Wall Street Unplugged
Episode: 843January 18, 2022

Three industry titans on inflation… and future market returns

With Frank on a boots-on-the-ground research trip, I (Daniel) am behind the mic to cover today’s top headlines.

Earnings season is officially underway. I share my thoughts on the latest results from JP Morgan, Goldman Sachs, and Delta Airlines… and what they tell us about the macro environment. [2:12]

Focusing on Delta, I explain why CEO Ed Bastian’s recent comments are positive for the economy. [4:33]

BlackRock CEO Larry Fink talked to CNBC about inflation, earnings season, and why he expects market gains to be muted going forward. I highlight why it’s important for investors to manage expectations accordingly. [10:07]

Hedge fund titan Bill Ackman took to Twitter to express his views on how the Fed should approach inflation. I break down why the Fed is in a tough position as it tries to balance economic needs with market concerns. [14:48]

Inside this episode:
  • Earnings results for JP Morgan, Goldman Sachs, and Delta [2:12]
  • Why Delta CEO Ed Bastian’s comments are positive for the economy [4:33]
  • Why BlackRock CEO Larry Fink thinks market gains will be muted [10:07]
  • Bill Ackman’s take on inflation… and the Fed’s tough position [14:48]

Wall Street Unplugged | 843

Three industry titans on inflation… and future market returns

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on main street.

Daniel Creech: How’s it going out there? It’s Tuesday, January 18th, and you’re listening to the Wall Street Unplugged podcast, normally hosted by Frank Curzio. But once again, he is traveling, boots-on-the-ground research, meetings of minds, pulling of strings, deal-makings going on. And in his place today once again is I, Daniel Creech, senior analyst here at Curzio Research, and filling in for him behind the mic for at least today and tomorrow. We’ll see how the schedule unfolds, but I’m excited to do this again. I had a great time a couple weeks ago while Frank was in Las Vegas at the Consumer Electronics Show, and we’re going to have a lot of fun today.

Daniel Creech: Normally, Frank hosts the Wall Street Unplugged every Tuesday, Wednesdays, and Thursdays. Tuesdays are his monologue, which I’ll do today, and I don’t know if he has a guest lined up, so just bear with us. A lot of exciting stuff, a lot of moving parts going around here to kick off the new year, and we’ll all get through it together.

Daniel Creech: Earnings season, well, I got to say, I love having a rough outline to cover the podcast. I love the prep work. I love doing everything about this. Then, you come to work, you get here early, you get all your ducks in a row, and of course, fun events happen, life happens. Markets are down. Yields are going higher with this constant inflationary mindset and the Fed hiking, projected hiking coming. Bill Ackman was out with a good tweet I’ll cover in just a minute, but Microsoft takes the cake today. Microsoft announces a huge deal, all cash, to buy Activision Blizzard for somewhere around, give or take, a 40% premium to its recent closing price. Talk about just highlighting the metaverse, highlighting gaming, macro play, and writing checks. I think they’re spending around 70 billion. Billion. Just going to write a check. Lots to talk about earning season.

Daniel Creech: Delta Airlines, earning season’s well underway. The big banks were reporting. Goldman Sachs reported this morning, JP Morgan reported last week. They even noted of strong consumers, strong conditions. Their results were positive. Goldman missed on earnings per share, but I think beat on revenues. My point is, they were solid in general because when you’re comparing these to last year or previous periods, remember, comparable sales comps, you want to put everything in context, so hey, we’re doing great over here. Compared to what? Well, for the airlines, for Delta, you’re not going to compare earnings or losses to the 2020 year because the coronavirus locked down everything, nobody was flying, so that’s basically a wash. What I like about Delta is, they are comparing to 2019 to try to give investors and everybody the perspective, the context of how they’re performing given the environment.

