Boockvar on Fed Policy, Earnings
The following is from Peter Boockvar:
The fate of this now really matters for policy/A bunch of earnings notables
Yesterday confirmed again my belief, and sorry to argue again, that we’re in a rate tweaking process and not a typical/ historical rate hiking cycle. And something I speculated on Monday, the state of the AI trade/buildout is very much front of mind at the Fed as Warsh told us and therefore what the impact is of the higher cost of funding can alone dictate monetary policy from here. Warsh when talking about the impact that just one rate hike had on the AI funding costs, “Interest rates get in the cracks. Interest rates affect, directly or indirectly, almost everything.”
To those who simply see the current inflation rate, say it’s still above 2%, then argue the Fed should hike again, I say back, if we lose the AI tech trade and the ever greater pace of CapEx spend, we lose both the economy and a chunk of the stock market.
I thus think that if we get more tremors/ruptures in it over the next six weeks, the Fed won’t be hiking in December. And it was interesting that short rates fell while long rates rose. Maybe that was just positioning unwind post meeting as rate hike odds for December remain at about 84% so the market right now doesn’t agree with me that the economic facts are now a bit more iffy.
Yes, I’m overwhelmed with earnings but this is what I got.
As a daily user of Gemini, I can’t remember the last time I clicked on a Google sponsored link so I’m not surprised by the new reality that their search business market share is slowly being eroded by AI chat bots. Gemini ad growth is taking place but not enough to offset the decline in clicks:
“people are using our AI features more, searching in entirely new ways. Their queries are longer, personalized and multimodal. Queries in AI Mode are on average three times longer than traditional searches.” Regular Google search and other advertising revenue saw growth of just 12%. They are blaming to an extent the impact of FX which they say “was the single largest driver of search deceleration relative to Q2.”
But, the bottom line on this from them, “the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode.” I bolded.
Youtube advertising revenue growth was only 9%. Cloud was where the strength was with revenues up 103% “driven by strong growth in GCP (Google Cloud) with strength in AI, including AI infrastructure and AI solutions, and core GCP. TPU system sales were also a meaningful contributor.”
“CapEx was $51.4 billion in the 3rd quarter, with the vast majority of this spend in technical infrastructure to support our investments in AI. Approximately 65% of our investments in technical infrastructure in Q3 was related to servers and networking equipment, which generally have useful lives of six years. The remaining 35% for data centers, which have useful lives of seven to 40 years.”
And hugely important in terms of the impact of all this spend, “We had negative free cash flow of $9.1 billion in the 3rd quarter driven by our investments in CapEx.” This is the 2nd quarter in a row of negative free cash flow which is something they’ve never seen as a public company up until now.
As for guidance, “our full year 2026 CapEx guidance range of $195 billion to $205 billion remains unchanged. We continue to expect our CapEx to increase significantly in 2027 and will provide further details on our Q4 call.”
And the impact of all of this on profitability, “In terms of expenses, the significant increase in our investment in technical infrastructure will continue to weigh on the P&L in the form of higher depreciation expenses and related data center operations costs, such as energy.”
Microsoft had a strong quarter (their Q1) with the Azure cloud business seeing sales growth of 48% y/o/y vs the estimate of 44%.
Of note, “capital expenditures were $45.2 billion, as some third party capacity deliveries we expected in Q1 were delayed. Roughly ¾ of our CapEx was for short lived assets, including CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications. The remaining spend was for long lived assets.”
In their Q2, “we expect CapEx spend will be over $50 billion…In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”
Unlike Google, Meta, Oracle and Amazon, “we expect to continue to remain free cash flow positive in FY27” but “To complement cash generated by the business and preserve financial flexibility, we will access additional sources of funding when we believe it is attractive to do so.”
Samsung Electronics traded down overnight by 4% in South Korea over disappointment with their shareholder return commitment as investors will have to wait until next year to get it. Also, they are ramping up CapEx to add more supply.
