Closing Recap

Tuesday, September 05, 2023

Index	Up/Down	%	Last
DJ Industrials	-195.61	0.56%	34,642
S&P 500	-18.98	0.42%	4,496
Nasdaq	-10.86	0.08%	14,020
Russell 2000	-40.38	2.10%	1,880

 

 

 

 

 

 

 

 

 

U.S. stocks finished low in a low volume, quiet Tuesday trading day as investors returned from the 3-day Labor Day holiday weekend. The top story of the day was the aggressive bounce in Treasury yields and the US dollar after a brief pullback last week. Dow Transports tumbled 2%, led by weakness in airlines after UAL airline issued a nationwide ground stop due to computer issues (which was later lifted) while Smallcaps were also down -2%. Energy stocks paced gains in the market behind another jump in oil on longer than expected production cuts from Saudi Arabia and Russia, boosting oil to best levels in 10-months. Discretionary and Technology also advanced while Industrials, Materials, and Utilities were the worst performers in the S&P 500 Index. There were no major earnings results and only 2^nd tier economic data failing to move the broader stocks market, though weaker China data overnight weighed on commodity/industrial related stocks. Things are expected to pick up next week with a handful of potential catalysts including: The AAPL iPhone event on Tuesday 9/12, CPI on Wednesday 9/13 and both the ECB meeting on Thursday and the expiration of the UAW contract with the Big Three US automakers (GM, Ford, STLA) as strike expectations have continued to ramp higher.

 

Goldman Sachs reduced its probability of a U.S. recession in the next 12 months to 15% from 20%, citing easing inflation and labor market tightness. Meanwhile, Morgan Stanley strategist Mike Wilson out with a new report this weekend saying he continues to recommend a more defensive growth posture in one’s portfolio given that growth fears or financial stress could return at any moment in a late-cycle environment, particularly as it enters September.

 

Economic Data

·     July factory orders fell a smaller-than-expected (-2.1%) vs. est. (-2.5%) and vs June +2.3% as July factory orders ex-transportation +0.8% vs June +0.3% and July factory orders ex-defense -2.2% vs June +3.0%. U.S. July Durables orders unrevised at -5.2%.

·     U.S. July nondurables orders +1.1% vs June +0.4%; U.S. July total manufacturing inventories +0.1% vs June -0.2%; U.S. July inventories/shipments ratio 1.48 months’ worth vs June 1.48 months.

 

Commodities, Currencies and Treasuries

·     Oil prices rise for a 6^th straight day (adding to last week’s 7% advance), with WTI crude +$1.14 or 1.33% to settle at $86.69 per barrel while Brent crude settle at $90.04/bbl, up $1.04, 1.17% after news Saudi and Russia would maintain their supply cuts through December, longer than the market anticipated. Saudi Arabia said it would extend its cut of 1 mln b/d for 3 months until December and Russia said to extend 300k b/d oil export cuts through December, sending Brent crude prices above $90 per barrel for the first time since November 2022. The news offset weaker data out of China and dealt the White House a fresh blow, with tighter supply boosting prices as the SPR remains at its lowest levels since 1983. U.S. natural gas futures fell -6.6% to a one-week low on forecasts for cooler weather and lower gas demand (after 9% gain last week).

·     Gold prices tumbled, falling -$14.50 or 0.7% to settle at $1,952.60 an ounce. Note commodity totals YTD: @charliebilello tweeted: Commodity price changes over the last year: Sugar: +42%, Silver: +37%, Gold: +14%, Copper: +13%, Gasoline: +5%, US CPI: +3.2%, WTI Crude: -2%, Soybeans: -4%, Brent Crude: -4%, Aluminum: -6%, Heating Oil: -13%, Cotton: -13%, Zinc: -22%, Wheat: -27%, Corn: -28%. Coffee: -34%, Nat Gas: -69%.

·     Treasury yields and the dollar surged on Tuesday, with the 10-yr up around 9 bps back to 4.26% and the 2-yr rising 10-bps to 4.97% after a brief pullback last week. The dollar index (DXY) approached 104.80, the best level since March. Economic data was better-than-expected ahead of several Fed speakers for the remainder of the week.

 

 

Macro	Up/Down	Last
WTI Crude	1.14	86.69
Brent	1.04	90.04
Gold	-14.50	1,952.60
EUR/USD	-0.0068	1.0726
JPY/USD	1.27	147.73
10-Year Note	0.089	4.262%

 

 

Sector News Breakdown

Consumer

Autos:

·     Tesla (TSLA) helped keep the Nasdaq higher, rising over 4.5% and topping its 50-day MA resistance higher at $256.15 midday.

