Closing Recap

Monday, July 08, 2024

Another day, another record high for the S&P 500 and Nasdaq. Coming off the weekend following a slow holiday week, US equity futures traded slightly lower early, but quickly regained upward momentum to turn green ahead of the open. We didn’t have any economic data releases today to drive direction or Fed speculation, but later in the week we will see both CPI and PPI so expect traders to be somewhat less aggressive into the data. Perhaps that is what the markets currently are reflecting in the Fear & Greed Index. Today’s 54/100 reading was Neutral, as were the readings last close, last week and last month as investors continue to play the Fed-watching game. Last year’s Fear & Greed, for reference, was 77, Extreme Greed. By late morning, breadth was a bit better than 3:2 favoring advancers as small caps outperformed. IWM was +1.25% versus SPY +0.12% and QQQ flat. Industrials, Technology, Materials, Consumer Discretionary and Financials all gained in the +0.3-0.4% range to lead S&P sector ETF gainers, while Communications led the decliners at -0.75%. Utilities, Consumer Staples and Energy were also in the red.

In data of interest today, NY Fed June one-year ahead expected inflation was 3% versus the May reading of 3.2%, while the three-year ahead was 2.9% versus May at 2.8% and the five-year ahead came in at 2.8% versus May at 3%. Per Nick Timiraos, the one-year and three-year remain near the lowest levels since the inflation shock, but also near the high end of the pre-pandemic range. @charliebilello shares a few broad observations, noting ratio of growth stocks to value stocks in the US is the highest since March 2000 (peak dot-com bubble) and the ratio of US large caps to small caps is at its highest since October 1999, as large caps enjoy their biggest outperformance over small caps since 1998 (large caps +17% YTD versus small caps -2%). On a similar, but more cautionary note, @KobeissiLetter points out that only 17% of S&P 500 names have outperformed the index in the past 30 days, the lowest share in at least a decade.

Heading into the final hour of trading, equities were off highs and holding just slight gains. Breadth had moderated to about 1.2:1, still in favor of advancers as small caps continued to outperform. IWM gained 0.7% versus QQQ +0.1% and SPY +0.03%. Sector performance had evened out a bit versus the morning, with Technology (XLK, +0.55%), Real Estate (XLRE, +0.31%) and Industrials (XLI, +0.15%) leaders to the upside. Communications (XLC, -0.90%) and Energy (XLE, -0.77%) were primary laggards. Value and growth both held small gains, as the Russell 1000 Value outperformed its Growth counterpart with gains of 0.06% versus 0.02%, respectively

• August WTI crude futures were weaker throughout the session, settling -$0.83/bbl, or -1%, at $82.33 as Hurricane Beryl failed to have a significant shut-in effect. Brent similarly faded -$0.79, or -0.91%, to $85.75. Current expectations on a supply/demand basis continue to see demand slightly outpacing supply through Summer but shift back to oversupply positions in September. That oversupply baseline could shift even further if OPEC+ raises output later this year. For now, rising travel-related demand and geopolitical concerns should help support crude on the demand side
• The Dollar Index (DXY) was modestly higher holding above 105, while the Japanese yen is among the weakest of the G-10 currencies, falling 0.2% against the greenback. Treasury yields have a mixed session in the absence of data and ahead of Fed Chair Powell’s congressional testimony this week. Bitcoin dips holding above $56,000 after tumbling last week.

• In Retailers: COLM upgraded from Hold to Buy at Stifel and raised tgt to $92 from $84, inspired by both fundamental prospects for revenue inflection and Stifel’s historical analysis of stock returns detailed in “Long-Term Assessment of Consumer Branded Equity Value Creation Variables.” VSTO said its board has unanimously voted to reject a $42-a-share offer from MNC Capital in favor of a competing bid from the Czechoslovak Group A.S. for its Kinetic Group business. CSG is seeking to buy the company’s Kinetic Group business for $2.1B, while MNC is seeking to buy the whole company for about $3.2B. In Home Furnishing: ARHS downgraded to Hold from Buy at Jefferies and cut estimates citing slowing site traffic growth, falling e-commerce conversion and a growing percentage of browsing activity tied to Sale SKUs. In addition, RH.com site visits are outpacing Arhaus.com despite RH sourcebooks only recently put into circulation.

• In Boating/RV/Recreational: MBUU was downgraded from Buy to Hold at Truist, noting their call appears late (shares down ~41% YTD vs +17% for S&P500) and MBUU’s current valuation (~6.5x ’25E EBITDA) stands at the lower end of the historical range (5.0x-9.0x) but notes the unfolding Tommy’s situation and recent c-suite turnover are likely to muddy visibility throughout 2024.
• In Autos: TSLA extended its winning streak to 9 days after seeing its best week on Friday in over 17 months after its positive surprise in its Q2 deliveries pushed TSLA’s stock to a six-month high on July 2. LCID delivered 2,394 vehicles in Q2, above consensus estimates of 1,940 units; company delivered 1,967 cars in Q1.

