Cooling Down?
Markets are hopeful that inflation is ebbing
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Succinct Summary: Equity markets surged last week as CPI showed a smaller-than-expected increase in October. The y/y increase was still very high, but we did see some commentary in last week’s earnings calls that inflation may truly be cooling down. Unfortunately, this may also mean that the economy is cooling too.
Macro
Markets are hopeful that inflation is ebbing
“The all items index increased 7.7% for the 12 months ending October; this was the smallest 12- month increase since January 2022.” - The US Bureau of Labor Statistics
"Jon, we expect inflation to come down slightly in the fourth quarter, right? We started to see that trend in the third quarter already, right? We had 15% commodity inflation that was following about 19% commodity inflation in quarter 2. On the labor side, we also got a slight improvement. We were -- labor inflation was a little bit north of 6%. Last quarter, we were sitting in the 11% to 12% range." - Wendy's (WEN 0.00%↑) CFO Gunther Plosch
Supply chains have gotten better
"I was talking to a builder last week. He said he started a house in late August and will close it in December. So he was pretty excited about that -- So I think we're making the right progress. We're starting to see a little bit of progress pick up in the numbers of October completions. We got a little bit of time back there. Getting back to where we want to be pre-pandemic levels, it might be by the end of the year for the starts that we have later in the year that we're pushing It through, but we're going to make that progress this year." - D R Horton (DHI 0.00%↑) Co-COO Michael Murray
Freight companies are signaling weak demand
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Labor markets are less tight
"I think the second observation that I made is that we're seeing some of the labor trends improve -- We saw some favorable trends in our contract labor utilization in Q3 compared to where we ran in the early part of the year. We're not settled yet. I mean, there's still more activity there, but we're pleased with the trends that we're seeing thus far." - HCA Healthcare (HCA 0.00%↑) CFO William Rutherford
High inventories are leading to promotional pricing
“...given the slowdown in consumer demand and the inventory buildup in the marketplace, the level of discounting that we have been experiencing since September was more significant than initially expected. Increased promotional activity, given the high inventory in the marketplace, will continue to weigh on our gross margin during the remainder of the year and is one of the reasons for our adjusted gross margin guidance of around 47% for the full year" - Adidas AG ($ADDYY) CFO Harm Ohimeyer
"Like all of you, our concern is, do competitors start to do irrational things on the promotional pricing side? -- I mean, Techtronic likes to have high levels of inventory -- .they have roughly 220 days of inventory today -- That's a lot of inventory." - Stanley Black & Decker (SWK 0.00%↑) CEO Donald Allan
But inflation has not gone away
"...we're seeing inflation across the board, and labor is a big part of that. When I think about our intermodal contractors, our automotive contractors, some of the folks that do work on our railroad are seeing those labor inflation pressures and some of is that passed on to us. So that's an uphill battle for us." - Union Pacific (UNP 0.00%↑) CFO Jennifer Hamann
The consumer still strong
"We have a lot of confidence in the consumer. We haven't seen anything change. No signs of trading down. We -- I think we referenced Europe as being different from the U.S. But beyond that, the consumer has been strong." - Tripadvisor (TRIP 0.00%↑) CEO Matthew Goldberg
Could capital markets open back up?
