Mid-Morning Look

Wednesday, December 13, 2023

U.S. stocks maintain their upward trajectory ahead of this afternoons FOMC policy meeting and Fed Chairman Powell’s press conference at 2:30 PM ET. No changes to policy are expected, with rates to hold at 5.25%-5% level while markets await commentary on the economy, and trajectory of future rate moves, with many banking on calls for rate “cuts” in 2024. Inflation data this week has been in-line, to slightly better (CPI yesterday and PPI today), raising the Bulls best case for rate cuts in Spring of 2024. Oil prices hits low of $67.71, their lowest since late June while the CBOE Volatility index (VIX), or fear gauge, hit below $12 Tuesday and ended at 12.07, its lowest close since November 2019. In stock news, Pfizer (PFE) shares tumble 8% after lower earnings and revenue outlook for 2024, semis outperform again as the SOX rises 55% YTD and energy (XLE) lags again on oil prices. The S&P, Dow, and Nasdaq are all at best levels since 2022 heading into the FOMC meeting in what has been a 6-week rally thus far.

Economic Data

·     The Producer Price Index (PPI) for November final demand M/M was unchanged vs. +0.1% expectations (prior was -0.5%) while rising +0.9% Y/Y vs. est. +1% (prior revised to 1.2% from 1.3%). On a core basis, or ex: food/energy, PPI was unchanged as well vs. est. +0.2% and on a Y/Y basis, core rose +2.0% vs. est. +2.2% (prior month revised down to +2.3%).

Sector Movers Today

·     In Insurance: BFH downgraded from Equal Weight to Underweight at Morgan Stanley saying risks to the subprime consumer are being priced into the valuation but notes BFH’s high subprime exposure and private-label tilt, add significant downside to bull/bear skew. In Mortgage Insurance, KBW upgrades RDN to Outperform and reiterate OP ratings on MTG and ACT saying strong residential mortgage credit tends, stable home prices, and stable unemployment should combine to result in losses on the delinquent book coming in below assumptions.

·     In Chemicals: LYB was downgraded to Neutral from Buy at Citigroup and lowered price target to $98 from $105 as sees more balanced risk/reward with weaker polyethylene fundamentals and softer oxyfuels and refining but with potential for 2H’24 upside. Overall, raised price targets on CE, HUN in chemicals saying a sluggish macro picture has pushed the recovery outlook to 2H’24, and prefers to stick with paints and coatings, citing price/cost.

·     In Consumer Finance: COF upgraded from Underweight to Equal Weight at Morgan Stanley saying slowing rate of entry into delinquencies bodes well for lower reserve build and EPS growth in 2024-25. Notes loan losses will continue to rise from here, but at a slower pace than previously feared. ALLY upgraded from Underweight to Equal Weight at MSCO as well noting the Fed no longer hiking rates from here means ALLY’s NIM is likely about to bottom, easing pressure on the company’s EPS into next year.

·     In Household Products: Citigroup said top Buy-rated picks in order are CLX (moved to top pick), CL, STZ, KO, PG, MNST, while downgraded CHD to Sell, and remains sell on KMB, BFB saying after two years of above-average organic sales growth across the group on outsized pricing with limited elasticity impacts, and recovery in GMs in 2023 on moderating commodities, sees a return to historical topline/EPS growth levels in 2024, with a few exceptions.

Stock GAINERS

·     AVGO +2%; extends gains as price target raised to $1250 from $1200 at Bank America following virtual investor meeting w/mgmt saying its AI oppty is strong as its workload complexity changes.

·     CCCC +80%; its experimental therapy, CFT7455, to treat a type of blood cancer was well tolerated and showed promising signs of anti-myeloma activity in phase 1 of its early-to-mid stage study.

·     PLAB +20%; after earnings; Q4 adj EPS $0.60 vs. est. $0.53; Q4 revs rose 8% y/y to $227.5M vs. est. $224M; sees Q1 revenue $217M-$225M vs. est. $220M.

·     TTWO +3%; will be added to the Nasdaq-100 Index and Seagen, Inc. will be removed as part of the annual reconstitution after being acquired by Pfizer.

·     VRTX +4%; said its non-opioid pain drug, VX-548, was successful in reducing nerve pain in patients in a mid-stage trial and says given efficacy of drug, it is working with urgency to advance it in late-stage study; said other late-stage studies of VX-548 in acute pain are on track to read out in Q1.

·     X +4%; after CNBC’s David Faber noted the company’s board to meet today and going over bids more than $40 per share and notes CLF financing to go up to $45/shr bid of X as per Faber on CNBC. http://tinyurl.com/yvwfwnfe

Stock LAGGARDS

·     ENPH -3%; SEDG also lower tracking weakness in European solar stocks such as Meyer Burger (MYRBY) and SMA Solar (SMTGF) as German politicians including Olaf Scholz announced they must make subsidies cuts that will affect the industry.

·     HTZ -3%; downgraded from Outperform to Perform at Oppenheimer as they believe next year will be a transition year and will face several headwinds in 2024.

·     LUV -4%; Q4 outlook for revenue seat miles improved to a drop of up to 10% from its earlier view of down as much as 11%; and expects Q4 unit revenue to improve to the better end of its previous guidance range; raises fuel cost forecast.

·     PFE -8%; said revenue could fall next year, weighed down by a continued slowdown in demand for its Covid-19 vaccine and related products – guided FY24 revs $58.5B-$61.5B below consensus $62.6B and tgts FY24 adj EPS $2.05-$2.25 vs. est. $3.17.

·     TSLA -1%; said it will recall more than two million vehicles (covers some Tesla Models 3, S, X and Y manufactured between 2012 and 2023) over concerns over its Autopilot system.