Closing Recap

Monday, December 09, 2024

U.S. stocks finished lower, pulling back from record highs reached last week by the S&P 500 and Nasdaq ahead of key macro events this week including CPI and PPI inflation data (12/11 and 12/12 respectively), several central bank policy meetings (ECB, BOC, BCB and SNB) with rate cuts widely expected for each, a handful of key earnings results in tech (ADBE, AVGO, ORCL, CIEN, MDB), and some potential market moving sell-side conferences. With today’s listless market action, S&P futures (Spuz) snapped their streak of consecutive daily higher highs at 14-days (failing to take out Friday’s 6,111 with an intraday high of 6,105.75). It was a busy day of M&A news with OMC acquiring IPG in the advertising sector and in the food industry, Bloomberg reported MDLZ was exploring an acquisition of chocolate giant HSY. Eyes remain fixed on next week’s FOMC meeting where Fed fund futures now signal a more than 90% chance of a 25-basis-point rate cut on 12/18 following jobs data last week. China stocks surged as the Hang Seng jumped over 2.75% after China said it will adopt an appropriately loose monetary policy next year (lifting China stocks broadly). Geopolitical issues also a possible factor in today’s market weakness after the collapse over the weekend of Syrian President Bashar al-Assad’s rule, which boosted oil and gold prices.

So, despite stocks slipping on Monday, major averages remain on track for solid year-to-date (YTD) returns given a confluence of factors that have led to the continued upside momentum. No new highs today, but the S&P 500 has registered 57 record closing highs this year and the Nasdaq 36, helped by indicators like GDP growth, low unemployment, and high consumer confidence. Central banks have reduced interest rates this year, making borrowing cheaper and encouraging investment in stocks, with more cuts expected this week/next (FOMC). Earnings growth has been strong, lifting stocks especially in the technology and communications sector in recent weeks (but PE’ are getting rich). The Fed has noted that inflation has improved and is perceived to be under control, which has also boosted sentiment. Given the mentioned factors, the last few weeks have been a massive melt up on FOMO (Fear of Missing Out), momentum investing as optimism about new technologies, innovations, or policy changes are leading to higher stock valuations. Volatility exists as markets do face pullbacks, corrections, and bear markets, often triggered by unexpected events, policy shifts, or poor economic data, but that has yet to be seen the last few months.

• Oct wholesale sales -0.1% vs Sept +0.5% (prev +0.3%); U.S. Oct wholesale inventories unrevised at +0.2% (consensus +0.2%); U.S. Oct stock/sales ratio 1.34 months’ worth vs Sept 1.34 months.

• NYMEX natural gas settled +10.6c, or 3.4%, to $3.182 per million British thermal units (mmBtu) to 1-week highs
• Treasury yields were little changed this afternoon after rising initially this morning; the 10-yr yield up over 3 bps to around 4.19% ahead of CPI and PPI inflation data later this week.
• Brent crude rose $1.02 or 1.43% to settle at $72.14 per barrel while WTI crude gained $1.17 to $68.37 per barrel.

• In Electric Vehicles: RIVN was initiated at new Buy and $18 PT at Benchmark as the firm believes Rivian is well positioned to gain a significant share of a massive market oppty in the coming decade. After a pause this year, domestic EV production is expected to improve in 2025 and further accelerate in 2026-27 as ASPs decline and the charging infrastructure is built out. NKLA files prospectus relates to resale from time to time by selling stockholders of up to 34.1M shares of common stock.
• Casino and Gaming stocks jumped (WYNN, LVS, MGM, CZR, MLCO) after monthly Macau November casino revenue was up 14.9% to 18.44B patacas

