Staying the Course
The pace of increases is not as important as how high rates need to go and how long they need to stay there
Editor’s Note: We launched a new service exclusively for premium subscribers. If you are a premium subscriber, you will receive an email with a link to access the “editor’s notes” version of The Transcript. This will be a version of the full weekly newsletter that includes comments from our editor Scott Krisiloff to help put some of the quotes in context and highlight important investment catalysts. This service is specifically designed to help you identify actionable insights to help you make money. We welcome your feedback. Become a paid subscriber for access:
Also, parts of the quotes which have been blocked are only available to our premium subscribers.
Succinct Summary: The Fed raised interest rates by another 75 bps last week. And while they did signal that the pace of increases could slow, Jerome Powell’s press conference was not dovish. Powell signaled that the pace of increases is not as important as how high rates need to go and how long they need to stay there. If anything, recent data tells the Fed that rates must go even higher.
Macro
The Fed raised rates and signaled that more increases are on their way
"Today the FOMC raised our policy interest rate by 75 basis points. And we continue to anticipate that ongoing increases will be appropriate. We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 per cent. In addition, we’re continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive stance of policy for some time." - Federal Reserve Chair Jerome Powell
The pace of increases may slow, but that shouldn’t be taken as a dovish signal
"At some point, as I’ve said in the last two press conferences, it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2 per cent goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go." - Federal Reserve Chair Jerome Powell
Their focus is on how high rates have to go and how long they will need to stay there
"...as we come closer to that level, move more into restrictive territory, the question of speed becomes less important than the second and third questions. And that’s why I’ve said at the last two press conferences that at some point it will become appropriate to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we’ll have a discussion about this at the next meeting—a discussion. To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus." - Federal Reserve Chair Jerome Powell
If anything, the Fed has grown even more hawkish
“Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected." - Federal Reserve Chair Jerome Powell
They are not concerned that they’ve overtightened
"I’m pleased that we have moved as fast as we have. I don’t think we’ve overtightened. I think it’s very difficult to make a case that our current level is too tight given that inflation still runs well above the federal-funds rate." - Federal Reserve Chair Jerome Powell
And don’t seem afraid of a recession
“Is [a soft landing] still possible? Yes. I think—we’ve always said it was going to be difficult, but I think to the extent rates have to go higher and stay higher for longer it becomes harder to see the path. It’s narrowed. I would say the path has narrowed over the course of the last year, really -- I think no one knows whether there’s going to be a recession or not. And if so, how bad that recession would be. And, you know, our job is to restore price stability, so that we can have a strong labor market that benefits all over time. And that’s what we’re going to do.” - Federal Reserve Chair Jerome Powell
Consumers are still spending
"We continue to see very strong attachment across the desert, across alcohol between entrees and appetizers. So that would also tell me that when guests are coming in, they're not managing their check or they don't have any sticker shock, because they're actually continuing to order a little bit more than they used to." - The Cheesecake Factory (CAKE 0.00%↑) CFO Matthew Clark
"So on mobility, we've looked at our mobility consumers from an income basis to see if there's any delta in behaviour. We're not seeing any kind of jumps one way or the other. Seasonal trends remain the same. Even lower-income riders continue to have higher trips per rider as things are opening up, showing absolutely no signs of slowing down. And we've also specifically looked at Europe with inflation with the European economies, I think leading in terms of weakness as far as the Western world. Again, we looked to see if there's any weakness and we're not observing any weakness." - Uber Technologies (UBER 0.00%↑) CEO Dara Khosrowshahi
Inflation has remained stubbornly high
“If I may say that inflation is going to stay high in 2023, that the dollar will remain strong as well, interest rates might impact demand as well at some point. But most importantly to your point, that Europe is going to have a tough winter." - Ecolab (ECL 0.00%↑) CEO Christophe Beck
“Inflation persists quite broadly” - Wayfair (W 0.00%↑) CEO Niraj Shah
"So far, we haven't seen that reduction in inflation, but as you know inflation tends to respond to increases in interest rates with a lag. And my guess is that the end of that lag is almost upon us. So, I would expect to see weaker GDP numbers in the coming quarters, along with the slowing inflation as measured by the CPI." - Loews (L 0.00%↑) CEO Jim Tisch
So the Fed is going to stay the course
