Closing Recap

Wednesday, October 09, 2024

US equity futures were modestly softer overnight after posting gains yesterday, but pared declines to open flattish. Fears of the next Israel/Iran retaliation appear to have subsided for now and upcoming Q3 earnings expectations remain somewhat modest despite stable underlying economic growth. That said, comments by the Fed’s Logan indicating a more gradual path on rate cuts seems appropriate boosted yields and pressured stocks early, but not for long. By late morning, stocks were near highs with breadth almost 3:2 favoring advancers. Small caps outperformed, as IWM +0.75% versus both SPY and QQQ at +0.45%. Sector-wise, only Real Estate, Communications and Utilities were in the red while Financials led the gainers with Technology, Materials and Industrials also strong. On sentiment, the Fear and Greed Index remains strong at 71/100 (Greed) versus 69 (Greed) last week, but 40 (Fear) a month ago and 29 (Fear) at this time last year.

On the data side today, interesting to note per @MikeZaccardi, the SPX is trading about six turns higher P/E than SMIDS, marking the widest spread in about 23 years and very different than the early 2010’s when SMIDS were about three points more expensive than SPX. As we head into earning season, HSBC notes Q2 yr/yr earnings growth for the S&P 500 was +12% (with 79% of companies beating EPS estimates), well ahead of the consensus Q3 forecasts of +4% yr/yr. Note, also, that +4% is the lowest expected growth since Q3 last year. On volatility, @bespokeinvest highlights NVDA is now 13.7% above its 50dma after rallying 13.6% over the past week, making its $3.26T market cap second behind only AAPL at $3.43T. Lastly, @DataTrekMB points out that when the S&P 500 is up at least 20% through Q3, we see low-mid-single digit gains in Q4 barring exogenous shocks. Something to watch.

Moving into the final hour of trading, US equities remained near highs and near resistance pivot test levels on the futures. Fed Minutes were largely met with a yawn by equities, and yields moved only slightly. Breadth had eased to just slightly better than even with a small advantage to advancers as outperformance in small caps turned into underperformance with IWM +0.23% versus SPY +0.69% and QQQ +0.79%. Communications (XLC), Real Estate (XLRE) and Utilities (XLU, -0.86%) lagged among S&P Sector ETFs in the red, while Technology (XLK, +1.12%), Financials (XLF, +0.88%) and Health Care (XLV, +1%) remained among the top performers. Growth and value performed equally well with both the Russell 1000 Growth and Russell 1000 Value gaining +0.52%. Stocks closed at highs for a second day and new all time highs for the S&P approaching 5,800!

• US mortgage applications market index declined -5.1% to 277.5 in the latest week according to the Mortgage bankers Association while the purchase index dipped -0.1% and the refinance index falls -9.3% as the average 30-year mortgage rate climbs 22 bps, largest weekly increase since July 2023, to 6.36%.

• WTI November crude futures slipped $0.33/bbl, or -0.45%, to settle at $73.24. A 5.8M bbls crude stock build for the past week came in well ahead of the projected build of 2.0M bbls and pushed crude below $72/bbl early in the session. Ongoing tensions between Israel and Iran continued to provide some support. Though Israel has not made as aggressive a retaliatory move as many had expected (yet), the rhetoric between the two remains particularly heated. Language out of Iran today included a warning that, if attacked, “we’re prepared to launch 1000s of missiles at Israel.” Investors are playing a waiting game here and will have to expect ongoing volatility. Brent similarly slid on the day to settle -$0.60/bbl, or -0.78%, to $76.58.
• Treasury yields and the dollar extended gains, with the dollar index rising an 8^th straight day, ironically moving higher since the Fed cut rates just a few weeks ago and Treasury yields have jumped as well, with the 10-yr topping 4.06% and the 2-yr topping 4% on lower rate cut expectations.

• China Retail/Leisure: Shares of BABA, BIDU, PDD, JD, NTES, BILI, NIO, LI, XPEV, and other U.S. listed Chinese stocks drop a second day as the recent 2-week rally on China stimulus measures fades. Also, data released by Ministry of Culture and Tourism showed that while travelers made 10.2% more trips during the Golden Week break than in 2019, spending only increased by 7.9%.
• In Consumer Products: HELE shares jumped after the consumer products company reported Q2 net sales and adjusted EPS that exceeded Wall Street projections and reaffirmed its full-year projections.

• In Building Products: Jefferies said with rainfall in the South up 28%, and further magnified by Helene & Milton, the firm is lowering its ests for MLM, VMC, SUM (weaker wallboard demand) and expect FY guide cuts. The firm said it expects MLM, VMC to lag as ests recalibrate in the next few weeks, but see a relief rally on earnings, and EXP could give back some of its recent gains due to the relative outperformance.

