The C-Suite Speaks: The Oracles Opine
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 as well as other forums.
There are a few oracles included in this week’s post.
US Federal Reserve chair Janet Yellen’s are among them. She testified before Congress and took a relatively optimistic view of the economy. Judging by her language, it doesn’t appear that the Fed is moving in a more dovish direction in the near future. Although many business leaders appeared to agree with Yellen that the economy is doing okay, credit markets have continued to tighten, which is always a negative sign.
Charlie Munger offered up some oracles as well. Last week, we attended a couple of events in Los Angeles and took notes to share with readers. The first forum was the Daily Journal Annual Meeting. Munger is the chairman of Daily Journal and each year he hosts the gathering and gives a one hour question and answer session that is typically quite enlightening. The second event was an angel investment conference that featured some big names from Silicon Valley. Unfortunately, we were asked to keep their comments off the record, so the quotes are attributed anonymously.
The Macro Outlook
Janet Yellen does not think that we should jump to premature conclusions about recession.
“I do not expect that the FOMC [Federal Open Market Committee] will soon be in a position where it becomes necessary to cut rates. . . . While there is always some risk of recession . . . I think we want to be careful not to jump to a premature conclusion about what is in store for the US economy.” — Fed chair Janet Yellen (Central Bank)
But Charlie Munger thinks that Alan Greenspan was an idiot. So . . . do we trust the Fed?
“Alan Greenspan is an amiable man, but he’s an idiot.” — Daily Journal chairman Charlie Munger (Publishing)
Howard Marks, CFA, appears to agree with Yellen and doesn’t see a recession this year.
“My general feeling is, I just don’t think that we’re in for a recession this year. . . . Eventually, we’re going to have a recession. We always do. But I just don’t think it’s imminent, and I don’t think it’s going to be a strong one, in large part because we didn’t have a strong boom. We didn’t have an overexpansion of facilities or payrolls.” — Oaktree co-chairman Howard Marks, CFA (Asset Management)
Other business leaders also said that the economy is doing better than Wall Street thinks.
“Those of us that are on Wall Street can sometimes be overwhelmed by the problems that we see on the horizon. And I think, from time to time, it’s important to step back, take off your Wall Street glasses, and put on industrial America glasses. And I think things don’t look as bad when you look . . . with that lens.” — Loews Corporation president and CEO Jim Tisch (Holding Company)
“I mean, it’s funny. If you turned off the stock market, you’d go, ‘These are great days around here.’ . . . In all areas — tenant demand, tenant attitude deal flow . . . rental rates etc.: up, up and up all good. . . . What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.” — Douglas Emmett president and CEO Jordan Kaplan (REIT)
CVS hasn’t seen many shifts in consumer behavior.
“Overall I’d say things are holding fairly steady. We certainly have seen the consumer — I wouldn’t say any change, really, from what we were seeing in the fourth quarter.” — CVS president Helena Foulkes (Pharmacy)
21st Century Fox said that the advertising market is in decent shape.
“The advertising market feels pretty good . . . and, internationally, businesses are operating pretty well also. So I don’t think there is a dramatic issue outstanding on a macro-economic basis.” — 21st Century Fox senior executive vice president and CFO John Nallen (Media Conglomerate)
But risk aversion has reappeared.
“Risk aversion is back after a five-year hiatus.” — Oaktree co-chairman Howard Marks, CFA (Asset Management)
And capital markets are seizing up.
“Look, the financing market is very difficult. I think in certain industries, it is almost completely shut down in the non-investment grade market, and I think the lower end, triple C lower, single B rating market is very difficult to access than the public markets.” — Moelis & Company chairman and CEO Ken Moelis (Investment Bank)
Default rates will likely increase.
“We expect a meaningful uptick in the US high-yield bond default rates over the next 12 months, with [the] distressed energy sector contributing more significantly.” — Oaktree co-chairman Howard Marks, CFA (Asset Management)
Credit market tightness is dripping into other sectors besides basic materials.
“For a while there, it felt like it was only going to be in the commodity based sectors, but it has leaked across the board and financing is tougher in almost all transactions that are less than investment grade right now. . . . It hasn’t spread as wide as it did in 2008, but I think it will continue to spread.” — Moelis & Company chairman and CEO Ken Moelis (Investment Bank)
Consumer sectors including media, retail, and restaurants are potentially at risk.
