Closing Recap

Wednesday, June 28, 2023

Index	Up/Down	%	Last
DJ Industrials	-72.83	0.21%	33,853
S&P 500	-1.26	0.03%	4,377
Nasdaq	36.08	0.27%	13,591
Russell 2000	8.78	0.47%	1,858

 

 

 

 

 

 

 

 

 

U.S. stocks pulled back from afternoon highs, ending the day mixed as the Nasdaq once again paced market gains (albeit modest), led by a new all-time high for Apple (AAPL) and as strength in software offset weakness in semiconductors after reports the White House could put more restrictions on chip exports to China. Early market attention was on the chip makers (AMD, NVDA) falling on that WSJ report (though pared losses) and Fed Chair Powell’s morning speech at a policy panel discussion at the European Central Bank Forum in Portugal who said, “policy hasn’t been restrictive for very long … so we believe there’s more restriction coming" and reiterated the likelihood of two more rate hikes this year. The 10-year U.S. Treasury yield shed 5 basis points to 3.71% following a strong bond auction while the dollar rose. Markets continue to plow ahead into quarter-end as major averages put the first half of the year in the books this Friday. RothMKM strategist Darda noted the S&P 500 forward multiple has expanded to a 14-month high on the back of rising hopes of a soft landing and increasing confidence that peak inflation and market interest rates are safely behind US. Yet, despite being off the cycle highs, risk-free rates are still 100 bps or so above the levels that prevailed 14 months ago, the last time the S&P 500 was at a 19x forward multiple. Earnings estimates are at about the same level now as they were 14 months ago. Hence, the so-called equity risk premium, the Gap between earnings yields and bond yields, has fallen to the lowest level since the summer of 2007. Interesting thought into 1H end.

 

Economic Data

·     May International Trade in Goods (Advance) deficit have narrowed to -$91.13B vs. -$92.5B consensus and -$97.1B in April (revised from -$96.8B). Exports of goods for May were $162.8B, $1.0B less than April exports and Imports for May were $254.0B, $6.9B less than April imports.

·     May Wholesale Inventories (Advance) declined -0.1% to $912.9B vs. -0.2% consensus and -0.3% in April (revised from -0.1%). May Retail Inventories (Advance) rose +0.8% to $778.7B vs. +0.2% prior; on a Y/Y basis, retail inventories climbed 7% in May.

·     US mortgage applications for home purchases rose for a third week even as borrowing costs remained elevated; the mortgage applications index rose +3.0%, the purchase index rises 2.8%, and the refinance index rises 3.3% as the 30-yr mortgage rate rises 2 bps to 6.75%.

 

Commodities, Currencies & Treasuries

·     U.S. crude oil futures settle at $69.56 per barrel, up $1.86, 2.75%, extending morning gains following a bullish EIA inventory report, that showed a weekly drawdown of nearly -10M barrels of crude oil. WTI crude now positive on the week with today’s gains. Brent Crude futures settled at $74.03/bbl, up $1.77, 2.45%. Natural gas prices pulled back off best levels since early March, falling -5.8% to $2.603 per MMBtu, marking a second straight day of declines following Monday’s 16-week closing high of $2.791 ahead of weekly inventory data tomorrow morning.

·     Gold prices slipped -$1.60 to settle at $1,922.20 an ounce, paring losses after hitting lows of $1,911.40 an ounce earlier as investors bailed on defensive/haven-related assets. Gold prices finished at the lowest levels since mid-March. The U.S. dollar index (DXY) rose +0.4%, getting a morning boost after Fed Chairman Powell reiterated likelihood of two additional rate hikes this year, but pared gains this afternoon.

·     Treasury yields near intraday lows late day, with the 10-yr down over 6-bps to 3.706% while the 2-yr slips5-bps to 4.714%. The rally in bonds came after a well received 7-year auction as the US Treasury sold $35B at high yield 3.839% vs. 3.85% when issued prior as the bid-to-cover ratio 2.65, as primary dealers take 8.14% of U.S. 7-year notes sale, direct 16.55% and indirect 75.31%. The 1-Year Year Treasury Bill yield has moved up to 5.33%, its highest level since December 2000.

 

 

Macro	Up/Down	Last
WTI Crude	1.86	69.56
Brent	1.77	74.03
Gold	-1.60	1,922.20
EUR/USD	-0.0044	1.0915
JPY/USD	0.22	144.29
10-Year Note	-0.056	3.712%

 

 

Sector News Breakdown

Consumer

Retailers, Consumer Staples & Restaurants:

·     In Food: the sector pressured after GIS posted a steep decline in profit and weaker-than-expected sales for Q4 ($1.03/$5.03B in sales vs. est. $1.07/$5.17B) and said gross margin fell 189 basis points to 34.4% of sales, driven by higher input costs and unfavorable mark-to-market effects; guided FY24 EPS growth 4%-6% and organic net sales +3%-4%.

·     In restaurants: GENK, the owner of Korean BBQ restaurants, priced 3.6M share IPO at $12, above the prior price talk of 3M shares at $10-$12, so raised $43M instead of $33M in a good sign for the IPO market (shares opened at $18.30).

