Closing Recap

Friday, September 27, 2024

U.S. stocks were mixed on a “choppy” Friday, as the blue-chip Dow Jones Industrial Average closed at a new record highs, and the Smallcap Russell 2000 outperformed rising as much as 1% as a benign PCE inflation report helped pave the way for the Federal Reserve continue its interest rate easing cycle. The Commerce Department’s report showed that consumer spending increased moderately in August, as the economy remains solid, while inflation pressures continued to abate. Eight out of the 11 S&P 500 sectors were higher, led by a 2% rise in energy stocks (though down on the week), while technology, healthcare and materials saw profit taking. Other top stories today outside of the PCE inflation and solid moves in global stocks included Hurricane Helene hitting western Florida, impacting inland Georgia and parts of South Carolina; Israel intensified attacks against Beirut, with Iran threatening retaliation; markets on track for another winning month (up 10 of last 11) heading into Q4.

Global stock markets were strong again this week, as the U.S. posted its 3^rd straight week of advances following a rough start to the month (fell sharply the first few days, much like August) following a recent dovish shift in rate expectations by the Federal Reserve last week and new stimulus plans announced by China which reinvigorated Asian stock markets. For China, fresh stimulus has raised hopes of a growth revival, fueling the best week for the CSI 300 Index since 2008. Meanwhile the S&P 500 index posted its 42^nd record closing high this week, led by broad-based strength as Industrials, Utilities, Industrials, Consumer Discretionary, and Technology helped overshadow weakness in Energy and Financials. The S&P 500 (SPX) is up more than 20% YTD and is on track for its best yearly performance through September since 1997.

In Asian markets, The Nikkei Index jumped 903 points or 2.32% to settle at 39,829, the Shanghai Index gained 86 points to 2.88% to settle at 3,087, and the Hang Seng Index jumped 707 points or 3.55% to settle at 20,632. Chinese markets clocked their best week in almost 16 years as the mainland’s CSI 300 rallied 15.7% this week, buoyed by several economic stimulus measures by the central bank. The last time the index saw a bigger weekly gain was the week ending Nov. 14, 2008. Hong Kong’s Hang Seng index recorded a weekly gain of 12.75%. Japan’s yen rebounded, climbing over 1% against the dollar as Shigeru Ishiba won the vote for leadership of the nation’s ruling party. In an amazing stat, @bespokeinvest noted “It took only eight trading days for the Shanghai CSI 300 to trade from a 52-week closing low to a 52-week closing high. The fastest the S&P 500 has ever done it was in 38 trading days (1968 and 1982).”

With PCE inflation data behind us, reporting in-line results and a small deceleration from prior month, attention turns to next week: Monday we see both Chinese NBS & Composite PMIs for Sept and the Caixin PMIs along with Japanese Retail Sales for August. Tuesday busier in the U.S. with JOLTS job openings along with ISM Manufacturing. Wednesday is ADP private Payroll, Thursday ISM Services data and Jobless Claims and then the Nonfarm payroll report on Friday.

• University of Michigan surveys of consumers sentiment final Sept 70.1 vs. consensus 69.3 and vs. prelim Sept 69.0 and final Aug 67.9; current conditions index final Sept 63.3 vs prelim Sept 62.9 and final Aug 61.3 while expectations index final Sept 74.4 vs prelim Sept 73.0 and final Aug 72.1
• University of Michigan surveys of consumers 1-year inflation outlook final Sept 2.7% vs prelim 2.7% and final Aug 2.8%; and University of Michigan surveys of consumers 5-year inflation outlook final Sept 3.1% vs prelim 3.1% and final Aug 3.0%

