The Transcript

Welcome to Episode 55 of The Transcript Podcast

Episode Summary:

In this episode, we discuss if the fed is out of touch in terms of inflation, AVOD vs SVOD in streaming, and reflections from Google's former CEO Eric Schmidt. 

The episode is based on yesterday's newsletter which is available on Substack. A transcript of this podcast, with relevant images and quotes, is available for subscribers only, after the show notes below.

Show Notes:

00:00:00 Introduction

00:00:04 The Fed is out of touch

00:02:00 Executives keep an optimistic outlook on supply chains

00:00:00 Introduction

Episode Transcript:

Introduction

[00:00:00] Scott: Welcome everyone. We sent out a new issue of the newsletter yesterday.

The Fed is out of touch

What we're seeing is a continuation, still a lot of concern over inflation in the economy and we're seeing that broadly in a lot of different places. The thing that stood out to me most was the juxtaposition of two quotes during the week. One was from Restoration Hardware’s CEO which talked about Fed policy and asking - - is the Fed listening to anybody? Have they picked up the phone and talked to anybody and asked them what they're seeing in inflation? - - and just kind of suggesting that the Fed is a little out of touch on this. And then the second quote that came right after it was from a Fed member, who talked about the Fed is on top of this, sees that there's inflation that's bad inflation. The justification for the inflation was like the greatest Marie Antoinette’s ‘let them eat cake’ moment I've ever seen where he said I was talking to a contact and he was saying that golf club dues are rising at a rapid and that he may have to play his local municipal golf course going forward. So I guess that's what really gets the Fed's attention is when golf dues are rising. That's what I learned this week

What do you think Erick?

[00:01:04] Mokaya: That was a bit funny. I was expecting him to say costs like maybe in grocery stores where normal people are shopping but then again his source of information is a golf club where maybe he plays or something. But that was pretty interesting, but at least it's good that they are noticing that they see inflation.

It surprises us though. They say they're data driven yet what they have is an anecdote sometimes. But it worries me. It worries me a lot that across board, a lot of prices are rising. RH, I think they, Restoration’s earnings call was one of the most candid ones you could find. They were very honest that prices are rising everywhere.

They also said that companies are having to choose between raising prices or reducing the quality of the products. And a couple of times I've gone to the store this week, I've seen the sizes of the products have reduced drastically if they're maintaining the same price or the price has actually gone up. Anything else you might have noticed?

Executives keep an optimistic outlook on supply chains

[00:02:00] Scott: Yeah. The supply chain stuff, still not getting too much better. I do feel like we are seeing people starting to say the first half it's bad and hoping the second half of the year is going to get better. That's better than it has been in the past. But…I don’t know. What do you think?

[00:02:18] Mokaya: Yeah, I think maybe most executives trying to be more optimistic for the second half of the year, but I noticed this also last year. They try, even if the near term is a big challenge, they always try to be at least optimistic in medium to long-term. So I think maybe that's why they are lifting up their eyes and hoping at least the situation in Ukraine gets resolved as quickly as possible so that things can come back to a bit normal. But I think it's a challenging environment for most CEOs to be operating in.

Ongoing dilemma between subscription and ad-based models

So something that stood out for me was of course the - - something we've been tracking for a while about a subscription-based model versus advertising models. So very interesting to see the quote from Chicken Soup for the Soul saying that SVAD, which is subscription-based is slowing down and churn is rising. And because of that, then companies are having to actually really explore the issue of advertising based tiers. Any thoughts on that yourself?

[00:03:17] Scott: Yeah. I think this is something we've been covering a lot for the last few weeks and a lot has gone on here. I think we have noticed this trend towards probably having a more ad supported model for a lot of the different video content players.

And then last week we didn't have a podcast but YouTube announced that they were going to be putting more content on the YouTube platform, which I think is a hundred pound gorilla just coming through. I think that's huge if YouTube is putting this content on. You and I had talked a lot about like, okay, we see this trend, but not exactly sure who's going to benefit from it, how they're going to benefit.

Chicken Soup for the Soul, it was super interesting. I didn't realize that this like a microcap company that has a semi buyable advertising based platform. And then I think Roku is another one that could potentially benefit from this, but both of them could potentially be fighting YouTube on one side for all of these content licenses.

I'm not exactly sure how it's going to shake out, but it certainly seems like if Netflix offered an ad supported model, if Hulu offered a ad supported model, which Hulu does, consider being a patron of it, but the entree to the website to of like coming in, it's totally free, you don't need to log in, and you're just clicking immediately. That YouTube-like experience is pretty compelling. So, I dunno. I mean, I think Chicken Soup for the Soul long story short, it's a hundred billion dollar market cap. It may be worth the flier here.

[00:04:43] Mokaya: Yeah, sure. I think so. But I think also a big winner if they choose this model, I mean, they don't need to offer an exclusive ad based model. It could be like a combined model where they offer for those who don't want any ads at all. You have your premium tier and then you have the ad-based tier for everyone else who wants to be there a couple of times and enjoy ads at the same time during the break. Instead of pausing, then you can have like ads or something like that.

So I think Netflix might find themselves at some point - - I was actually reading their earnings call, the last earnings call. They were asked about the same question and their response was to quote the CEO, he said that it's not like we have a religion against advertising to be clear, but if at some point because maybe of consumer experience consumer choice, and what's great for creators and storytellers, if we determine that we have the right kind of player within the space and it meets those dimensions, then that's something that we can put in our plans, but not right now.

"Now for us, it's not like we have religion against advertising to be clear. I mean we're -- we said we're focused is on building optimizing for long-term revenue, big profit pools. And we want to do it in a way that is a great experience for our members, great for. So we lean into consumer experience, consumer choice and what's great for our creators and storytellers. So if at some point, we determine something that we have the right to kind of player within the space and it meets those dimensions, then great. But that's not something that's in our plans right now." - Netflix (NFLX) CFO Spence Neumann

[00:05:44] Scott: I think there are some pretty strong headwinds to Netflix growth that I keep hearing, not only in earnings calls around different companies that we're listening to, but I'm also hearing it just anecdotally from friends and family and people who are thinking about changing their Netflix subscription, or, you know, dropping some of these SVOD subscriptions. The fact that churn is going up, it's a real headwind essentially for these stocks that, for Netflix especially they could overhang for a bit. So if you're a Netflix shareholder this could be a decent time to be [trimming].

[00:06:21] Mokaya: Yeah, definitely because this is a time when they're really reconsidering the business model. There was an article, I don't know if it's New York times this week that said that the CEOs emphasized twice to the employees that they need to pay attention to the bottom line. So I guess when you hear that, usually it's when the growth has kind of stalled a little bit. So then like you need to cut down our costs to maintain margins or at least to grow them for a little while as you rethink the model.

[00:06:50] Scott: These sorts of anecdotes are the things that like big earnings messes or beta, like I could totally see next quarter, we have Netflix down 20% on the day that they reported earnings because they miss Schreiber numbers. Like this is something that people should be paying attention to.

Brands dropping intermediaries

[00:07:08] Mokaya: On the other hand, there's something that I also noted. Nike reported earnings a couple of weeks ago, I think two weeks ago. And then surprisingly Adian, which is a payments platform, noticed something which I also noted about Nike. Now I think 40% of their revenues are generated from B2C commerce, which is very interesting, meaning that, and this is a trend that Adian picked, where they're saying that a lot of manufacturers and a lot of companies are deciding to own the customer, the direct relationship with the customer without having an intermediary at the end of the day.

So they don't want to pay the toll to access their consumers. You want to own it directly so that you can max out your earnings, so to speak. So it's a common trend that will be very interesting to pay attention to in the market. Anything that you want to add there?

[00:08:02] Scott: Yeah. I mean, I think this is something that is one of those big relational trends that we're probably in the third or fourth inning, if not even farther along, but it's just one of those things the internet has fundamentally changed. And I totally agree with you. This was a big quote last week that we didn't get a chance to podcast about, but the fact that Nike has withdrawn, I think they said 40% of their wholesale channels, where they were selling their merchandise.

It's just hard to be a boutique that sells a lot of different brands anymore. That brand is direct to consumer. It's just so easy today to get a direct response from a consumer on the internet, or develop a relationship directly with your audience. But especially if you're a big brand like Nike it's higher margin to cut out the middleman or not have somebody in the middle and just fulfill direct to consumer. So that's an important one to track.

[00:08:55] Mokaya: Yep. I think that's a very important one to keep track of. Before we close there’s that quote by Eric Schidt. I posted it on Twitter and it got a little traction about Google being early on social media but missing out entirely. I made a joke that if Google had succeeded we’d be on Google plus now, and not on Zuck-verse. Any thoughts of that, especially from your perspective in the US. What made Google fail so miserably at social media?

[00:09:24] Scott: I dunno, it's a good question. I wasn't really framing it in my head is what made Google fail, more just like I have a tremendous amount of respect for Eric Schmidt as a CEO. I think he was excellent at Google and kind of complete juggernaut. And even though he's he bemoans missing social media, like Google is the best position out of any of the tech companies today, probably. Especially with this with the changes that apple made for privacy that are hitting Facebook, Google is completely.

Immune to it because search is such an important pillar of the internet. And then not only do they have search, they also have YouTube, which I think they bought YouTube for like a billion dollars or something back in the day, which is like, again, just like what we were talking about this AVO D no, one's going to compete against YouTube.

If YouTube wants to go into the, into this into this market. And so why did they fail at social? I'm not exactly sure, but the bigger actually part of the quote that struck me was Eric Schmidt. If you had told me how big Google was going to get, I would've, I wouldn't have believed you basically. But he was as surprised as anybody and it just reminds me, but like, even when you're in the pilot seat of an organization, that's going to be maybe the defining organization of the information technology era.

It's hard to see. It's hard to see that exponential growth.

[00:10:47] Mokaya: It's true. So and that, that applies also even to a small organization, you have the transcript you're actually hitting one year in a month time. And the growth has been incredible for us even on the premiums and petition side. So it's be interesting, those quotes that we saw there.

So I think that's a good point to close. Thank you so much for joining us this week. See you again next week for another episode as we gear up for ending season. Thank you. And bye.

[00:11:13] Scott: Thank you.

Welcome to Episode 53 of The Transcript Podcast. This week we have made a transcript of this podcast, with relevant images and quotes for all subscribers. Become a paid subscriber to enjoy this every week.

Episode Summary: In this episode, we discuss the impact of the Russia-Ukraine war on inflation which has shifted from transitory to structural and the hints of a potential recession. 

The episode is based on yesterday's newsletter which is available on Substack.

Show Notes:

00:00:00: Introduction.

00:00:17: Impact of Russia-Ukraine War on Inflation.

00:03:26: Omicron Crisis In Asia.

00:04:53: Rising Defence Spending

00:05:45: The downtick in advertising spending in Europe.

00:08:06: Rising CounterParty Risks

00:10:25: Netflix not following Disney

Episode Transcript:

Introduction

[00:00:00] Scott: Welcome everyone to a new episode of the transcript podcast. You've got me, Scott Krisiloff, I'm the editor of The Transcript, along with Erick Mokaya, our lead author. We sent out a new issue of the newsletter a couple of days ago. We were late on the podcast this week, but never fear, we're still here

Impact of Russia-Ukraine War on Inflation

[00:00:17] Scott: The biggest thing in this week's newsletter was, continuing to watch the situation of Ukraine unfold. Obviously, around the world, everyone is watching this and everyone is extremely saddened by the humanitarian crisis that's going on there stunned that we could be in this sort of war in the 21st century seems unfathomable to me personally. It's having significant economic effects though, that we're seeing as well in the form of higher inflation around the world and I think that this is bringing us closer to just this inflationary psychology that we're seeing breakout. We saw three different quotes from three different sources, all saying that inflation is now a structural problem, which if I think back to last year when the Fed was talking about inflation being transitory, everyone was saying that if inflationary psychology took hold the Fed moved quickly and so I think we're starting to see that. I think we are starting to see people look at and have a structurally higher view of long-term inflation. And that means a potential larger change for the Fed. So any thoughts on that Erick?

"I think a good bit of the inflation that we're seeing across the country is structural in nature" - Tractor Supply Company (TSCO) CEO Harry A. Lawton

"I think we would view a lot of this inflation as structural. " - Colgate-Palmolive (CL) Chief Investor Relations Officer John Faucher

"We believe that inflation is now a structural problem. We already had an inflation problem, which the war is certain to accelerate" - Greenlight Capital Re (GLRE) Chairman David Einhorn

[00:01:23] Mokaya: My keynote is of course the change in terms of the wordings around inflation. So last year we talked about. Transitory, transitory being banned as a word and now we are into that phase of the economic cycle, we are being told that it's actually a structural problem. I was curious about the west management CEO who said that.

His statements struck me as well. So it's like we have to increase prices by 20%, but customers know that wherever they go, they will get everyone else has increased by 20%. So this means that they have no choice, but to take up that inflation. That they have to take up the prices have risen. Sadly consumers are also feeling this inflation. They are noticing it.

I mean, you can't go anywhere and not notice the price increase. Gas prices are skyrocketing over here. So food prices are rising very, very fast. I mean, discretionary spend is becoming under pressure. So I think that's what I'm noticing from where I am. So it's, it's a little worrying to be honest never really through an inflationary cycle. And, and most of us haven't at least this younger generation. So this is our first time experiencing very high inflation. So I don't know. I don't know. What's your experience? What's your experience on the ground? In the US yourself?

[00:02:37] Scott: Yeah, I mean, you're seeing gasoline prices and rising and it's definitely noteworthy. Again, you've had very strong consumers for the last couple of years, driven by stimulus as we've exited the pandemic, those things aren't there anymore. And so, you know, the increase in prices to those consumers is particularly acute. I think one, I guess, silver lining, if you would call it a silver lining is that I expect that labor shortages will probably start to improve because people are seeing their savings get eroded by inflation. They're going to need to go back to work. And so I think that, especially in the higher labor-areas of the economy, you may see signs that the labor markets are healing. So that is one potential silver lining in here.

Omicron Crisis In Asia

“Omicron in Asia is still a problem, and there is still significant hindrances to travel there, particularly internationally” - Booking Holdings (BKNG) CEO Glenn D. Fogel  

[00:03:26] Mokaya: Yep. A little worrying though, is that there is also an Omicron crisis in Asia currently. So in addition to the issues that you're having in Ukraine and Russia, I talked to a couple of friends, and actually, there is a surge in Omicron cases in Hong Kong. They're having lockdowns in Hong Kong presently. I mean, I don't think we needed war on top of a pandemic now, but it's unfathomable that we are living through such times. Geopolitics now. It's common parlance. Now, like everybody's talking about it a lot. Russia, Ukraine, China, Europe, the US, Africa, where were the stages of play in terms of where they're standing in terms of the various countries. So it's frightening times at the same time, I would say.

[00:04:15] Scott: Yeah. It's interesting what you brought up about Asia and the Omicron surge. There is obviously another layer of impact to the supply chain where a lot of inflation has been coming from. That makes from this plus war, you know, we've had two years of pretty heavy supply chain shocks. It really makes you think that the supply chain is a little more fragile than we had thought about in the decade before the last two years.

And it's something, again, this is a theme we've picked up in previous weeks. That it seems to me, there's likely to be. Some rethinking of the way that supply chains are structured and potentially more of a tilt towards economic nationalism or supply chain nationalism.

Rising Defence Spending

[00:04:53] Mokaya: And heavy investment, of course, in the defense system. I think I saw Germany has kind of scaled it. They intend on building up their arsenal in terms of arms. A lot of companies had gotten into this complacent face. I guess, going forward, this is going to take a lot more, it's going to be more serious in this regard, but something else that we noticed beyond like war and Europe was about retail comps coming back down. I think this is specifically meta platforms that noted this. So, I listened to and I looked at the earnings note, the conference call where the meta platform CFO was, and he noted that had noticed that the retail comps are slowing down. That means ad spend is also going down. So I'm not so sure like an ad spends in Europe itself is soft to me going forward. Quite significant for Facebook.

"The 3% comp that we talked about is on top of a pretty big number. We've added a significant sales volume to the U.S. over the last couple of years. Walmart U.S. is [like a] 15% 2-year stack over 2 years." - Walmart (WMT) Executive VP & CFO M. Brett Biggs

"It looks like we have reverted back to the pre-COVID trend line in terms of gradual increase that we've seen in e-commerce as a percentage of total retail. So that big surge that we saw when the COVID lockdowns went into place has pulled back to the trend as life has returned to normal." - Meta Platforms (FB) CFO David M. Wehner

The downtick in advertising spend in Europe.

"More broadly than just the Russia exposure, we're also experiencing some softness in Europe beyond that as well due to the conflict. It's hard to say whether that is temporary or will persist. But this is another challenge that we hope will be a short-term headwind to the business" - Meta Platforms (FB) CFO David M. Wehner

[00:05:45] Scott: Yeah. I think the quote about ad spending declining in Europe is really important because it helps to remind that in addition to all the geopolitical things that are going on in Europe and the surge in energy prices, that's an indicator to me that just like a general recession is coming to Europe as a result of these things. So advertising spending would usually be a leading indicator into a recession that people are pulling back on something that's a more discretionary line item in the budget. So any thoughts on that? I mean, are you seeing any signs of just general recession in Europe?

[00:06:23] Mokaya: I haven't really paid much attention to Europe, but I would say that there's been a significant impact in terms of energy prices. I read something like in, especially in Italy gas prices are super high and the Alliance, of course with Russia is impacting some of these countries very negatively. Like now that they've cut off supply from Russia in terms of oil and gas. So yeah, I think there's going to be a really significant hit to Europe going forward, given the reliance that we have on some of these on Russia and Ukraine.

[00:06:56] Scott: I think there were a few big alarm bells to me in this issue of the transcript this week and the ones we already covered. The first one was just this inflationary psychology. The second one was that downtick in advertising spending in Europe. And the third one was JP Morgan's head of global markets talking about how markets are extremely treacherous and he said the counterparty risks are growing. When you have these targeted dislocations, especially in products that are tied heavily to futures and options trading, you can often have over-leveraged players who are big customers of the financial services companies who end up causing big problems.

When you have these like extreme volatility moves, You often end up finding out that somebody is in trouble and JP Morgan's head of global markets is in a better position than pretty much anybody to notice that and understand that. And he was talking about how their clients are under extreme stress. And so we've seen a little bit of a bounce in markets in the last couple of days as we're recording this. If things get moved in an extreme negative direction, you know, by a few percent you may start to see a lot more pressure. So something to keep in mind. 

Rising CounterParty Risks

"The markets are extremely treacherous at the moment. There is a lot of uncertainty. There are a lot of clients that are under extreme stress. That creates potentially very significant counterparty risk exposure. And the movements here are extremely significant and playing out in real-time. So I would suffice to say that the full ramifications of the current conditions are still uncertain and unknown at this point." - JPMorgan & Co (JPM) Head of global markets Troy Rohrbaugh

[00:08:06] Mokaya: I would say JP Morgan was, I think they're speaking from experience because this past, I don't know if you've noticed this past two weeks, there's been a Serge in BitCoin prices. And because of that JP Morgan was the counterparty to one of the guys who shot a nickel. And because of that, they, they had to, I think that the LSC tickets, they see the. The regulator who deals with the cost, the market for nickel, because of the short position moving very badly against the player. And of course, being that JP Morgan is on the other side of this trade. I think this part, they are speaking from experience that they are actually seeing counterparty risk increased significantly.

So the guy was shot around 150,000 tons of nickel and 50,000 tons were actually held by JP Morgan. So quite significant to pay attention to, but I don't know, like in a recession, how should investors be thinking about like, it seems like we are headed into one significantly. 

[00:09:05] Scott: Yeah this is, this is really the rub because we're heading into recession with petty high inflation and usually the way that the market reacts is it will sell off into the fear of a recession. And then it will bottom once the Fed recognizes that we're in a recession and the Fed starts pumping money again, or, you know, easy monetary conditions. So it usually starts to get worried as the Fed is raising interest rates because it knows that that is a precursor to recession coming. And so we're in that phase right now. But we are down like I think like 12%, 10, 12% on the S and P 500. And in terms of the economic backdrop, relative to that, we're not really progressed in that recessionary timeline.

Like the Fed is still the Fed still hasn't raised rates and is going to just do like a small increase in rates right now. We're still pumping money out in QE and we have 8% inflation. So, the level of, you know, real monetary policy impact act that needs to be taken in order to impact the inflationary environment and all of these other cross-currents that we've got. We could still be on track for a bigger recession here.

Netflix not following Disney

"Now for us, it's not like we have religion against advertising to be clear. I mean we're -- we said we're focused is on building optimizing for long-term revenue, big profit pools. And we want to do it in a way that is a great experience for our members, great for. So we lean into consumer experience, consumer choice and what's great for our creators and storytellers. So if at some point, we determine something that we have the right to kind of player within the space and it meets those dimensions, then great. But that's not something that's in our plans right now." - Netflix (NFLX) CFO Spence Neumann

[00:10:25] Mokaya: I would say that we are recording this podcast before the fed announces rates today, they may actually have raised rates by the time the podcast comes out, I would say so. So maybe one final thought before we go about Netflix, they're not planning to have an ad-supported tier. So it's very interesting to see how that's playing out, but what Disney is doubling down and I was talking to a friend, I was actually wondering how they would do the targeted ads on Disney plus because they will only have data on the kind of movies I've watched. So I'm not so sure how precise those ads are going to be for me to actually enjoy watching them. Or I may take a break during that and not watch. I don't know what, at what point in the movie will they be putting this ad in the first place or will they be like the ones who go to the movies and they're just random at the beginning of a movie or something like that. So, pretty interesting to see.

[00:11:21] Scott: Yeah. I mean, I think it's just going to be like linear TV. I think they'll splice the band throughout the time that you're watching. I think the quote that we pulled from Disney was interesting because it gives a little bit more color on the way that Disney is thinking of the advertising inventory itself, the way that they're going to market, and having customers purchase that advertising inventory. There's a growing marketplace for people to be directly into these apps that are hosted by very large media companies, Disney is an example of it. It's really, it's a great kind of like the experience of launching those ads.

Where you're sitting on your couch, watching television. It's just like the old linear TV days, which were the most effective form of advertising, but that's where you really had people's attention. Versus like, if you're watching YouTube, you're usually at your computer or your laptop, you're like, kind of on the screen and maybe you're doing other things and stuff like that.

But this is going to create a venue for advertisers or recreate the venue for advertisers to be able to have the kind of full attention of somebody who is just watching a program. And so that I think advertisers are probably going to be pretty excited about, and because these companies are going to go direct to consumer there's more data it's much better than the linear TV experience for, for an advertiser. You might be able to charge very premium prices here.

"We have also had an incredible amount of advertiser demand ever since the launch of Disney+ and as you can see from our results in addressable advertising out of our Hulu business, we have more demand than supply.… And it's also going to be great for the advertisers because we have a very unique audience here. It is a family audience, we will be very careful about the ads we take, how we put them into our content. And we've learned a lot over the last couple of years about what kind of content lends itself to natural breaks...We're going to be very careful about making sure the -- any advertising is consistent with the content; what people are watching. So, it's not going to be something that's going to be jarring an off-topic or off-brand... I suffice it to say the advertising community was extremely pleased with this announcement." - The Walt Disney Company (DIS) CFO Christine McCarthy

[00:12:42] Mokaya: Interesting. I see a point there and definitely as Disney itself says it was that there's an incredible demand from advertisers on this end. And one thing I noticed in the conference call that they had was that they appreciate the granular data that having Disney plus affords them from the consumer. So they know how much, which movies you're watching, which are not trending, or which part of the movies you like most, where are you pausing at so that they can actually be with that kind of feedback, which they couldn't get from movie theatres. Now they can go back and make better movies for you in the future.

So I think that's something that I noticed. Well, Disney is really, really appreciating that data is actually the new gold. And now imagine before, when they had to go through Netflix to do this and they couldn't get that kind of granular data. So pretty interesting what is happening in this space going forward I would say.  So I think that would be a good place to close at for this week. Thank you so much for joining us. See you again next week, and hopefully that all of you are safe wherever you are on this planet. Thank you once again and see you next week again. Bye. 

Welcome to Episode 51 of The Transcript Podcast.This is a special episode of a recording of a Twitter Spaces conversation we held on Thursday, 24th February with Sam Ro as our special guest.In this episode, we discuss the key themes that we took note of in Q4 2021 earnings calls.

We are making this week’s episode and transcript available to all our subscribers, both paid and free. Become a paid subscriber to enjoy access each week:

Show Notes:

[00:00:00] Introduction

[00:03:67] Covid and geopolitics

[04:10:27] Inflation

[00:08:27] Labour market shortages

[00:13:28] Supply chain challenges

[00:18:45] Crypto-trading and interest rate hikes

[00:22:51] High valuations and massive earnings growth

[00:29:54] Subscription fatigue

[00:33:38] Independent content creators

[00:35:54] Technology cycles

[00:37:34] Inventory

[00:40:22] Travel dynamics

[00:41:11] 2021 key themes and 2022 outlook

Episode Transcript:

Introduction

[00:00:00] Scott: Welcome to our Twitter Space for The Transcript where we're going to be going through insights from last quarter's earnings calls. It feels like the world has changed quite a bit in the last 24 hours. So I'm sure we'll start to think about what the world looks like going forward a little bit here too. I'm Scott Krisiloff, the editor of The Transcript along with Erick Mokaya, who is the lead author of The Transcript and co-host/co-founder and we've got Sam Ro on here as well. He's been a big supporter and we're happy to have him on the line as well. How's it going, Sam?

[00:00:32] Sam: Great. Thanks for having me on.

