Closing Recap

Thursday, March 28, 2024

U.S. stocks were higher in a narrow trading range this final day of month and quarter, putting Q1 in the books with solid gains for risk assets and a 5^th month in a row higher for stocks. Smallcaps are slowly catching large caps as the IWM traded to highs above $211.80, its best level since March of 2022. However, the S&P 500 (SPX) notched 22 record highs in Q1 (including today) and is up 10% YTD. The big 7 names in tech mostly show big gains in Q1 with: NVDA +82%, META +40%, NFLX +26%, AMZN +18%, MSFT +12%, GOOGL +8%, while the two lower are AAPL -10% and TSLA -28% for the quarter. Bitcoin (BTC) +70% YTD and Ethereum (ETH) +35% YTD. Bullish sentiment remains strong as indicative of the bull-bear spread in the American Association of Individual Investors (AAII) weekly survey was 27.6 vs 16 last week while Bulls rise to 50% from 43.2%, Neutrals fall to 27.6% from 29.6%, Bears fall to 22.4% from 27.2%. Not even an inkling of concern ahead of tomorrow’s Core PCE inflation data for February as major averages finished around record highs. At 8:30 AM on Friday, Personal Income/Spending M/M for February will be released as well as inflation readings (while major U.S. averages are closed in observance of Easter). The Fed’s favored inflation reading is the PCE with ests for PCE Price Index M/M for February (est. +0.4% vs. +0.3% prior) and Y/Y (est. +2.5% vs. 2.4% prior). The core PCE for Feb M/M (est. +0.3% vs. +0.4% prior) and on a Y/Y to rise (+2.8%, same as prior). Markets are firmly holding the view for three rate cuts in 2024 despite the CPI/PPI rise in inflation in Jan/Feb, so tomorrow’s data will be key. Overnight, Fed Governor Christopher Waller said that recent disappointing inflation data affirms the case for the U.S. central bank to hold off on cutting its short-term interest rate target, but he did not rule out trimming rates later in the year.

Sector winners for Q1: Energy (XLE) +12.5%, Communications (XLC) also +12.5%, Financials (XLF) +11.75% and Industrials (XLI) +10.5%, while ten of eleven sectors up on year; only REITs (XLRE) -1.5%. In other interesting data, M&A activity improved in Q1’24 – Total M&A volumes globally climbed 30% to about $755.1B, according to the most recent data from Dealogic. The number of transactions worth more than $10B jumped to 14, compared with five during the same period last year. U.S. M&A volumes surged 59% to $431.8B. European deals jumped 64%, while Asia Pacific volumes slumped 40% – Reuters. In other news, Sam Bankman-Fried, the co-founder and former CEO of crypto exchange FTX and trading firm Alameda Research, has been sentenced to 25 years in prison and ordered to forfeit more than $11 billion.

• Weekly Jobless Claims fell to 210,000 from 212,000 last week and vs. consensus 212,000 as the 4-week moving average fell to 211,000 from 211,750 prior week and continued claims climbed to 1.819M from 1.795M prior week; the U.S. insured unemployment rate unchanged at 1.2%.
• The University of Michigan Sentiment consumers sentiment final March reported at 79.4 above consensus 76.5 and vs preliminary March 76.5 and final Feb 76.9; current conditions index final March 82.5 vs prelim March 79.4 and final Feb 79.4. The UoM 1-year inflation outlook final March 2.9% vs prelim 3.0% and final Feb 3.0% and the 5-year inflation outlook final March 2.8% vs prelim 2.9% and final Feb 2.9%.
• Chicago PMI for March falls to 41.4 from 44.0 prior and below consensus of 46.0, weakens for fourth straight month in March and has been below the 50 breakeven level for most of the last year and a half.
• Feb Pending Home sales index +1.6% vs. consensus +1.5% and down -7.0% from Feb 2023.