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done." - Federal Reserve Chair Jerome Powell
International
Europe is really weak
"I might be overly realistic in Europe. But I think that the war in Europe, the impact as well on energy cost on all European economies as well over there is going to have a major impact. I hope I'm wrong, but that's going to be the bull's eye of the volume challenge." - Ecolab (ECL 0.00%↑) CEO Christophe Beck
"Although the macro headwinds I outlined earlier are weighing on most global economies, the effects are more pronounced in Europe through September. Consumer confidence remains near historic lows across most of our largest markets. European consumers remain even more cautious as they face significant energy price hikes" - eBay (EBAY 0.00%↑) CFO Stephen Priest
China is seeing renewed COVID lockdowns
"...over the past few weeks, there has been a significant resurgence of COVID in China. With the resurgence has come renewed lockdowns and mobility restrictions pursuant to China's strict zero-COVID policy, including in many cities in which we operate, meaningfully reducing traffic in our stores." - Starbucks (SBUX 0.00%↑) Interim CEO Howard Schultz
The Fed isn't the only central bank ratcheting up rates
"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 2 November 2022, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.75 percentage points, to 3%. One member preferred to increase Bank Rate by 0.5 percentage points, to 2.75%, and one member preferred to increase Bank Rate by 0.25 percentage points, to 2.5%." - Bank of England Monetary Policy Committee
Mexico is a beneficiary of the shift away from China
Quotes Hidden. Subscribe to Read
Financials
Investors’ free ride may be coming to an end
"We have an entire generation of investors and investment analysts who have really grown up just seeing the market go in one direction. And we now all know it goes both ways -- Investors have now discovered that everything is correlated to the Fed. And they are also discovering that most, if not all, of last decades' investment acumen was really nothing other than market beta and in some cases nothing other than levered market beta. Over the past decade, investors kind of got a free ride." - Apollo Global Management (APO 0.00%↑) CEO Mike Rowan
Rising interest rates will impact company income statements
"Yes, we've got about 25% of the debt floating right now. And so, certainly, the way rates are going, we'll expect some upward pressure on interest as a result, but not looking to pay off any debt in the near-term future" - Ecolab (ECL 0.00%↑) CFO Scott Kirkland
Banks hold less than 20% of US debt
"And something not fully appreciated is the changing role of banks post-Dodd-Frank. Many of the fixed income originating assets are the kinds of assets that in prior periods might have ended up on bank balance sheets. Securitization is now how America banks. We estimate that less than 20% of debt capital to U.S. businesses and consumers is provided directly by the banking system. The vast majority of the capital is provided by all of you through intermediaries like us and our peers." - Apollo Global Management (APO 0.00%↑) CEO Marc Rowan
Our capital markets are not structured to provide liquidity on the way down
Quotes Hidden. Subscribe to Read
Stripe and Block are both cutting investment
“Today we’re announcing the hardest change we have had to make at Stripe to date. We’re reducing the size of our team by around 14% and saying goodbye to many talented Stripes in the process -- Our business is fundamentally well-positioned to weather harsh circumstances -- However, we do need to match the pace of our investments with the realities around us. Doing right by our users and our shareholders (including you) means embracing reality as it is. Today, that means building differently for leaner times." - Stripe CEO Patrick Collison
"In 2023, we expect to significantly moderate our pace of hiring compared to recent years, which will benefit our financial results on a lag with greater leverage on headcount costs expected in the back half of 2023 and into 2024. Second, sales and marketing. In 2023, we intend on pulling back on lower ROI, more experimental areas, including brand and awareness, spend across both our Square and Cash App ecosystems, and continue investing in channels with more proven ROI." - Block (SQ 0.00%↑) CFO Amrita Ahuja
Public Storage and Marriott both see low delinquency rates
“...the customer base as a whole continues to operate from a delinquency standpoint at nearly historically low levels. It's elevated up somewhat from where we were, say, a year ago, but nowhere close to what we saw pre-pandemic or what you would consider typical environment” - Public Storage (PSA 0.00%↑) CEO Joseph Russell
"When we look at the trends of what we're seeing for defaults and delinquencies, they are tracking in line with what we saw back in 2019. So besides some of the accounting changes that we've made in the reserve, we're really not seeing a whole bunch of negativity in that right now." - Marriott Vacations Worldwide (VAC 0.00%↑) CFO Tony Terry
Consumer
Companies are pulling back on ad spending going into the holidays
Quotes Hidden. Subscribe to Read
Luxury consumers don’t seem to be pulling back