Daniel Creech: Lots of risk out there, of course, but Delta came out, JP Morgan, everybody’s talking about inflation, higher cost across the board, but JP Morgan and Goldman Sachs’ comps were against very solid quarters, very high earnings. Those are fluctuating a little bit. JP Morgan dropped, sold off after earnings. Last week, Goldman’s down roughly four or 5%. Thesis is still intact for Curzio Research Advisory members big on Goldman Sachs. That’s just a great bank. I’ll sift and go through the details, but overall, in a higher interest rate environment, yeah, trading might be tough, but overall, that thesis and that juggernaut is probably going to continue to be a solid, solid place for investment capital.

Daniel Creech: Switching gears to the airlines real quickly because I want to help continue to paint the picture, unfold the thesis of the recovery trade as we look past the variants and this “back to normal, back to 2019” issue with comments and perspectives from the CEOs who are behind all this. The reason this is important is because as the narrative shifts and the majority of people or businesses and/or politicians move away from lockdowns to open economies, that’s just good for everybody, and I want to explain that, continue on that thesis. Delta reported earnings. Not going to get into those details. I want to focus on what the CEO said on… He did an interview with CNBC afterwards and then a few conference call transcript quotes.

Daniel Creech: But first, on CNBC, Ed Bastian says, “The worst is behind the airlines regarding impact operations due to Omicron.” If you remember a few weeks ago, when Omicron were really started to hit the headlines and spread, and it continues to, I’m not ignoring anything there, the case count and all kinds of stuff is continuing to move higher, the point here is that Delta’s saying that flight cancellations are way down over the last few weeks. Get this, this is just positive news in general, “8,000 staff members were infected,” he’s referring to Omicron, “but all of them are fine and there were no health issues.” That’s wonderful, just in general, like I said, for humans, for the economy, for everything. That’s a great stat and that’s positive to hear.

Daniel Creech: “The holiday season was the busiest for travel period in two years.” Again, put everything in context. What are your comparables to? That makes sense because the last couple of years with starting in 2020 have been volatile as can be after nobody was flying in 2020. “Bookings continue to remain robust because people know Omicron is not a threat to them.” That is a hell of a powerful statement from the CEO of Delta. Again, what’s driving his thesis in results, he’s looking at the bookings. He’s looking about the business, the services that he provides and how the customers are responding, and he says “The company is prepared for higher oil prices.”

Daniel Creech: Regular listeners know that I’ve been bullish on oil. Frank has been, too. As inflation continues, I expect commodities and oil to continue higher. Oil today is roughly, it’s closer to $85 a barrel than it is 84. That’s up. It’s been a steady track higher, but the point here is, I don’t want to get off on a rabbit trail, sorry, Delta Airlines, these are hugely positive comments for the economy in general as far as an open-versus-closed standpoint and as far as people’s perspectives and feelings towards fear of going out and doing something, contributing, i.e. buying goods and service, providing goods and services, the ability to do that, are trending in the right direction from that standpoint.

Daniel Creech: A couple of conference call bullet points here. He believes that, again, this is referring to the CEO, or just management, believes given the high transability and low severity of Omicron that the virus is “likely to mark a shift in COVID-19 from a panic to an ordinary seasonal flu.” How do you play this out? Why am I going through this macro trend? Because airlines is one way to play it because they were so hurt and so beaten up, and the industry is not going anywhere, and you can benefit as this recovery to normal. From a seasonal flu standpoint, if that mindset is not going to hinder a lot of operations, that’s a positive.

Daniel Creech: Again, we’ve talked about the pharmaceutical industry and how you can have exposure to that. Pfizer has long been the low-hanging fruit, in my opinion, on how to do this, and how you go from the narrative of curing and eliminating the virus to treating it. Remember, we’ve had this, this direction or this conversation about getting rid of it, completely shutting down the virus, not shutting down the country to more of, hey, we’re going to have to learn to live with this, and we’re going to treat this. Pfizer’s treatments, different pharmaceutical companies. Like I said, Pfizer’s just the lowest-hanging fruit on that. But this is, again, from Delta, which is a positive thing. That’s what he is saying, okay? You can agree, you can disagree. That’s what he’s saying. Based on the data he’s looking at from his business.