·     Auto strike looms: The expiration of the UAW contract with the Big Three US automakers (GM, F, STLA) is set for Thursday 9/14 as strike expectations have continued to ramp higher. Increasing press coverage of strained negotiations between Detroit automakers and United Auto Workers (UAW) union, with many commentators seeing potential for an industrywide, ~150K-worker strike when the current contract expires after 14-Sep. Union seeking a 46% pay raise along with concessions on hours and a restoration of pensions.

·     In automotive retail: CRMT shares slide after saying current Board President Doug Campbell to take over as CEO, effective Oct. 1, succeeding Jeff Williams while noting Q1 EPS declines to $0.65 from $2.07 y/y and provision for credit losses as a percentage of sales rose to 30.9% from 25.9% last year; Q1 total retail unit sales increased 2.4%

 

Consumer Staples & Restaurants:

·     In restaurants: DPZ upgraded raised to outperform at TD Cowen and raise tgt to $450 from $420 saying they are optimistic on the brand’s upcoming turnaround efforts for U.S. delivery sales which gives US confidence to model upside to 2024-2025 same store sales.

·     In Food Sector: new 52-week lows for CAG, GIS, K; In earnings, NOMD said still sees adjusted EPS EU1.54-EU1.57 vs. est. EU1.56, mid-single-digit organic revenue growth, and adjusted Free Cash Flow of approximately EU250 million; in research, LW upgraded from Neutral to Buy at Goldman Sachs as sees recent underperformance providing an attractive entry point, with shares -15% (6/30 through 8/31).

Leisure, Gaming & Lodging:

·     In online travel: ABNB shares jump as will replace NWL in the S&P 500 and Newell Brands will replace UVE in the S&P SmallCap 600. TCOM shares declined despite earnings results topping expectations – Benchmark said this morning they continue to view TCOM as one of the best consumer plays in China in FY23/24.

·     In Leisure & Recreation: MANU shares fell after a report in the Mail that said the Glazer family is going to take the club off the market after failing to receive offers that match their asking price. http://tinyurl.com/25kj64tt; Skiing resort co MTN was upgraded from Hold to Buy at Stifel with $268 tgt noting shares have underperformed through the N.A. offseason (-10% T3M vs S&P +5%) now trading near post-COVID lows – sees a favorable setup heading into F4Q earnings.

·     In Casinos & Gaming: MGM shares declined after report Japan’s Osaka prefecture to postpone casino project opening. WYNN, LVS and others decline, temporarily shuttered overnight on Friday as a precaution due to the Typhoon Saola, which made landfall in the southern Chinese province of Guangdong early on Saturday.

 

Homebuilders, Building Products, Home Furnishing:

·     Homebuilders DHI, BZH, TOL, LEN, MTH, KBH, PHM and others were broadly lower following another spike in both the US dollar and Treasury yields, pushing mortgage rates even higher and making it harder for housing.

·     In Home Improvement retail: LOW was upgraded to Outperform at Bernstein and raised tgt to $282 from $252 saying they believe LOW will continue to deliver modest op margin expansion over the next 24 months, driven by the continued modest gross margin expansion of 5-10bps / year combined with stable to modestly improving OpEx % of sales.

·     Citigroup Citi Card Data showed Hardlines Retail (LOW, HD, TSCO) spending declined -12.2% y/y in August, worse than July’s decline of -9.3% y/y and marked the weakest 1-year growth rate since March 2022. On a 2-year basis, August also came in below July’s trend. By category, the pace of y/y declines worsened in August across the board led by deceleration in household appliances and home furnishings.

 

Energy, Industrials and Materials

·     In Aerospace & Defense: WWD upgraded to Outperform and raising tgt to $160 from $135 at TDCowen saying it stands alone in aero as one of the few catalyst-rich, upward EPS revisions stories left, and is likely to catch a more positive narrative in the next few months; AVAV expected to report earnings after the close tonight.

·     In Utilities: the sector (XLU) among the worst performers in the S&P given today’s spike in Treasury yields, making high dividend paying sectors less attractive; DUK files for potential offering of senior notes due 2033 and senior notes due 2053; WES announced that one of its operating subsidiaries has signed an agreement to acquire Meritage Midstream Services II, LLC in an all-cash transaction for a purchase price of $885 million; 52-week lows for several utility names given the jump in Treasury yields today: D, DTE, AES, AGR, ETR, FE, NEE, OGE

·     In Industrials and transports: EMR’s planned $8.2 billion purchase of NATI was approved by China’s antitrust regulator. In airlines, LUV said it has reached a tentative agreement with the International Brotherhood of Teamsters, the union covering the air carrier’s material specialists. UAL shares slipped mid-afternoon after the airline issued a nationwide ground stop due to computer issues, according to reports.

