Battening Down The Hatches
As the economic storm clouds gather, the Fed is seeing more pressure about raising rates by too much
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Succinct Summary: Consumer spending is still strong, but corporate confidence appears to be deteriorating. Economic headwinds are starting to materially impact earnings as well. Inflation still isn't contained but as the economic storm clouds gather, the Fed is seeing more pressure about raising rates by too much. There are some indications that the Fed is getting nervous and ready to pause.
Macro
Consumer spending is still healthy
"A perspicacious analyst might wonder whether talk of inflation, recession and other factors would fructify in a slower spending growth. We just don't see here at Bank of America -- The reality is the consumers still are employed and earning money, and so the Fed's toughest job on inflation is also the best thing about the U.S. economy, which is a strong consumer." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
"We're confident. Look, the spending speaks for itself. I mean, just look at some of these numbers. You've got goods and services up 16%. Our US consumer is up 22%. Millennial spending is up 39%. Our T&E spending is up 57%. International spending is 37%. We haven't seen any change -- we're not seeing any changes in consumer spending behavior at all. And look, that's not to say that things may not change, but I can only look at what I'm seeing right now." - American Express (AXP 0.00%↑) CEO Steve Squeri
"We continue to see a healthy guest shopping in our stores and shopping online. We'll see how they react throughout the holiday season, but when we talk to them they continue to say they want to celebrate the holidays. On one side, we have got inflation that is at a 40-year high, but unemployment is incredibly low — and I think those two things are balancing out right now," - Target (TGT 0.00%↑) CEO Brian Cornell
"I don't know how to answer that question definitively because -- there are lots of variables that go into that. But if we look at consumer sentiment — and one measure of that is trade down to private label brand — we're seeing very little movement." - Procter & Gamble (PG 0.00%↑) CEO Jon Moeller
But CEO confidence appears to be deteriorating
"I think the psychology has changed dramatically because of all this aggressive Fed action. So I've done a good job of not answering the question. If you had to ask me last quarter what's the probability of a recession in the next year, I would have told you 90-10. Today, I would go 60-40 or maybe 50-50. I think we're much closer in the U.S. I think in Europe, we will go into a very slight shallow recession." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
"If you go back six months ago, the sentiment was definitely of concern. Three months ago, it was a greater concern and now if you spent time, we talked to venture capitalists, and we just had a global CFO summit for VC and PE, the sentiment has gotten worse." - SVB Financial Group (SIVB 0.00%↑) CEO Greg Becker
"Everywhere I go, macro themes dominate. In my conversations with CEOs, they tell me that they are rethinking business opportunities and would like to see more certainty before committing to longer-term plans. As we head into the fourth quarter, my sense is that the outlook will remain unsettled, though economic performance will vary by region" - Goldman Sachs (GS 0.00%↑) CEO David Solomon
Even strong industries sound concerned
"Of course, we are mindful of the mixed signals in the broader economy. As always, we have plans in place to pivot should the operating environment change dramatically -- you do now see that delinquency rates for loans have started to modestly pick up, but also remain well below pre-pandemic levels." - American Express (AXP 0.00%↑) CEO Steve Squeri
"Global labor markets remain tight and clients continue to hire, albeit at a more conservative pace. Demand for talent remains high, notwithstanding the increasingly uncertain economic outlook, although the sales cycle has lengthened. Many clients are becoming more selective and requesting to see more candidates for their open positions -- Clearly, the economic environment is becoming more uncertain." - Robert Half International (RHI 0.00%↑) CEO Keith Waddell
"Looking forward, there is obvious macroeconomic uncertainty as the Fed remains committed to raising rates and addressing high inflation. Given this backdrop, the team is highly focused on its efforts to drive strategic growth opportunities that target truck and expand CSX's addressable market." - CSX (CSX 0.00%↑) EVP of Sales & Marketing Kevin Boone
There are major headwinds to earnings growth
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Inflation still isn't contained
"Third quarter revenue increased 18% year-over-year -- Overall volumes were up 2% -- driven by pricing that reflects rising cost inflation and higher fuel surcharge revenue." - CSX (CSX 0.00%↑) EVP of Sales & Marketing Kevin Boone
"And rents are still going up. I mean, we started 2022 thinking rents are going to be up 11%. They're up 28%." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
