Closing Reca

Friday, October 13, 2023

Index	Up/Down	%	Last
DJ Industrials	39.22	0.12%	33,670
S&P 500	-21.82	0.50%	4,327
Nasdaq	-166.99	1.23%	13,407
Russell 2000	-14.47	0.84%	1,719

 

 

 

 

 

 

 

 

 

U.S. stocks finished lower on the day but mixed for the week, filled with massive swings in commodities, bond, and stock markets. The week started with violence as Hamas attacked Israel last weekend and Israel has since gone on the offensive. Several Fed speakers were out this week along with key economic data which saw rising inflation in CPI, PPI reports. Earnings season started with big banks posting positive surprises from JPM, C, WFC all beating along with UNH in healthcare. The 10-year yield declined 15.5 bps this week to 4.628% amid a flight to defensive assets, along with a 5% jump in gold. Oil prices jumped after US tightened sanctions on Russia crude exports. The CBOE Volatility index (VIX) soared as much as 25% to 20.78 (before paring gains), just below its Oct high 20.88 on 10/4 heading into the weekend on fears of further developments in Gaza. Dow Transports dropped below their 200-day MA of 14,800 as the spike in oil prices weighs on the sector; airlines tumbling (LUV 52-week lows – AAL ALK UAL earnings next week) and cruise lines a (NCLH RCL) also fall on rising oil. Despite today’s market pullback the Dow Jones Industrial Average posted its first positive week in the last four, the S&P 500 made it back-to-back winning weeks (behind gains in energy, utilities, and staples).

 

The “Wall of Worry” grows for U.S. markets: 1) Investors loaded up on haven assets heading into the weekend as bonds and gold prices surge given several developments. Israel called for an evacuation of civilians from Northern Gaza to Southern Gaza. Protesters held marches against Israel in countries including Jordan, Iran, and Syria, as the Israeli military urged an evacuation of the northern part of Gaza with a ground operation expected soon. Reuters reported Saudi Arabia is putting U.S. backed plans to normalize ties with Israel on ice, citing two sources familiar, signaling a rapid rethinking of its foreign policy priorities as war escalates between Israel and Palestinian group Hamas. 2) JP Morgan CEO Jamie Dimon issued a stark warning after reporting quarterly results saying, “this may be the most dangerous time the world has seen in decades.” Beyond the military conflicts in Ukraine and Israel, Dimon cited the burgeoning national debt and “the largest peacetime fiscal deficits ever.” 3) North Korea has delivered arms to Russia for use in Ukraine, providing more than 1,000 containers of military equipment and munitions in recent weeks, White House spokesman John Kirby told reporters.

 

Economic Data

·     Import prices for September rose a smaller-than-expected +0.1% vs. est. +0.5% and below Aug +0.6% while Export prices rose +0.7% topping the +0.5% estimate, but below Aug +1.1%. U.S. Sept year-over-year import prices -1.7%, export prices -4.1%.

·     University of Michigan surveys of consumers sentiment prelim Oct 63.0 vs. consensus 67.2 and below Sept-Final 68.1; current conditions index prelim Oct 66.7 vs. Sept-F 71.4 and consumers expectations index prelim Oct 60.7 vs. Sept-F 66.0.

·     Inflation expectations rise: University of Michigan surveys of consumers 1-year inflation outlook prelim Oct 3.8% vs final Sept 3.2% and University of Michigan surveys of consumers 5-year inflation outlook prelim Oct 3.0% vs final Sept 2.8%.

 

Commodities, Currencies and Treasuries

·     Oil prices posted the biggest one-day gain since April as WTI crude finished up $4.78 or 5.77% to settle at $87.69 per barrel (off the overnight low $83.35) after the U.S. tightened its sanctions program against Russian crude exports, raising supply concerns in an already tight market. Also, Israel has called for an evacuation of civilians from Northern Gaza to Southern Gaza with a ground assault seen as imminent, raising fears it could cause violence to spill over into other parts of the Middle East, potentially causing disruptions to oil production and shipments.

·     Gold prices surge on haven asset buying by investors, rising $58.50, or 3.1%, to settle at $1,941.50 an ounce, marking the biggest one-day gain since December 2022 and finished up 5.2% for the week (3-week highs). Prices jumped as Israel ordered over a million people to evacuate Gaza, lifting safe-haven demand for the precious metal. The events in the Middle East have taken center stage, vastly overshadowing market concerns and discussions. Gold futures traded as low as $1,823.50 on Oct. 6, the lowest intraday level since March.