Daniel Creech: A couple more here. He expects the recovery… Well, okay, expects rates of recovery stepped down in January because they did have some staffing issues and all that kind of stuff, but January to February is going to be about 70% of 2019 levels. We’re nowhere near. That’s a big deal from if you want to compare, “Hey, when are we getting back to 2019?” Well, he’s projecting going forward, and this is over bookings and different things, roughly 70%. We’re not there yet, which is the thesis that Frank had behind Delta. As we get back there, Delta’s going to be able to cut costs, manage that business, and be profitable, and reward shareholders, of course. “Omicron variant has greatly impact operations. Again, we’re looking in the rear-view mirror,” so he’s talking about why they expect a small dip in the first quarter here, and then they’ll get through that. That’s just a little bit of, boy, this is a terrible pun, but a little bit of turbulence, if you will.

Daniel Creech: But to recap, the CEO coming out and having very positive comments on his staff, and I don’t want anybody to get affected with anything or ever feel bad, but I’m glad to hear that several thousand, 8,000 were infected, and there were no health issues there, so that’s a positive. Hopefully, that is a domino effect, and we start seeing that more and more across corporates, corporations, across staffing, across all goods and services, that’s just a real positive thing. That thesis continues to play out and that’s a positive for everybody.

Daniel Creech: Continuing on with CEOs, I want to switch gears this morning. BlackRock, Larry Fink. BlackRock, oh, they got to be the largest, huge investment manager, just absolute juggernaut of 10 trillion-ish assets under management. He was on CNBC, and he was talking about he expects higher inflation and aggressive Fed. I’m going to use this as a segue to something that Bill Ackman tweeted about, and I think is worth noting because as we get closer to Fed meetings. You’re going to continue to see volatility like we are today, and like we have all year. Larry Fink said, a couple bullet points here, “Some of the inflation was created by sustainability measures. Increasing wages are a blessing, but the question is, can companies pass on wages and maintain margins?” Just like airlines, if you’re only operating at 70% capacity, give or take here or there, are you able to cut it off cost? Are you able to charge? Do you have enough pricing power for those customers that you are serving to strengthen your bottom line, to manage your business, to grow your business, to reward shareholders?

Daniel Creech: This is something that everybody is going to have to continue to deal with. This is the new normal. From an investor standpoint, I want you to think about the new normal and how those businesses that you’re investing in, you’re buying a piece of a business, how is that going to operate in not only the current environment that we are anticipating and seeing rising interest rates and higher costs, but then to sustain through that period where you have that as a constant? He believes the US…

Daniel Creech: Quickly, that pricing power is important because low-hanging fruit, McDonald’s, you could argue, has great pricing power. The one here on the island that I go to every once in a while, I try to do everything in moderation, you see the constant switching of deals. It was two for four, now, it’s buy one, get one. I’m talking about their breakfast, which I am so biased and think McDonald’s has amazing breakfast. I had a friend of mine tell me, “It wasn’t as bad as I thought.” How much more general can you get for justification? I said, “Oh, well, it’s not that bad.” How that’ll all effect, will companies be able to pass on wages and maintain margins? That’s a big red flag to watch going forward, or a big signal. Larry also believes the US will have higher inflation over the next year in an aggressive Fed over the next two years. Now, he’s counting, put that in context, that’s a big theme today, he’s counting this year and next year, so 2022, 2023, an aggressive Fed. Hold that thought.

Daniel Creech: Two more points from him quickly before I get onto the Fed. He thinks earnings will surprise to the upside. That’s a positive. He believes deficits matter, okay, and he thinks stock market gains will be muted going forward. Now, I’m just looking at the bullet points here on one of our services. I’ll dig into more of this and continue to update you, but that’s an important thing because you want to learn… Or, excuse me, I don’t want to sound like I know it all, you want to think about the expectations and how those are going to play out in reality.

Daniel Creech: Let me explain that. I don’t feel like I’m doing this just. As Frank likes to talk about, markets hate uncertainty, so if you have high expectations going into an earning season and they come in lower than expectations, you’re going to see more volatility because it’s a shock. It’s an awe factor. It was something that wasn’t prepared for by investors. It took them by surprise. That is something you need to constantly think about. Here, you have the largest asset manager CEO talking about, “Hey, your expectations going forward ought to be, eh, tamed down.”

