Closing Recap

Friday, September 01, 2023

Index	Up/Down	%	Last
DJ Industrials	116.56	0.34%	34,838
S&P 500	8.11	0.18%	4,515
Nasdaq	-3.15	0.02%	14,031
Russell 2000	21.15	1.11%	1,920

 

 

 

 

 

 

 

 

 

U.S. stocks were choppy on Friday, giving back early gains as stocks finish mixed into the 3-day Labor Day holiday weekend. Volumes were light on this final Friday of the summer while Treasury yields surged following economic data. The 30-year yield rose 8 bps on the day to 4.285% and the 10-year reversed off lows of 4.06% following a mixed jobs report to highs around 4.2% midday, as stocks fell led by growth and interest sensitive names. A case could be made that the rise in unemployment, increase of labor market participation and slowing wage growth could lessen chances of any further rate hikes by the Fed this year and push the dollar and yields lower. That view held true initially after the jobs report, but quickly reversed. The Nasdaq fell off highs of 14,140 to around 14K despite better earnings in the software and hardware sector overnight (DELL, S, ESTC, IOT, MDB). Media stocks were a standout to the downside as Disney and Charter dispute spills over to TVs as ESPN, ABC go dark ahead of college football season start on price concerns, carrying over to other media players PARA, FOX, CMCSA, WBD. Note there were 597,000 new entrants in the labor market – people looking for work for the first time – and the highest level since October 2019. Savings have run out and credit cards are maxed out (reminder over $1 trillion in credit card balances as of last month, highest on record). US Average hourly earnings increased 4.29% YoY in August, the slowest growth rate since July 2021. For the week, the S&P rose 2.47%, the Dow added 1.43%, the Nasdaq gained 3.22%.

 

Economic Data

·     Better headline jobs data, but revisions lower, wages slip, and unemployment rises. August Nonfarm payrolls rose +187,000 vs. consensus +170,000 while July revised down to +157,000 from +187,000), and June +105,000 from +185,000). U.S. August private sector jobs +179,000 (cons +150,000) – headline better but revisions to downside. US August Unemployment rate rises to 3.8% vs 3.5%. The Labor Participation rate was 62.8%, higher than the 62.6% pre-covid.

·     U.S. August average hourly earnings +4.3% from year earlier vs. consensus +4.4%, U.S. August average hourly earnings all private workers +0.2% from prior month (cons +0.3%).

·     ISM U.S. manufacturing activity index 47.6 in August above consensus 47.0 and 46.4 in July while the prices paid index 48.4 in August was above 42.6 in July, new orders index 46.8 in August vs 47.3 in July and the employment index 48.5 in August vs 44.4 in July.

·     S&P global august final manufacturing PMI at 47.9 (vs flash 47.0)

·     July construction spending rose +0.7% topping the consensus +0.5% to $1.973 trln, vs June +0.6% (prev +0.5%); US July private construction spending +1.0%, public spending -0.4%.

 

Commodities

·     U.S. WTI crude oil futures settle at $85.55 per barrel, rising $1.92, or 2.30% to its best levels since last November driven higher by tight supply expectations after inventory data this week. Oil prices snapped a two-week losing streak. Brent Crude futures settled at $88.55/bbl, up $1.72, 1.98%. Saudi Arabia is widely expected to extend a voluntary 1 million barrel per day (bpd) oil production cut into October, prolonging supply curbs engineered by OPEC+. For the week, WTI crude advanced over 7% while crude oil prices are quietly up 30% in 2 months. Gold prices edged higher $1.20 to $1,967.10 an ounce; prices pared gains as the dollar rebounded +0.6%.

 

Currencies & Treasuries

·     Treasury yields end higher to end the day, mixed on the week. After a sharp drop to lows of 4.06% after the payroll data, markets saw a big reversal in yields as the 10-yr moved to highs above 4.2% briefly; the 2-yr yield flat at 4.866% (off lows – still down 19 bps for the week). Federal Reserve Bank of Cleveland President Loretta Mester said inflation remains too high despite recent improvements, and the labor market is still strong. Some of the bond losses are attributed to unwinding of the month-end bid that helped boost the market yesterday. There is some set up ahead of an expected heavy corporate issuance calendar next week.

 

 

Macro	Up/Down	Last
WTI Crude	1.92	85.55
Brent	1.72	88.55
Gold	1.10	1,967.10
EUR/USD	-0.0065	1.0776
JPY/USD	0.62	146.15
10-Year Note	0.082	4.173%

 

 

Sector News Breakdown

Consumer

Autos:

·     Regarding the UAW strike update, Deutsche Bank noted that UAW President Shawn Fain provided an update about the union’s negotiations with the D3 automakers via live stream last night stating that GM and STLA have not made any economic counteroffers to the UAW demands despite the UAW submitting the demands over 4 weeks ago. With only 14 days until the current contract expiration, this reinforces the likelihood of a labor strike.

