Closing Recap

Thursday, April 11, 2024

U.S. stocks market resiliency remains astounding as the Nasdaq Composite erased all its prior day CPI inflation report related losses, led by large cap tech (AAPL, AMZN, GOOGL, MSFT, NFLX) and semiconductors (NVDA, AMD, AVGO) as the SOX Semiconductor Index jumped over 2.4%. The S&P 500 also recovered nearly all its prior days losses as Bears were trampled again as investors “buy the dip” continue to be rewarded for the last 6-months. Markets got a boost this morning as the March producer Price Index (PPI), which had posted two straight “hot” inflation reports prior, showed decelerating prices this month. While the consumer prices index (CPI) carries greater weight than the PPI, today’s numbers helped fit the market narrative of rate cuts in 2024 vs. the “higher for longer” view yesterday by the Fed and markets promptly responded with a full day market “squeeze”. While Fed speakers today (Collins, Barkin, Williams), still see cuts this year, they noted they were in no rush to cut amid inflation risks. U.S. stock markets bounced around 10:30 an never looked back, making new highs all day behind strength in tech. Financials lagged (XLF) ahead of bank earnings tomorrow from Cit, JPM, WFC and STT. REITs (XLRE) also experienced a modest bounce after tumbling 4% Thursday. After a 6:1 NYSE breadth edge Wednesday for decliners over advancers, today was slight edge for advancers.

In an interesting statistic, @MikeZaccardi noted “the 10yr yield is up 80bps since Dec 27, in that time: $SPY +8%

$QQQ +7%, $IWM -1%, $VEU +4%, $USO +18%, $DXY +5%, $GLD +13%” (and don’t forget $BTC Bitcoin up 67% YTD) – in what has been an all-out buying frenzy for stocks, crypto, oil, the U.S. dollar, and gold! The rally has come on broad hopes of aggressive rate cuts this year – but since three straight “hotter” CPI prints to start the year, expectations have diminished – but that still has not deterred investor buying of stocks (S&P less than 2% off ATH), Bitcoin (about 2% off its record highs), Gold (just off recent all-time highs), and oil (best levels in 5-months). Something just not adding up.

The European Central Bank (ECB) decided to keep the three key ECB interest rates unchanged saying the incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook.

Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labor costs in their profits. Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

• Weekly Jobless Claims fell to 211,000 from 222,000 prior week and below consensus 215,000; the 4-week moving average fell to 214,250 from 214,500 and continued claims climbed to 1.817M from 1.789M prior week; the U.S. insured unemployment rate unchanged at 1.2% in latest week.

• After a dreadful 10-yr auction on Wednesday, today the U.S. Treasury sold $22B in 30-year notes at a yield of 4.671% vs. 4.661% when issued prior (first 30yr auction tail since 11/23), as the bid-to-cover ratio 2.37 vs. 2.47 last auction, non-comp bids $22.51M and primary dealers take 17.34% of U.S. 29-year 10-month bond sale, direct 18.28% and indirect 64.38%.

• In Retail: NKE was upgraded from Neutral to Buy at Bank America and raise tgt to $113 saying estimates finally look achievable, Nike is taking bold steps to- transform, and cites upcoming potential catalysts that include the Olympics and the company’s analyst day meeting this fall. RENT reported revenue 2% above consensus, though the beat was driven by product sales, as ending active subs fell 5.8K Q/Q and 1Q24 revenue guidance came in 3% below consensus at the midpoint – but loyalty improved by 10% Y/Y in FY4Q23. LOVE slides as guided Q1 sales $126M-$132M vs. est. $147.5M after posted Q4 gross profit $149.6M vs. est. $158.4M and guides lower FY25.
• In Broadlines/Hardlines: COST reported total and U.S. core March comp growth of 7.5% and 7.4%, with Easter timing positively impacting sales by ~0.5%, compared to consensus of 6.3% and 5.8%. On a 2-year basis, total company and U.S. core comp growth were largely consistent with results from recent months.
• In Food & Beverages: STZ posted Q4 EPS and sales that topped consensus ($2.26/$2.14B vs. $2.08/$2.1B) while guided FY25 EPS $13.50-$13.80 vs. est. $13.44 and said FY24 EPS outlook as beer business outperforms growth expectations; delivers operating cash flow at high end of guidance and free cash flow exceeding guidance.
• In Consumer Products: KVUE shares were weak after Bernstein initiated at Underperform and $18 tgt saying Kenvue has consistently lost market share across most of its business for the past several years.
• In Restaurants: TD Cowen raises tgts for CAVA to $73 from $63, CMG to $3,400 from $2,900 and SG to $22 from $17 saying their panel suggests a favorable Q124 fast casual sales & margin environment that increases its conviction in the sub-sector. Given fast casual’s YTD valuation expansion, TDCowen believes this places greater importance on raising 2024 adj. EBITDA guidance to sustain stocks’ runs. Stifel raised prices tgts on CMG, EAT, DPZ and FRPT and cut tgts on MCD and SBUX while continues to favor high-growth restaurant companies with attractive unit economics (E.G., BROS, WING).

• In Ride Hail/Food Delivery: DASH upgraded from Neutral to Buy at MoffettNathanson and raise tgt to $164 saying its newly published industry tracker for U.S. restaurant and grocery delivery reveals share gains for DoorDash in each category, along with an increasing rate of adoption for grocery delivery.