·     In beverages: Citigroup noted that monthly Nielsen Beer Data showed ABInBev Bud Light volumes down -29% in last 4 weeks. Noted data showed total US Beer, FMB & Cider volumes fell by -4.1% in the 4W to Jun 17th (decelerating from the 12W trend at -3.6%) as Beer volumes fell by -3.6% and Hard Seltzers were down -27.2% in the latest 4-weeks vs respective trends of –4.3% and -23.9% last month (shares of BUD, SAM, TAP among beer companies).

·     In Retail: CASY laid out a more detailed strategy to attain MSD inside sales and an 8-10% EBITDA CAGR through FY’26. OSTK rises after a U.S. bankruptcy judge approved the company’s $21.5M purchase of troubled retailer Bed Bath & Beyond’s brand name, intellectual property, and ecommerce platform.

 

Leisure, Gaming & Lodging:

·     In ride Hailing: UBER was downgraded from Buy to Outperform at Daiwa while raising its price tgt to $51 from $42 and boosted ests to reflect higher bookings (GB) growth at Mobility operations and increased profitability at Delivery.

·     In casinos/gaming: DKNG dropped its bid for PointsBet U.S. Business after Fanatics sweetened its offer by 50% to $225 million. Further, the superior offer from Fanatics has also won the support of PointsBet’s Board. https://tinyurl.com/39bb3a2z

·     In Movie theatres (AMC, CNK, IMAX): KeyBanc said Box office trends continue to improve as prop First Look Data from credit/debit cards indicates a 9.2% decrease in y/y indexed spend for the week ending June 18, 2023; weekly data remains volatile, though April spend was higher by +38.4% y/y and indexed spend over the last six weeks was higher by 3.7%.

 

Energy

·     Oil prices: UBS strategy piece shows firm cuts its 2023 and 2024 oil price forecasts as see Brent down to $80/bbl from $90/bbl for 3Q23 and $85/bbl from $90/bbl for 4Q23, bringing the 2023 average price to $81/bbl from $88/bbl, and 2024 down to $80/bbl from $85/bbl.

·     Utilities: in water utilities, Wells Fargo said based on recent performance and their revised Cost of Capital assumptions—new EPS outlooks, updated risk assessments, and CWT avoiding a downward authorized equity ratio revision, they upgraded CWT to Equal Weight from underweight but downgraded AWR to Underweight and lower tgt to $89 from $94.

 

Financials

Banks, Brokers, Asset Managers:

·     For Banks: The Fed is expected to release the results of its annual bank health checks "stress tests" at 4:30 PM this afternoon, where the Fed tests big banks’ balance sheets against a hypothetical severe economic downturn. The results dictate how much capital those banks need to be healthy and how much they can return to shareholders via share buybacks and dividends. In 2023, 23 banks will be tested. That’s down from 34 banks in 2022, as the Fed decided in 2019 to allow banks with between $100 billion and $250 billion in assets to be tested every other year.

·     Wall Street banks and brokerages are in a last-minute scramble to meet a July 3 deadline to charge investors for research reports, bankers and others in the industry said, a requirement that threatens their European business if they fail to comply. Many in the banking industry had hoped a regulatory reprieve in place since October 2017 would be extended beyond July 3. The challenge is more likely being felt by smaller and regional firms who lack European operations rather than the largest Wall Street banks, who are expected to meet the deadline. U.S. financial firms were initially given an exemption by the U.S. SEC, which expires on July 3 – Reuters.

·     In brokers: JEF posted Q2 profit that slightly topped analysts’ estimates as robust performance in the investment bank’s capital markets business cushioned a slump in dealmaking.

·     In credit cards (AXP, COF, DFS, SYF), Citi’s Proprietary Credit Card Data for the week ended 6/24 weekly aggregate purchase volume growth was down -1% y/y, up from -2% y/y with the prior week, and flat from -1% y/y in the prior two weeks. Two-week trailing spends decreased to -1.6% from -1.3% in the prior week and four-week trailing spend decreased to -1.0% from -0.9% w/w.

 

Healthcare

Biotech & Pharma:

·     AXSM priced a 3M share offering of common stock at $75.00 per share.

·     CGTX said its experimental drug CT1812, to treat adults with mild-to-moderate Alzheimer’s disease met main goals of safety and tolerability in mid-stage study and showed positive impact on brain function but data not statistically significant.

·     CTLT adds to yesterday’s losses after saying its facility underwent inspection related to its role in the production of REGN’s Eylea.

·     ETON said it received a Complete Response Letter (CRL) from the FDA to its New Drug Application for dehydrated alcohol injection for the treatment of methanol poisoning.

·     PFE and OPK said the FDA approved its Ngenla once-weekly, human growth hormone treatment for children aged three and older who have growth failure due to inadequate secretion of endogenous growth hormone.

·     RETA said it received regulatory approval from the FDA to offer its drug for the treatment of Friedreich’s ataxia, Skyclarys, in the U.S.

·     ROIV reported a smaller-than-expected Q4 loss of (-$0.20) on revs $27.4M, vs. ests (-$0.36)/$21.5M noting upcoming milestones.