[00:00:34] Scott: Cool. Let's start with the way that the transcript is structured each week, we have the sections that are the same thing each week. And we start with the macro section. Let's start with the macro and the rundown there. I think the biggest change that happened in the first quarter is that we have the big Omicron wave that we all went through. And then on the other side of that, it feels like the era of COVID having a psychological impact on all of our lives is over. And I feel like that kind of got cemented today with the Russian invasion of Ukraine. I feel like that in and of itself is just an indicator that we're ready to turn the page on COVID being a dominant factor in our lives. Hopefully, that's the case and no new variants pop up that make us go back. But that's the way it feels to me right now. Erick, Sam, any thoughts?

[00:01:23] Sam: Erick, you go ahead.

Macro

[00:01:24] Mokaya: I think the main takeaway from the macro section is the same, especially in the past four weeks, suddenly geopolitics has sort of started being a key factor that a lot of companies are mentioning. We haven't seen that in a while where there's a unanimous kind of a discussion around companies concerned about an event in Ukraine or around the world generally. A lot of companies were mentioning that. I would agree that this is kind of the quarter you could tell, a lot of companies have shifted from maybe using COVID as a reason for anything and more discussing now issues to do with geopolitics. Sam, did you see anything similar?

[00:02:00] Sam: Yeah. I was going to say the same thing, and I might add a little bit of nuance to that. One of my favorite quotes from this earning season came from Boston Properties, the commercial real estate manager. There were talking about how even amid, the Omicron wave, and yes, there are so many disruptions tied to COVID variants and stuff like this that a lot of leisure activities and entertainment types of activities were at full capacity concerts, amusement, parks, restaurants to the degree that these businesses could serve their customers. But they did say, and I think a lot of us and a lot of the listeners can sort of appreciate this. They did say that one area where there continues to be a sort of weakness in terms of activity is office spaces.

While companies are certainly open and having workers come back activity around offices continues to be kind of low. I wonder to what degree COVID and variants are affecting behavior because of people’s concerns about getting infected, which certainly exists. But to what degree these other things are going on, like for instance the way people think about work and lifestyle and stuff that are making them more reserved about going back to the office. Using COVID as an excuse to not go back to the office as opposed to being concerned about COVID. So yeah, I think it's some really interesting stuff that came out in terms of how companies performed in light of what was expected to be very disruptive.

[00:03:41] Scott: Yeah, that was super interesting, Sam. We picked up the same thing in terms of people not going into the office, but still living their lives, going to restaurants, traveling, and stuff like that. For me, even in the first quarter business travel fell off a lot but it started to pick back up. I feel like I'm seeing more people going back into offices more regularly and in LA mass mandates are coming off completely even at schools. So I think the world's getting back to normal.

[00:04:09] Mokaya: Yeah, I think definitely on that end. Another theme that we checked out in earnings calls is about inflation, of course. I know Scott you have a lot of historical perspective on this since you've handled this a lot and the issues may be to do with the company's expectations around raising rates, going into this new year. I mean, raising rates from the perspective of the Fed. This is also the quarter where you see a lot of companies who've mentioned inflation being a major concern, but again from what we could gather is that the consumers so far have been able to take the price increases well. Maybe going forward, there could be maybe a little worry around if the consumer can keep taking this more price increases as maybe costs and labor become a big issue. Did either of you see something like that?

[00:04:55] Sam: Yeah, sure. I'll go ahead and jump in. It's interesting. There's sort of two things to hit on there. First, the matter of inflation and cost increases and all of this stuff and I think you mentioned this too briefly, but one of the things that a lot of these companies, if not all of these companies that are sort of facing these challenges with cost inflation, whether it's rising raw material costs or higher labor costs have all almost universally talked about how they are at least passing some of this cost pressure off onto their customers. And, they're very specifically noting that there's very little resistance to accepting those price increases.

Some of the commentary that's been coming out and I think this is something that's sort of changed in this recent quarter, as opposed to earlier quarters where maybe consumerism businesses were sort of surprised by these price increases and maybe there was some more resistance. Now, a lot of the conversation seems to be, well, the customer now knows inflation is everywhere. And so when we raise prices they know that this is not us like trying to screw them, but that this is just a part of every other business and everyone trying to deal with inflation as a problem.

It's almost like the customer, whether it's a consumer or a business is now understanding at least in the short run that inflation and price increases are just part of the deal. And so they're moving on with it. And on the other side of it, this is also an acknowledgment of the fact that consumers and businesses from a financial perspective are pretty healthy. Their capacity to service debt and cash levels is extraordinarily high. And so we have this interesting dynamic of limited goods that are leading to higher prices but customers are paying because they have the financial capacity to pay for it. So yeah, some interesting dynamics there.

[00:06:54] Scott: Yeah. Adding to this again, consumers have so much money they're flush with from stimulus spending, generally healthy economy, strong stock market, and all of that. Historical perspective, it has in many ways felt analogous to me, the period post World War II, that was the last great deflationary period that we experienced as a country. It was the 1930s, and then you had this big international calamity event in World War II, where the US government took on a massive amount of debt, put money straight into consumers' pockets through really hiring back then. But people came out of World War II, there was a scarcity of production and the supply chain, we were making cars or tanks and planes instead of automobiles. So people came back and just started spending a really large amount on consumer goods.

And you saw a large amount of inflation throughout the economy during that time. And originally the US government tried to fight that with price controls. That's what they had done during World War II. And then kind of like in late 1947 the Fed decided, Hey, wait, maybe monetary policy has something to do with this, and we should be using monetary tools to address inflation. And so they finally started to do that in ‘48. And then in ‘49, you had kept the inflation more in check and you got a huge bull market from ‘49 through the 1950s, really through the 1960s. So similar to that with the exception that in this time around financial markets, asset prices are extremely elevated. We're not exactly low multiples facing this inflation.

[00:08:26] Mokaya: A quick one on labor markets. One of the quotes we picked up was from Ark restaurant CEO saying that we have labor problems everywhere. We can't find people, our labor costs are going up significantly well beyond minimum wage for certain functions that used to be minimum wage. So I think this is picking up in the trend that has happened in the pandemic where people are going away from jobs that they didn't like now into jobs that they want, or just staying off the job market because they have some money in their account. Anecdotally, or at least on the ground, what have you seen as regards labor market issues? I think from what you pick up in their earnings calls is that companies are stressed in terms of getting labor to meet the demand that is out there. Sam?

[00:09:07] Sam: Yeah. I think that's probably one of the more interesting things that are sort of flying under the radar in terms of macro right now, and it's sort of an extension of supply chain issues too. But because of the shortages and the inability to meet the actual demand that customers are bringing there are so many companies that keep telling you that the business could have been better if we had more people on the assembly line or we had more servers or if we had more line cooks or whatever. There was like 30% year-over-year earnings growth in Q4 and sure.

People expect that to decelerate a little bit, but it still seems to be the case that pent-up demand is still not being fully addressed. And this has to do with the fact that Scott, you mentioned this too, that there are shortages just all over the place. So, the fact of labor shortages is that there aren’t already enough goods being made, or they aren’t already enough tickets to sell at Disney world or what it might be. And I think that sort of speaks to what could be a longer-term sort of bullish potential. That's still sort of, built up in that the consumer and the business is doing these purchases they're still not able to fully spend as much as they would like because of these shortages.

So I think there's a lot of fuel for demand in the coming quarters because of these actual shortages. But whether something like labor shortage gets addressed is a really interesting one because if you look at stuff like the JOLTS survey or data from like the Indeed Hiring Lab, the US economy at least has had 10 million unfilled open jobs for months. And this is happening as companies are increasingly increasing wages but these jobs are continuing to go unfilled. So, there is this lingering question of are companies able to increase their capacity to the degree that they would like so that they can address all of this demand? Those are unanswered questions, but I think, at the very least, the pattern seems to be the case that there continues to be pent-up demand.

[00:11:23] Mokaya: Maybe I jump in and ask Sam, I know you've written a little bit about this, but then what are some of the reasons why there's a lot of jobs that are remaining unfilled?

[00:11:31] Sam: Well, I think the first and foremost one is it seems that people have a lot of financial sort of flexibility. And this is not uniform across the board but folks who are homeowners are folks who have had money in the stock market, people who were on the receiving end of stimulus payments and stuff have had kind of a buffer when it comes to their financial situation. So maybe it's the case that people are still sort of not ready to go back to work for whatever reason. We still know that childcare continues to be a huge issue. It's not hard to find someone, whether it's someone in your own family or your own family or friends or whoever, but everyone is struggling to understand how to address childcare issues, especially with school systems having to deal with all of these kinds of problems.

I think as mass mandates and stuff like that evolve we could probably see more people go back to work because childcare issues sort of naturally get addressed. But yeah, I think those are the sort of the two biggest things. People do sort of have some financial flexibility. I mean, there was another survey a couple of months ago, or I think this gets updated by the Indeed Hiring Lab. There's also a big chunk of this population of people who used to work who aren't working now may be living off of the other spouse's income. So, suddenly there are two-income households that become one-income households, and while that might be more of a stretch from a lifestyle perspective that might work out better for them as people sort of reevaluating how they live their lives in this sort of post COVID era. I think those are the big factors, incomes that are up, savings levels that are up, and then two childcare issues that continue to linger.

[00:13:21] Mokaya: Perhaps now to wrap up on the macro section Scott, any thoughts that you'd want maybe to give on that section?

[00:13:27] Scott: Yeah, I was thinking about asking both of you guys, is there anything contrarian that we picked up in any of the quotes on the macro section. And I was trying to think about what my answer would be. I think there were some quotes talking about supply chains getting better, but it wasn't a resounding thing. I think the one that stuck out to me most was a quote from Walmart that talked about supply chains getting slightly better for them. And especially unload times at ports were getting better. That was a big source of supply chain disruption during the pandemic. So if that's getting better, that's something that could on a contrarian basis be surprising to the market. So that's something that I keep an eye on. Either of you guys has something to add to that.

[00:14:10] Sam: Yeah. That's something that's starting to come up in ISM and purchasing manager surveys where supplier delivery times are starting to improve. It's still taking forever for people to get their goods from manufacturers and stuff but there are signs that sort of improving broadly across multiple industries. But yeah, no, anecdotally there is no shortage of companies that are complaining that supply chain problems continue to be a huge problem. But one thing that's kind of interesting and I wonder how this affects profit margins and efficiencies structurally going further down the road is all this talk about like bringing processes in-house.

Rather than outsourcing certain aspects of the supply chain, they’re actually building that out, and then related to that, companies are increasingly onshoring/reshoring, whatever you want to call it, manufacturing capacity as opposed to being too reliant on vendors that have to ship products and stuff through ships and go through customs or whatever it is companies that are building plants in their home country. So I wonder to what degree that might help loosen the supply chain issues for certain companies, but what does that mean for costs and competitiveness down the road?

[00:15:36] Mokaya: Maybe I can jump in a little. I think last week's earnings newsletter was sent out and we noted this issue of trying to deal with supply chain issues by retaining some of the manufacturing inside the country. And I think one key area, this has revealed separately is with Intel where we looked at it more like a geopolitical play because everyone wants to make sure that they’re manufacturing some of these semiconductors within their country. Their target is to move from 10% currently semiconductors being produced in the US to around 20 to 25% in the next decade. It's shifted from where it was before, where the US was the one which is manufacturing, and then they outsourced it to Taiwan. And now they wanted at least to bring some of that manufacturing back. One of the companies to watch out for in that regard in terms of supply chains and in terms of sourcing of components is Intel definitely. And we talked about it a lot, Scott this week, right?

[00:16:34] Scott: Yeah. We did talk about that a lot and I think it could potentially become an even bigger theme going forward, especially if geopolitical stuff continues to heat up with Russia and Ukraine. And I think what most of us are probably really worried about is China and Taiwan, especially from a semiconductor standpoint. If we put the same sort of sanctions on a Chinese invasion that we did on a Russian invasion, the supply chain challenges that we've already been experiencing and are maybe starting to heal will probably get much worse again, and all of the inflationary impacts and stuff like that. So I think that's something that is like outstanding questions and things that we're watching into Q2 and going forward.

[00:17:15] Sam: Just on that point, Scott, I think it's interesting how we're talking about geopolitics right now and sanctions on Russia and how that stuff impacts the economies who have something at stake here. A lot of the talk that we hear from Biden and other policymakers when they're talking about sanctions against Russia, hand-in-hand, we'll talk about how they're trying to do this in a way that has a limited/minimal economic impact on their own countries and their economies. And so, maybe it's the case that, I mean, listen, I'm not by no means, am I a geopolitical expert, but this is something that I'm going to pay attention to should things escalate in other parts of the world.

I want to word this very carefully because I don't want to offend anybody, but it seems like it's easier to impose sanctions on an economy when you have very little exposure to them from a trade or economic perspective. I feel like these types of conversations become very different. To your point, Scott, but it would be much more of an issue for the US economy and other economies that are exposed to semi-conductors and Southeast Asia if similar types of sanctions were imposed on China, should that sort of escalate to those kinds of levels. I guess the other way to put this is that the more international economies are sort of reliant and intertwined with each other, everyone has an interest in sort of keeping the peace so that they don't have to go down these roads.

Financials

[00:18:45] Scott: Yeah. Those are very good points. That probably covers the international section. The next section for us is the financials. I think crypto's been very interesting and hot web three throughout the fourth quarter. It feels like crypto has died down a little bit with Bitcoin falling, but curious to hear any other trends that you guys are keeping an eye on the financial side.

[00:19:11] Mokaya: I don't think there was much right about in the financials. Banks are just doing the same thing they'd been doing for a while, releasing reserves. And definitely, there's a cool down in terms of the crypto thing that has affected companies like Robinhood, which rely a lot on that trading volume. That's been a major trend, this Q4 and full-year 2021. Sam, yourself?

[00:19:33] Sam: Yeah, from a lot of what I feel like we used to hear about when it came to stuff like crypto was overwhelmingly about trading and I guess from a more traditional financial services perspective, the degree to which banks were bending over backward so that they can meet client demand but it seems like the hottest that ever was may perhaps be behind us from a trading perspective. though it seems like interest generally speaking persists. The other thing, and I think this goes back to macro stuff that we were talking about earlier in this whole matter of interest rate hikes from the Fed and I guess sort of just the interest rate conversation more broadly.

And I think at least a couple of banks we're talking about these on their earnings calls about how they're pretty bullish on this especially if all this means a yield curve that potentially steepens, even though the exact opposite of that has been happening. But I think something that gets banks perked up is the prospect of higher interest rates. And then the other thing too, being, especially with short term rates something that I guess anybody with cash on their balance sheets will benefit from is higher short-term interest rates because so much of that cash and cash equivalents or specifically cash equivalents are exposed to short term interest rates. So we could see cash levels for companies increase as the short-term interest rates go up.

[00:21:06] Mokaya: Quick on that. Maybe I could ask a question. How do banks do when interest rates rise? That's a common question I've seen most of the banks getting asked in Q4. And then also how do banks position themselves in times of rising rates? I know a lot of us have not been in periods where banks or at least financial institutions experience rising rates. Since they hold deposits and they have to pay upon them. And then as they have mortgages and the issues around refinancings and all that's your take on that? Maybe Scott.

[00:21:35] Scott: Yeah. I think Sam hit the trends well in his comments that I think there's some perception that banks would benefit from rising rates. At the end of the day, Erick, to your comments, it comes back to the net interest margin, right? You have to be lending at a higher rate than you're paying your deposits. And I think psychologically depositors have become so used to earning no interest on their deposits that banks have become really asset sensitive. So if interest rates go up on a short-term asset side of the portfolio, you could see better earnings growth from these banks, and that definitely would be a catalyst.

Banks have perpetually traded pretty low multiples relative to the market since the financial crisis. And, it's been like 14 years since the financial crisis now. So I think we can all leave that behind psychologically. And maybe inflation is, again, we're kind of exiting this psychological period of deflation and going into potentially more of a psychological period of inflation. Banks could refer to more of a normalized inflation environment from an earnings perspective and also an investor multiple perspectives. So that is something that could happen. I would say that's probably a contrarian thing to watch.

[00:22:50] Mokaya: And maybe on that notice, it's good to ask because the public markets have been on a downtrend that past month. And a common question in earnings calls for financial institutions about whether that impact in public markets is flowing into private markets, especially in terms of valuations, and the common answer is, of course, very little has changed. I think companies like Blackstone don't see it. They're still raising record amounts of money and still processing demo that money into some of the small startup companies that are out there, or at least in the space that they invested in.

So I'm curious to know, a lot of companies are coming out in Q4 and full-year results like Facebook they reported their earnings and if you disappointed just a little, you got punished a lot by the markets and if you even beat the targets or the estimates out there, you still got beat up in the market. So I don't know what's been happening in the markets lately, but the observations that you've seen maybe as regards the public-private impact in terms of valuation and all. Maybe we can start with Sam.

[00:23:55] Sam: Yeah, sure. I think it's interesting how investors and traders have reacted to the beats and the misses. To your point yeah, it has been the case. And I think there are some charts and data about all this too, that better than expected earnings were either not rewarding too much in terms of share price or if the guidance wasn't particularly strong then investors were dumping the stock. And then of course, if you were disappointing on the bottom line not only would the stock sell-off, but we see trillion-dollar companies lose eight, 10, 12% of their market cap in a day.

I think that's probably a combination of things. One, evaluations being very high and not to mention the fact that stocks had been climbing for so long, especially coming out of the early phases of the coronavirus pandemic and that initial crash. It also has to do something with this expectation for higher interest rates and how higher interest rates suddenly make other types of securities more attractive and it means the cost of capital is going up. And it would make sense that valuations would contract. And then sort of tying all that stuff together is maybe, I hate to speak like this because it's all purely speculation, but maybe some investors and traders are looking for a reason to liquidate some positions on book profits or whatever.

Again, speculation, I hate even speaking to stuff like that, but it would make sense. It would make sense that stretched valuations, rising interest rates, and massive unrealized gains maybe that's a reason why people are selling a little bit more aggressively than they used to. But on the other side of that though, relates to valuations and specifically with public markets. I think what's interesting, still is the expectations for forwarding earnings like 2022 and 2023 earnings. Even after all of these under-earnings announcements and guidances have been issued forward earnings have been pretty stable as far as expectations are concerned.

So a lot of the seller seems to be somewhat detached from expectations for earnings. Yes, earnings growth is decelerating, but none of the expectations for absolute earnings have changed. If anything in recent months has just only changed for the better as they have been upgraded. You put all that stuff together and valuations are slowly becoming a lot more attractive than they used to be. And, it could soon be the case, it might be next week or whatever, but we're going to start seeing a lot more strategists talk about, well, valuations are attractive now. We can no longer talk about bubble-level evaluations because of how much prices have come down despite earnings holding up.

[00:26:48] Scott: Yeah, I think you make a great point, Sam, and the earnings growth has been so massive over the last couple of three years, that valuations that looked an extremely high couple of years ago have kind of been eaten away by the earnings growth. And so as stock prices have fallen, the multiples don't look quite as high as they did. And I think a counter to that though, is part of that major boost to earnings for these companies has been inflation. And when you have that large CPI, seven and a half percent of the earnings growth, I think there are a lot of indicators to say that inflation has been even higher in other segments.

But when you have inflationary periods, you would expect to have rising interest rates offsetting that. And so multiple it could go much lower, an average multiple for the S&P 500, I think it's more than the 14, 15 percent if you go back through the 20th century. So yes, earnings could be growing a lot and multiples could be falling more than what we've been used to in this extremely low-interest-rate environment. So that's something to keep an eye on too. One other point on earning seasons, I think two of the big earnings miss company that stands out to me are Netflix, Peloton, a third being Facebook.

And some of the dynamic there is the readjustment from the pandemic where you had really strong growth again from like a Netflix and then the readjusting to a world in which people aren't sitting at home watching TV quite as much. And so you're having now a growth headwind in 2022. And that's interesting, and for a long-term investor that probably actually creates some sort of buying opportunity because the stock may trade sideways. You might have some multiple compression and then earnings growth returns in like 2023. So those are other dynamics. I think Facebook is probably the most extreme example of that. Erick, do you have any thoughts?

[00:28:52] Mokaya: I was surprised by the amount of punishment some of these stocks had to endure, let's say like Facebook losing around 200 billion in market cap in a single day. I think that was substantial. Looking at some of these companies, it's not that something that's fundamentally changed about the company in the past quarter. If anything, some of them had record quarters let's say a company like Salesforce or Shopify, so it's not like something has substantially changed in the fundamentals of the company. Maybe investor psychology has changed.

I just posted one of the charts that shows that most of the companies that missed this quarter got hit a lot more. Or if you miss by a little you got hit a lot more than usual. But again, this also presents nice buying opportunities for those who missed it. Some of these stocks are trading at the same valuations they were just before the pandemic. So it tells you the opportunities to also maybe go into the market with a nice bucket and just collect some of these stocks that you may have missed out on because of the pandemic. Scott, do you have anything? You can also at the same time, segue us into consumer and tech.

[00:29:53] Scott: Yeah, I think you may have been segueing to the same place that I was going to, which you and I have talked about on our podcast a couple of weeks that Facebook's earnings myths are reflective of potentially a very large change in the advertising landscape of the way that advertisers are reaching consumers. And we've picked up quotes not only on the Facebook earnings call but in companies like The Trade Desk, Roku recently. Subscription fatigue is one element of this, like people having to subscribe to a lot of different services and not wanting to pick up an additional service and so gravitating towards more of an ad-supported model like Hulu or something like that.

So there's that, and then there's also the bigger one for Facebook, and some of the other social media companies are the move towards privacy and the move towards not being able to see who is interacting with ads in the same way as you would've been able to a year or two ago. And so that benefits companies like Google on the search side and is a headwind to Facebook and could be large to shift in the way advertising budgets are allocated. And so, again, anytime you have a big shift in money is being allocated that creates an investment opportunity for companies with their buckets in the right place. The Trade Desk is one, I don't own it, but I'm following it closely. It's got a hefty, hefty, multiple on it. But if there's a sell-off, I could see myself buying that. Sam, are you picking up any of that?

[00:31:20] Sam: Yeah, I think you've pretty much said all of it. I come from media companies that relied so heavily on operating as free sites with all paid for by ads, hopefully, that people were clicking through or at least, just sort of seeing through impressions or whatever. But, I'm not gonna pretend like it wasn't surprising to see how much market cap Facebook loses in a day. But when you begin to think about how quickly there could be shifts in terms of industry trends, like specifically for something like advertising, it's unsettling to watch because so much wealth vanishes and that doesn't even get into all the different companies that are impacted by various policy changes, whether it's Apple and their policy changes as well. But yeah, definitely very jarring and I guess it's just sort of a lesson for all investors that things can change just very quickly.

[00:32:17] Mokaya: Yeah. On that issue of submission fatigue, it's the first time I've seen it mentioned by companies. The example we give with Scott is about, you want to watch a show say on Netflix and HBO, let's say you're a regular user of Netflix, and then you want to maybe watch a show on HBO, the challenge is that you have to pay the whole month subscription to enjoy just one movie or series from another streaming platform. And that creates a lot of challenges in the sense that you don't want to keep paying that every month. So there are a lot of consumers who would prefer maybe all the content was assembled to one platform where they can pay for it.

But now that they have so many, they are okay with consuming ads in some of them to be able to enjoy the content that is there. So I think that's what you see. So remarkably, this is a quarter you saw like YouTube revenues when you compare the YouTube ad revenues alone with the total revenues on Netflix, they surpassed that. And I think that's very significant. It shows you that there's a little bit of a battle between the types of business models some of these companies are adopting. Is it optimal business model going to be pure ad-based or pure subscription-based like Netflix or somewhere in between? And I think that's a good trend to keep track of going into this new year, I would say. Any thoughts on that are any other thoughts that you may have noticed in tech or consumer?

[00:33:38] Sam: Yeah, just one more thing related to this sort of consumer behavior too and this came up during the Facebook or the meta platforms call, there's this gigantic elephant in the room called TikTok and it's not easily comparable to binge-watching eight hours of a great series. And indeed a person's time is finite. And, with all these people spending so much more time on places like TikTok, that's time that isn’t being spent scrolling through Instagram or scrolling through Facebook or looking at some of these other social media platforms, and yeah, maybe that's even taking away potential eyeball time, screen time from places like Netflix or whatever.

I'm sure it's not as material for some of these bigger streaming services but it is something worth noting. And maybe this also speaks to YouTube, where there are a lot of folks who sort of operate outside of these big streaming companies that are sort of independent content creators. I think that's certainly an interesting sort of space to watch. I mean, everything from ring lights to the new iPhone video cameras and stuff is turning average Joes into extraordinary producers of very compelling content. And they're all doing it independent of some of these big production houses. I don't have the numbers or whatever to talk about like how much impact that has but anecdotally as someone who does spend some time scrolling through TikTok I can say that the entertainment space is very competitive.

[00:35:13] Mokaya: It's amazing how much good content is being produced or churned out on TikTok itself. And there's a quote I’ve pinned there from Facebook, of course, citing one of the key issues that they're having is TikTok they don't know how to compete with it. Instagram was the way they wanted to compete with it through their reels but so far they haven't made a dent in TikTok’s dominance in this space. So it was a big worry, and my contention was that if Zuckerberg's hands were not tied in issues to do with antitrust, he would easily have bought up a TikTok because he sees it as a formidable opponent. And at the same time, it would have been a formidable ally, kind of an arrow within the quiver.

[00:35:53] Scott: Maybe just one wrap-up comment and then move on to industrials. One thing we talked about in a podcast was how the social networks are heavily generationally based, and that in the same way, you wouldn't want to frequent the same restaurants or bars that your parents go to, a lot of kids don't necessarily want to go to the same social media channels that their parents are on. So that creates the opportunity for refresh and renewal with each cycle of the generation where maybe Gen Z likes TikTok and stuff more than Instagram. And then the generation after that will like something else.

