Practical analysis for investment professionals
14 December 2015

The C-Suite Speaks: Countdown to Liftoff

Posted In: Weekend Reads

The C-Suite Speaks: Countdown to Liftoff

Each week our team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts.

“Ground Control to Major Tom . . . Commencing countdown, engines on . . . “

The US Federal Reserve may raise interest rates from the zero-bound for the first time in seven years this week. I know we’ve all got Fed fatigue, but this really is an important shift in policy.

Goldman Sachs held a financial services industry conference this week, so we got to hear from some of the management teams that will be most affected by the change. Everyone expects the Fed to move but will be watching the commentary closely for an indication of future increases. The consensus seems to be that future hikes will be slow in coming. Banks should benefit from the increase, but it’s anyone’s guess how the rest of the economy will react.

Plus, what are high-yield spreads saying about credit quality in non-energy sectors? AT&T and Verizon confirm that handset sales are weak this quarter, and energy companies continue to search for a bottom.

Click here to receive these posts weekly via email.

The Macro Outlook

We’re all watching and waiting for liftoff this week.

“I mean, we are going to be obviously watching it very carefully, as you all will.” — JP Morgan CFO Marianne Lake (Bank)

Fed fatigue or not, this is a big deal.

“Look, I think, if I’m realistic in 2016, the single big thing that is going to drive earnings growth is going to be the rate environment.”— JP Morgan CFO Marianne Lake (Bank)

People are expecting this increase, but will be listening for how the Fed frames future expectations.

“From ‘A what happens after the day after,’ I think a lot of that’s going to again depend upon Fed commentary. So are we going to see a rate increase next week and then what’s the prospect? How do they think — how do we think that they are going to handle rate increases into the future?” — Citigroup CFO John Gerspach (Bank)

Most people assume that the Fed will move slowly.

“Future increases, I would assume, will not be too robust, because that would slow the economy too much, which I don’t [think] is the Fed’s objective.” — Blackstone CEO and co-founder Stephen Schwarzman (Asset Management)

US Bank is expecting two more interest rate increases within the next year.

“As we think about the interest environment, we are projecting in our plan, a potential for two interest rate hikes next year, and then December 1 of this year. So a total of three if you look out over the course of the next 12 months.” — US Bank CFO Kathy Rogers (Bank)

Banks will benefit from higher interest rates, but Richard Davis wants to be careful what he wishes for.

“I’m not one who every day wakes up wondering and hoping for rates to go up because [while] higher interest rates will help net interest income and margins . . . the bigger question really is what also comes along with that territory . . . Origination sometimes slows down because the pricing feels higher and consumers themselves haven’t internalized the rising rate.” — Capital One chairman and CEO Richard Fairbank (Bank)

The economy is currently slowing even without higher rates.

“The US [is] slowing a little bit, not tragically so, and we have interest rates going up in the currency. :ooks like it will be going up for while and that sort of impacts [the] US economy a bit, It’s harder to export. So those types of companies aren’t doing as well and it also hurts the general stock market, because to the extent that you have earnings being translated from outside United States that slows down [the] growth rate, because the translation.” — Blackstone CEO and co-founder Stephen Schwarzman (Asset Management)

But the consumer is actually fairly healthy.

“I think we have a fairly healthy consumer right now. . . . Certainly through the lens of a bank and a huge credit card company, I think the striking thing about the consumer is just how responsible the consumer has been, how low credit losses have been. I mean, the losses and the industry losses in credit card are just extraordinary low.” — Capital One chairman and CEO Richard Fairbank (Bank)

They aren’t spending heavily though. Part of it could be a confidence issue.

“One of the things that I think has been a bit surprising is the big reduction in the price [at] the pump. In other words, it’s almost like a tax cut for consumers has not yet been spent. Some of it’s been spent, but more of it’s been saved or used to pay down debt in the small business area, and I think part of that’s confidence.” — Wells Fargo chairman and CEO John Stumpf (Bank)

Another part could be that prosperity remains bifurcated.

“The economy overall continues to slowly improve, and customers continue to feel more optimistic, but the bifurcation in the economy remains. Some customers are willing to spend more while others are worried about their job or next paychecks are more focused on saving.” — Kroger CEO W. Rodney McMullen (Grocery)

Lower income consumers have seen the cost of living rise faster than wages.

“Our consumer is always under pressure. I mean, she lives that way . . . She is facing a lot of headwinds, especially in rents. I mean, rents are up tremendously over the past few years. Our core consumer — our core, core consumer — nearly 50% of her take home pay is going to rent today versus just a few short years ago 37%. So you can see the headwind that she’s gotten and quite frankly not a lot of wage growth for her.” — Dollar General CEO Todd Vasos (Retail)

Upper income consumers have it a little easier.

“I would say right now, I think . . . the US economy on the domestic side is very strong, the upper income portion of that remained strong.” — Vail Resorts chairman and CEO Robert Katz (Ski Resort)

Industries that benefit from low interest rates are showing the most strength.