• In Transports: in airlines, Deutsche Bank downgraded ALGT to Hold from Buy (tgt to $53 from $75) and cut SAVE to Sell from Hold (tgt to $2 from $3) saying while full-service airlines drive industry profits; low fare carriers continue to struggle despite record volumes and demand. In rails, CNI was downgraded to Market Perform from Outperform at Bernstein saying the rail seems stuck for the n-t on Q2 cost pressure and potential intermodal book around due to strike risk. CSX was downgraded to Neutral from Buy at Bank America as negative mix; cost pressure May yield to minimal/if any 2024 EPS growth and the firm lowers rail Q224 EPS 3% on avg. In container/shipping, Barclays remain underweight rated on AMKBY, ZIM, HPGLY as approach peak rates/earnings. GBX posted Q3 top and bottom-line miss (EPS $1.06/$820.3M vs. est. $1.14/$978.7M) and narrowed FY24 revenue view to $3.5B-$3.6B from $3.5B-$3.7B (est. $3.56B).
• In Packaging/Materials: Citigroup previewed the sector, upgrading SLGN to Buy with a $50 target saying shares are trading at a sharp discount (8.5x NTM EBITDA vs 9.2x 10-yr avg.) and expects shares to trade higher on reiteration of FY EPS guidance. The firm said for overall NA Containers & Packaging Q2 preview, is updating models ahead of Q2 earnings; avg. ’24 est. fall -3% and it is now -3% below Q2’24 consensus and says expectations for Q2 prints are potentially quite low following sharp share price weakness over the past month.
• In Industrials: FTV upgrade Hold to Buy and raise tgt to $90 from $75 at TD Cowen saying their recent time with management supports a more constructive stance with incremental comfort around capital deployment strategy, which has been their most significant hang-up historically.
• In Solar & Utilities: SEDG was upgraded to Neutral from Underperform at Bank America with $29 tgt noting the shares are trading near five-year lows on softening residential demand, and the firm believes the company’s negative overhangs are reflected in the stock’s discounted valuation.
• In Energy: DVN announced it has entered into a definitive purchase agreement to acquire the Williston Basin business of Grayson Mill Energy in a transaction valued at $5 billion, consisting of $3.25 billion of cash and $1.75 billion of stock to the sellers. XOM said it expects changes in gas prices to decrease qtrly upstream earnings by $300M-$700M.
• In Chemicals: ECL upgraded from Hold to Buy at Stifel and raise tgt to $283 from $233 saying the ECL story sounds better than it has in many years, and the firm expects the positive trajectory to continue noting the bias to estimates will be upward for the next several years.

• In Asset Managers: SF and OWL downgraded to Hold at TD Cowen while calling JHG, SCHW, APO top picks in the sector into earnings. TD Cowen makes several changes into 2Q24 earnings season, expected to kick off on 7/15 with BLK. They trim our Buy recommendation list, and downgrade OWL and SF, both to Hold. We alter our price target work on the Alts—curbing targets moderately—easing retail gross up premium factor despite still bullish secular view. For the Traditionals – we generally raise our outlook, mostly due to above trend equities returns in 2Q.
• For Brokers: Jefferies said in Q2 preview for the brokers, they largely trim estimates given residual cash outflows, but says IBKR and LPLA remain top picks. Jefferies takes its Q2 EPS estimate for IBKR slightly higher to $1.68 from $1.66, based on better-than-expected trading and increased margin balances. And for LLPA, takes its Q2 EPS est. from $3.78 to $3.61, it remains positive on the organic growth outlook.
• In Consumer Finance: ALLY was upgraded to Neutral from Underweight at JP Morgan as the firm acknowledges that its views on ALLY’s credit, NIM, and multiple trajectories have been overly conservative. As the impact of less profitable vintages wanes and are replaced by higher yielding pools, risk-adjusted margins should steadily improve.

• GILD upgraded to outperform from market perform at Raymond James on the potential for its HIV and liver disease treatments to drive growth.
• GRFS shares jump following news the Grifols family and Canadian fund Brookfield have agreed to launch a joint takeover bid for Spanish drugmaker with the intent to delist it, the companies said in regulatory filings on Monday.
• GSK downgraded to Neutral from Buy at UBS which reflects strong franchises, a solid balance sheet and a compelling EV/NPV valuation, that pays nothing for R&D. However, as it lowers Arexvy and US Shingrix forecasts, it also reduces its target PE relative to the sector to reflect uncertainty on the timing of Zantac resolution.
• HLVX shares tumbled after saying its experimental vaccine against the norovirus failed to reduce severe gastrointestinal events compared to a placebo in infants enrolled in a mid-stage clinical trial.
• IDYA shares rise; announces positive interim phase 2 monotherapy expansion data for IDE397 a potential first-in-class MAT2A Inhibitor in MTAP-deletion urothelial and lung cancer.
• UK’s competition regulator said on Monday it has cleared U.S. medical equipment maker TMO’s $3.1B deal to buy Swedish biotech firm Olink Holding AB.

• In Media/social media: BMBL was downgraded to Equal Weight from Overweight at Wells Fargo and cut tgt to $10 from $15 saying while the company’s April app relaunch drove a "bump" in trends, it hasn’t observed a sustained benefit. As such, the analyst believes the 2H’24 expectations for reacceleration are likely more challenging. PARA and Skydance Media announced they entered into a definitive agreement to form "New Paramount", through a two-step transaction including the acquisition of National Amusements, or NAI, which holds the controlling share stake in Paramount.
• In Optical/Hardware: GLW guided Q2 core sales to exceed guidance, with core EPS at the high end of or slightly above guided range of $0.42-$0.46 (est. $0.45) and said now expects Q2 core sales of approximately $3.6B (vs. est. $3.41B), while believes that first-quarter 2024 will be lowest quarter for year.
• In Semis: more strength early in sector with the SOX around the 5,770 level at highs (off all-time highs 5,792) led by gains in TSM, INTC, AMD, NVDA, among others as investors still buying sector on AI demand growth hopes; SIMO said prelim Q2 revenue growth is expected to be slightly above the high-end of its original guidance range of $199M-$208M, and gross margin (non-GAAP) is expected to be near the high-end of the company’s original 45.0% to 46.0% guidance range.