We talked about how this ties into what Zuckerberg sees with the metaverse. I think he's just trying to get ahead of the next curve and own the next curve of this potential virtual reality world that many of us will be living in at some point in the not-too-distant future. It's just something to look at and watch. And it's interesting because I think especially in tech investing, there's a propensity to believe that wherever we are will exist forever. And the reality is the technology cycle is last for very short periods, where if you own the VCR market and you own the DVD market, you gotta own the internet next. So, these windows are short compared to what gets priced into the securities markets. So something to think about.

[00:37:19] Mokaya: Perhaps something I would add was something we picked up from the earnings calls, Disney was a hundred years old and the iPhones are 15 years old now. So it tells you a lot about how tech has changed. Any perspective on those companies?

Industrials

We segue into the industrial section where I think most of the issues are about supply chains which are easing a little bit in some spaces, but still heavily constrained, especially in areas like semiconductors where everyone is watching car companies still focusing more on the premium side of things and where they can add a little bit more money, where they have some way to be able to produce some of these things. From the industrial section, that's my main takeaway. Most supply chains have constraints for the first half of this year. My worry is once supply chain issues ease some of these companies may be left with very high-cost products. And I think that was one of the challenges that Peleton faced. They sourced their goods at higher costs of production, and that means that, even if they sell them, they are cutting into their margins unless they raise prices. And consumers are sensitive in some of these companies in terms of if they raise prices at the end of the day. Did you see anything?

[00:38:30] Sam: Yeah, I think something that people aren't talking about enough is this whole matter of when the pendulum swings too far in the opposite direction where companies are sitting on a little bit, too much inventory, right? This is sort of like the irony of a company like Peloton and maybe that's something that more companies, or maybe investors just generally should be thinking about a little bit harder. If we all remember from late 2020, one of the hottest stories in business was Peloton not having enough bicycles. They just could not, there was so much demand.

And then what people were complaining about when it came to Peleton was it's going to take four months or six months for a bike to get delivered. And so that was just sort of like the purest form, and this wasn't even before a lot of supply chains sort of rippled across the economy. They just didn't have enough stationary bikes. It's its own specific example, but we do have to wonder what happens because there will be some overcorrection at some point and then, maybe that turns disinflationary and perhaps even deflationary.

But I think something to watch concerning that is there is a metric, I think it's either published by the Bureau of Economic Analysis or the Census Bureau, one of the government agencies. But every month they publish a stat on business inventories and they also provide you with a ratio for business inventories as a percentage of sales. And that continues to say that inventory levels are just very depressed. So it looks like there is still a little bit of time before that becomes kind of a problem. I think there'll be some morning, but yeah, I agree. It's going to be interesting to see exactly how the inventory and then the supply chain story more broadly how all that stuff unfolds.

[00:40:21] Scott: Yeah. Just one thing to add to the industrial section is that's where we had been chronicling the travel dynamics of the COVID period then the end of COVID and I think travel still has not fully recovered and is slowly on the path to recovering though. But with everything else that's going on in the world, it's kind of become a quiet story within capital markets which is again, an investment opportunity. Cruise ship stocks are still way down, commercial and business travel is still way below where it used to be. And now maybe something that doesn't fully recover, but there are still opportunities just to invest in normalization, post-COVID within the market at those edges. So something to point out.

Key Themes From 2021 and 2022 Outlook

[00:41:10] Mokaya: Scott maybe you can give us your expectations going into the new year. And then you can also give us a little bit of perspective, one key thought from the Q4 in FY 2020/2021, one overall theme that you like.

[00:41:25] Scott: Yeah. Let me start with a theme from 2021, the biggest theme was the earnings growth, just the massive earnings growth fueled in part by inflation, but it doesn't matter when you look at the numbers and they're double-digit numbers and large double digits in the twenties and thirties percent range. That's meaningful, significant growth, even if it's only nominal. So that was the biggest theme and most important thing of 2021. And the flip side for 2022, I think it was not impossible to see going into this year that it was going to be hard to recapture the same level of earnings growth that we saw last year, and that inflation had been bad all year.

And so you've got decelerating earnings growth and more inflation, higher interest rates that all seem to equate to a more difficult year for the stock market. And so we've seen a sell-off at the beginning of 2022, that's consistent with the way that a bear market would operate. The bear market doesn't necessarily have to plummet, but if we were down 20% at some point this year, I don't think any of us would be surprised. And so that's still my outlook for the year and the way that I'm navigating markets is for continued volatility, even though we're probably overdue for a pretty big rally here if only a bear market rally.

[00:42:44] Mokaya: All right. Let's hear Sam and then we can close up after that.

[00:42:48] Sam: Yeah, sure. Scott is nailing it right there. This whole matter of earnings growth, decelerating is something, I think investors are still sort of coming to terms with. So many of these growth companies that have seen their stocks crash still have tremendous earnings, growth prospects in front of them. It's just that it's a little bit slower than what they were expecting in the previous year. And this is something that is sort of being said across the board and then yeah, to Scott's point inflationary pressures on higher interest rates are all sort of headwinds when it comes to the stock market and valuations and all this stuff. But with all that said, earnings expectations are holding up.

And one thing I wanted to follow up on with Disney, and I think this is extremely telling, and this relates to travel too, but one thing that Disney was saying about music park visits is that international tourist has just been completely absent. And a lot of this is going to deal with local COVID restrictions and how people are sort of thinking about international travel and all this stuff. But this whole matter of international travel has yet to come back. And I think it's stuff like that sort of like hiding in the shadows of demand opportunities that might need to get a little bit more attention because all this stuff of course translates to more sales and more people willing to pay a higher price for a plane ticket and all this stuff. And I think that is the sort of tailwind for companies that will offset some of these pressures when it comes to higher inflation and higher interest rates.

[00:44:24] Mokaya: Yes. That's a perfect place to close for the quarter. We'll do this again next quarter, Q1 review in three months again. Thank you, Sam. Thank you, Scott, for joining us, and goodbye for now. Sam, I think you should plug in your substack newsletter.

[00:44:40] Sam: Oh yeah. If you're not subscribed, make sure to sign up for a TKer that's TKer.co. There are links to it in my Twitter profile. So just go ahead and click through there and sign up, check out if you like it, then maybe you'll even become a paid subscriber.

[00:44:55]Mokaya: Great. You can also find us on thetranscript.substack.com we aggregate weekly thoughts from earnings calls and we do partner a lot with Sam on this. So thank you for joining us this week.

Welcome to Episode 44 of The Transcript Podcast

Episode Summary:

In this episode, we recap 2021 through earnings calls quotes from each week. We discuss vaccinations paving the way for economies to reopen, the slight easing of supply chains, and 2021 being the year of the consumer.

The episode is based on yesterdays’ newsletter which is available on Substack.

A transcript of this podcast, with relevant images and quotes, is available after the show notes below.

Show Notes:

00:00:00 Introduction

00:00:35 Vaccination paved way for economies to reopen

00:01:42 The Fed was behind the inflation curve

00:02:55 Tapering has began

00:04:33 There is slight easing of the supply chains

00:05:00 2021 was the year of the consumer

00:06:51 Meme stocks and speculative mania

00:07:35 It’s been a great year at The Transcript too

Episode Transcript:

Introduction

Scott: [00:00:00] Welcome everyone to a new episode of The Transcript podcast. This will be our last one of the year. You've got me Scott Krisiloff, I'm the editor of The Transcript, along with Erick Mokaya who's our lead author. We sent out a new issue of The Transcript newsletter yesterday, and it was our usual end of the year where we took quotes from each week and told the story of the year throughout the year through those quotes. It's always a fun thing to put together and watch the way that a year unfolds. A year is long enough that you can't really remember the way it started, but short enough that it feels like it just started yesterday.

Vaccination paved way for economies to reopen

So the end of the year is always one of my favorite times for me personally. What I saw when I was putting things together yesterday was, the biggest thing was it's hard to believe that we weren't vaccinated at the beginning of the year. Most of us weren't at least. And so the economies around the world were mostly still closed. The story of the year was the vaccine. As people got vaccinated, economies around the world were reopening and really punctuated by the consumer euphoria that was felt during the summer of people getting out of lockdown, reconnecting with friends, and family gathering for the first time in a very long time. That was the primary story of the year and then the secondary story was about the impacts that had on the supply chain, inflation, and the Fed's response.

January 18: The world was on the brink of mass vaccination

“….we expect the federal program to open up shortly, and we are ready in our CVS Pharmacies to administer the vaccine. We have over 90,000 clinicians who are pharmacists, who are pharmacy techs, who are nurses and are nurse practitioners to be able to administer the vaccine. And we do expect that we can administer 20 million to 25 million vaccines per month once the federal program opens up.” – CVS Health (CVS) EVP, CVS Health & President, Aetna Business Unit Karen Lynch

[00:01:19] Mokaya: Yeah. It's fascinating to work through the year because it doesn't feel like the president was inaugurated early this year and it feels like it's such a long time ago. The midterm elections are next year. Time flies by so fast when you are not paying attention. I think this was a really nice way to go back to the beginning of the year to see what was going on.

The Fed was behind the inflation curve

One thing that I noted is a little bit of the tension between what the Fed sees and what the companies are saying. So I could see from the beginning, from as early as February and March there, companies which were already saying that inflation is higher and the Fed was at the same time saying hey, there’s no inflation, inflation is transitory and that tension went on until the end. Really it feels like The Transcript could be a better source for information for the Fed than whatever it is that they are relying upon.

February 15: The Fed vs the C-Suite

“…we are seeing the same inflation. We’re also seeing the inflation that you’re seeing, and coming from non-commodities – non-key commodities, ingredients, especially packaging in transportation in the U.S. And we think that the level and the type of inflation that we are seeing, it’s manageable,” – Kraft Heinz (KHC) CFO Paulo Basilio

“My predecessor has indicated that there’s a chance that this will cause inflation to rise. And that’s also a risk that we have to consider. I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materializes, but we face a huge economic challenge here and tremendous suffering in the country. ” – US Treasury Secretary Janet Yellen

[00:02:13] Scott: Yeah. I mean, the Fed was just totally behind the curve this year on the inflationary impacts. And to your point in February, we were picking up concerns about it. The minute that the Fed started calling it transitory, we had quotes from many companies basically saying this isn’t transitory, this could be lasting throughout this year and into next year mostly driven by the supply chain stuff. And then it was like every week we would find quotes about the inflation impacts of being broad-based, of being severe and sure enough, by the end of this year, we're seeing the worst inflation since the 1980s and the Fed still is pretty slow to react differently.

Tapering has began

[00:02:55] Mokaya: But I mean, at the end of the year, now they're doing a little bit of tapering and then going into next year, there is a chance that they might raise rates and the Bank of England already started last week also by suddenly surprising the markets by raising rates by a small percentage, but still significant in the sense that they're sending a message that there may then next year, at least more rate rises.

December 6: The Fed changed its tone

“The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases - - perhaps a few months sooner” - US Federal Reserve Chair Jerome Powell

[00:03:21] Scott: Yeah. I mean, if you just look at where we would be with this inflation rate and this unemployment rate in decades past, we'd probably be in the 6 to 8% interest rate zone already, and we're at zero. So you know, there's a lot of room to go. If the Fed is actually going to have to fight inflation next year, it could be pretty damaging to the economy or pretty damaging to the capital markets because certainly no one is expecting 5% plus interest rates. But that's probably not going to happen next year. More likely is a continuation of higher inflation if that's the case

[00:03:58] Mokaya: Yeah, something else I also noticed is that from as early as February, we were also picking the bottlenecks in the supply chain. And I think that's the same thing that you're tying to what we talked about with The fed. It seems that transcripts are a really good source for such kind of information because very early the companies were saying the supply chain is constrained. Companies can’t get enough inventory. And that was at the beginning of the year. And at the same time, they were also saying there was a lot of stimulus in the system and a lot of excess demand. So that means that it was setting up for what we saw in the summer and in the fall, a lot of companies struggling to meet the demand that was out there.

March 29: But supply chains were seeing challenges

“The supply chain is still catching up and trying to rebuild inventory levels in particular in the North American market…So some of those supply chain issues have been well-documented, in particular the semiconductor shortages…There are some other challenges, right? So there was a bout of severe weather in the southern US a few weeks ago. That has actually created a shortfall of chemical feedstocks. That’s also impacting the supply chain. There was a fire last week in Japan in a major semiconductor plant. So all of these are sort of impacting our customers. But in the end, it’s delaying the recovery, but the recovery is coming back.” – IHS Markit (INFO) EVP-Transportation Edouard Tavernier

2021 was the year of the consumer

[00:05:00] Scott: Definitely. I think all of those things are true and they're going to continue at least for a little bit into next year. I do want to hit again though that it's easy to focus on some of the challenges that the economy was facing from an inflationary and supply chain perspective. And we should make sure we're always focused on just how strong the consumer was in 2021. That was the driver of all of these challenges because the demand side push from the consumer, which there was this again euphoria for the reopening plus just so much liquidity pumped into capital markets, put directly into consumers' pockets through stimulus checks that consumers were in such good financial position for the first time in a very long time and consumer were spending heavily in 2021. A lot of that stimulus is coming off so it's going to be interesting to see if the consumer can maintain that pace in 2022. That will be the biggest question for 2022.

May 17: Consumers were euphoric

“…we continue to be conservative because between being cooped up, between being locked down, between the stimulus, between celebrating that we are - the country is still around, and we're still going to try to get back to normal, there's clearly some level of euphoria around that. It would be impossible for me to tell you what percent that is.” - Simon Property Group (SPG) CEO David Simon

[00:06:00] Mokaya: Yeah, I agree on that. And also I think to end the year, in the last two months, we also picked a lot of quotes that still emphasize the issues to do with the consumer being strong, headed into the new year. That's a really good setup for next year. And it's good to remember as you say like this year has been all about the consumer. The consumer has a lot of money. The consumer wants to spend, and the consumer really wants goods as soon as possible and that's what's pushing up some of these issues in the supply chain. We shouldn’t forget that. Also, something else that we shouldn’t forget also this year, it is the year Web3.0 became the talk of the town, Metaverse. Now Facebook has changed its name to Meta, and then we also have Square now is called Block. So I think this has been the year when Web3.0 and the metaverse have become common lingo now in the financial circles.

Meme stocks and speculative mania

This is the year of Wallstreet Bets once again. It's all happened within one year. It feels like a lot, but all this has happened this year. That's when AMC has become a crypto company and all. It's such a crazy year it's been in the markets and it was really good to go through all these quotes to get a feel of how we started earlier in the year.

November 15: AMC is now a crypto company

“AMC has also been speaking publicly in recent months about cryptocurrencies and NFTs. I can confirm today that we have been exploring with third parties over the past few months, both how we can accept cryptocurrency and if it is feasible for AMC to consider even launching our own cryptocurrency. We think we'll be able to launch the acceptance of Dogecoin in the first quarter of '22 -- And we are now figuring out how we can take Shiba Inu as a currency; that's the next one on our cryptocurrency hit parade -- I might add that we believe we have figured out ways where we do not have to hold cryptocurrency on our balance sheet. So we're not taking increased balance sheet risks with all this potential acceptance of cryptocurrency.” - AMC Entertainment (AMC) CEO Adam Aron

[00:07:15] Scott: Yeah. I mean, there were certainly speculative manias throughout the year. The meme stocks were probably the craziest with GameStop and AMC and then the entire crypto boom has been something to watch. We wrote in one of the newsletters that the most exciting thing going on in financial services right now is crypto. And I still feel that way as we're exiting the year.

It’s been a great year at The Transcript too

May 17: The Transcript moved to Substack!

Welcome to our first post on Substack! We are very excited to be here and glad to have our supporters make the move with us. We are pleased to continue to offer a mostly free version of this newsletter along with a few small changes.

One other thing I think we should note before we sign off for the year is this was a huge year for The Transcript too. I was reading back through our posts and we launched the podcast this year. This was our first year ever doing a podcast. I think we've done 40 episodes now, 44. So it's been great being able to get together and talk each week halfway across the world and talk about the global economy. That's been great. And then also we moved to Substack this year. This was the first year that we were on Substack and it's been a really time to be on Substack. So I think it's really appropriate that we finished the year by thanking all of our listeners, our readers, especially our subscribers who are supporting our work. We really are grateful for all of you and really also grateful for the work. I think Erick and I really learned a lot doing this. It's fun to just be able to share it with people. Any thoughts?

[00:08:32] Mokaya: I agree with you. I should say the first time I sent out the email that we were on Substack now I was super afraid because we didn't have any paying subscribers right then. An hour or two later, I was still very tense because I was like, did we make the right decision in terms of moving to Substack? But the last several months have been a strong validation that we are really doing a good job and especially when you see the scale at which we’ve been able to operate and have a lot more people on our paid subscription, which is allowing us to get more resources to make the product better. I'm also very excited for 2022 because then we have a really good base to build upon for this year. And I think it's a good time to say thank you so much for the people who have walked with us. We do welcome feedback all the time. Tell us how we can make this better and how we can keep enhancing this so that it can be the best product that you always look forward to read every Monday morning.

The Transcript is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

[00:09:24] Scott: Well Merry Christmas to everyone and happy new year and hope everyone has good holidays. We will be back in the new year with more of The Transcript, following the economy through quotes from CEOs and other leaders around the world. Thanks, everyone.

Welcome to Episode 41 of The Transcript Podcast.

This is a special episode of a recording of a Twitter Spaces conversation we held on Friday, 19th November with two special guests, Sam Ro and Alex Morris.  In this episode, we discuss the key themes that we took note of in Q3 2021.

We are making this week’s newsletter available to all our subscribers, both paid and free. Become a paid subscriber to enjoy access to the full newsletter each week:

Show Notes:

00:00:00:  Introduction

00:01:54: The impact of Inflation

00:09:56: All about Inventory and nagging supply chain issues

00:19:26: Trends in the labor market

00:24:45: Tech Companies in Q3

00:28:32: The Metaverse

00:36:38: Opportunities and Challenges in Streaming

00:41:21: What Surprised you the most in Q3?

00:51:02: What to look out for in Q4

00:56:29: Conclusion

Episode Transcript:

Introduction

[00:00:00] Mokaya: Welcome to our Twitter space today. I'm Erick Mokaya, I'm based in Sweden and I'm the author of The Transcript, a weekly newsletter where we cover the key quotes from earnings calls. Today we are very privileged to have guests, Sam Ro and Alex. I've known them for a while and would allow them to introduce themselves. So maybe I'll start with Sam. Sam, I know you've made a major move this past quarter, maybe you can tell us a little bit more about who you are and what you do. Then, Alex will do that after you. Welcome, sir. 

[00:00:28] Sam: Sure. Thanks, Erick. Thanks for having me again for this call. I am the writer of Tker. It's a newsletter on Substack that focuses on the news and data that inform longer-term themes in the markets and the economy. I started that just over a month ago in the middle of October. Before that, I was the writer of the XES markets newsletter. Before that, I was at Yahoo Finance where I co-wrote the Morning Brief newsletter. If you want to go back to ancient history, I was at Business Insider for a while, where I led the team’s coverage of markets. I’m glad to be here. If anybody is interested in Tker and what I'm doing, the links and URLs are all on my Twitter profile.

[00:01:13] Alex: Perfect. I hope everybody's having a good day so far. My name is Alex Morris. I run the TSOH investment research service. In a nutshell, it's everything that I used to do in my former life as an Equity Research Analyst. I just made it completely available to everybody who subscribes to the service. It's deep dives on individual companies, updates on the companies that I currently own, and names on the watch list. Every once in a while, some investment philosophy-type discussions and then disclosure of any changes before I make them along with the rationale for those changes. I've been doing that for the past seven months now. It's a lot more work than a real job ever was, but I've greatly enjoyed it so far. Thanks for having me as part of this Space.

The impact of Inflation

[00:01:54] Mokaya: Alex's favorite companies include Facebook and we're going to explore a little bit of the key themes he saw during this quarter. Sam, I know of a generalist, you especially look at the key macro themes and you write a lot about them. So I guess I'll start with you Sam, maybe the first thing that we'll talk about is inflation, what you saw there this quarter, as many companies talked about that. I know the Fed keeps saying that inflation is transitory, but do you think the companies agree with that from what you read from the earnings calls?

[00:02:22] Sam: Yeah, I mean the whole ‘inflation is transitory' is a pretty loaded question. So I'll come back to that in just a second. But on the matter of inflation, I think we've seen a lot of the charts where they aggregate the number of times inflation has been mentioned on the earnings calls. I believe if it wasn't a record, it was right up there for Q3 similar to Q2. I think it was probably the case in Q1 as well as businesses were guiding what the rest of the year was gonna look like. But yeah, I think it's very unambiguous that the prices for a lot of goods and labor, all of it is going up. Both companies’ and consumers’ cash levels are in good shape but again, something that we saw this quarter and it was something that happened last quarter was, as much as all the execs and companies have been screaming about rising costs because of inflation, they were able to deliver record-high profit margins and it's a combination of things: efficiencies, bringing in technology to streamline things and then, of course, raising the prices of the goods and services that these companies sell. So I think that was pretty interesting this quarter, the degree to which companies were saying that their customers were able to absorb these higher prices. I guess to a certain degree, that's not too surprising when you do see some of the macro data, especially with the big companies. Companies are in much better financial shape than they were pre-pandemic. Cash levels are higher, et cetera, et cetera.

Both companies’ and consumers’ cash levels are in good shape but again, something that we saw this quarter and it was something that happened last quarter was, as much as all the execs and companies have been screaming about rising costs because of inflation, they were able to deliver record-high profit margins and it's a combination of things

And then of course with the consumers, there are quite a few economists who've tried to measure this, but this concept of excess savings, the additional amount of savings above-trend that consumers saved during the pandemic because they didn't go on vacation last year or they weren't going to restaurants last year. Then not to mention government stimulus checks and financial aid and all that stuff. Consumers’ balance sheets are in a lot better shape than they were pre-pandemic and they're also just sitting on a lot of cash. I think what we've seen in the last quarter and it might spill into the next quarter as well, is as much as inflation and rising prices is sort of undesirable, all the customers of these businesses that we're following are willing to pay because they need those goods and services and the equipment for their businesses to run. So I thought that was a really interesting dynamic and that can't go on forever. Eventually, people tap out those excess savings on corporate leverage and financial conditions become a lot tighter. For the time being, at least businesses seemed to have a good grasp on what their customers can handle in terms of price increases. That's been interesting to watch. There's a lot of inflation in the system but the customers have been able to take those prices.

[00:05:42] Mokaya: Alright. I want to ask Alex, maybe you can comment on that. Also, in addition to what Satya Nadella was saying about digital technology being a deflationary force in an inflationary economy. From the companies that you follow yourself, have you seen them raise prices, and how are the consumers responding to that, Alex?

"Digital technology is a deflationary force in an inflationary economy...I mean in an inflationary environment, the first place any business should go to is how to really ensure that they're able to get productivity gains and even dealing with constraints." - Microsoft CEO Satya Nadella

[00:06:01] Alex: I think what Sam said is a really important point, which is a lot of the focus has been on the supply side of the equation, which we know things about the ports and some companies have quantified that like Dollar Tree on their most recent call when they talked about how this was a meaningful hit to their business. I ran the math to try to estimate what they were talking about and what I got to was something like 200 or 300 bits as a percentage of revenues was the incremental cost that they were looking at, which when you run a business on an annualized basis, or with mid to high single-digit, even margins, that's a very massive hit. We've heard about that side a lot. I think to Sam's point, the demand side is what's interesting to me. We talked about this last time, but I just think we've seen it continue. I look at some of the retailers that I follow... Walmart's 2-year stacked comps were up 16% in this quarter, still right around all-time highs. That number historically has been more like low to mid-single digits if you look back over the past five years or so it’s meaningfully above trend and Walmart, at the end of the day, is a huge part of their mix is consumables and groceries. It's not people going out and just spending money on discretionary purchases. It's something that people have to have. When you look at other retailers like Home Depot or Target where maybe that purchases are a little bit more selective and you see comps are even stronger. I think in the case of both of those companies the two-year stack was up north at 30%. So you're seeing massive demand on that side of the equation and impacts on supply play into that as well. I think what we've seen this quarter was more clarity out of companies like Walmart and Costco and the like that are what I kind of view as the very well-run best in class retailers. It's interesting to see how effectively they make decisions and find ways to work around these challenges. I think it was on the Target call that they made the point that a few years ago, we were having a similar conversation about tariffs and it just stuck out to me that this is just a reality of running a business. There are always these short-term headwinds of one kind or another, might be tariffs, it might be cost inflation, or supply chain issues tomorrow it'll be something else. So I just think it's interesting to see the companies that can really think long-term and can navigate their way through.

So you're seeing massive demand on that side of the equation and impacts on supply play into that as well. I think what we've seen this quarter was more clarity out of companies like Walmart and Costco and the like that are what I kind of view as the very well-run best in class retailers. It's interesting to see how effectively they make decisions and find ways to work around these challenges.

[00:08:22] Mokaya: In addition, that speaks a lot about the pricing power some of these retailers can actually raise prices and yet the consumers are not in any way kind of reducing the demand for some of their products that they have. Is that something that you'd speak about most of the retailers? I know there are a couple of companies that have struggled to keep up in terms of prices. They can’t raise prices as much as possible and they're kind of two types: some can raise prices and then they don't have a lot of margin pressure, then some can raise prices in that regard. Do you see some companies being affected one way or the other with inflation?

[00:08:55] Alex: Yeah, it's kind of interesting I might even just flip that. Doug McMillon, who's Walmart CEO made an interesting comment on the call. He said, fighting inflation is in our DNA. Some won't love that fight and so do we. We have a lot of variables to manage, deliver everyday low prices to customers, and simultaneously strong financial results for our shareholders and we're using that. I think these companies are constantly fighting with navigating the cost of running their business and ensuring that they deliver a good product to customers at the end of the day at a very compelling price point. And if they don't do that all the time, they won't stay in business. So this is just a different version of what they're constantly facing. Now you have some things like right now, Costco called out on their call, we still have limitations on certain things, whether it's toilet paper, bottled water or the like, but they can also react to those things as they mentioned, we had the financial ability to bring things in early or to order really, to mitigate future delays. We have the balance sheet to hold a little bit of excess inventory in the short term and we need to. It's part of the entire long-term business model financing strategy of these businesses.