·     Treasuries rallied amid “haven” buying given the turmoil in the Middle East and fears of an escalation of violence this weekend, pushing Treasury yields lower across the board. Yields hit decade highs earlier this month on rising expectations the Fed may need to raise rates further in upcoming meetings following signs of stubbornly high inflation and strong jobs – but the violence in Israel and Gaza has sent investors scurrying for bonds. The yield on 10-year Treasury notes was last down 8 basis points at 4.629%, while two-year note yields, which often reflect interest rate expectations, were little changed at 5.06%. The yield on the 30-year fell -10bps to 4.77%.

 

 

Macro	Up/Down	Last
WTI Crude	4.78	87.69
Brent	4.89	90.89
Gold	58.50	1,941.50
EUR/USD	-0.0019	1.0507
JPY/USD	-0.29	149.51
10-Year Note	-0.082	4.629%

 

 

Sector News Breakdown

Consumer

Retailers, Consumer Staples & Restaurants:

·     In Grocers: California is preparing a lawsuit to block KR’s $24.6B acquisition of ACI on concerns the deal could hurt consumers and workers, Attorney General Rob Bonta said Thursday https://tinyurl.com/4kpfcxs3 . In food, HRL -added to yesterday’s -9.8% decline following its investor day (down 6 of the last 7 days and trading at lowest levels since 2017) as Piper cut its tgt to $35 from $41 noting the Co presented its restructuring and cost saving plans at its Investor Day, pointing to 5-7% long-term EBIT growth and ~$250M of EBIT growth by F26, but with near-term investments that weigh on F24 earnings.

·     In Discount stores: DG announced a CEO transition, with the rehiring of Todd Vasos, who had retired as CEO in November 2022 while also lowered 2023 guidance, which reflects the ongoing challenges as cuts top end of FY23 EPS view to $7.10-$7.60 from prior $7.10-$8.30 (est. $7.73) and sees FY23 rev growth 1.5%-2.5% from 1.3%-3.3% prior.

·     In Home Improvement retail: TSCO was downgraded to Perform from Outperform and tgt to $210 from $280 n-t they are increasingly concerned that shares do not yet discount adequately for a potentially pro-longed, post-pandemic sales expansion lull.

·     In Autos: The United Auto Workers spared GM and STLA from a strike escalation Friday morning, two days after turning up the heat on Ford Motor (F) with a surprise walkout that targeted one of its most profitable plants. "We’re entering a new phase of this fight, and it demands a new approach, " UAW President Shawn Fain said in a livestream Friday. "We are prepared at any time to call on more locals to stand up and walk out."

 

Energy, Industrials and Materials

·     In Energy: oil stocks paced the gains in the S&P 500 following a spike in oil prices as MRO, EOG, DVN, COP, FANG were among the biggest movers. The Baker Hughes (BKR) U.S. Rig Count up 3 from last week to 622; U.S. Oil Rig Count up 4 from last week to 501 and the Gas Rig count down 1 from last week to 117.

·     In industrials: OSK was upgraded to Buy at Citigroup saying they made modest revisions to 2H23 estimates and price targets in the sector to reflect better margin outlooks, offset in part by higher projected real rates and lower target multiples.

·     In Aerospace & Defense: BA and supplier SPR slide after saying they expanded the scope of their ongoing inspections of a production defect affecting 737 Max 8 aircraft. In August, the plane maker identified a new quality problem with its popular 737 MAX aircraft involving Spirit that resulted in improperly drilled holes on the aft pressure bulkhead made using an automated drill. AVAV shares jumped after Wiliam Blair said data points suggest the co has received its first large order for its anti-tank Switchblade 600 loitering missile system, with more on the way.

·     In Lithium sector: TD Cowen lowered price targets for ALB to $220 from $300, LTHM to $30 from $35, MP to $26 from $31 and PLL to $55 from $90 ahead of 3Q23 reporting season saying with spot lithium pricing down 46% since the end of 2Q, all eyes will be on estimate/guidance.

·     In Metals & Mining: Gold miners rise (AEM, NEM, GFI, HMY, GOLD) amid rotation back into “haven” assets after reports Israel is close to launching a ground invasion of Gaza after its military ordered more than a million people in the territory to flee south.

