Closing Recap

Thursday, June 20, 2024

US equities looked primed for another solid performance as both the S&P and Nasdaq futures gained overnight following the Juneteenth holiday break. The AAII bull-bear spread weekly survey remained bullish at 21.9 vs 18.9 a week ago as more bears moved to the neutral camp. Neutrals climbed from 29.7% to 33.1%, while bears dipped from 25.7% to 22.5% and bulls eased slightly from 44.6% to 44.4%. Pre-open economic data was broadly a bit soft, and stocks faded into and after the open with a bad-news-is-bad-news bias. Pre-open comments from the Fed’s Kashkari didn’t help as he had a decidedly higher-for-longer tone relative to the path back to 2% inflation. By mid-morning, stocks saw some divergence with small caps outperforming and Nasdaq slipping versus the S&P. IWM was +0.27% versus SPY +0.06% and QQQ -0.19%. Breadth was holding slightly in favor of advancers. Sector wise, Energy and Utilities led the gainers across S&P sector ETFs, while Real Estate and Technology were the only decliners.

Factoids of interest today: despite recent index gains, per @bespokeinvest more than half of all sectors have not seen a new high in at least two months. @charliebilello notes the US housing market Index has dipped to 43, its lowest level of the year, while US Housing Starts hit a 47-month low in May. Also on housing, @KobeissiLetter highlights homebuyer conditions for US consumers has slipped to an all-time low with the index of buying conditions at 27 points, down from about 140 points in 2020. On index performance, @DataTrekMB points out the cap-weighted S&P 500 has now outperformed the equal-weighted version over the past year by even more than during the pandemic crisis in 2020. They also note every S&P sector, except for Energy and Utilities, has a forward P/E multiple higher than its ten-year average.

Heading into the final hour of trading, stocks were broadly lower but off the early afternoon lows. Breadth had reversed to favor decliners by about 1.3:1 and IWM, SPY and QQQ were all in the red. SPY was the modest outperformer at -0.27% versus QQQ -0.77% and small caps split the two at -0.43%. Sector performance still saw Energy (XLE, +1.84%) and Utilities (XLU, +0.87%) leading the gainers, while the losers had expanded to include Consumer Discretionary (XLP, 0.12%), Real Estate (XLRE, -0.29%), Consumer Staples (XLP, -0.22%) and Technology (XLK, -1.12%). Value outperformed growth with the Russell 1000 Value gaining 0.33% versus its Growth counterpart slipping 0.74%. Today remained more of a bad-news-is-bad-news day for stocks despite yields and gold saying otherwise as investors hope softer economic data will translate into Fed cuts sooner. The Nasdaq also snapped its 7-straight-days of record setting closing highs.

• Weekly Jobless Claims fell to 238,000 in latest week from 243,000 prior and vs. consensus 235,000; the 4-week moving average climbed to 232,750 from 227,250 prior week; continued claims climbed to 1.828M from 1.813M prior week and the U.S. insured unemployment rate unchanged at 1.2%.
• Housing Starts data weak for May, falling (-5.5%) to 1.277M unit rate vs April +4.1% and below consensus 1.370M, while Building Permits fell (-3.8%) to 1.386M from 1.44M April unit rate and consensus of 1.45M; May single-family starts (-5.2%) to 982,000-unit rate; multifamily (-6.6%) to 295,000-unit rate.
• The Q1 Current Account balance actual (-$237.6B), worst since June 2022 as compared to forecast (-$206.8B) and the previous reading of (-$194.8B).

• July WTI crude futures gained $0.60/bbl, or +0.74%, to $82.17 while Brent similarly gained $0.64/bbl, or +0.75%, to settle at $85.71 following EIA inventory data showing a draw of more than 2.5M. Also, as well gold, oil reacted favorably to softer economic data as investors looked to a scenario of quicker Fed rate cuts to spur demand. Also at play, though perhaps less impactful today, are forecasts for more active Summer travel to support demand and the continuation of geopolitical risks in the Middle East on the supply side.