All About Inventory and Nagging Supply Chain Issues

[00:09:56] Sam: If I can just add something there. I think Alex nailed it in that this quarter we learned a whole lot about execution. Last quarter and this was just sort of the mix of the companies, I feel like in the second quarter we were hearing a lot of the early concerns about supply chain issues and ability to procure goods and maintain inventory and stuff. Whereas with this quarter there were a lot more earnings calls where the CFOs and the executives were talking about the plan that they put into place to execute so that they could have inventory to sell. When you hear about Walmart and Target and Home Depot's 2-year stack comp sales growth it's one thing to see that as a reflection of consumer demand, but what's also really impressive about that was that all of these stores were able to secure the inventory to sell to their customers. I thought that was super interesting about this past quarter is, while inventories and supply chains are still a big issue and the census data will tell you that inventory levels are still pretty deflated, it seems like there's a higher degree of confidence, especially with some of these best in class retailers, that they are figuring out a way to work through the supply chain issues so that they do have inventory for the holiday season and the coming quarter.

I thought that was super interesting about this past quarter is, while inventories and supply chains are still a big issue and the census data will tell you that inventory levels are still pretty deflated, it seems like there's a higher degree of confidence, especially with some of these best in class retailers, that they are figuring out a way to work through the supply chain issues so that they do have inventory for the holiday season and the coming quarter.

[00:11:23] Alex: Yeah, I think I just wanted to add to that point. There was an article in the Wall Street Journal maybe a month or two ago now that discussed specifically how Walmart was finding ways to work around the major ports that were congested. It's an example of exactly what Sam's talking about and we see the net result now when they report, their inventories are up 12% from a year ago. They're getting prepared for where they need to be for the months ahead. So execution is a massively important part. I think to Sam's point, when we talked about this last quarter, it was almost like the bomb had just hit. Now over the past three months, we've seen companies effectively make plans and execute against those plans.

[00:12:04] Mokaya: I agree. I think that's a nice segue also into the second topic that we wanted to address, which is supply chain congestion. A lot of companies say that most demand is not an issue. The issue is getting the inventory that they need. Especially the smaller retailers are having a difficult time. The larger ones, as you say, can use other alternatives. They're able to charter flights, they're able to get their inventory on time, especially heading into this holiday season. But then others can’t be able to get the inventory they need to the consumer on time. So in terms of the companies that you two follow, are there specific examples where you see brilliant ways in which companies have innovated to make sure that they get the inventories to the consumer on time? And also, are you worried that perhaps at some point we'll see a reversal in the supply chain, the supply chain easing up, and then companies stuck with a lot of inventory that is not moving?

[00:12:58] Sam: Yeah. That last question I think is interesting and let's not forget to talk about that, but regarding the supply chain, just as a continuation of what we were just talking about in terms of companies trying to figure stuff out. That's always the lesson of every earning season and the aftermath of any kind of crisis, whether it's a pandemic or a financial crisis or a supply chain issue or whatever it is these companies are figuring ways around this. I think of two examples, one of them was on Crocs. Crocs’ earnings call and Crocs’ earnings announcement. So they are one of these companies that source their footwear from Vietnam and because of the resurgence in Delta, there were all these issues with all the footwear companies trying to secure their goods from out of Vietnam. And one of the issues is because those factories are delayed, and then it gets onto a boat, and then it ends up in LA where it's going to get gummed up for weeks again, Crocs just airlifted their supply out of Vietnam.

Now, this isn't like a new thing that companies have just figured out overnight, but flying something across the world is a lot more expensive than shipping it. But it is of course faster. If you do have the margin to absorb those costs, then maybe you get to make it up on volume. Crocs were successful in the last quarter because there was a lot of demand. The last thing you want to do is have a customer show up to your store and not be able to sell them anything. I mean it's hard enough to get someone's attention to your brand. So it's just a disaster to have to turn them away. So I think that was interesting, that they were willing to absorb that cost so that they could get that footwear to their customers. They also mentioned that they're investing a small fortune into redesigning their supply chain structure so that air freight becomes a more permanent part of their procurement process.

And then another one, I can't remember. I don't know if this was a dream or I read in the paper or they said this, but it seemed kind of surreal to me and you guys can correct me if I'm wrong on this. But I recall Costco saying that to get their goods to their US stores quicker, they actually chartered, or maybe even got a share of a cargo ship or something. I don't know if it's true, I'm pretty sure it is. I'll have to Google it, but it just speaks to the extent that a lot of these companies would go to make sure that their customers are being served. So as much as there are all these efforts to preserve profit margins, it appears to be the case that a lot of businesses will go that extra distance, even if it costs them something so that they can make sure that they have the goods to sell. So I thought that was a really interesting thing in terms of working the supply chain.

The other thing that you asked about Erick is the concern that there's going to be too much supply down the road. I think that's just always going to be a risk. Especially now with all these pendulums swinging, like one day, there's not enough supply, the next day there could be too much supply. This is not just like retail and consumer goods, but also industrial products and all these things. I think one thing that's encouraging is that there still seems to be a lot of pent-up demand just across the economy that should be able to help clear out what could be inventory that's coming down the road. Let's keep in mind that CapEx orders are still at record highs, which means businesses that are creating stuff have plans for more business down the road. And don't forget there are also 10 million job openings, which is right below its record high and companies aren't planning to do the hiring, unless they are planning to use these people for something. So I think, yeah, there's always going to be a risk that there's too much inventory that could potentially be deflationary if we want to even go that far. I think one thing that has been a constant theme this quarter, as well as the last couple of quarters, is that demand is very high and it's expected to persist at least for the near future.

Let's keep in mind that CapEx orders are still at record highs, which means businesses that are creating stuff have plans for more business down the road. And don't forget there are also 10 million job openings, which is right below its record high and companies aren't planning to do the hiring, unless they are planning to use these people for something. So I think, yeah, there's always going to be a risk that there's too much inventory that could potentially be deflationary if we want to even go that far.

[00:17:20] Alex: Two things that come to mind for me as we think short-term and longer-term. Short term, the responses are a lot of the things that you'd expect companies like Dollar Tree or even Disney in terms of some of their offerings in the parks mentioned, for example, the idea of smaller pack sizes which some of them like Dollar Tree has been toying with those kinds of variables for decades now. So that's just a normal part of the business for them. I think what's interesting sometimes is that you see longer-term changes that come about as a result of some of these things. In the case of Dollar Tree, they've considered multi-price points. For those of you who don't know, Dollar tree is a US retailer that sells everything for a dollar, basically everything for a dollar. They've tested, multi-price points, effectively selling things for a $1.50, $2.50...They've tested that in the past, but they never took it particularly seriously. I think after what happened here with the supply chain, particularly their freight costs they've now really stepped on the gas. So it's just interesting to see how this seemingly short-term impact is, has led to a pretty significant change in terms of how they think about who they are long-term as a business. Another example, it's a little bit different, but I think Airbnb is another case where you have to deal with impacts to supply and demand. It’s very different than putting a box of some product on a ship and sending it over from China. Airbnb introduced certain product changes, specifically a feature called ‘I'm flexible’, where it allows them to match supply and demand in a way where someone's flexible on the search. They can meet that need in a way that they had not been able to do previously. So I think it's just another interesting example of how innovation and execution can resolve some of these supply and demand issues over time.

[00:19:02] Mokaya: I found the quote from Costco. Sam, I think I just put it below the pinned tweet. It's about Costco chattering three ocean vessels for the next year to move their goods from Asia to the US and Canada. Dollar Tree is indeed testing various price points beyond a dollar, which is very interesting too since they are sticklers to pricing items at $1 and below.

Trends in the labor market

[00:19:26] Maybe that's also a good segue to discuss a few of the issues which I've seen Sam address, a lot about labor issues. I know a lot of companies have been saying that it's really hard to secure labor for their stores. A lot of retailers said that. You had an article in your newsletter, Sam, that talked about 11 reasons why there are lots of issues at various points in the labor channels. So maybe you can discuss a little bit about that and tell us a bit more about what you wrote there.

[00:19:51] Sam: Yeah, sure. So this is something I wrote for Tker subscribers last week. If you guys want to go back into this, I have the link on my Twitter profile. A lot of the labor shortage issues relate to things that I think a lot of us have heard of. Things like people who are still concerned about catching and spreading COVID. Childcare issues are a huge one that's keeping a lot of parents out of work. Folks retiring and then not to mention there's this trend where for every couple of people who retire in a given year there is a percentage of folks who returned to work and retirements are high and the number of people who unretire is a bit depressed. Two more that are interesting and jarring to hear about, immigration is way down. It continues to decline year after year and this is something that began in 2016 during the Trump administration. Another one that I thought was interesting, and this is something that economist Diane Swonk tweeted a couple of weeks ago. Another interesting thing is the number of people who hold multiple jobs is way down. Millions of people who used to have multiple jobs are no longer in that demographic anymore. I don't know about you guys, but when I was in college, I had two work-study jobs and one of them was working part-time at a bar. There's not a lot of people who will work 40 hours a week as a bartender, but it's a great place to pick up a couple of extra hours. And suddenly if you do find yourself getting higher pay at one of your other jobs, and they're giving you more hours because there is this labor shortage and suddenly you don't have to work two jobs anymore. You can work one job. So this is among the many things that are creating these pressures for a lot of companies that can't seem to staff their businesses, even though people are coming into shops like crazy. So it's a weird conundrum to see exactly what happens with this. With stuff like immigration and retirement, these things are going to turn around very quickly. And then of course if you're following the CDC data, we see this fourth wave of infections that are happening in the US and this is happening with cold weather. So you can't expect folks who are concerned about spreading COVID to be coming back anytime soon.

But getting back to something that I mentioned earlier, one of the things that are keeping workers on the sideline is because they can. And one of the reasons for this is because of all this money that, not everybody, but a decent number of folks were able to save money because they didn't spend a whole lot last year. And then not to mention the fact that a lot of people got stimulus checks and different forms of government aid that gave them a little bit of breathing room so that they don't have to rush back to work. This stuff eventually runs out and it's kind of a complicated dynamic, but let's go ahead and throw in the whole fact that there's goods inflation, right? It's getting more expensive to pay for the goods and services that you need. And so eventually a lot of these extra savings, the financial cushion that people have accumulated in the last two years, goes away, which ends up becoming a source of labor supply for a lot of these companies. I think this is going to be the big theme to watch in the next couple of months and in the next maybe two-quarters of earnings to see to what degree companies complain less about labor. This is going to show up in monthly jobs reports, but eventually, these folks who have been sitting on the sideline of the workforce, maybe not all of them, but at least some of them are going to start coming back because they're going to have to start earning money again.

[00:23:48] Alex: Yeah. I don't have a ton to add to that other than, and this is only tangentially related and it's a bit anecdotal, but I've been interested to see how some of these larger tech companies, had a perception as being capital-light and did not need many people to run the businesses. I just think we've seen that kind of go way over time, obviously in terms of their CAPEX spend, but also in terms of their headcount. I'm looking at Facebook right now, a decade ago they had roughly 5,000 people working at the company based on the guidance they gave last quarter for 2022, there'll be closer to 90,000 people next year. So it's just interesting to think of some of these companies where you might not think that they would employ a lot of people, they're needing a much larger workforce than many may have anticipated. So, it's only 90,000 jobs, but there are a lot more companies than just Facebook that have similar demands in their business. So I just think that's interesting to keep an eye on as well.

Tech Companies in Q3

[00:24:45] Mokaya: Definitely. I sourced a few thoughts from many people on FinTwit and one of the thoughts was actually about Twitter itself scaling up in terms of hiring in the next quarter or so, which may affect that 2022 earnings. So it may not be able to be reflected this year, it will be reflected more next year, which may be one of the reasons why the stock is trending very low as it is currently. So I think we've gone through half an hour of discussing the macro topics. I would like to open up more to very specific things that you may have noticed, which may be unique to you. And at this point, I think I'll start with Alex who follows Facebook a lot, and you follow a lot of these companies. Maybe you can tell us a bit about what you saw, which are unique points that you've been following for awhile

[00:25:28] Alex: sure. Well, if we're starting with Facebook, there are like 10 different big things that we could talk about. The first one, I guess, at a high level is that the core business by my reading continues to do very well. They have a massive number of users across their platforms and the ability to deliver effective ads enables them to generate significant increases in ARPU as well because there's high demand for those impressions. So their two-year stack growth, I believe, I'm forgetting now, was either 60 or 70%, but that's still obviously a very strong growth rate for a business that has seen its revenue base increase multiple times over the past handful of years. So that's very impressive. Now they're dealing with the impact of Apple's ATT implementation, which if people are interested in learning a lot more about that topic, I highly recommend the podcast that Ben Thompson did with Eric Seufert, I believe his name. He's very thoughtful about online advertising and the whole industry.  It's worth listening to. I think this quarter we saw Snap come out with their results and the stock got pummeled. I think effectively what happened is they did a really bad job of communicating with the investment community about the short-term impact from ATT.

When Facebook's results came out, they were impacted as well, but they did a better job of effectively communicating with investors about what the impact might be. They also laid out their plans for how to at least try to address it. There's a big problem here in terms of finding ways to close that loop between targeting and attribution, which is really what direct response advertising is dependent upon. So a lot is happening in the business and it's getting to a size where it's not going to increase the user base double-digit growth rates and perpetuity because they're going to round up people on earth eventually. But they're in a very strong spot in a lot of ways. The really big announcement was about their metaverse efforts and the name change. And they said that their investments in FRL would be a $10 billion hit to operating income this year, which is a very big number and much bigger than people had guessed based on what they had said previously. I don't have a ton to say about it, I mean, I wrote an article about it, so I tried to put my thoughts as clearly as possible in that piece. It’s incredibly early, but I think this idea of presence in digital spaces and just this is where the world is going to seem intuitive and it almost seems inevitable over a long enough period. I think it was interesting that the guy who runs Microsoft's Microsoft 365 business, said recently he was talking about Microsoft specifically, but he said the first digital revolution of ours was essentially about the digitization of paperwork. This next digital transformation that we're all going through is about the digitization of space and time. And I think that idea makes a lot of sense. So, it's incredibly early. But I think Zuck's a visionary in a lot of ways and he has the balance sheet and the income statement to invest aggressively and the voting shares as well. That's also very important. But this will be an interesting development to watch throughout the next five, 10 years, maybe longer.

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The Metaverse

[00:28:32] Mokaya: Sam, any thoughts on the metaverse especially as on big tech, any of those companies? Because one of the things that we noted in The Transcript about big tech especially the social media companies saying that they're seeing the fact that their supply chain issues affecting some of the companies ability to spend on ads some, of the companies noted that they're seeing some other companies reducing their ad spend because of supply chain issues. An impact from some of the companies Apple’s privacy concerns. It's impacted the ability of some of the social media companies to be able to assess the impact of ads. And that has also made some of the companies reduce their spending in that regard. Maybe, Sam, you could tell us a little bit about any thoughts that you may have on tech and big tech and metaverse and all those. 

[00:29:21] Sam: Yeah I think it was Snapchat that had the headline, that they were saying ad spend declined because of businesses that said, well, if we don't have the inventory to sell any of this stuff, then why are we trying to advertise so hard to draw people into our stores and our online portals and stuff, to look at goods that they can't order anyways. So maybe that explains a little bit of why companies were able to save a little bit on their profit margins. I don't know if I buy that it's going to move the needle by that much but that's an area that's very personal to me. If anything it was more personal before, but it's a little bit less now. For the last 15 years, I was working at news websites where it was all free and it all depended on companies being able to spend on digital advertising so that we could monetize our free content. I'm not sure I'm that's going to be something that persists, but regarding the metaverse though, I think it's just really interesting. It's fun to poke around and joke about and stuff, and I'm not completely sure it completely displaces everything that we do in terms of work on and interaction with each other. But I can certainly see it having a huge impact on how we do a lot of the work that we do, especially as companies try to figure out ways to increasingly streamline their businesses and cut costs and stuff. There's going to have to be a way that companies save in other areas.

And this is also going to be something that if this is a source of cost savings, this is going to be something that offsets something where costs might eventually rise soon. I think one thing that we have learned during the pandemic is that these extremely efficient supply chains and just-in-time delivery and all this stuff are while efficient, really cost-effective, and all this stuff, it's incredibly fragile. So you see silly things like Costco getting into the boating business because they're trying to make their supply chains more robust, but that's going to cost something and they've got to figure out how to save elsewhere. And so maybe they cut their corporate real estate in half and do all of their meetings in the metaverse or whatever. But I think it's something to not laugh away because I think it could be something that does have a huge impact.

My question, maybe Alex, you can speak to this or because I'm just really not that well versed in this. But my question is, what's stopping Microsoft from having a better metaverse or maybe converting Slack into -- we saw Netflix pivot from DVDs to streaming. What's going to stop Slack from going from chat to this metaverse kind of experience. From a competitive standpoint, I don't know exactly where I would be putting my money in terms of betting on the metaverse. But I do think it's something that will be a bigger part of our lives much sooner than we think.

[00:32:28] Alex: Yeah. I think it's a fair question. And it's one that Facebook shareholders or Meta shareholders like myself should be asking themselves. I think I’ve pitched this every time I talk anywhere, but Ben Thompson's newsletter is a must-read for anybody interested in technology generally. He did a really good podcast basically on this exact topic where he broke down how he sees the competitive landscape between four key players. One being startups of some kind, two being Apple, three being Meta and four being Microsoft. The point that he made that resonated with me is this idea of Microsoft Teams as kind of a key layer of what Microsoft brings to the table. And this idea that the adoption of AR-VR, whatever you want to call it, for lack of a better term is more likely to mirror what happened with PCs, where adoption started in the workplace, started in the enterprise, and found its way into the home, as opposed to what we saw in mobile, where people essentially already had a phone in their pocket We just went from a phone that did nothing besides phone calls and text messages and now it does whatever you could possibly want it to do. So that was more of a consumer-driven adoption as opposed to an enterprise-driven adoption where the use case and the price point for the technology are going to find their best use, at least at the start in terms of enterprise application.

So his argument at the end of the day is that the front runner in this race is actually Microsoft. I don't want to misquote him, but I think his addendum to that was Facebook is second given who Mark Zuckerberg is and given the resources that he has at his disposal. So it'd be very interesting to watch, but yeah, I think it's incredibly early and maybe a more tangible thing to talk about in tech is kind of this just the idea of digitization generally. Satya Nadella, who's Microsoft CEO, said about a year ago that over the next decade, they think that technology spending as a percentage of GDP is going to double and just looking at the results as of late it's hilarious. I think we talked about this last time as well,  these companies just get bigger and bigger and bigger. And the growth rates that they're putting up in some cases have only accelerated, they're not even slowing down. In Microsoft's most recent quarter, their cloud business revenues were up mid-thirties year over year. It's at a run rate north of $80 billion, which is three times larger than it was three years ago and now accounts for nearly half the business. Just to put that in context, they only ever set a financial goal for their cloud business back in 2015, with this target of $20 billion run rate revenues by FY 18. So we're 4X that level now it's half their business and it's growing, the mid-thirties. So just crazy and AWS results, very similar run rate north of 60 billion and growth last quarter in the upper thirties. So I just think we're witnessing some very large long-term structural trends and their global trends. What that means is that for a certain number of companies, there are astounding results currently being reported.

[00:35:24] Mokaya: Pretty incredible actually to look at some of the companies and the kind of results they reported this quarter. About the metaverse maybe to add a comment there, I think listening to Zuckerberg what he said is they're not going to build a metaverse alone, so there are going to be multiple players in this space. There may be a few winners in the end but I think at the beginning there are a lot of companies that have a very high interest in this space, and there's going to be a lot of collaborations needed to build and to take advantage of the opportunities in this space. I think that's one key thing that came about. But also in terms of Facebook changing its name to Meta, I think one of the things that stood out for me is that Facebook in the space of one quarter, just turned the conversation about metaverse from being very niche to being mainstream and now everyone is talking about it a lot more. Some companies have been playing in this space for a while. I think listening to a company like Roblox, they've been doing it for a while. I went and listened to Invidia’s call. They also have been doing it for a while. Theirs is called the omniverse.  I think there are companies which are playing in this space if you're very interested, I think that there are a couple of companies like those that you can follow: Roblox, Facebook now Meta, and of course also Tencent. They have very many quotes in this space.

Opportunities and Challenges in Streaming

[00:36:38] Maybe turning to one more thing that I wanted to hear, maybe more from Alex is about Netflix and the Squid game. I think this was a stunning quarter listening in on their earnings call or reading the earnings transcript, you could tell that they were very surprised as Squid Game took off in the way in which it did. And then I think Disney also had quite a tough time, I mean, it's especially been a bit tough in the Disney+ space. They've hit 118 million subscribers on Disney+. So maybe I wanted to hear your thoughts on those two companies and whatever else you saw in that space of streaming services.

[00:37:10] Alex: Yeah, sure. Well, let's start with the fun one. Yeah, Netflix released Squid Game, which I'm sure everybody knows they released it in mid-September. I wrote about this and it's kind of funny that the show had been rejected for about a decade by local studios in South Korea and then Netflix took a local content team there, they signed to deal with the writer and director in 2019. So yeah, they released a show and it built somewhat slowly but it's become a huge phenomenon sun, sun. And I think the number they gave on the call was 142 million member households had watched it, I believe. And that was still relatively early into all this. So that number is north of 150 million. And just to put that in context, that's three times larger than the total population of South Korea and it has been a top program in nearly a hundred countries around the world for Netflix. I've been somewhat doubtful about the ability of video content to travel globally and to have a big impact on engagement, user retention, and all the important metrics. And I think this isn't the first time that Netflix has had a successful show like this that traveled borders in a big way. I think the big knock-on idea is that thesis that I had previously and as you're thinking about Netflix’s business long-term and you think about global scale if that fact is true, it's incredibly important to the business. 

In terms of Disney, it's funny to think that six months ago people were having a conversation about Netflix and its ability to grow and add subscribers and whether or not they'd kind of hit a wall and well that narrative has changed and Disney was somewhat able to avoid that earlier this year. I think in hindsight, with clear data, we can see that that was driven by these very low ARPU Disney+ hot star subs, primarily in countries like India. So, how you think about that is important, but they've hit a bit of a snag in the short term, and this is kind of the reality of running a D2C business and learning the ropes and they've been impacted by their ability to get content to the services as a result of COVID, there were delays associated with that. So they won't hit their stride in terms of the content they need till six to nine months from now. And a period like this also presents questions to management. I wrote in the introduction to my Disney article that's going to come out

Sometimes when you report earnings or report some news as a company, the market reacts a certain way and the right thing to do is just disregard a short-term noise in the market to do what it does. I think other times the market reacts a certain way and people have questions about your strategy and you really should consider effectively what they're saying, the people who are selling the stock and pushing the price down. I think this is probably a case where Disney needs to think about the effectiveness of having multiple services as opposed to consolidating it all into a single lap, kind of an all-you-can-eat model that Netflix has utilized. Disney has done the same thing, even in markets like throughout Europe or in Canada, they have Disney+ with the star tile built into the offering. And for stars, basically, just call it an equivalent of something with Hulu. It's a more general entertainment offering that they decided to consolidate into a single app.

“Disney+, ESPN+, and Hulu continue to perform incredibly well with 118.1 million, 17.1 million, and 43.8 million subscribers, respectively, for a total of 179 million subscriptions. To put this growth in perspective, in the past fiscal year alone, we have grown the total number of subscriptions across our DTC portfolio by 48%, and Disney+ subs in particular by 60% -- We are enormously proud of all that we've accomplished with the service in just the first 2 years. It has exceeded our wildest expectations” - Walt Disney (DIS) CEO Bob Chapek

So I think they're seeing that the strategy they currently have in a market like the United States maybe needs to evolve a bit to more effectively service the needs of the business. So it's still incredibly early. They launched Disney+ two years ago now. Expectations at the time were for something like 60 to 90 million subs globally in five years. And, as I mentioned about the hot star subs, there's probably some adjustment needed to that number for an apples-to-apples comparison. But the reality is if you look at it today, from where you thought they might end up two years ago, they knocked the ball out of the park. So as always in business, you need to adjust the realities on the ground at the time you're making the decision. And I think in this case, Disney needs to do that and I ultimately think they will do.

[00:40:53] Mokaya: Thank you, Alex, for that. I think from my readings of the transcripts of those two companies, Disney and Netflix, I would say mostly, especially about Disney, that they're going to spend a lot on CapEx in the next year to try and get more content, especially on Disney+. So it's going to be a challenging year, maybe short-term challenges, but the long time is very good. They have a very ambitious goal of getting to around 200 million-plus subs by 2024. I'm pretty sure that they're capable of that. We will keep watching in that space. 

What Surprised you the most in Q3?

[00:41:21] So maybe I want to turn to Sam, you had an article titled “counterintuitive trends that surprised Wall Street”. So in that same regard, I wanted to ask you, what kind of things surprised you in Q3 from the earnings of the companies that you followed generally, or maybe key themes that surprised you and the same for Alex.