From ADP, down 3% yesterday:
“Labor markets continue to demonstrate resiliency, and we have seen our clients continuing to hire at a steady pace.” But, “I think it still is a relatively low hire, low fire environment.”
Sector wise with respect to the jobs picture, “we look at 10 to 12 industry verticals. There’s obviously differences between some of the verticals. We’ve seen strength in areas like trade and transporations, but also continued strength in healthcare and education as an example. Also, financial services continues to show some resilience. We’ve seen a little bit of softening in places like leisure and hospitality.”
From Cheesecake Factory, down 2.5% yesterday:
“Comp sales and traffic growth meaningfully outperformed the broader casual dining industry, underscoring healthy demand for our brand and continued market share gains.”
Comps jumped with 15.2% with traffic growth of 9.5%, “outperfomring the Black Box casual dining index by an impressive 940 bps. Additionally, the improvement has been broad based across geographies, dayparts, days of the week, and channels.” Also adding to comps, 2.4% was pricing and 3.3% was a positive mix.
Flower Child, a restaurant I highly recommend, saw comps up 11%. North Italia is their weaker brand.
“we expect effective commodity inflation of low single digits for Q4 as our broad market basket remains stable.”
“We are modeling net total labor inflation of low to mid single digits when factoring in the latest trends in wage rates and minimum wage increases as well as other components of labor.”
Sticking with food, Wingstop was up 12% yesterday but business was challenging as they have many lower income customers and they said this:
“During the 3rd quarter, domestic same store sales declined 5.4%, below our expectations. While we’re beginning to see positive signals from the changes we’ve made, the improvement in sales performance is taking longer than we initially anticipated, and the macro trends we are seeing among customers have intensified over the last few months.”
From Jersey Mike’s, up almost 3% yesterday:
Comps rose 3%, “accelerating from 2.3% in the second quarter. We continue to outperform the fast casual segment this year…And I think it’s important to note that our gains are primarily driven by traffic both during the third quarter and year-to-date and anticipate that’s continuing in the fourth quarter.”
The caveat, their Q4 comp guide is a bit below the last few years and “what we’re really reflecting is the continued progression of our marketing strategy as well as some continued softness in the overall consumer confidence.”
Brinker’s continues to crush it with its Chili’s brand and its stock was rewarded by 12% yesterday. They said of note:
Chili’s comps were up 10%, “outperforming the casual dining industry by 720 bps” and “was driven by traffic increases of 6% versus a year ago.”
“While it’s clear the consumer is challenged, we feel we are positioned to continue to win in this environment through market share growth.”
From Chipotle, trading up premarket:
Comps grew 2.1% y/o/y with “a positive transaction comp of .8%.”
“We entered the quarter with strong sales trends supported by our Recipe for Growth Initiatives. However, industry headwinds beginning in mid-July slowed our momentum. We quickly acted to reengage our guests with promotional offers…We were pleased to see trends normalize by late August, and we saw further improvement in September…October trends have softened, consistent with the broader industry.”
“On pricing, the impact in Q3 was around 2.7%. We anticipate it will increase to about 3% in Q4, bringing total pricing in 2026 to around 2%. As we look ahead to 2027, we currently anticipate overall inflation to remain in the low to mid single digit range and expect to continue managing that inflation over the long run with our new approach to menu pricing.”
To the more bigger ticket item like vehicles.
From Group 1 Automotive, down 2% yesterday:
“There’s plenty of narrative these days around headwinds in our sector and in the broader economy. Affordability is certainly an issue. Negative equity, higher interest rates, cost of ownership, finance terms, geopolitical issues, and declining SAAR are all getting plenty of airtime. Most of that we can’t control at all. What we can control is how well we execute.”
New vehicle comps fell 4.6% y/o/y and they declined for used too.
To some industrial/transportation names.
From Old Dominion Freight Line, down 7% yesterday:
“the weight per shipment is up about 3% compared to October of last year. So, we continue to see that flexing up and that generally is a positive indicator for demand.”
