Closing Recap

Thursday, August 31, 2023

Index	Up/Down	%	Last
DJ Industrials	-169.08	0.48%	34,721
S&P 500	-7.33	0.16%	4,507
Nasdaq	15.66	0.11%	14,034
Russell 2000	-3.54	0.19%	1,899

 

 

 

 

 

 

 

 

 

U.S. stocks were choppy on Thursday, snapping the 4-day win streak for the S&P ending the month lower on light volumes. The S&P was down as much as -5.5% at its peak low in August, paring losses to -1.7% with big gains this week, but still snapped its 5-month winning streak along with the Nasdaq. Most sectors were red on the day outside of the 2023 winners Technology, Communications, and Consumer Discretionary, while defensive Healthcare, REITs, and Utilities fell the most. Federal data showed U.S. consumers spent at a faster clip in July, while a closely watched measure of underlying price pressures remained steady. That could complicate the Federal Reserve’s debate on whether to hold interest rates steady in September. The tech-focused Nasdaq advanced for the 8^th time in the last 9-days led by gains in CRM, CIEN, CRWD, OKTA after earnings. Retailers were mixed, as discounters DG and FIVE reported disappointing guidance outlooks. Transportation stocks fell led by trucking stocks while managed care names (UNH CI ELV HUM) pressured the sector. In China, the Shanghai Composite logged its worst monthly performance since September 2022, while Hong Kong’s Hang Seng Index fell into a bear market in August. Oil prices closed near the highs. All eyes on the monthly nonfarm payroll report tomorrow with ests 170K jobs and 150k private payrolls.

 

Economic Data

·     July personal income rose +0.2% vs. est. +0.3% and June +0.3% while Personal Spending rises +0.8% above consensus +0.7% as the July personal saving rate 3.5% and July real consumer spending +0.6% vs June +0.4%.

·     Inflation readings show: July overall PCE price index +0.2% vs June +0.2% (prev +0.2%) and July core PCE price index +0.2% (in-line w consensus +0.2%) and vs. June +0.2%. July y/y PCE price index +3.3% vs June +3.0% (prev +3.0%); core +4.2% (consensus +4.2%) vs June +4.1%.

·     Private worker wages and salaries 4.6%, down from 5.9% and govt worker wages and salaries 6.0%, down from 6.1%.

·     Weekly Jobless Claims fell to 228,000 from 232,000 in prior week and below consensus 235,000; the 4-week moving average rose to 237,500 from 237,250 prior; continued claims rose to 1.725M from 1.697M prior and vs. est. 1.703M; insured unemployment rose to 1.2% from 1.1%.

·     Chicago PMI report business index at 48.7 tops est. 44.2.

·     China’s manufacturing PMI improved for another month to 49.7 in August from 49.3 in July and 49.0 in June. Most of its subcomponents improved, most notably the increase in manufacturing output to 51.9, while new orders also rose above 50 again for the first time since March. The continued rise in both purchase and ex-factory prices, to 56.5 and 52.0, respectively, from 52.4.0 and 48.6 in July suggests China’s producer price deflation may be coming to an end.

 

Commodities, Currencies & Treasuries

·     Oil prices closed near the highs as WTI crude oil futures settle at $83.63/bbl (its 2^nd highest settlement in 2023), up $2.00, 2.45%, posting solid gains for August rising 2.2%. Prices found support from expectations for tighter global supplies in the coming months. Analysts expect Saudi Arabia to extend a voluntary oil production cut of 1 million bpd into October, adding to cuts put in place by the OPEC+. Gold prices fell -$7.10 to settle at $1,965.90 an ounce, giving back most of the prior day gains, losing more than -2.2% for the month amid a dollar/yields spike.

·     Bitcoin prices slip late week, dropping over -2.5% to $26,500, erasing much of the euphoric pop earlier in week after a court ruled that the SEC’s denial of Grayscale’s petition was “arbitrary and capricious” as the agency failed to adequately explain why it had approved two Bitcoin futures ETFs but not Grayscale’s spot Bitcoin ETF proposal. However, prices have pulled back since the ruling, with broad weakness in crypto space today.

·     Treasury yields decline ahead of August payrolls report but finish the month with a gain for the 10-year and a loss for the two-year. August was marked by shifting outlooks for interest rates and the economy, as data showed a slowing but still resilient labor market and inflation. The 10-year yield gained 13.4 bps to 4.090% and the two-year lost -1.7bps to 4.857% in the month.

 

 

Macro	Up/Down	Last
WTI Crude	2.00	83.63
Brent	1.00	86.86
Gold	-7.10	1,965.90
EUR/USD	-0.0076	1.0849
JPY/USD	-0.81	145.42
10-Year Note	-0.031	4.087%

 

 

Sector News Breakdown

Consumer Staples & Restaurants:

·     In Food space: CPB reported mostly in-line Q2 top and bottom lines results with better organic net sales +5%, vs. est. +3.55% while guides 2024 adj EPS $3.09-$3.15 vs. est. $3.09; HRL falls on results/guide as Q3 adj EPS $0.40 vs. est. $0.41; Q3 revs fell -2.3% y/y to $2.96B vs. est. $3.05B; cuts FY adj EPS view to $1.61-$1.67 from prior $1.70-$1.82. TWNK downgraded from Overweight to Neutral at JPMorgan on valuation as is near its $28 tgt.