“Weakness is starting to bleed into other segments of the bond market, including media and retail.” — Oaktree co-chairman Howard Marks, CFA (Asset Management)
Venture capital is starting to anticipate a downturn too.
“We all are getting this feeling that there may be an economic downturn coming. As an investor, I’m actually excited about that. When things get difficult, that’s what separates the great founders from the weak.” — Angel Investor Conference
“Don’t invest in tech. . . . There’s an adjustment happening. . . . This bubble is deflating. Asset valuations were astronomical. The Fed kept interest rates low and there was a lot of money floating around. Companies’ valuations were very ripe and now they’re getting marked down. . . . I think the real companies will survive, but other than that, we’ll see a little bit of a blood bath.” — Angel Investor Conference
Don’t expect the Fed to ride to the rescue any time soon though.
Yellen believes we’ve not yet seen enough of a downward trend in the economy to warrant lower rates.
“We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.” — Fed chair Janet Yellen (Central Bank)
The Fed is watching credit but doesn’t seem too concerned about current conditions.
“Well not really [do we see credit tightening] at this stage. But what we do see is that spreads, especially on lower graded bonds, have widened, bank rates have widened . . . and it’s not just energy. . . . In our recent survey of banks, we’ve seen a tightening of lending standards. . . . That is something that bears watching.” — Fed chair Janet Yellen (Central Bank)
Yellen does not think that the Fed’s decision to raise rates is a primary factor in the recent market decline.
“The immediate market response for a number of weeks to the Fed decision was quite tranquil. It was a decision that was well communicated and was expected and there was very little market reaction. Around the turn of the year, we began to see more volatility in financial markets. Some of the precipitating factors seemed to be the movement in Chinese currency and the downward move in oil prices. I think those things have been the drivers and have been associated with broader fears that have developed in the market about the potential for weaker global growth with spillovers to inflation. So I don’t think it’s mainly our policy.” — Fed chair Janet Yellen (Central Bank)
Coke says that the world economy is experiencing a rough patch, especially in China.
“The global economy remains challenged and is not improving rapidly. We do see slightly better GDP growth rates for 2016 as compared to 2015. But to be fair, forecasts continue to be revised downwards and there is still much uncertainty. . . . I think that the environment in China is pretty clearly having slowed down.” — Coca-Cola president and COO James Quincey (Beverages)
Even if the dollar continues to weaken, many companies may have already hedged their exposure.
“In terms of coverage, we are fully hedged on the euro, yen, and sterling for 2016. We also have near-term coverage in place across several other major currencies.” — Coca-Cola EVP and CFO Kathy Waller (Beverages)
Munger had harsh words for the finance industry.
“Elizabeth Warren and Bernie Sanders are not two of my favorite people but they are absolutely right on this subject. . . . American finance is out of control and has too much evil and folly in it. . . . We have this huge overdevelopment of finance. . . . We have a vast gambling culture and people have made it respectable to bet on the price of securities. Very respectable people get drawn into casinos when they see others getting wealthy. . . . I am always concerned that I will be a terrible example . . . . We have something going on in our nation that is very bad.” — Daily Journal chairman Charlie Munger (Publishing)
An excess of money leads to problematic behavior.
“Venture capitalists make their living more honorably than other members of finance, but they do not escape their own sin. . . . Even our most reputable part of finance has dirty sleazy activity creeping in. Large amounts of money create regrettable human behavior. That’s Munger’s rule.” — Daily Journal chairman Charlie Munger (Publishing)
Start-up investors have a different way of looking at things than regular investors.
“The key to normal investing is to not lose money. The key to start-up investing is to not not make a lot of money.” — Angel Investor Conference
There’s a debt refinancing wave starting in 2017, especially in commercial real estate.
“We do have the refinancing build from 2017 through 2019 coming closer on the horizon. . . . I think the most important driver in structured side is the refinancing that has to occur for commercial real estate.” — Moody’s president and CEO Raymond McDaniel, Jr. (Credit Rating Agency)
Some people are still rooting for higher interest rates.
“We continue to hope for higher interest rates. As discussed on previous analyst calls, rising new money rates will have a positive impact on operating income.” — Torchmark co-chairman and CEO Gary Coleman (Insurance)
Most have given up though.
“I was worried about interest rates going up. About mid-year last year, I decided that I was wrong and that, as the phrase goes, ‘Rates were likely lower for longer.'” — Markel co-CEO Tom Gayner (Insurance)
Whole Foods is hoping that a new concept will give it a fresh start.
