Closing Recap

Wednesday, January 17, 2024

US equity futures followed overseas markets lower overnight and faded further following slightly stronger economic data with core retail sales and industrial production both a bit better than forecasts. That’s not all bad if you are super concerned about recession prospects, but not too helpful if you are hoping for more aggressive Fed cuts. Early breadth favored decliners by just over 3:1 with early sector moves laying most of the blame on Consumer Discretionary, Technology and Communications – all down by more than 1%. Consumer Staples, Utilities and Energy were slightly in the green while Health Care and Financials were just slightly in the red. Investor sentiment still skews positive overall but has eased recently, with Fear and Greed now at 59 (lowish end of Greed) versus 80 a month ago (extreme greed).

From a data perspective today, @MikeZaccardi starts with a cautious comment indicating the percentage of stocks above 10-day moving average is currently bearish and a risk to early 2024. Also, on the topic of early 2024, @bespokeinvest highlights the 100 most heavily shorted names in the Russell 1,000 are -8.7% ytd versus a gain of +0.41% for the least shorted names. They also point out IWM was showing -1.2% pre-market today, which would mark it at -6.05% ytd after just 11 trading days. Moving to inflation, @charliebilello notes Truflation’s real-time measure of US inflation moved down to 2.1% from 6.4% this time last year. Similarly, the Cleveland Fed is forecasting headline CPI to drop to 2.96% this month, the lowest since March 2021 while core CPI is estimated to dip to 3.81%.

Heading into the final hour of trading, stocks were off lows, but breadth had slipped to nearly 4:1 in favor of decliners. Sector-wise, Consumer Staples were nearly flat. Health Care (XLV, -0.2%) dipped, while Real Estate (XLRE, -1.8%), Utilities (XLU, -1.45%) and Consumer Discretionary (XLY, -0.9%) were the primary laggards. Small caps continued to underperform with IWM and RUT about -0.7% versus SPY and QQQ down 0.6%. Value and growth both were in the red, but growth outperformed modestly. The Russell 1000 Growth had slipped 0.66% versus its Value counterpart at -0.86%.

• Import Prices for December were unchanged vs. consensus (-0.5%) and vs November (-0.5%); Dec non-petroleum import prices unchanged, and y/y down (-1.5%). Dec export prices fell (-0.9%) vs. est. (-0.6%) and vs. Nov (-0.9%) and Dec year-over-year import prices -1.6%, export prices -3.2%.
• Industrial Output for December rose +0.1% vs. consensus unchanged and Nov unchanged while Capacity utilization rate in-line with prior month of 78.6% (vs. est. 78.7%); Dec manufacturing output +0.1% (vs. consensus unchanged) and vs Nov +0.2% (previous +0.3%).
• Business Inventories for November fell (-0.1%), in-line with consensus and vs Oct (-0.1%); Nov business sales +0.2% vs Oct -1.1% (prev -1.0%) and inventory/sales ratio 1.37 months’ worth vs Oct 1.37 months.
• US homebuilder sentiment climbed in January by the most in nearly a year as lower mortgage rates boosted customer traffic, sales, and the demand outlook. NAHB Housing market index for January jumped to 44, above consensus 39 and vs. 37 in December; January index of current single-family home sales 48 versus revised 41 in December (previous 40); January index of home sales over next six months 57 versus 45 in December (previous 45).
• China home prices fell the most in almost nine years in December, underscoring why officials are extending support to the biggest cities to end the property crisis. New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.45% last month from November, when they declined 0.37%. China 4Q GDP y/y 5.2% vs 5.3% estimate (and 4.9% prior), Dec factory output 6.8% vs 6.6% estimate, retail sales 7.4% missing the 8.0% estimate, and jobless rate 5.1% vs 5.0% estimate.

• Despite spending much of the day lower, WTI crude futures for February rallied to gain $0.16/bbl, or +0.22%, to settle at $72.56. Brent continued its recent underperformance versus WTI and went the other way, falling $0.41/bbl, or -0.52%, to $77.88.  Traders attributed the bounce in WTI primarily to supply concerns as Red Sea shipping attacks continue and North Dakota suffers additional outages due to freezing weather. On Red Sea concerns, Aramco CEO Amin Nasser notes markets can handle short-term disruptions, but prolonged tanker attacks could generate shortages.

