Closing Recap

Thursday, July 11, 2024

U.S. stocks witnessed a massive one-day day rotation following a cooler June inflation report, as underperforming Russell 2000 Smallcap rose over 3.5% (came into the day YTD +1.2%), while the AI hyped Nasdaq Composite, riding 7-day win streak/record highs every day in July, saw a more than 400 point roll off its highs (of 18,671.07), falling over 2% midday (Comp came into the day +24.2% YTD). The S&P 500 index (SPX), which had closed above 5,600 for the first time Wednesday, also came in riding a 7-day winning streak, fell more than 60 points off its intraday highs, trading below yesterday lows. The CPI report boosted expectations of a 25-bps rate cut from the Fed in September (given future inflation reports stay steady), and a possible further cut in late 2024, which rallied interest rate sectors on the day including homebuilders, finance/lending stocks, solar names (low rates lower costs of solar projects for homeowners) and utilities.

NYSE breadth was positive with about 6:1 advancers leading decliners amid Smallcap strength – mega cap tech weighing on broader averages (NVDA, ARM, AAPL, AMZN, META, MSFT, etc.). Dow Transports up around 2% at 15,400 (above 200dma of 15,315 – below 100dma 15,430) despite weakness in airlines after DAL results as all other components of index were higher (UBER, R, UPS, FDX etc.) After hitting all-time highs of 5,931.83 shortly after the open, the Philly semi-index (SOX) proceeded to tumble over -3% to around 5,700 before paring losses as investors dumped big winning tech names, rotating into the Russell 2000 Smallcap stocks, which surged over 3.3%. So how rare was today’s market action? @bespokeinvest noted “There’s been just one other trading day since 1979 when the small-cap Russell 2,000 rose 3%+ while the S&P 500 was down on the day. 10/10/08: R2K was up 4.6%, S&P was down 1.2%. Today: R2K up 3.35%, S&P down 0.75%.”

• @charliebilello noted “Shelter CPI has now moved down on a YoY basis for 15 straight months, from a peak of 8.2% in March 2023 (highest since 1982) to 5.2% today. Given its long lag vs. real-time rent data, a continued move lower is expected which should lead to a continued decline in core inflation.”
• Weekly Jobless Claims fell to 222,000 in latest week from 239,000 prior week and vs. consensus 236,000; the 4-week moving average fell to 233,500 from 238,750 prior; continued claims fell to 1.852M from 1.856M prior week and the US insured unemployment rate unchanged at 1.2%.

• In Restaurants: Barron’s positive on shares of DPZ noting shares of restaurant and casual diner names have been battered (WEN, MCD, BLMN, DIN, CMG) as customers stay home thanks to inflation-fueled higher prices. Barron’s said the drop might have created a buying opportunity. Jefferies downgraded shares of DRI (to Underperform) as it sees risk to NT fundamentals and CHUY (to Hold from Buy) predicated on its view that SSS/traffic through ’25 will materially lag peer’s w/ a lack of meaningful traffic-driving initiatives.
• In Warehouse/Discount Retailers: COST reported net sales of $24.48B for retail month of June, five weeks ended July 7, 2024; said from Sept 1 to raise annual membership fees by $5 for U.S. & Canada gold star, business, & business add-on members and Executive Memberships in the U.S. and Canada will increase from $120 to $130. BIG upgraded from Sell to Hold at Loop Capital with $1 tgt based on its belief the stock has limited additional downside risk as opposed to a more bullish view of fundamentals, as continues to believe a bankruptcy filing is a very real possibility.
• In Apparel Retail: ANF downgraded to Hold from Buy at Argus saying the company has been benefiting from supply chain improvement that allows it to replenish popular items quickly and increase average unit retail growth, but its growth should moderate later this year and fall to mid-single digits in FY26.

