Closing Recap

Tuesday, September 17, 2024

US equity futures gained overnight and held/extended gains into the open following the release of Retail Sales and Core Retail Sales data that was roughly in-line (slightly above on one and slightly below on the other) and not sufficiently outside expectations to shift views ahead of tomorrow’s Fed decision. Implied probabilities now see a 65% likelihood of a 50bps cut and 35% for a 25bps cut with the September 2025 implied rate down to 2.874%. The market “seems” to be ok with the idea that a 50bps move would be more a function of risk management (not falling behind) than to signal any more meaningful concern with the current health of the economy, while a 25bps cut would invoke a more risk-off reaction as it would put the Fed at risk of falling behind deteriorating employment data, thus having to play catch-up in the future. Early trading remained to the upside with the S&P 500 hitting a new intraday record high, putting it on track for the first record close since mid-July. Early breadth favored advancers by nearly 3:1 as small caps outperformed. IWM was +1.64% versus QQQ +0.78% and SPY +0.60%. On the sector side, Consumer Discretionary, Energy, Industrials and Technology led the gainers while Consumer Staples, Real Estate and Health Care were the only decliners.

In data of note today, @bespokeinvest notes the mega-cap resurgence with five of the six up over 5% in the past week, with only AAPL declining (-2%). Separately, ahead of Fed day, @KobeissiLetter notes while a 50bps cut is favored over a 25bps cut, it doesn’t really matter as futures see the Fed Funds rate dipping to 3% over the next year. In terms of stocks, he notes the S&P 500 typically returns +15% with a year of the first rate cut if there is no recession but drops 15% in the first year if there is a recession. More reason for the market to be eyeing a 50bps cut. On a similar note, @RyanDetrick highlighted the Fed has cut rates with stocks near all-time highs 20 times. The S&P 500 was higher a year later all 20 times. 

Heading into the final hour of trading, stocks had reversed to losses after earlier all-time intraday highs. Breadth had contracted but continued to favor advancers by about 1.2:1 with small caps remaining to the upside. IWM gained 0.80% versus QQQ flat and SPY flat. S&P sector ETF performance also evened out with Energy (XLE, +1.3%) and Consumer Discretionary (XLY, +0.5%) leading the gainers while Health Care (XLV, -1%) and Consumer Staples (XLP, -0.9%) led the decliners. Communications, Utilities and Technology joined the decliners versus gains in the morning. Growth led Value with help from S, APP and CELH while NFE (leaders in Russell 1000 Growth), THC and ACN were the largest laggards on the Russell 1000 Value side.

• August Industrial production climbs 0.8% m/m, topping consensus est. for rise of +0.2% (and vs. July’s (-0.9%), while U.S. Aug motor vehicle assembly rate climbed to 11.03M units/yr from July 9.40M units/year; August capacity utilization use rate 78.0% vs. consensus 77.9% and vs July 77.4%. U.S. Aug industrial output ex cars/parts +0.3% vs July -0.5%.
• July Business Inventories rose +0.4% vs. consensus +0.3% and vs June +0.3% as July inventory/sales ratio 1.37 months’ worth vs June 1.38 months; U.S. July business sales +1.1% vs June unchanged (prev -0.1%).
• September NAHB Housing market index rises to 41 vs. consensus 40 and above prior 39 in August (which was weakest of year); September index of current single-family home sales 45 versus 44 in August (previous 44); September index of home sales over next six months 53 versus 49 in August (previous 49).

• October WTI crude futures finished the overnight flattish but gained early as Core Retail Sales did not disappoint. Despite jitters about how aggressive the Fed may be tomorrow and ongoing demand concerns, crude gained into early afternoon before profit taking ate away some of the upside. The October futures settled +$1.10, or +1.57%, to $71.19/bbl, while Brent enjoyed a similar gain, +$0.95/bbl, or +1.31%, to $73.70. Now all eyes will be on the Fed’s economic commentary tomorrow.
• The U.S. dollar strengthened after falling the last few days to 2024 lows, while Treasury yields also held near yearly lows ahead of tomorrow’s FOMC rate meeting results. Against the Japanese yen, the dollar rose over 1% back above 142 after initially weakening following the retail sales data. The euro was down slightly to $1.112, not far from the year’s high of $1.1201. Fed funds futures show the chance of a 50-basis point rate cut stood at 63%, against 30% a week ago, while the chances of a 25-basis point cut were at 37%. Bitcoin prices jumped over 4% back above $60,000.

