Closing Recap

Thursday, August 03, 2023

Index	Up/Down	%	Last
DJ Industrials	-67.42	0.19%	35,215
S&P 500	-11.66	0.26%	4,501
Nasdaq	-13.73	0.10%	13,959
Russell 2000	-5.12	0.26%	1,961

 

 

 

 

 

 

 

 

 

U.S. stocks slipped in the final hour of trading after spending the early part of the afternoon swinging between small gains and losses, partially rebounding after yesterdays sharp declines. Investors expressed caution early ahead of key earnings tonight (AAPL, AMZN, AMGN, ABNB, SQ, COIN) and tomorrows’ July non-farm payroll report (after strong ADP yesterday). Treasury yields climb again, with the 10-yr near 4.2% after another round of strong economic data. REITs were the top sector decliner in S&P (down over 2%), followed by Utilities (-1.5%) as interest rate sectors being hit as yields moved higher; homebuilders (XHB, ITB) also lower on rising yields. Energy was the big sector winner in the S&P behind a bounce oil prices/offsetting weak earnings (COP, OXY).

 

Two Wall Street powerhouses out in reaction to the recent AAA rating cut by Fitch of the US and actions in bond market with: 1) Warren Buffet said last night “Berkshire bought $10B in U.S. Treasury’s last Monday. We bought $10B in U.S. Treasury’s this Monday and the only question for next Monday is whether we will buy $10B in 3-month or 6-month” in his response to CNBC after the Fitch downgrade of U.S. yesterday. 2) On the other side, Bill Ackman said we’re shorting 30y UST’s; I’d be surprised if we don’t find ourselves with persistent global inflation of ~3% which would put the 30y rate of 5.5% and could happen soon; cited larger deficits and higher refinancing rates; also partially buying as a hedge against the impact of higher long rate rates on stocks https://tinyurl.com/2hj5dk9k

 

Earnings season has been good, or has it? Note roughly 77% of S&P 500 firms have beaten Q2 consensus EPS estimates thus far while only 59% of firms have beaten revenue expectations, the lowest level in 3 years. EPS beats at the median are 4.5% above expectations and 6.3% on aggregate, while sales have surprised by 1.6% on aggregate. The guidance has disappointed in many cases and several companies have noted lower margins, but overall, stocks have held up relatively well, staying near 52-week lows after Q2 and despite yields rising and rate hike expectations remaining given good data.

 

Overseas. Asian equities finished mostly lower on Thursday as the Nikkei and Hang Seng extended losses, mainland China stocks closed higher, and Taiwan was closed due to a typhoon. In central bank news, the Bank of England hiked rates for the 14th time, 25 bps increase to 5.25% – their highest rate since 2008. Tomorrow in the US, monthly nonfarm payroll data expected at 8:30 AM (est. +200K nonfarm, +179K private and +5K manufacturing) while unemployment expected to dip to +0.3%.

 

Economic Data

·     Weekly Jobless Claims rose to 227K from 221K in the latest week (est. 227K) as the 4-week moving average fell to 228,250 from 233,750 prior and continued claims rose to 1.700M from 1.679M prior (in-line with ests.) and the insured unemployment rate unchanged at 1.1%.

·     U.S. Q2 non-farm productivity rose +3.7%, topping consensus +2.0% and compared to Q1 (-1.2%) while Q2 non-farm unit labor costs rose +1.6% vs. consensus +2.6% and vs Q1 +3.3%.

·     S&P Global July composite PMI at 52 vs 53.2 prior; S&P Global July final services PMI at 52.3 (vs flash 52.4).

·     ISM non-manufacturing sector for July shows PMI 52.7 in July vs. consensus 53.0 and vs 53.9 in June as business activity index 57.1 in July vs 59.2 in June, prices paid index 56.8 in July vs 54.1 in June, new orders index 55.0 in July vs 55.5 in June and employment index 50.7 in July vs 53.1.

·     Factory orders rose +2.3%, in-line with consensus and best since June 2021 and way above May +0.4% but factory orders ex-defense +3.0% vs May +0.9%; June Durables orders final revised to +4.6% from +4.7% and June nondurables orders +0.1% vs May -1.1%.

