Closing Recap

Thursday, September 26, 2024

It was a risk-on morning as US equity futures gained overnight following new headlines on China considering another round of stimulus to recapitalize key commercial banks. Fairly benign economic reports added further early support with GDP, core durable goods and initial jobless claims all slightly better. Weak consumer confidence? Recession coming? Not on investors’ minds today. On sentiment, the AAII bull-bear survey came in at 25.9 this week versus 24.4 last week with both bull and bears slipping a bit, while neutrals gained. Bulls faded from 50.8% to 49.6% and bears dipped from 26.4% to 23.7%. Further, today’s Fear and Greed Index measured 72/100 (greed) versus 65 (greed) a week ago but 43 (fear) a month earlier and 24 (extreme fear) at this time last year. By mid-morning, profit taking had trimmed gains, but breadth remained strong at almost 5:2 favoring advancers. Small caps outperformed with IWM +0.57% versus QQQ +0.37% but fading and SPY +0.33%. S&P sector ETFs were largely to the upside, led by Materials +1.77%. Consumer Discretionary, Real Estate and Energy remained in the red. After Nasdaq futures tested the unchanged level, equities bounced into midday.

In noteworthy data today, better GDP, core durable goods and initial jobless claims once again put recession fears on the back burner, at least for now. These reports offset somewhat weaker consumer confidence earlier in the week. A less discussed, but interesting number to come out of the confidence data is the confidence spread (present minus expectations). This figure typically goes negative during recessions but unfortunately tends to be more coincident. As of the latest data, the spread was 42.6, so definitely not negative but worth watching as it has contracted every month since March. Dipping to negative does not always mean recession, but we haven’t had a recession since the 1970’s without a negative confidence spread (though the spread was slightly late for the party for 2001). On market performance, @DataTrekMB notes the S&P 500 has gained 52% over the past two years, which is one standard deviation above the long-run mean. In past instances, the index rallied by 17% over the next two years.

Heading into the final hour of trading, stocks remained higher with breadth holding slightly better than 2:1, still in favor of advancers. Small caps continued to outperform with IWM +0.6% versus QQQ +0.75% (thank you, Micron) and SPY +0.35%. Utilities (XLU, -0.9%), Real Estate (XLRE, -1.3%) and Energy (XLE, -2%) were the only S&P sector ETFs on the losing side, while Materials (XLB, +2%) and Technology (XLK, +1.35%) led the gainers. Style-wise, both growth and value enjoyed gains with value the outperformer. The Russell 1000 Value gained 0.67% and was led by WOLF, MU, and JBL while its Growth counterpart added 0.17% with JBL, EL and CC as top performers (yes, there is overlap across the portfolios).

• Weekly Jobless Claims fell to 218,000 in latest week from 222,000 prior week and vs. consensus 225,000; the 4-week moving average fell to 224,750 in latest week from 228,250 prior week; continued claims climbed to 1.834M from 1.821M prior week and the Insured Unemployment Rate unchanged at 1.2%.
• U.S. Aug Durables Goods ex-transportation orders +0.5% vs. est. +0.1% and vs July -0.1% (prev -0.2%); Aug Durables ex-defense orders -0.2% vs July +10.3% (prev +10.3%); Aug Machinery orders +0.5%, electrical equipment +1.9%, defense aircraft/parts +8.4%; Durables shipments -0.5% vs July +1.1%; Aug nondefense cap shipments ex-aircraft +0.1%.
• Aug. Pending Home sales climb 0.6% m/m vs. est. up 1%; Pending Home sales fall 4.3% from the previous year.

• WTI crude futures faded overnight and never staged much of a rally despite the China stimulus headlines and benign/positive economic data. The November contract settled down $2.02/bbl, or -2.9%, to $67.67. Brent similarly slipped by $1.86/bbl, or 2.53%, to settle at $71.60. A report in the Financial Times likely was the primary culprit, stating that Saudi Arabia is looking to remove its $100/bbl target and may be looking to raise production to recapture lost market share. Bulls attempted to counter the story’s legitimacy, but ultimately were unsuccessful in moving prices higher.

• In Auto Retail/: used-vehicle retailer KMX posted better-than-expected Q2 sales $7.01B vs. est. $6.83B (but was down -0.9% y/y) but said its Auto Finance (CAF) income was $115.6M, down -14.4% y/y as a higher provision for loan losses outweighed growth in CAF’s average managed receivables (shares of CVNA, COF, SYF weak). KMX shares fell initially on the CAF results, but shares rebounded.

• Softline Retail: Keybanc raised price tgt on ONON to $60 and CROX to $60 from $47 and said DECK, WWW, ONON remain key stock ideas, as they overall feel cautiously optimistic about the Softlines and internet retail sectors. The firm said while sees potential headwinds easing for certain companies, mixed signals in the macro environment suggest a nuanced landscape ahead. DECK stands out as a top pick within its coverage, driven by solid growth and momentum in both HOKA and UGG.
• In Department Stores: JWN was downgraded to Sector Weight from Overweight at Keybanc saying while they maintain a favorable view on JWN’s 2024 key strategic priorities, it thinks the uncertainty around the proposed transaction will remain an overhang on stock price upside; as a result, it downgrades to Sector Weight.
• In Food: HSY downgraded to underperform from hold at Jefferies saying elevated prices and a stretched consumer are finally impacting the US snack category. Chocolate stands out as amongst the most concerning, with buy rates vs 2019 trailing other snacks, wide price gaps vs other snacks getting wider.
• In Restaurants: SBUX upgraded to Outperform from Market Perform and raise tgt to $115 from $92 saying the market has positively reacted to the appointment of Brian Niccol as the new CEO, but the stock’s current valuation does not fully appreciate the earnings power that Starbucks could unlock. YUMC shares jumped as stocks with China exposure seeing strength today on stimulus measures by country.