"With all that said, I know you all are curious about how many orders we already have and how long the order book is. But you also know that we do not provide this kind of detail. Trust me, it is unlike any other. It is way above our most promising expectations -- we feel very much confident and that's the reason why we are increasing, number one, the confidence -- the guidance for this year and we are also very positive for the next year. This is thanks to the order book that we have, that is, let me say, spanning all the products we have as well as all the regions. So this is very -- first important message." - Ferrari N.V. (RACE 0.00%↑) Group CEO Benedetto Vigna
“While supply chain challenges persist, demand for our larger, feature-rich boats has remained strong, particularly in the saltwater segment, which was highlighted at the season’s first boat shows” - Malibu Boats (MBUU 0.00%↑) CEO Jack Springer
Consumers are hungry for live content
"Fans around the world continue prioritizing their spending on live events, particularly concerts. Despite varying economic headwinds, including inflation, we have not seen any pullback in demand as on-sales on-site spending, advertising, and all other operating metrics continue showing strong year-on-year growth." - Live Nation Entertainment (LYV 0.00%↑) CEO Michael Rapino
"The marketplace is hungry and willing to pay a premium for live content, and as Steph detailed at the top of this call, we're seeing increased viewership across all of our content." - World Wrestling Entertainment (WWE 0.00%↑) Co-CEO Nick Khan
Restaurant dine-in traffic is still down 30% from pre covid levels
"When we look at the growth we have in Institutional, it's all self-made. Today, we're ahead of pre-COVID levels, which is quite remarkable when you think that just a comparison point that in the U.S. the dine-in traffic, so people sitting in a restaurant is down close to 30% versus pre-COVID level as well and our sales are ahead of 2019." - Ecolab (ECL 0.00%↑) CEO Christophe Beck
Restaurant staffing remains a challenge
"While our sales have continued to grow, we are not staffed to optimal levels, which is impacting our ability to be open full hours consistently in all channels. It is also weighing on our throughput. Investments in our Team Members and added training and retention initiatives are a key priority, as is streamlining work in the Shacks. As one example, we are bringing digital kiosks, our highest margin channel, to all Shacks by the end of 2023" - Shake Shack (SHAK 0.00%↑) CEO Randy Garutti
Airbnb focuses its marketing energy on brand
"...the marketing approach that we’ve had since pre-COVID and that we really have accelerated in COVID in sense has been to continue to focus on the overall brand of Airbnb and to be less reliant on search engine marketing." - Airbnb (ABNB 0.00%↑) CFO Dave Stephenson
Warner Bros.’ new management doesn’t believe in direct-to-streaming movies
"And this is what doesn't work for us based on everything that we've seen and we've looked at it hard. One is direct to streaming movies. So spending a billion dollars or collapsing a motion picture window into a streaming service. The movies that we launch in the theatre do significantly better and launching a two-hour or an hour and 40-minute movie direct to streaming has done almost nothing for HBO Max in terms of viewership, retention or love of the service. The other is the entire library or almost the entire library shouldn't be on HBO Max and paid for by HBO Max." - Warner Bros. Discovery (WBD 0.00%↑) CEO David Zaslav
Technology
Qualcomm expects smartphone volumes to decline by “low double digits”
Quotes Hidden. Subscribe to Read
PCs are also challenged
“So, clearly, the PC business has been very volatile and underperformed for us in the third quarter. I think as we go into the fourth quarter, we are guiding that -- embedded in our guidance is that, PCs will be down again in the fourth quarter. We believe that that will be a significant step in clearing inventory between the third quarter and the fourth quarter, and of course, we will monitor the macro conditions, but we will certainly exit the year in a better place." - Advanced Micro Devices (AMD 0.00%↑) CEO Lisa Su
"...for this year, we are seeing a range of around 290 million units for the PC market. And for next year, we are modelling flat to plus or minus 4% in terms of the total available market." - Lenovo Group ($LNVGY) President-Intelligent Devices Group Luca Rossi
There’s a lot more ransomware than gets publicized
"And these days, you have to be very secure. The cyber warfare that's going on right now, is we don't publicize it. It's kept a secret. When hospitals are taken hostage or someone else has been taken hostage for ransomware, we don't -- it's like kidnapping. We don't -- it doesn't make the news, but there is a lot of it -- So we think if we can -- we actually thought about maybe we should go in the ransomware insurance business, and I'm not just kidding." - Oracle (ORCL 0.00%↑) Chairman & CTO Lawrence Ellison
HealthCare
The healthcare industry is dealing with labor shortages
"...finding labor is hard right now, particularly for frontline and other important personnel that you need in your laboratories. And it's not only hard to find them, but once you find them, training for something in the laboratory takes a lot longer than most other workers. And it takes them a while before they become fully productive. So when you look at our early development business, that business looks great in terms of orders, in terms of our capacity, in terms of RFPs. The issue that we're facing there is we just can't get all the studies up and running as fast as we'd like because we're needing more personnel. And we're doing everything we can. If you look at Madison, Wisconsin, we have a large lab. We actually have buses wrapped in Labcorp talking about coming to one of our career centres because we're trying to hire as many people as we can as fast as we can." - Laboratory Corporation of America (LH 0.00%↑) CEO Adam Schechter
