More Cooling
There are signs of increasing stress among low-income consumers
Succinct Summary: It seems like the economy continues to cool along with the weather. Especially within this week’s Financials section, we picked up signs of increasing stress among low-income consumers, including dwindling savings. Spending is still strong though. The Fed isn’t taking anything for granted and continues to signal that it will be raising rates and holding them there for a year or more.
Happy Thanksgiving to our readers! We’re extremely grateful for all of your support. We’ve seen incredible growth recently and continue to be energized and humbled to have so many people following this work. If you are enjoying the Transcript, please consider becoming a premium subscriber.
Editor’s Note: Premium subscribers now have exclusive access to the “editor’s notes” version of The Transcript. This is 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. Become a paid subscriber for access:
Additionally, blocked quotes are only available to premium subscribers.
Macro
The Fed likes that inflation is coming down
“It’s good finally that we saw some evidence of inflation starting to come down. We’re going to need to see a continued run of this kind of behavior on inflation slowly starting to come down before we really start thinking about taking our foot off the brakes here -- 7.7% CPI inflation is enormous. It’s really not so much about the pace any more, it’s where we’re going to end up. And where we end is going to be driven solely by what happens with inflation." - Federal Reserve Governor Christopher Waller
But one data point is not enough
"The market seems to have gotten way out in front on this, over this one CPI report. So it’s good, finally, that we saw some evidence of inflation starting to come down, but I just cannot stress [enough] this is one data point. We’re going to need to see a continued run of this kind of behaviour and inflation slowly starting to come down before we really start thinking about taking our foot off the brakes here -- We’ve seen a couple of these before where it looked like inflation was turning and it took back off." - Federal Reserve Governor Christopher Waller
Inflation remains high
"Inflation remained high, up mid-teens percentage in food categories reflecting an 80 basis point step-up compared to levels at the end of Q2. We've seen incremental levels of inflation month-over-month be less significant, but it's not clear if this represents a sustainable trend." - Walmart (WMT 0.00%↑) CFO John David
We’ve still got a ways to go
"These rates are going to stay -- keep going up -- and they’re going to stay high for a while until we see this inflation get down closer to our target. We’ve still got a ways to go. This isn’t ending in the next meeting or two -- So everybody should just take a deep breath and calm down. We’ve got a ways to go. This is kind of what happened to us in 2021. We thought it was going to come down, it was starting to come down, and then it exploded and we were caught flat-footed and we had to pivot very quickly. So everybody should just take a deep breath and calm down. We’ve got a ways to go yet." - Federal Reserve Governor Christopher Waller
The Fed may slow, but the pace isn’t what matters
"If I can do one thing for the public, I would say: stop thinking about pace and start thinking about level." - San Francisco Federal Reserve President Mary Daly
"We’re not softening. We’re looking at moving in paces of potentially 50 at the next meeting or the meeting after that. We're at a point we can start thinking maybe of going to a slower pace -- [but] we’re not softening" - Federal Reserve Governor Christopher Waller
Rates may have to stay high for a year
"If I can hold it there [at an elevated level] for a year and really think that inflation is coming down, then that’s probably a reasonable rate to stop at. It depends on what happens with inflation. If inflation does not come down or bounces back up, we may have to go higher -- Right now inflation is determining where that number is going to end up." - San Francisco Federal Reserve President Mary Daly
This is a delicate moment for the Fed
"This next phase of policymaking is much more difficult because you have to be mindful of so many things. You have to be mindful of the cumulative tightening that’s already in the system. You have to be mindful of the lags in monetary policy. You have to be mindful of the risks that are all throughout the global economy and the tremendous uncertainty that we have even about what the evolution of inflation is going to be" - San Francisco Federal Reserve President Mary Daly