Tech-related housing markets have not slowed down at all.

“If tech was to slow, I think we have the land in the right locations and we will be fine. I don’t see that happening. We have continued through this week to see tremendous demand and have significant pricing power and I’m very comfortable with how we positioned Northern Cal.”— Toll Brothers CEO Douglas Yearley (Homebuilder)

Commercial real estate construction is booming.

“We believe the construction end market continue to be solid. In particular, non-residential demand continues to be strong in our priority districts. We continue to see cranes across the skyline in most of our major markets.” — HD Supply CEO Joseph DeAngelo (Industrial Distributor)

If rates rise, home buyers would probably have to purchase smaller homes though.

“I think it’s reasonable to assume that as interest rates increase, they might select a slightly smaller model than the largest model, which are very popular right now.” — Hovnanian Enterprises chair and CEO Ara Hovnanian (Homebuilder)

Higher interest rates would also change the math on commercial real estate deals.

“You look at some of the cap rates on real estate, you scratch your head, you look at threes and fours, and you don’t know how they make the numbers work.” — Wells Fargo chairman and CEO John Stumpf (Bank)

On the other hand, other factors may be more important to asset prices than interest rates.

“Well 25 [of] the last 26 times in history, when interest rates went up, the value of houses went up. . . . And that’s the way it works. Why? Because you have inflation or you have people making more money with the economy growing, and that tends to push up the value of houses.” — Blackstone CEO and co-founder Stephen Schwarzman (Asset Management)


High-yield bond spreads have widened significantly. What does that mean for broader credit markets?

“With the high-yield or junk bond market, I think that — clearly those spreads have blown out. I think it was mispriced going in. I mean, I think there is probably a realization that we need to price this properly. I don’t know if that’s a precursor to being concerned about what’s in a loan portfolio.” — Wells Fargo chairman and CEO John Stumpf (Bank)

JP Morgan’s CFO says that for now the deterioration is contained to energy.

“We don’t see it as being a broader indication of credit deterioration . . . The stresses that we are experiencing, they are reasonably tightly contained within [the] energy sector.” — JP Morgan CFO Marianne Lake (Bank)

Other banks agree that energy deterioration is not impacting other parts of their commercial loan portfolios.

“We don’t see any real knock-on effects yet from the energy on other aspects of our C&I book. And certainly, from a consumer point of view, right now what we are looking at is very steady credit performance.” — Citigroup CFO John Gerspach (Bank)

“The simple answer is no. We’re really not. Outside of energy, it’s really relatively benign. No significant change.” — US Bank CFO Kathy Rogers (Bank)

However, Toronto Dominion said it has noticed early indications of credit deterioration in consumer loans in energy-impacted provinces.

“We are beginning to see signs of deterioration in the oil-impacted provinces’ consumer credit portfolios, which again are well within our earlier expectations . . . in the non-prime auto segment primarily and then in the card segment. . . . In many respects, we look at that as an early indicator because that would be the customer that maybe would be more challenged than the typical customer.” — Toronto Dominion chief risk officer (CRO) Mark Chauvin (Bank)

The housing market in Houston has slowed down too.

“In terms of Texas, Houston is slower, no question about it.” — Toll Brothers CEO Doug Yearley (Homebuilder)


Retail sales may have picked back up towards the end of November.

“The first couple of weeks of November weren’t terribly exciting and then it got more exciting. And middle of November and late November, it was quite a bit stronger than the first part of November.” — Costco CFO Richard Galanti (Retail)

Times have changed since Christmas 2000 for e-commerce.

“Everyone went online to shop in 2000 and the selection was probably better, the pricing was probably better, but they couldn’t deliver the product on time, the wrong product showed up, it showed up after Christmas, returns were challenging, the product was broken. And ultimately, the value proposition didn’t deliver. And in 2001, the number of people [who] shopped online went down.” — Twitter CFO Anthony Noto (Social Media)

The organic food industry has gone mainstream.

“Throughout the 90s and up until 2014, our industry was a niche. There is no doubt that today we are mainstream.” — United Natural Foods (UNFI) CEO Steven Spinner (Organic Food Distributor)

Even pets are adopting a healthier lifestyle.

“If you go down the dog food aisle, the growth in the dog food aisle is in grain-free and natural kind of dog food. So even our pets are jumping onto the bandwagon of leading a healthier lifestyle. Everybody is laughing at me in the room by the way.” — Kroger CFO J. Michael Schlotman (Grocery)

As a result, competition is intensifying and pressuring margins.

“We’ve seen an increase in competition across every retail channel and corresponding competition within wholesale distribution and supply chain . . . Our margin certainly isn’t going to go up as we renegotiate these contracts.” — United Natural Foods (UNFI) CEO Steven Spinner (Organic Food Distributor)


Costco saw consumer electronics sales turn a corner.

