Closing Recap

Monday, October 16, 2023

Index	Up/Down	%	Last
DJ Industrials	313.92	0.93%	33,984
S&P 500	45.85	1.06%	4,373
Nasdaq	160.75	1.20%	13,567
Russell 2000	27.56	1.60%	1,747

 

 

 

 

 

 

 

 

 

US equity futures started mixed early, with modest overnight gains in the S&P 500 and flattish Nasdaq. Both moved more firmly into positive territory following a softer NY Fed Manufacturing report despite rising yields on 10-year US Treasuries. Markets perhaps are enjoying a mini relief rally in recognition of no major escalation in the Israel/Hamas fighting over the weekend, though grumblings from Iran are worth watching. Mid-morning breadth followed indices higher and was 5:2 in favor of advancers. All S&P sector ETFs enjoyed gains, paced to the upside by Materials, Industrials and Financials. Energy and Utilities were early laggards, but still gained by more than 0.6%.

 

In interesting data today, @bespokeinvest points out that outside of ten days in August 2015, the spread between average daily moves in TLT versus SPY has never been greater. Following today’s Empire Manufacturing, @RBAdvisors notes hiring accelerates when profits accelerate, and Empire Manufacturing workweek hours have turned up as profits have begun to trough. Also on the Empire report, @LizAnnSonders further highlights employment popped back into expansion despite the index, new orders, and delivery times in contraction. Lastly @KobeissiLetter reminds us there is no such thing as free money, noting the US government net interest payments climbed 33% in fiscal 2023 versus 2022 while average interest rates on federal debt have climbed from 1.5% to 3.0%.

 

Heading into the final hour of trading, stocks held near highs for the day on the lack of bad news. Breadth improved just slightly beyond the morning’s 5:2 in favor of advancers, while all S&P sector ETFs continued to enjoy gains. Leaders included Consumer Discretionary (XLY, +1.8%), Communications (XLC, +1.65%) and, in a reversal from its lagging position earlier, Utilities (XLU, +1%). Laggards were Energy (XLE, +0.7%) and Healthcare (XLV, +0.8%). Growth and value both saw nice gains, with growth the outperformer. The Russell 1000 Growth was +1.2%, while its Value counterpart gained +0.7%. Small caps reversed recent troubles to outperform today with a gain of +1.6% for IWM into the last hour versus the S&P at about +1.1%.

 

Economic Data

·     New York Empire State current business conditions index -4.6 in October vs. consensus -7.0 and below the +1.9 in September as new orders index -4.2 in October vs +5.1 in September, prices paid index +25.5 in October vs +25.8 in September, state employment index at +3.1 in October vs -2.7 in September and 6-month business conditions index +23.1 in October vs +26.3 in Sept.

 

Commodities

·     December gold futures slipped $7.20/oz, or -0.37%, to $1,934.30 after rising close to $100/oz since Hamas attacked Israel. Gold’s safe-haven status has driven prices higher, but investors seem to be balking at further increases today as the US Dollar and Treasury yields climb and provide potential alternatives. History says geopolitical spikes in gold tend to be followed by a return to pre-event levels once the catalyst dies down, so a weekend without incremental escalation may have generated today’s easing. All eyes will remain on Israel as a safe-haven driver versus Treasuries and earnings/economic drivers in the US over the next few weeks. $2000 for gold could be a tough level.

·     WTI November crude slid -$1.03/bbl, or -1.17%, to settle at $86.66. After holding steady over the weekend, WTI faded as the lack of incremental escalation in the fighting between Israel and Hamas eased fears of imminent supply constraints out of the region. Further, today’s move is just a modest reversal of the sharp gains recognized toward the end of last week. Again, rumblings today from Iran are worth watching but today likely limited the pullback as investors worry about spillover to fighting across the region. Brent similarly eased, settling -$1.24, or -1.36%, to $89.65/bbl. Of course, any easing of hostilities will likely quickly erase the geopolitical premium and much of the recent gains. 

 

 

Macro	Up/Down	Last
WTI Crude	-1.03	86.66
Brent	-1.24	89.65
Gold	-7.20	1,934.30
EUR/USD	0.005	1.0559
JPY/USD	-0.09	149.51
10-Year Note	0.075	4.704%

 

 

Sector News Breakdown

Consumer

Retailers, Consumer Staples & Restaurants:

·     In Consumer Products: CL was upgraded to Buy from Hold at Stifel seeing more upside than downside from current levels driven by modest multiple expansion reflecting estimated 2023 organic sales growth at least at the high-end of 5%-7% targets.

·     In Retail: broad strength in consumer discretionary despite a bounce in Treasury yields; LULU surges after news it will replace ATVI in the S&P 500 after MSFT acquired Activision Blizzard in a transaction completed today, October 13.

·     In Home Retailers: Wayfair (W) was upgraded from Sell to Hold at Loop Capital and lower tgt to $50 from $60) and cutting its margin estimates slightly in 2024 and raising interest expense longer term but thinks this is priced in with the stock -16% MTD. OSTK shares jumped after JAT Capital Mgmt LP and affiliates reported a stake in a Schedule 13D filed with the SEC.

