Slowdown or Shifting Demand?
We have more quotes that talk about consumer strength than weakness
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Succinct Summary: Last week FedEx announced that global volumes declined and trends “significantly worsened” late in its quarter. This is usually a clear signal that a recession is brewing. In this case, that may be true but there are also cross currents. This week we have more quotes that talk about consumer strength than weakness, including from key financial companies. Is FedEx seeing a true slowdown in demand or is it just seeing a shift in spend from goods to services? Either way, if consumer spending remains strong it means that there is still inflation pressure in the economy that the Fed must fight.
Macro
FedEx is seeing very weak volumes
"Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S -- We’re seeing that volume declined in every segment around the world, and so you know, we’ve just started our second quarter. The weekly numbers are not looking so good, so we just assume at this point that the economic conditions are not really good. We are a reflection of everybody else’s business, especially the high-value economy in the world,” - FedEx (FDX 0.00%↑) CEO Raj Subramaniam
There are some other signs of a slowdown
"market demand for core appliances in Europe and the U.S. have decreased at a significantly accelerated pace compared with the second quarter. We estimate that the year-over-year demand drop is as much as twice of what we saw in the second quarter. This is driven by the impact of high inflation on consumer durables purchases and low consumer confidence. As we said in our Q2 report, we expect consumer spending to further deteriorate, but it was uncertain to what extent. Lately, we have seen consumer confidence in both North America and EU hit very low levels. In Europe, even lower than during the pandemic. Higher retailer inventory levels have further amplified the impact of a slowdown in consumer demand. The weak market environment in combination with supply chain imbalances is expected to result in third-quarter group earnings to decline significantly compared to the second quarter -- Against this background, the Board has this morning decided to initiate a group-wide cost reduction program, addressing both variable and structural costs as well as a turnaround program in North America." - Electrolux ($ELUX-B) CEO Jonas Samuelson
But overall demand continues to be healthy
"We have good visibility in the second half of the year. And overall, the demand signals continue to be very healthy. There's no red flags, no other indicators. So demand signals continue to be healthy, just seeing elongation on the sales cycle from the enterprise side." - Pure Storage (PSTG 0.00%↑) VP of IR Sanjot Khurana
"...it’s interesting. I mean, generally, that’s – I can be talking to a number of CEOs across any spectrum, and it wouldn’t be that different. I mean, we were cautious, but demand has still been pretty good. We haven’t managed to slow down demand that much so far -- I always tell people, look, I can turn on CNBC and see what they have to say about the macro, but I only react to what our experience is. We’re touching that part of the world. Our world is good. It’s not euphoric." - Snowflake (SNOW 0.00%↑) CEO Frank Slootman
Consumer spending has remained resilient
“Generally speaking, they're holding their own. I haven't seen any further deterioration of what we saw earlier in the year and some extension on payment cycles. But generally speaking, it seems that people who want to work can work and they're able to pay the bills” - AT&T (T 0.00%↑) CEO John Stankey
"So I think the best way to describe consumer spending right now is stable, and that's what we see in our numbers. There's been some shifts in the way consumers are spending, what they're buying, and where they're spending. But, overall spending has been remarkably stable, both in the United States here and for the most part around the world." - Visa (V 0.00%↑) President Ryan McInerney
“Consumer remained and has remained strong, and honestly, surprisingly strong. Said to a few of you today, I would caveat that by -- across our portfolios, we are heavily consumer-oriented. But -- and we kind of -- as we're trying to figure out why things were strong, looked at it, and we are much, much lighter on lower-income consumer” - InterActiveCorp (IAC 0.00%↑) Executive VP & CFO Christopher P. Halpin
"We saw a real turn in June, which was a surprise to everyone. And we saw that compounded then by retailers as well. But [since then], we've seen stabilization. We think that they're being cautious but they're still buying" - Sonos (SONO 0.00%↑) CEO Patrick Spence
And the consumer balance sheets remain strong