• In Restaurants: DRI Q4 adj EPS $2.65 vs. est. $2.62 and sales rose 6.8% y/y to $2.96B vs. est. $2.97B, raises quarterly dividend by 6.9% to $1.40, and same-restaurant sales were flat on a total-company basis, ticking 4% higher at LongHorn Steakhouse but falling within the Olive Garden; guides FY sales $11.8B to $11.9B, EST $11.93B. MCD is pitching a new $5 meal deal with a McDouble cheeseburger, fries, chicken nuggets, and a soft drink.
• In Consumer Staples: In grocers, KR topped Wall Street estimates for quarterly same-store sales, rising +0.5% vs. est. +0.13%, benefiting from more customers to its outlets for lower-priced groceries; still forecasts FY CAPEX $3.4B to $3.6B, est. $3.62B and reaffirmed FY guidance. In Food, Piper cut its 2024 outlook on KHC citing weaker momentum on Lunchables (hurt by negative social media) and Capri Sun and from disruptions in Brazil from severe floods and said does not expect KHC to make up for lost sales.
• In Furniture/Appliances: for WHR, Raymond James noted the Fed recently reported Industrial Production of major appliances was -3.0% y/y in May while April was revised slightly higher to -3.3% y/y from -3.9% prior – firm notes believe Whirlpool has been assuming “flattish” NA industry shipments in 2Q, so quarter-to-date shipments have likely been below internal expectations. In furniture, SCS Q1 adj EPS $0.16 topped est. $0.10 while Q1 revs $727.3M compared to est. $729.12M; sees Q2 adjusted EPS $0.36-$0.40 vs. est. $0.30 and revs $850M-$875M vs. est. consensus $865.22M.

• In Leisure Sector: In RV Sector, WGO reported EPS and revs below consensus for Q3 (EPS $1.13 vs. est. $1.30 and revs falling -12.7% y/y to $786M vs. est. $805.3M), while adj EBITDA declined -40% y/y to $58M, vs. est. $63.6M on weaker operating income -46% y/y; said outdoor industry market conditions remain challenged, but is generally pleased with the resiliency of their portfolio (shares of CWH, THO, LCII, PATK among other RV names).
• In Casinos & Gaming: Stifel noted investor sentiment on U.S. online sports betting (OSB)/iCasino operators has shifted negative since Q1, primarily as the IL OSB tax rate hike has resurfaced concerns of additional tax hikes in existing markets & upward pressure to rates in future expansion states. The firm said negative sentiment shifts around tax hike risk May yield attractive buying opportunities for DKNG given a continued upside bias to estimates. PENN shares jumped late day on a Reuters report that BYD had approached the company to express interest in acquiring its peer.

• In Aerospace & Defense: for BA, families of the victims of two fatal 737 Max crashes are asking the Justice Department to seek to fine Boeing Co. nearly $25 billion, saying the company committed “the deadliest corporate crime in U.S. history.” JOBY said the FAA has authorized the use of the air-taxi maker’s in-house software operating system, known as ElevateOS, to perform tasks such as managing pilot workload and matching passengers with aircraft like ride-hailing apps (targeting launch of commercial air taxi operations as soon as 2025). SPR was downgraded to Hold from Buy at Benchmark. given the assumption of a Boeing ($BA) takeout is at least partially baked into the stock at this point.
• In Metals & Mining: CMC posted a Q3 profit as EPS of $1.02 met expectations, but were down from $1.98 a share, in the same quarter a year ago as sales slid to $2.08B from $2.34B but above consensus $2.02B and said expects the current quarter to be in line with the previous one, with finished steel shipments in North America coming in at the same level.
• In Materials: WRK shares rallied after S&P Dow Jones Indices said Tuesday that Smurfit WestRock — the new company formed via the merger of Smurfit and WestRock — will be included in its indexes; BG entered into definitive agreement to sell its 50% share in BP Bunge Bioenergia to BP, its joint venture partner.
• In Refiners: Mizuho lowered price tgts for refiners VLO, MPC, PSX, DINO, PBF, DK and update estimates ahead of 2Q24 earnings saying with still-tepid product demand and refiners running at 90+% following the heavy turnaround season in Q1, product inventories have built, and crack spreads have declined sharply in June. On average, Mizuho’s company earnings estimates are now ~14% and ~2% lower vs consensus for Q2 EPS and EBITDA respectively.
• In Transports/Tankers: The Baltic Dry Index hit more than a one-month high on Thursday, rising 41 points, or 2.1%, to 1,984, its highest level since May 14. The Capesize index rose 152 points, or 5.1%, to 3,079, marking its highest level since May 13, the Panamax index fell 52 points, or about 2.7%, to 1,867, its lowest level since June 12. The Supramax index was up 15 points, or 1.1%, to 1,389, its highest level since May 20.