• U.S. natural gas futures jumped about 5% to a 14-week high as Hurricane Helene battered the U.S. Southeast after causing Gulf of Mexico producers to cut output and knocking out power to millions of customers in Florida, Georgia and the Carolinas. On its first day as the front-month, gas futures for November delivery rose 12.9 cents, or 4.7%, from where they traded on Thursday to $2.882 per million British thermal units (mmBtu). That was about 11% from where the less expensive October contract closed when it was still the front-month on Thursday.
• Treasury yields fall, with the 10-yr yield down at 3.75% (off weekly highs above 3.8%) as August PCE report comes in milder than expected, potentially supporting more aggressive rate cuts by the Fed in November and December. The 12-month inflation reading was 2.2%, down from 2.5% in the previous month, but in-line with estimates while personal income increase slowed to 0.2% in August, while forecasters expected an acceleration to 0.4% from July’s 0.3% reading. Note the 10-year UST yield is now down 68bps since June 30 and was ~3.80% as of September 26.
• The U.S. dollar fell as Japan’s yen rebounded, climbing over 1%, bouncing back from earlier losses, after Japan’s former defense minister Shigeru Ishiba won the leadership contest of the country’s ruling Liberal Democratic Party and was set to become its next prime minister. Ishiba is a critic of past monetary stimulus according to Reuters. The dollar fell to 142.50 from 146.49 earlier in the day, its weakest since Sept. 3. Elsewhere, the euro was down 0.13% at $1.1163.

• In Hardlines & Wellness Conviction List: TD Cowen said they prefer ORLY, HD, PLNT as ORLY remains #1 pick as a high-quality compounder that is well positioned to continue DIFM share growth despite a slower backdrop. HD remains #2 as a high-quality way to own the home improvement & housing recovery. PLNT moves into #3 as we are positive on the turnaround & like the risk-reward. RH now #4 with a favorable N-T setup. Price tgt changes for: AAP $40 (from $55), BOOT $185 (from $145), FND $120 (from $100), HD $440 (Prior $420), LOW $270 (Prior $265), ORLY $1,300 (Prior $1,275), RH $380 (Prior $350), TSCO $285 (Prior $270), and WSM $165 (Prior $160).
• In Food & Beverages: Citigroup opened a negative 30-day catalyst watch on PEP (maintained Buy) saying they believe the Q3 earnings release on October 8 could be a negative catalyst for the stock as they forecast an organic sales growth miss, driven by weakness in North America and also expects a guidance cut. CPB was downgraded to Neutral from Buy at DA Davidson saying they see near term volume pressure and minimal price contribution weighing on the top line, while marketing and selling reinvestment constrains margins, and doesn’t see a near in catalyst. For CELH, RothMKM lowered Q3’24 estimates as it now expects the impact of PEP inventory reductions to be at the top end of the range previously given by mgmt ($100M- 120M) and expect promotions to weigh on GM and AEBITDA for the upcoming quarter.

• In Leisure & Lodging: MTN missed quarter (EBITDA -$116MM vs. -$108MM consensus) with guidance below as well (EBTIDA $827-889MM vs. $875MM consensus) though season pass sales did improve. Barclay’s remained Underweight and lowered tgt to $155 saying sees further risk to the downside if weather is worse-than-normal.
• In Autos: VWAGY updated 2024 financial year lower as follows as now expects deliveries to customers to be around 9 million vehicles (2023: 9.24 million vehicles; previous forecast: increase of up to 3%). Volkswagen now expects Group sales revenue to be around 320 billion euros (2023: 322.3 billion euros; previous forecast: increase of up to 5%). Porsche (POAHY) also lowered views as sees after tax earnings to be expected in a range of 2.4B euros to 4.4B euros, below prior forecast for group result after tax was between 3.5B euros and 5.5B euros.

• In Energy: Midstream Sector: After underperformance all week, energy stocks saw a rebound, especially in natural gas E&P producers (AR, CHK, EQT) as nat prices hit 14-week highs amid impact of Hurricane Helene on productions. Citigroup launches coverage of 3 compression stocks (AROC, KGS with buys and USAC at Neutral) with a constructive outlook. Citi expects an already tight compression market to benefit from several ongoing macro tailwinds, most notably increasing natural gas demand over the near-to-medium term.
• In Homebuilders/Building Products: Jefferies was out with analysis on how the recent interest rate cut cycle by the Fed will impact the housing market over the next several years. Jefferies said they think single family new construction will inflect first from lower rates, and see BLD and BLDR as best positioned. For single family repair and remodel, the firm expects a recovery by late Q225/2H25 and favor FBIN and AZEK.
• In Aerospace and Defense: BA and its largest union resumed contract negotiations on Friday. Workers represented by the International Association of Machinists and Aerospace Workers walked off the job at the aerospace giant on Sept. 13 after rejecting a tentative agreement by an overwhelming majority. IONQ said it signed a $54.5M contract with U.S. Air Force Research Lab (AFRL), to be delivered over four years; said focus of partnership is to design, develop, and deliver technology and hardware. RKLB price tgt was raised to $11 from $8 at Keybanc after saying they came away from Investor Meetings with increased visibility/ confidence in RKLB’s ability to scale its business, and it continues to believe it is positioning itself to be an industry leader in both launch services and satellite manufacturing/design.