"In the month of August 2022, consumers spent 10% more than they spent in August 2021 -- customers are spending more. They have – the amount of money and accounts is not going down. It's been relatively flat -- They're spending it at a good clip. Their capacity to borrow. All credit cards are still enough to where they were in the pandemic. Our home equity loans are still down and you look across the industry capacity to borrow. So the consumer is in very good shape. And you sort of say, why is that true in the discussions with various people, it's pretty simple. They're getting employed." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
“...if you think about all of the trends that we talked about in sort of excruciating detail back on the July earnings call, they really all continued. So goods and services spending continues to look very strong. The U.S. consumer continues to look very strong” - American Express (AXP 0.00%↑) CFO Jeffrey Campbell
"So net-net here is what I would tell you, the consumer continues to remain strong. We are encouraged by what we see there." - Mastercard (MA 0.00%↑) CFO Sachin Mehra
"The consumer has been a strong place -- in a strong place." - JPMorgan Chase (JPM 0.00%↑) President & COO Daniel Pinto
The main driver of Fedex’s weakness may just be a shift from goods back to services
"If you look across categories, as you might expect, people have switched from, as they say, buying things to doing things. And sort of buying goods, people are into experiences. Travel is booming as you might know from having flown yesterday. Hotels, airlines, and entertainment is doing well, restaurants are doing well. There's no obvious difference between high-end consumers and lower-end consumers. They may be buying different things, but nominal levels of spending have stayed quite stable, and that's largely true around the world." - Visa (V 0.00%↑) CFO Vasant Prabhu
"On the demand front, you're right, demand could be getting weaker, but for us, we're seeing a secular shift from demand for retail, Target, Walmart, and some of the other retailers, talk about some weakness, shift to demand services. we're at a big conference now everyone is in person, the U.S. Open was record in terms of going there, so more and more people are going out, spending on services, and that's been a real tailwind for us." - Uber (UBER 0.00%↑) CEO Dara Khosrowshahi
Strong consumption may actually be bad news for the Fed
“So consumers are spending and that bodes well for the economy. It's also the toughest thing the Fed has to deal with because what consumers are spending money on now services travel things like that take a lot of labor content, which means the employment situation is going to be tight. And that's the struggle they're doing is they can't get easing in employment markets because everybody started traveling. Demands in hotels, restaurants, the airlines, et cetera was high unemployment kept coming up” - Bank of America (BAC 0.00%↑ ) CEO Brian Moynihan
The odds of a recession are high
“With the caveat that I've been doing this for 45 years and between the pandemic and the war and the crazy policy response in the United States and worldwide, this is the hardest environment I've ever encountered to try and have any confidence in a forecast 6 to 12 months ahead -- The odds of a global recession and a change in the macroeconomy are about as high and as severe as I've seen them in decades..So there's a high probability in my mind that the market at best will be flat for ten years, sort of like the 1966-1982 time period, but the nice thing is there were companies that did very well in that environment back then. That's when Apple computer was founded, and Home Depot was founded, coal and energy companies and chemicals made a lot of money in the 70s.” - Duquesne Capital Founder Stanley Druckenmiller
International
Companies are deglobalizing
"We looked at some socioeconomic and geopolitical trends. Deglobalization is an absolute truth today. It's increasing. It impacts supply chains, it impacts standardization. And that's something we keep a very close eye on. We don't want the standards to fragment, for example. That's not good for the business in the industry as such." - Nokia Oyj (NOK 0.00%↑) Chief Strategy & Technology Officer Nishant Batra
Inbound travel is still lagging in China
"Really, the direction of travel thus far in China, and this should come as no surprise to anybody, inbound is continuing to lag. It’s not showing any sort of real strength coming back. Outbound has shown some level of improvement take place in the recent past in terms of outbound from China into other markets. But there is a ton of room still left for the Chinese markets to open up and border restrictions to be lifted and quarantine restrictions to be lifted. So that’s kind of where we are." - Mastercard (MA 0.00%↑) CFO Sachin Mehra
China is the first country to have more shopping happening online than offline
"The other thing I think that is just important to just say out loud is 75% of retail is still being done in the physical world. And that is obviously shifting. Now you have countries like China, which is the first country on the planet that actually eclipse the 50% mark in terms of commerce happening more digitally than in person. But I think if you look at the U.K., they've had an increase that is larger than the U.S. Canada is still below the U.S. But I think where it's going to settle is around the 2019 mark, which is still a massive growth rate." - Shopify (SHOP 0.00%↑) President Harley Finkelstein