• In Department Stores: Macy’s (M) shares active after the WSJ reported activist investor Barington Capital urges co to cut spending and consider the separation of a real-estate unit. Barington Capital was working with property-owner Thor Equities to build a position and is pushing strategic alternatives for its Bloomingdale’s and Bluemercury chains. https://tinyurl.com/3ddsz4n2
• In Broadlines/Hardlines: RBC Capital said WMT ($105 PT), CHWY ($42 PT) and OLLI ($120) are top picks in Hardlines/Broadlines heading into 2025 as believes US consumer balance sheets are relatively healthy, but excessive inflation and a lack of meaningful innovation have distorted value propositions, resulting in a very selective consumer.
• Online Retail: REAL shares jumped after being upgraded from Equal Weight to Overweight at Wells Fargo and raised tgt to $15 from $4 as raise 2025 revs/EBITDA above Street and PT to $15 saying the story has changed, and the market has not fully caught up yet. RENT shares tumbled after guided FY24 revs growth to between 2% and 4% from a year earlier vs. prior forecast growth between 2% and 6%.
• In Food Sector: HSY shares popped after Bloomberg reported MDLZ noted to have made preliminary approach for Hershey, noting that deliberations are in an early stage, and a deal is not certain https://tinyurl.com/chhkba5z . Mizuho said following a generally lackluster Q3 EPS season characterized by value-seeking consumers, varied degrees of market share pressure from private label, and now concerns over "MAHA"-related disruptions to ingredients and regulations for processed food, expects sentiment for the group will remain muted into Q4 EPS season in Jan/Feb. Mizuho lowers ests and tgts for HSY ($180 from $200) and THS ($35 from $40) on macro pressures, and raising its PT on SMPL ($45 from $40) on stronger market sentiment for health & wellness names and continued solid early consumer reception to this summer’s innovation. Separately, MKC upgraded from Hold to Buy at Jefferies saying its meal-related portfolio positioning provides a more favorable backdrop, advantaged core category growth potential, and increased defensibility compared to other large-cap comps.

• In Brokers and Investment Banking:
• Morgan Stanley with several changes as they upgraded JEF, MC to Overweight, while downgraded both LAZ, HLI to Underweight saying after this year’s outperformance, sees further upside across its M&A boutique coverage as prior bull case plays out and firms execute on the M&A rebound. The firm also notes the return of M&A is here, with Trump win driving capital markets activity even higher.
• Barclay’s also out with an industry note as CBOE was downgraded to Equal Weight W from Overweight (PT to $220 from $230), while upgraded HOOD to Overweight from EW (PT to $49 from $26) and SCHW upgraded to Overweight from EW (PT to $95 from $74) saying market conditions look constructive going into 2025, particularly for the alts and brokers. Barclay’s see SCHW medium-term earnings growth trajectory as one of the "easiest" in its coverage; sees HOOD as a uniquely differentiated growth opportunity set and an increasingly demonstrated ability to execute and notes CBOE is facing increasingly challenging comps on high multiples.
• In Private Equity: APO will replace QRVO in the S&P 500, and Qorvo will replace KELYA in the S&P SmallCap 600.

• In Fintech/Payments: PYPL was upgraded from Neutral to Buy at Bank America and raised tgt to $103 from $86 noting a year after C-level mgmt change, PYPL is demonstrating increased turnaround progress, warranting a higher valuation multiple. BAML sees potential ’25 acceleration in underlying TP growth. KBW Inc. downgraded FOUR to Market Perform citing leadership transition as may take until 2H’25 for CEO to settle in and think a meaningful premium from current levels may be hard to attain on the back of an unsuccessful strategic sale process earlier this year as well as the increase in share price YTD. KBW also cut PAYO to MP from OP noting the stock has had a solid run in 2024 with a 104% return YTD as has been one of the key beneficiaries of higher interest rates, and a reversal in rates is likely to limit EBITDA margin expansion.
• Consumer & Specialty Finance: SYF was upgraded to Overweight from Neutral at JP Morgan given upside to earnings from higher APRs and relative discount to the market. Said SYF’s discount to the SPX remains wider than its historical average (creating the opportunity for relative outperformance). RWT was downgraded to Neutral from Overweight as higher L-T rates delay discount accretion and may put additional pressure on residential investor loan portfolio

• In Financial Services: RDDT was upgraded to Overweight from Equal Weight at Morgan Stanley and raised tgt to $200 from $70 as RDDT’s engagement and advertising pipelines to drive industry leading user, time spent and ad rev growth – says $300 bull case as sees user and time spent per user growing, ad pricing rising (as advertisers pay for improving performance) and upside to ad load as well.
• In Crypto: RIOT announced $500M 6-year convertible bonds to buy more Bitcoin. Note other bitcoin miners have recently issued convertible securities recently, capitalizing on their rising stock prices, including MARA, CORZ, BTDR. MSTR revealed it acquired 21,550 bitcoins from Dec. 2 to Dec. 8. Note Bitcoin has stormed past $100,000 on hopes of friendlier regulatory environment for digital assets under Donald Trump administration.