"...lowered its guidance for full-year 2022 to reflect lower than expected sales due to continued supply constraints, veterinary workforce challenges, and the negative impact of recent changes to foreign exchange rates." - Zoetis (ZTS 0.00%↑) Q3 2022 Results
"Our U.S. Neurovascular business had an organic decline of 2%, driven by a strong double-digit comparable in 2021, disruptions due to hospital staffing shortages and slower clinic volumes as well as competitive pressures." - Stryker (SYK 0.00%↑) CFO Glenn Boehnlein
"Sales were below our expectations due primarily to the persistent U.S. hospital staffing shortages and COVID headwinds in Japan, which intensified the typical impact of summer seasonality." - Edwards Lifesciences (EW 0.00%↑) CEO Michael Mussallem
Industrials and Transport
Caterpillar sees healthy industrial demand
"...while we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our segments. We expect top-line growth in the fourth quarter, both year-over-year and sequentially -- we have strong orders. Our dealer inventory remains towards the low end of the typical range." - Caterpillar (CAT 0.00%↑) CEO James Umpleby
Grainger has seen a dip in demand among some of its customers
"I want to talk a little bit about what I've seen and heard during my market visits with customers. I recently visited an outdoor equipment manufacturer that experienced a surge in demand during the pandemic. As consumers had excess cash and a desire to spend more time outside during COVID, they saw a major uptick in revenue. They're now facing a dip in demand as consumers begin to pull back on spending." - W.W. Grainger (GWW 0.00%↑) CEO D.G. Macpherson
Automotive semiconductor demand is still strong
"In the third quarter, we saw continued strong demand in the automotive and industrial end markets, with revenue increasing sequentially by 11%, and 5%, respectively." - ON Semiconductor (ON 0.00%↑) CEO Hassan El-Khoury
"...we are seeing very resilient customer demand in the Automotive and core Industrial segments, where demand continues to outpace supply, which hinders us from shipping to the true end demand. So, overall, we remain cautious in the near term due to the uncertainties in the macro environment." - NXP Semiconductors N.V. (NXPI 0.00%↑) CEO Kurt Sievers
Tesla to get into the mining business?
"It is looking increasingly like, for some of the critical elements of batteries, that Tesla will need to get into the mining business, Mining and refining. We've never contemplated investing in Glencore. I am talking about Tesla doing it. Tesla is really, | think at this point, probably the best at manufacturing in the auto industry." - Tesla (TSLA 0.00%↑) CEO Elon Musk
Travel demand continues to boom
"Despite near-term macro headwinds, we're not seeing any signs that fundamentals are weakening. Consumers are shifting back to spending on experiences, international borders are reopening and pent-up demand is being released across all segments." - Hilton Worldwide (HLT 0.00%↑) CEO Christopher Nassetta
“While we are carefully monitoring macroeconomic trends, bookings across all our customer segments remain strong, contributing to the ongoing momentum in our business." - Marriott International (MAR 0.00%↑) CEO Anthony Capuano
"...travel demand for the fall is robust, and we are optimistic this will continue through the holiday season." - Avis Budget Group (CAR 0.00%↑) CFO Brian Choi
"Cities are reopening; travel is booming and more broadly, a continued shift of consumer spending from retail back to services. We've seen these trends continue into the fourth quarter with October tracking to be our best month ever for mobility and total company gross bookings." - Uber Technologies (UBER 0.00%↑) CEO Dara Khosrowshahi
Ocean freight rates are coming down as demand slips
"As a result of increasing inflation and economic slowdown, demand for Ocean shipping began to decline in August, and this was clearly observed in both rates and volumes. The positive aspect of this normalization is that the lower demand will allow global supply chains to progressively improve, even if it still remains elevated in some geographies" - A.P. Møller - Mærsk A/S ($AMKBY) CEO Søren Skou
"...freight spot rates are coming down -- obviously, container freight is coming down as well. So we're seeing some favorability on that in the spot market. Obviously, we'll expect some of that to flow through as we move into 2023." - Caterpillar (CAT 0.00%↑) CFO Andrew Bonfield
Materials & Energy
Europe is now prepared for winter
“The European market appears well prepared for winter as shown with storage levels exceeding their 5-year average on the back of milder weather, some level of industrial demand management and aggressive buying by European utilities. As such, we have recently seen prices moderate as the market waits for winter demand to kick in” - Cheniere Energy (LNG 0.00%↑) CCO Anatol Feygin
But next winter is more of a challenge
"We are in good shape for this winter. But as we said, the issue is not this winter. It will be the next one because we are not going to have Russian gas. 98% [less] next year, maybe nothing." - Eni CEO Claudio Descalz