• In Casinos/Gaming (DKNG, FLUT, WYN, MGM, CZR, PENN): JMP Securities notes SaharaBets, only operational in Arizona, and Super Group, a global operator, announced the closure and large-scale pullback of operations in the U.S. in OSB market. They estimate 74 companies have entered the legal U.S. online gambling market since 2018. Of the 74, 43, or 58%, are still operational, 18 (24%) have shut down operations, 10 (14%) have significantly pulled back (like Wynn) or are shutting down, and three (4%) have been acquired. To put this into perspective, the top seven companies’ control ~98% of sports betting revenue and ~90% of iGaming revenue. In casino, Deutsche Bank lowered its Wynn Macau forecasts, while raising its domestic estimates.
• In Online travel/Lodging: Barclay’s previews Q2 results, as sees a beat & raise at BKNG already priced in (tgt raised to $4,300 from $3,800), while ABNB holding up on strong 3P data, even as LT expectations for adjacencies get pared back and 2024 margins are trimmed; said investors split on EXPE at present; sees TRIP likely to see better 2H results and noted web traffic softening for BKNG, EXPE sites.

• In Energy: Natural gas prices extend recent declines, falling to the lowest level in two months (AR, CHK, EQT, RRC, SWN). In Water/Utilities: ZWS said sees preliminary Q2 results in-line to slightly ahead of the outlook range they provided earlier in the quarter. Utilities another sector benefitting from lower rate outlook env’t – hitting one-month highs as easing interest rates make dividend-paying stocks more attractive; shares of AES, AWK D among top gainers.

• APAM said prelim assets under management as of June 30, 2024, totaled $158.9 billion. Artisan Funds and Artisan Global Funds accounted for $77.0 billion of total firm AUM, while separate accounts and other AUM accounted for $81.9 billion.
• BEN prelim month-end assets under management (AUM) of $1.65 trillion at June 30, 2024, compared to $1.64 trillion at May 31, 2024. This month’s increase in AUM reflected the impact of positive markets and flat long-term net inflows.
• IVZ prelim month-end assets under management (AUM) of $1,715.8 billion, an increase of 1.7% versus the previous month-end. The firm delivered net long-term inflows of $6.5 billion in the month. Non-management fee earning net inflows were $0.2 billion and money market net outflows were $1.9 billion.
• LAZ prelim assets under management, as of June 30, totaled approximately $244.7B. The month’s AUM included market appreciation of $2.5B, net outflows of $1.4B and foreign exchange depreciation of $1.4B.
• TROW preliminary month-end assets under management of $1.57 trillion as of June 30, 2024. Preliminary net outflows were $2.6B for June 2024 and $3.7B for the quarter-ended June 2024. Preliminary quarterly net flows include $1.1B of Manager-driven distributions.
• VCTR reported Total Assets Under Management of $168.7 billion, Other Assets of $5.1 billion, and Total Client Assets of $173.8 billion, as of June 30, 2024.

• Citigroup (C) shares dipped after the Federal Reserve and Office of the Comptroller of the Currency said they had fined Citi $136 mln for making "insufficient progress" toward fixing data management issues identified in 2020.
• ENV announced that it has entered into a definitive agreement to be acquired by Bain Capital in a transaction valuing the Company at $4.5B ($63.15 per share). Reverence Capital also agreed to participate in the transaction.

• SLRX shares fell after noting the FDA placed a partial clinical hold on its early-stage trial studying its experimental drug Seclidemstat in combination with chemotherapy drug azacitidine in adult patients with type of blood cancer.
• Morgan Stanley with Q2 preview in biopharma, adjusting models for IQVIA trends as well as intra-quarter updates saying within US large caps, they are OW rated on ABBVand Underweight BMY while downgrade UTHR to EW from OW following recent outperformance as now see risk/reward in shares as more balanced

• In Pharmacy Benefit Managers (CVS, CI, UNH): been a rough news flow week in the press for the managed care and PBM spaces. On Monday, the WSJ ran a piece about Medicare Advantage plans using risk coding aggressively to increase revenue and earnings. On Tuesday the FTC released its long awaited and – expectedly scathing – report on the PBM market. Then Wednesday, Politico and other news outlets reported the FTC is preparing to sue the big three PBMs UNH’s Optum, CVS and Cigna, though on what grounds seems unclear.