[00:41:40] Sam: That article related to how companies were able to maintain their profit margins at near-record levels. I know that you read a lot and you hear a lot on CNBC and Bloomberg and a lot increasingly about how companies have this pricing power. When you hear about it at this high level, it's like, okay, that's interesting. But I thought one call from earlier this week was extremely interesting and that was the TJX companies. If you guys aren't familiar, TJX is the parent company of TJ Maxx and Marshall's, and growing up, this is where I did all of my shopping because I didn't have a job that could pay for the actual nice clothes. And my parents weren't giving me s**t for allowance. So if I wanted to try to get something that was a decent brand but affordable, you went to TJ Maxx and you went to Marshall's because that's where, Polo and Monica and Levi's when they had too much inventory, it gets sent to these stores, it gets marked down by 50% and suddenly, you look cool in middle school or high school. All the places that you would think that would have a little -- I would struggle a little bit with inflation or inventory or costs or anything. You'd think that TJ Maxx might have an issue there, but I believe their quote was that they were, I guess, strategically raising prices and the quote was there was “no pushback from the customers”. So this company that sells consumer goods to a consumer that knows inflation is happening but is specifically targeting people in lower-income demographics is raising prices and people are taking it. They are still buying these goods. So I think that speaks to how crazy things are in the world right now with both sentiments being very sour because of inflation being high. And yet every company, including discounters are actually raising prices and they're still able to send off those costs to their customers. So I think that was one thing that just really stuck out to me because this is not some fluke that pricing power is sort of happening very quietly, but even discounters are raising prices. I think that was probably the biggest surprise to me. And, again, I think, looking out and until the next quarter, the question is going to be, to what degree pricing continues to stick. If it continues I think I would be surprised again. And if profit margins continue to be at record levels, I would be surprised again. But if there's anything the last two quarters have taught us is to not be surprised by that kind of thing.

One thing that Alex mentioned in passing that Erick, I think you mentioned in one of the, I don't know maybe in a DM or something, was in this quarter, investors and traders punished companies on missed expectations. More so than considerably more. And I think you had a chart and maybe you can share this. I think JP Morgan or someone did this analysis, but I think in a given quarter when a company misses on earnings, you see, so I'm looking at this, there's like an average sell-off of about 1.7%. I believe it's the relative one-day performance relative to, I guess the S&P. You typically see maybe about a 1% sell-off when you miss on earnings. In Q3, the sell-off was the under-performance was 4.3%. So companies were getting smoked for falling short of expectations. And I think this is something to watch or just to be mindful of as an investor who might be thinking about making tactical tweaks to their portfolios, or making changes before the year is over. I'm not making any kind of recommendation or anything here, but to me the way I interpret what's going on right now is, God, I hate to use this phrase, but this is telling me that the market is generally getting to that point where you can call it priced to perfection, where you have to either meet expectations or beating expectations tends to be what the market actually expects. But if you're falling short of expectations, your stock is going to get dinged. So, I think that is something to certainly be mindful of as an investor as you think about your positions.

[00:46:25] Alex: Yeah. I don't know if I have anything, in particular, to shout out from this quarter that surprised me outside of probably just broadly speaking. It's amazing to think about what we just lived through over the past, I guess, 24 months to see a business, it's a younger business and it has some structural tailwinds [but it’s growing anyway]. So it's kind of a cherry-pick, but a business like Airbnb, where the bookings on the platform this past quarter are down by a pretty immaterial amount relative to where they were pre-pandemic. I mean, just the ability of the economy to weather a lot of these issues and to adjust and to find a way forward is just amazing. The economy is just the accumulation of all individual people and companies and all the decisions they make and the investments they make, et cetera. So I've just been amazed by a lot of the results that I've seen from a lot of the companies that I follow. It's really something.

Maybe the one other one that wasn't from an earnings call, but I know you'll appreciate this is probably Comcast paying $2.7 billion to keep the Premier League rights in the US where the prior deal had a value over the life of the contract of the comparable length of time. That was a billion dollars. So I'm still trying to wrap my head around how they justify paying for that. And also the decision that they announced earlier this year that they're shutting down NBC sports, which for those who don't know, that's the channel where they feature the vast majority of their EPL rights. So I don't know how to read into what they're doing there, but I found that a bit mind-blowing. So maybe that could be my answer.

[00:47:52] Mokaya: Yeah in addition to that, I think what I saw from the Netflix earnings call is that they say that a lot of traditional broadcasters are trying to bank on live sports as the way to save themselves from cord-cutting. And I think the streaming companies also, eyeing this piece of live sports to also boost their viewership. It’s pretty interesting that they're paying that much, but I'm told if you put that in a context in the US that's very small compared to what other companies pay for the rights for baseball or basketball and all. I'm not so sure. I just saw someone comment below the tweet that you had. Is that true, Alex?

[00:48:28] Alex: Yeah. I mean, some of the rights are incredibly expensive, particularly the NFL, and obviously, you're getting a lot less tonnage in terms of the number of games. The premier league has I think it's 300 games, 300 and something games in a season, something crazy like that. So, if you're paying up, for example, an ESPN package from NFL football, they're only getting, whatever it is, 15 games a year or whatever it may be. So yeah, it's a huge price tag. That’s a good point though. I think we're starting to get to a place where the role of sports and I guess you could say live programming, generally stuff like news and how it interacts with some of these D2C e-sports services, it's going to be very interesting to see because it has a place and it's very big in terms of retention and engagement. So I think Netflix, they've said for years that they don't think that their next best dollar is spent acquiring sports rights. And I think the reasons they've laid out are very logical. And I think it makes sense. That said, they saw something with the F1 series that they had. And, I don't know if it means that they'd be interested in looking at buying a league like Formula One or how they would look to get more involved. Maybe it's just more shows like the F1 series that they have. It's a very interesting landscape. It's going to evolve a lot over the next couple of years.

[00:49:42] Mokaya: Yeah, they do have a really good quote about opportunity cost, I think. And that's what makes them, they don't see value in live sports, but come to think of it, imagine being able to just log into Netflix and being able to watch all your favorite sports in one space. And then you just pay one subscription for all of the games and for all the sports. It can be pretty impressive of course the rights will be very expensive. I know Formula One had their own exclusive channel where you can pay a monthly subscription and then get access to all of these channels. But that's very interesting whatever is happening in that space. I know EA Sports is also having issues with FIFA in that regard also. They want to have the product itself, not associated with FIFA itself because FIFA wants them to pay very high costs for that.

So perhaps this is towards the tail end of our talk today. Maybe I would ask one more question because this is the last earnings call for the year because the next earnings season is early next year. So perhaps you could tell us what you’ll be watching over this space until next year. And maybe also you can plug in your various Substacks and also tell listeners where they can find you and maybe some closing comments. You can tell us where readers can also find you, what are you watching and what should the listeners and readers be looking at, and also where can they find you?

What to Look Out for in Q4

[00:51:02] Alex: Sure. Let me start by saying thanks for putting this together again. I think it's an enjoyable conversation. I always like hearing Sam's point of view on things. I'm going to take them in reverse order real quick. So my service is the TSOH investment research service on Substack. You can find it on my Twitter page, Twitter bio. I have an article coming out in two weeks, it'll be available to free subs and pay subs available to everybody where I'm going to lay out my investment thesis. And the reason why I wrote the article is because I started investing in, I believe it was 2007 and over the course of the past 10 plus years, a lot of the things that I believe fundamentally have not changed in a big way, but how I apply that in terms of my investment process has evolved a bit.

So I think it's worthwhile for me to put that on paper, one for prospective subscribers or current subscribers to see whether or not it aligns with their own view of the world. And I also thought it might be helpful for me to write it down just so I could have it very clearly stated somewhere. So the point of me saying that is, and I’ve outlined in that article in more detail, obviously I'm a long-term investor, who looks to own high-quality businesses and typically fairly concentrated positions. Something like 5 to 15 positions total with the top handful being the majority of the portfolio. I say that because when I listen to the next rounds of earnings calls, just as I do with every set of earnings calls, I'm looking for a handful of things. I want clarity and vision from management. I want clear explanations for the things that are not going well. I want a real reason to believe that the people that I've entrusted with my capital to run these companies have the same long-term goals as I do in terms of maximizing the per-share value of the business, but also ensuring happiness and satisfaction of all stakeholders to some degree. And also that they're continuing to move forward in a way that I think makes sense. So those are the things that I'll be listening for and we'll see how that goes. Hopefully not too many surprises. It sounded like people had a lot of surprises in Q3. I think I luckily missed a good amount of those generally speaking, but that might just mean I have them coming in Q4. So I'll keep my fingers crossed. Thanks again for having me.

[00:52:59] Sam: And it's called The Science of Hitting. You forgot to plug in the name.

[00:53:03] Alex: I forgot my name. Yeah. The Science of Hitting. Thank you, Sam.

[00:53:05] Sam: Yeah likewise, it's great to hear from Alex and Erick. Thanks for setting this up. It's great hearing from Alex. Cause a long time ago I spent a lot of time analyzing equities at that company level. So it's good to know that there are still people who take great care when doing that. Tker, the newsletter that I write, the link is in my Twitter profile, really focuses on the macro themes, the big picture, the backdrop that the companies that Alex covers are operating in. I think one of the things to look out for, and this is something that I'm going to be writing about, on my Sunday issue and if you guys want to check that out, this is the preview of what that's gonna look like. And my Sunday issues are always free. So that goes out every Sunday weekly.

But I think the big thing to watch right now, and I think it's super bullish is to see what companies are doing with inventory and specifically the inventory rebuild. This is not even about the degree to which companies are converting this into sales and revenue. We know that the demand is pretty robust, but even if things go sideways, companies are still having to restock their stock rooms. A lot of the sales and earnings beats that we've heard about in the last two quarters has been because companies have been depleting the hell out of their inventories. And there's a lot of nuance to this too. Keep in mind that, when companies have a lot of inventories, that means they also have to do something about clearing this stuff out, which means, clearance sales, markdowns, promotional pricing, and all this stuff. And that has just not been happening. As much as it used to in the last couple of quarters, and this actually sort of feeds into a lot of these inflation stories. One of the reasons why my jeans are so expensive this year isn't so much because the price went up. TJ Maxx didn't have them on markdown this year. So this whole story about inventory and companies getting their inventories back to those normal levels I think ends up becoming an incredibly bullish story for the economy.

So this whole story about inventory and companies getting their inventories back to those normal levels I think ends up becoming an incredibly bullish story for the economy.

And, again, this is not just retailers, capital equipment, I mean we know everything we know about, tech companies and chip suppliers on, of course, the auto companies as the supply chains do loosen up and they are loosening up. I mean, as much as they're still backed up and you hear about these bottlenecks when you do look at the data, it turns out that the port of LA is processing more goods this year than they were last year, even though it looks worse now it's because of all this demand. So I think it's going to be interesting to see these conversations about inventory and it's going to be incredibly boring conversations. It's the kind of stuff that happens in the middle of the Q&A as analysts are trying to tweak their models and adjust how they analyze a company's balance sheets. But I think this inventory conversation is gonna be really interesting because the more companies talk about how they're right-sizing their inventories in an expansionary way. That is someone else's business. And that also is going to translate into a huge tailwind for stuff like GDP. So keep an eye on inventories. My newsletter is called Tker, that's TKER and you can find that at tker.co. 

Conclusion

[00:56:29] Mokaya: Thank you. Thank you, Sam. Thank you, Alex. It's always a pleasure. I religiously read your newsletters every time they come to my inbox. So it's a pleasure to come and listen to you. I love your writings, so I enjoy them a lot and share them with friends as much as I can. It's always nice to host this. This is our second quarterly review. So we'll be doing another one again early next year. So in the meantime, it's good to tell our listeners I just posted the links to Sam and Alex's various newsletters. You can just subscribe to them and follow them. We also have our newsletter, The Transcript, where we read earnings call transcripts and summarize the key thoughts and key quotes that can also impact your portfolio. Also, subscribe to thetranscript.substack.com. The key themes which we've been following with Scott, he was not able to join today. Mostly, we are also looking at supply chains, we're trying to see when they will turn. And we are also looking at inventories as Sam says also if they are also going to pile up once the supply chain situation eases up. But also we are looking at various other aspects like we track quarter to quarter and see what a company is saying, and we try to analyze the key themes and trends for you and to distill that in our weekly newsletter. So do follow us and we hope that we can also do another one like this early next year. In the meantime, we wish you happy holidays and see you next year. Thank you, Sam. Thank you, Alex.

[00:57:49] Both: Thanks, everybody.

[00:57:50] Mokaya: Thanks for joining us today.

Episode Summary: In this episode, we discuss the Fed's tapering and desire to raise rates soon, the signs of normalization from various consumer trends, and fusion energy as a way to power our future energy needs. 

The episode is based on yesterdays’ newsletter which is available here:

A transcript of this podcast, with relevant images and quotes, is available for subscribers only after the show notes below.

Show Notes:

00:00:00 Introduction

00:00:16 Tapering Begins

00:04:02 Will they raise rates soon?

00:04:22 Normalization trends in consumer markets

00:08:22 The world can count on fusion

Show Notes:

Introduction

[00:00:00] Scott: Welcome everyone to a new episode of the transcript podcast. You've got me; Scott, Chris loft. I'm the editor of the transcript, along with Erick Mokaya who's the lead author. We sent out a new issue of the newsletter yesterday and had a focus last week on the federal reserve meeting.

Tapering Begins

"...the focus at this meeting is on tapering asset purchases, not on raising rates. It is time to taper, we think, because the economy has achieved substantial further progress toward our goals measured from last December. We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation." - US Federal Reserve Chair Jerome Powell 

As I'm sure most people saw, the federal reserve decided to begin to taper asset purchases. But overall remain very devish. Interest rates are still at zero and not expected to increase anytime soon. And all of this was despite the fact that Jerome Powell did say that the level of inflation we have is not at all consistent with price stability and also that there are signs of a “really strong labor market”. Yet, the federal reserve continues to maintain an easy managing policy because it's talking about not having achieved maximum employment which is a nebulous term that they're not really defining. Eric, any thoughts on any of that?

[00:00:56] Mokaya: I think I have more questions than answers. And I think since you spent a lot of time yourself on the transcripts with the federal reserve, you`ve read a lot about them. Have you seen any changes in terms of maybe the tone about raising rates going forward? Because; the explanation they give that it doesn't think like it's controversial to not raise rates, but everybody seems to think like, it is actually controversial for them not to raise rates at this point in time. Like, what exactly is their thinking there? What, what do you get about that?

"I do think it would be premature to raise rates today. That’s not -- I don’t think that’s controversial. Certainly, I don’t know anyone arguing for that today. And the reason is that there’s still ground to cover to get to maximum employment." - US Federal Reserve Chair Jerome Powell 

[00:01:26] Scott: Yeah, I mean, I think 12 years of an effective zero interest rate policy has taught everybody who's operating capital markets that you shouldn't fight the Fed and that the Fed is going to be leaning towards a very easy money policy. And everybody's just kind of watching and no sign of changes I guess.

"We are prepared to speed up or slow down the pace of reductions asset purchases if it’s warranted by changes in the economic outlook. And again, if we feel like something like that’s happening, then we’ll be very transparent. But we wouldn’t want to surprise markets." - US Federal Reserve Chair Jerome Powell 

[00:01:46] Mokaya: I think the last bit of the quote that we highlighted was about them not wanting to surprise the markets. I think that was what maybe they are going for. So I think the expectation would be for them not to raise rates for a little while longer. And when they do that, they will give express notice to the market. So there is no taper tantrum, like last time. I think that would be maybe what is informing, how they are going forward. But I think right now, everybody kind of agrees that this is so late in the cycle, they should be raising rates at this point in time. I think every company that you read, especially in the financials real estate sector, they actually are expecting that they should raise rates soon.

“I personally think the flat rate scenario that everybody is projecting is overstated. The underlying strength of our economy is not great, but it’s good. The Fed, I believe, clearly knows they need to raise rates, and I think they will the minute they see a window, which could still easily happen at least one rate increase towards the fall.” — BB&T chairman and CEO Kelly King

[From 2016]

But then again, there's a day I went back to copies of the transcripts, maybe from 2016. And I actually found out banks were still expecting in 2016, but the Fed was going to raise rates. So it was just surprising that back then they were saying in the next seating, they are going to raise rates. So I think this is five years later and we're still hoping for them to raise rates. So we are pretty much stuck in a rat, so to speak. What do you think there?

[00:02:52] Scott: Yeah, I mean, I think for the last 12 years, There has been this psychology that we're in deflation, even though the data doesn't support, that there's been any real deflation happening in the U S there's still been positive inflation over all of those years, but the mindset is that we are trending towards deflation. And so the Fed had to maintain an easy money policy. Today we're very clear on the experience. Again, inflation, you know, five, 6% inflation. But then again, the narrative is around. Oh, well it's just transitory inflation and then, oh, well it's not transitory but it's just episodic inflation.

And I mean, the federal reserve just seems very intent to not at all address the inflation that it's seeing in the economy and just say, you know, we think things are going to get better, but then printing money into this is not a way to be addressing inflation at all. And an emergency monetary policy in this environment feels somewhat irresponsible or at the very least, not at all data-dependent. And I think that is a major concern as a citizen.

Will they raise rates soon?

We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation." - US Federal Reserve Chair Jerome Powell 

[00:04:01] Mokaya: Yeah, I agree. Totally. But, is there any indication from the transcript that when they are likely to raise rates?

[00:04:09] Scott: Yeah. I mean, I think the federal reserve is being very clear that they don't expect to raise rates until sometime next year. So the easy monetary policy will persist for a while. 

Normalization trends in consumer markets

“...with cases on the downswing, we have built -- quickly we built momentum into October and the level of demand in the marketplace, especially on the weekends has simply been incredible. October will be another all-time record month." - MGM Resorts International (MGM) CEO Bill Hornbuckle 

"...a combination of variants, increased employment opportunities and compensation, along with fatigue, have all led to significantly fewer enrollments than expected this semester -- Nobody could have anticipated just the robust nature of the low-end economy where our kind of students, community college students, four-year students and schools that most of you don't know about, chose to go earn an income or stay home with their child versus go back to school this semester." - Chegg (CHGG) CEO Daniel Rosensweig

[00:04:22] Mokaya: All right. Anything else that you may have picked from this week's quotes? We had a lot of them, especially in the consumer section. If you can pick a few, then we can break them down as we go forward.

[00:04:31] Scott: Yeah. I mean, I think the consumer section showed the juxtaposition between what's happening in the real economy and with federal reserve policy where a federal reserve policy is very much focused on an emergency response and the consumer economy is jumping right back into where it used to be in 2019. So you're seeing kind of the last fringes of the economy. Healing with things like people returning to gyms, Airbnb seeing a pickup in demand in urban areas, Uber seeing strong demand for bride share, Vegas bouncing back.

And then you're also seeing some beneficiaries of the pandemic seeing headwinds. So like Peloton experiencing a post-pandemic slowdown, Chegg is talking about people not investing as much in their education. So you're seeing this like final, complete normalization of the economy that is showing up in earnings calls right now. Any thoughts there? 

"People are choosing bricks and mortar. They’re coming back faster than we’ve ever seen. They’re rejoining our clubs faster than we’ve ever seen. The Gen Z’s are joining faster than we’ve ever seen. All the winds are blowing the right direction, and the sails are wide open." - Planet Fitness CEO Chris Rondeau

 "It is clear that we underestimated the reopening impact on our company and the overall industry --.While we continue to see a nearly 100% two-year growth CAGR in both traffic and unit sales in Q1 and into Q2, we've seen a greater-than-anticipated taper of our website traffic levels over the past two months and a slower-than-expected pickup in retail showroom traffic, both of which are important inputs into our forward-looking demand mode." - Peloton Interactive CFO Jill Woodworth

[00:05:29] Mokaya: Yeah, I agree on that. The companies that experienced really tailwinds during the pandemic are actually experiencing slowdowns, as you've noted. One of them that I have also been observing very keenly is Peloton. And I think one of their quotes from the CFO was actually very telling. It says that they underestimated the reopening impact in the company and the overall industry. So if you put a side-by-side Peloton, and  Planet fitness, they show you the trend of the economy. So Peloton is experiencing headwinds. As the economy opens, they are experiencing slowed-down traffic on their website. While Peloton is experiencing headwinds. We can see a company like Planet Fitness is experiencing tailwinds. As people move back into the gym. Airbnb is experiencing demand in urban areas. People are moving back away from suburban areas. As you say it tells you that the economy is reopening and things are actually almost normalizing. And I think a couple of weeks ago we saw a quote that says that people are now learning to live with the pandemic. Like it's not something that is going to be wholly disruptive to people's lives going forward. Of course we continue to see issues with the supply chains. As we head into the holiday season, I think it's a very key thing to note. The quote from FreightWaves CEO that said that people may actually be forced to go to stores this holiday actually, instead of shopping online more than you'd normally expect them to. So I think that's something notable. Anything else that you may have noted yourself?

 "The housing market is returning to sustainable levels and oh what a relief it is. Year-over-year price gains peaked in May 2021 at 24% and have narrowed every month since to 13% in September. In the hottest pandemic markets, like Boise, Salt Lake City, and Tacoma, more than 40% of the listings on the market have dropped their price, when earlier this year that number was below 12%. From April to September, the percentage of Redfin’s offers facing competition decreased from 74% to 59%.” - Redfin (RDFN) CEO Glenn Kelman

[00:06:54] Scott: Yeah. Two other areas of normalization that are noteworthy. One in housing markets, Redfin mentioned housing markets are starting to normalize now. That means the price level is going up by only 13% instead of 24% a year, which is still a massive jump in home prices. But that's another sign where, like Chegg or Peloton, where people are focusing more on experiences, again, going out, traveling, rather than the intense focus on the home. You're seeing a bit of a shift away from, from housing spent there potentially. And then the other area, which I just think is kind of comical where there's no normalization is on the work from homework, work from the office front. 

Where I think companies still kind of want to try to get their people back in offices. But I think that employees don't really want to go back into the office, they want to be able to still have the flexibility of working from home. And so I think it's really that balance where Yeah, but people have no problem getting on a plane, but don't want to get on a plane for work. That's making the nature of work change and is probably going to have the nature of work changed for the longer term because of that. So I thought those were two interesting areas.

The world can count on fusion

 "This funding ensures that Helion will be the first organization to generate electricity from fusion -- Our 6th prototype demonstrated that we can reach this pivotal milestone. In just a few years we will show that the world can count on fusion to be the zero-carbon energy source that we desperately need.” - Helion Energy Founder and CEO David Kirtley

[00:08:06] Mokaya: Yes, and I think one final bit is, let's talk a bit about fusion and I mean, one of the quotes we picked up there was that we need more backup for solar and wind as energy sources. And I think one of the new energy sources is fusion. Maybe you can tell us a little bit more about that?

Source: Helion Energy

[00:08:22] Scott: Yeah, thanks for teeing up for me, Erick. So some listeners may know that the transcript is a side project for me. My actual day job is as Chief Business Officer at Helion Energy, which we're a fusion startup, based out of the state of Washington. And we had some big news last week, we actually closed our series E fundraise. It was a $500 million fundraise with opportunities for an additional $1.7 billion in funding. And we also made a very important announcement that we are expecting to generate that electricity from fusion in 2024 which means that we will have our first demonstration fusion power facility in 2024. And this is something that I wanted to make sure that it was highlighted for listeners of the transcript. Not just because it's important and it's something that I'm working on, but also because this will potentially have major economic impacts and investment impacts in the energy space. I don't expect us to move markets in the near term, but I think this is something that people will recognize more and more in the not-so-distant future.

[00:09:28] Mokaya: I think it's good to say congratulations on that. But then again, just to ask in the same breath, I should ask the question, what is fusion energy for the uneducated like me?

[00:09:37] Scott: Sure. Thanks. No, I appreciate your asking that. So fusion is the opposite of fission. It's a form of energy where you actually combine two atoms together and you get energy out of it. fission you split it out of a part and get energy out of it. So fusion is the same energy source that powers our sun. And you take two atoms that you can find in water. It's a form of hydrogen called deuterium. You fuse them together and you're able to produce energy and a bottle of water containing deuterium water would be able to power a home for 800 years. So it's incredibly energy-dense. It also, you know, as opposed to fission, no risk of meltdown, no long-lived radioactive waste. And it's been this holy grail of energy for a long time. People have been trying to do it for several years, but have never been able to do it successfully on earth. And so we're making really great strides here at Helion and again we expect to have her first demonstration facility in 2024.

It's an energy source so cheap and clean and plentiful that it would create an inflection point in human history, an energy singularity that would leave no industry untouched. Fusion would mean the end of fossil fuels. It would be the greatest antidote to climate change that the human race could reasonably ask for.- Lev Grossman, Lead Technology Writer, Time Magazine

Source: Inside the Quest for Fusion, Clean Energy’s Holy Grail

[00:10:34] Mokaya: All right. Congratulations once again. The energy space is something we'll be paying very close attention to. You notice in the recent past the issues a lot of the companies are having are in this space. So it's exciting to see these good developments happening in this space so that we can be able to power the planet. 

We will put some links to the transcript to this podcast, so that listeners can also be able to read a little bit more and also follow up on what you're doing. On that bright note, we'll end this week's podcast.  Thank you listeners for joining us this week. We hope to see you again next week as we continue to cover all things related to earnings quotes.

This week:

Episode Summary: In this episode, we discuss the worst of the semi-conductor industry being behind us, the impact of iOS changes on the ad industry and companies like Snap, and the key milestone that Tesla hit.

This week, we are making available to everyone a transcript of this podcast, with relevant quotes and images. This is usually only for our paid subscribers.

A massive thank you especially to the paid subscribers who keep making it possible for us to keep writing and sending out this weekly newsletter and podcast. You too can be subscriber here:

The episode is based on yesterdays’ newsletter which is available here for free signups and here for paid subs.

Show Notes:

[00:00:00] Introduction 

[00:00:37] Labor issues

[00:01:32] Economic cyclicality impacting tech companies

[00:03:27] The metaverse

[00:06:35] The long-term Impact of iOS changes:

[00:07:26] Customers not having an issue with price increases

[00:10:29] Asian supply chain challenges easing 

[00:11:55] Apartment renters not seeking to renew leases

Transcript

Introduction:

[00:00:00] Scott: Welcome everyone to a new episode of the transcript podcast. You've got me, Scott, Chris loft. I'm the editor of the transcript, along with Erick Mokaya who's our lead author. We had a new issue of the newsletter sent out yesterday. It was a continuation of the earning season last week.