“This is a bit of an unusual cycle in that you have other factors that are sort of buoying costs. And you're seeing inflation numbers continue to outpace what expectations are every month. We're still seeing cost increases coming from our suppliers late through -- late calendar '22, and we're hearing it may even be early calendar '23, certainly not at the rate and pace it was or the size, but still there” - MSC Industrial Direct (MSM 0.00%↑) CEO David Gershwind
“We experienced increases in raw materials, freight and logistics costs and more recently, energy costs -- We do expect cost inflation to persist throughout the first half of 2023 and costs moderating in the second half of 2023.” - Whirlpool (WHR 0.00%↑) COO Joe Liotine
”You are aware of the high rate of inflation and we have to increase our compensation in line with the inflation rate." - Interactive Brokers Group (IBKR 0.00%↑) Chairman Thomas Peterffy
“...inflation remains persistent and elevated and we anticipate this to continue well into 2023 with some moderation in the back half of 2023” - Tractor Supply (TSCO 0.00%↑) CEO Hal Lawton
It's time to batten down the hatches
"I think it’s a time to be cautious, and I think that if you’re running a risk-based business, it’s a time to think more cautiously about your risk box, your risk appetite. I think you have to expect that there’s more volatility on the horizon now. That doesn’t mean for sure that we have a really difficult economic scenario. But on the distribution of outcomes, there’s a good chance that we have a recession in the United States. That environment heading into 2023 is one that you’ve got to be cautious and prepared for" - Goldman Sachs (GS 0.00%↑) CEO David Solomon
"Yep, the probabilities in this economy tell you batten down the hatches" - Amazon (AMZN 0.00%↑) Founder Jeff Bezos
As the outlook deteriorates, the Fed is getting pressured to pull back
"The U.S. actually isn’t -- North America is in a pretty good health, although the Fed is raising interest rates more than they should, but I think they’ll eventually realize that and bring back down again." - Tesla (TSLA 0.00%↑) CEO Elon Musk
"...there is no reason this economy should be in a recession other than just wanting to wring out this inflation. And this is a personal editorial. This is not a company position, but I believe more -- based on what I'm seeing, more of the inflation is actually affected by not that systemic wage price push that we saw in other times of high inflation -- I think the Fed is all going to overdo it" - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
They may be getting nervous
"I think the time is now to start talking about stepping down -- the time is now to start planning for stepping down" - San Francisco Fed President Mary Daly
International
Europe's economy is ailing
"In Europe, I think we shouldn't put our head in the sand. I think that with the mixture of energy and inflation, you can sense that there is some caution creeping into the conversations, albeit not in the data and not yet in what we are doing as business there. But we'd be foolish not to prepare that there could be a bit of a downturn in Europe only." - International Business Machines (IBM 0.00%↑) CEO Arvind Krishna
But there may be attractive value investment opportunities
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Currency is impacting US earnings
"On the bottom line, core earnings per share were $1.57, down 2% versus prior year. On a currency-neutral basis, core EPS increased 7%." - Procter & Gamble (PG 0.00%↑) CFO Andre Schulten
“I think foreign exchange movements are very dramatic right now and more dramatic than they've been in many years. They are a little difficult to communicate and hard for a lot of people to fully understand. So you've seen dramatic moves in many of the currencies that are most important to us, from the yen to the euro, to the pound. And so when you look at our revenue growth this quarter, that's why you saw a 300 basis points difference between the FX-adjusted revenue growth and the reported revenue growth 24%.” - American Express (AXP 0.00%↑) CFO Jeff Campbell
"...the FX drag is significant -- we're still holding to -- that 19% to 20% margin range FX neutral -- But on a reported basis, it's just a little over 17%. So there's about 2.5 points of FX drag in our margin. That equates to it's about $1 billion of revenue drag about $800 million of margin drag" - Netflix (NFLX 0.00%↑) CFO Spence Neumann
Financials
The cost of capital has gone up materially
“The cost of capital if you're buying a company or buying real estate has gone up materially -- it is harder to borrow money -- overall message is financing is generally tougher and it makes transactions harder..I would acknowledge it’s harder out there. Investors are more capital constrained. I think it will be tougher for many groups to raise capital and that will be until markets get better, a bit tougher." - Blackstone (BX 0.00%↑) CEO Steve Schwarzman
Private equity activity has slowed
"Private equity activity gets reset at a time like this because values have to come down because financing costs have gone up. So there's been less private equity activity right now." - Goldman Sachs (GS 0.00%↑) CEO David Solomons
There's still a large disconnect between public and private market valuations
"I think if you take a big step back and look at venture deployments, there's a -- like we talked about $0.5 trillion worth of funding that's been raised. What's really stopping that from being deployed is this disconnect in valuations between public equity markets that are bouncing around and the expectation of all these amazing founders that are -- and management teams that are working on these ideas." - SVB Financial Group (SIVB 0.00%↑) CFO Daniel Beck