Financials
Delinquencies remain low
“In general, the consumer is in a very good place, and that is reflected. And then when you think about delinquencies in the credit card business, so I think that if I remember correctly, the lower delinquency rate was August 2021. From there, we increased but increased very, very, very little. And where we see normalization towards the level of '19 for delinquency rates is in the low income, low FICO scores, 650 and down. But for us, it's a very, very small part of the portfolio and more -- so the overall portfolio for us in terms of delinquency is looking really, really good" - JPMorgan Chase & Co. (JPM 0.00%↑) President & COO Daniel Pinto
“You're seeing that in terms of a small uptick in delinquencies” - The Bank of New York Mellon (BK 0.00%↑) Senior EVP & CFO Michael P. Santomassimo
“The areas that, of course, this current environment is impacting higher interest rates means it's tougher to get a mortgage or refinance. Delinquency rates have ticked up a little bit, but they're still at the lowest levels in a very, very long time. So generally, things are still strong relative to even pre-pandemic levels” - Intuit (INTU 0.00%↑) President & Director Sasan K. Goodarzi CEO
Mortgage banking is weak
“The one area that I would say that we are seeing a little bit of pressure is just in the mortgage banking business. I think that’s kind of in line with what’s happening in the industry at this particular point in time.” - U.S. Bancorp (USB 0.00%↑) CFO Terry Dolan
The US Consumer Financial Protection Bureau wants to regulate BNPL
“We want to ensure that BNPL companies are subjected to appropriate supervisory examinations, just as credit card companies are -- We’re already seeing a deterioration in credit performance on BNPL loans. This heavy reliance on data, combined with a mismatch between transparency and choice, elevates the risk of what the report describes as “overextension.” Specifically, there are two types of overextension risk: loan stacking, which is the risk that a borrower takes on multiple Buy Now, Pay Later loans at the same time; and sustained usage, which is the risk of repetitive borrowing causing stress on borrowers’ ability to meet other, non-Buy Now, Pay Later financial obligations. We’re already seeing a deterioration in credit performance on Buy Now, Pay Later loans. In 2020, 2.9 percent of borrowers in our dataset “charged off” on a Buy Now, Pay Later loan, which jumped to 3.8 percent in 2021. And public filings show that this upwards trend is continuing through the first half of 2022” - Consumer Financial Protection Bureau Director Rohit Chopra
VC companies will have a harder time pursuing unprofitable growth
"We are not seeing the crazy days of people buying placement, and we know it's an unprofitable placement. The days of VC-funded placement for payment marks is at least now gone" - PayPal (PYPL 0.00%↑) CEO Daniel Schulman
You still need to do your taxes even in a recession
“With tax, good times or bad times, people have to do their taxes. And so it's really almost recession-proof.” - Intuit (INTU 0.00%↑) CEO Sasan Goodarzi
Consumer
Inflation may be driving job hunting
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The retail environment is very promotional
"We are seeing a much more promotional retail environment than in years past due to the excess inventory across the industry." - Five Below (FIVE 0.00%↑) CEO Joel Anderson
Inventories could be cleaner in 2023
"I think when you get into 2023, I think traditional retail broadly defined, is going to have pretty clean inventory and a clean inventory environment means that prices will actually stabilize and margins will stabilize" - thredUP.com (TDUP 0.00%↑) CEO James Reinhart
Is content spending in streaming moderating?
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Sony chose to make itself an arms dealer in streaming
"We decided a long time ago, 5 years ago to become what we euphemistically call ourselves, an arms dealer. We saw that all of these general entertainment SVOD businesses were going to go to headlong against each other, spending a tremendous amount of money to gain subscribers and compete with each other. And we could have gone and done the same thing and spent billions of dollars and be in the same boat and everybody else is, and we decided to go a different way. And we're selling our library product to everybody. We're selling our television shows to everybody. We did a pay-win deal probably. I'm sure it is, but I'll say probably the best deal in the history of pay-win deals. We sold to Netflix -- we sold to Netflix and Disney in a kind of a combination pay-win deal, which is also very unique to the business." -Sony Group (SONY 0.00%↑) CEO Anthony Vinciquerra
What happened when Airbnb turned off all its marketing?