 

Retailers:

·     In online retail: SHOP shares surge after AMZN announced that its Buy with Prime app would work with Shopify’s Checkout resource and allow Prime members the option to use the app before completing the transaction in the Checkout (SHOP upgraded to Buy at Canaccord with $70 tgt). CHWY Q2 sales growth was similar to recent quarters with flattish net customer adds, saw margins decline y/y, and guided Q3 revs below at $2.74B-$2.76B, consensus $2.79B.

·     In Discount stores: DG shares tumble after Q2 miss and lower guidance (follows weaker DLTR results prior week) as Q2 EPS $2.13/$9.8B revs miss $2.47/$9.93B est. and sees FY EPS $7.10-$8.30, below est. $10.03 citing slowing traffic, softer sales trends and an increase in inventory shrink. FIVE Q2 EPS and sales were in-line while guides Q3 EPS and sales below views while sees FY24 EPS $5.27-$5.55 down from prior $5.31-$5.71. OLLI Q2 EPS (67c vs. 62c), comps (7.9% vs. +3%) and sales ($514.5M vs. $498M) top views and raised year revs and comp sales view.

·     In Apparel & Accessories: VSCO reported an ~in-line top-line, but EBIT and EPS miss, as much of 1Q’s trends continued into 2Q and mgmt introduced 3Q well-below Street, inclusive of significant SG&A deleverage – sees Q3 EPS loss ($1.00)-(70c) vs. est. loss (-$0.14).

·     In Sporting Goods: After weak results from DKS and FL in the sporting goods sector last week, ASO provides positive sentiment as raises FY EPS to $6.65-$7.35 from prior $6.50-$7.20 after reporting EPS beat, in-line Q2 sales of $1.58B on better margins 35.6% vs. 35.3% y/y.

·     In Warehouses: COST August core comps were +4.1% and YoY inflation moderated vs. July in Food and Sundries. Traffic experienced positive trends both worldwide and domestically, but transactions were down again in August.

·     Other retail movers on earnings today included: SIG earnings beat amid engagement ring increases, DLTH slumps after lowering results and CFO steps down; FLWS EPS of -$0.28 beats by $0.04, revenue of $398.8M misses by $14.51M; GCO EPS of -$0.85 beats by $0.38, revenue of $523M beats by $25.75M; LE tumbles after Q2 loss widens amid drop in sales and lowers guidance; BKE Aug comparable store net sales decreased -5%.

 

Energy, Industrials and Materials

·     In Energy: OPEC oil output rose in August as Iranian supply rose to its highest since 2018, a Reuters survey found. OPEC has pumped 27.56 million barrels per day (bpd) this month, the survey found, up 220,000 bpd from July. That’s the first rise since February. In Utilities: UGI said its board is reviewing strategic alternatives to unlock shareholder value.

·     In Chemicals: OLN and WLK shares weaker after Keybanc noted that Chemical Market Analytics (CMA) released its monthly chlor-alkali report, which showed continued strong downward momentum in the domestic caustic soda market. Caustic soda prices fell $45/ton m/m in August, ahead of CMA’s forecast of a $40/ton decline m/m and following the $50/ton decline in June.

·     In Transports: Truckers RXO and CHRW both downgraded to Negative at Susquehanna and remain Neutral on LSTR saying truck brokers face a difficult cyclical path into 2024 with demand seasonal at best, very little spot volume, contract rates pressured until spring bid season, and truckload capacity stubbornly priced with spot rates below operating costs. In airlines: SKYW was upgraded to Outperform at Raymond James on increased conviction on the likely continued improvement in pilot trends as U.S. mainline and cargo airlines moderate growth into 2024.

·     In Industrials: TITN posted Q2 revenue $642.6M vs. est. $602.4M and entered into a definitive purchase agreement to acquire J.J. O’Connor & Sons Pty. MMM was upgraded from Underweight to Equal Weight at Morgan Stanley and raised tgt to $113 from $102 saying liabilities are likely to grow but look better discounted into shares and sees balanced but still wide risk/reward.

 

Financials

Banks, Brokers, Asset Managers:

·     In Banks: European banks strong overnight after UBS said it will cut 3,000 jobs in Switzerland in the coming years as it integrates Credit Suisse, with further staff to go of their own accord, the bank’s CEO Sergio Ermotti told staff. UBS reported $28.875 billion in net profit attributable to shareholders for the second quarter, in its first earnings results since it took over Credit Suisse.

