Closing Recap

Wednesday, July 10, 2024

Stocks rip higher into the bell, closing at the highs for a 7^th consecutive day for the S&P 500 index and Nasdaq Composite, both closing at fresh record levels, as investors unafraid of crucial inflation data tomorrow morning. Coming into July, historically speaking, the first two-weeks of July are among the best 2-week stretches of the year – with this year only adding to those totals as July has seen a 7-day win streak to kick off the month. The Nasdaq 100 index hit a fresh high (QQQ highs above $503) led by another record for semiconductors (SOX +40% YTD), with big gains from NVDA, AMD, MU, TSM, and others. The optimism in stock markets has been impressive, especially in the technology sector with Technology (XLK) +23% YTD and Communications (XLC) +20% YTD with Financials (XLF) the next strongest sector at +11% YTD. Interestingly software stocks (IGV) were weak with semis making new highs. Along with technology/AI demand growth expectations boosting big cap tech, the hopes for interest rate cuts in the next few months are also spurring investor demand in stocks. As noted above in semis, returns for $SMH by month massive: since Nov (23) +15.3%, Dec (23) +8.9%, Jan +6.3%, Feb +14%, March +6.1%, April down 4.8%, May +12.3%, June +8.4%, July +7.1% – as go semis – so goes the market!

Markets liked comments from Fed Chair Powell in day 2 of testimony on Capitol Hill on monetary policy, saying you don’t want to wait until inflation gets all the way to 2% to ease policy, giving hopes that a rate cut can come as soon as September with a tamer CPI reading tomorrow morning. Powell did note that the Fed is not just an inflation-targeting Central bank, but they have an employment mandate as well. The outlook for tomorrow’s all important consumer price index (CPI) for June show estimates calling for CPI headline to rise +0.1% (vs. May unchanged) and headline Y/Y to rise +3.1% (vs. May +3.3%). The core CPI, or excluding food & energy is expected to rise +0.2% M/M (same as in May) while Y/Y to rise +3.4% (also in-line with May reading). The S&P is up 17 of the last 21 days, with no signs of slowing!

• China consumer price index (CPI) in June rose 0.2% from a year earlier, against a 0.3% uptick in May, the slowest in three months, and below a 0.4% increase forecast. Food prices slipped 2.1% year-on-year, compared with a 2% decline in May. CPI edged down 0.2% month-on-month, versus a 0.1% drop in May and worsening from an expected 0.1% fall.
• China producer price index (PPI) fell 0.8% in June from a year earlier, less than a 1.4% decline the previous month, and matched a forecast 0.8% fall. The fall in the PPI was the smallest in 17 months.

• Aug gold prices rise $11.80 to settle at $2,379.70 an ounce, helped by comments from Federal Reserve Chair Jerome Powell as he raised expectations that the U.S. central bank is on track to lower interest rates soon, while investors awaited U.S. inflation data for more cues.
• The 10-yr Treasury yield was little changed on the day to close at 4.28% ahead of the CPI data tomorrow morning; the 10-yr yield is 70bps off 52-week high of 4.9877% (10/19/23) and up 54bps from 52-week low of 3.741% (7/19/23).
• The US Treasury sold $39B in 10-year notes at a yield of 4.276% vs. 4.286% when issued prior as the bid to over (demand) at 2.58 vs. 2.67 in previous auction, as Primary dealers take 11.53% of U.S. 9-year 10-month notes sale, direct 20.86% and indirect 67.61%.

• In Restaurants: sector been very weak of late with market reasons potentially: MCD data hasn’t inflected post value launch, Wall Street notes on slowing traffic in June, CMG acting terribly post-split combined with Avocado overhang, and CPI concerns re: Food-at-home being cheaper; KRUS reported FQ3 results that were in line with what the company had shared when it preannounced results on June 27th that reflected a sudden falloff in traffic trends in the CA market. YUMC cautious comments at OTR Global saying sales trends deteriorated at KFC and Pizza Hut in China, falling below plan for most managers during 2Q24 despite promotions. CMG announces CFO Jack Hartung has decided to retire effective 31-Mar-25; to be succeeded by VP of Finance Adam Rymer.
• In Retail: LULU remain Underperform at Jefferies and lower tgt to $220 from $240 saying following their case study on UAA, it provides another lens that investors can leverage when reviewing the setup for LULU. Coach was a well-known brand with a strong revenue base in the early 2010s; however, Michael Kors rapidly grew across the marketplace, resulting in a valuation re-rating for TPR over the coming years. Jefferies believes a similar story could be ahead for LULU as early-stage growth Co’s continue to drive brand momentum/retail expansion. In Footwear, Bank America with earnings preview noting Footwear stocks have pulled back 11% off highs and firm thinks most compelling buying oppty are CROX (10x P/E) and SKX (14x P/E) as expects CQ2 sales trends will remain strong and model sales beating or hitting upper end of guidance for each stock. For DECK expects strong qtr; beyond FQ1, more difficult UGG compares, and spec run competition could temper size of beats.