• In Cruise lines: NCLH was upgraded to Buy from Neutral at Citigroup and raised tgt to $30 from $20 saying analysis and data suggest this growth the recent share rally in the cruise space has real legs into 2025 and beyond (shares of comps CCL, RCL, VIK also moved higher in response).
• In Autos: TSLA’s China’s total shipments rose 1.9% from August to 88,321 units in September, according to Bloomberg calculations based on preliminary data released by China Passenger Car Association.

• In Aerospace & Defense: BA shares fell after negotiations to end an almost monthlong strike collapsed, with the planemaker withdrawing its contract offer saying that the workers’ union did not seriously consider its proposals. Separately, S&P Global Ratings is looking at downgrading the company’s credit grades to junk.
• In Transports: LUV was upgraded to Hold from Underperform at Jefferies and raised tgt to $32 from $24 saying they can get behind about $2B of Southwest’s targeted $4B in incremental EBIT by 2027, which enhances the risk-reward profile over the next 12 months. Wolfe with several changes in trucking/logistics as downgraded EXPD to Underperform from Peer Perform and ARCB to Peer Perform from Outperform, while upgraded SAIA to Outperform from Peer Perform with a $511 price target.
• In Metals & Mining: RIO confirmed reports from last week, as it announced a definitive agreement to acquire lithium producer ALTM in an all-cash transaction for $5.85 per share. The transaction values Arcadium’s diluted share capital at approximately $6.7B. CMC downgraded to Peer Perform at Wolfe Research which follows a more cautious U.S. construction outlook, plus tougher landscape for its Polish mill. VALE was downgraded to Underperform from Peer Perform at Wolfe saying now sees structurally weaker Chinese demand and new low-cost capacity from Simandou. WOR announced that Mr. Joseph Hayek will become the company’s next President and CEO effective November 1, 2024, as current CEO Andy Rose is retiring.
• In MLPs/Pipelines/Refiners: DKL 3.85M share Spot Secondary priced at $39.00. In Refiners, VLO was upgraded to Overweight from Equal Weight at Wells Fargo saying believes cracks have bottomed out, diesel demand is improving, lower prices and payrolls support gasoline demand and refined product inventories are below normal. Also says rising OPEC production in 2025 should widen crude diffs favoring coastal refiners.

• In Financials Tech Services: RDDT was initiated at Buy and $90 target price at Jefferies saying the co is combining AI-driven product enhancements with a robust archive of contextual content to spur trial and engagement, resulting in recent user growth accelerating to the highest level in 2+ years.

• BMEA rises as EF Hutton initiated coverage with a Buy rating and $128 price as models BMF-219 in diabetes; applies a Probability of Success factor of just 10% as it is in the early phases of development and for conservatism, as the diabetes market is so large that even the smallest chance of success translates into very large projected valuations.
• CI filed motions Wednesday seeking to disqualify Federal Trade Commission Chair Lina Khan and other top officials at the agency from participating in a case against it because of their alleged bias.
• CLSD said its drug CLS-AX showed stable vision in patients with wet age-related macular degeneration for up to 6 months compared to REGN aflibercept, during a mid-stage trial.
• PFE CEO Albert Bourla plans to meet key executives of activist hedge fund Starboard Value next week, the Financial Times reported late on Tuesday, citing people familiar with the matter.
• ZELA announced it received a complete response letter (CRL) from the FDA for dasiglucagon in CHI because of timing of a third-party manufacturing facility reinspection.
• Vice President Harris announced a proposal yesterday to use savings that Medicare gets from drug price negotiations to fund new home care, vision, and hearing benefits for older Americans.

• In Internet: The U.S. Department of Justice late Tuesday made recommendations for GOOGL search engine business practices, indicating that it was considering a possible breakup of the tech giant as an antitrust remedy. In research, Keybanc raised its price tgts on META to $655 from $560, TTD to $130 from $115 and PINS to $45 from $43 in Q3 Large Cap Internet ad preview saying checks suggest the ad market remained solid in Q3. In the Internet Teen Survey at Piper, TikTok & Instagram both improved their usage leads, while SNAP fell again as the favorite app. RBLX active users improved materially from prior surveys. Teen shopping on China-based retailers was down notably from Spring. Piper sees +results for META, RBLX, PINS, UBER, DASH, mixed for AMZN, GOOGL, and negative for SNAP.

• ALAB shares jumped after announced a new portfolio of fabric switches, including the industry’s first PCIe 6 switch, built from the ground up for demanding AI workloads in accelerated computing platforms deployed at cloud-scale.
• ZETA said it would acquire LiveIntent in a deal valued at $250M, $77.5M in cash, $172.5M in stock; ZETA also reaffirms Q3 2024 guidance with revenue of at least $255M