• In EV’s: RIVN was downgraded from Buy to Hold at Deutsche Bank and cut tgt to $19 from $29 as thinks there could be downside risk to 2024 expectations around Rivian’s volume and gross margin, and while the planned R2 unveil could help sentiment, there remains many other questions post the announcement. TSLA slashed prices for Model Y Long Range and Model Y Performance in Germany by 5,000 euros to 49,990 euros ($54,340) and 55,990 euros respectively, representing a discount of 9% and 8.1% compared to the previous prices. It also cut the price of Model Y rear-wheel drive models by 1,900 euros, or 4.2%, to 42,990 euros, according to data on its website.
• In Auto Suppliers: AXL was downgraded from Neutral to Sell at UBS and cut tgt to $6.50 from $8 citing three key points: sees difficulty having meaningful EBITDA growth beyond this year, may face a higher CAPEX cycle vs recent below-trend years and says outer-year consensus outlook looks aggressive. VC was upgraded to Buy at UBS, seeing mid-term concerns over a slowdown in growth as more than priced in.

• Piper Sandler remains Overweight on both WMT and TGT saying disinflation/deflation and more moderate experiential spend could drive a wallet share shift to discretionary and underpins its upgrades of RVLV and BURL today as well while downgrading RENT to Neutral saying the equity value represents a mere 20% of total enterprise value and thinks meaningful reduction in leverage will be necessary over the medium-term.
• In Food: CVGW shares fell after delaying the publication of its fiscal fourth quarter and full-year results, expected after the market closed, following an internal audit process.

• RDFN noted in a new report that: Just over one-quarter (26.3%) of adult Gen Z’ers owned a home in 2023, little changed from 26.2% in 2022, while the homeownership rate for millennials rose to 54.8% from 52%, and the homeownership rate for Gen X rose to 72% from 70.5%. The rate for baby boomers little changed (78.8% vs 78.7% in 2022), down from a record 79.7% in 2020, as some boomers have passed away or moved into retirement homes.

• In Lodging/Airlines/Transports: SAVE extends Tuesday’s decline after its $3.8B M&A deal with JBLU was blocked yesterday by a federal judge.

• CFG Q4 EPS $0.85 vs. est. $0.71; Q4 revs $1.99B vs. est. $2B; Q4 net interest income down -2% q/q given lower NIM, partly offset by a modest increase in interest earning assets and sees Q1 NII down about -3% vs. Q4; Q4 provision for credit losses of $171M; ACL/loans ratio up 4 bps QoQ to 1.59%.
• USB Q4 profit fell after a $734M charge tied to the fee it has to pay to the FDIC to refill the fund, said net interest income (NII) fell (-4.2%) to $4.14B in the quarter and average total deposits at the bank fell (-1.9%) from the third quarter to $502.78B.
• In SMID/regional banks: FULT Q4 operating EPS $0.42 vs. est. $0.40; sees FY24 NII $790M-$820M, noninterest income $235M-$250M; FY24 provision for credit losses $45M-$65M, with noninterest expense $670M-$690M; HWC Q4 adj EPS $1.26 vs est. $1.19 on NII $272.3Mm vs est. $271.31Mm, credit loss allowance -336.8Mm
• In Online brokers: SCHW Q4 adj EPS of $0.68 tops $0.64 estimate as revs fell -19% y/y to $4.46B (est. $4.49B), said Q4 revenue per trade fell (-11%), and clients daily average trades fell (-4%) with trading revs $767M; said new brokerage accounts were 910K and core net assets exceeded $40B. IBKR shares dip as Q4 adj EPS $1.52 vs. est. $1.55; Q4 revs $1.15B vs. est. $1.14B; Q4 Total DARTs up 2% at 1.93M; Q4 customer accounts increased 23% to 2.56M, customer equity increased 39% to $426.0B, customer credits increased 10% to $104.5B.
• In Research: MS was downgraded to Neutral at JP Morgan and cut tgt to $87 from $94 after earnings saying the stock offers limited upside at current valuation. Noted while MS offers significant gearing to improvement in capital markets activity, they reflect this in its estimates with IBD revenues +47% YoY in its 2024E forecasts.