• In Online Retail: SHOP was upgraded from Neutral to Buy at Redburn with $99 tgt backed by industrial work around its multi-faceted moat – characterized by scale, high switching costs and an impenetrable three-sided network – alongside attractive structural growth and ability to win additional share.
• In Apparel: CURV was upgraded to Outperform from Market Perform at William Blair saying the shares can effectively double over the next six to 12 months and that last week’s pullback following its secondary offering provided a bigger opportunity to take advantage of the more recent inflection in comp.

• In Autos: in auto retail/dealers, Wedbush noted KMX Auto Finance (CAF) securitization trust data for the month of August reported yesterday indicates a new post-pandemic-lockdown peak of delinquencies plus extensions, and another jump in losses; CVNA was reinstated w/ Buy and $185 PT at Bank America saying thinks the leading seller of used cars Online is well positioned for sustained long-term growth, in a fragmented $800B+ market that is recovering.
• In Cruise lines (CCL, NCLH, RCL, VIK), Susquehanna said checks suggest that global supply and demand for the cruise lines remains favorable, with the recent slew of newbuild orders unlikely to negatively skew the industry’s pricing dynamic for 2025. The firm looks to CCL’s Q3 results later this month for the next read on industry demand into 2025, with CCL’s formal update on FY25 likely a December/Q4 event.

• In Solar: SEDG was downgraded to Underperform at Jefferies and cut tgt to $17 from $27 citing significant headwinds in Europe from persistently high inventory levels and Chinese competition, as well as stiff competition in the U.S., and sees more downside to the stock as estimates are revised lower.
• In Utilities/Power: The Utility sector (XLU remains best performing sector in the S&P this year, rising 25% YTD ahead of widely expected aggressive interest rate cuts by the Fed, which are seen as a positive for high dividend paying sectors as Treasury yields decline making bonds less attractive. GEV shares rose as several analysts raise price tgts and was upgraded to Buy at Bank America (tgt to $300) after the company announced it is adding incremental capacity for Power and is continuing to see robust demand in Electrification. ETR was upgraded to Overweight from Equal Weight at Barclays and raised tgt to $138 from $115 saying the company had several positive regulatory developments this summer but the shares still trade at a discount to peers. AES said it would sell its 30% indirect equity interest in its Ohio subsidiary to Canada’s CDPQ for $546 million.

• In Consumer Finance: RBC Capital said they reviewed monthly card data for August as credit metrics are showing continued easing in y/y increases in key metrics, which aligns with management expectations that card losses have generally peaked. Although overall metrics continue to screen above longer term ranges, they believe the industry is successfully navigating this environment. Meanwhile, the August card balance growth was modest.

• BNTX was upgraded from Hold to Buy at Jefferies and tgt raised to $150 from $96 saying post SMMT’s encouraging (VEGF/PD1) data, the firm thinks BNTX’s VEGF/PDL1 BSAb BNT327 could significantly drive rev drivers for BNTX.
• MRK and Daiichi Sankyo said a Phase 3 study evaluating patritumab deruxtecan in patients with locally advanced or metastatic EGFR-mutated non-small cell lung cancer who received prior EGFR tyrosine kinase inhibitor treatment met its primary endpoint of progression-free survival.
• NVO and other obesity drug makers (LLY, VKTX, etc.) dropped after Senator Bernie Sanders said he received confirmation from major generic pharmaceutical companies that they could sell copycat versions of Novo Nordisk’s diabetes drug Ozempic for less than $100 a month. Novo Nordisk CEO Lars Jorgensen is set to testify before the Senate Committee on Health, Education, Labor and Pensions next week.
• RVNC shares defended at Mizuho noting shares fell as low as ~17% on Monday due to concerns that the Revance/Crown Labs deal might fall apart, as the launch of the tender offer, expected on September 13, 2024, did not occur. Mizuho said they view the missed September 13th deadline as a delay and continue to expect the deal to be completed.
• In Pharmacy, CI disclosed that its subsidiary Express Scripts filed a lawsuit in federal court demanding the Federal Trade Commission retract a July 2024 report which the company claims has false and misleading claims about the pharmacy benefit management (PBM) industry