"We did the experiment that every CMO in the United States wishes to do. What happens if you turn off all your marketing? Do you know what happened? Almost nothing. Google did not want anyone to know this. But our traffic came back to more than 90% of what it was after we turned off all of our marketing. And we learned a couple of things. The first thing we learned is our brand is incredibly strong. The second thing we learned is that our model is incredibly adaptable, because when cross-border travel got shut down, when people stop traveling to cities, they got -- they were stuck in their home and they are like, people are like, we want to get out of our house. So they started traveling nearby basically a tank a gas, call it, 200 miles away and they started booking these entire homes, Airbnb for weeks, even months at a time." - Airbnb (ABNB 0.00%↑) CEO Brian Chesky
Technology
IT sales cycles are extending
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PC is still slowing down but still above pre-pandemic levels
“I would say, the PC market continues to track lower than expected. Typically, you would see the second half of the year higher. But as it relates to the PC market, I think, it’s lower than expected, it’s kind of the current view” - Advanced Micro Devices (AMD 0.00%↑) SVP, Marketing, Human Resources and Investor Relations Ruth Cotter
"Even though we're saying things are slowing, we're seeing the continued higher level than pre-pandemic levels." - Dell Technologies (DELL 0.00%↑) CFO Yvonne McGill
Layoffs at tech companies continue
“I am not asking you all to “do more with less.” I’m asking the company to actually do fewer things better. I take responsibility for choosing to grow our team faster and pursue many priorities beyond these four priorities over the recent years. And now, I also own the decision to become more focused – resulting in this layoff” - Twilio (TWLO 0.00%↑) Co-founder & CEO Jeff Lawson
Microsoft is a one-stop shop for all your enterprise cloud needs
"...we're the best-of-suite cloud if you think about it. If you look at what's in the Microsoft Cloud, you'd need the best of AWS, the best of Google, the best of Salesforce, the best of Zoom, the best Octave, the best of CrowdStrike, and you'd have to hope like hell, that some integrator will have that together for you perfectly to get what you can get from the Microsoft Cloud. So, we're going to do all of these things and we're going to lower customer spend and increase our share at the same time." - Microsoft (MSFT 0.00%↑) EVP & COO Judson Althoff
The big 3 cloud players will be hard to compete with
“I think if you take your pick, whether it’s Google, whether it’s Amazon, whether it’s Microsoft, I think they’re going to outclass every one of us companies trying to run 150 countries with the data center. It’s a matter of time. So I’d much rather get on that bandwagon early, learn how to leverage their capabilities and be willing to pay the slight premium that I pay than trying to run. I think sub $20 billion revenue companies running their own data centers globally is like the mom-and-pop store against Walmart. So, I think we’ll see how this bears out over time. But these three guys have 42,000 people selling cloud capabilities around the world. They’re spending $20 billion-plus a year. I don’t have the intellectual bandwidth, the human capacity, the capital required to go beat them at running a much more efficient and much more AI-enabled data center." - Palo Alto Networks (PANW 0.00%↑) CEO Nikesh Arora
“On average, a company uses 13 different products from Google cloud, showing the deep product relationships we have with these customers. In the first half of this year alone, we delivered 1,300 new products and features, a 22% increase from a year ago. On the partner side, as I said, 92,000 partners do business with us. It's a 3x -- along with -- we committed 3 years ago or 4 years ago that we would expand our sales organization by more than 3x, and we have done that through disciplined focused expansion of our sales and go-to-market organization. Are we winning only in the largest customers? No, even in the new emerging companies, 70% of the top 100 unicorns run on Google Cloud” - Google Cloud (GOOG 0.00%↑) CEO Thomas
Industrials and Transport
Commodity costs are flattening, not falling
"So I think on the cost side, we saw significant downward pressure on things like steel, copper and aluminium. So actually feels like some of that may be bottomed and is inching upward again, but not any -- not relative to where it was, just sort of maybe flattening, let's say, rather than on a continued downward slide." - Hubbell (HUBB 0.00%↑) CFO William Sperry
GM is making progress in self-driving cars
“So earlier this year, I took the CEO job at Cruise. It's a lot of fun, but I made a promise, which is to commercialize our product and put it in the hands of real paying customers, and we did exactly that. Since I took my very first driverless ride, less than a year ago, we've spun up what we believe is the largest commercial robotaxi operation in the world. It was the first one in a major U.S. market, and we provided thousands of rides to people in San Francisco, and importantly, there's no NDAs. Most people post their first right on social media. This transparency is critical to gain consumer trust. But more importantly, what I'm excited about, people love this product. You can see all the quotes up here. It's a really fun experience, and people are using it over and over again. To show you what that looks like. This is a composite rendering of all our rides from June of this year. We've peaked at over 70 concurrent AVs operating -- driverless AVs operating concurrently. We're probably going to double or triple that by the end of the year. And it's being used all the time. Through the first half of the year, I'm proud of this stat like our 28-day retention, so people coming back after a month is almost at 50%. And to put that into perspective, that's almost as good as a mature ride-hailing company today, and we're only just a few months into this service” - General Motors (GM 0.00%↑) CEO of Cruise Kyle Vogt
Business travel is never going to be the way it was before