 

Financials

Banks, Brokers, Asset Managers:

·     JPM said Q3 profit rose 35%, boosted again by rising interest rates as income hit $13.15B, up from $9.74B a year ago (EPS $4.33 tops $3.95) as revs rose 22% y/y to $39.87B; made $22.73 billion in net interest income, what it earns on loans minus what it pays on deposits, up 30% y/y; Net interest margin rose to 2.72% from 2.62% in Q2.

·     Citigroup (C) Q3 EPS $1.63 above estimates $1.22 on better revs $20.14B (est. $19.26B) as better revs in FICC sales & trading $3.56B (est. $3.25B), investment banking $844M (est. $662.8M), while equities sales & trading revs $918M below views around $960M.

·     WFC said Q3 profit rose as EPS $1.48 tops the $1.24 estimate on better revs $20.86B vs. est. $20.1B helped as customers pay higher interest on loans; its Net interest income (NII) climbed 8% to $13.1B in Q3 and said sees FY23 NII 16% higher than FY22’s $45B; said Q3 provision for credit losses included a $333M increase in the allowance for credit losses for CRE and real estate loans.

·     Regional banks: PNC said it would reduce its staff by about 4% as part of a cost-cut initiative, while revs fell -5.7% y/y to $5.23B vs. est. $5.32B and average deposits fell 3.8% to $422.5B, compared with $439.2B y/y; posted profit of $3.60 vs. est. $3.11.

·     In Asset managers: BLK Q3 adj profit of $10.91 per share topped analysts’ estimate of $8.26, helped by strong investment advisory fees, but still posts a sharp drop in net inflows where were down at $2.57B vs $16.9B a year ago.

·     In Consumer Finance (AXP, COF, DFS, SYF); credit card providers active following comments on the consumer alongside earnings from the big banks. JPM noted debit/credit card spend +8% y/y accelerating vs +7% in Q2 and noted charge-offs modest +8bp QoQ to 2.49%, still well below 3.33% in Q2 2019 while Citigroup noted continued deceleration in spending indicates an increasingly cautious consumer.

·     In Consumer Lending: LC announced a 14% workforce reduction, or 172 employees, which should result in annualized cost savings of $30M-$35M or about 5% of total annualized 2Q expenses. LC also provided select preliminary 3Q results, including loan originations of $1.5B, which was at the lower end of prior guidance of $1.4B-$1.7B.

·     In Insurance: PGR Q3 EPS $1.89 topped ests $1.68 as Q3 combined ratio reported 92.4%, Q3 net premiums earned $14.89B and Q3 net premiums written $15.59B. ALL moved back above its 200-day MA resistance of $116.45 (helped by better $PGR earnings results in P&C space). Barron’s noted insurance stocks have been hammered, name 6 picks for the rebound (ACGL, CB, EG, WRB, AJG, MET) https://tinyurl.com/yn32746a

 

Healthcare

Biotech & Pharma:

·     AMGN presented preliminary results from its first study of an experimental pill that selectively blocks the enzyme in cancer cells, showing five partial responses from 31 evaluable patients; The 16% partial response rate demonstrated in the AMG 193 study may fall short of some investor expectations, STAT news reported https://tinyurl.com/msyu94um

·     AMLX received an initial negative opinion from an EU regulator on the marketing authorization application AMX0035 (under the trade name Albrioza), for its treatment of ALS in the EU; says final decision from EC expected by end of 2023.

·     ARQT downgraded to neutral at Goldman Sachs on view the launch of Zoryve in plaque psoriasis has underperformed expectations, and they believe there is limited line-of-sight to potential catalysts that could accelerate sales growth.

·     ATRA negative catalyst mention opened at Citigroup ahead of next month’s MS readout saying data from the Ph2 EMBOLD study evaluating ATA188 in Progressive MS are expected in early November, and Citi is opening a negative Catalyst Watch ahead of the readout.

·     HRMY announces topline data from phase 3 Intune study evaluating pitolisant in patients with idiopathic hypersomnia; said safety & tolerability profile in adults with idiopathic hypersomnia consistent with established safety profile of pitolisant.

·     NUVL announced updated preliminary data from the Phase 1 dose-escalation portion of its ongoing ALKOVE-1 Phase 1/2 clinical trial of NVL-655 for patients with advanced ALK-positive non-small cell lung cancer, or NSCLC, and other solid tumors.