·     In Sporting Goods Stores: VSTO guided FY adj EPS to $3.65-$4.05, below prior $4.50-$5.00 and said it has reached an agreement to sell its sporting products business to Czechoslovak Group A.S. (CSG) in an all-cash deal valued at $1.91B as part of its plan to separate into two entities.

 

Leisure, Gaming & Lodging:

·     MANU shares fell on reports Qatar’s Sheikh Jassim bin Hamad Al Thani is withdrawing his offer to buy soccer club Manchester United (MANU), a person with knowledge of the process told The Associated Press on Saturday. https://tinyurl.com/2zkc4j89

·     In Transports: Dow Transports with a big bounce off 200-day MA 14,820 (100-day MA higher at 15,330 and 50-day MA 15,400) in broad rally (NSC outperform). Rail Cars TRN and GBX both upgraded to Positive at Susquehanna as believes the fundamental backdrop for N.A. railcar into 2024-25 is strengthening, not weakening. Said expects replacement-like new railcar demand and high new car pricing supportive of sharply positive lease.

 

Energy, Industrials and Materials

·     In Solar: MAXN was downgraded from Buy to Neutral at Bank America and slash tgt to $12 from $31 as grows increasingly bearish on resolution with SPWR, margins across residential channels and end market demand. ENPH was downgraded to Market Perform, at BMO Capital and lower tgt to $148 from $175 saying the trough in U.S. residential solar demand appears to be deeper than BMO had anticipated and timing of recovery uncertain.

·     In Oil Services: PTEN upgraded to Buy and WHD downgraded to Underperform at Bank America saying stills think Int’l is better positioned than N.A. in OFS despite an improving rate of change in NAM, it sees INTL structurally better placed to benefit from a durable spending growth cycle. SLB stays top large-cap pick; FTI top mid-cap picks, sees HAL (tgt to $47 from $42) and HP (tgt to $48 from $42) as best positioned in NAM.

·     In Metals & Mining: TECK said steelmaking coal sales were 5.2M tonnes, below guidance of 5.6M-6.0M due to slower than anticipated supply chain recovery following the impacts of B.C. wildfires and the Labor disruption at B.C. ports, and plant challenges. Steel producer NUE upgraded from Underweight to Neutral at JP Morgan with $151 tgt which reflects an expectation that non-res decelerates in 2024 and a slew of new EAF capacity can squeeze metal margins and result in lower highs and higher lows for pricing.

·     In Materials: ALB scrapped its proposed $4.16B takeover of Liontown Resources, scuttled by Australia’s richest person https://tinyurl.com/bdcsknnd . In Paper & Packaging: BCC downgraded to Underperform at Bank America and said ATR, CCK, SEE, WRK are their favorite ideas into quarterly earnings. The average packaging stock is down -10% YTD with a bottom-up decrease in earnings of -10% forecasted for 2023. Bofa forecasts currently call for a 7% decrease in paper/forest earnings and a 12% increase in packaging.

·     In Aerospace & Defense: HUBB will replace OGN in the S&P 500, and S&P SmallCap 600 constituent ONTO will replace Hubbell in the S&P MidCap 400, and Organon & Co will replace Onto Innovation in the S&P SmallCap 600. ERJ was upgraded to Buy at Citigroup saying fundamentals continue to look mixed for Embraer, with good expectations embedded in the executive jets backlog, while the current geopolitical environment possibly boosts defense.

 

Financials

Banks, Brokers, Asset Managers:

·     In Brokers: SCHW reported -44% drop in Q3 profit to $1.13B, but the adj EPS of $0.77 topped the $0.75 estimate saying clients chase higher interest-yielding alternatives, taking cash away from its funds and dragging down its net interest revenue by 24% to $2.24B; overall revs fell -16.3% to $4.606B vs. est. $4.615B while admin fee revs rose 16.9% to $1.224B.

·     Data released by the Federal Reserve on Friday, for the week ending October 4, indicated that total deposit balances were down 0.4% for the nation’s 25 largest domestically chartered banks, but were up 0.6% for the nation’s small banks from the previous week. In 3Q, the 1.1% increase in the deposit balances for the small banks outperformed the 0.1% decrease for the large banks.

·     Monthly credit care NCO/delinquency data: BAC reported charge-offs for September of 2.09% vs. 2.1% in August and Delinquencies reported at 1.3% vs. 1.26% last month. JPM charge-offs for September of 1.6% vs. 1.68% in August and Delinquencies 0.95% vs. 0.9% last month.

·     In insurance: Reuters reported Nelson Peltz’s activist hedge fund Trian Fund Management has built a stake in ALL, one of the insurers struggling to cope with the fallout of natural disasters such as the Maui wildfire in Hawaii, people familiar with the matter said. https://tinyurl.com/3st3x647

·     In Crypto: Bitcoin prices rose as much as 10% to around $30K before paring gains, lifting shares of cryptocurrency and blockchain-related companies (COIN, BITF, HUT, MARA, MSTR, RIOT) on speculation that the US SEC approved an exchange-traded fund that invests directly in the cryptocurrency – Blackrock later said the SEC is still reviewing https://tinyurl.com/bdfe4ujw

·     In Information Services/Rating agencies: Jefferies lowered Q3 estimates for EFX, TRU, FICO with weaker-than-anticipated mortgage volumes the primary driver as believes EFX’s revenues have the potential to miss the low-end of their guidance, while TRU likely nudges investors towards the low-end of its guide. The firm is cautious into 3Q earnings.