"I think there’s a debate in the travel industry. Is the world going to go back to the way it was before the pandemic for travel or is it fundamentally changed forever? And I am of the opinion that we are not going back to 2019 anymore than we are going back to 1950. We are not. The world has changed. All you have to believe is that Zoom is here to stay. If you believe Zoom is here to stay, then you believe that there’s permanent flexibility that people that have jobs on laptops aren’t going back to the office five days a week. And if they are not going back to the office five days a week and many people are living remotely, then we are now living in a world of newfound flexibility. Business travel is going to come back. It’s starting to come back. But business travel is never going to be the way it was before. And the reason why is the bar to go on an airplane for a meeting is now higher when they are Zoom. And when people do get on an airplane, I think they are going to want to travel and stay longer." - Airbnb (ABNB 0.00%↑) CEO Brian Chesky
Materials & Energy
China continues to play the long game, this time in EVs
"The Chinese want their OEMs, which are the big jobs -- the big time jobs, big time GDP contribution to compete in the Western world and dominate. So right now, Nio, Xiaopeng, there's -- Chinese manufacturers that are selling very well in Europe. The rare earth industry is just a feedstock to the magnetics that ultimately are the feedstock to that -- a bigger industrial hope for standardization, i.e., domination globally. Our expectation -- and everything we've seen from the quota system in the recent -- they recently raised quotas -- is we should expect the Chinese to raise quotas to supply their own industry. And that will be -- they will supply their own industry so that there is orderly supply and reasonable pricing for a fair profit and that there's not too much environmental destruction, that the illegal mining is cracked down and that they can then provide the feedstock to their downstream industry. What I think is very unlikely and what we shouldn't rely on in the West is that the Chinese are going to subsidize Tesla, GM, Volkswagen, whomever, as they try to make EVs. And so I think that the prior 10 years -- and this probably also goes for other materials. And I think that this is sort of the big disconnect we have in the West as we kind of look at the market today and, "Oh, copper prices have pulled back, aluminum price" -- the big picture theme here -- and again, by the way, this is -- it gets -- the longer we have sort of a higher cost of capital and a pullback, the more magnified the snapback pain will be and it kind of speaks back to this idea of supply chain really mattering for the future. But I think we're going to find in the West that China to their credit, competitive credit has made sure that their industry has what they need. But then there will be a scramble for the rest of the world to figure out how they're going to get the supply. Because it makes no economic sense for the Chinese to subsidize their competitors when the idea of gathering all the resources was what they were focused on 10 years ago. For the next 10 years, they're focused on industrial domination. And so that, I think, sets up an enormous bull market for these materials. Again, the economy has kind of got to work through a lot in the coming months, certainly. But I think that is the landscape through which you should view supply and demand certainly in our space. But I think that analogy applies kind of across your space." - MP Materials (MP 0.00%↑) CEO James Litinsky
Real Estate
Higher interest rates may further restrict home supply
"...if you think about interest rates for a second, 90% of our customers have a fixed interest rate. So even though the Fed has taken quite a bit of action, our homeowners and our customers are not impacted directly by higher mortgage payments because they are in a fixed interest rate environment and most of their interest rates are sub 3%. So if you consider the impact of a customer deciding to stay in their existing home because of a low-interest rate for – on a fixed rate, and because of the fact that we estimate, yes anywhere from 1.5 million to 2 million homes that are short versus the demand that’s currently in the marketplace, it incentivizes customers to actually stay in their existing home and invest in that home." - Lowe's Companies (LOW 0.00%↑) CEO Marvin Ellison
“In the other piece that has helped home prices to stay in line has been that sellers have also been a little bit slow to come to the market, for some sellers have just said, "This isn't the time for me to sell. I don't want to trade up from a 3% mortgage to a 6% mortgage." And so that has kept down inventory levels in a decent territory. So that there's an opportunity for buyers, but we haven't started to see any kind of oversupply that would typically be indicative of prices coming down a lot” - Redfin (RDFN 0.00%↑) CFO Chris Nielsen
Nuggets of Wisdom
Don’t pick the fly sh–t out of the pepper
"...if you want to get out in 90 days and make a bunch of money, I have nothing to tell you -- We’re making sizable acquisitions. We give 10-year guidance. Why? Because we don’t want people to pick the fly shit out of the pepper, so to speak, and you have my opaque views of the quarter. But say, look, is your thesis intact over the long period of time. And those are always the questions that we try and answer. I cannot run a company on a quarterly basis. There are quarterly aspects to it. Fundamentally, almost everything that we do has a much longer time horizon. When you look at P&Ls, most of the money we spend is not related to the current period, right? And sometimes it’s hard to convey that. This is a good audience to do that with." - Snowflake (SNOW 0.00%↑) CEO Frank Slootman
Waiting for the markets to bottom in order to buy is not a wise idea
"Well all I know for sure is that the prices have been reduced, there’s a sale going on. We say in the United States there could be further markdowns. If during the sales well there could be further markdowns in the market too. But the important thing in that article was the idea of saying we’re not going to buy anything until we get to the bottom. That’s a terrible idea! Because you never know when you’re at the bottom. And the bottom comes about because everybody achieves maximum pessimism and at that time very few people are capable of buying all right. So what I believe is you buy a little here, it gets cheaper, you buy a little more." - Oaktree Capital Management Co-founder Howard Marks