• BMEA was upgraded to Buy with $54 PT at Truist following clinical hold lift for lead drug BMF-219 in type 2 diabetes (T2D), as the firm believes a key overhang is removed and N-T focus on Phase 2B data readout by YE24.
• BMY won FDA approval for its new Schizophrenia drug Cobenfy, previously known as KarXT. The FDA said, "this drug takes the first new approach to schizophrenia treatment in decades." Rival ABBV is currently testing a drug, emraclidine, which works in a similar fashion. Topline data is expected later this year.
• ESTA shares rise after announced that is has secured FDA market clearance for its Motiva SmoothSilk Ergonomix & Round implants in primary and revision breast augmentation surgeries. Mizuho said it could re-rate 20-25% on a positive outcome to clearing event.
• REGN and SNY both announced that the National Medical Products Administration in China has approved Dupixent as an add-on maintenance treatment for adults with uncontrolled chronic obstructive pulmonary disease characterized by raised blood eosinophils.
• SAVA shares fall as the drugmaker and two of its former executives agreed to pay more than $40 million to settle SEC charges that they made misleading statements about the results of an Alzheimer’s drug trial.
• SMMT was downgraded from Buy to Neutral at Citigroup with $23 tgt (up from $19) noting shares are up 670% and now trading at a $16B market capitalization since May’s the HARMONi-2 headline.
• TVTX announced it was pausing enrollment of the pegtibatinase phase 3 HARMONY study to address manufacturing issues; co says the update is "an admitted setback to the commercial portfolio," with Travere estimating a trial re-launch by 2026 at the earliest.
• XAIR announces $20.6M private placement offering priced at-the-market under Nasdaq rules; private placement offering of 40.4M shares at $0.51 per share; financing strengthens balance sheet and is expected to provide sufficient cash runway through June 2026; enters $11.5M royalty funding agreement
• In CRO Sector: MEDP downgraded to neutral from Buy and cut PT to $350 from $420 at UBS with a view that a confluence of factors (waning biotech funding strength, weak year-to-date bookings growth + cancellations, sluggish hiring, and biopharma M&A pacing) will challenge the company’s ability to achieve double-digit sales growth in 2025.
• Lab Companies DGX and LH got a boost after Congress recently deferred cuts to reimbursement rates from 2025 to 2026. JP Morgan noted this is the fifth one-year delay of PAMA and continues to believe a longer-term solution (SALSA) is required. The one-year delay removes a large overhang for the Labs headed into 2025, saving ~$85M in pure pricing headwinds for DGX and ~$80M for LH in FY25 as per JP Morgan.

• In Online: UDMY was downgraded to Underweight at Morgan Stanley and cut tgt to $7.50 from $10 saying growth deceleration to continue due to weak web traffic and consumer conversion to paid, tighter enterprise budgets, macro & impact to GTM from strategic shift.
• In Internet: Former President Donald Trump called for GOOGL to be criminally prosecuted for what he called the company’s bias toward his election opponent Vice President Kamala Harris in online search results.

• CERT upgraded to Buy from Neutral at UBS with increased conviction that the company is uniquely positioned to drive further adoption of biosimulation in drug development and cross-sell related software, the combination of which should restore double-digit sales growth from current depressed levels.
• HPQ was downgraded to Neutral from Buy at Bank America predicated on the view that any EPS growth will come purely from share buybacks as potential upside from PCs, including AI PCs, should be offset by lower print margins given that company has been "over-earning in printing".

• NVDA shares dipped late day after Bloomberg reported China urges local companies to stay away from Nvidia’s AI chips; Ramping up pressure to use domestic champions like Huawei and Cambricon
• SMCI shares bounce after tumbling yesterday on news the Justice Department probes server maker Super Micro Computer as former employee accused AI server maker of accounting violations. @bespokeinvest tweets: "Since it was added to the S&P 500 on March 18th, $SMCI has declined 60.3%. It is also down over 15% since announcing its 10-1 split on 8/6. That split takes effect on 10/1."