“I think that just based on customer conversations we’ve had throughout the year, but even recently, we just continue to see stable demand trends. Obviously there’s a lot going on in the world and what the broad economy that our customers are managing through when they think about inventory trends but that’s something we just continue to stay in front of.”
And of course, “The increase in our operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum based products.”
They are also dealing with higher healthcare costs for employees. “I think overall, not just us, but the entire medical inflation has been pretty significant through the last couple of years. And based on what I’m seeing in October, we’d expect that’s going to be potentially a headwind in the 4th quarter as well.”
From FedEx, trading down premarket:
“Revenue was up 12%, which includes a 4 percentage point boost from fuel price driven surcharge revenue. Underlying revenue growth was supported by base yield expansion across both segments, along with US domestic and international export volume growth.”
“We were particularly encouraged by the strength from our B2B customers, including the fast growing data center vertical, which supported 28% y/o/y growth in international freight revenue.”
US domestic saw income up 7% “despite a headwind from higher over-the-road line haul purchase transportation rates. The unique pressures in US domestic purchase transportation rates are largely tied to the broader tightening in the labor market for truck drivers from recent regulatory changes.”
On the macro as we head towards the holidays, “In general, we are forecasting about a 2% average daily volume growth for peak and that’s specific to the peak period, which is sort of Black Friday through Christmas. It’s important to note that we have one extra day in November. So that’s great for retailers. And it’s great for our peak demand. SMB in our small business is actually really strong as well.”
“So, as we head into peak, despite the high fuel surcharge, the US consumer seems resilient. Both large and small customers seem to be able to pass on the fuel to date.”
From International Paper and whose stock rallied 3.3%:
In their Packaging Solutions North America business profits rose as “Price realization and stronger operating performance drove the improvement despite softer demand and higher input costs.”
Also, “Since our 2nd quarter call, incremental headwinds of approximately $145 million have emerged. The largest drivers are higher diesel fuel and distribution costs, along with increased volume pressure.”
And more on their higher costs, “Seasonally higher labor and employee medical benefit costs are also expected to partially offset these benefits. Our outlook assumes continued inflationary pressure with input costs expected to be unfavorable, primarily driven by higher diesel and OCC (old corrugated container) costs.
From Masco, up 1% yesterday and which makes a variety of stuff that is sold at home improvement stores, thus more focused on repair and remodel, and Delta faucet is their best known brand:
Plumbing sales rose 5% adjusted and “This strong performance was driven by pricing, which increased sales by 5%, and higher North American volume, which contributed 2% to growth. This was partially offset by lower international volume and unfavorable mix.”
In their Decorative Architectural business, pro paint sales were good while DIY was soft, the trend seen for many quarters.
On cost inflation, “in Q3, we experienced mid single digit inflation from input costs in both of our segments and we expect that for the year in its totality.”
From GE Vernova, down yesterday but up for the week and benefiting from the huge demand for gas turbines:
“the demand environment remains strong and customers secure turbines further into the future. Demand also remains diverse, with approximately 100 customers in 25 different countries, of which approximately 80% are traditional customers and 20% are for data centers. We are seeing strong equipment pricing and total lifecycle economics in gas.”
From Ford Motor, down slightly premarket:
“Our guidance now assumes a US SAAR of 16.5 million units, commodity headwinds approaching $2.5 billion y/o/y, an increase of about $500 million as we continue to see increasing pressure from input costs. In addition, higher fuel prices are impacting our freight and energy costs. But notably, we are not seeing it impact customer demand for trucks and fleet vehicles at this point. We now expect full year US industry pricing to be about 100 bps higher y/o/y, which is a .5 point higher than our previous assumption.”
The final thing on this long read, the October Eurozone Economic Confidence index fell to 96.9 from 97.5 and that is the lowest since June. Manufacturing continued to improve but services, consumer, retail and construction confidence all moderated.