• Leisure Products: Bank America said Nielsen data implies SharkNinja (SN) sell-through accelerated in 2Q and implies upside vs. street N. America revenue forecast. They also believe YETI web traffic data implies 2Q DTC revenue slightly below street and said toy imports +20% y/y in June and tracking up for 9 months (see green shoots for physical toy segments of HAS).

• In Chemicals: Agricultural chemicals (NTR, MOS, CF, IPI) shares active after Mizuho noted China settled its potash contract with Russian producers at $273/ton, slightly below expectations of $275-$280/ton. They said it was widely assumed that India would settle first and then China.
• In Metals & Mining: Jefferies said it remains cautious into European steel sector’s Q2 reporting season and says demand recovery might be pushed to 2025. The firm said steel prices are close to the bottom and expects infrastructure related demand to pick up in late H2 2024 or in 2025, after the U.S. Presidential election. Top picks remain MT in Europe and both CLF and United States Steel (X) in the U.S. Uranium stocks CCJ, URA, UUUU, UEC jumped after a surprise hike in extraction taxes in Kazakhstan, the world’s largest uranium-producing country, which BMO Capital Markets said will limit future supply growth. Per the new code, the new MET rate is to increase to 9% from 6% in 2025.
• In energy: Utility HE shares jumped after fire lawsuits settlement advances at Maui County Council https://tinyurl.com/3cr29ckv

• In credit cards: Bank America downgraded shares of both MA and Visa (V) to Neutral from Buy saying upside potential on stocks’ valuations and estimates is limited despite premier business models and competitive advantages and notes that a volatile regulatory environment could limit multiple expansions and Visa or MA’s ability to take price.
• In Insurance: BHF was upgraded to Buy from Hold at Jefferies and raise tgt to $54 from $49, staying constructive on U.S. life insurance ahead of the Q2 results; says the company is well positioned due to its strong market share in registered index-linked annuities while the stock trades near its lowest absolute and relative multiples since 2017 MET separation.
• In Crypto: Bernstein initiated IREN ($26, 78% upside) and CORZ ($17, 64% upside) with an Outperform rating. The firm said the market is penalizing Bitcoin miners for Bitcoin volatility, despite their expectation of long-term Bitcoin structural uptrend led by growing institutional adoption. They believe we are in a new Bitcoin upcycle, driven by institutional adoption and growth of ETFs. However, Bitcoin miners are being undervalued for their ‘strategic power portfolio’ and monetization option into AI data centers, in a ‘power’ constrained world. We believe AI revenue line provides a downside floor to the miners, with Bitcoin driving cyclical upside.

• IDYA 7.23M share Spot Secondary priced at $35.00.
• LNTH shares jumped after CMS proposal (draft proposal of Medicare payment rates for hospital outpatient and Ambulatory Surgical Center, or ASC, services for calendar year 2025).
• NVO signed a deal with Indonesia’s state-owned pharmaceutical company Bio Farma to produce insulin to combat diabetes in the Southeast Asian country, a senior Bio Farma official said
• TEVA was upgraded to Buy at Argus saying the company appears to have "steadied its ship" following several years of challenges, launching a range of new drugs and achieving margin growth across all its three primary business segments.
• TXG shares fell after gene-sequencing company ILMN said it has acquired Fluent BioSciences – a developer of single-cell technology, sending TXG shares, which is in the single-cell space, lower on the news.
• VRPX shares surged after announced results from an animal study testing its non-addictive pain medication, probudur; said the treatment was injected into 4 domestic pigs at a dose of 30 mg/kg and was well-tolerated by all the pigs.
• In Weight loss: Reuters noted only one in four U.S. patients prescribed NVO’s Wegovy or Ozempic for weight loss were still taking the medications two years later, according to an analysis of U.S. pharmacy claims provided to Reuters that also showed a steady decline in use over time. The analysis does not include details about why patients quit. https://tinyurl.com/ye29nyre  