·     In Chemicals: OLN upgraded from Sector Weight to Overweight at KeyBanc as views recent underperformance unwarranted after announced that CEO Scott Sutton will be departing the Company in 1H24, which resulted in a sharp selloff (-10.4% vs SPX +0.2%). UBS upgraded CTVA from Neutral to Buy and is increasing its 2024/25 EBITDA estimates ~3%/~5% as believes the market is now too negative earnings growth while downgraded FMC to Neutral from Buy and reduce EBITDA ests 6-7% in 2024-2025 saying the speed of June quarter volume declines caught FMC, the industry, and them off guard.

·     In Lithium sector: ALB entered into a non-binding acquisition agreement for pre-production spodumene miner, Liontown Resources (after raising its proposed price to $3.00 from a previously rejected $2.50 per share subject to a few conditions (valued at $4.25B).

 

Financials

Banks, Brokers, Asset Managers:

·     The S&P announced 60 discretionary constituent changes (30 adds / 30 drops) in the 3Q23 rebalance late Friday. Among these changes, BX will be added to 500, ALLY, FNF and MORN will be added to the S&P 400, BXMT and HASI will be added to the 600, CATY will migrate to 600 from 400, LNC will migrate to 600 from 500, and RMAX and UVE will be removed from 600.

·     In Asset Managers/PE: BX shares jumped as will replace LNC in the S&P 500, and Lincoln National will replace QURE in the S&P SmallCap 600. AB was upgraded to Buy at Bank America noting it is the worst-performing asset manager stock over the last three months (-10% vs +10% peers) and its +1STDEV premium valuation deteriorated to -1STDEV discount during 1H23. JEF was added to the Goldman Sachs Conviction List and removed Macy’s (M) as believes JEF is well-positioned to gain share driven by its underappreciated investment in people.

 

Bitcoin, FinTech, Payments:

·     In Buy Now Pay Later: AFRM tgt raised to $25 from $20 at Mizuho as continue to view as one of the most innovative names in the space after recently reported stellar F4Q results and provided FY24 guidance that more than impressed (stock up nearly 30% the next day).

·     In credit cards: MA said it is not raising interchange rates in the US this fall and has no plans to do so; not raising network fees required for the processing of MasterCard transactions this fall. The comments refuted a WSJ story last week (8/30) that had suggested raising credit card fees.

·     In Consumer Finance: AXP upgraded to Outperform at RBC Capital while downgraded SYF and BFH from Outperform to Sector Perform saying while maintains a balanced long-term view for the industry, it sees near-term sentiment risk from the CFPB’s late fee proposal, and some potential sentiment risk from ongoing normalization of credit quality and spending trends. Aligning RBC’s stock preferences to favor the top-of-wallet card players such as AXP and DFS.

 

REITs:

·     Self-managed REITs: DEI downgraded from Overweight to Neutral at Piper which reflects the tough earnings outlook for 2024 and 2025 driven by $2.5b of swaps burning off, Barrington redevelopment (fire safety upgrade), and the planned move-out of Warner Brothers. HPP was upgraded to Overweight at Piper and raised tgt to $9 from $6 based on valuation and the presumed resolution of the Hollywood strike later this year, driving rebound in studio NOI.

·     Residential REITs: EQR was upgraded to overweight at Wells Fargo and downgraded ELS to EW saying they expect EQR to deliver the best results in multifamily over next 12 months and believe earnings risks outweigh ELS as a defensive at current levels.

·     Shopping center REITs: Raymond James downgraded KRG to Market Perform from Strong Buy and downgrading FRT to Outperform from Strong Buy, while upgraded both ROIC and REG to Outperform from Market Perform saying they are cutting AFFO estimates across the sector as all their AFFO estimates are below consensus.

 

Healthcare

Healthcare Services & MedTech movers:

·     Healthcare manufacturing: CTLT upgraded from Hold to Buy at Argus with $62 tgt saying they see several positive developments as the company transitions to a post-COVID environment with a focus on developing and commercializing advanced biologics and gene therapies.

·     Healthcare technology: NXGN rises after Bloomberg reported Thoma Bravo nears a deal for the company and could be announced as soon as this week while noting NextGen had attracted interest from other private equity firms http://tinyurl.com/58pkjyes

·     In ortho sector: SYK was upgraded to Buy w $315 tgt at Bank America saying the co message on margin upside has turned more bullish, but the stock has yet to work given all the negative sentiment on MedTech which they see as an opportunity now ahead of the 2024 upside.