·     China’s Caixin services PMI rose stronger than expected in July to 54.1 vs. est. 52.4 and prior 53.9. It’s the second time the Caixin Services PMI bucked the downward trend in the official non-manufacturing PMI since March.

·     The Bank of England (BOE) hiked rates for the 14th time, 25 bps increase to 5.25%, highest rate since 2008.

 

Commodities

·     Oil prices jumped $2.06 or 2.59% to settle at $81.55 per barrel, building on yesterday big weekly inventory drawdowns reported by the API and EIA and getting another boost earlier this morning after Saudi Arabia said it is extending its oil production cut, sending crude prices higher in a move that threatens to add fresh fuel to inflation. The Ministry of Energy reported that Saudi Arabia will extend the voluntary cut of one million barrels per day for another month to include September that can be extended or extended and deepened. Natural Gas Rose 3.55% to Settle at $2.5650. Gold prices dropped -$6.20 to settle at $1,968.80 an ounce.

 

Currencies & Treasuries

·     The U.S. dollar index (DXY) touched a four-week peak above 102.80 against major peers after upbeat labor market data a day Wednesday (ADP) and ahead of tomorrow nonfarm payrolls but gave back gains later in the day as stocks rebounded (fell below 102.45). Sterling recovered from its initial weakness after the Bank of England downshifted to a smaller 25 basis point hike. The safe-haven yen active after the Bank of Japan came into the market for the second time this week to slow gains in benchmark sovereign bond yields. The euro turned higher at midday.

·     Treasury yields jumped early, extended yesterday’s rally, and finished near the highs, especially on the long end of the curve into the monthly payroll data tomorrow. The benchmark 10-year yield jumped over 10-bps to highs around 4.19%, its best level since November.

 

 

Macro	Up/Down	Last
WTI Crude	2.06	81.55
Brent	1.94	85.14
Gold	-6.20	1,968.80
EUR/USD	0.0004	1.0940
JPY/USD	-0.70	142.61
10-Year Note	0.117	4.195%

 

 

Sector News Breakdown

Consumer

Autos:

·     BLDP announced the signing of a letter of intent with Ford Trucks (F) to supply a fuel cell system as part of the development of a hydrogen fuel cell powered vehicle prototype.

·     QS shares plunge after launching a $300 million stock offering.

·     Bloomberg reports TSLA’s Shanghai plant delivered 64,285 cars last month, a 31.4% drop from June, according to preliminary data published by China’s Passenger Car Association on Thursday.

·     Tire company GT shares fell after earnings results.

 

Consumer Staples & Restaurants:

·     In Consumer Products: CLX reported Q2 profit and sales well above expectations and called for higher earnings and revenue for the year as well citing a “favorable” price mix, which “more than offset” lower volumes – guided FY adj EPS $5.60-5.90 vs est. $5.63.

·     In Food & Beverage: Kellogg (K) posted Q2 profit beat but sales $4.04B slightly below the $4.06B estimate while North America cereal sales rose 1.8% from last year, while snacks sales increased 4.3% and frozen sales were up 3.0%. OTLY and AMZN expand their relationship to meet growing demand for plant-based drinks across Europe. BUD profit fell in Q2 as higher costs and operating expenses outweighed an increase in sales but was in-line with estimates.

·     In Restaurants: PZZA Q2 EPS fell y/y, but in-line with ests as saw lower-than-anticipated comparable sales in the quarter and cited a "challenging operating environment." DIN mixed Q2 results as EPS beat but revs miss and said Applebee’s Q2 comp store sales declined (-1%); WING upgraded from Hold to Buy at Benchmark with $200 PT following solid 2Q23 results that were reported on August 2nd.

Retailers:

·     Online retail: SHOP Q2 results above consensus as adj EPS $0.14 tops est. $0.05 and Q2 revs $1.69B vs. est. $1.62B; Q3 gross merchandise vol (GMV) $55B vs. est. $53.43B; said expects Q3 gross margin will be 2 to 3 percentage points above the 49.3% recorded in Q2.

·     In Clubs: COST July same-store sales rose 2.5% compared with a year prior, after having declined for two consecutive months, falling 1.4% in June and 0.3% in May; net sales also improved in July, up 4.5% year over year to $17.6 billion, better than June’s 0.4% increase and May’s 1.2% rise.

