Let 3Q(uid) Games Begin
Banks kicked of the 3Q21 earnings season last week
Succinct Summary: It was the first week of earnings season last week and banks kicked off as usual. Banks generally reported strong earnings, assisted by reserve releases and benign credit. Consumer spending continues to fuel growth. But inflation is also “brutally high” and the supply chain is “crushingly bad.” Even the Fed is beginning to recognize that this is not transitory inflation and inflation expectations are rising. They may soon feel the need to “prick this bubble a little bit.”
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Macro:
This will be another strong quarter for many companies
"Many companies are making healthy profits and our research team expects another strong quarter of profits by American businesses." - Bank of America (BAC) CEO Brian Moynihan
Spending remains strong
"Third quarter total Bank of America consumer spending...Payments were robust. They reached $937 billion, up 23% over 2019 for the quarter and a similar percent of growth over 2020. September was the best month of the year, and we've seen that spending rates continue through the first part of October" - Bank of America (BAC) CEO Brian Moynihan
GDP growth is expected to remain high
"While there's been some discussion around the slowdown, I'll just note that the U.S. economy is now as large as it was in the pre-pandemic. Our own research team, not being in transition at all, expects the U.S. economy to grow 5.5%-plus this year and 5.2% next year. These growth rates are more than twice the growth rates that many of the – that occurred in the pre-pandemic decade or longer.” - Bank of America (BAC) CEO Brian Moynihan
"In regard to our view of the overall economy, after somewhat slower growth during the third quarter of 2021 due in part to the Delta variant and supply chain problems, we expect GDP to accelerate to above 6% annualized in the fourth quarter." - PNC Financial Services (PNC) CEFO Rob Reilly
But inflation is also high, brutally high
"As you read about in the paper and as I've seen in some of the write-ups and I've seen from some of our peers and some of our other industries, the product and shipping cost inflation is not just high, it's brutally high. The chaos and the impact, not just from a financial perspective, but from the toll it takes on our human capital, is immense." - Fastenal (FAST) CEO Dan Florness
Inflation is clearly more than transitory
“It’s not transitory. I’ve never seen a greater divergence between what’s defined as transitory and what’s being seen day in and day out. Most CEOs I talk to today are very concerned about supply chain, very concerned about import costs, whether they’re materials, commodities and increasingly labor” - Goldman Sachs (GS) President John Waldron
"Inflationary trends are appearing more than transitory, reflecting structural changes, including a shift from consumerism to job creation, rising wage growth, and the energy transition. As I said in a speech to the G20 in July, society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net 0 economy." - BlackRock (BLK) CEO Laurence Fink
“Inflation is clearly not temporary...The Fed is starting to indicate it’s time for them to move” - Bank of America (BAC) CEO Brian Moynihan
Even the Fed is tired of people calling this inflation transitory
"You'll notice I brought a prop to the lectern. It's a jar with the word "transitory" written on it. This has become a swear word to my staff and me over the past few months. Say "transitory" and you have to put a dollar in the jar. My issue is not with the meaning of the word, but with using it to describe current inflation dynamics--Instead of that word, I think "episodic" better describes these pandemic-induced price swings. By episodic, I mean that these price changes are tied specifically to the presence of the pandemic and, once the pandemic is behind us, will eventually unwind, by themselves, without necessarily threatening longer-run price stability" - Federal Reserve Bank of Atlanta President Raphael Bostic
It may not even be brief
“That said, it is becoming increasingly clear that the feature of this episode that has animated price pressures -- mainly the intense and widespread supply chain disruptions will not be brief. Data from multiple sources point to these lasting longer than most initially thought. By this definition, then, the forces are not transitory--I believe evidence is mounting that price pressures have broadened beyond the handful of items most directly connected to supply chain issues or the reopening of the services sector." - Federal Reserve Bank of Atlanta President Raphael Bostic
And the Fed is only starting to taper
"Regarding the outlook for monetary policy, market participants noted policymaker communications suggesting that tapering of asset purchases could begin this year and end by mid-2022--Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December." - US Federal Reserve Open Market Committee and the Board of Governors Joint Meeting
You’ve got to prick this bubble a little bit
"We do expect the Federal Reserve will begin tapering soon, and that will be followed by increasing rates in 2022--You’ve got to prick this bubble a little bit. Money is a bit too free and available right now--I think the market has digested that the Fed will have to move, not just on tapering, but rate increases. And by the way, we are 10 rate increases away from what would be considered normal." - Morgan Stanley (MS) CEO James Gorman (Check)
"…if you look at what's happening in inflation and with tapering coming and we still think that there's more risk to upside on rates than there is downside at this point." - Wells Fargo & Company (WFC) CFO Michael Santomassimo
Will we recognize normal when we get there?