• In Aerospace & Defense: Morgan Stanley maintained Underweight rating for SPCE and slash tgt to $5 noting commercial flights are on hold until ~2026 and the stock’s YTD slide (down ~85%) reflects the realization that the business model / attractive economics are premised on delivering a new fleet on schedule and at cost. Defense contractor stocks LMT, NOC, GD, RTX slipped, possibly on reports of Ukraine’s allies starting to talk about how the fight against Russia’s invasion might end, raising concerns that these efforts could lead to Kyiv being forced into a premature cease-fire. The FAA said it is proposing to fine Elon Musk’s SpaceX $633,000 for allegedly failing to follow license requirements and not getting approval for changes during two launches in 2023.
• In Steel sector: STLD guides Q3 EPS $1.94-$1.98 vs. est. $2.10; says underlying steel demand remains steady; says Q3 profitability from steel operations expected to be meaningfully lower than sequential Q2 results; NUE guides Q3 adj EPS $1.30-$1.40 vs. est. $1.81; said the largest driver for the expected decrease in earnings in Q3 as compared to Q2 is the decreased earnings of the steel mills segment, due primarily to lower average selling prices.

• In Media & Advertising: SNAP announced an upgraded version of its Spectacles augmented-reality glasses on Tuesday, doubling down on its bet that wearable devices. GCI was upgraded from Sell to Neutral at Citigroup and opens a 90-day positive catalyst watch saying they see three potential positives over the next 12 months: 1) a Google court loss in the DOJ case in Virginia, 2) management has suggested it May sell assets to quickly reduce leverage and 3) in 1H24, Gannett made solid progress slowing the rate of topline declines, which may result I margin expansion if continues.

• MSTR announced a $700M convertible senior notes offering.
• PLTR Reiterate Buy and tgt raised to $50 from $30 at Bank America and added it to its US 1 list saying the upcoming S&P 500 inclusion provides a watershed moment for institutional investors to revisit what they “know” about PLTR. PLTR’s Ontology creates a unique ecosystem to unlock the value of data and automation to enhance decision making.
• APP upgraded to Buy from Neutral at UBS with a price target of $145 (prior $100) citing on improving visibility into med-term rev growth and supportive valuation. The firm said AppLovin’s improved relative return on ad-spend vs. competing channels is rarely seen in the digital ads space and could support 20%-30% software revenue growth from gaming alone.
• In Comm & Networking: VSAT was downgraded to Neutral from Overweight at JP morgan following last week’s news that United Airlines will shift 1000+ mainline aircraft from existing IFC providers (including VSAT) to Starlink. While UAL will only begin trialing Starlink service next year, JPMC assumes ViaSat will lose its direct service aircraft.
• Computer Hardware: HPE was upgraded to Buy from Neutral at Banc America with $24 tgt as views shares as attractive as it sees the oppty for significant cost cuts driven by new CFO Marie Myers, cyclical recovery across servers, storage and particularly networking, revenue and increased cost synergies with the upcoming Juniper acquisition, and High-Performance Compute (HPC) margin recovery from depressed levels. GRMN announced it has received certification of the G5000(R) integrated flight deck for Cessna Citation XLS+ and XLS Gen2 aircraft, building upon the successful G5000 upgrade program for Citation Excel and XLS aircraft.

• Citigroup updated their semiconductor stock ranking table, moving ADI to top pick as believe it has lower downside risk in Autos vs. other analog names given, they have just announced earnings. AVGO and AMD continue to be our top AI picks and remain in the second and third spot respectively. Other Buy-rated names include TXN, MU and MCHP.
• LSCC was upgraded from Hold to Buy at Stifel with $55 tgt after announced the appointment of Dr. Ford Tamer as CEO and to the company’s Board, effective immediately. Given extensive industry experience and an impressive track record of working with and building successful semiconductor/components businesses, Stifel views the appointment positively.