood these factors were likely to continue to pressure our sell-through earlier this year, their impact deepened as we move through the second quarter. " - Traeger (COOK 0.00%↑) CEO Jeremy Andrus
"Starting in the first quarter and accelerating into the second quarter, there was a shift in consumer demand. The shift was from higher priced items like fine jewelry and watches to lower-priced items like ready-to-wear and shoes." - RealReal ( REAL 0.00%↑) Co-Interim CEO Rati Sahi Levesque
Video games are not recession proof
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Akamai is seeing a slower than expected growth rate in video traffic
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Disney has 221 million total streaming subs
"We had an excellent quarter powered by -- significant subscriber growth at our streaming services which added 15.5 million subscriptions in the quarter, including 14.4 million Disney+ subscribers, of which 6 million were core Disney+ and 8 million were Hotstar. As of the close of Q3, we now have 221 million total subscriptions across our streaming offering. " - Walt Disney ( DIS 0.00%↑) CEO Bob Chapek
The ad-supported SVOD marketplace is in its early stages
"actually was hoping somebody would ask about Netflix and Microsoft, because I think it’s one of the most exciting scenes that’s happened in our space in it in the quarter. So let me first just restate something that, that Netflix stated on their, which I think is a direct quote, it’s still early days. " - The Trade Desk ( TTD 0.00%↑) CEO Jeffrey Terry Green
"As you know, we've had a lot of experience with this on Hulu and a lot of success with this on Hulu. And we are walking before we run in terms of seeing what the market will bear in terms of an ad load. So we're going in very conservative upfront. But we believe that there's probably going to be some more ultimate elasticity in that as well as we go forward. And we're just really thrilled that we're able to launch the Disney+ ad tier and expand our audience access through all these multiple price points that we're going to have. " - Walt Disney (DIS 0.00%↑) CEO Bob Chapek
Selim Bassoul ( Former MIDD 0.00%↑ CEO) is now at Six Flags and making changes
"Six Flags resorted to excessive discounting to drive volume. For context, let me provide an example related to one of our largest parks. In 1994, a season's pass to Six Flags Great Adventure in Jackson, New Jersey averaged $75. At the time Great Adventure only had 4 roller coasters. Fast forward 25 years to 2019, and we were still charging on average only $75 for our season's pass, despite the fact that we have invested hundreds of millions of dollars in our park, and we now have 14 roller coasters, including several of the top-rated coasters in the world. Just to keep up with inflation, we would have had to increase the price by 70%, but instead, our season pass price remained flat. I also looked at other smaller theme parks in our markets and noticed that their prices are substantially higher than ours. This gave me confidence in our ability to raise price. I tell the story to illustrate both one of our historical issues as well as one of our biggest opportunities. " - Six Flags Entertainment (SIX 0.00%↑) CEO Selim A. Bassoul
Howard Hughes corp is still seeing meaningful migration to NV
"We still see meaningful in-migration from the coast from the Northeast, Pacific Northwest and Midwest into Summerlin, into Bridgeland. And some of those folks that are leaving California are getting twice the house for half the money, and I honestly don't think that those buyers are concerned with a 5.5% mortgage rate or a 3.5% mortgage rate because they're making that quality of life trade. And that's remained consistent. And I think that our relative positioning or relative affordability and the quality of life that we can offer within our communities is appealing to buyers despite higher home costs despite higher mortgage costs, and that's translated into our financial results year-to-date. " - Howard Hughes (HHC 0.00%↑) CEO David R. O'Reilly
Digital ad spend may be falling faster than other spend
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The future of cookies is uncertain
"couple of weeks ago, Google announced that they are delaying the demise of third-party cookies in Chrome until at least the second half of 2024. If you’ve been paying attention to anything we’ve said over the last couple of years at The Trade Desk, you’ll understand how completely predictable this announcement was. I’ve said, I’m not sure it is ever in Google’s best interest to get rid of third-party cookies, but it ultimately doesn’t really matter that much. The uncertainty around Google’s decision making is only hardening the resolve of the rest of the industry to develop new approaches to identity. It is shortsighted to think about this work as simply a replacement for cookies that doesn’t really capture the scope of what’s going on. And Disney is a great example of this. Disney wants to pioneer new ways to create highly personal experiences that protect consumer privacy across all channels. In most of those channels, cookies are not even present. It’s much bigger than cookies. CTV does not rely on cookies. " - The Trade Desk (TTD 0.00%↑) CEO Jeff Green
Technology:
Weakness in PC and smartphones has accelerated