“On the public market side, valuations have come down significantly already. On the private side, I don't know what happens. But as you can imagine, some of the holders of the private side, private asset side, there's still dream of the good old days, some 8 to 18 months ago. So they have not -- some of them might not have realized that valuations have changed that the market has fundamentally changed” - Deutsche Börse ($DBOEY) CEO Theodor Weimer
Not seeing down rounds but they're coming
"...right now, we're not seeing a lot of down rounds, we're simply more structured rounds, which means you keep the same price, but maybe you do a 2x liquidation preference from a return perspective, we're seeing more of that. But it's going to happen, we're going to see more of it." - SVB Financial Group (SIVB 0.00%↑) CEO Greg Becker
Loan delinquencies are still very low but some modest increases
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Banks are managing through deposit mix shifts
"I think there will continue to be downward pressure on the non-interest bearing to interest bearing proportion as we continue to see higher rates." - SVB Financial Group (SIVB 0.00%↑) CFO Daniel Beck
Consumer
Consumers still have a lot of savings
"The level of customer liquidity remains strong. Average deposit balances of our Consumer customer remained at high levels relative to a year ago. These balances are still multiples of the pre-pandemic periods, and they were largely unchanged at these elevated amounts for the month of September." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
And are accepting higher prices
"In terms of volume elasticity in my earlier remarks, as I said, we feel very encouraged by the fact that we were able to realize 9% of pricing in organic sales growth and effectively only see about a point of reduction in volume, which speaks to favorable elasticities" - Procter & Gamble (PG 0.00%↑) CFO Andre Schulten
"We will probably have price hikes between 5 and 10 percent .For the moment, we don't see any sign of slowdown in any of our markets..In the medium-term, despite the economic, geopolitical and monetary uncertainties around the world, the group confirms an ambitious goal for revenue growth at constant exchange rates" - Hermes VP of finance Eric du Halgouet
Holiday spending looks good
"...what does the holiday season look like? Well, the holiday season, from a travel perspective, looks really, really strong, because people are booking three months out. And if you're going to be traveling, you're probably going to be going to restaurants. And if you're traveling in some place, you're probably bringing presents with you as well. So we don't see anything really changing over the next three months." - American Express (AXP 0.00%↑) CEO Steve Squeri
“We are definitely seeing a lot of strength for the holidays or obviously approaching the Thanksgiving time period, and our bookings are incredibly strong. And as I said earlier and as you indicated, the bookings are a little bit different this year and that they’re more spread out across multiple days than they were on any single day, very, very close to the holiday in the past. So, that definitely is a new travel pattern for us. And we’re also seeing that develop for the Christmas time period as well” - United Airlines (UAL 0.00%↑) CCO Andrew Nocella
But businesses are cutting ad spend
"We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital. In some industries where topline growth remains strong, but businesses are experiencing input cost pressure due to inflation, we have observed reduced campaign budgets as businesses seek to offset input cost pressures." - Snap (SNAP 0.00%↑) CEO Evan Spiegel
Streaming services are pushing into sports
"I think depending on how SUNDAY TICKET lands at some -- Apple Amazon somewhere else, you'll start to see a bunch of people focus on sports and bringing that over to on-demand." - Netflix (NFLX 0.00%↑) Co-CEO Reed Hastings
Technology
Semiconductor Fabs are decreasing Capex for 2023
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Chatbots are growing share of customer service
"Erica surpassed 1 billion interactions since it was introduced four years ago this quarter. It has become a primary interaction method for our clients with more than 130 million interactions this quarter alone." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
Moore’s law is still alive
“Some believe Moore's Law is dead, but Intel’s work shows me that Moore's Law is alive and well. We will stay relentless in our path to innovate in the magic of silicon” - Intel (INTC 0.00%↑) CEO Pat Gelsinger
Healthcare
Healthcare isn't immune to macro challenges
"Clearly, the macroeconomic pressures that all industries and all companies are facing is something that we have to address as well. While healthcare is a very, very good business and more resilient than most, it's not as if we're immune to some of those dynamics." - Johnson & Johnson (JNJ 0.00%↑) CFO Joe Wolk
Industrials and Transport
Supply chain issues have eased but still not gone away completely
"Supply chain issues have begun to ease somewhat. They have not gone away completely, however. We continue to deal with certain inflationary pressures as well as output constraints." - Lam Research (LRCX 0.00%↑) CFO Doug Bettinger