Daniel Creech: We’ve had a great couple of years. I highlighted a couple of weeks ago, or Frank and I did, hell, last year, the S&P 500 was up almost 30%. Those are much higher than your traditional 10% averages over a long time or 8.5%, depending on how far you want to go back, the 20- to 30-year long-term compounding of wealth, so expectations going forward need to be tamed, they need to be lowered. That all transitions or translates into the reality of volatility and possibly lower prices, lower asset prices across markets, across the Dow, the S&P, the Russell, the NASDAQ. Keep that in mind going forward, an aggressive Fed over the next two years.

Daniel Creech: Bill Ackman has come out and he tweeted, I believe it was a few days ago… Today’s the 18th, I think this was from the 15th. Yes. He says, “While it has become conventional wisdom that the Federal Reserve will raise interest rates three to four times this year to mitigate inflation, the market expects 25 basis point increments. The unresolved elephant in the room is the loss of the Fed’s perceived credibility as inflation fighter and whether three or four would be enough.”

Daniel Creech: I’m going to take a break here from his tweet. The perceived credibility, because we’ve talked extensively as the Fed chair, Jerome Powell, does his press conferences and up to and testimonies about how he is trying to guide this economy, about how he’s trying to be transparent or to communicate with the market, i.e. investors, because like I say, he watches the market, and they don’t want to cause a market crash. Nobody does. I get that. I’m not saying he should or whatever. I’m simply saying that I believe that he watches asset prices, he’s trying to manage the economy, he’s trying to manage everything. The perceived credibility is when Frank talked about when they did a complete 180, when he threw away the transitory inflation remarks and said, “Hey, it’s going to be here. It’s here to stay,” essentially. That was a couple months ago. Frank thinks that they’re going to hike even more than expected, so four or more.

Daniel Creech: If you remember our conversation a few weeks ago, this is a great point, and also reiterated by Bill Ackman, you don’t have to do the 25 basis point increments. You can do 50, you can do anything. In reality, to an extent, you can say, “Hey, let’s raise it XYZ. Let’s bump it by 1%.” Now, I’m being a little silly there just to prove a point. Bill Ackman’s point is, “Hey, this would give you a lot of credibility.” It would shock the market, so it would be painful, and he even highlights that in one of his tweets because it was a couple, two or three tweets. What kind of pain would you see there? Well, you would definitely see, the easiest thing to think about would be markets would swoosh lower. You would have a quick drawdown while everybody basically hits the sell button first and then asks questions later.

Daniel Creech: But just like he pivoted and shocked a lot, excuse me, with the inventory to more constant inflation, if he did come out in, say, March or whatever, the first Fed meeting, that Goldman Sachs and other banks have pulled forward, if he comes out and does that, that would be a buying opportunity in certain sectors where inflation… Remember, that’s not going to fix anything, so if the market goes down 3% from here in general, you’re going to have a lot of stocks that are down significantly more than that. If those stocks are in certain sectors, commodities, goods, different services, different products, those companies have pricing power, those are going to be excellent opportunities to look at for investors to buy up shares. Just like Larry Fink is telling you to tame your expectations, you’re not going to get 20 to 30% a year like we have in the past, or at least last few years, i.e. last year. Those gains, he believes, are going to be muted. Couple that with Ackman calling for a shock and awe from the Federal Reserve, it’s just going to increase all the volatility.

Daniel Creech: One more thing on Larry Fink’s comments, just to couple that and show you how I’m trying to put this puzzle together. There was a solid report out of Bank of America last week, and they were giving their take on believing cash is basically going to outperform the market, 2022 is going to be a down year for equities, meaning it’s not going to be a positive vault. Now, that doesn’t mean it could be down 10% or 20%. That simply means that they don’t believe it’s going to have a positive return.