There was a lot of good stuff in there on the macro side, continued to see strength in the US economy, supply chain issues, saw inflation, and some talk about the federal reserve, which will be meeting this week and likely to start tapering. So yeah, it was kind of a continuation of the same things with a lot of little stuff in there, which we'll talk about. Erick, any high-level thoughts? 

Labor issues

"We're at full employment in the field. It's probably the statistic that I am most proud of. Our clubs have been at full staffing for probably over three months." - Sam's Club CEO Kathryn McLay

"We really had essentially no problem in attracting -- talent. The people that provide service are what makes the company so successful. They are the ones that the guests love. We’ve had no difficulty recruiting and -- I think it’s because we’re just seen as such an attractive job for people all over the world,” - Royal Caribbean CEO Michael Bayley

[00:00:37] Mokaya: Just want to start with the labor issues because I think for a while now I've been reading like a lot of companies have issues with labor, so it was pretty interesting to see Sam's club and Royal Caribbean saying like we don't see these issues at all. And I think for Royal Caribbean it was mostly because they, I think people are naturally attracted to jobs at sea.

So then they don't have any issue with that, and I think the same for Sam's club. There's an attraction to other types of jobs. So the companies that are saying that they are having issues are mostly, maybe that needs transportation. I think there are companies like Flexsteel, Amazon, and Kimberly Clark. The major issue that continued to be that companies are saying are constraining them is supply chain issues and it was surprising to see almost all the big tech companies actually comment about how supply chain issues are impacting them, whether it's Facebook indirectly through ad spending going down or it's Amazon, which is directly actually being impacted by that. I think that was pretty interesting. 

Economic cyclicality impacting tech companies

"These factors have been compounded from many advertisers by major global supply chain issues and labor shortages, which have lost many consumer businesses with less inventory. This has reduced their appetite to generate demand from consumers, which has impacted advertising spend. Businesses in every region and across a range of verticals have been affected. At the same time, we've also seen some impact from COVID surges around the world in places like Southeast Asia." - Facebook COO Sheryl Sandberg

[00:01:32] Scott: Yeah I think the comments from the tech companies, Amazon and Facebook both really stood out to me for a few reasons. I think the most important reason that stood out to me honestly, is it was showing the effects of economic cyclicality on two companies that have not really been hit by economic cyclicality before.

And You're seeing, potentially, the hyper-growth of these companies starting to trail off. Such that they're just becoming more cyclical. And I mean, I have a personal rule of thumb when I'm reading through these conference calls that the companies that don't talk about cyclicality or what's going on in the economy at all are actually the ones you want to be invested in because they tend to have these tailwinds that are just so strong that they don't even make it into the earnings calls.

And so Facebook and Amazon were two companies that were always that way, except this is the first time I've ever really seen them talk about cyclicality in a way that's meaningful. And also in addition, we had a few quotes in there about e-commerce slowing in general, the growth slowing relative to what happened last year. Obviously, we took a lot of demand and pulled it forward with what happened with COVID. But still, the fact is that e-commerce is seeing some effect now.

"Another external factor is slowing e-commerce growth. The strong e-commerce growth in recent quarters was driven in part by the acceleration of the digital transformation that is now tapering out..Businesses are still making the shift online, but e-commerce is no longer growing at the pace it was at the height of the pandemic." - Facebook (FB) COO Sheryl Sandberg

"As the world begins to return to some normalcy and the extreme levels of online shopping over the past year make way for more in-person retail and experiences, e-commerce's share of overall retail has reset lower than the peak last year, but still several points higher than it was two years ago and is poised to resume a more normalized rate of growth and continue its share gains of retail over the long term." - Shopify (SHOP) CFO Amy Shapero

[00:02:39] Mokaya: Pretty interesting that you say that, because it's true that I mean, I've been doing ANet school for five years, myself for five to seven years. And I think all that time, we rarely actually pick up quotes from Amazon. And I think also Facebook, they`re pretty dull to read because most of the time it's normally tech stuff and all. So it's very, very interesting that this week they took time to actually discuss the cyclicality. Though now tying it to what you just said, I think then it must mean that they are actually seeing some real issues and actually being also impacted by whatever is happening. They're not immune completely to what is happening in the economy. And of course the slowing down of e-commerce, that's also a challenge and this is Facebook and Shopify talking about it. But the most interesting aspect of the week was, of course, Facebook being renamed as meta. What's your thought on that? 

The metaverse

The next platform will be even more immersive -- an embodied internet where you’re in the experience, not just looking at it. We call this the metaverse, and it will touch every product we build. The defining quality of the metaverse will be a feeling of presence -- like you are right there with another person or in another place. Feeling truly present with another person is the ultimate dream of social technology. That is why we are focused on building this." - Facebook Metaverse VP Vishal Shah

[00:03:27] Scott: Well, actually, as I was thinking about talking about the cyclicality impacting Facebook, the Meta change kind of coalesced for me as well because it's it is also an indication that Facebook's core business growth is slowing and they're looking for new avenues of growth which I happen to believe in the metaverse. I think it's going to be a really, really big thing from an entertainment standpoint. And I think we will all engage with the metaverse in some way over the next 10 to 20 years. And Facebook is very likely to lead that. It's interesting, relatively.

[00:04:00] Mokaya: I mean, of all the companies that are walking on the metaverse, I think Facebook is the loudest and they're the guys who have done, I think they, as you say, like they've brought the conversation from being just a tech only, or something that happens on in gaming platforms to now something that actually happens in the real world, conversations about okay, how does the metaverse impact us and how are we going to benefit from us? I mean, a lot of memes and the jokes on Twitter this past week about the metaverse.

“Over the next decade, these new platforms are going to start to unlock the kinds of experiences that I wanted to build since before I even started Facebook. Along with those social experiences, I expect a massive increase in the creator economy and amount of digital goods and commerce. If you're in the metaverse every day, then you'll need digital clothes and digital tools and different experiences. Our goal is to help the metaverse reach 1 billion people and hundreds of billions of dollars of digital commerce a day” - Facebook CEO Mark Zuckerberg

[00:04:30] Scott: Look, I read that quote and also a quote that I think didn't make it into the final cut, but about Facebook focusing on younger audiences and talking about how TikTok was one of their most formidable competitors. And I just read those things and thought to myself; What an amazing competitor Mark Zuckerberg is and what a visionary he is, because really what happens in entertainment and media is that the big platforms exist. And then they tend to be displaced by new media avenues. And so you know, Facebook and its original iteration could have gotten displaced by Twitter, could have gotten displaced by Instagram, and could have gotten displaced by TikTok, is kind of in a way, but they know how to get ahead of those. I mean, Zuckerberg has enough vision to really get right in front of those. And I think he sees that the metaverse is an existential threat to the way that we interact with the internet today via the web browser or the mobile phone Which is where Facebook thrives and he's getting ahead of this. What he thinks is like this massive circular change where previously new startups, new entrances could have entered and probably still will. But if Facebook is controlling that it continues to control the internet for another cycle. So it really shows vision on his part and shows why he's one of the best capitalists in the world.

"Historically, young adults have been a strong base, and that's important because they are the future. But over the last decade, as the audience that uses our apps has expanded so much and we focused on serving everyone, our services have gotten dialed to be the best for the most people who use them rather than specifically for young adults. And during this period, competition has also gotten a lot more intense, especially with Apple's iMessage growing in popularity and, more recently, the rise of TikTok, which is one of the most effective competitors that we have ever faced. So we are retooling our teams to make serving young adults their North Star rather than optimizing for the larger number of older people. Like everything, this will involve trade-offs in our products, and it will likely mean that the rest of our community will grow more slowly than it otherwise would have. But it should also mean that our services become stronger for young adults. This shift will take years, not months, to fully execute, and I think it's the right approach to building our community and company for the long term" - Facebook CEO Mark Zuckerberg

[00:05:49] Mokaya: Yeah, I think to quote him directly, he says over the next decade, these new platforms are going to start to unlock the kind of experience that I wanted to build since before I even started Facebook. So it's like it's been a long-term vision from the time Facebook started on the desktop and then shifted to mobile in 2014 and the likes. And now, totally going into the metaverse. So I think it's all about staying ahead of the competition and that's actually disrupting your own business.

So if it works out, it's going to walk out big time. And if it doesn't of course, well, it was just another bet and there's still the core business of trying to also revive. But Facebook still has the challenge of; they need to get the younger audiences back in. And I think by creating this big vision of a metaverse, it's also about bringing in the young people.

The Long-term Impact of iOS changes:

"There are 2 big challenges coming from these iOS changes. The one is targeting and one is measurement. I'm taking the second one first. On measurement, we think we can address more than half of that underreporting by the end of the year and make more progress in the years ahead. We estimate we're underreporting iOS web conversions. We believe that real-world conversions like sales and app installs are higher. And so we have to do the work to help clients measure these properly in order for them to really understand the outcomes they're getting and improving performance. And again, we think we can get a good chunk of that done this year and more in the next year. Targeting is a longer-term challenge. Our direct response products are built on user-level conversions. And as a result of the iOS changes, we don't see the same level of conversion data coming through. So we have to rebuild our targeting and optimization systems to work with less data. So this is a multiyear effort" - Facebook (FB) COO Sheryl Sandberg

[00:06:35] Mokaya: Something else that I noted is the iOS changes. They are really affecting companies like Facebook. I think from two aspects, they say, I think targeting and measurement is becoming more blurry in that sense. On one hand, we have Facebook saying that this IRS change is actually impacting them a lot. And then we have companies like Twitter, which are like, ``oh, we don't use those kinds of cookies, Like to target customers. We actually rely on first-party data.`` So then they're not massively affected. And then in the middle, you have Apple who said consumers are actually loving that they can choose whether to be tracked or not to be tracked. And so this means that these IRS changes, they are here to stay. So they are in their long-term. So companies have to adjust. So this is a very significant point of shift in the advertising cycle or the advertising models that the companies were operating for a while. Thoughts on that yourself? 

Customers not having an issue with price increases

"Last quarter, I think I talked about how we were seeing roughly a 6% increase year-over-year in the U.S. We are still seeing that and that -- that's pretty much the level we expect for the full year 2021 over 2020 right around that 6%...We haven't seen, I’ll say, any more resistance to our price increases than we've seen historically. So that the 6% has been pretty well received by customers." - McDonald's CFO Kevin Ozan

[00:07:26] Scott: Yeah. I mean, I think the fact that Facebook was talking about the targeting issue, creating a longer-term challenge, that's going to take a multi-year. One other thing I wanted to go back to earlier in the macro section was a comment from McDonald's talking about how they are seeing that their customers are not having an issue with 6% annual price increase in the inflation. They're able to take price and not see a real difference in volumes. I think that's really important because I think that, that is something that has been the case this year, that I don't know if we're going to actually be able to continue to sustain that rate of inflation and not see some sort of demand response.

This just is an anecdotal feeling I'm getting from driving around and living my own life here in the US you know, I saw six and a half dollars gas prices in, in LA this week, which is like $6 a gallon. You know, there's a lot of people that are going to be restricted in their mobility because of how expensive gas prices are.

And then the same thing, like I went out to dinner this weekend and the bill when it comes, it's like meaningfully painful compared to what it used to be. I mean, to the extent that it feels like I'm spending twice as much when I go out to eat in a restaurant today than I was before the pandemic. So I do think that there may be some demand responsiveness. We should be on the lookout for this, as this inflation continues to hit. 

[00:09:02] Mokaya: I agree with that because at one point, I remember Somewhere in mid this year, I think the statistics that came from Bank of America was that around 66% of money that was flowing through the bank accounts was actually being saved. So I think, a hint I'm getting is, some of that money is actually being spent away now. So I think like going into next year, it may actually be that consumers don't have any more money to spend because the stimulus check has stopped. 

“the biggest news is our consumers, the best we calculated have only spent about 30% to 35% of the stimulus dollars that went into their account from the last two rounds. Therefore they have lots of purchase power waiting to go out if they choose in the future” - Bank of America CEO Brian Moynihan [June 2021]

So they may have been able to sustain the demand this year because of that money that they had saved. But I wonder how that is sustainable Long-term. So a one-year price increase of 6% is okay. But like a consecutive 6% price increase may actually not be sustainable. So I think that's a trend I've seen in a couple of companies here and there in the earning score, so customers don't have any problem taking price increases.

They don't have any problems waiting. They don't have any problems right. Currently, but you'd expect that at some point they're going to feel this in their pockets and then they're actually going to resist those kinds of price increases. And that's where you're going to get demand being hit.

[00:10:09] Scott: Yeah. At a certain point when inflation is running higher than wages, compensation increases, you have a real decline in purchasing power and that is likely to flow through at some point because I don't think wages are rising at 6% on average for McDonald's customers.

Asian supply chain challenges easing

"There was a bright spot during the quarter with the foam supply as our vendors do not see this as an issue moving into the fourth quarter. Vietnam began a shutdown in late July and things accelerated in August, where a majority of our factories were closed for the months of August and September. We are getting positive news from our vendors as they began opening at the beginning of October. However, it will be a slow process to get back to 100% production" - Haverty Furniture President Steven Burdette

[00:10:29] Scott: One or two other things that I think are really important from this week's newsletter that people should have on their radars. One that was in the international section was a company called Havarti furniture talking about getting positive news from their vendors, that their vendors in Vietnam or beginning to open back up.

And that could be a really big signal for a marginal improvement in the supply chain. Because Asia had been the bottleneck for a long time. So Vietnam is opening back up with more vaccinations, things like that. It could have implications for the broader supply chain that are positive. 

[00:11:01] Mokaya: I think Europe is also picking up in terms of growth. I think this was a quote from Lazard that I saw there and people may be underappreciating. Maybe Europe is not that much talked about because they have had struggles with the pandemic, in the past year or so, but I think they actually are picking up slowly. All restrictions have been lifted, especially in the Nordics now. So people are able to move around as if it was pre-pandemic. Of course,just a few restrictions like keeping distance and all, but generally I think that's what's happening. Maybe one more thing that I wanted to note was the slump in trading in Robin hood. I think it's pretty interesting like there was a surge in volatility in markets in the first half of the year, that's when they actually IPOed. And now it seems like crypto activity is actually slow, coming off a very record high. So interesting to see where that goes from here. 

Apartment renters not seeking to renew leases

"In August, we surveyed more than 20,000 renters about their moving intentions. As a result of that survey, we expect the apartment market will experience increased turnover, more out of market moves and lower renewals as we head into 2021 -- 2022. When asked, when do you think you will next move into a new residence, 53% of survey respondents said they will move by winter. When asked, what do you plan to do when your current lease expires, only 24% of renters expect to renew within the same community, down from 47% pre-COVID. This all makes sense given the huge affordability changes and changing work-from-home policies." - CoStar CEO Andy Florance 

[00:11:55] Scott: Yeah, definitely. I think it is an indicator of just retail trading in general. One more thing I wanted to mention as well, God, there was a lot of good stuff in there this week. But CoStar group talked about renters getting ready to move saying that in a survey they did recently only 24% of apartment renters expect to renew within the same community down from 47% pre-COVID. Apartment renters are probably just one segment of a broader part of the population that is potentially going to make a big move with their life. Like moving cities, moving jobs, as the economy has settled into a more normalized ish zone post-COVID as it's settling, people are able to take that, potentially make big changes with their lives.

[00:12:40]Mokaya: Yeah, couple that with working from home trends that you've been observing the pandemic, and that actually tells you there is a pretty significant change in mindset in where people want to live and stay and if housing prices are going to go up the way they've been going for a while, well we are up for some significant changes ahead. I think we'll stop there for this week. I think this week was really rich in terms of quotes. We had a really difficult time cutting down on quotes. We have had a huge amount of quotes that we left out this week. Thank you for joining us this week.

This week:

Episode Summary: In this episode, we discuss the strong start to the Q3 earnings season last week as the big banks reported.

The episode is based on yesterdays’ newsletter which is available below: 

The free version of the newsletter is available here. A transcript of this podcast, with relevant images and quotes, is available, for subscribers only, after the show notes below. Subscribe to access it:

Show Notes:

00:00:00 Introduction

00:00:17 Strong GDP growth despite inflation

00:01:54 Supply chain issues have dwarfed demand recovery

00:03:25 Inflation hitting small businesses disproportionately

00:07:34 Surge in energy prices

00:08:19 Tightness in the labor market persists

00:10:03 Squid Game global euphoria

00:12:59 Banks loosening credit in commercial real estate

Episode Transcript:

Introduction

Scott: [00:00:00] Welcome everyone to a new episode of The Transcript podcast. You've got me, Scott Krisiloff, I'm the editor of The Transcript, along with Erick Mokaya who's our lead author. We send out a new version of The Transcript newsletter earlier this week, and it was the beginning of earning season last week.

Strong GDP growth despite inflation

So the banks were reporting. Got good insight into what the banks are seeing in the economy. They continue to see a strong driven by really strong consumer spending. Bank of America talked about consumer spending in payments up 23% over 2019, just really strong growth along with some comments about GDP growth in the 5.5 to 6% range, which again, is really really large, especially when you consider that’s real GDP that people are quoting and not nominal GDP, where we have another five, 5% plus inflation on top of that.

Speaking of inflation, inflation was again, a very prominent topic in conference calls last week. The thing that stood out most was actually a presentation from Fed president Raphael Bostic of Atlanta who was talking about transitory is a dirty word at the Atlanta fed. Now talking about this being episodic inflation and talking about how this episode of inflation may not even be brief. Everyone's inflation expectations are getting higher even longer out and it's definitely something that the Fed is going to have to act against. Erick, any thoughts?

[00:01:31] Mokaya: I agree. The frustrating bit was about the word transitory being a swear word now at the Federal Reserve, I think they don't like the word anymore. And again, the common issues that people have is supply chain issues and inflation. Those are the topics that all the CEOs that we read about last week mostly are concerned about.

Supply chain issues have dwarfed demand recovery

But one thing that I also saw, I looked at a note from Morgan Stanley this week and that's where I wanted to ask you a question. They seem to think that the coverage of supply chain issues has actually dwarfed the coverage of demand recovery. We can see those two in play last week that there's a lot of recovery that is going on, as you say, around 6% growth, there’s projection for 2021. But then again, on the other hand, what we've been hearing constantly is about the supply chain issues. Do you think, we are a bit overblowing the issues along supply chain even though it's more an issue of demand that is way higher than the supply that we have currently?

[00:02:31] Scott: Yeah. I mean, I think you and I have done a pretty good job of covering the demand boom for the last year. And that was a theme of everything in the summer for us. It was just like the euphoric demand recovery in the US and global economy. I think demand is still really strong. I don't think that's the story anymore. Personally the story and what we keep covering is the persistence of the supply chain problems that don't seem to be getting better and may last into and through 2022. Those are drivers of inflation, but I think that there's other drivers of inflation here.

At one point in history, we used to talk about inflation being a monetary phenomenon. It's kind of crazy to me that the Federal Reserve, which is probably driving inflation by printing hundreds of billions of dollars a month, seems to advocate any responsibility in the inflationary boom that we're seeing.

Inflation hitting small businesses disproportionately

"Many companies are making healthy profits and our research team expects another strong quarter of profits by American businesses." - Bank of America (BAC) CEO Brian Moynihan

[00:03:25] Mokaya: I think, especially for the Fed, they're blaming the supply chain and they are not at all taking responsibility themselves, but something from Bank of America CEO that he said also, companies are actually making healthy profits. It's either companies have very strong pricing power most of the companies out there. They expect another very strong quarter in terms of profits from American businesses. Any thoughts on that?

“We do hear a lot about supply chain issues from that customer segment [small business]" - JPMorgan CEO Jamie Dimon

[00:03:49] Scott: Yeah, we had a quote. I can't remember if it's in this week or weeks earlier that the inflation and supply chain challenges are hitting small businesses, disproportionately, and again, Bank of America, Goldman Sachs that upper echelon, upper-tier banks are really dealing with upper-tier Fortune 100 type clients who have pricing power to be able to avoid inflation and cram inflation down on customers and suppliers. Also, have the ability to take a disproportionate share of supply chains. So, those sorts of investment banks don't necessarily see the same picture small businesses and small consumers are seeing from an inflationary standpoint where those entities are bearing the brunt of the inflation. $5, $6 gasoline is a real tax on somebody who is making minimum wage.

[00:04:45] Mokaya: Yeah, definitely. I think the smaller retailers and small businesses are the ones that are going to be disproportionately affected by this. They don't have the pricing power, they don't have the power to pass on this kind of price increases to their customers.

“I think those retailers who have big presence from a supply chain perspective and have big volumes are advantaged to be able to secure capacity and actually help mitigate and manage the cost increases that are happening in the space…If you're a small player in the marketplace, you're seeing probably greater cost increases and probably struggling to get capacity into the U.S" - Lowe's (LOW) CFO Dave Denton

But something else we talked about is what if, and I think that's a really good question which was being asked by PNC financial services and Fastenal, what if the supply chain actually flips and companies are actually stocking up a bit too much inventory right now, because right now what's happening is that a lot of stocking in terms of inventory, most of the companies and retail companies that we’ve followed in the past couple of weeks, they are building up inventory readying for the season ahead.

But then what if something flips at some point and now companies have built the next 30 to 45 days of time into the supply, and these supply chains suddenly becomes better then companies are going to be stuck with a lot of inventory, especially those ones, which are perishable maybe a bit of a challenge. Thoughts on that? And I think you highlighted it for our premium subscribers as something to note.

"…is this something that's part of our new normal that we're going to have this kind of consternation and we need to build an extra 30 or 45 days of time into the supply chain? The risk is when that flips. And again, I don't know if it's 6 months from now or 6 years from now. When that flips, we have to be acutely aware it's happening when it's happening because right now we sell $13 million worth of inventory a day. If all of the sudden stuff comes in three weeks faster, four weeks faster, you get -- well, 13 times 20 business days in a month, that's $260 million. So you could add 100, 200, $250 million of inventory really fast. If you're not dialed in and managing and -- but it's measured in weeks, and I apologize, we don't have it at our fingertips. But a 30-45 day window wouldn't surprise me, but I just don't have the accurate number at my fingertips." - Fastenal (FAST) CEO Dan Florness

[00:05:50] Scott: Yeah. I think it is reflective of the fact that this is a very classic industrial cycle on the one hand. We saw this in the 20th century frequently, this was basically the front end of a recession in the 20th century. What would happen is you would have very strong stimulated demand and you would have a supply chain, which was primarily domestic in the middle of the 20th century that wasn't able to keep up with that demand. And you would have inflationary pressures that were working through the system and at the site of inflation, the Federal Government during the 20th century would usually respond.

So if you had 5% inflation and 4% unemployment in the 1960s, you probably would already be at like 7% interest rates here and the Fed would be aggressively tightening more and more which would flip the economy into a recession. On the other side of things, you would be over inventoried because there was a demand response to the negative side.

The difference this time around is that the Federal Reserve, at least at this point has no interest in responding to these inflationary pressures to the extent that they do is withdrawing stimulus marginally. We're still going to be printing actually like heavily stimulating the economy through the middle of next year in terms of quantitative easing, which is like an emergency response measure.

And then we're not even talking about raising interest rates until thereafter. If you're a market participant here, you're looking at the Federal Reserve not really acting to tighten until late 2023, 2024 is what their path is right now. And you've got this inflation and it just means that the most likely outcome is more inflation at this point.

Surge in energy prices

[00:07:34] Mokaya: Yeah, definitely. Then we noted this week that things like energy prices are surging a lot. Rising fuel prices are definitely also worrying, especially the airlines, which have been in a bit of recovery mode, but they really worried especially for Q4, whether they're able to handle the very high increases in terms of the prices in energy. Any thoughts on that yourself or?

[00:07:58] Scott: Yeah, I mean, I think all of it, but I don't want to be an inflation alarmist here. But people are actually talking about inflation, regular people are talking about inflation here and that qualitative data again, would have elicited a totally different response from the US government 50 years ago than it does now.

Tightness in the labor market persists

[00:08:19] Mokaya: Yeah, I agree. Again, with the housing market, something that we saw in the quotes also is that there’s still limited supply, very frothy over there.

Also staffing issues continue. Some restaurants are actually having to close. I'm not sure what you're observing where you are, but I hear a lot of companies last week had to comment about how they are handling issues to do with both the supply chain and also how they're dealing with the tightness in the labor market. I heard a lot of statistics floating around about a lot of people quitting jobs in August and September. Maybe that's what's driving -- the fact that there are fewer people to actually do transportation in trucks. We saw a quote there that said that going into the Q4 transportation issues are not going to ease up.

So a couple of things to worry about, but generally as most of the CEOs said, even though there are issues, the economy is still doing well.

[00:09:23] Scott: Yeah. I hear myself being an alarmist here and the inflation right now, securities prices are benefiting tremendously from inflation, which is, again, a difference from what it would have been in the 20th century. You would have had interest rates going up cost of capital going up which would have put a bit of a lid on equity values. And today we just have this economy where somehow the inflation is all getting captured by the corporate sector. So look, it's all a normative thing of “what is good”. But yeah, if you like securities prices rising, that's good.

Squid Game global euphoria

[00:10:03] Mokaya: Well, we will have to keep looking at the Q3 earnings this week again. Any other, anything else that captured your thoughts? Maybe one more thing that I wanted to actually highlight myself is have you watched Squid Game?

[00:10:16] Scott: I have not personally watched Squid Game, but I'm glad you brought it up. Cause I think this is one of the most important things happening right now. I think it's really important because it's showing the internationalization of content. The internet is really truly hitting this inflection point in globalization where, I mean, you're sitting in Sweden right now and I'm sitting in Los Angeles and we talk every week about stuff that's going on globally.

This is a new phenomenon that attentions are actually coalescing around certain things. I was looking at Spotify the other day and some of these songs have billions of billions of listens. The entire world moving at once is kind of a crazy thing.