“One of the things perhaps not fully appreciated is that the 365 stores are going to leapfrog ahead on many of the practices that we will be evolving in Whole Foods Market. We can put them in. There’s no culture, there’s no legacy there to overcome.” — Whole Foods EVP, operations, Ken Meyer (Grocery)
The trend towards cord cutting may have taken a pause last quarter.
“Broadcast season to date: Prime time ratings have stabilized and overall ad revenues for the network were up in the quarter.” — 21st Century Fox CEO James Murdoch (Media Conglomerate)
“So what we believe we’ve seen, or what we have seen recently, is that subscriber trends going in the negative direction have abated somewhat. We’re not making any predictions about them going forward, because we really don’t know.” — The Walt Disney Company chairman and CEO Bob Iger (Media Conglomerate)
“We and a lot of other folks had very good reason to believe that there was going to be the good possibility of a large influx in [over-the-top] OTT traffic. That did not take place.” — Akamai CEO F. Thomson Leighton (Content Delivery Network)
Most local businesses are still not advertising much online.
“In general, when they hear Google and Facebook from a local advertiser, that’s a really good sign. That means that it’s a local advertiser who has already started to shift online. . . . More often, frankly, we are dealing with prospects who don’t advertise online at all yet and that’s a more difficult conversation, because you are trying to get somebody effectively out of print and online, which is happening over time, but is a more gradual process.” — Yelp COO Geoff Donaker (Consumer Reports)
Labor markets are very tight in Silicon Valley.
“We remain very competitive, especially with regard to technical hires, which has been a challenging hiring environment, I think, for a couple of years, especially here in the valley. And I think our team has done excellent work in terms of continuing to add to the world-class folks that we already have here.” — LinkedIn CEO Jeff Weiner (Social Network)
Viacom is trying to remain relevant by partnering with Snapchat.
“We have taken a significant number of steps . . . to move into the future, to build the existing ecosystem, revitalize our brands, grow internationally, grow on multiple platforms. The Snapchat deal that we announced this morning is an indication. You will see more deals to come. As I said in my remarks, I will leave no stone unturned. I never have and I never will.” — Viacom chairman, president, and CEO Philippe Dauman (Media Conglomerate)
Twitter is trying to figure out what has been holding back growth.
“We are focusing a lot of our energy on refining the core products and looking at what is confusing about the service, what is inhibiting growth.” — Twitter CEO Jack Dorsey (Internet)
There is a fierce competition going on in the auto sector.
“The [auto] industry is about as brutally competitive now as I have ever seen. Everyone knows how to make good cars. — Daily Journal chairman Charlie Munger (Publishing)
Offshore oil production is still key to global supply.
“By some estimates, offshore oil production supplies up to 30% of the world’s oil — a significant percentage that cannot be replaced by conventional onshore drilling or shale production.” — Loews president and CEO Jim Tisch (Holding Company)
Miscellaneous Nuggets of Wisdom
Be fanatical about improving your product.
People who don’t care about anything other than making their product better — those people build big companies. — Angel Investor Conference
“We don’t plan to obsolete things. We just relentlessly make things better. . . . It is a continuous improvement process. . . . When people say, ‘When should [I] buy a Model S? Like what model year?’ It’s like, we don’t really have model years. We keep improving the car. If you want to wait until the car stops improving, you’ll be waiting forever.” — Tesla CEO Elon Musk (Automobiles)
The best start-up founders create value out of thin air.
“Great founders make something out of nothing. Most founders make nothing out of something.” — Angel Investor Conference
Value investing is here to stay.
“Value investing will never go out of style. It’s like arithmetic.” — Daily Journal chairman Charlie Munger (Publishing)
Negative emotions cloud the ability to think rationally.
“Anger, resentment, jealousy, envy — all of these are one way tickets to hell in rational decision making.” — Daily Journal chairman Charlie Munger (Publishing)
Take pride in your accomplishments.
“I think most people who have stood on top of Everest are proud they got up there.” — Daily Journal chairman Charlie Munger (Publishing)
This is a tough business.
“You are all in the investment business. Do you find it easy? Anybody who finds it easy is wrong.” — Daily Journal chairman Charlie Munger (Publishing)
Full transcripts can be found at Seeking Alpha.
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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.
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