• BIIB was downgraded to Hold from Buy at Jefferies and cut tgt to $180 from $250 saying they see a tough setup into 2025 with modest Leqembi and Skyclarys US.
• BIOA shares tumbled after halting obesity drug trials on safety concerns. BioAge announced it was discontinuing its Phase 2 study of azelaprag following some participants in the trial developed liver transaminitis.
• ENTA announced positive topline results from the first-in-pediatrics Phase 2 study evaluating zelicapavir in hospitalized and non-hospitalized children aged 28 days to 36 months with respiratory syncytial virus.
• INCY said its Phase 3 POD1UM-304 trial met primary endpoint of overall survival and all secondary endpoints in patients with previously untreated metastatic non-small cell lung cancer who didn’t harbor a driver mutation, according to a statement
• VRTX was upgraded to Buy from Hold at Jefferies and raised tgt to $550 as they like shares on the recent pullback and updated Vertex on improving fundamentals and its growing $5B-$7B "mega late-stage pipeline

• Managed care/Facilities: EHAB was upgraded from Hold to Buy at Jefferies noting that late last week, EHAB issued an 8-K noting that they had entered a new home health contract covering UNH’s MA lives. While rates UNH will pay beginning 1/1/25 are still below EHAB’s ‘payor innovation contracts’ the firm views the rate increase the company will see for that book of business positively, as it estimates a potential EBITDA boost to ’25 of ~5MM+.

• Industrial Tech/Distribution: ROK was upgraded to Overweight from Sector Weight at Keybanc with $345 PT; raise EMR PT to $158 from $140 and raise WCC PT to $245 from $225 saying while visibility around NT cycle conditions continues to be limited, the firm remains cautiously optimistic for inflecting organic volumes in 1H25 supported by easier comparisons, stabilizing channel inventories, and ongoing secular trends supporting domestic onshoring/automation investments. TT authorized a new share repurchase program of up to $5B
• In Transports: CHRW was upgraded from Equal Weight to Overweight at Wells Fargo and raised tgt to $130 from $118 saying they see a unique opportunity for earnings to compound through ’27, driven by improved execution (led by technology), which should lead to share gains and margin expansion.
• In Aerospace & Defense: ASTS announces definitive commercial agreement with Vodafone through 2034. PLTR announces expansion of its contract with the U.S. Special Operations Command (USSOCOM) to deliver technology solutions in support of enterprise capabilities as the one-year delivery is valued at $36.8M.
• In Chemicals: DOW agreed to sell a 40% equity stake in some U.S. Gulf Coast infrastructure assets to a fund managed by Macquarie Asset Management for $2.4B. DOW’s new partnership with Macquarie Asset Management has a 6-month option to increase its equity stake to 49% within six months of the deal closing.
• In Packaging: PTVE shares jumped after packaging firm Novolex said it will buy its rival in a $6.7 billion deal, paying $18 per share to take Pactiv private in an all-cash transaction, including debt, the companies said on Monday.

• U.S. listed China stocks jump, big moves for tech names (BABA, BIDU, PDD, JD, NTES, etc.) after China said it will adopt an appropriately loose monetary policy next year and will step up "unconventional" counter-cyclical adjustments, focusing on expanding domestic demand and boosting consumption.
• In Telecom & Media Sector: CMCSA shares dropped following comments at UBS conference as CEO notes competition remains intense in the fourth quarter; also notes in Q4 hurricanes will impact around 10,000 broadband losses and looking at broadband subscriber loss in Q4 of just over 100,000 (commentary weighed on other cable names with CHTR down on the day); TMUS shares dropped following comments at UBS conference as well with CEO discussing Q4 outlook.
• In Software: WDAY shares jump on news it will replace AMTM in the S&P 500, and Amentum Holdings will replace SVC in the S&P SmallCap 600.

• LSCC announces an additional $100M stock repurchase program authorization.
• NVDA shares slipped early on headlines China’s market regulator opened an investigation into Nvidia over suspected violation of the country’s antimonopoly law. Last week, Chinese industry association warned Chinese companies to be wary of buying U.S. chips as they are no longer safe.
• SMCI said it has been granted an extension from Nasdaq that gives the server marker until Feb. 25, 2025, to file its latest annual report. In a statement, Super Micro said it currently expects to file all the required reports by the deadline. The company also said its stock would remain listed on the Nasdaq during the exception period as long it remains in compliance with listing rules.