• In MedTech: Citigroup previews earnings and opens a 30-day positive catalyst watch for TNDM and opens a 30-day negative catalyst watch for ISRG while downgraded GKOS to Neutral as the iDose success (up 59% YTD) is well understood. Notes that MedTech E&S Index up just 4.1% YTD versus the S&P 500’s 17.5% though a few big winners (BSX +32% YTD, EW +22% and ISRG +34%), but the valuation difference between the “haves” and the “have nots” has expanded significantly. Citi said top Picks include BSX, GEHC, and PODD
• In Healthcare Services: Cantor said HCA remains their top pick in Healthcare services as newly released hospital volume data from three large sources (Strata, Kaufman, Bloomberg) reaffirm their confidence that hospitals will have a strong quarter on volumes and revenue / admission, potentially exceeding consensus expectations. Optimism is supported by data suggesting 1) a 2Q24 recapture of delayed March procedures in April on both outpatient and inpatient metrics, 2) strong June foot traffic data, 3) recovery in revenue / patient day paired with recovery in 4/4 high acuity procedures.
• In MedTech: Lake Street names AORT, LNSR, NPCE, LUNG, TELA as five "bargain bin" ideas in Healthcare that 1) have solid fundamentals, 2) trade below the comp group averages, 3) grow double-digits, and 4) have novel technologies that support durable growth and/or strategic takeout.
• In Pharmacy benefit managers: the WSJ reported The Federal Trade Commission is preparing to sue the largest three pharmacy-benefit managers over their tactics for negotiating prices for drugs including insulin, after a two-year investigation into whether the companies steer patients away from less-expensive medicines. The agency plans to file lawsuits taking aim at the business practices related to rebates brokered with drug manufacturers, a person familiar with the matter said (shares of CI, CVS, UNH dipped on the headlines). UnitedHealth Group’s OptumRx, Cigna Group’s Express Scripts and CVS Health’s Caremark — handle roughly 80% of U.S. prescriptions.

• In Media: SPOT and WMG both downgraded to Sell at Redburn saying that music streaming is facing competitive and structural challenges that and will prevent broad-based price increases from becoming a new norm. Redburn sees UMG (remains Sell rated) as most exposed – its 40% valuation premium to WMG is not justified by the companies’ almost identical EBITDA growth forecasts and their historical LFL growth rates. While Spotify’s operating momentum has been impressive, consensus is simply forecasting too much growth. Redburn downgrades to Sell.
• In Software: the sector underperformed semiconductors (SOX) which hit new all-time highs as the IGV declined behind weakness in CRWD, HUBS, MDB, SNOW; HUBS shares tumbled more than 10% late day after Bloomberg reported that Google parent Alphabet (GOOGL) has shelved efforts to acquire the company https://tinyurl.com/mrh69vbs . RPD provided preliminary estimates for its Q2/24 ARR and anticipates $814-816M total ARR, up 8-9% YoY, and in-line with both the company’s and Street’s $815.1M expectation. MSFT announced price increases for its subscription service Xbox Game Pass; the higher costs take effect starting September 12.

• AEHR shares jumped after guiding Q4 revenue of about $16.6M, and net income of about $23.8M, well above its prior quarter figures of revenue $7.6M and a loss of $1.5M.
• AMD shares jumped as agreed to acquire Silo AI, the largest private AI lab in Europe, in an all-cash transaction valued at approximately $665 million.
• SGH shares rise after results as Q3 adj EPS $0.37 vs. est. $0.30; Q3 sales fell -22% y/y to $300.6M in-line with consensus estimates and sees Q4 revenue $325M, plus/minus $25M vs. consensus $322.22M.
• SMCI was downgraded to Neutral from Buy at Nomura with an unchanged price target of $930 saying following SMCI’s strong guidance for CYQ423-CYQ124 the firm feels SMCI’s performance potential changed from "easy to beat low mkt expectations" to "less room to beat already-high expectations." They also say several uncertainties could make it difficult for Supermicro to deliver stronger than expected sales.
• TSM reported 32% on-year growth in Q2 revenue at T$673.51 bln ($20.67B), according, compared with estimates of T$654.27B; and is above prior forecast of $19.6B-$20.4B in April; said it topped revs expectations on the back of booming demand for artificial intelligence (AI) applications.