• In Coal Sector: BTU guided prelim Q1 adj Ebitda $160M and sees revs about $980M vs. est. $1.03B and prelim Q1 income from continuing operations, net of income taxes of $45M; HCC was upgraded to Buy at Citigroup as they incorporate Blue Creek volumes (+4mt) into its target price and remains mid-term constructive on met coal as a play on stronger Indian steel production.
• In Water space (ACM, J, VLTO, XYL): the EPA announced national drinking water standard/limits on PFAS, which Citigroup thinks could be a longer-term incremental positive for its water utility exposed companies – XYL and VLTO, and to some extent infrastructure design companies ACM and J. According to the rules, it notes that public water systems will have three years to complete initial monitoring/test for the current levels of PFAS and an additional two years to reduce PFAS (if water levels exceed Maximum Contaminant Levels).

• In Insurance: shares of GL tumbled after a short report from Fuzzy Panda Research https://fuzzypandaresearch.com/globe-life-american-income-life-david-zophin-steve-greer/ citing fraud accusations (shares fell over 50% late day).
• In Consumer Finance (AXP, BAC, JPM, COF, DFS), credit card delinquency rates reached their highest level on record in Q4 2023, according to a report from the Federal Reserve Bank of Philadelphia, while new mortgages appear to be riskier amid rising housing costs. "Credit card performance further deteriorated at the end of 2023, with firms recording the worst 30+, 60+, and 90+ account-based days past due levels," the report said.
• In Mortgage/Lending: Wedbush downgraded shares of WD, RWT, ABR to Neutral citing rates likely “higher for longer”. For ABR said higher for longer could extend stress on multifamily bridge loan borrowers for longer than previously expected; for WD Higher rates and rate volatility could keep transaction volumes subdued this year, and for RWT, believes higher rates for loner could pressure BPL credit/jumbo volumes.

• ARVN entered a strategic license agreement with NVS for worldwide development and commercialization of its experimental prostate cancer drug called ARV-766; ARVN will receive commercial milestones of up to $1.01 billion as well as tiered royalties for ARV-766 and receive a $150M as upfront payment for the license of ARV-766.
• BHC shares gained after an appeals court affirms ruling in Norwich patent case.
• EXEL was downgraded from Overweight to Equal Weight at Barclay’s citing a lack of near-to-mid-term catalysts as it is unlikely to see high impact data in 2024 (such as Phase 3 data) consequently, it sees greater upside potential from other OW stocks in its coverage universe, and positive IP outcome is mostly baked into consensus estimates.
• LPCN announces positive LPCN 2401 clinical results showing improved body composition in participants with obesity; LPCN 2401 treatment resulted in statistically significant body composition improvement in men; increased lean mass (LM) by 4.4% and decreased fat mass (FM) by 6.7%.
• RLYB announces collaboration to advance therapeutic solutions for pregnant individuals at risk of fetal and neonatal alloimmune thrombocytopenia; said to receive funding for FNAIT awareness initiative and equity investment from JNJ, as received an equity investment of $6.6 million.

• In Medical Equipment: RCEL cut its commercial revenue guidance for Q1 to $11.0M-$11.3M, ~26.1% – 28.1% below consensus estimates and the guidance provided on the Q423 call of $14.8M-$15.6M, promoting a downgrade at BTIG to neutral from buy.

• In Chemicals: ALB upgraded from Hold to Buy at Berenberg and raised tgt to $160 from $130 noting its FY24 guidance in Feb was underwhelming, followed by a surprise USD2.3B convertible preferred stock issuance. But from here expects growing lithium volumes, upside to lithium prices and no need for a further equity raise. Wells Fargo upgraded ASH to EW from UW as it sees compelling evidence from FY2H24 that its earnings’ run rate is ramping up supporting stronger EBITDA growth into FY25 and upgraded PPG to OW from EW as sees an exit of the US architectural coatings market as the right strategic move.

• In Cable/Telecom: ATUS downgraded from Neutral to Underweight at JP Morgan driven by ongoing (and lengthy) turnaround story as BB momentum remains weak, elevated competition in BB (fiber and FWA), which it expects to persist for some time, elevated leverage profile and limited cash flow generation and the low likelihood of an acquisition near term.

• In Software: TEAM was upgraded to Overweight from Equal Weight at Barclay’s and raise tgt to $275 saying a healthier growth profile with more enterprise customers on Atlassian’s cloud solutions warrants a higher multiple for the shares given improved revenue durability; GEN was downgraded at Barclay’s saying ARPU could continue to be capped by faster growth in lower-ASP products, while firm likes INTA, PTC, TENB, and VRNS into Q1.
• In IT Services/Consulting: IT was upgraded to Buy at UBS saying they believe Contract Value (CV) growth is likely to trough in Q1, re-accelerate in Q2, and exit the year growing double digits Also, analysis of expense seasonality puts its 2024E EBITDA margin ~100bps ahead of the Street, and its EBITDA forecasts are +3-8% ahead thru ’26.
• In Semiconductors: Group outperformed broader technology space all morning, even before stock markets rebounded as the sector has been seen as flight to safety on AI optimism (NVDA, AMD, AVGO, SMCI). QCOM was placed on the Negative Catalyst Watch at JP Morgan saying they are yet to see any significant change in the fundamentals for the smartphone market with the recovery expected to remain muted in 2024. MRVL said it has won new business helping large U.S.-based cloud computing firms make custom chips for artificial intelligence but that its custom unit carries lower margins than other lines of business.