"There's always a backlog of companies that need to go public. We're going through a reset of valuation expectations, which takes some time. We're three-quarters into a more difficult capital markets environment. History would tell you three, four, five, six quarters; you get that re-adjustment. I think we're going to reach a point in 2023 where people who need to get public and raise capital will accept the reset valuation levels. It hasn't happened yet, but it's coming. I think we'll see that in the coming months. We will see a bit of a re-opening in the capital markets when people get used to this valuation adjustment." - Goldman Sachs (GS 0.00%↑) CEO David Solomon
International
70% of Ukrainian businesses continue to operate
"Regarding the war in Ukraine, while the situation in the region remains fluid, our Ukrainian customers continue to be incredibly resilient. A recent survey found that 70% of Ukrainian businesses continue to operate despite the invasion of their country. Our outlook on our business in Ukraine remained stable at 75% of our original budget." - Payoneer Global (PAYO 0.00%↑) CFO Michael Levine
Adidas saw particular weakness in China
"If you take a closer look at the top-line development during the quarter, you will see that we experienced robust momentum in all markets, except Greater China, during the first two months of Q3. This is reflecting -- this is reflected in the 7% growth or plus 13% growth, excluding China in July and August. In contrast, deteriorating traffic trends in Greater China and slow consumer demand in major Western markets weighed on the revenue development in September, leading to flat net sales for the month. Key markets like the U.K., Germany, and also the U.S. were particularly affected by the slowdown." - Adidas AG ($ADDYY) CFO Harm Ohimeyer
The World Cup starts next week
"From a category perspective, as mentioned before, football continued its exceptional growth trajectory with an increase of 36% as we capitalize on the consumer excitement ahead of the FIFA World Cup. In addition, running achieved growth of 24% as the latest iterations of our successful franchises resonate extremely well against the background of continued wins at the world's major races." - Adidas AG ($ADDYY) CFO Harm Ohimeyer
Financials
The Crypto community suffered a shocking blow
“I'm sorry. That's the biggest thing. I f**ked up and should have done better..the full story here is one I'm still fleshing out every detail of, but at a very high level, I fucked up twice. The first time, poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users' margin. I thought it was way lower. My sense before: Leverage: 0x USD liquidity ready to deliver: 24x average daily withdrawals Actual: Leverage: 1.7x Liquidity: 0.8x Sunday's withdrawals Because, of course, when it rains, it pours. We saw roughly $5b of withdrawals on Sunday--the largest by a huge margin. And so I was off twice” - FTX CEO Sam Bankman-Fried.
“It feels like we were in a nightclub and the lights just turned on” - Airbnb (ABNB 0.00%↑) CEO Brian Chesky
FTX’s implosion is not good for anyone
“FTX going down is not good for anyone in the industry. Do not view it as a win for us. User confidence is severely shaken. Regulators will scrutinise the exchanges even more. “Licenses around the globe will be harder to get" - Binance CEO Changpeng Zhao
“In recent days, a liquidity crunch has created solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0” - Sequoia Capital
It will likely mean more regulatory scrutiny
"There's going to be regulatory headaches galore. I'd say Sam Bankman-Fried spent more time than anyone in Washington so regulators will take a new look at this. And so that's frustrating. Confidence in institutions, and so I'm not trying to be pollyannaish. This makes the operating environment more challenging for the next period. But I want to emphasize I have not lost any of my medium and long-term belief that this space is inevitable -- What's painful about this is that Sam spent so much time in D.C., And it wasn't that what he said was crazy. It's just that the messenger now looks like he ran his ship into an iceberg. We'll see why that happened. It's just going to anger the people he spent time with, and I think it will slow them down some." - Galaxy Digital ($BRPHF) CEO Michael Novogratz
Consumer
The low-income consumer is strapped
"We've seen the consumer be a little more strapped. You start to continue to see food, at-home meals being about 85% of the consumer's basket when it comes to meals. That's up from 82% pre-pandemic. It shifted to more meals at home during the pandemic. It's kind of stuck there as the consumers have been strapped." - Wendy’s (WEN 0.00%↑) CEO Todd Penegor
Savings rates have come down
"...the external environment continues to be challenging, particularly for those less affluent borrowers with limited access to credit at the core of Upstart's mission. Consumers have simultaneously whittled personal savings rates from pre-pandemic levels of roughly 9% down to 3.3% in Q3, a level not seen since the great financial crisis, and have swapped credit card balances to record highs." - Upstart (UPST 0.00%↑) CFO Sanjay Datta
Loan defaults may be starting to rise
"Savings rates have dwindled, and credit card balances have inflated to pay for a continuing expansion in real consumption, so far with no corresponding increase in either real wages or labor force participation since the advent of COVID. As a consequence, defaults are on the rise. Industry-wide data shows that less affluent borrowers are leading the way with impairment levels on unsecured personal loans that are about twice as high as before the onset of COVID. By comparison, highly affluent borrowers are now roughly back to being in line with pre-COVID impairment levels, although they continue to rise." - Upstart (UPST 0.00%↑) CFO Sanjay Datta
But falling gas prices may bring some relief
"...what we’ve seen, and we have a survey, research that came up this summer that showed that our customers were affected by the financial tightening or felt that the fiscal tightening would affect them. And what happened is that happens with – starting seeing that mid-June through July and then through the summer. Our guests started feeling the pinch on gasoline prices, utility prices, and food in the grocery store -- we also saw that some of those guests returned when gasoline prices went down in the fall. I assume there is somewhat of a correlation as they came back, and we saw the return to a little bit more normalized attendance in October and November." - Six Flags Entertainment (SIX 0.00%↑) CEO Selim Bassoul
There is a shakeout underway in plant-based meat.