• In Crypto: MARA was upgraded from Neutral to Buy at BTIG with $27 tgt noting Bitcoin is flattish YTD at ~$43k after hitting ~$47k (Jan 8th) ahead of the SEC’s approval of 11 Spot ETFs on Wednesday (Jan 10th). Says on the back of the weakness in the miners and Marathon’s decision to pivot into infrastructure late last year, BTIG upgrades to Buy.

• ALLK extends Tuesday’s 60% plunge after the drug developer was downgraded to hold at Jefferies following two mid-stage trials that failed to meet their main goals.
• DH shares dropped after below-consensus revenue guidance for 2024 and named founder and executive chairman Jason Krantz as interim CEO to succeed Robert Musslewhite.
• EOLS said Q4 revs was about $61M above ests $59.3M; said saw enrollments in its consumer loyalty program rise 55%, boosted by a record 170,000 total redemptions in the quarter.
• LPTX said its therapy candidate DKN-01 in combination with cancer drug bevacizumab and chemotherapy generated clinically meaningful tumor reductions in patients with advanced colorectal cancer in a mid-stage study.
• NTRA shares rise after better-than-feared jury verdict after the company provides update on Ravgen Trial; no willful infringement, damages significantly less than what Ravgen was seeking.

• In Aerospace Research: KeyBanc initiated TDG at Outperform and $1,180 tgt and SPR with Sector Weight saying they see a favorable macro backdrop within A&D for both OEM and MRO players driven by the aging/growing fleet, global air travel recovery, and easing supply constraints. KeyBanc also initiated RKLB at Overweight and $8 tgt reflecting 50% upside as views the company as one of the handful of companies within the Space industry with a proven business model and viable path to profitability in the next 1-3 years.

• In lithium sector: ALB outlined actions to preserve growth, reduce costs and optimize cash flow; said expects its 2024 capital expenditures to be in range of $1.6B-$1.8B; said is pursuing actions to optimize its cost structure, reducing costs by approximately $95 mln annually.

• In the EMS Sector: PLXS pre-announced FQ124 results with downside to the prior outlook as demand softness and inventory digestion in the Healthcare/Lifesciences and Industrial end markets continue; said that it will not meet its Q1 revenue guidance of $990M-$1.03B, GAAP operating margin of 4.8% to 5.3% and GAAP EPS of $1.15-$1.33 (shares of CLS, BHE, SANM, FLEX weak in sympathy).
• In Internet Security: CRWD was downgraded to Hold from Buy at Westpark Capital based on valuation concerns against near term revenue and earnings projections though continues to see Crowdstrike as one of the leading cybersecurity platforms in the market and believe the company will continue to operate well in this space.
• In Software: PRGS Q4 adj EPS $1.02 above est. $0.91; Q4 revs $177m vs. est. $174M; Q4 operating margin 35% vs. 39% y/y, est. 34.6%; guides Q1 revs $180M-$184M vs. est. $178.8M and guides FY revenue $722M-$732M vs. est. $727.3M and adj EPS $4.58-$4.68 vs. est. $4.64.
• In IT Services: Citigroup said they remain cautious about enterprise IT spending for early 2024 but believe a modest spending recovery is likely as the year progresses. The firm downgraded DXC to Sell from Neutral citing uncertainty on the company’s strategy and expectations following the "abrupt" CEO departure in December 2023. Citi upgraded shares of EXLS to Buy from Neutral (tgt to $36 from $29) noting shares underperformed in 2023 despite consistent beat-and-raise quarters and industry-leading sales growth. Citi noted their top IT Services ideas are ACN, CTSH, EXLS, GDYN, and GLOB.
• In Semis: little breather for the group after recent rebound; PI shares a bright spot after issuing prelim Q4 revs above $70Mm above est. $67.02Mm and prior guide $65.5-68.5Mm, sees adj EBITDA to exceed $2.5Mm vs est. ($0.247Mm) and prior guide ($0.9)-$0.7Mm.