“I don't think these issues are resolved overnight. Obviously, we are very focused on making sure we play our role and move through the system. We are currently hiring 30,000 additional team members in our supply-chain system. I think this is going to take quite a bit of time to sort out” - Target (TGT 0.00%↑) CEO Brian Cornell
"it's still an issue and far from normalized, so that's ongoing -- I mean, yes, the semiconductor availability has improved, but we still see differences between the different customers here -- The year started with light-vehicle production expected to grow by 17% in Europe, while now nine-months later, it is expected to decline by 2% -- the main problem for us at the moment is more on the raw material side" - Autoliv (ALV 0.00%↑) CFO Fredrik Westin
Shipping charges are decelerating
“And cost of shipping has come down tremendously. Like last year, the cost of a container on the spot market from Shanghai got as high as $20,000. And now it’s $3,500, $3,600. It’s that kind of reality. We’re seeing deflation in a lot of commodities with a few exceptions as Elon mentioned on batteries” - Tesla (TSLA 0.00%↑) CFO Zachary Kirkhorn
Airlines are posting record revenue
“Our record quarterly revenue of $13.5 billion is a 13% increase over 2019. Notably, we achieved this record revenue while flying nearly 10% less capacity than we did in the third quarter of 2019." - American Airlines (AAL 0.00%↑) CEO Robert Isom
It's a golden age for travel
"I would say we are at the beginning of what I think is going to be a new golden age of travel” - Hilton (HLT 0.00%↑) CEO Chris Nassetta
“We expected the recovery in travel spending to be a tailwind for us, but the strength of the rebound has exceeded our expectations throughout the year” - American Express (AXP 0.00%↑) CEO Stephen Squeri
"There has been a permanent structural change in leisure demand, because of the flexibility that hybrid work allows. With hybrid work, every weekend could be a holiday weekend. That’s why September, a normally off-peak month was a third strongest month in our history -- This is not pent-up demand. It’s the new normal." - United Airlines (UAL 0.00%↑) CEO Scott Kirby
Elon sees a path for Tesla to be worth 2x Saudi Aramco
"I have the opinion that we can far exceed Apple’s current market cap. In fact, I see a potential path for Tesla to be worth more than Apple and Saudi Aramco combined. So, now that doesn’t mean it will happen or that will be easy. In fact, I think it will be very difficult. It will require a lot of work, some very creative new products, manage expansion and always the luck. But for the first time, I am seeing -- I see a way for Tesla to be -- let’s say, roughly twice the value of Saudi Aramco." - Tesla (TSLA 0.00%↑) CEO Elon Musk
Materials & Energy
Oil service companies are bullish on supply-side dynamics
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Traditional oil companies tend to support hydrogen
"In the U.S., the Inflation Reduction Act should be particularly impactful in accelerating the development of green hydrogen, CCUS and direct air capture." - Baker Hughes (BKR 0.00%↑) CEO Lorenzo Simonelli
The energy transition requires massive amounts of this commodity
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Hard assets may benefit in an inflationary environment
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Nuggets of Wisdom
Buy when times look tough
"If you look at the last cycle, a lot of big companies actually started and grew in difficult times. So, from an investor’s perspective, we have the capital to deploy and I think it’s probably a better time to invest than it was the same time last year -- I don’t think it’s necessarily a bad time." - Qualcomm (QCOM 0.00%↑) CEO Christiano Amon
"This is the best time to get funded as a company. If you look at every one of these crash periods, those are when some of the best companies have been born.” - Yahoo Finance CEO Jim Lanzone
"I am sympathetic to many of these economic and geopolitical concerns but amidst all the gloom, we are seeing very attractive valuations, particularly assuming an economic scenario short of financial Armageddon, and are taking up exposures as we speak. As my friend and mentor, who I will dub the “smartest man in America,” recently told me, he did not know when the market would bottom, but he knew for sure it would be when economic data looked godawful. I am reminded of this NY Post cover and headline from March 9, 2009: “Warren Buffet: The Economy Has Fallen Off a Cliff!“ I am familiar with this doom spiral trap because I fell into it too, declaring in an investor letter on March 10, 2009 that we should “brace for impact” just before markets (and our portfolio, since I changed my view only days later based on new data and had ramped exposures to banks/autos) turned around dramatically. The essential question for me at this point is whether capitulation on rates and inflation driven by Fed policy are the key or if a bottom in the real economy (based on unemployment, income, industrial spending, and broad measures of GDP) is actually what matters most. For now, while we remain respectful of the numerous well-flagged risks, we are looking to deploy capital into both world-class companies trading at bargain basement prices and event-driven situations that will be somewhat protected from market moves." - American Investor Dan Loeb