Closing Recap

Friday, August 16, 2024

US equities came into the open flattish after yesterday’s recession-off party. With no “big” economic news today, no major earnings surprises and few comments from Fed speakers, it’s feeling like a traditional, slow summer Friday. That said, what’s a good summer Friday without a little debate? We seem to have moved beyond cut or no cut from the Fed and yesterday seemed, for now, to push us past recession imminent or not yet. That opens space for a focus on what happens to the market after the first rate cut. Most of the numbers being tossed around are not particularly encouraging, but that is where there is room for debate. Many, or most, of the cuts incorporated into recent market-move analyses are recession-driven cuts to stimulate growth which support the concept of weaker equities with a weaker economy. But what about this time and the handful of other Fed pivots? Is a September cut with a goal of becoming less restrictive the same as a cut with a goal to be more stimulative? Subtle difference, maybe, but perhaps different sentiment and different equity market results.

In data of note today, with housing starts one of few economic releases, @NickTimiraos notes residential housing unit volume under construction has dipped at a 15% annualized rate over the past six months, but the residential construction employment has risen 3.3% over the same period. Further, related to housing, @LizAnnSonders points out the Atlanta Fed’s GDPnow is down to a +2% qtr/qtr annualized for Q3 with residential investment as the big drag on today’s figure. Consumption and business investment remain healthy. Lastly on housing, @charliebilello notes 8.5% of US homes are worth over $1Mm, the highest ever versus 7.6% a year ago and 4% pre-pandemic. On the Nasdaq 100, @bespokeinvest points out we’ve already seen a 10% drop and 11.8% rally and we’re just halfway through the month. So much for August being slow.

Heading into the final hour of trading, markets had recovered from early declines to modest gains. Small caps were back to outperforming with IWM +0.42% versus SPY +0.28% and QQQ +0.21% and breadth favored advancers by just over 2:1. Only Industrials (XLI, -0.03%), Energy (XLE, -0.04%) and Real Estate (XLRE, -0.2%) were lower among S&P sector ETFs. Leading the gainers were Utilities (XLU, +0.73%), Financials (XLF, +0.67%) and Communications (XLC, +0.40%). Value and growth both enjoyed gains with value the outperformer. The Russell 1000 Value climbed 0.3% versus its Growth counterpart at +0.18%.

• University of Michigan surveys of consumers sentiment prelim Aug 67.8 above consensus 66.9 and vs final July reading of 66.4; the current conditions index prelim aug 60.9 vs final July 62.7 and expectations index prelim aug 72.1 vs final July 68.8. The 1-year inflation outlook prelim for Aug 2.9% and 5-yr at 3%, both in-line with prior reading.

• September WTI crude futures were lower into the open and really never staged much of a comeback, trading in a fairly narrow range all day before settling down $1.51/bbl, or -1.93%, to $76.65. Brent crude similarly traded lower to settle at $79.68/bbl, -$1.36 or -1.68%. Traders generally focused on demand concerns again despite the more favorable recent economic data and lingering fears of action from Iran against Israel. Certainly, the surprise inventory build we saw earlier in the week did not help.

• In Retail: NKE was double upgraded to Buy from Sell at William Trading and raised tgt to $93 from $67 saying the recent rehire of Tom Peddie as the head of U.S. wholesale indicates that change is brewing, and says Nike wholesale partners it has spoken to are very pleased with Peddie’s return, and are beginning to see more focused attention on their accounts.
• In Food: FLO posted mixed Q2 results as EPS beat ($0.36 vs. $0.33) but sales light ($1.23B vs. $1.24B), while reaffirmed its yearly profit and revenue outlook.
• In Mattress Retail (TPX, SNBR, LEG, PRPL): Piper noted their Mattress Survey for July was overall disappointing with sales -7.5%/-7.0% on a mean/median basis — a slight deterioration from June. Weakness appears mostly unit-driven, as AUP seems to have stabilized in recent months, and July 4th performance was just okay.

• In Autos: RIVN has paused production of the electric commercial van it makes for Amazon.com Inc. due to a parts shortage in the latest supply chain snafu for the EV maker, Bloomberg reported overnight.