• In Airlines: sector weak after DAL Q2 EPS $2.01 misses’ consensus $2.37 on revs of $15.41B vs. est. $15.43B while forecasts Q3 adj. revs $14.8B-$15.1B, below consensus est. $15.32B; also guides Q3 adj EPS $1.70-$2.00 vs. est. $2.06 (the results/guidance weighed on AAL, JBLU, UAL, LUV, ALK shares).
• In Trucking: KNX and LSTR both downgraded to Peer Perform from Outperform at Wolfe Research saying along with other truckload-levered stocks, the firm continues to see significant EPS risk for both and argues that valuation remains "quite elevated on our reduced estimates" even with the stock’s underperformance.

• In Building Products: OC was upgraded to Buy at Citigroup citing potential upside in roofing, composites and doors as well as the stock’s discounted valuation, while saying CRH remains its top pick and Buy-rated VMC both trade at a slight discount to their 5-year NTM EBITDA averages. The firm lowered est. and target multiples for Building Products producers to reflect more conservative macro assumptions, especially around resi construction.
• In Industrials: in waste, RSG was upgraded from Hold to Buy at Truist and raised tgt to $220 from $192 saying valuation looks attractive here at a ~10% discount to direct Solid Waste peers (WM, WCN both Buy-rated) and it is growing increasingly optimistic around margin expansion potential in the company’s growing Environmental Services platform.
• In Aerospace & Defense: RTX was awarded a $1.2B contract to supply Germany with additional Patriot® air and missile defense systems.

• In Chemicals: WDFC shares jumped after Q3 results beat, as EPS $1.46 topped consensus $1.39 on sales $155Mm vs est. $145.8Mm, gr mgn 53.1%; reiterates FY guidance. Keybanc noted Chemical Market Analytics published the June PE contract, reflecting flat m/m price, in line with its forecast. Earlier, over the last week or so, some investors had been seeing a healthy chance of a price increase in June, given producers’ comments and potential disruptions related to Hurricane Beryl. (note shares of LYB, DOW slipped late Wednesday after the news).

• AAPL price tgt raised to $256 from $230 at Bank America on confidence around multi-year iPhone upgrade cycle. Reiterate Buy given multi-year iPhone cycle driven by GenAI, strong services growth, and margin expansion
• MSTR announced a 10 for one stock split.
• SKIL provided a strategic and financial outlook update, announces $10M share repurchase, reaffirms 2025 adjusted EBITDA outlook, and said it expects $45M in cost savings.
• In Video game preview: TD Cowen said TTWO remains top pick, PLTK, SONY, EA Buy rated and a sell on RBLX in Video Game Earnings Preview saying they expect few surprises this quarter and overall remains bullish on the video game space. TDCowen expects Q2 industry trends to be slow on console due to very tough comps but expects strong DD% y/y growth in mobile. Meanwhile Jefferies assumed EA with a Buy rating ($165 tgt), TTWO a Buy ($185 tgt) and remains the firm’s top pick in interactive entertainment, while downgraded RBLX to Hold from Buy and cut tgt to $42 from $51 saying the stock’s premium valuation warrants caution.

• ON was downgraded to Underweight from EW at Morgan Stanley and trim tgt to $65 from $70 and downgraded MCHP as well to EW from Overweight while raised tgt prices on TXN to $156 from $150 and NXPI to $275 from $247 in analog space saying fundamentals are bottoming out in Q2 (early-cycle) but stocks bottomed 8 months ago (mid-cycle). The firm says continues to see analog and MCU shipments bottoming out in Q2.
• AVGO tgt raised to Street high $2,400 from $1,650 at Rosenblatt saying, “Broadcom’s execution has been commendable,” and “for FY24, we continue to expect an upside to the recently raised sales target of $51B, driven by AI semi-sales (40%+ of mix) and better VMware integration”
• In Semi equipment preview at TD Cowen: Firm said names they like especially into the print are: AMAT (+trends in HBM & advanced packaging (Adv. Pkg.); moderate domestic China risk), ASML (orders improving), LRCX (eventual NAND capex recovery), TER (HBM test & CY25 setup) and MKSI They expect CY24 WFE (Wafer Fab Equipment) spending to remain around CY23 levels in the mid-90B range as memory spending incrementally improves through C2H24 while foundry/logic remains tepid. The focus is on the magnitude of a CY25 recovery, which we model up 17% Y/Y to $110B.