·     In EV: TSLA announced a revamped version of its cheaper Model 3 comes with a longer range but also a higher price, up about 12% to around $36,000. Tesla also slashed prices on its expensive Model S and Model X cars, which start at about $100,000.

·     In Chinese Autos: XPEV recorded monthly deliveries of 13,690 Smart EVs, a 24% increase over the prior month and a 43% increase y/y. LI delivered 34,914 vehicles in August, up 663.8% y/y, with monthly deliveries for each of the three Li L series models exceeding 10,000 vehicles. NIO delivered 19,329 vehicles in August, representing an increase of 81% y/y.

·     In European Autos: Volkswagen (VWAGY) was downgraded to Sell from Neutral at UBS and lower tgt as believes VW is the OEM globally most negatively exposed to the rise of Chinese carmakers – as the former #1 OEM in China it is potentially on a path to marginalization and as #1 in Europe it is likely to be most impacted longer-term by highly competitive Chinese EVs. BS also downgraded Renault (RNLSY) to Sell from Neutral saying most indicators are no longer improving.

 

Retail, Consumer Staples & Restaurants:

·     In Apparel & Accessories: LULU Q2 beat on revenue, GM%, operating margin% and EPS, and raised FY23 top- and bottom-line outlook again – beat high end of rev guidance by 2% and high end of EPS guidance by 7% as traffic up >20% in stores and online; DD gains in all categories; while growth slowed q/q, it remained very strong y/y with revenue +18% (vs. guidance +15-16%). OXM reported mixed Q2 results but cuts FY24 adjusted EPS view to $10.30-$10.60 from $10.80-11.20 (est. $10.78) and lowers FY24 revenue view to $1.57B-$1.6B from $1.59B-$1.63B.

·     In Restaurants: PZZA was upgraded to Outperform at Wedbush and raised tgt to $95 from $80 saying the stock is too cheap for >7% system sales growth as checks point to Q3 N.A. SSS growth trending above consensus and says Q2’s International SSS growth likely a trough; QSR announces new $1.0B share repurchase authorization.

·     In the food sector: shares of Kellogg (K), CAG, CPB, GIS, KHC hit 52-week lows today as the consumer staples sector broadly underperformed.

·     In tobacco: BTI was downgraded to Hold from Buy at Argus with no price target saying while mgmt expects global tobacco volume to be down 2% in 2024, the stock has outperformed relative to the broader index and the Consumer Staples ETF (IYK) over the past three months.

·     In Services: ARMK was upgraded from Neutral to Buy at Citigroup saying Q3 ex-pricing organic growth of 8.5% is consistent with strong underlying fundamentals, and even as Uniforms’ organic growth appears to be undershooting its potential, Uniforms’ margin 15bps ahead of 2019 levels.

Leisure, Gaming & Lodging:

·     In Casinos: Macau says August gambling revenue up 686.4% from a year earlier to 17.2 bln patacas; against a soft comparable to last year when travel restrictions were in place due to COVID outbreaks in some regions. The monthly gross gaming revenue tally was also 3.3% higher from the level seen in July (WYNN, MGM, MLCO).

·     In the RV sector: Citigroup initiated recreational vehicle retailer CWH with a buy recommendation and named the company as its top pick within the industry.

·     In gun space (RGR, SWBI): U.S. unadjusted criminal background checks rose 6.4% to 2.14 million in August, according to data from the FBI’s National Instant Criminal Background Check System (NICS). Compared to a year earlier, background checks decreased 15% from 2.52 million.

 

Energy, Industrials and Materials

·     In Metals: precious metals and miners saw early strength following mixed jobs data monthly report, which raised expectations the Fed rate hike cycle may have concluded for now (AEM, AUY, NEM, GOLD rises early); VALE was upgrade to overweight at JPMorgan noting it has de-rated as it is down 27.2% YTD and valuations are now at 4.2x 2024E EV/EBITDA from a peak of 5.9x in early Feb/23 and as China overproduces steel, it overconsumes iron ore.

·     In the lithium sector: Piper updated models for lithium companies ALB, LTHM, LAC saying lithium prices have been declining throughout much of 3Q23 and Piper anticipates the average 4Q23 price may be below 3Q. Piper further expects that because of challenging economic conditions in key EV buying regions, build growth rates may be slightly slower than it had anticipated.

·     In Chemicals: OLN shares tumbled after announced a mutual agreement that Scott Sutton will step down as President, Chief Executive Officer, and Chairman of the Board in the first half of 2024. Recall shares weak yesterday after caustic soda prices fell $45/ton m/m in August, following the $50/ton decline in June, citing CMA monthly data.

 

Financials

Banks, Brokers, Asset Managers:

·     In brokerage: HOOD said today it has entered a share repurchase agreement with the United States to buy back the stock that Sam Bankman-Fried owned for $605.7 million.

·     In Crypto: Crypto sector extended weakness, giving back all the recent gains as the SEC delayed key bitcoin ETF decisions that were expected on Friday, damping traders’ hopes of a long-term recovery. Bitcoin fell under $26,000, while broad crypto dropped as well.