But nothing has broken yet
"What’s impressed me to no end is that it hasn’t broken anything. For all the talk of crashing the economy and breaking the financial markets, it hasn’t done that. We’ve got [the Fed funds rate] to kind of a good level, and we got it there fast, and we didn’t break anything. And if we can start seeing some inflation coming down, then that’ll help guide us on how much faster and how high we have to go on rates" - Federal Reserve Governor Christopher Waller
The consumer is still very strong
"...when we look across all of our merchandising departments, we don't have any really red blinking lights of concern relative to certain categories, certain items, certain SKUs." - Lowe's (LOW 0.00%↑) CEO Marvin R. Ellison
"...what we continue to see is a very strong consumer. Consumer spending is healthy -- for what we've seen from our operating metrics through the first week of November what we're seeing is generally consistent with our expectations as we had laid out in Q3." - Mastercard (MA 0.00%↑) CFO Sachin Mehra
"The consumer is healthy. The consumer is healthy. I don't see it necessarily taking off, but if there's any pullback, it's very, very, very, small, if there is any. So I think the consumer is still out in force. Their behaviors -- I think the pandemic changed a lot of things, probably every person here has changed to something more. So I'm not sure that the dynamics are exactly the same as pre-pandemic to post-pandemic, and I see a strong consumer right now." - Fiserv (FISV 0.00%↑) CEO Frank Bisignano
But that may be changing
"So far we haven't seen very much indication of consumers running out of debt capacity or liquidity, but I think it's right around the corner. If you look at credit card outstandings, if you look at delinquencies and mortgages, they're starting to build. So my guess. That there will be a little bit of a squeeze on consumer ability to purchase. Clearly, it's hit the housing market with these higher mortgage rates. And so my guess is that we're gonna see a recession of some kind of the end, toward the end of this year, into next year. I don't really think it, it'll be In my own opinion, but it's likely to be very much correlated with what the Federal Reserve does Sure. And what the other banks do in response to the Federal Reserve's actions." - Liberty Media (LSXMA 0.00%↑) Chairman John Malone
International
Demand in China remains soft
"...demand in China more broadly remains soft, and we expect that to continue in the current quarter" - NVIDIA (NVDA 0.00%↑) CFO Colette Kress
Financials
Loan delinquencies may be rising among lower-income consumers
Quotes Hidden. Subscribe to Read
Credit is tightening for subprime borrowers
Quotes Hidden. Subscribe to Read
Consumers are using credit cards more. Savings may be dwindling.
Quotes Hidden. Subscribe to Read
Treasury market liquidity is a concern
Quotes Hidden. Subscribe to Read
FTX had an unprecedented failure of corporate controls
"Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised" - FTX New CEO John Ray
Charlie Munger didn’t pull punches on crypto
"It pains me that in my own country, I see people that once were reputable people helping these things exist, promoting their use and so forth. This is a very bad thing. The country did not need a currency is good for kidnappers and so on. There are people who think they just gotta be on every deal that's hot and they don't care whether it's child prostitution or Bitcoin. If it's hot, they wanna be in it. I think that's totally crazy. Reputation is very helpful in financial life and to destroy your reputation by associating with scumballs and their scumball promotions [is] a huge mistake -- It's partly fraud and partly delusion. That's a bad combination. I don't like either fraud or delusion. And the delusion may be more extreme than the fraud. Nobody's gonna build a new thing that every 12-year-old kid can be a billionaire or something. He just calls it Munger coin. He starts trading it or something. It's crazy. It's demented." - Berkshire Hathaway ($BRK.B) Vice Chairman Charlie Munger
Venture Capital is shaken
Quotes Hidden. Subscribe to Read
High cost of capital makes it harder to invest in the future
"We have to live with the reality that investors expect us to show a little bit more results here-&-now rather than talking about the future..money isn’t as cheap as it was a year ago. It doesn’t allow you to invest as much into the future as you’d like to" - Klarna ($KLAR) CEO Sebastian Siemiatkowski