European demand is good for US LNG
Quotes Hidden. Subscribe to Read
Commodity prices have been declining
"In the meantime, the number of commodity prices are declining as a result of tightening by the Fed. Copper prices are down 25%, lumber prices are down almost 60% from their highs in March, and oil prices are almost 30% from their peak, in June." - Loews (L 0.00%↑) CEO Jim Tisch
Copper markets remain tight
"Despite uncertain market conditions in the near term, we believe the outlook for copper fundamentals in the medium- and long-term remains favourable, with studies indicating that demand for copper may double in 15 years based on the global movement towards decarbonization. We also believe substantial new mine supply development will be required to meet the goals of the global energy transition, and current prices for copper are insufficient to support new mine supply development, which is expected to add to future supply deficits." - FreePort-McMoran (FCX 0.00%↑) Management’s Discussion and Analysis of Financial Condition and Results
Rare Earth metals are essential to the green transition and China controls the supply
"As you know rare Earth metals are essential to ensure the green energy transition and support the development of more sustainable solutions for electric mobility and clean energy generation." - Solvay SA ($SOLB) CEO Ilham Kadri
"What is plain is that China has extensive plans to electrify its own economy. These plans promise to consume a great deal of its, and by extension the world’s, existing production of rare earth oxides, and of course we want the world’s most populous nation and second-largest economy to decarbonise. But right now, the rest of the world can only decarbonise with China’s permission." - Iluka Resources ($ILKAF) MD Tom O’Leary
Real Estate
Housing markets have taken a significant hit
"Home mortgage rates have moved up, from 3% at the beginning of the year, to over 7% now. This increase in mortgage rates means that the monthly cost of buying a new home has more than doubled in the past 10 months. As a result of the increase in the cost of home ownership, we will begin to see a significant reduction in home prices, and the fall in the number of housing starts will continue to accelerate, all leading to a weakening GDP." - Loews (L 0.00%↑) CEO Jim Tisch
“In prior calls, we have said we were preparing for the housing market to normalize. Now, it’s clear the pendulum has swung past normal and indeed challenging. With mortgage rates doubling and expectations that could move higher, demand has cooled considerably. Finding buyers who are both motivated and qualified is the new game in town. And we are pivoting in line with our core competencies to meet this challenge” - LGI Homes (LGIH 0.00%↑) CEO Eric Lipar
Remodeling demand has fallen
"As central banks around the world continue to raise interest rates and inflation reduces discretionary expenditures, we expect our business to remain under pressure. Residential remodelling drives the majority of our sales, and customers are deferring purchases and trading down -- Residential remodelling does drive the majority of our sales. And as you know, the residential remodelling, unlike other product categories, customers can defer them almost indefinitely. So when you have slowdowns, our category is impacted more than most. Interest rates and inflation are impacting spending both in the U.S. as well as Europe. Europe is in a crisis, and people are just pulling back from spending and they're going to have to get through it." - Mohawk Industries (MHK 0.00%↑) Jeffrey Lorberbaum
Nuggets of Wisdom
Apple has a surprisingly low headcount in core finance roles
"We run the finances of Apple with about half the size of some of the companies that I worked for before, they were like a 10th the size of Apple, right? I have an investor relations group of 2 people. The group that manages $230B of cash is a group of 7. I know when I look at my counterparts in other large companies that got multiples of those resources, but we really believe that if we have the right people, we don't need a lot of them. So I think that's a different way" - Apple (AAPL 0.00%↑) CFO Luca Maestri
Lead by example
"I was living in the factory in Fremont and the one in Nevada for three years straight. Those were my primary residences. Not kidding. Literally. I slept on a couch at one point in a tent on the roof. And then for a while there, I was just sleeping under my desk, which is out in the open in the factory, and for an important reason. And it was damn comfortable sleeping on the floor. And always when I woke up, I'd smell like metal dust -- but actually, I stopped using the couch because there was little confidence room in the couch there. I stopped using the couch I just slept on the floor under my desk. So during shift change, the entire team could see me. And that's important because the team if they think their leader is off somewhere having a good time, drinking Mai Tai on Tropical Island, which I could definitely have been doing and would much have preferred to do. I'm not actually a masochist, I think. But the thing is that since the team could see me sleeping on the floor, during shift change, just not with nothing. They knew I was there, and that made a huge difference. And then they gave it their all" - Tesla (TSLA 0.00%↑) CEO Elon Musk