“I think if you’d ask me what surprised me in the last month versus the last couple of months, electronic has finally turned and that’s I think a function of people coming in, pricing keeps coming down.” — Costco CFO Richard Galanti (Retail)

But Verizon and AT&T confirmed that phone sales are weak this quarter.

“I think last year was a much more dynamic year. Plus on top of that you had a new iPhone configuration and new format which drove a lot of volume. . . . You are seeing a less volume year than you did a year ago . . . But I anticipated that.” — Verizon EVP and CFO Fran Shammo (Telecom)

“Obviously our upgrade cycles on smartphones is way down this year. People aren’t upgrading like they have in the past. . . . Upgrades are not happening as quickly as they were” — AT&T chairman and CEO Randall Stephenson (Telecom)

Big enterprises seem to be favoring a hybrid cloud.

“What we’re hearing from customers fundamentally is that they want to see the benefits and the economics of public cloud in their private cloud environment. So that would suggest to us that ultimately there is a hybrid cloud solution out there for enterprises.” — Cisco chief technology and strategy officer Hilton Romanski (Networking Equipment)

The cloud and mobility go hand in hand.

“60% of the new applications are actually being built out on the cloud. And if you look at that data, the majority of that will be in mobile applications, because mobile is now becoming a really key part of that business process.” — IBM SVP Robert LeBlanc (Enterprise Technology)

In the virtual world, there is still something to be said for getting a team together in an office.

“I think that creating connectivity of people and clients in an environment of collaboration is incredibly important. And although we live in a virtual world, I fundamentally believe that the people, to the extent possible, need to be housed in the same location.” — Korn Ferry CEO Gary Burnison (Executive Search)

Everyone wants to learn from Facebook’s culture.

“A lot of my conversations today with marketers are to help them understand the Facebook culture and how that could adapt the companies that have been around for 100-plus years. That’s the first thing that’s on every company — every big company’s mind” — Facebook VP Carolyn Everson (Social Media)

Health Care

Health care spending growth may slow next year as comps get difficult.

“US has been stronger than I can remember for a long time, and that is not only the medtech sort of companies but also hospitals. Now, as we are going to sort of calendar year ’16, there will be some anniversarying that is happening and also some of the hospitals have reported slightly sort of lower growth rates . . . I do not know to what extent the procedure growth will continue at the same rate of growth. I do not think it will slow down per se, but the growth rate might well slow down.” — Medtronic chairman and CEO Omar Ishrak (Medical Device)

Materials, Industrials, Energy

Oil producers have been very effective at continuing to lower the cost of production.

“The breakeven perhaps used to be $90 to $100 [per barrel] probably. The marginal cost of supply was $90 to $100. Now it’s probably $75 to $80. For EOG, we would be tickled to death for $60, $65 price. I think we’d be able to generate really strong rates of return and grow the company at very healthy levels at $60 or $65 price environment.” — EOG EVP Billy Helms (Oil E&P)

As a result, oil-drilling activity has not slowed down as much as expected.

“North America does look like it’s going to be marginally better than what we said in the third quarter call.” — Halliburton acting CFO Christian Garcia (Oil Service)

Capital budgets will fall again next year though.

“We’re announcing a 2016 capital budget of $7.7 billion. That’s $2.5 billion lower than 2015 capital guidance and more than $9 billion lower versus 2014.” — ConocoPhillips’ CEO Ryan Lance (Oil & Gas)

It’s tough to say where prices will settle.

“I had a funny conversation with . . . the head of one of the largest companies in the world in the energy business. I asked him what he thought about energy prices, he said, ‘Well, we plan for somewhere between $20 and $120 . . . I know it’s going to be somewhere in that range.’ And I said, ‘Well, that’s very precise.'” — Blackstone CEO and co-founder Stephen Schwarzman (Asset Management)

It’s still not easy to find great acquisition targets.

“You’re right. We started off the year thinking, ‘Okay, in this down cycle we might seen an opportunity for a corporate acquisition. And we’re not really used to the company doing that, but we’re hoping at the opportunities.’ And we looked at a lot of different things, but we never really saw anything that would compete with our portfolio here that we’ve shown.” — EOG EVP Billy Helms (Oil E&P)

Miscellaneous Nuggets of Wisdom

Find good partners.

“We go in there saying. ‘We really like this business, but we want to be makes sure we do it on the right terms.’ That is, starting with looking for partners . . . choosing those that are motivated for the right reason. . . . I have found that that motivation drives just about everything about how partnership works and really affects the attractiveness. We are very focused on going to the right players . . . and to work with them to build deep customer relationships.” — Capital One CEO Richard Fairbank (Bank)

Play to win.

“I didn’t play for any attention. I played for the hardware. I wanted to know that I beat everyone in this field, and I wanted them to know that they got their butt kicked.” — Golfer Tiger Woods in a Time interview

Full transcripts can be found at Seeking Alpha.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©

About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

1 thought on “The C-Suite Speaks: Countdown to Liftoff”

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.