Consumer
Walmart had a strong quarter
"Total constant currency revenue grew 9.8% as our omni model and strong value proposition continue to resonate with customers during this period of broad inflationary pressures. Each of our segments delivered strong sales results. Walmart U.S. comp sales accelerated sequentially to 8.2% growth with increases in average ticket size as well as transactions." - Walmart (WMT 0.00%↑) CFO John David
Other retailers weren’t quite as strong
"In the middle of October, there was an unexpected slowdown in sales, which continued into November, markets that were unseasonably warm were the most affected. Over the past week, our sales performance has improved. We are evaluating the sustainability of recent trends and the drivers that we believe will impact holiday consumption." - Macy's (M 0.00%↑) CEO Jeffrey Gennette
"As mentioned in the prepared comments, with the comp down 3%, as we mentioned, traffic did improve for the quarter, but it still declined versus the prior year" - Ross Stores (ROST 0.00%↑) COO Michael Hartshon
Black Friday is expected to be strong
"According to Mastercard SpendingPulseTM, U.S. retail sales excluding automotive is expected to grow +15% on Black Friday compared to last year." - Mastercard (MA 0.00%↑) SpendingPulseTM
But consumers are waiting closer to the holiday to make purchases
"This year, the consumer is hearing about a glut of inventory. They are under a tighter budget, feeling the impact of inflation on non-discretionary items and beginning to deplete their savings. With that in mind, we believe they are waiting until closer to holiday to make purchases." - Macy's (M 0.00%↑) CEO Jeffrey Gennette
Higher-income consumers are becoming more price conscious
Quotes Hidden. Subscribe to Read
Brick and mortar spend has been taking back share from digital
"Digital is reverting back to kind of a mix between where we were pre-pandemic and where we were during the pandemic. So when you look at our digital penetration of the business in '19, it was 25%. During the pandemic, it was 40%. And as you heard from our call, we're now calling 2022 at 33%, down from our initial estimation that it was going to be in the 37% range. So that has downshifted." - Macy's (M 0.00%↑) CEO Jeffrey Gennette
Bob Iger is back effective immediately as CEO of Disney
“The Board has concluded that as Disney embarks on an increasingly complex period of industry transformation, Bob Iger is uniquely situated to lead the Company through this pivotal period. Mr Iger has the deep respect of Disney’s senior leadership team, most of whom he worked closely with until his departure as executive chairman 11 months ago, and he is greatly admired by Disney employees worldwide—all of which will allow for a seamless transition of 2leadership” - Disney (DIS 0.00%↑) Chair Susan Arnold
“Bob Iger is one of the best CEOs in the world, and his return is a game changer for Disney, and all the creative people who work at the company” - Airbnb (ABNB 0.00%↑) CEO Brian Chesky
Technology
Tech companies continue to cut hiring
"What we're doing as a consequence of being in this period is we're being very deliberate on our hiring. That means we're continuing to hire, but not everywhere in the company are we hiring." - Apple (AAPL 0.00%↑) CEO Tim Cook
"Yesterday, we communicated the difficult decision to eliminate a number of positions across our Devices and Books businesses and also announced a voluntary reduction offer for some employees in our People, Experience, and Technology (PXT) organization. Our annual planning process extends into the new year, which means there will be more role reductions as leaders continue to make adjustments" - Amazon (AMZN 0.00%↑) CEO Andy Jassy
But layoffs have remained low in the broader labor market
"In the last 3 months, we have seen an increase in the news of layoffs, especially at tech companies. But in the labor market as a whole, layoffs have remained low. Recent increases in layoffs are primarily seen in the industries that ramped up the hiring significantly during the pandemic." - Recruit ($RCRRF) CEO Hiyasuki Idekoba
Micron is reducing DRAM and NAND wafer starts on reduced demand
"Recently, the market outlook for calendar 2023 has weakened. In order to significantly improve total inventory in the supply chain, Micron believes that in calendar 2023, year-on-year DRAM bit supply will need to shrink and NAND bit supply growth will need to be significantly lower than pre” - Micron (MU 0.00%↑) CEO Sanjay Mehrotra.