·     In REITs: SBRA upgraded and MPW downgraded to Underweight at Wells Fargo in 3Q23 Healthcare REIT Earnings Preview. SBRA upgraded to Equal weight, wrong to in assumption that tenant issues from earlier in the year would persist, d/g MPW to Underweight due to debt concerns, continue to favor WELL. In Towers, CCI downgraded to Sector Perform from Outperform at RBC Capital ahead of earnings, lowering PT to $100 from $125 on macro factors including interest rate expectations and forex rates, as well as the announced restructuring.

 

Healthcare

Biotech & Pharma:

·     Vaccine makers volatile after several headlines: 1) PFE late Friday slashed its FY23 revenue guidance to $58B-$61B from prior $67B-$70B, below estimates $66B and lowers FY adj EPS $1.45-$1.65, from prior $3.25-$3.45 solely due to Covid products (shares opened lower but reversed higher after fresh 52-week lows); 2) shares of German partner BNTX disclosed it currently expects to record a charge of up to EU900M in Q3 as it writes of inventory of COVID-19 vaccine Comirnaty; NVAX and MRNA shares also fell in sympathy.

·     ALDX warned that minutes from a recent FDA meeting indicate that the agency might not approve its new drug application for reproxalap, sending shares tumbling.

·     AMAM ESMO abstracts released which included additional updates from higher dose cohorts from the dose-escalation part of AMAM’s phase I APEX-01 trial with ARX517 in prostate cancer.

·     IDYA announces Phase 2 expansion of darovasertib and crizotinib combination in GNAQ/11 metastatic cutaneous melanoma.

·     MLTX announces the full dataset from its 24-week MIRA clinical trial, establishing the Nanobody Sonelokimab as a highly promising and differentiated therapeutic solution.

·     OMER tumbled after announcing it will discontinue its kidney disease study after its therapy failed to meet main goal in late-stage trial; said narsoplimab drug failed to show statistically significant improvement in reducing elevated levels of protein in urine compared to placebo.

·     PRTA shares jumped on report the company us exploring options including potential sale, Bloomberg reported https://tinyurl.com/2pvdrrn3

 

Healthcare Services & MedTech movers:

·     In Pharmacy Retail: CVS said EVP, CFO and President of Health Services Shawn Guertin will be taking a leave of absence from his role due to unforeseen family health reasons and SVP of Corporate Finance, Tom Cowhey, has been appointed interim CFO; the company also reaffirmed guidance ahead of results. RAD filed for bankruptcy Sunday, as it faces billions of dollars of debt related to opioid lawsuits.

·     In Managed Care: After the close on 10/12, CMS released Medicare Advantage Star score data for the 2024 plan year, which are based on 2022 data and drive 2025 revenue. CVS’s Aetna National PPO (~60% of 2023 MA membership) returned to 4.0 Stars after falling to 3.5 Stars last year. ELV saw 3 of its 4 largest plans drop from 4+ Stars to 3.5, with total membership in 4+ Star plans falling to 34% from 64% last year. UNH had stable Star scores yoy, CI had a notable increase, and CNC had slight declines. Separately, ALHC was upgraded to a Strong Buy at Raymond James and raised price target to $10 (+$1) following the 2024 Star Ratings release.

 

Technology

Hardware & Software movers:

·     Bloomberg reported AAPL’s new iPhone 15 is selling far worse in China than its predecessor, according to separate analyses, reflecting stubbornly weak consumption as well as the rise of rivals like Huawei Technologies Co. Sales of Apple’s flagship device are down 4.5% compared with the iPhone 14 over their first 17 days after release, market tracker Counterpoint Research estimated to Bloomberg. https://tinyurl.com/25eswmd6

·     In Comm & Networking: PCTI reached an agreement to be acquired by APH in an all-cash transaction that values the company at about $139.7 million, with holders to receive $7 per share in cash. https://tinyurl.com/mr2u47fz . CNSL shares jumped after agreeing to be acquired in $3.1B all-cash deal https://tinyurl.com/2a8xv2p9

·     In Software research: MSFT named as highest conviction large-cap stock into year-end at Piper citing into year-end based on 1) first-mover advantage in generative AI, 2) accelerating growth prospects for the December quarter on a non-cloud recovery, 3) M365 Copilot GA release catalyst on November 1, 4) Microsoft Ignite user conference catalyst on November 15-17.

·     Cybersecurity software: CHKP upgraded to Equal weight with a $144 tgt at Morgan Stanley as thinks consensus estimates are now achievable, while valuation is undemanding at 14X CY25 EPS and said checks indicate more stable demand and market share trends.