"As noted a moment ago, a shakeout does appear to be underway, and we expect more brands to either retreat or consolidate a less cluttered playing field to emerge in the midterm. A less tangible, though important dynamic is also present within the category today. As consumers intensify their focus on making ends meet, health and environmental considerations take a back seat. This phenomenon makes it more difficult to convey our core value proposition to the consumer broadly" - Beyond Meat (BYND 0.00%↑) CEO Ethan Brown
Movie theaters still make sense for Blockbusters
"It’s hard to have an answer yet, but from our observation, the tentpole, big, blockbuster films are certainly back. Beyond that, it gets sketchy. That’s good for us because most of our box office films are those blockbusters, and whether they’re Lucas and Marvel and Pixar or Disney, that’s where we play. The other genres and the other demographics are a bit more challenged. And the question of whether will they ever come back in a significant way is, I think, to be seen, and that’s why one of our distribution strategies is always flexibility.” - Disney (DIS 0.00%↑) CEO Bob Chapek
Technology
Meta signaled a change in direction
"I’ve decided to reduce the size of our team by about 13% and let more than 11,000 of our talented employees go. We are also taking several additional steps to become a leaner and more efficient company by cutting discretionary spending and extending our hiring freeze through Q1 -- "the world rapidly moved online, and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration even after the pandemic ended. I did too, so I decided to increase our investments significantly. Unfortunately, this did not play out the way I expected -- I got this wrong, and I take responsibility for that." - Meta (META 0.00%↑) CEO Mark Zuckerberg
Is the company being underestimated?
"I believe we are deeply underestimated as a company today. Billions of people use our services to connect, and our communities keep growing. Our core business is among the most profitable, with huge potential. And we’re leading in developing the technology to define the future of social connection and the next computing platform. We do historically important work. I’m confident that if we work efficiently, we’ll come out of this downturn stronger and more resilient than ever." - Meta (META 0.00%↑) CEO Mark Zuckerberg
The metaverse isn’t very cool right now
"...even though we're using a computer screen to play a game or have a zoom meeting, we can still interact physically with people around us. You can't do that when you have a headset on. So I'm not sure. Right now, the manifestation of what some people call the metaverse we do not is really interactive entertainment. Will it be how we communicate all day long, every day, in the future? I don't believe so." - Take-Two Interactive (TTWO 0.00%↑) CEO Strauss Zelnick
AMD launched a new chip that promises lower cost of ownership for datacenters
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Capex investments in fabs is ramping up
“We just add up for our 3 largest customers and see where it happens across the globe. Then this is $330 billion of announced fabs. I’m not spilling the beans. I mean this is just public information. That’s the global capacity. So it’s happening, and this is happening in different parts of the world, as you can see. And that could be a driver – very likely is going to be a driver from some level of innovation” - ASML (ASML 0.00%↑) CEO Peter Wennink
“We agreed to fund half of a $30 billion chip manufacturing facility with Intel, with Brookfield funding $15 billion through our infrastructure business. This is just one chip manufacturing facility and the trends towards de-globalization may result in similar opportunities going forward” - BrookField Asset Management (BAM 0.00%↑) CEO Bruce Flatt
The world consumes a lot of energy just to cool data centers
"Data centers, when you look at the energy utilization of a data center that's just to cool not just for the computational needs, it's a lot, right? They've often said, if you put data centers altogether, they would consume more power than some of the largest countries in the world." - nVent Electric (VNT 0.00%↑) CEO Beth Wozniak
Industrials and Transport
Semiconductor shortages remain an issue for auto companies
"...the biggest issue right now, I mean, in general, it's easing, but the semiconductor shortage is costing us closing out some hard at right now." - Motorcar Parts of America (MPAA 0.00%↑) CEO Selwyn H. Joffe Chairman