The era of generative AI is here
"You know that for the first 10 years, we’ve dedicated ourselves to perception AI. Now, the goal of perception, of course, is to understand the context. But the ultimate goal of AI is to make a contribution to create something to generate product -- and this is now the beginning of the era of generative AI. You probably see it all over the place, whether they’re generating images or generating videos or generating text of all kinds and the ability to augment our performance to enhance our performance to make productivity enhanced to reduce cost and improve whatever we do with whatever we have to work with, productivity is really more important than ever." - NVIDIA (NVDA 0.00%↑) CEO Jensen Huang
50% of applications are still deployed on-prem
“So looking at some results from a recent survey, our Cloud Pulse, which is done across multiple countries. 50% of applications, which organizations currently have is still deployed on-premises. And actually, this ratio isn't -- is expected to stay fairly stable in the next couple of years. So this is the balance we are talking about, 50% of applications are still running on-premises. And other applications are running in other environments. It's not only public cloud. It can be hosted cloud, it can be colocation facility, there are like multiple choices that organizations have now." - Quantum (QMCO 0.00%↑) Research Director, Storage Systems, International Data Corporation Natalya Yezhkova
Industrials and Transport
Supply chain is getting healthier
"...goods will be flowing. We're certainly seeing the goods roll this year, which has positioned us very well for the holiday season. We're set on our floors, we're ready for holiday. But we believe the supply chain is going to continue to get healthier and healthier. But the key thing is that goods are flowing." - Macy's (M 0.00%↑) CFO Adrian Mitchell
But automotive semiconductors are still tight
"The semiconductor shortages continue to show some signs of improvement. However, supply remains tight and is likely to continue to remain tight through 2023." - Nexteer Automotive Group ($NTXVF) SVP & Global CFO Michael Bierlein
Ocean freight cost is becoming a tailwind
"Ocean freight will probably be the most tangible tailwind for us. As you remember last year, we are getting into the period where rates were escalating significantly, demand was high. So that will be a tailwind for us." - Ross Stores (ROST 0.00%↑) CFO Adam Orvos
Industrial demand is holding up well
"When we talk to our customers, we feel very good about the outlook. Our salespeople feel very good about what they're hearing. The indicators we look at on a forward-looking basis remain very encouraging, and we'll be carrying a lot of momentum. Our customers continue to look very positive. And as we think about these emerging tailwinds that Matt and I have talked about, infrastructure kicking in, IRA kicking in, auto continuing to invest in EV, semis and energy are the 5 big buckets." - United Rentals (URI 0.00%↑) CFO William Grace
“I think the demand is holding up well on the automotive and the construction side and certainly on the power generation side and some other heavier industries. And I think they're weathering through.” - Cummins (CMI 0.00%↑) VP of IR Christopher C. Clulow
Contractors are still optimistic about home improvement demand
"We recently completed our annual Pros survey, which provides real-time insights into what's on the minds of our Pros and how they view their future business opportunities, and we're encouraged to hear that Pros remain optimistic with over 70% saying that they expect even more work in 2023 than they had in 2022. This is just another proof point of the resilience of home improvement demand even in this uncertain macro environment." - Lowe's (LOW 0.00%↑) CEO Marvin R. Ellison
Wholesale car markets have changed dramatically
"The market changed dramatically during the past year, as the price of used vehicles increased while our customers’ ability to pay has declined. The result is we have taken losses on certain amounts of inventory, and we expect wholesale losses to continue into next quarter" - America's Car-Mart (CRMT 0.00%↑) CEO Jeff Williams
Materials & Energy
There’s no newbuild cycle coming for oil rigs
"I think what's really, really important in this market is now versus previous cycles is we don't see for the foreseeable future any chance of a newbuild cycle. The costs -- the yards haven't built rigs in a significant period of time. The absolute costs to build another that's what's derailed this market through previous cycles. And for the foreseeable future, we do not see another newbuild cycle emerging. And just with a tick up in demand and as we slowly bring these rigs back to market to see a nice sustain based on the fundamentals sustained up cycle." - Valaris (VAL 0.00%↑) CEO Anton Dibowitz
A new rig costs around $1 billion and wouldn’t come online until 2028 or 2029
"Don't quote me, but I think [to build a rig today] you're probably looking at all-in, including project costs, around $1 billion. Remember, at the start of the last cycle, we were building rigs for $750 million, $850 million. There are no yard slots — and quite frankly, it would take 3, 4, 5 years to actually get that rig on water and to make the decisions to say we're going to have a rig that comes on to water in 2028, 2029 — and in order to generate a return [the rig] needs to work all the way through its useful life, for the next 30 years. I just don't think any rational player is going to be making that decision. Once there was a production line, right? At the start of the cycle, the yards were producing a huge number of rigs and that leverages the cost down — but they haven't done it in 7 years. So, I think if you did a one-off today — it's probably in that range." - Valaris (VAL 0.00%↑) CEO Anton Dibowitz
Nuggets of Wisdom
There was no aha moment in founding Netflix
"Reed and I were looking at ideas for a long time before we came up with the one that eventually became Netflix. There was no "aha" moment. We brainstormed all kinds of crazy stuff, from personalized shampoo to custom dog food. Although everyone likes the idea of the epiphany, of the "idea that changed everything," unfortunately that's not how it happens. No successful company got there doing the thing they started off with. It's a process of trial and error, iteration, and persistence." - Netflix (NFLX 0.00%↑) Co-founder Marc Randolph