·     In MedTech: AGTI downgraded to Underperform at Bank America and cut tgt to $11 as now sees as low visibility into organic growth in the n-t. Noted AGTI missed the consensus adj EBITDA estimate in Q2 and cut adj EBITDA guidance by 12%, citing lower peak need rentals utilization as well as higher onboarding costs from newer contracts.

·     In Managed care: CNC upgraded from Underperform to Neutral at Bank America saying they no longer see a significant downside case as the company is now trading below 10x 2024E EPS, which is historically a floor for MCO valuations, while the new expectations have been rebased.

 

Technology

Internet, Media & Telecom

·     In Media: Last week, DIS pulled its access to ABC, ESPN, other channels from CHTR after failing to reach an agreement over new carriage terms. This morning, Disney urged customers of CHTR’s Spectrum cable service to consider switching to a live television option from Hulu as the media companies remain at odds over a new distribution deal. (Disney-owned channels have been blacked out on Charter’s service since Thursday). WBD cuts FY 2023 adjusted EBITDA forecast to $10.5B-$11B range from prior $11B-$11.5B citing earnings negatively impacted by strikes while raises FY free-cash flow expectations to at least $5B and expects to exceed $1.7B FCF for Q3.

·     In broadcasting: NXST and FOXA announced that they have reached a comprehensive multi-year agreement renewing the Fox affiliations of 29 Nexstar-owned stations across the United States, including those in six of the country’s top twenty markets. In addition, Fox Corporation has reached agreements to renew the Fox affiliations of 12 stations that have shared services agreements with Nexstar, 11 of which are owned by Mission Broadcasting, Inc.

·     In internet/social media: JPMorgan said it updated its Internet Global Monthly Metrics tracker which captured global data across Apptopia & SimilarWeb. Firm said within Online Ads, PINS stands out for accelerating download growth in August & strong QTD Ad Manager trends; said within E-Commerce, CHWY, which last week pointed to softening macro & a wider range of outcomes in 2H, saw better download growth in August than July, but its overall mobile growth trends are softer 3QTD than in 2Q and within Rides & Food, LYFT saw 3QTD acceleration in Downloads, MAUs, & DAUs vs 2Q growth.

 

Hardware & Software movers:

·     In Software: ORCL was upgraded to Overweight from Equal Weight at Barclays and raised tgt to $150 saying sees a multi-year opportunity for solid growth at high margins driven by an ongoing positive mix effect of better SaaS and OCI outweighing the lower growth parts of the business.

·     In Storage: NTAP upgraded to Positive from Neutral at Susquehanna and raise tgt to $100 from $62 saying Quarterly Product revenue has bottomed (-25% Y/Y in July, -34% from the peak of Apr-22) and is poised to show Q/Q improvement with Y/Y growth resumption by mid-CY24.

·     In 3D sector: DM board of directors unanimously recommends that desktop metal stockholders vote "for" merger proposal with SSYS.

·     In ID Solutions: BRC shares rise after reports Q4 results above analysts’ expectations ($1.04 vs. est. $0.90 on better revs $345.9M vs. $331.8M) and guides FY24 adj EPS $3.85-$4.10 topping the consensus est. $3.84 and approved a $100 million stock buyback program.

 

Semiconductors:

·     Arm Holdings (ARM) set terms for its initial public offering (IPO) in the U.S., looking to raise up to $4.87B and be valued at up to $52.3B; said it is offering 95.5 million ADR’s in the IPO, which is expected to price between $47-$51 per ADS and listed on the Nasdaq under the ticker symbol “ARM.” Each ADS will represent one ordinary share. http://tinyurl.com/28rcpc3v

·     In Semi-equipment: Bernstein revised its CY2023 wafer fab equipment (WFE) model upward to reflect stronger mature-node demand but now expects CY2024 to be flattish YoY. Firm adjusts its company models and maintains Outperform on AMAT, as well as MP on Tokyo Electron, ASML, ASMI – said CY2024 will be however roughly flattish YoY due to soft macro-outlook.

·     Morgan Stanley noted the Semiconductor Industry Association (SIA) July sales numbers were down -12.3% m/m compared to the 10-yr average change of down -7.0% and MSCO’s estimate of down -5.7% citing weaker analog volumes (expected) and weaker memory volumes mostly a function of very back end loaded memory qtrs.

·     STX shares tumbled midday following comments from the Goldman Sachs Tech conference.

·     TSEM shares rose early after INTC said it will offer foundry services to Tower Semiconductor in a new deal that will see the Israeli contract chipmaker invest $300M in Intel’s New Mexico factory.