"We are doing our utmost daily to overcome the disruption and delay caused by the global semiconductor shortage and pressures on automotive supply chains. While these difficult conditions may persist and cause delays in delivery timing, we are making company-wide efforts around the world to increase our production and complete deliveries as soon as possible." - Nissan Motor ($NSANY) COO Ashwani Gupta
Travel demand is still hot
"We exceeded expectations, and Q3 was also the first quarter that we surpassed 2019 levels on a consolidated revenue basis at 107%, accelerating from 99% last quarter. It's worth mentioning that this was also our highest quarter of revenue on record at $459 million, not by much but a record, nonetheless." - Tripadvisor (TRIP 0.00%↑) CEO Matthew Goldberg
"The strength we have experienced over the past several quarters has continued into the fourth quarter. Our EBITDA during October was an all-time monthly record for the property. Similarly, our forward-looking indicators also remain quite strong despite well-known macro concerns as room bookings are pacing at or above pre-COVID levels on substantially higher ADRs." - Wynn Resorts (WYNN 0.00%↑) CEO Craig Billings
"While there are heightened concerns surrounding an economic slowdown in the broader marketplace, the primary target cohort of our three brands, which is more upmarket and affluent than that of the cruise industry as a whole, continues to demonstrate its willingness to spend on travel and experiences" - Norwegian Cruise Line (NCLH 0.00%↑) CEO Frank Del Rio
Materials & Energy
Coal demand is high
"We have reason to believe that there's still going to be strong demand for domestic coal next year. Inventories are quite low. Natural gas prices are still high. So even if we're in the middle of a recession next year, as long as those commodity prices stay high, we feel good about the demand for domestic coal next year and export coal; it's been a very strong year for us, particularly on the pricing side." - CSX (CSX 0.00%↑) CFO Sean Pelkey
Oil companies are trying to find ways to position themselves as low-net emitters
“...we'd like to use either anthropogenic or atmospheric CO2 for the -- to develop [our reserves]. In addition, we know that we can technically use CO2 in the shale reservoir, so we can increase the 10% recovery that we have today to something much higher. So it's -- there is a use for CO2 in enhanced oil recovery. It still needs to be recognized. But when the world realizes how much the transition will cost, I do believe that this will become the preferred option to ensure that we can continue the production of low-carbon fuel for those that need it." - Occidental Petroleum (OXY 0.00%↑) CEO Vicki Hollub
The energy transition needs power semiconductors
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Strong tailwind for demand for steel
"We've had some spending bills passed. We're excited about that. We think it's the right thing for America, but it's also a huge tailwind for steel demand. We'll have more spending on infrastructure as a company in the next 10 years than we've had in the last 7 decades. That's a huge win. It's something like 3 million to 5 million tons per year annual steel demand incremental from prior years. As we think in the middle there about the reshoring and the onshoring story in America, this is also great for our country. It's also a tailwind for steel demand. And I'll share some thoughts more about that because some of the things we're seeing within that reshoring story are also particularly steel intensive. And lastly, there's the power grid modernization. As we start to transition from a fossil fuel-based energy system to renewables, that transition is steel-intensive. This is also some exciting things happening here -- that you'll hear about from Chad Utermark in this area." - Nucor (NUE 0.00%↑) Investor Day
Real Estate
Moderation in housing demand has accelerated
"In June, we began to see a moderation in housing demand that has continued and accelerated. The rapid rise in mortgage rates, coupled with high inflation and general economic uncertainty, have made many buyers pause in their home buying decision or choose not to move forward with their home purchase." - D R Horton (DHI 0.00%↑) CEO David Auld
There are too many real estate agents out there right now
"...there are too many agents out there now. There's going to be a drop-off for the less productive agents because they're not going to be able to make a living doing it or even incremental revenue to offset their costs. So we expect to see a lot of that drop-off." - Re/Max (RMAX 0.00%↑) CEO Stephen Joyce