Closing Recap

Tuesday, July 02, 2024

U.S. equities slipped overnight with S&P futures hugging the 5,512-support pivot early. One could argue on any given day that the market’s rise should not be linear, and it is time for a breather. Momentum is great, but boring concepts like valuation, cash flow and risk/reward will probably matter again at some point. We may not be super over-stretched yet and focus on Fed expectations/actions or an AI super-cycle can create long-lasting distortions and great money-making opportunities. Perhaps, though, today will just be one of those days the buyers decide to look at the market of stocks instead of the stock market and take a pause to re-evaluate. Ummm, never mind. With no significant economic news to set direction, less hawkish comments at the open from the Fed’s Powell popped stocks right back up to flattish for the S&P and green on the Nasdaq. Consumer discretionary was the early S&P sector ETF leader thanks to better delivery numbers from TSLA. Sentiment-wise, the Fear & Greed Index is Neutral at 49/100 versus 39/100 (Fear) a week ago and 48/100 (Neutral) a month ago, but 79/100 (Extreme Greed) a year earlier. By late morning, QQQ was outperforming +0.4% versus SPY +0.1%, while small-caps were in-line with SPY (IWM +0.1%). Joining Consumer Discretionary, up 1.25%, were Utilities and Financials to round out the top three sector performers. Health Care, Materials, Technology and Energy were all in the red. Breadth was slightly in favor of advancers.

In data items of interest, it is worth noting ocean freight rates are on the rise again with some rates almost eight times last year’s level. From December to mid-June, shipment rates from the Far East to Northern Europe and the US West Coast have climbed roughly 300% and are worth watching as consumers continue to fight already-high prices. On a different note, perhaps we should not be surprised to see continued market strength. @RenMacLLC points out the first half of July beats out even the second half of December as historically the strongest period of the year for the S&P 500. Enjoy the Uncle Sam rally. On a macro note, @CScottGarliss highlights the May job openings of 8.1Mm is well below the 10.4Mm average since November 2021, while the number of unemployed is rapidly rising. He sees these trends pointing to slowing economic growth which should strengthen the case for ongoing easing of inflation and support Fed cuts later in the year. Lastly, on housing per @charliebilello, just 47% of newly constructed apartments in the US rented within three months, hitting the second lowest rate over the past 12 years (Q1 2020 was lower).

After a strong afternoon, stocks held near highs into the final hour of trading with Nasdaq leading versus the S&P. Small caps lagged with IWM +0.2% versus SPY +0.5% and QQQ +0.9% so breadth remained about 1.2:1 despite some indices working higher. Consumer Discretionary (XLY, +1.75%), Financials (XLF, +1%) and Communications (XLC, +0.8%) were S&P sector ETF leaders, while Materials (XLB) were flat, Energy (XLE, -0.25%) and Health Care (XLV, -0.3%) were the laggards, all in the red. Growth and value both enjoyed gains, though growth outperformed along with the Nasdaq. The Russell 1000 Growth gained 0.65% versus its Value counterpart adding 0.12%. By day end another record setting day as markets finish at highs again.

Is this a healthy market? Or just holding at or near record highs for the Nasdaq and S&P 500 amid strength in a few heavily weighted market positions? Note the Nasdaq Composite scored another new high on Monday, though fewer than 40% of stocks advanced, and there were more new lows than new highs (a common theme in recent weeks). So just how concentrated and impactful is the “Mag 7” on markets? @zerohedge tweeted: “the six largest stocks in the index ($AMZN, $AAPL, $GOOGL, $META, $MSFT, and $NVDA) are expected to grow Q2 EPS by 30% year/year and the other 494 to grow by 5%.” @MikeZaccardi notes “in the S&P 500 the degree of stock concentration is extreme; the top 10 companies have the highest weight in the index since 1929.”

***Reminder US stock markets are closed at 1:00 PM ET tomorrow and closed all day Thursday for Independence Day.

• After enjoying overnight gains and a test of the $84.22 resistance pivot, August WTI crude futures slipped to settle at $82.81/bbl, -$0.57 or -0.68%. Brent similarly faded to settle at $86.24/bbl, -$0.36 or -0.42%. US JOLTS data leaned a little more toward some underlying slowing, perhaps applying pressure to WTI on the demand side. That said, it wouldn’t be uncommon for bulls to counter with expectations for firmer demand on the prospect of Fed rate cuts later this year, so anticipate volatility in the debate over whether bad news is good news or bad news, etc. It was interesting today, though, to see profit taking sufficient to offset the early support of supply concerns from Hurricane Beryl and expectations of a big travel weekend (both air and car).
• Treasury yields took a breather after a stellar run in recent days, as the 10-yr dipped to 4.43% off highs above 4.49% the day prior. The actions seem to be leaving the front-end alone, and pricing for Fed rate cuts in the near to medium term remains essentially unchanged. November has ~25bps of cuts price, while December is at ~44bps, only 2bps less than what it did this time last week. Falling U.S. yields weighed on the dollar after more dovish comments by Powell.