·     NVO raised its FY23 sales and profit outlook citing higher-than-expected U.S. prescription volumes for its diabetes/weight loss drugs Ozempic, Wegovy; now sees full-year company sales rising as much as 38% from prior view up to 33% growth and operating profit growth of 40-46%.

·     SAVA shares tumbled after the publication “Science” said their “investigative committee found numerous signs that images were improperly manipulated” in SAVA’s research. The publication cited an internal report prepared by City University of NY about research conducted by one of its scientists on the company’s experimental drug Alzheimer’s drug https://tinyurl.com/nhd2nkmz

 

Healthcare Services & MedTech movers:

·     In Managed Care: UNH 3Q upside was driven by lower MCR and strong NII as Q3 EPS of $6.56 exceeded ests $6.31 and MCR below Goldman est. by 50bp and revs slightly stronger and raised the low end of its 2023 EPS guidance by $24.85-$25.00 from $24.70-$25.00 (est. $24.83).

·     Axios noted Monthly Medicare premiums covering physician and outpatient care will rise almost 6% next year as part of a series of hikes the Centers for Medicare and Medicaid Services announced. The standard monthly premium for traditional Medicare Part B coverage will be $174.70 in 2024, up from $164.90 this year. The annual deductible for all Part B enrollees will be $240, an increase of $14 from this year’s $226.

·     In MedTech: OM shares slump as reported a Q3 preliminary revenue of $30.4MM, below Street’s $36.0MM and 16% below guidance of flat sequential growth. FY23 guidance was lowered to $130MM from $144-150MM, implying flat sequential growth in Q4.

 

Technology

Internet, Media & Telecom

·     In China Internet: JD extending yesterday losses after Morgan Stanley downgraded to EW from OW citing slower-than-expected consumer demand recovery in China and slashed tgt to $33 from $55; Citi, Daiwa and Jefferies also cut tgts and rev growth forecasts today.

·     In media: NFLX was downgraded from Outperform to Peer Perform at Wolfe Research ahead of earnings next week saying while Netflix should continue to gain share of the global premium video revenue pie, they have rising concern about 2024-25 growth forecasts.

 

Hardware & Software movers:

·     In Comms & Networking: BDC tumbled as guided Q1 revs about $625M vs. est. $685.2M; narrows Q3 EPS view down to $1.75-$1.77 from $1.75-$1.85 (est. $1.82) and cuts Q3 revenue view to $625M from $675M-$690M (est. $685.2M) saying demand to weaken in Q3. CMTL surges as Q4 adj EBITDA $18.9Mm vs est. $13.23Mm on net sales $148.8Mm vs est. $140.13Mm; entered into a definitive agreement with Stellant.

·     In Video games: MSFT $69 billion acquisition of ATVI was finally cleared by UK regulators on Friday after it forced the Xbox owner to sell the steaming rights to games including "Call of Duty" to address its competition concerns.

·     In Internet Security: Barclays upgraded VRNS and downgraded FTNT in Security/Design/Vertical SaaS preview as likes the setups on GEN with better web traffic and analyst day, as well as CYBR on better checks/heightened interest. Barclays said it would watch ALRM and TYL.

 

Semiconductors:

·     In Semi-equipment: AMAT and LRCX were both upgraded to Buy from Hold at Needham saying LRCX looks to be an outperformer in 2024-2025 and expects resilience from AMAT; expects memory WFE to normalize at ~40% of total WFE by 2025. Needham is launching its Wafer Fab Equipment (WFE) model and setting its initial 2023, 2024, and 2025 WFE estimates at $90B, $90B, and $100B respectively. Separately, Deutsche Bank said in Q3 preview, LRCX in large cap and ENTG in mid-cap are fav names in semi equipment into earnings.

·     TSM received an extension to its exemption from US trade sanctions on China, allowing it to continue acquiring advanced chip equipment for its operations there. The Taiwanese chipmaker expects eventually to win permanent US authorization to secure sophisticated machinery for its operations in the world’s largest semiconductor market – Bloomberg reported.

·     SGH Q4 results (EPS $0.35/$316.7M vs. est. $0.45/$375M) and Q1 guidance (EPS loss -$0.16 plus/minus 15c vs. est. $0.40 and revs $250M-$300M below consensus $383.4M) fell short of expectations as sales were down -12.6% y/y for Q4.