·     In toy retail: HAS cut its 2023 revenue forecast to a decline 3% to 6%, compared with its previous outlook of a low-single-digit decline, as entertainment segment revenue is expected decline between 25% and 30%; said it would sell its eOne film and TV studio to Lionsgate Entertainment for about $500 million as part of its efforts to focus on more profitable brands.

·     In Footwear: BOOT reported healthy sales upside on much better GM and operating leverage, flowing through to a sizeable EPS beat and guide was raised effectively by the 1Q upside; SHOO reported mostly in-line Q2 results and reaffirmed guidance.

·     In specialty retail: SBH total comps missed by ~250bps due to a big miss in the BSG segment (~400bps miss) while FY guidance still being maintained; COOK reported a top- and bottom-line beat as better revenue across all three segments flowed through at better GM (first YoY expansion since 3Q20).

·     In retail research: ROST upgraded to Outperform at TD Cowen and raised tgt to $128 from $113 as sees a beat and raise, and see estimates being revised higher and valuation multiples following suit. TD Cowen downgraded COLM to Market Perform saying they see risk to consensus ests into ’24 and tgt cut to $83 from $94.

 

Leisure, Gaming & Lodging:

·     In Online Travel: EXPE shares tumble on mixed results as adj EPS of $2.89 tops consensus of $2.35 but revs grew 5.6% to $3.35B missing the $3.37B est., booked hotel room nights rose 8.7% to 89.7M but below consensus of 90.5M and gross bookings of $27.32B missed ests. $28.22B. TRIP slides after results last night in sector while SABR rises after results; BKNG reports tonight.

·     In Food delivery: DASH reported a slightly bigger Q2 EPS loss than expected, but sales beat estimates, and the company said it would keep investing in new businesses.

·     In Casino: MGM reported revenue of $3.9B, beating consensus by 3% as exceeded revenue across its three segments, highlighted by Macau 7% above expectations, and LV/regional +2%, but shares fell as margins declined 244 bps on a same-store basis.

·     In Leisure: gym owner PLNT posted better-than-expected earnings, which was offset by lowered guidance (FY23 revenue view to up 12% from up 13%-14%).

·     In Lodging: While PK delivered essentially in-line 2Q results (against a backdrop of reduced expectations), HST came in a bit light across the board as both companies made modest downward revisions to full year guidance on RevPAR, margins, and EBITDA. Hyatt (H) said it sees FY RevPAR +14% to +16%, vs. prior +12% to +16% after mixed Q2 (EPS miss/rev beat).

 

Homebuilders, Building Products, Home Furnishing:

·     In Home Furnishing: Wayfair (W) big profit beat and 2Q revs ahead with total net revs -3.4% y/y with US -40bps and Int’l -18% ex-FX while say they have returned to positive y/y order growth.

·     In Home Services: ZG reported strong 2Q23 results, beating both top- and bottom-line estimates, but guidance for 3Q23 was softer than expected for both revenue and adjusted EBITDA as industry uncertainty persists into 2H23.

 

Energy

·     In Oil majors: mixed results as OXY Q2 adj EPS $0.68 missed the est. $0.71 on lower energy prices and crude oil volumes; COP Q2 profit and revenue missed expectations as prices tumbled, while production reached record levels and the full-year outlook was raised; APA a bright spot as Q2 adj EPS $0.85 and revs $1.96B top est. $0.75/$1.71B and said on track to deliver total adjusted oil production growth of more than 10% for the year; MRO Q2 profit and revs fell as expenses rose.

·     In Solar: RUN missed revenue expectations for Q2 but delivered a surprise profit of $0.25 vs. est. loss (-$0.26) saying they are seeing a tremendous acceleration in storage attachment rates on new sales. The better results come after a bad Q2 for solar in general, with shares of ENPH, SPWR, SEDG all falling in the past week on miss/lower guides.

 

Financials

·     In Brokers: HOOD shares fell after mixed as results as company reported a surprise profit and rising revs ($486M vs. $318M y/y) but posted declining transaction sales and monthly active users, as monthly active users fell by 1 million from the prior quarter, to 10.8 million.