• In restaurants: group rebounds after tumbling Monday on consumer discretionary spending fears, while the highlight of the day was a media post on MCD over 1-year chart. @Barchart tweets “McDonald’s $MCD has done it!” https://x.com/Barchart/status/1808224073086128157/photo/1

• In Leisure: seeing impact concerns as Hurricane Beryl strengthened after becoming the earliest ever Category 5 storm in the Atlantic, with the system heading toward Jamaica with life-threatening winds and heavy rainfall. Cruise lines (CCL, NCLH, RCL) saw weakness while also watching travel (ABNB, EXPE, BKNG) and hotel names (MAR, HLT, H).

• In Industrials: MSM reported in-line Q3 EPS of $1.33 and revs $979.4M (down -7.1% y/y) but guidance weak as now expects average daily sales to fall (-4.7%-4.3%) vs. prior guide for flat to up to 5% growth in average daily sales and guides Ebit margin 10.6% vs 12.4% prior; shares of GWW, FAST and other wholesale distributors moved in reaction.
• In Homebuilders: DHI and LEN both downgraded to Neutral from Buy at Citigroup and reduced estimates on builders to reflect softening housing activity this summer. Citigroup said it sees limited near-term catalysts for the stock until ’25, with September rate cuts at least partially priced in. note the homebuilder sector (TOL, KBH, PHM, MTH, CCS) was sharply lower the last few days given the recent resurgence in Treasury yields/mortgage rates.
• In Metals & Mining: FCX cuts 2024 gold sales view to about 1.8M ounces from about 2M; now sees 2q consolidated unit net cash costs $1.77 per pound of copper (up from prior $1.57 per pound of copper); sees 2q consolidated sales about 5% below prior guidance of 975 million pounds of copper and sees 2q consolidated sales about 30% below prior guidance of 500,000 ounces of gold citing delay in obtaining PT-FIs export license.
• In Aerospace & Defense: Airbus (EADSY) won an order from Philippines budget airline operator Cebu Air which will buy up to 152 Airbus jets valued at $24 billion, an order it said would be the largest in the country’s history. ACHR shares rose after STLA to invest an additional $55M in Archer, purchasing 8.3 million shares of Archer’s stock in March.

• In Canadian banks: UBS initiated the Big Six Canadian banks with 2 Buys (RY, NTIOF) and 4 Neutrals (TD, CM, BNS, BMO) saying price targets suggest average implied total return of 17% on our Buy-rated stocks. They are cautiously optimistic on the Canadian Bank group noting the Canadian banks have strong balance sheets, solid capital positioning and diversified business mix, which provides resilience amidst slowing revenue growth and rising credit costs.
• In FinTech: PYPL was upgraded from Neutral to Positive with $71 tgt at Susquehanna saying recent conversations with the company, which when coupled with customer and industry observations, seem more constructive. Profitable growth is now a top priority for PayPal, enshrined in a recent update to the company’s 2024 Annual Incentive Plan (AIP).

• ARDX shares fell after saying they chose not to apply to include Xphozah in CMS end-stage renal disease prospective payment system transitional drug add-on payment adjustment.
• INCY downgraded to Underperform at BMO Capital and cut tgt to $48 from $52, spurred by Incyte’s recent $2B Dutch auction, which in its view has cut capacity to acquire, while generating minimal incremental value for holder. Said recent pipeline wins are promising, but revs are in smaller indications/too late to meaningfully resolve Jakafi LOE concerns.
• LEGN announces positive overall survival results of landmark phase 3 cartitude-4 trial in multiple myeloma.
• MRNA said it was awarded $176M by BARDA for the development of mRNA-based flu vaccines. BARDA has said for weeks that it’s been talking with mRNA vaccine manufacturers with the aim of diversifying the U.S. flu response capacity.
• PCRX shares tumbled after the FDA has approved a generic version liposomal bupivacaine, applied for by Chinese pharmaceutical company, Hengrui Pharma, the parent company to eVenus.
• RNAC shares fell after announced results from a mid-stage study investigating an mRNA-based cell therapy for myasthenia gravis, a type of autoimmune disorder and raised $130M via a PIPE.

• In Storage/Components: PSTG was downgraded to Sell from Neutral at UBS given an unfavorable risk/reward given and notes slowing growth (est. growth of ~8% over the next 5 years vs 16% the prior 5-yrs), declining mkt share and elevated valuation as shares have increased ~83% YTD despite rev expectations declining 1% for both FY25 and FY26.