• In Lodging & Leisure: Lodging REIT rating changes at Wolfe Research downgraded PK to Peer Perform from Outperform, largely driven by its view that the Hawaii recovery story hasn’t come to fruition and could end up being challenged again in 2025. The firm also downgraded RLJ to Peer Perform as well, primarily driven by its shift in preference to resorts and group-focused assets. TNL was downgraded at Barclay’s to Underweight saying they remain cautious on the broader leisure demand travel backdrop and expect further deterioration of Timeshare, while Fed cuts won’t benefit near-term.
• In Cruise lines: Shares of NCLH, RCL, CCL advance after Truist raised tgt prices for NCLH to $25 from $21 and RCL to $204 from $175 saying strong 2025 pricing on the books suggests significant upside to current consensus expectations and said booking for Mediterranean region looks strong for 2025.

• In Utilities: NRG shares advanced after raising its 2024 adjusted core profit forecast to be in the range of $3.5B-$3.7B, above its prior view of $3.3B-$3.6B; CEO said they are "confident in our ability to drive growth and capitalize on the emerging opportunities in our markets"
• In Chemicals: FUL shares weaker after reported Q3 adj EPS $1.13 below consensus $1.23 and revs $918M misses Street est. $944.25M; said volume growth during the quarter was impacted by slowing market demand in certain durable goods markets in EA, and lowers its FY organic revenue view to 0%, vs. prior forecast 0% to +2%. (shares of AXTA, PPG, RPM weak in sympathy early before bouncing). BASFY CEO says no sign of economic pickup in Europe, we don’t forecast slowing down in U.S.
• In Solar: SMA Solar Tech (SMTGY) initiates restructuring and transformation program with target of cost savings of EU150M-EU200M; says sales development in Home Solutions and Commercial & Industrial Solutions continues to be significantly influenced by persistently high inventories at distributors and installers, and challenging market environment.
• In Industrials: CAT positive mention in Barron’s saying the stock has powered higher as the well-oiled company managed through a difficult economic environment. Now, headwinds are turning into tailwinds, and the shares can build on their previous gains. It might feel like an odd time to recommend buying Caterpillar stock Barron’s said.

• In Exchanges: TD Cowen is expanding into its third vertical and 4th sub-sector as ICE are their top picks both rated Buy; followed by NDAQ each rated Hold. While TDCowen is fundamentally constructive on the sector the sharp YTD rallies (mostly ex CME) and wide multiple expansion leave US tactically selective.

• EXAS shares fell after the Centers for Medicare & Medicaid Services (CMS) released payment recommendations for diagnostic tests that Wall Street deemed as unfavorable to the test-makers.
• GEHC was downgraded to Sell and tgt cut to $74 from $84 at UBS saying risks are not priced in. UBS noted shares are up 20% YTD and close to all-time highs, a 5% PE premium to close peer SHL vs their 15% 18- month average discount which the firm said they view as hard to justify given the lower growth outlook.
• PFE said it is voluntarily withdrawing all lots of its sickle cell drug Oxbryta in all markets where it is approved, two years after acquiring its parent company Global Blood Therapeutic in a $5.4 billion deal. Piper said this morning they think this move is generally a positive for AGIO’s mitapivat and VRTXs CasGEVy.
• RHHBY said late-stage trial data for its cancer drug Gazyva/Gazyvaro showed positive results in patients with kidney inflammation; said they aim to bring the potential lupus nephritis treatment–which seeks to prevent or delay progression in end-stage kidney disease–to market as soon as possible (though met only 2 secondary endpoints despite longer duration and only some of others numerically better – AUPH also moved on news)
• SAGE said partner BIIB has terminated a licensing deal for Sage’s experimental drug to treat essential tremor, effective February 2025. Sage had discontinued development of the drug, SAGE-324, after it failed in a mid-stage study in July. Sage says it plans to continue to evaluate other potential indications, if any, for SAGE-324.

• In Services: CNXC shares fell as reported a small shortfall in Q3 EPS ($2.87 vs. the Street $2.92) driven by margins while sales were approximately inline; Q4 guidance is weak, forecasting EPS of $2.90-$3.16 vs. Street $3.50 estimate.
• In Hardware: SONO was double downgraded to underweight from Overweight at Morgan Stanley as believes the top and bottom-line impact of the company’s app redesign is likely greater than the market currently perceives and the firm is 5% below FY25 Street revs and 13% below FY25 Street Adj. EBITDA.
• In IT Services & Consulting: ACN shares rallied following in-line EPS and slight rev beat for Q4, approves $4B of additional share repurchase authority and raises dividend and guided Q1 revs $16.85B-$17.45B vs. consensus $16.94B; posted Q4 new bookings were $20.1B, while generative AI new bookings were $1B (FY25 guide was light)
• In EMS Sector: JBL Q4 profit and revs topped consensus expectations and disclosed up to $200 million in restructuring costs for headcount reductions in its manufacturing units; Q4 EPS $2.30 topped ests $2.22 as revs of $6.96B beat the $6.59B estimate and guided Q1 EPS $1.65-$2.05 a share above ests $1.83 and approved a $1B stock buyback program (the results boosted shares of other EMS names BHE, CLS, FLEX, SANM).