Daniel Creech: For asset allocation, they point out that they believe that cash and can outperform equities, which is rare. It’s just twice in the past 30 years, which was 1994 and 2018, were both Fed shock years, but there was this long period of stagflation where you have constant or leveling off of wages and much higher prices, so any wage increases are offset by higher prices, which doesn’t do consumers any good. That era, I know numbers are hard to follow, so I apologize, but they’re just pointing out that, hey, from 1966 to 1981, cash outperformed stocks and credit seven out of 16 years.

Daniel Creech: The point is they’re thinking, hey, history doesn’t repeat itself, but it can rhyme, and if you have these negative years, these Fed shocks, which is kind of what Ackman is talking about, or what Frank has been talking about, and saying, “Hey, if they do surprise like the transitory issue deal, that’s going to cause significant volatility and those prices are going to move lower.” I’m not saying sell everything, go all to cash, I’m just pointing this out to try to build the environment, put in context of what we’re in now and what we’re going through this year and in the next as we have higher prices across the board. Hopefully, that makes sense from a macro level.

Daniel Creech: Finally, I want to just discuss the Microsoft is a great deal in the sense of it shows you that, hey, the world continues to move forward. There’s a ton of volatility. Activision Blizzard was going through a lot of bad press, a lot of investigations on corporate, not accountability, but environment… Accountability is in there, I don’t mean to throw that away, but a lot of investigations on management and corporate style and the environment of working there and is it comfortable, is it fair, and all that kind of stuff, so their stock has been drifting lower. Microsoft comes in and swoops it up with all this higher interest rates, with all of this noise going on with what the Fed’s going to do. Where are you going to see struggles with ebbs and flows of higher commodities? Consumer spending. They’re looking long-term.

Daniel Creech: As investors, you can take away from that and think about that. Hey, the world is not ending. Even if the market “crashes,” you’ve been through market crashes before. Unless the world ends, you got to look for opportunity, and if the world ends, then it doesn’t matter. That’s a silly cliché, but this is just a good macro perspective of saying, hey, look at these largest corporations in the world. They’re looking through all this noise. They’re still trying to find value. They’re still planning on the future. They’re still investing on the future.

Daniel Creech: Again, I don’t want to get ahead of myself. I’ve just looked at several headlines as the news has been breaking this morning. You keep seeing references to the metaverse. I’m going to listen to some interviews coming up with Microsoft Gaming and Activision and put that together. Again, I’ll talk more about that tomorrow, but I do love the timing. It’s coming off of a holiday weekend, they’re doing all this. That’s just good stuff. I hope that that helps tie in from how to look through the noise and don’t be blindly bullish. Just keep an open mind to opportunity because as prices move lower, as volatility increases, that increases the opportunity, that increases the more ways to win. As investors, as stock pickers, for us, you don’t like to go through painful times, but you want things to trade on their own thesis’s. A rising tide lifts all boats, so from our perspective, we’d rather want to shine in a good environment. We want the environment to where we can shine and provide value and that’s what we’re expecting and looking forward to.

Daniel Creech: All right, so just a few topics here, a little shorter today, but that’s typically my style. Please send your feedback, good and bad, to me at daniel@curzioresearch.com, that’s daniel@curzioresearch.com. I’m only doing the audio for when I sit in with Frank, but continue to follow him on Twitter. Check out our Curzio Research page, our Curzio YouTube page. Also, follow Frank on TikTok. Love building the social media presence there and appreciate all followers, again, all comments and everything. We’ll pick up tomorrow. This has been great filling in. I hope you guys have a great rest of the day, and we’ll talk about a lot of exciting events, including some more stock idea tomorrow. Cheers.

Announcer: Wall Street Unplugged is produced by Curzio Research, one of the most respected financial media companies in the industry. The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.

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Daniel Creech is a Curzio Research analyst with over a decade of experience. He writes on macro trends, large- and small-cap stocks, and digital securities. He’s a regular contributor to Wall Street Unplugged, Curzio Crypto, Curzio Research Advisory, and The Dollar Stock Club.

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