[00:10:59] Mokaya: Yeah. And I think that's now you captured the sentiment quite well there. Now it's about like local content hitting internationally and hitting in such a way that Squid Game is actually going to be the best in terms of TV series ever for Netflix. Which is quite amazing. They say something around 111 million people have watched at least two minutes of the episode.

I actually did watch a few minutes of it last week, just to get a sense of what the movie is all about. It's based on a story of people, someone caught up in a debt spiral and then they have to go to these games where they compete for prize money so that they're able to get that money to actually pay off their debts.

So again, it resonates to a lot of people who may be struggling, especially because of the pandemic and all. Maybe that could be the global appeal in the TV series. But generally I say a Netflix are super pumped, and at least they are reporting earnings this week so it will be interesting to get the numbers from them on what they think about the TV series.

[00:12:02] Scott: Yeah. I mean, honestly for Netflix 10 years ago, I thought it would be a Herculean lift to get to a hundred million subscribers. And now I look at it and go, I don't see why they can't get to a billion subscribers which means that there's still upside for this stock.

[00:12:18] Mokaya: And so something that I read also, I think that their strength is actually, compared to Disney, Disney have a rich IP content. So compared to them, Netflix don't have that. So they're not bound by legacy. They can take their adventures wherever it leads for them.

Last year it took them to France and then they had one of the best hitting TV series from there. And this year it takes them to South Korea to create a whole series and now they're also selling merchandise around the TV series itself. It's pretty interesting to see how the stock itself goes. But generally again, it captures the internationalization of local content, local content capturing international audiences.

Banks loosening credit in commercial real estate

"…in CRE, we see quite a robust origination pipeline, as we've fully removed any pandemic-related credit pullbacks, and we're leaning into that and we do expect to see a little bit of net loan growth going forward." - JPMorgan Chase (JPM) CFO Jeremy Barnum

[00:12:59] Scott: One other important catalyst that I think we caught last week that I just wanted to highlight before we break, is JPMorgan talking about loosening credit standards in commercial real estate. That's something we picked up earlier too in a previous issue that commercial real estate sector had been an area where there had been the most tightness because people were wondering whether people will actually go back to offices, but banks loosening credit into that sector can be a very positive catalyst for that sector. And that is one sector that's still depressed from COVID. So there may be some investment opportunities there.

[00:13:38] Mokaya: Great. I think on that note we’ll end for this week. So thank you for joining us. See you next week on The Transcripts podcast. You can leave us your comments and send us your feedback [email protected]. So see you next week. Bye.

Thanks everyone.

Episode Summary:

In this episode of The Transcript Podcast, we discuss the dampening effects of the Delta variant, the strong start to back-to-school, and the metaverse/omniverse that is getting companies excited.

The episode is based on yesterdays’ newsletter which is available on Substack. A transcript of this podcast, with relevant images and quotes, is available, for subscribers only, after the show notes below.

Show Notes:

00:00:00 Introduction

00:00:15 Marginal dampening from the Delta variant

00:01:34 Covid vaccine booster shots needed

00:03:48 No one wants lockdowns again

00:05:18 People are looking forward to back-to-school.

00:06:36 Regulations in China and the effect on tech companies

00:08:31 The metaverse/omniverse

00:09:48 The metaverse could become larger than current economy

Episode Transcript:

Introduction

[00:00:00] Scott: Welcome everyone to a new episode of The Transcript podcast. You've got me Scott Krisiloff, I'm editor of The Transcript along with Erick Mokaya our lead author. We sent out a new issue of The Transcript newsletter yesterday and had a lot of good stuff in there.

Marginal dampening from the Delta variant

The key thing that we were focused on last week was the extent to which the Delta variant is impacting the economy in the US. What we saw is that there was some impact, although pretty marginal at this point. There were companies talking about a little bit of dampening was what one restaurant company [said]. Disney talked about seeing some group and convention cancellations. So a little bit of impact, but overall, the retailers who reported especially reported strong consumer spending and still plenty of foot traffic into stores and a really strong start to the back of the school season in general. The economy is still, very strong, despite some marginal dampening from the Delta variant. Mokaya, you have anything to add to that?

"With the Delta virus we're seeing a little bit of dampening. It's hard to tell whether that's the Delta virus or just seasonality. We suspect it's a little bit of both." - Ark Restaurants (ARKR) CEO Michael Weinstein

[00:01:01] Mokaya: I think it's the same thing that I noticed across the retail space. It's a little bit of marginal impact as you'd call it, but then mostly the consumer is resilient. The theme you keep seeing is of course, the disruptions in supply chains that are continuing into this second half of the year. Something else that struck me a lot also was the fact that a company like Tyson Foods is saying that labor is their number one challenge currently. They're really looking out for the easing of that kind of labor shortages as they head into September.

Covid vaccine booster shots needed

Some statistics that came out this past few weeks is that the vaccine that we've been having, its effect moderates with time, six months or so, so you need a third booster. It’s always interesting to see BioNTech and also Dr. Fauci come out and say that the third dose may be needed. I don't know how soon that will be available in the US but in Sweden there's a consideration of maybe early next year for the third dose for that matter. But overall most of the companies that we saw the data and statistics for August, they are saying that the impact is not much to write home about there.

“We believe that the best approach at the moment to deal with the situation is to continue with a booster dose with the existing wild-type strain, which creates antibody responses which are about fivefold higher than the antibody titers -- neutralizing antibody titers after the second shot” - - BioNTech (BNTX) CFO Sierk Poetting

[00:02:13] Scott: I think expanding on the Delta variant stuff, anecdotally, what I'm noticing is that anything that is a personal decision, people are still pretty much making the same decision as they would have otherwise. There's some concern in the back of your head about whether you're traveling as much or going out to restaurants as much, but for the most part, I see restaurants packed and people living their lives. But when there's institutional decisions, it's much easier for the institutions to decide to be much more conservative. I'm hearing people like on the work from home basis, I spoke to somebody last week who was at a big Fortune 100 company, the company, told them they won't go back to the offices until August of 2022. Full year from now that they're already saying they're not going back. Everybody who is planning to go back to offices after Labor Day, I haven't heard anybody who's being forced to go back in the offices personally that I'm talking to. That's the divide on the Delta variant, in the US right now.

[00:03:13] Mokaya: Something I picked up from the Deloitte US which may explain a little bit of when it comes to individual positions, people are more making their decision of, okay, it's here with us, we’ve got to learn to live with it. What he says there is that there is a realization that as the Delta variant surges along, COVID will probably be with us for a little while longer. That may be pushing people to make that decision of say, let's go out to just live life and try to be as normal as possible even though we know the Delta variant is there as long as you're vaccinated and all. Don't you think so?

“There’s a tension between the desire of some leaders to bring back a preponderance of in-person work and a yearning of many in the labor force to preserve the level of flexibility. This is not an all-or-nothing, though" - Deloitte U.S. CEO Joe Ucuzoglu

No one wants lockdowns again

[00:03:48] Scott: Yeah, I think so. I don't think anybody wants to go back to lockdowns again in the United States. There's no will towards that, especially when it looks like 90% of the hospitalizations are happening among people who are unvaccinated. So really the perpetual spread of this here in the US is on the shoulders of people predominantly who have not been vaccinated. If you haven't been vaccinated, go get vaccinated. There's billions of doses that have now been administered so concerns about health effects we would have seen these already pop up in my opinion.

[00:04:26] Mokaya: I would agree on that because this past week Australia went into a lockdown and the kind of reactions that they've seen there, people are noticing that lockdowns may not be the best way to live. You've got to learn to live with the virus, take precautions of course, but at the same time, life doesn't need to stop at the end of the day. That's what I'm learning. As you go forward, maybe also stretching out to what the Deloitte US CEO said, is about companies are still trying to figure out this work from home and work from office kind of mix. What's the best mix. Some companies have already made that decision, like okay, until the next year. Even those who are very keen on having people back by September are delaying those decisions a little bit, especially with the surge of the Delta variant.

People are looking forward to back-to-school.

Something else you said before which we picked up was about the back to school. Lots of the retailers are commenting on this. I picked a lot of quotes about that. The way it's developing so far, it's hitting past 2019 numbers, which tells you that people are really, really looking forward to students or kids being back in school. It will be very interesting seeing how this plays out in September-October, even as the cases rise and what people do with that. Don't you think so?

“we're off to a really strong back-to-school start" - Target (TGT) CEO Brian Cornell

"…it does feel like kids are physically going to be back to school...So, the consumers’ pattern, I would put it more close to 2019, Jonathan, than 2020, mostly because of the impact of environmental things, the pandemic across our store fleet, etcetera." - Foot Locker (FL) CEO Dick Johnson

"And then relative to back-to-school holiday, back half of the year, I'd say right now, we are happy with how back-to-school is playing out.” - Kohl's (KSS) CEO Michelle Gass

[00:05:48] Scott: Yeah, I think so. And we've been talking about this for several weeks now about looking forward to the end of summer here in the United States and people getting back into more of a normalized cadence of their life after we had this summer euphoria post-COVID vaccination.

We really are getting into that. The back to school sales suggest that people are really excited to get back to a more normal phase of life. And again, that's the question. I think there's two motivations to the work-from-home thing. There's one, the institutions being more conservative, but then also I think people don't really want to go back into the office five days a week. From that standpoint, the adults at least don't want to come back into the office. I think a lot of people want their kids back in school though.

Regulations in China and the effect on tech companies

[00:06:36] Mokaya: Something else that you were discussing before the podcast was about regulation in China. It's been impacting the valuations on tech companies. They’ve taken a huge hit this past week. A company like Alibaba is actually 50% down from its October highs last year. It's the new development in China where there's some regulations coming into force. Some are being fined a lot. I don't know if you've been following that. I saw that companies which are listed in the US but are Chinese-based have had to comment about this, especially because analysts are asking them these tough questions. They're very conservative in their approach. They're more in line with whatever it is that the Chinese government wants to do. That was pretty interesting to see. I didn't see anyone who's coming out to very strongly against [them]. Most of them just respond in a very “subservient” manner. We will do whatever it is the government wants to do. It will be interesting to see what that turns out to be there. But most Chinese-based tech companies are actually trading at multi-year lows in terms of valuations. So could be places to pick up a few if you can handle the government risk there, could be a place to go and pick a few interesting companies to follow. Any thoughts on that?

[00:07:56] Scott: Yeah, it seems like a good value catalyst to have this going on. It was interesting, the quote you pulled out from Tencent, them talking about the internet regulation in China just being an extension of what's going on around the rest of the world. A lot of governments around the world are talking about how to regulate the internet. We have these very large internet companies that have not really had any regulation tied to them that are impacting public discourse and government and things like that. Regulation is something that's happening all over the world.

The metaverse/omniverse is coming

It also dovetails nicely into another theme that was in this week's newsletter about the multi-verse and the omniverse, whatever people are calling it now which is potentially the next phase of internet engagement. We had a bunch of quotes in there and I also saw last week a really interesting segment on CBS Morning News with Mark Zuckerberg which was him doing a VR interview with one of the hosts of CBS This Morning. The reason I thought it was really interesting is because that's a very mainstream, non-business looking forum when you're going there. The omniverse seems to be coming and it could be very wild.

[00:09:12] Mokaya: It is. The excitement you see in a lot of companies, Facebook is leading because I think when you read Roblox and all these kinds of companies, they've been doing this for a little while. One of the companies said they've been doing this for 15 years, but then Facebook comes and says, okay, we are taking that and actually bringing it to your home, bringing it to CBS This Morning. Taking it mainstream, that’s what Facebook did to the metaverse this past quarter. Now companies are being forced to also clarify ‘where are you in terms of also helping build these metaverse’?

The metaverse world might become larger than our current economy

One of the companies that is also way ahead in that area is Nvidia. One thing that I've learned from this is that this is not going to be one company leading the omniverse. There needs to be strategic partnerships between various companies. If you're looking for a catalyst there, you need to look for a couple of companies which are major players in that area, and some of them are Nvidia, Roblox, and Tencent and also Unity Software. This is a theme that has come to the forefront it could be time to actually really take a deep dive into that area and actually figure out a little bit more about what's happening as an investor. The Nvidia CEO is very convinced that the metaverse world is going to be way larger than our current economy and it's really hard to doubt what they're saying.

"I'm fairly sure that at this point, that Omniverse or the metaverse is going to be a new economy that is larger than our current economy." - NVIDIA (NVDA) CEO Jensen Huang

[00:10:36] Scott: Yeah. I mean, can you imagine the speculative activity that would go on in the metaverse right now in this economic era. People will be buying land in the metaverse…

[00:10:46] Mokaya: NFTs also…

[00:10:48] Scott: Yeah. It’s an extention of all of that.

[00:10:51] Mokaya: It's a natural extension of the crypto craze, which you saw in one of the quotes this past quarter, Robinhood had 62% of crypto volume just based on Dogecoin. Imagine Dogecoin in the metaverse now.

[00:11:05] Scott: Yeah, absolutely. Fundamentally, is there going to be scarcity to any of this? That’s the question and if there's scarcity, there's so much money flying around the world right now that prices go up. Dogecoin doesn't even have scarcity though. Right?

[00:11:23] Mokaya: I have no idea what it is. It's an interesting time to be at, there’s metaverse, Dogecoin, cryptocurrencies and all these which are supposed to power the next world. Very interesting to see how this physical and the virtual merge as we go forward.

Anything else that you may have picked up?

[00:11:47] Scott: don't think so. I think that was a good rundown.

[00:11:49] Mokaya: So maybe something I then added later was a book I've been reading called Oversubscribed and it really fits in well now with what we're building at The Transcript. It talks about defining your markets and knowing what people really care about. For us, we care about earnings calls and our readers care about that. It dovetails perfectly with what we are building at The Transcript. It's a book that I would really recommend anyone to read. I had two quotes there. One of them says that your market is made up of the people who really care about what you do. That's the kind of readers and listeners we have at the end of the day. It's a really good book. I hope if you have time to have a look at it to pick more points and share them with our readers as we go along. We can stop there for this week. Thank you so much for joining us and hope to see you again next week. From us here at The Transcript we say bye.

Welcome to Episode 29 of The Transcript Podcast. This is a special episode as it is a recording of a Twitter Spaces conversation we held on Friday, 13th August with two special guests Sam Ro and Alex Morris.

Look out for more such episodes where we bring in special guests to help us explore specific themes.

The Podcast is available on Apple Podcasts, Google Podcasts, and Spotify among other platforms and channels.

Episode Summary:

In this episode, we discuss the key themes that we took note of in Q2 2021. The episode is brought to you in partnership with Quartr and Koyfin.

The episode accompanies yesterdays’ newsletter which is available on Substack. A transcript of this podcast, with relevant images and quotes, is available, for subscribers only, after the show notes below.

Show Notes:

00:00:00 Introduction

00:00:54 Q2 in review

00:07:35 Inflation and increased consumer uptake of prices

00:11:13 Excess savings and higher consumer spending

00:16:19 Tight supply chains to continue into next year

00:18:00 COVID, the Delta variant, and vaccinations

00:21:35 Digitization and the unfolding future

00:27:09 Key surprises from Q2 results

00:34:15 Q3 outlook

00:37:25 Why we read earnings transcripts

00:41:49 Closing remarks

Episode Transcript:

Introduction

[00:00:00] Mokaya: Welcome to this Q2 earnings review. My name is Erick Mokaya. I'm based in Sweden and then we have speakers here today. I'll ask Scott to introduce himself and what he's been up to in The Transcript for these many years.

[00:00:13] Scott: Hi everybody. Thanks for joining us on this Twitter Spaces. I founded The Transcript before it was Avondale earnings call notes probably about seven, eight years ago now. And Erick Mokaya and I have been working on this together for about 75% of that time. And we rebranded as The Transcript. I've been distributing it, and I think a lot of you probably read it. So thank you to everyone who reads it and listened to our podcast and everything. I'm excited to be doing this today.

[00:00:42] Sam: Hi, I'm Sam Ro. I'm the writer of the Axios markets newsletter. And like Eric and Scott, I listen to a lot of these earnings calls. So there'll be lots of fun stuff to talk about.

Q2 in Review

[00:00:54] Mokaya: All right. So maybe Scott you can give us a bit of a rundown of just the quick things that you picked up in the Q2 earnings calls.

[00:01:00] Scott: Yeah, I think as probably a lot of listeners or readers know, we break down each week on The Transcript in sections. So we have a macro section that leads it off and then we've got a bunch of industry sections below. So I think that may be the best way to go through this too, is start off with the macro and the big trends of the second quarter which we saw throughout earnings calls.

Erick and I on our podcast have been talking about this as earnings as an economic euphoria that we've had for the last quarter. Ever since people have been getting vaccinated and moving back out into the world and enjoying travel and restaurants and friends and family there's been a huge amount of economic activity. And a lot of people have pent-up savings from stimulus and things like that. And that pent-up demand getting unleashed on the supply chain, causing shortages in the supply chain and inflationary pressures. That's been the story of the last quarter.

"Ever since people have been getting vaccinated and moving back out into the world and enjoying travel and restaurants and friends and family there's been a huge amount of economic activity. And a lot of people have pent-up savings from stimulus and things like that. And that pent-up demand getting unleashed on the supply chain, causing shortages in the supply chain and inflationary pressures. That's been the story of the last quarter" - Scott Krisiloff

[00:01:54] Sam: Yeah. I think something that's been really interesting is, like you said, lots and lots of mentions about inflation, cost inflation, rising wage costs. And then at the other side of this, you have all these companies that are reporting record profit margins. You know, I think some of the analysis will tell you, well, they're actually, there is a little bit of a lag between these companies complaining about rising costs and so maybe the profit margin pressure starts to show up in Q3 or Q4. But clearly based off of the earnings surprises relative to analysts’ expectations I think to some degree, people were surprised by how little these rising costs actually ended up affecting these companies. And I think something a little bit kind of interesting more recently, and maybe this is going to be coming up in your next newsletter make sure you guys subscribe to The Transcript, that's really good. But something that we've been looking at paying really close attention to especially in the last week is, anything companies have been saying about how the spike in COVID infections is affecting business in any kind of way. And I don't know what you guys have been reading, but based off of the handful of earnings transcripts and earnings calls that I've been paying attention to this week, for the most part, businesses seem to not be that affected. Like a lot of what you're hearing about late July and even like the last couple of weeks is consumers are still out there shopping. They're still going to retail stores. I don't know if you guys saw this the other day. The Bumble CEO came on and said activity is actually increasing on their dating app. There were a couple of other earnings calls this week.

Yeah. There were two companies, Aramark and Cisco. You guys will recognize these as the brands that are on the side of trucks and stuff that supply food to college cafeterias and ballpark stadiums and stuff. They were talking about the last couple of weeks. There's no slow down in activity when it comes to entertainment venues and sporting arenas or universities. Everyone seems to still be on track to either reopen or stay open. For the most part, everyone seems to be operating business as usual, even with the spike in the Delta variant infections.

"we are seeing some customers differ their reopening dates by 30 to 60 days and we're seeing that in the B&I sector. But I think people are still taking a wait and see attitude based on the timing of the Delta variant and what impact it might have on their businesses" - Aramark CEO John Zillmer

[00:04:31] Alex: I'll hop in real quick. My name's Alex Morris, I run the TSOH Investment Research Service on Substack. You can find it on my Twitter page. I'd say, yeah, my takeaways so far have really been along those same lines, you know, for me this quarter really started out with some of the banks. And something that stood out from Bank of America and Wells, they effectively said that their credit card and debit card spend among their customers, meaning tens of millions of people was up more than 20% comp to the first half of ‘19 against obviously, you know, a normal period.So that was a number that, that stood out to me really early. And we've seen a bunch of retail results that kind of paint the same picture. You know, DG, Walmart companies that sell a lot of basics, a lot of food, things that people have to buy all the time to your stacks in the mid-teens, which is, I mean, just a crazy number. Five below home Depot, kind of less essential stuff, but even better comps on two-year stacks. So that's, that's been really interesting and I would say Comcast theme park commentary and Disney theme park commentary was kind of along the same lines. The other key thing that's standing out to me is this idea of digitization and the world kind of changing and it's accelerated as a result of COVID. And I think Satya Nadella, Microsoft, has his comment that digital adoption curves aren't slowing down. In fact, they're accelerating. I mean, I think you see it in the results when you look at a company like Microsoft, a company like Amazon, Facebook, Google, et cetera. So it's really interesting.

"In a secular basis...I always go back to that number, which is 5% of the world GDP is tech spend, it’s projected to double. I think that doubling will happen in a more accelerated pace. And we feel well-positioned because of the innovation across the stack. Because if you think about it, what’s going to happen is every business, whether you’re a retailer or a manufacturer, in the service sector, public sector or private sector, digital adoption is the way you’re going to be both, resilient as well as transform the core business processes" - Microsoft CEO Satya Nadella

[00:06:03] Mokaya: Something I can add to Sam, I think the same thing that we saw in some of the companies, especially in The Transcripts that we had last week, we also noticed that consumer spending is actually still holding up. I think they gave us some statistics for July and June and with post Q2, it seems like especially things to do with travel, they are kind of holding up steadily. But then moving on, I think the worry is mostly about schools reopen this month and next month. So as unemployment benefits come to an end, I think they're watching very closely how things develop, and especially the data comes in going into August and September. So I think that's a key thing to watch out for as we go into the next quarter.

[00:06:48] Scott: Yeah, I mean, I think I agree with everything that everybody's saying. One of the key things that Mokaya just hit on that we've been thinking about is how things change after labor day. And we've had this interesting confluence of events here in the US economy, especially where everybody basically got vaccinated in the spring. And so you had this surge and ability to go places, not only the weather getting nicer and people, you know, partaking in more social activities during the summer than they do in other parts of the year anyways. It'll be interesting to see as we get past labor day kids potentially going back to school if people basically take an opportunity to take a breather from the type of activity they've been they've been partaking in.

Inflation and increased consumer uptake of prices

But at the same time, there's a lot of money in the system. Asset prices are up, people's wages are up and people are feeling more flush. Until you have feelings of inflation to the extent that they actually impact people's feeling of their purchasing power, I would expect consumption to continue.

[00:07:56] Mokaya: Yeah. On the aspect of inflation, something else that we saw, and I think we've been talking about this a lot with Scott, is that several companies are saying that inflation is actually higher. I think they’re experiencing more price increases and a lot of them actually planning to increase prices, even up to January next year. There is a bit of a disconnect between what the companies say they're seeing and then also when you read about the Fed and then I'm sure Sam Ro writes a lot about this, so maybe he can comment a bit more about it.

"We’re seeing what seems like inflation across the board. Four months ago, no one was talking inflation when we had our call. Now everybody is talking about it. And you are hearing even the retailer is talking about taking price. If we continue to be an inflationary environment in 2022, there’s probably more price increases" - B&G Foods CEO Casey Keller

[00:08:24] Sam: Yeah. So we know, we know about cost inflation, and we know a lot of them are saying that they're raising prices. But the other thing that a lot of these executives are really proud to talk about on their calls is that their customers are taking the prices. There's a high uptake of these prices. It'll be interesting to see exactly how this shows up and things like the aggregate inflation data. It's going to be interesting to see how this stuff translates into the aggregate data. I wasn't really keeping that much track of like what the different industries were, who were talking about increasing prices, but you know, the other day you see this big jump and the producer price index wall that that's like very disconnected from what the consumer price index looks like. I dunno, do you guys think this is a function of like manufacturers and companies who are actually absorbing costs instead of passing it onto like the consumer or, you know, what, what do you think is going on there?

“I would lastly just say, the pricing that we’ve taken this year, roughly around 6% or so I think in the U.S., that is about in line, maybe a little bit ahead of where the overall inflation is when you add in the labor inflation with food inflation” - McDonald’s Corporation CEO Chris Kempczinski

[00:09:30] Scott: Yeah, Sam actually, as you were talking, the quote that stood out in my mind that I read last quarter was from McDonald's where they were talking about taking price on their food items by 6%. But they were only seeing cost inflation themselves of like 2%. So their margins were expanding to a point. And I thought when I read that, I thought of it as McDonald's having so much pricing power against their suppliers, that they were able to hold back and push inflation back onto their suppliers. And so I think it's natural. We're reading all of these large multi-billion dollar companies talking about inflation. They're going to have the most pricing power over like small and medium business suppliers or fragmented consumers. I think in the story of earnings calls, you're just not hearing about the people who are really eating inflation at the end of the day. And I think we did have a really good quote on that in one of the transcripts too, about who ends up eating the inflation. I can't remember which company that was from. Maybe Eric you remember.

"We know what happens in an inflationary environment that way, somebody pays for it. It’s usually the consumer, which means, right, that price increases get passed along all the way to the end to the consumer until the consumer says ouch, I am not going to buy anymore" - United Parcel Service CEO Carol Tomé

[00:10:32] Mokaya: I don't remember specifically, but what I’ve seen in earnings calls are mostly maybe CEO saying that the consumer is okay to take some of the price increases because they understand the situation that is arising in terms of the supply chains be very tight and that they have to kind of pass on these costs to them. So that surprised me because I mean, you don't get to hear directly from the consumer, but at least the CEO is saying the consumer is taking it well, and they're okay with the price increases so far, and they’re understanding of the lags in the supply chains. And they're okay with receiving products a bit later than they expected. So I think that was surprising to me. I don't know what Alex has to say about that.

Excess savings and higher consumer spending

[00:11:13] Alex: No, I think the willingness and propensity to spend apparently is there, I mean, I'm thinking of Disney's call yesterday. Last quarter they said that per cap spending at the domestic parks was up double digits from the 2019 comp. This quarter, their wording suggested the per cap for even stronger. So the people who show up to the parks are just spending significantly more money than the people who were there in that same position two years ago. And, you know, it just aligns with everything I've seen in terms of retail data. It just seems that for whatever reason, people have a lot of money to spend right now, I don't totally understand all that stuff. I don't track it all very closely, but it's definitely happening.