·     In FinTech: PYPL reported earnings beat and in-line guidance, but shares slipped as reported an adjusted operating margin of 21.4% for the second quarter, below the 22% outlook that the company had given previously.

·     In REITs: worst sector performer in the S&P as interest rate sensitive sectors dropped amid the spike in Treasury yields; SPG tumbles after Q2 FFO missed estimates and lowered annual net income to $6.39-$6.49 from prior $6.45-$6.60 per share. EQIX Q2 FFO topped views, but shares fell as guided next qtr revs $2.04B-$2.07B vs. est. $2.08B. PSA shares rose after results.

·     In Business services: UPWK increased its revenue and profit projections for the full year. DLO downgraded to Neutral at Bank America citing potential risks related to margin compression, top-line deceleration, and regulatory risk.

·     In Lending: Fitch downgraded Fannie Mae & Freddie Mac to AA+ from AAA after the US downgrade on Tuesday; the downgrade isn’t driven by a deterioration in fundamental credit, capital, or liquidity.

 

Healthcare

Biotech & Pharma:

·     ACAD reported 2Q23 financial results and 2023 product sales guidance consistent with last month’s pre-announcement.

·     ARAV tumbles after its Phase 3 AXLerate-OC trial evaluating the safety and efficacy of Batiraxcept in platinum-resistant ovarian cancer did not meet its primary endpoint of progression-free survival.

·     IONS enters collaboration with NVS to advance next-generation program targeting Lp(a) for cardiovascular disease. Ionis will receive a $60M upfront payment.

·     MRNA raised its annual forecast for COVID-19 vaccine sales to up to $8 billion on hopes of a boost in the fall season but was downgraded to Hold from Buy at Deutsche Bank and cut tgt to $125 from $200 based on its assessment of the Q2’23 results and outlook for the year.

·     REGN reported Q2 revenue $3.16B (vs. est. $3.01B) and EYLEA U.S. net sales $1.5B as adj EPS of $10.24 beats $9.92 estimate.

 

Healthcare Services & MedTech movers:

·     In Managed care: CI Q2 adj EPS $6.13 vs. est. $6.02; Q2 revs $48.62B vs. est. $47.31B; reaffirms FY23 adjusted EPS view $24.70 and revenue view $190B vs. est. $191.69B; sees 2023 Cigna healthcare medical care ratio of 81.5% to 82.3%; q2 medical care ratio of 81.2% vs 80.7%.

·     In Healthcare Services: DOCS downgraded from Overweight to Neutral at Piper calling it best in class platform, growth, and profitability; with developing risk to FY24 guidance – specifically, concerned about the $35.3M mid-year upsell burden embedded in FY24 revenue guidance.

·     In Healthcare staffing: CCRN Q2 results beat consensus, but Q3 guidance was well below expectations and full-year minimum guidance was reduced for the second quarter in a row (shares of AMN also moved in sympathy).

·     In Hospitals: CYH the latest to report better results as Q2 EPS loss (-$0.22) smaller than the est. loss (-$0.27); Q2 revs $3.115B vs. consensus $3.04B; On a same-store basis, admissions increased 4.8% and adjusted admissions increased 4.9%.

 

Industrials & Materials

Transports

·     In Trucking: CHRW said low rates and sagging volumes hit the freight broker as Q2 profit fell 72% and revs fell -35% y/y to $4.42B primarily due to lower pricing in its ocean and truckload services but above est. $4.23B.

·     In heavy machinery: in class 8 trucks (CMI, PCAR), Stephens noted ACT Research released preliminary July Class 8 net order figures of 16,000 units, rising 45% y/y, but decreased 5% seq and says when adjusting for seasonality, July orders increased 5.5% seq. as July is traditionally the annual trough for monthly orders. CMI reported EPS beat and in-line sales for Q2, as shares tumbled with industrials weaker.

·     In E&C Sector: PWR Q2 EPS and revs top consensus and sees FY FCF $800M-$1B, up from prior view $750M-$1.00B and est. $852.8M; Jacobs (J) receives $450 Million U.S. Environmental Protection Agency contract.