·     In Lending: OPFI, FINW shares active after Reuters reported a California judge is poised to decide if an online lender offering small loans at over 150% interest violates state law. The California Department of Financial Protection and Innovation (DFPI) is seeking a ruling that would block Chicago-based Opportunity Financial (OppFi) from offering loans with an interest rate above California’s maximum of 36%. https://tinyurl.com/3nrcy3d9

·     In Payments: Visa (V) provided volume update, pointing to normal spending dynamics; total processed transaction volume growth was 10% in July & 10% in Aug, while US payments volume ticked up to +7% in Aug vs. +5% in July.

·     In REITs: MPW downgraded to Neutral from Buy at Mizuho post 2Q results and recent tenant developments, saying mgmt’s attempt to reduce leverage via asset sales, will likely be earnings-dilutive (Mizuho’s FY24 AFFO estimate of $1.15 is now 7% below the Street). In Commercial Real Estate, Wells Fargo said they expect meaningful losses to mark this CRE cycle but highlighting where they see oppty in REITs: REXR, IVT, SBAC, CUBE, UDR stand out most.

·     In Insurance: Hurricane Idalia knocked out power for hundreds of thousands in Florida, and caused flooding in many areas, but the toll was not as devastating as initially expected by analysts, easing fears for the likes of ALL, TRV, CB, RNR upgraded to Outperform at BMO Capital and target to $126 saying after a string of disappointing quarters (’22A and ’23E RoEs of 7% and 4%, respectively, relative to guidance in the low teens), BMO estimate too much bad news is priced into THG’s valuation (near record lows vs peers).

 

Healthcare

Biotech & Pharma:

·     Cannabis stocks extend yesterday gains after reports the Drug Enforcement Agency is looking at whether to reclassify marijuana into a less hazardous category, boosting the industry: GTBIF, TCNNF, CURLF, CRLBF among those jumping a second day.

·     Managed care stocks CI, HUM, ELV, UNH were broadly lower, weighing heavily on the Healthcare industry today on no apparent news stories.

·     Drugmakers challenging a Biden administration program requiring them to negotiate with Medicare over the prices of selected costly drugs may not have a clear legal precedent on their side, but there are signs they could get a friendly hearing from the U.S. Supreme Court, legal experts said – Reuters reported. CMS is expected to soon begin the negotiations for lower prices on the 10 drugs that will take effect in 2026 (ABBV, AMGN, BMY, JNJ, MRK, AZN, NVS, NVO).

·     Wells Fargo noted the impact of Momelotinib’s potential approval in myelofibrosis, regardless of its label, is an incremental negative for INCY as the firm expects Jakafi sales to be impacted. For MOR, the firm thinks a 1L momelotinib approval is a modest positive for pelabresib.

 

Technology

Hardware & Software movers:

·     In Optical: CIEN posted top and bottom line Q3 beat ($0.59/$1.07B vs. est. $0.51/$1.04B) amid strong +20% y/y rev growth for Networking platforms, Converged Packet Optical, Routing and switching and Platform software and service segments.

·     In Software/SaaS: Dow component CRM posts top and bottom-line beat/raise as margin surprises to upside again with 32% OM in 2Q (400 bps seq expansion) vs. 28% consensus and raised FY guide from 28% to 30%; said subscription revenue grew 12% and cRPO 11% in CC, above expects and only showing modest deceleration.

·     In Internet Security: CRWD posted Q2 revenue of $731.6M, up 36.7% y/y vs. est. $724M and ARR of $2,930M, up 36.9% of which $196M was net new ARR added in the period while EPS beat, and subscription revs grew 36.3% y/y to $690M vs. Street $683M on muted guidance. OKTA strong quarter, beating on all metrics helped by OKTA’s 18% cRPO growth, strong margins, and FCF and raised full-year guidance above views.

·     Other software: PLTR downgraded to Underweight at Morgan Stanley while raise tgt to $9 from $8 saying near-term optimism in AI product cycle and valuation premium create an unfavorable risk-reward in shares, as visibility on AIP monetization remains low.

·     In Networking: ANET was upgraded to Buy from Neutral at Citigroup and raised tgt to $220 and raises ests as expects 400G cloud spend to recover into next year as hyperscaler spending on traditional data center infrastructure rebounds and a top customer’s CAPEX recovers. 

·     In Storage: PSTG posts modest top / bottom line beats as revenue growth of 6.5% was powered by strength across its FlashBlade and Evergreen One offerings. Going forward, 3Q guidance was roughly in-line with expectations, and PSTG reiterated its MSD to HSD FY rev growth guidance.

·     In Media: WWE shares tumbled after Wolfe Research maintained OP and $137 tgt but said while there is room for all to succeed in the growing global mixed martial arts market, Saudi Arabia’s backing "augurs poorly" for WWE and UFC’s medium- and long-term talent costs.

 

Semiconductors:

·     AVGO is expected to report earnings tonight.

·     INTC advanced after the CEP said at a conference the company is tracking above the midpoint of its third-quarter outlook, noting a healthy client business. Intel previously said to expect $12.9 billion to $13.9 billion in revenue.

·     NAND/memory stocks higher: WDC, STX, MU shares outperform early after Digitimes reported NAND flash memory suppliers appear determined to raise prices, resulting in a modest increase in spot market prices for August, according to industry sources.