"At that time, we pointed to challenging market conditions and weakness particularly in PCs and smartphones -- we anticipated there would be inventory adjustments in PC and smartphones and then some isolated adjustments in some other areas like enterprise. And that happened, of course -- But actually, in the quarter here that we're in, the August quarter, it's broadened and actually weakened more. We're seeing inventory adjustments across most end markets. That includes the cloud. Now the cloud is a bit of a unique case because we still see strong end market demand. " - Micron Technology (MU 0.00%↑) CFO Mark J. Murphy
Weakness has extended to auto and other markets
"We're also beginning to see some inventory adjustments occurring in automotive and industrial markets. And so that's beginning, and we'd expect that to continue through this quarter and into our first quarter. And then, of course, we see PC and smartphone and enterprise continue to be weak. " - Micron Technology (MU 0.00%↑) CFO Mark J. Murphy
Semiconductor companies are trying to rebalance inventories
“We have an over-rotation where people are trying to cut inventory to unhealthy levels and there’s a pessimism that sits in the market that’s also wrong. So I think our picture is uncertain.” - Synaptics (SYNA 0.00%↑) CEO Michael Hurlston
"I think what we're seeing, and I'm speaking broadly here because we're really not seeing a lot of it, but what we are seeing is modest rebalancing. I would probably characterize it as 10-ish percent, maybe 15-ish percent, but in that type of ballpark. " - GlobalFoundries (GFS 0.00%↑) CFO David W. Reeder
Honda expects to have semiconductor shortages for another year though
"Now about the semiconductors themselves, currently, as you have seen in the newspapers and others, other industries like computers and cell phones. In those sectors, there is some excess supply, and we think that semiconductors will become available. But when it comes to the Automobile industry, that is not the impression that we are getting. For the time being, we think that we will continue to see a shortage. This is our current understanding. There are different types of semiconductors and there are different types, and we have to manage the semiconductors depending on the type, and we are continuing to allocate based on what is available. Now, when about do you think that we can resolve this? We think that until end of this fiscal year, we'll continue to see the impact of this semiconductor shortage. So until the end of this fiscal year, we need to handle the situation and taking into consideration that there will continue to be this shortage. We want to make every effort to deliver our products to our customers as soon as possible. " - Honda Motors ($7268) CFO Kohei Takeuchi
GM trying to simplify the number of chips they use
"Longer term, we've taken the step of reducing the number of chip families by 95% that are going to go into the vehicles. We think that by the middle of the decade, we'll have 3 chip families and we'll go all the way up to the -- all the way down the manufacturing tier to make sure that we're helping to control the production of those chips partnering with the chip makers themselves, but the simplification is going to be tremendously beneficial to us, as we look to scale and look to get more consistency in the supply chain over the longer term." - General Motors (GM 0.00%↑) CFO Paul Jacobson
Industrials and Transport:
Travel demand is not cooling down
"...while the broader economy has experienced a pullback in consumer spending for physical goods, we continue to see strong propensity for spending on travel and experiences, particularly from the affluent consumer. Hotel average daily rates and airline fares remain at or near record levels, with occupancies reaching pandemic peaks. Consumers want a vacation even during economic downturns." - Norwegian Cruise Line (NCLH 0.00%↑) Frank Del Rio
"The data this summer continues to show that leisure travel is back. In fact, 88% of those who remain concerned about COVID-19 still plan to travel and are not canceling trips. According to the GSA, the checkpoint travel numbers are close to pre-pandemic levels. Consumers are continuing to spend on travel expenses with airline spending up 18% from last year and lodging up 34% from June 2021. And according to the U.S. Travel Association, leisure travel spending exceeded 2019 levels in April, for the first time, since the start of the pandemic. This all indicates that leisure travel demand remains strong, which we saw in our remarkable second-quarter results. " - Marriott Vacations Worldwide (VAC 0.00%↑) CEO Steve Weisz
"Looking at our U.S. business and leisure mix in more detail. The momentum behind leisure travel has continued with occupancy and particularly rate, exceeding 2019 levels. We have not seen any indicators that demand momentum is waning. -- So what you're seeing is leisure demand up versus 2019, business demand getting closer to 2019, and groups lagging but still getting sequentially better with rates going up across the board. We are not seeing any signs of demand cooling across any one of the segments right now. And we would expect that to continue on into the remainder of the year. " - InterContinental Hotels (IHG 0.00%↑) CFO Paul Russell Edgecliffe-Johnson
As a result, aviation looks good