·     In Industrials: WCC shares fall after guides full-year earnings of $15-$16 a share, below est. $17.24 and lowers full-year sales outlook to a forecast for growth of 5% to 7%, down from 6% to 9% driven by weakness in certain sectors in its Electrical and Electronic Solutions segment. PH aerospace systems segment revenue soared 90% to $1.28 billion, said profit and sales surged in the latest quarter after seeing demand for its aerospace system unit soar.

·     In Aerospace: SPR was downgraded to Neutral from Buy at Goldman Sachs and cut tgt to $30 from $45 after its wider than expected Q2 earnings loss. CACI awarded a mission expertise contract valued at up to $2.7 billion to provide network and exploitation analysis to the National Security Agency’s (NSA) foreign intelligence and cybersecurity missions.

·     In Airlines: SAVE Q2 adj EPS $0.29 missed the $0.32 estimate saying demand for peak summer travel period has been softer than expected, resulting in lower fare levels on routes. LUV downgraded to Underperform at Jefferies and cut tgt to $25 from $40. ALGT posted a strong 2Q23 earnings beat driven by robust rev performance.

 

Materials, Metals & Mining

·     In Lithium sector: ALB crushed estimates as Q2 adj EPS $7.33 vs. est. $4.44 on mostly in-line revs while raises year EPS and revenue outlook citing rising lithium prices and volumes.

·     In Chemicals: in ag chemicals, NTR revised FY guidance reflects lower global potash prices than expected as well as factors impacting offshore potash sales through Canpotex; WLK just the latest in a strong of chemical companies that reported a quarterly miss.

·     In the Paper & Containers sector: WRK shares were among the top gainers in the S&P after earnings came in well above consensus (thought down y/y) while sales missed; shares of IP, WRK rose in sympathy. BALL shares jumped as Q2 EPS of $0.61 above $0.59 estimate though revs fell -13.7% y/y to $3.57B vs. eat. $3.83B.

 

Technology

Internet, Media & Telecom

·     In Media: WBD Q2 EPS and revs fall short of consensus but topped free cash flow (FCF) expectations and grew per-user revenue in streaming on a sequential basis/said total direct-to-consumer subscribers were 95.8 million, down by 1.8 million on a sequential basis. ROKU was downgraded to Neutral from Buy at Citigroup citing the run-up in the shares YTD (up ~120%).

·     In Online Services: ETSY downgraded to MP from OP at Bernstein after earnings and lower tgt to $100 from $120 saying they were hoping that Q3 GMS guidance and mgmt commentary could draw a line in the sand on the business returning to growth, but it wasn’t quite as reassuring. META’s Threads’ daily active user count is down 82% from launch as of July 31, according to Sensor Tower, with just eight million users accessing the app each day."

 

Hardware & Software movers:

·     AVID shares popped midday after Reuters reported Symphony Technology Group and Francisco Partners are among the private equity firms competing to acquire media editing software maker.

·     CFLT shares rise as delivered a strong 2Q, with revenue, non-GAAP OM, and non-GAAP EPS all solidly ahead of Street estimates.

·     COMM shares tumbled over -25% after quarterly loss widened and sales fell.

·     CTSH reported 2Q23 results that beat ests for both revenue and adjusted EPS and maintained its FY23 revenue guidance and increased its adjusted EPS guidance.

·     DXC tumbles; downgraded by several Wall Street analysts following its disappointing fiscal 1Q24 results saying visibility also appears to be a challenge in this uncertain macro with the outlook.

·     HUBS delivered a beat-and-raise however, billings and net adds did not quite meet elevated expectations, leading shares lower.

·     PCOR Revenue grew 33% ($11m beat), operating income beat by $14m, cRPO growth of 32% and raised full-year guidance by beat.

·     Unity (U) outperformed both its guidance and consensus estimates for revenue and adjusted EBITDA, but guidance mixed.

 

Semiconductors:

·     QCOM shares fell after mixed Q2 results as EPS beat but sales missed and revenue at Qualcomm’s handset chip business fell 25% to $5.26B while warned that revenue growth will depend upon a recovery in handsets, or phone sales, and a recovery in China. QCOM was downgraded from Buy to Hold w/ $120 PT at Deutsche Bank.

·     However, the Philly semi-index (SOX) with a nice rebound after 3% decline on Wednesday as AMD recouped more than 50% of yesterday’s earnings/guidance related loss.