"…while many of us are still waiting for a return to normal, it does feel like we're on our way. The question is, will we recognize normal when we get there?" - Alphabet (GOOG) CEO Sundar Pichai
International:
The Evergrande situation seems to have been contained
"So look, obviously, everyone is looking at Evergrande. Let me start by just saying that, for us, in terms of direct Evergrande exposure is absolute de minimis--I think, in terms of cross-border contagion, I don't hold my own opinion on this in particularly high regard, but it does seem like this was pretty well telegraphed by the Chinese authorities when they talked about their three red lines. So it's a process that's being managed. And I would say the better view right now is that it will be contained." - JPMorgan Chase (JPM) CFO Jeremy Barnum
Financials:
Banks had strong quarters
"It was an exceptional third quarter this -- the firm delivered, and it's contributed to year-to-date revenues of 45 billion. To put this in context, year-to-date revenues surpassed full-year 2019 revenues by nearly 10% as of this stage. Our business model continues to generate durable revenues, high returns, and strong operating leverage, and we produced an ROTCE of over 20%, both in the quarter and on a year-to-date basis." - Morgan Stanley (MS) CEO James Gorman
Credit is still healthy
"…consistent with last quarter, credit continues to be quite healthy. In fact, net charge-offs are the lowest we've experienced in recent history." - JPMorgan Chase (JPM) CFO Jeremy Barnum
[Catalyst in Commercial Real Estate]
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Loan growth is still muted
"…while loan growth remains muted, we see a number of indicators to suggest it has stabilized and may be poised to begin more robust growth across the Company and particularly in card." - JPMorgan Chase (JPM) CFO Jeremy Barnum
Big banks opine on crypto
“I personally think that bitcoin is worthless--Our clients are adults. They disagree. That’s what makes markets. So, if they want to have access to buy yourself bitcoin, we can’t custody it but we can give them legitimate, as clean as possible, access.” - JPMorgan Chase (JPM) CEO Jamie Dimon
"I am probably more on the Jamie Dimon camp. But I am fascinated by so many people’s interest. It’s fantastic. I love the fact that more people are looking to invest in different things. I believe this is a very good, positive action..I'm not a student of bitcoin and where it's going to go so I can't tell you whether it's going to $80,000 or zero. But I do believe there is a huge role for a digitized currency and I believe that's going to help consumers worldwide" - BlackRock (BLK) CEO Laurence Fink
"…listen. I've said it publicly before, I'll say it again. I don't think crypto's a fad. That doesn't mean it's going to go away. I don't know what the value of -- I don't know what the value of Bitcoin should or shouldn't be, but these things aren't going away and the blockchain technology supporting it is obviously very real and powerful, so it remains Andrew a working space" - Morgan Stanley (MS) CEO James Gorman
Everyone is talking about BNPL
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Consumer:
The housing market is a little less frothy, but there’s still very limited supply
"But in our markets, the supply constraint is still pretty tight. It is getting a little better. Listings are up slightly. And prices appear to have maybe topped a little bit. I don’t want to say they are done rising by any means. But on the other hand, we do see an occasional deal of transacting below asking very little. But – and so it’s not quite as frothy as it was, which I consider to be good" - First Republic Bank (FRC) CEO Jim Herbert
"The severe lack of inventory is restricting home sales. Even though plenty of people bought homes last year, many homebuyers waited while the pandemic went from bad to worse and remote-work policies were finalized. The homebuyers who are just beginning their search are finding that the well has run dry. But I am hopeful that as it becomes easier to get building materials, we will finally have a strong year for new construction in 2022. That’s what the market needs more than anything." - Redfin (RDFN) Chief Economist Daryl Fairweather
“home price appreciation continues to be a bit elevated. We have an aging housing stock here in the West...the supply is pretty anemic at this point in time” - Fastenal (FAST) CFO Holden Lewis
Some restaurants have had to be closed due to staffing issues
"For certain restaurants with labor availability challenges, we selectively increase wages and in some cases, temporarily closed dining rooms or limit our late night and early morning hours of operation." - Del Taco Restaurants (TACO) CEO John Cappasola
"I certainly believe that the staffing challenges are impacting the restaurant industry more broadly. As I take a look across the industry and talk to leaders in the industry, it’s certainly a common theme that you hear--I suspect that there is a lot of pressure on the P&L among some of the independents and smaller regionals out there." - Domino's Pizza (DPZ) CEO Rich Allison
Squid game is showing the power of international content distribution
“The reason Squid Game has such great meaning for us internally is that it’s perfect evidence that our international strategy has been right. We’ve always believed that the most locally authentic shows will travel best, so having a show that’s about really authentic Korean games and characters become really big not only in Korea but also globally -- it’s such an exciting moment for us.” - Netflix (NFLX) VP Content for Asia Pacific Minyoung Kim
Technology:
Cybersecurity is very important
"So again, cybersecurity is super important. Infrastructure is changing at an insane pace right now. All of that is just good news for us in some perspective, but our work is very hard. The attack landscape is just -- it's insane right now. At the same time, what you all need to understand about cybersecurity, it's the only segment in the software where you don't only fight your competitor, you're also fighting the attackers -- and mostly, you're fighting the attackers, at least in our case. I think our competitor sometimes confuses us with maybe someone more malicious." - SentinelOne (S) CEO Tomer Weingarten
Some companies are finding it hard to preserve a culture that’s remote for too long