• In Lending: TREE announced the promotion of Jason Bengel to CFO following the departure of Trent Ziegler on August 9th and raises Q2 revenue view above previous guidance of $175M-$190M (est. $184.5M), while reaffirms Q2 variable marketing margin and adjusted EBITDA outlook of $70M-$76M and $22M-$26M, respectively.
• In Financial Services: TRU was upgraded to Buy from Neutral at Bank America saying its more positive outlook is fueled by its inexpensive valuation, room for upside in its emerging verticals segment and persistent stability in consumer lending and sees additional room for upside on a potential recovery in consumer lending as 2025 and rate cuts.
• In Insurance: ALL said its May pretax catastrophe losses totaled $1.4 billion, bringing year-to-date pretax losses to $2.62 billion; said about 70% of the May losses were related to five wind and hail events.

• HROW said it has successfully manufactured the first commercial-scale process performance qualification batch of its eye drug Triesence after having been on the FDA shortage list for over five years.
• JAZZ said its experimental drug, suvecaltamide, to treat essential tremors did not meet the main goal in a mid-stage; said some numerical improvements were observed on main and secondary goals of the study in patients, but these were not "statistically significant; the co said it plans to further evaluate the data before determining next steps.
• OCUL was upgraded from Hold to Buy at TD Cowen and raised tgt to $11 from $7 saying the SOL-1 enrollment is going great due to the experienced team and strong KOL support, and TDCowen believes it should be successful.
• VCEL was initiated Buy and $55 tgt at TDCowen saying VCEL appears undervalued among its SMIDcap MedTech peers despite having top-tier revenue growth and already eclipsing EBITDA profitability.

• In IT Services & Consulting: ACN Q3 results fell just short of consensus (EPS $3.13/$16.5B vs. est. $3.15/$16.53B), while narrowed FY 24 rev view to up 1.5%-2.5% in local currency from 1%-3% prior and cut FY EPS to $11.85-$12.00, below prior view $11.97-$12.20 and still sees FY 24 FCF $8.7B-$9.3B (helping shares were improved margins and rev growth on AI boost). ALTR will be added to the S&P Midcap 400 index prior to the opening of trading on Monday, June 24.
• In Computer Hardware & Equipment: DELL and SMCI shares jumped early (reversed lower) after AI startup xAI’s founder Elon Musk says SMCI and DELL are supplying server racks for co’s supercomputer. Dell CEO Michael Dell says in a post on X co is building "AI factory" with NVDA for xAI, supplying half of the racks for the AI startup. In the EMS sector, JBL shares rose initially after results, but reversed lower after commentary on call saying they are recovering slower than they had anticipated and noted auto (which was strong) now weakening.
• In Semiconductors: it was a day of rest after several days of record setting highs, with profit taking/pullbacks in names like NVDA, ARM, MU, QCOM, AMAT, and others; shares of analog semis saw weakness (NXPI, ON, WOLF, TXN) after JBL comments on auto chip weakness; SWKS was upgraded to buy from neutral at B Riley with Street-high price target of $130; ON announced plans to establish a vertically integrated silicon carbide, or SiC, manufacturing facility in the Czech Republic for up to $2B, expanding the company’s European capacity.