• Treasury yields little changed after data today and PCE tomorrow. The 10-yr yield finished day at 4.192% down -2.5bps on week, rising 33.2 bps this qtr, but down -5.9bps in March (yield down 7 of last 8 trading days). Despite reduced expectations for rate cuts previously expected to begin in 1Q24, the 10-year treasury has been range-bound between 3.9% and 4.2% since the start of the year and the yield curve remains inverted around 30-35 bps; since inverting in July 2022, the yield spread between 2’s and 10’s has been inverted for 20 months and counting.
• Gold prices rose $25.70 to settle at $2,238.40 an ounce (earlier hit intraday record high of $2,246.60 an ounce) as market expectations remain for rate cuts this year from Fed. Oil prices rose by more than $1 a barrel on Thursday, after falling for two consecutive sessions, on the prospect of supplies given the OPEC+ producer alliance is widely expected to stay the course on its current production cuts. Both benchmarks were up more than 2% on the week and finish higher for a third consecutive month.

• In Beauty: EL upgraded from Neutral to Buy at Bank America and raise tgt to $170, expecting meaningful growth off what appears to be bottoming sales and EPS and said savings targets and innovation efforts signal a clear effort to adapt to the reality of a smaller China/Hainan.
• In Retail: VFC will be replaced in the S&P 500 index by SOLV and move to the S&P SmallCap 600 effective prior to the opening of trading on Wednesday, April 3, replacing MODV.

• In Home Improvement Retail: RH shares rise as 4Q rev/EPS of $738mn/$0.57 missed Street at $776mn/$1.62. Revenue was adversely impacted by $40mn from shipping & weather disruptions in 4Q, though mgmt. expects to recognize delayed sales in ’24; EBIT margins declined 7.5ppts YoY to 9.1% – 1Q rev guide was below Street, though, FY’24 rev guide is better than expected and demand trends are above.
• In Online furniture retail: Wayfair (W) tgt raised to $85 from $73 at Citigroup after hosting an advisor call with a top Wayfair seller partner ($100mm+ annually) and came away more confident on Wayfair’s LT competitive advantages, as well as stable macro, with potential upside from spring trends.

• In Autos: STLA said it is ready to cut more than 3,000 jobs in Italy, a local union says; TSLA delivery estimates cut at both RBC and Deutsche Bank. RBC Capital reduces Q1 deliveries estimates for Tesla to 446K from 500K, which is also about 3% below consensus citing registration data and app downloads. DBAB now expects ~414k units, down from 427k units prior, due to weaker than expected sales in China in the last few weeks of March. DBAB also cut its full year deliveries estimate to ~1.9M units (consensus: ~2.06M units).

• In Metals: CLF was upgraded to Buy from Sell at GLJ Research saying to benefit from lower metallurgical coal pricing in Q2 2024; FCX said its Freeport Indonesia has warned the Indonesian government that banning exports of copper concentrate in June could lead to a loss of $2 billion in revenues for Jakarta; gold miners (AEM, NEM, GOLD) bounced again early with gold prices.
• In Chemicals: CC disclosed material weakness that led to "immaterial" revisions to financial statements of last three quarters and reported a narrow loss in qtr helped by reduced costs, higher sales in some of its units; sees Q1 net sales to be flat to down sequentially. FUL reported F1Q24 adjusted EBITDA of $123M, in-line w/Street and revs of $810M were below Street $823M while pricing declined 3.3% during the quarter, the company was able to keep volumes relatively flat; adjusted EPS (diluted) is expected to be in the range of $4.15-$4.45, equating to y/y growth of between 7%-15%.
• In Transports: Dow Transports +1.35% to 16,250 (500 points from ATH’s), with 2% gains for CHRW, JBHT, LSTR, ODFL in truckers/freight names. In rails, Susquehanna with tgt changes as CNI tgt to $140 from $143, CP to $84 from $85, CSX to $44 from $42, NSC to $270 from $245, UNP tgt to $255 from $245 saying they remain selectively constructive on CSX as the rail industry shows cyclical stability into Q2, but actively looking for mid-term entry points on short-term stumbles. For NSC, sees activist Ancora’s momentum accelerating into the May 9 shareholder meeting. SUSQ is exiting Q1 on rails much like it entered the quarter — comfortable with slow but stable volumes, enthusiastic about the rails’ pricing power relative to deepening rate-driven pain in truckload, and confident U.S. rails’ challenges that tempered its long-held bullishness in 2022 have largely played.