 

Healthcare

Biotech & Pharma:

·     AMGN reached a settlement with the FTC that will allow the company to move forward with its takeover of HZNP after accepting a binding deal that the combined company will bundle together some of its drugs (the news help lift other M&A deals in FTC review like PFE).

·     ME said it received FDA 510(k) clearance to report an additional 41 genetic variants in the BRCA1 and BRCA2 genes that increase risk for breast, ovarian, prostate, and pancreatic cancer.

·     Cannabis companies rise a third day, extending a recent surge on hopes of U.S. legalization of marijuana after the Department of Health and Human Services (HHS) Wednesday recommended easing restrictions on marijuana following a review request from the Biden Administration. U.S.-listed shares of Canadian cannabis firms CRON, CGC, TLRY as well as GTBIF, CURLF, CRLBF rose.

 

Healthcare Services & MedTech movers:

·     Managed Care sector: shares of UNH, CI, ELV, HUM were sharply lower yesterday, leading the Healthcare sector down. Bank America noted that a relatively misleading (in their view) press release from NY may have pressured MCO stocks, talking about lowering Affordable Care Act (ACA) insurer rate increase request by 40%-50% and limiting insurer margin ‘provisions’ to 1.0%. These headlines sound extreme, but individual rates are still up 12.4% (vs 22.1% proposal) and small group rates are up 7.4% (vs 15.3% request), and big reductions in proposed rates have been part of normal course operations since the ACA was implemented. The firm said they view the rates in NY as normal course, if not emblematic that rates should be solid/higher for 2024.

·     In Pharmacy retail: Dow Jones Industrial component WBA said CEO Rosalind Brewer stepped down and named Lead Independent Director Ginger Graham as interim; also sees 2023 adjusted EPS to be at or near low end of range.

 

Technology

Internet, Media & Telecom

·     In Media: ESPN and ABC’s local stations were pulled from CHTR as the two companies failed to strike a new carriage deal; Charter serves more than 32 million customers in 41 states through its Spectrum brand, according to its website. It said on Friday that Disney has "not seriously engaged" on its partnership proposal – shares of other media co’s PARA, FOX, WBD tumbled.

 

Hardware & Software movers:

·     In Database Software: MDB delivered a beat-and-raise, as Q2 revenue beat consensus by 8%, led by more multi-year Enterprise Advanced and licensing deals than expected EPS of $0.93 easily topped consensus $0.46 on better non-GAAP operating margin of 19% (est. 10%), and with Atlas revenue growth of 38% was down from 40% growth last quarter. PD shares fell as guided Q3 EPS below views 13c-14c vs. est. 15c) but mid-point of revs above views after Q2 beat.

·     In Application Software: ESTC posted a ~3% top-line beat mostly driven by Self-managed outperformance while SaaS revenue was meaningfully better than feared, increasing ~$8.8M sequentially after only increasing $1.6M Q/Q last quarter and raised FY24 EPS/revs guidance. IOT reported a strong 2Q with 43% rev growth, a 6% beat while hitting FCF+ and FY/24 guidance was raised across the board.

·     In Cloud Computing: APPF upgraded to Buy at Davidson and raised tgt to $230 as believes holds a competitive edge in the user-friendliness of its software, multiple growth drivers from both expansion amongst existing clients and market penetration. HCP delivered modest beats on the top/bottom line as continued to see macro headwinds impact its ability to land new customers and expand/cross-sell within existing accounts—driving NRR down further to 124% in 2Q.

·     In Internet Security Software: Sentinel One (S) Q2 ARR beat by 1% and EBIT margin beat by 13pts while FY24 ARR growth guide raised to "high 30s%" from "mid 30s%" previously and EBIT margins raised by 2pts as mgmt noted stable macro and competitive trends compared to last quarter.

·     In IT Services and Consulting: NTNX reported a strong F4Q and beat all the guided metrics as ACV billings continued to benefit from strong renewals (saw some pull-in of renewals from F24 into F23) and announced $350M share repurchase program. The company signed several larger, multi-million-dollar deals during the quarter despite relatively soft macro.

·     In PC/Hardware: DELL shares surged after posted a solid beat at both ISG and CSG as overall results were better than rival HPQ earlier this week. In addition to building strength through the qtr in both PCs and Servers, Dell disclosed they had ~$2B in AI Server orders in backlog as AI servers increased to 20% of orders in H1:24.

 

Semiconductors:

·     AVGO reported in-line JulQ and guided in-line OctQ to $9.27B, slightly below the consensus of $9.28B, up 4% q/q; said networking/AI remain strong with a $1B AI tailwind and accelerating into F24E; AI/ML is tracking to ~15% of Semi revenue in FY23 and management is projecting it to exceed 25% in FY24, in line to slightly better than prior expectations.

·     Samsung shares rose after a media report said Samsung Electronics has signed deals to supply high bandwidth memory 3 products to NVDA as early as next month https://tinyurl.com/y7cdf2v4