[00:11:59] Sam: That's actually something we've been following for a little bit. So, you have this concept of excess savings, right? So, a couple of different economists will track this kind of differently, but it's this idea it's, it's basically based off of this principle of the degree to which income was outpacing spending. And the more income outpaces spending or the more spending pulls back more so than income, that gap represents the personal saving rate or the household saving rate, whatever you want to call it. And so, that amount of saving was something that was actually increasing very significantly during the pandemic. And you know, it makes sense if you think about it, right. If you're on lockdown, you have limited options to spend. You're certainly not going to Disney World in April 2020 or May 2020, right? So, a lot of this money, and let's also not forget about stimulus checks and unemployment benefits and all these other forms of income through transfer payments and stuff.

But the bottom line being that since March of 2020 consumers have accumulated something in the order of $2.4 trillion in excess savings. So what does this mean? Well, it means that consumers just have a lot more flexibility to spend, and just from a straight psychological standpoint, if you had to cancel your Disney World plans last year, and you didn't take a vacation, when you do go this year, you'll probably spend a shitload more. Instead of bringing sandwiches and eating in the parking lot, you might actually go inside and order from the Disney restaurant and eat the $25 cheeseburger or whatever it is. But yeah, consumers, I mean, listen, this is not universal. Like there are a lot of people who are out of work and suffering and struggling, but at the aggregate level it looks like, it seems to be the case that people just have a little bit more money than they did before the pandemic.

[00:14:07] Alex: I just think it's the sustainability of a lot of these numbers that's just really surprising to me. And just to pick a specific example, Dollar General reported 16% comps last year for the fiscal year. They just reported Q1 a couple of months ago, but their guide for fiscal 21, which still has eight, nine months to go, their guide is basically a low single-digit decline. So on a 2-year stack basis, it just seems like this is pretty sustainable. And again, think about the type of businesses, think about the type of customers that they see every day. It's just really surprising. But apparently, it's gonna happen.

[00:14:46] Scott: The numbers certainly do seem unbelievable in magnitude for a lot of, not just the retail comps, but like house prices running at a 25% increase year over year. Are people's incomes going up by this much? Like, are people really making that much more money or it's the segment of society that owns asset prices clearly that there's a lot more purchasing power?

[00:15:13] Sam: I think it's a little bit of both, right? I mean, cause here's the other thing that, and I'm sure we're going to speak a lot more about this, but don't forget that there are shortages for everything out there. Shortages for houses, shortages for cars, shortages for literally everything. So what we're looking at is probably distortions based on the fact that demand is just far outpacing supply. So there's plenty of people who are certainly getting priced out of the market and they complain about it on stuff like the University of Michigan sentiment survey, where the historic numbers of people who are outraged by how expensive stuff like cars and houses have gotten. But on the other side of the data, we're also seeing prices go up because there's still a healthy amount of demand. So I think some of this, a lot of these prices is a reflection of the imbalance in supply and demand. But that said, yeah, it does seem to be the case that people collectively have a little bit more money.

Source: Axios

Tight supply chains to continue into next year

[00:16:19] Scott: Sam brought up a good segue into the supply chains and things that we're seeing there. And, you know, that's something we've documented throughout the quarter, too. I think for at least the last month and a half, Eric and I have been looking for signs that the supply chain is healing and I still don't have good consensus from any of the earnings calls that I'm reading that there's green shoots. So it seems like the consensus is more that the supply chain is going to be tight through the end of the year, into next year, not only in semiconductors but all the other things that we're watching right now. I'm curious if you guys are seeing the same thing.

[00:16:56] Mokaya: I agree on that. It's especially expected auto companies to have.. they had guided that Q2 would be the trough, but what we have seen in most of the calls is that Q3 may actually be tougher in terms of they're not getting what they want to produce the products that they need to. So I think we haven't seen any companies and maybe one or two here and there that say maybe it's easing up, but generally the consensus is that going into Q3 and Q4, the demand will still greatly outpace the supply.

"As for semiconductors, the situation does remain fluid, and the supply chain continues to be impacted by events like what is happening right now with the COVID spike in Malaysia." - General Motors CEO Mary Barra

“we expect our capacity will remain tight throughout this year and extend at least into 2022 ”- Taiwan Semiconductor CEO C. C. Wei

[00:17:24] Sam: Yeah. Two reports that are worth following the ISM surveys and then the market PMI surveys where they actually have that sub-index of supplier delivery times. And that's sort of a pretty good proxy for.. like a one-measure proxy for supply chain issues. And the amount of time it's taking to get raw materials and goods to stores and manufacturers and all this stuff at least through July has continued to increase.

COVID, the Delta variant, and vaccination

One of the calls this week actually that I thought was really interesting was Callaway golf. I actually don't remember if that's actually the name of the company, but whoever does Callaway golf, they had an interesting call because they were being asked specifically about if they are being affected at all regarding the Delta variant and the spike in COVID cases in recent weeks. And you know, I think that call probably best captures the state of the world right now because the CEO comes out and says they are seeing no change in demand for their golf clubs and golf balls and all that stuff that they saw. And they also said that foot traffic to the retail outlets that sell their equipment has seen no noticeable negative change. If anything the demand is increasing despite the spike in COVID cases. But one thing that he did mention, and I think this was in the press release too, was that they see an increase in issues in their supply chains because of the Delta variant because they do supply out of places like Southeast Asia where the spike in cases is affecting things like manufacturing.So I forgot exactly what they said. I think it was like 20 million in lost revenue opportunity in the second half of the year because of supply chain issues that are occurring overseas. So I think that's sort of where you make that connection between how the Delta variant is going to, I mean, I'm assuming most of this audience is like a US-based US-company type of audience, but in areas where consumer demand and stuff like that is holding up, where you are going to see that disruption is when people go to shop and the shelves are empty because of supply chain issues in regions where the Delta variant is actually disrupting the manufacturing process.

[00:20:10] Mokaya: I should say I'm based in Sweden. And then what you see is a bit of.. kind of a disconnect between the US and these international companies. You find that vaccination rates in Europe have been lagging a lot to the US for a while. So I think by the time the US was opening up in the summer, you know, it was a bit behind. There's a difference between the international trajectory of the virus and the trajectory of the opening everywhere as compared to the US so I think the US is way ahead in terms of that. So I’d expect as maybe more cases get to come up in certain regions of Asia, then that actually would cause a little bit of worry to US companies that have exposure to those parts of the world. Generally in Sweden, it didn't close down. So I think the economy still has been open as it was before the pandemic kind of. So there's nothing much that you could not here.

[00:20:59] Alex: Yeah. I haven't heard too many specific examples, but along that line of thinking, Spotify is a company that I follow closely. They talked about some impact in the quarter from countries like India and research in COVID cases. And I think Disney as well, you know, domestic parks have been something of a bright spot, at least as they start to return to something that resembles normalcy, but internationally, my sense, at least from really what they haven't said more than anything else is that the line to recovery there is much less clear and much less advanced than what it looks like in The States.

Digitization and the unfolding future

[00:21:35] Scott: Alex, you mentioned that trend towards digitization when you were first starting off. Curious to get more of your thoughts on that.

[00:21:42] Mokaya: And the metaverse.

[00:21:45] Alex: Well, I'm about as far from an expert as you can be on the metaverse. As a Facebook shareholder, I just find it really interesting how aggressively the company's investing behind this vision of where they think the world's going, and by aggressively, I mean, it sounds like they're probably spending a couple of billion dollars a year run rate at this point in time when something admittedly that's obviously at least a few years away from realizing that vision.

Another good example is probably Disney where they have a movie coming out here and in early September where they kind of have to set dates to release things obviously quite a bit before they actually do release them. And I think some of the commentary on the call suggested that they're kind of skeptical that it's going to do well. And I think that reticence to go back into the theaters even as vaccination rates and things like that are picking up, I think it probably reflects some of that development. It's this idea that the world is changing and in some way, consumer preferences are also changing as well. And some of that is not pandemic-related. It's probably going to be a permanent change. So I think you see that a lot of other areas obviously as well, like food delivery and things along those lines. So I think it's interesting to see how we might live quite a different world on the other side even if the vaccines and such address the issue.

[00:23:08] Scott: Yeah. It's interesting. A lot of you may know I'm an economic historian on top of this earnings call stuff that I've done. So, this period there's a lot of resonance to me in the period that was the post-World War II period where there was a reorientation of the economy, or there was all of this industrial capacity that was created in World War II from investment by the US government, obviously in producing tanks and planes and things like that to go fight the war. But then you came out on the other side and society had completely changed in terms of its industrial capacity.And all of that went into consumer goods. And the similar analogy here is that in this pandemic, all of us had to spend even more time on the internet. The digitization trend was accelerated. And on the other side, we're probably going to keep working from home, keep ordering our food online to your point, Alex. And the world has kind of fundamentally changed here potentially.

[00:24:04] Sam: I mean it's interesting that the thing about movie theaters…I was talking to an economist a couple of weeks ago about jobs and how the jobs landscape is changing. She's not convinced that we're going to get back to pre-pandemic employment levels any time soon because of exactly what you're saying. That we've undergone a major economic transformation. I mean you just look at some…You take a step back and look at some of the data and some of the economic numbers and, I mean, considering the fact that we're back to a pre-pandemic run rate for GDP yet employment is still 6 million workers below where they were in February of 2020. So where the economy is producing at a rate it was, but with 6 million fewer workers. This same economist was telling me that during this period, because they couldn't go to the movie theater and because they had all these, a lot of these places were just allowing people to screen these things when they came out, she doesn't have to put her two kids into the car, they don't have to get dressed, they don't have to like tie in traffic. They don't have to find parking. They're not buying the $18 popcorn. And of course, they're not buying five movie tickets that's going to cost like $80. It's you stay at home, you microwave the $3 popcorn, you're in your pajamas, you have you can probably invest...Most people can probably, well, not most people, I don't know what the number is, but many people increasing numbers of people can buy gigantic TVs with great sound systems and you just turn the curtains down and suddenly you have a theater experience or something that's marginally less than your theater experience, but at a fraction of the cost. So this is not health, safety concerns, but maybe the pandemic has sort of fast-forwarded some of these behavioral changes that were probably inevitable.

[00:26:19] Alex: Yeah, I think along those lines too, this is more of a long-term trend, but I think not to mention Disney endlessly, but the way they talked about their parks business on this call was a clear indication of how they see their ability to use technology and data to make the experience at the parks better, but also to use it to segment the experience based on how much people are willing to pay if we're being honest. And I think you'll see that trend become more common as data truly becomes something that companies can use in an effective way. Another prominent example is Vail, the skiing and snowboarding mountain operators. They think about it very similarly. And I think that's a trend that as we continue down this path of digitization and everybody having phones in their pocket, you're going to see more and more of that unfold.

Key surprises from Q2 results

[00:27:09] Mokaya: Other than what you've covered so far, are there any other, like thoughts maybe you've had or key things that may have surprised you from the Q2 results and maybe I'll start with Sam.

[00:27:17] Sam: I think one of the most surprising things continues to be the expansion of profit margins. I think from the perspective of all the cost-cutting that happened last year and being able to pass on higher costs through price increases and stuff like that, I think everyone sort of expects that to a certain degree, but to have so many companies beat expectations by such a wide margin. And I understand that that's also a function of the analyst's ability to forecast this stuff. But the degree to which these companies were able to beat expectations while stock, while the market, while the stock market was at an all-time high, right? This was one of those conversations that everyone was having, going into earnings season, that all those expectations were already priced then. Cause we were at a record high before the earnings season even started. It blew away all those expectations on everyone's raising guidance for forward earnings now. So I think from that perspective, the stock market and the companies underlying the market have done a pretty incredible job of beating everybody's elevated expectations.

[00:28:31] Alex: I would tag onto those same comments, but I narrow it down to a single group, which I would just say as big tech, or FAANG. I think about Microsoft they reported Q4 FY21. Their FY21 revenues were up 18%. It was their best result in more than a decade. You know, as I tweeted the other day, Facebook's revenues in 21 will probably be about $60 billion higher than they were three years ago. But I think the incremental revenues in three years for this business are higher than Unilever's annual revenues, their total revenues. Amazon during the pandemic added more than a hundred billion dollars of incremental revenues in a year. And my sense from the Google results I haven't dug in, but my sense was that on a two-year stack basis where you try to X out the impact of COVID and get a clean comp, Facebook was up 70% year over year. And my sense from what others were saying was that Google was even stronger. So it's just amazing how big and dominant these businesses already were. And I know that the FAANG name has been going around for a long time, but the sustainability of these massively out-sized results is… it's kind of mind-blowing.

[00:29:40] Scott: Yeah. It is always surprising how money can seem to come out of areas that you don't expect to happen. Like the numbers don't always end up adding up with respect to like that TAM. I think again, going back to that post-World War II environment, something that always stuck out to me is that American GDP was like $100 billion dollars a year before World War II, shot up to $300 billion a year, all based on spending and borrowing from the US government over that time. And so the analysts at the time would say, okay, now that we're done with World War II, there's not going to be borrowing. GDP is obviously going to go back down to $100 billion dollars a year and just like through a confluence of inflation and also that greater, real industrial capacity, nominal GDP…I don't think, I mean, it felt like 10% or something like that, but we were well at like this new level. And that was just an example that always stood out to me of, you can do all the numbers as they are today, but then somehow new numbers come in, new spending comes in and I think that's the same dynamic that's going on here. When we're looking at 20% comps, 25% comps for companies just the old numbers don't really are not sensible anymore. They don't make any sense.

[00:30:57] Mokaya: Yeah. So if I were to add something, maybe that surprised me myself, it's something in the industrial section from the auto company. So, I think, something that Elon Musk said that electric vehicles especially are at an inflection point and that it has become consensus now that electric vehicles are the only way forward. You see these in a lot of the earnings calls, like the companies themselves shifting a lot to EV. And if they're not there, they are on their way there. When something becomes that consensus it's sometimes it's a little, it's a point at which you need to ask yourself a question, whether it's really true, that that's the way it's going to be. But then again, you see a lot of comments from companies. They also say that there's a lot of runway to go before all autos shift towards being EV-based and until then, oil is still going to be the main source of energy. Scott. You picked up on that yourself.

[00:31:52] Scott: Yeah, that, and actually one of my favorite catalysts of the quarter that I saw was in the Google quarter talking about commercializing the Waymo business in Phoenix, which I haven't really seen anywhere else, anybody talking about that, but that seems like a really big deal to me. Which is crazy. This is a huge catalyst. This is self-driving cars being commercialized.

“Waymo continues to build and commercialize the Waymo driver and grow the team. People love the fully autonomous ride-hailing service in Phoenix. Since first launching its services to the public in October 2020, Waymo safely served tens of thousands of rights without a human driver in the vehicle, and we look forward to many more” - Alphabet CEO Sundar Pichai

[00:32:15] Sam: I saw a TikTok from the Olympics showing people in a car, I guess they pulled over to help someone who needed medical attention, and then the self-driving car actually left without them. But I can't confirm if it was true and listen, I'm not a conspiracy theorist or whatever, but I think a lot of us would love to see a lot more tests before jumping in. But yeah, it's definitely made a lot of progress. Everything you see in terms of self-driving cars and AI and all the machine learning technology and all that stuff behind it has made tremendous amounts of progress. There's no question about that.

[00:33:01] Scott: On the automobile and the AI conversation, the electric vehicle comments to me this quarter felt like in 2010, the way we used to talk about digital distribution of movies, that it was like in five years, it'll be here and everybody will be doing yet. And lo and behold, I mean it's 10 years later, but we have a full digital distribution of movies that we didn't have when we were mailing away for DVDs. And it feels like 10 years from now, we'll look forward and look back and all of us will be driving electric vehicles. No more gasoline, really on the road to speak of.

"It also seems that public sentiment towards EVs is at an inflection point.And at this point, I think almost everyone agrees that electric vehicles are the only way forward" - Tesla CEO Elon Musk

[00:33:38] Alex: An interesting one from Disney today, as a lot of these companies are getting into new businesses, just a general comment, you know, speaking about their D to C opportunity, they essentially said we don't really know what the seasonality is like in this business. So as for guiding quarters, maybe that's not a great idea until we get our arms around it. It's just, for me, it was just a funny comment in terms of, we all obviously live quarter to quarter because that's just how time goes. But as you're, as you're focused on the long term, you're going to see a lot of bumps along the way as we move into what feels like a new world as you move into new business models. And you know, I just think it's interesting.

Source: Disney

Q3 outlook

[00:34:15] Mokaya: I guess then that's in terms of thoughts for Q2. So what are you paying attention to as you move into Q3 then?

[00:34:22] Sam: For anyone who followed the consumer sentiment report this morning, a historic drop in consumer sentiment based off of responses to this University of Michigan sentiment survey. Obviously, this is soft data. People say whatever they want and they'll go do the exact opposite in real life. But to what degree is our concerns about COVID and economic prospects and future inflation and all this stuff actually affecting consumer behavior? You know, this might not even be a thing that we need to wait for Q3 earnings season. We have retailers who are going to start announcing earnings in the next couple of weeks. But the degree to which concerns about things like inflation and the Delta variant is actually translating into a slowdown in economic activity.

[00:35:21] Scott: Yeah. I think to echo Sam, watching really closely for the impact of the Delta variant going forward here and that'll start to show in the next couple of weeks probably. And then also comps getting tougher in the back half of the year. And the back to school period at the end of summer, people going back to a more normal, normalized life, potentially.

[00:35:45] Alex: Yeah. I would say pretty similar as well. I'm curious to see if..where I live, we were back to masks mandated everywhere, and it's not an if you're vaccinated or not kind of thing, it's just everybody to wear masks. And we'll see what the response is by people. If this becomes it's a very serious issue or an even more serious issue than it already is, I’m curious to see how people's ability to spend can manage to stay near the levels that it's at currently. I guess we'll see with retailers in this coming quarter, Q2, you know, the quarter that they're about to report, I would assume it's doing pretty good based on the stuff we've already seen. I'd be curious if we see any changes in terms of guidance, how they look to the back half of the year.

[00:36:30] Mokaya: I think we’ll also be paying attention to supply chains. I think Scott and I are very keen and reading, especially industrials, and trying to look for any signs that there will be changes in the supply chains maybe a balancing out of demand and supply. So I think that's the one thing that we’ll be paying very keen attention to. Something else, of course, a key statistic that’s noted from Q2 from Bank of America was that 65% of the money that was flowing to client accounts from the unemployment benefits were actually being saved and only 30% was being spent. So, that’s a substantial amount, so you'd want to see also how those trends are going going into Q3 and maybe some States in the US also stopped the unemployment benefits and how that impacts spending. So I think apart from the Delta variant, we also want to keep track of the booster vaccines that have also been approved this week, how that's going to impact.

Why we read earnings transcripts?

Before we close up one thing I wanted to ask all of us since you spend a lot of time on earnings transcripts, maybe why you read earnings' calls transcripts and why you spend a lot of time with them, and what you’ve gained from them.

[00:37:38] Sam: Yeah. I probably was reading a lot more transcripts before I started subscribing to your newsletter, which by the way is great. So everyone should make sure it's subscribed to The Transcript and I'm not collecting any fees or anything from that. It's just great. So if you haven't make sure you sign up for that. But yeah, what I like is, you know, sure it's all being taped and they have their handlers all around them, but this is one where executives will go off-script. And you know, it's not like..no one wants to like see people stumble over their words and accidentally say something that's inaccurate or whatever, but you get a lot of information and a lot of color that you do not get in a press release or a 10K or something that is..that has to go through legal compliance departments and stuff like that. You know, getting color on stuff like what happened in the first three weeks of Q3, This is stuff that you don't get any kind of response or companies don't often actively give that kind of color in an AK or an earnings release. So yeah, it's hearing executives answer questions that they would have rather avoided, I think, is really the big benefit of going through these transcripts and listen to these earnings.

“So yeah, it's hearing executives answer questions that they would have rather avoided, I think, is really the big benefit of going through these transcripts and listen to these earnings” - Sam Ro

[00:39:04] Alex: Yeah, for me it's, you know, everything I do in terms of being an investor is trying to find companies and management teams that I want to partner with for the long term. So a huge part of conference calls for me is getting a better feel for the people that I'm entrusted with my capital. Particularly when things are not going well. And obviously, anybody will make mistakes, but I want a clear sense that they're focused on the things I care about, which is the long-term economics competitive position of the business. And I also want to be sure that when those tough times come along, they're being honest with me and transparent with me on the things that I need to know. So that's the primary reason that I listen to conference calls.

"So a huge part of conference calls for me is getting a better feel for the people that I'm entrusted with my capital particularly when things are not going well"- Alex Morris

[00:39:47] Scott: Yeah. I echo everything that Sam and Alex just said in terms of the breadth of information you can get from earnings calls. And also the depth of being able to really get to know the way that management teams are thinking about their companies, especially when you follow them over the length of time that we've been doing. You know, there's some, some CEOs that we've been listening to for a decade already talk about the way that they're thinking about their companies and you get to watch their strategies evolve and the way that they react and their track record, and really get a sense for their track record. I think one thing to add as well is that there's elements of investing that are really about information arbitrage. And I think the interesting thing about conference calls is that every company is trying to tell their story, but not everybody is listening to the full story. And so when you really dig into the conference calls, there's lots of times that there's information in there that the market is not fully appreciating. And there are catalysts to be found that we publish in our newsletter all the time. The Waymo commercialization in Phoenix is a great one. That is a major economic dislocation potentially that it doesn't sound like many people are paying attention to. So those are the reasons that I listen to conference calls. Mokaya, what about you?

"...the interesting thing about conference calls is that every company is trying to tell their story, but not everybody is listening to the full story. And so when you really dig into the conference calls, there's lots of times that there's information in there that the market is not fully appreciating. And there are catalysts to be found that we publish in our newsletter all the time" - Scott Krisiloff

[00:41:05] Mokaya: I think there's a lot of wealth of information. I read it mostly because it gives me a better glimpse of how the economy's doing. Because sometimes, as Sam said, you'd make them the CEOs and the management teams go off script a little bit and they tell you, look, this is what is really happening on the ground. Or sometimes, maybe the question was very irritating and they use practical examples from the field to actually show you what exactly is happening. So I like those kinds of earnings calls where the management has a grip on what's happening and they are actually hands-on and they can give you some statistics and stories and show the impact of the products or the customers and how they're feeling. Maybe they talked to people on the ground and that's something that they can’t really hide.

"I like those kinds of earnings calls where the management has a grip on what's happening and they are actually hands-on and they can give you some statistics and stories and show the impact of the products or the customers and how they're feeling” - Erick Mokaya

Closing remarks

As we close, I wanted to say that the Spaces today we brought in partnership with Koyfin. Koyfin also helps us also to get access to some of the transcripts. We still get good data from them. Also, we partnered with Quartr. It's an app that you can find on Android and iOS where you can also listen to earnings calls. They’ve really revolutionized that. So I think that's been good partners that we’ve had on The Transcript and also along the way. So I would say closing words then maybe we can start with Alex and then Sam, and then Scott, and then you can finally wind up. You can also tell people where they can find you.

[00:42:32] Alex: Yeah, I think as you've heard here the first half of the year or the first half of 2021 is generally done, very strong, both relative to the first half of 2020, obviously, but for most companies that I look at, also relative to the first half of 2019. So it's nice to be in an economic environment that feels a lot different than where we were at 18 months ago. And hopefully, companies continue to do things to keep moving forward and investing for the future. So you can find me on Twitter, as, you know, if you go to my homepage, I guess you'd call it, you can find my Substack. You can sign up for. There's a free version where you'll see previews of the things that I write or a paid version if you want complete access to everything that I do. So I appreciate you guys having me on and hope to do it again in the future.

[00:43:18] Sam: Yeah, I mean, you know, there's..it seems like there's a lot of things to be optimistic about. Of course, there's a lot of things to be uncertain about, but, you know, uncertainty is just the name of the game when it comes to investing in stocks and all that kind of stuff. There will always be a number one topic of uncertainty and in future Twitter Spaces, we'll be probably talking about something else at some point or another. But yeah, it's really encouraging to see not just revenue and earnings for these big companies coming back, but seeing stuff like GDP and household spending and a lot of these other metrics return to pre-pandemic levels, and this is all occurring as there are still 10 million job openings out there. And supplier times are suggesting that there are still supply constraints, which means that there's still a lot of demand in the pipeline. Again, there's still $2 trillion in excess savings for consumers. So there's a lot of things that still need to get processed through the economy and all the companies that are involved in it. So lots of interesting things watch as the economy continues to unfold. But yeah, follow me at @SamRo. On my profile page, you can also see links to how to sign up for the Axios markets newsletter. And you can also click on any of those links and you'll also find my email address. Don't hesitate to email me any questions or anything, or if you want to follow up on something or if you need me to look into something and write about it in future newsletters.

[00:45:00] Scott: Yeah, I think echoing things that have already been said, this has really been a great time for society. I think for people to be vaccinated and have this release of energy from a pretty dim period during the depths of the pandemic. And so we're not totally out of the woods yet. Obviously, Sam mentioned there's still a lot of unemployed and we have the Delta variant and stuff, but I think hopefully this has been a really positive summer for everybody. And, you know, times like this happen infrequently and in society’s life or a person's life span. So I hope everybody was able to enjoy it. Beyond that, just want to say thank you, especially to Alex and Sam for joining us today. Really nice to have you guys here. And hopefully, people will sign up to your guys' newsletters as well. And then Koyfin and Quartr who were also our sponsors today. Thank you. And thank you to everybody who tuned in.

[00:45:50] Mokaya: Thank you so much for joining us today. I'll do this again every quarter or every so often. And so keep an eye on our timelines and also subscribe to our newsletter thetranscript.substack.com. And also listen to our podcasts. And you can also get our email there. You can just drop us an email. Thank you Quartr for helping us and also Koyfin. Thank you and see you next time.