• In Insurance: TD Cowen noted the collapse of the Francis Scott Key Bridge outside Baltimore, MD, is a sizable loss event for the P&C (re)insurance sector, with the insured loss likely rising to the highest ever in the marine market (I.E., potentially ~$1.5-$3B). TDCowen expects losses to be manageable across its coverage, with the loss to be borne mostly by marine reinsurers, and it remains at Buy on ACGL, HIG, and TRV.
• In Brokers: RILY disclosed it had secured an extension from lenders to deliver its audited 2023 financial statements; the co has extended time until April 29 under its existing credit agreement with Nomura Corporate Funding Americas and did not incur additional fees due to the extension. JEF core EPS came largely in line with results driven by stronger core business (IBanking slightly weaker and better trading revs), stronger asset management and merchant banking revenue, but higher non-comp costs (+23% above street ests).  
• In Lending/Finance: TREE shares rose after announced $175M financing from Apollo funds, while KBW said they expected the stock to react positively to the partial removal of this overhang, which was a key component of its recent upgrade of the shares to Outperform.
• In Real Estate/REITs: Country Garden, once China’s top property developer, warns it will miss its deadline for reporting annual results as more information is needed for appropriate accounting. PSA upgraded to Strong Buy and $330 tgt at Raymond James while downgraded EXR to Outperform from Strong Buy ($160 tgt) and reit CUBE OW ($48 tgt) in self-storage REITs. The firm updated 2024 FFO estimates decline 1% on average (PSA +1%) while its AFFO estimates decline 4% on average (PSA -1%) due to higher-than-previously expected maintenance CAPEX, something that has gotten more attention lately across the REIT universe.

• ALDX announced the clinical development plan intended to enable resubmission of a New Drug Application of topical ocular 0.25% reproxalap, an investigational RASP modulator, for the treatment of dry eye disease to FDA.
• AVTX shares soar following news the company acquired privately held AlmataBio in a stock-for-stock transaction, getting a Phase 2-ready anti-IL-1<BETA> mAb, which it refers to as AVTX-009. Avalo also announced private placement financing of up to $185 million, which includes an initial upfront investment of $115.6 million.
• GLPG downgraded from Neutral to Underperform at Bank America and cut tgt to $31 from $41 on concern the stock remains a value trap. A pre-commercial stage biotech developing therapies for Oncology and immunologic disorders, GLPG’s enterprise value has remained stuck at negative $1.5-2B EV for over 2 years.
• STOK announced pricing of its upsized underwritten public offering of 5,555,557 shares of its common stock at a price of $13.50 per share.
• XLO shares surged after announces exclusive license agreement with GILD to develop and commercialize its cancer therapy XTX301; XLO will receive $43.5M upfront and will also be eligible for additional milestone payments of up to $604M; XLO to reduce its headcount by 15 employees, about 21% of its current workforce.

• In Managed Care: MOH downgraded from Neutral to Underperform at Bank America as it now sees a less attractive risk-reward compared to other insurers in its coverage. The firm is concerned that MOH and the Medicaid industry more broadly are likely to face rate pressure after a period of elevated margins.
• In Lab sector: LH to acquire select assets of BioReference Health, a unit of OPKO Health, for $237.5M; the assets that LH will be acquiring currently generate about $100 mln in annual revenue.

• In memory: Goldman Sachs positive on the space as anticipates substantial expansion in the TAM for high-bandwidth memory (HBM) chips, driven by the demand for NVDA’s new Blackwell GPU chips; predicts the market to grow tenfold to $23B by 2026, up from $2.3B in 2022; specifically, sees this benefitting SK Hynix, Samsung, and MU. Digitimes says Samsung plans to triple HBM memory chip output in 2024 to lead in AI memory chips, citing Samsung EVP Sang-joong Hwang, and adding 5th-gen HBM3E chips will be in production in the 1st half of 2024.