 

Industrials & Transports

·     In rails: CP, CSX, and Genesee & Wyoming Inc. reach agreement to create new direct connection and corridor linking Mexico, Texas, and the US Southeast. Weekly US rail traffic was 469,453 carloads and intermodal units, down 3.2% compared with the same week last year. Total carloads for the week ending June 24 were 222,431 carloads, down 0.4% compared with the same week in 2022, while U.S. weekly intermodal volume was 247,022 containers and trailers, down 5.5% compared to 2022.

·     In industrials: CIR shares rose after Private equity firm Arcline Investment Management proposes to acquire the company for $57 per share in an all-cash deal, which represents a premium of ~12% to the $51 per share offered by KKR https://tinyurl.com/yck2jz6h ; WMS downgraded to EW at Morgan Stanley after run in shares, saying its material substitution model benefits most from inflation and non-resi strength, both of which are moderating.

 

Aerospace & Defense

·     AER announces lease placement of three Embraer e195-e1 aircraft with airlink; first aircraft was delivered in March, while second and third aircraft are scheduled for delivery in July 2023.

·     ASTS shares tumbled as 12.5M share Spot Secondary priced at $4.75.

·     AVAV shares rose as Q4 mixed (EPS slight miss but revs $186M well ahead of ests) while record funded backlog of $424.1m as of April 30, 2023; and guides FY24 EPS $ $2.30-$2.60 ahead of consensus $2.04 and revs $630M-$660M vs. est. $600.24M.

·     BA said that about 90% of Boeing’s China 737 MAX fleet have resumed commercial operation as of the end of June. Noted Chinese carriers grounded all 96 jets after an Ethiopian Airlines-operated 737 MAX jet crashed in 2019.

·     JOBY said it received a special airworthiness certificate for the first aircraft built at its pilot production line in Marina, California; the aircraft will now undergo initial flight testing before being delivered to Edwards Air Force base, California.

·     SPR extends yesterday gains early after lates yesterday said they reached a tentative agreement on revised contract with the International Association of Machinists and Aerospace workers.

 

Materials, Metals & Mining

·     Industrial metals: VALE downgraded from Sector Outperform to Sector Perform w/ $16 PT at Scotia. Copper prices slumped overnight to 2-week lows following weak industrial profits data in China and further U.S. rate hikes dampening economic growth and metals demand.

·     In Forest and Wood Products: Truist upgraded both BCC and LPX to Buy from Hold, raising ests and price tgts to $100 from $66 (on BCC) and to $82 from $49 (on LOX) as they believe that the US housing market, especially single-family starts, is poised for a recovery. Firm remained Hold rated on shares of PCH, RYN, and WY given their lower beta.

·     Gold miners (AEM, GFI, GOLD, NEM) extended their recent slide as gold prices fell to fresh 3-month low, nearing $1,900 per ounce as expectations for more central-bank interest-rate hikes later this year have diminished the appeal of the yellow metal. Federal Reserve Chairman Jerome Powell acknowledged last week there are more interest-rate hikes to come. Gold is now sharply lower from its second-highest settlement on record on May 4^th of $2,055.70 an ounce.

 

Technology

Internet, Media & Telecom

·     In Media: NFLX shares outperform after Oppenheimer raised its tgt to $500 in anticipation of higher subscribers on bullish indicators for Paid Sharing and higher rev/sub with potential discontinuation of lowest priced ad-free plan (testing in Canada).

·     In social media: PINS was upgraded to Overweight at Wells Fargo and tgt raised to $34 from $23 saying they expect upside from a partnership with AMZN and improved engagement.

·     In telecom: KLR shares jumped as Tata Communications entered into an agreement to acquire the mobile communications services company for about $100 million, paying $7.25 per share.

 

Semi’s Hardware & Software movers:

·     In Hardware: AAPL made another all-time high today, extending gains and helping push broader markets higher amid strength into end of quarter buying in tech. DELL tgt was raised to $60 from $55 at Bank America saying the company is taking actions to becoming more shareholder friendly with several changes to Board and increased capital return.

·     In software: early strength in names such as DDOG, MDB, SNOW, TWLO as software a bright spot early; SNOW price tgts raised by analysts following Investor Day citing some increased optimism on Snowpark and AI; VEEV downgraded from Equal Weight to Underweight with $181 tgt at Morgan Stanley as expects Veeva’s lock on the Life Sciences CRM market to be tested by Salesforce, representing the most formidable threat yet. Needham initiates ZI with a Buy rating and $35 price target as it views the current valuation as an attractive entry point for investors who are willing to wait for a recovery in broader demand trends for the company’s solutions.

·     In Semis: Sector pressured early, led by AI leaders NVDA, AVGO, AMD after reports overnight the Biden administration is weighing tougher restrictions on exports of computer chips that process AI software, the Wall Street Journal reported. The new restrictions would also apply to Nvidia’s less powerful A800 AI chips, which were designed to avoid export curbs. Investors shrugged it off with semis bouncing off opening declines. COHR downgraded to Neutral at B Riley, saying the stock lacked meaningful catalysts in the n-t and is unlikely to benefit from Nvidia’s AI spending.