"I'm very excited to welcome our colleagues back to BlackRock's offices in certain parts of the world where we begin our future of work pilot. It's a culture that can't be built or maintained remotely over the long term, that ensures we can never forget who we are, who we serve. It also helps us in our markets and our industry and most importantly, help us continue to evolve and experience the constant change of the world. Having togetherness and connection with all our employees is vital for our culture and vital for serving the needs of our clients." - BlackRock (BLK) CEO Laurence Fink
Industrials and Transport:
Supply chain issues may be gone in a year or so as companies work hard to resolve this
"There's not one company I know who's not working aggressively to fix the supply chain issues. Sales are still up, credit card debit card spends still up because it was in great shape. And capitalism works. I doubt we'll be talking about supply chain stuff in a year. I just think that [Indiscernible] we're focusing on too much is simply dampening a fairly good economy. It's not reversing a fairly good economy." - JPMorgan Chase (JPM) CEO Jamie Dimon
It's crushingly bad right now in the supply chain
"…one thing that helps us in the process, and we've gotten some grief from -- over the years from the analyst community and justifiably so, we carry a lot of inventory and we have inventory spread across 3400 locations, branch on-sites, and distribution centers. And so that gives us some resiliency that a lot of our peers don't have. But no, it's crushingly bad right now on a product coming in that has to go through a port..." - Fastenal (FAST) CFO Holden Lewis
"And while demand remained steady, supply constraints continue to impede the free flow product." - LVMH Moët Hennessy (LVMH) Director of Financial Communications Chris Hollis
“I think those retailers who have big presence from a supply chain perspective and have big volumes are advantaged to be able to secure capacity and actually help mitigate and manage the cost increases that are happening in the space…If you're a small player in the marketplace, you're seeing probably greater cost increases and probably struggling to get capacity into the U.S" - Lowe's (LOW) CFO Dave Denton
The transport bottlenecks are likely to intensify during the coming holidays
"While peak season is upon us, we believe the bottlenecks in the West Coast are going to compact and even intensify further peak season capacity needs into November and December and are preparing ourselves accordingly--Freight is moving inefficiently today at elevated truck and spot rates" - J.B. Hunt Transport Services (JBHT) Chief Commercial Officer Shelley Simpson
Companies are reacting to supply chain bottlenecks in a way that could have negative implications if dynamics flip
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Business travel is picking up again
"While the recovery in business travel paused in August and early September as case counts increased, demand has picked up since Labor Day. Last week was our top corporate revenue booking week since the start of the pandemic. And with the announcement that U.S. borders will open in November, bookings from Europe and Brazil to the U.S. are rapidly improving--We saw a full return of domestic consumer travel to 2019 levels, as our customers safely returned to the skies" - Delta Air Lines (DAL) CEO Ed Bastian
"Fortunately, I've been traveling again. And in recent months to see clients worldwide. It's great to be back on the road meeting face-to-face with our clients." - BlackRock (BLK) CEO Laurence Fink
Materials & Energy:
Rising fuel prices are putting pressure on airline profitability
"...While demand continues to improve, the recent rise in fuel prices will pressure our ability to remain profitable for the December quarter" - Delta Air Lines (DAL) CFO Dan Janki
Climate policy may contribute to surging energy prices
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We need to find new sources of energy
"…this is one of the reasons why we wanted to be a partner in Breakthrough Energy. We want to learn more of the science and the new technology. This is why we partnered in our decarbonization fund with Temasek. The demand is growing precipitously in terms of clients interested in finding new -- being part of this transition. And so the capital is there. What is not as prevalent are projects or the opportunities. We are having conversations with the universities. We're having conversations with governments across the board on how can we provide capital?" - BlackRock (BLK) CEO Laurence Fink
Aluminum prices are at their highest point in 13 years
"We had another strong quarter bolstered by aluminum prices that are higher than we've seen in more than a decade. The LME aluminum price is the highest it has been in 13 years and has doubled relative to the low point in the second quarter of 2020. In addition, regional premiums are being influenced by higher transportation costs into deficit markets, such as North America and Europe. The continued economic recovery in the tightness of supply has continued to support this LME rally and high regional premiums." - Alcoa (AA) CEO Roy Harvey
Nuggets of Wisdom:
Strong cultures drive performance
"I am a firm believer that every truly great Company understands that culture needs to be at the center of their success. The legendary Management Consultant, Peter Drucker, once famously said, culture eats strategy for breakfast. And what he means by this is you can have the best-laid plans in the world, but if you can't retain and recruit high-caliber talent, and if they're not motivated to work hard and together as a team towards shared goals, you'll never accomplish much. Years ago, Company culture was sometimes viewed as the light and fluffy stuff. But when done right, we know now that it can drive so much more than that. Strong cultures drive performance. Performance since companies that are united by purpose has been proven to outperform the general market 15 to 1 and with recruitment, with 52% of job candidates saying that they will only accept a job offer if they know and agree with the Company's purpose, vision, and values. Employee satisfaction, because 9 out of 10 people are willing to trade a percentage of their lifetime earnings for greater meaning at work." - Walgreens Boots Alliance (WBA) CEO Rosalind Brewer