"I would say after a couple of rough years economically for the airlines and the business aviation and defense, a lot of turmoil in the defense, I think the setup for the next few years is pretty good for the industry and specifically for Honeywell. When I look at kind of the environment right now, narrow-body flight hours are back to, not all the way back to 2019 levels, but close as the airlines are feeling the pressure, trying to keep up with all of that demand. Widebodies are still at 60%, 65%. So still a lot of growth there. So when we look at the air transport sector, we're seeing growth of double digits over the next few years, both in the aftermarket and OE." - Honeywell International (HON 0.00%↑) Aerospace CEO Michael R. Madsen
Materials & Energy:
European energy markets are still in turmoil
"The Russian war in Ukraine, paired with Russian curtailments of natural gas flows to Mainland Europe, continue to cause turmoil in European energy markets. Flows of Russian gas to Western Europe are now approximately only 20% of their historical average. This has resulted in Mainland European power prices spiking to over EUR 300 per megawatt hour in Germany, France and other regions. High European energy prices have, in turn, put upward pressure on pricing in the Nord Pool energy markets, albeit at significantly lower price levels. In Q2, Nord Pool energy prices averaged about EUR 120 per megawatt hour, up about EUR 10 over Q1. Fortunately, with the Nord Pool prices reduced so far in Q3 with Nord Pool averaging around EUR 90 per megawatt hour in July. Norwegian officials yesterday announced that they will limit energy exports to the rest of Europe when necessary to maintain normal reservoir levels in the Nord Pool system. This should help to reduce volatility in Nord Pool and keep prices at more moderate levels. " - Century Aluminum (CENX 0.00%↑) CEO Jesse E. Gary
Ford CEO doesn't expect electric vehicle battery costs to drop anytime soon
"I don’t think there’s going to be much relief on lithium, cobalt, and nickel anytime soon, " - Ford (F 0.00%↑) CEO Jim Farley
Real Estate:
Housing markets have been strengthening recently
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Big city housing markets are still active
"Obviously, the stock market volatility in the first half of the year might cause a little bit of a pause or a take a look to make sure before you buy something. But the reality of it is the Bay Area, New York City, Boston, LA remain pretty active. Clients are active, they were buying homes. The market is shifting a bit towards purchase and less refinance, and that's frankly where the bank's client service model resonates, right? " - First Republic Bank (FRC 0.00%↑) CEO Michael J. Roffler
There are meaningful supply-demand imbalance in land sales
"And I would tell you that in my view, the largest driver of what has seen us show strength in land sales, not just in the number of acres, but in price per acre, is what we see is a meaningful supply-demand imbalance as it relates to finished lots and land in the home -- in the hands of homebuilders. And they are -- even with slower home sales, as we mentioned in our prepared remarks, they are still playing catch-up to get to an inventory level that they feel comfortable with, and an inventory level that we want them to have so that they have enough product on the ground to sell. As a result, the demand has not tapered, and the results this quarter and for the first half of this year, I think, demonstrate that, that there are a lot of homebuilders out there within our communities and a lot of homebuyers moving to our communities that want to be there, and they're willing to pay that price to be there. And that has translated into a great price per acre of our residential land. " - Howard Hughes (HHC 0.00%↑) CEO David R. O'Reilly
Nuggets of Wisdom:
Tough times are formative
"Personally, if I think back, my career has been defined by recessions, I think a lot of people’s are. Recessions have always been hard, but they're also formative moments to focus and ultimately improve. In 2000, as the first dotcom bubble first, the law firm I was supposed to go workforce that they didn't need any more securities lawyers, but they could probably find a spot for me in their bankruptcy practice. At just that time, you reflect on whether watching companies and flows was what I wanted to do with the rest of my life and pivoted to become an entrepreneur. 14 years ago, in 2008, at the onset of the last global recession, Google pulled their full-time offers for all their summer interns, which included my co-founder at Cloudflare, Michelle Zatlyn. If that hadn't happened, Cloudflare would have never been born. At the same time, I learned what a margin call was and, simply embarrassingly, literally had to borrow money from my mom to pay my rent. That's when I got an extremely personal lesson on the importance of free cash flow, and it's why I'm ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive. Tough times force you to reevaluate everything you've done and become better. It's why the best companies come out of tough times even stronger than they went in. So, maybe it's a bit masochistic but I'm looking forward to have Cloudflare get even better during some of the tough times for the global economy that seem likely ahead. Hands on the wheel, eyes on the road, letting up a bit on the accelerator. " - Cloudflare (NET 0.00%↑) CEO Matthew Prince