• In Lithium sector (ALB, ALTM): Keybanc noted Lithium production (carbonate and hydroxide) in China fell 4% m/m, but rose 35% y/y. The decline is largely attributed to producers, who outsource raw material (lepidolite, spodumene), facing losses amid the decline in lithium prices. YTD lithium production in China is up 37%, outpacing EV sales growth of 34% and NEV production of 27%. The firm said following the $4,000/ton decline in China spot lithium prices since early May, Keybanc sees little risk to the downside given the cost curve and supply response from producers.
• In Aerospace & Defense: PL announced that its first hyperspectral satellite, Tanager-1, along with 36 SuperDoves (Flock 4BE) will launch on the Transporter-11 Rideshare mission with SpaceX today from Vandenberg Space Force Base in California. CAE was downgraded to Equal-weight from Overweight at Morgan Stanley as it balances strong end markets and capital deployment opportunities with execution challenges and lower Civil outlook.
• In Transports: FDX Q1 estimates lowered at UBS from $5.20/share to $4.70 to reflect on-going pressure from trade down, a competitive pricing environment, and generally soft parcel market volumes. UBS has also modestly reduced its Ground and Domestic Express revenue growth forecasts.

• In Financial Services: HRB shares advanced after better Q4 results and guidance, reports a new share buyback authorization of $1.5B; FY24 total revenue/adjusted EBITDA/EPS grew 4%/5%/15% y/y, respectively as the tax industry’s FY24 season was better than originally expected.
• In Real Estate Services: RDFN reports nearly one in 10 (8.5%) U.S. homes are worth $1M or more, the highest share of all time, which is up from 7.6% a year ago and more than double the 4% share before the pandemic.
• In Crypto: group strong to start the day behind bounce in Bitcoin; COIN, MARA, CLSK, MSTR all active.
• In REITs: KIM and KRG both upgraded to Strong Buy at Raymond James as they see more upside in the lower multiple shopping center REITs and/or those trading at discounts to NAV. The firm said they continues to be bullish on the REITs in general and view the Shopping Center REITs as one of the more attractive sub-sectors given it’s one of the few REIT sectors trading at both an NAV and multiple discount (vs. the broader REITs) while earnings growth is accelerating.

• GSK said it would seek a dismissal of an upcoming Zantac case in Florida, where plaintiffs alleged that its discontinued heart burn drug had caused prostate cancer.
• NVO said its Pharmatech unit will build a 1.5B Danish crowns ($220.83M) plant in Denmark to meet significantly higher demand for the production of medicines to fight chronic diseases, the company said.
• PFE said a late-stage trial of their experimental mRNA vaccine to protect against influenza and COVID-19 found the combination shot failed to meet one of the study’s two main goals and they are evaluating next steps.

• GLOB posted an in-line Q224 report and essentially in-line Q324 and 2024 guide with a slight increase to EBIT margins relative to the Street for 2024.
• LUMN was downgraded from Equal Weight to Underweight at Wells Fargo while raising its tgt to $4 from $1.75 after recent run saying the risk/reward not as favorable (+378% past month vs S&P -2.0%) and now trades nearly in line with peers like T, VZ and FYBR that are growing revenue and EBITDA today at lower leverage levels; also warned managing its $19B+ debt maturity stack longer-term remains a concern.
• PANW was added to ‘Tactical Underperform’ list at Evercore ISI as the firm believes Palo Alto’s Q4 could serve as a clearing event to reset estimates, potentially offering a better buying opportunity.

• COHR posted results slightly above investor expectations and guided September non-GAAP earnings within investor expectations; Revenues increased 9% y/o/y (vs. +6% consensus) and EPS came in slightly above the midpoint of guidance, benefiting from gross margins.
• MCHP upgraded to Overweight from Neutral at Piper and raise tgt to $100 citing numerous growth levers set to turn on in the near term for the company and says Microchip is set up for a substantial gross margin uptick as underutilization and inventory reserve charges abate and reverse.
• SIMO double downgraded to Underperform from Buy at Bank America as does not expect any meaningful growth after the 1H24 upturn. Silicon Motion’s (SIMO) 2H guidance already reveals minimal top-line growth versus the Q224 level and the firm’s new analysis also indicates low growth in 2025 sales/OP/EPS.
• TER was upgraded to Overweight from Neutral at Cantor, add to Top Picks list with $160 tgt calling it one of the sneakier AI plays in Semis – with excellent leverage to Networking and HBM, and growing traction on the Custom Silicon side of the house. Further, they are also well-levered to a broader industry recovery given outsized share in Auto/Industrial test, strong positioning in the robotics market, and a solid exposure in the mobile market.
• TXN will receive as much as $1.6 billion in direct funding from the U.S. Commerce Department to support the construction of three new domestic facilities, the analog chipmaker said.