Closing Recap

Thursday, June 29, 2023

Index	Up/Down	%	Last
DJ Industrials	269.79	0.80%	34,122
S&P 500	19.69	0.45%	4,396
Nasdaq	-0.42	0.00%	13,591
Russell 2000	22.88	1.23%	1,881

 

 

 

 

 

 

 

 

 

U.S. stocks were choppy/higher on Thursday, holding on to strong month, quarter, and 1H gains for broader averages, that have been dominated by strength in Technology, Communications, and Consumer Discretionary. With one trading day left, those three sectors have made up of the gains this year, while Energy (-8%), Utilities (-8%), Healthcare (-3.5%), Financials (-2.5%), and Consumer Staples (-1.5%), are all down year-to-date. Financials paced gains today after all 23 banks that underwent the Federal Reserve’s annual stress test passed, while strong economic data stoked expectations of further interest rate hikes from the central bank. The Russell 2000 index of small-cap stocks rose more than 1%, while the materials index led gains among the S&P 500 sectors. Another round of key inflation data tomorrow with Personal Income, Spending, and Core PCE data.

 

Market resiliency remains astounding as major averages are higher than where they were just two-months ago when the market was forecasting at least three-interest rate cuts by the Fed and no more hikes – but now expectations are for at least 2 more hikes and no cuts this year. @bespokeinvest noted: “through the 4th to last trading day of the first half, the Nasdaq is on pace for its 3rd best first half on record. Last year was the second worst at this point.” Nasdaq overall best 1H since 1983, on track to rise nearly 30%, led by a 42% rise in the semis (SOX). Dow Transports topped 15,500 this afternoon, now up 13% this month and less than 400-points from 52-week highs. Homebuilders/products have been another monster sector this year with the XHB +31% YTD, +17% QTD and ITB +39% YTD, +20% QTD.

 

Stocks pared gains, slipped late afternoon briefly around the time that the WSJ Nick Timiraos tweeted: "Fed Chair Jay Powell said the next phase of rate increases is harder to map out; inflation has "over and over" been "more persistent than we expected;” "At some point that may change." "We have to be ready to be a little patient as we let this unfold." It appears markets are starting to take the prospect of more rate hikes from the Fed more seriously as Treasury yields jumped today after the better GDP and jobless claims data showed the economy remains strong and inflation “sticky”. 

 

In IPOs today, three companies priced and traded today: 1) Savers Value Village (SVV) 22.29M share IPO priced at $18 – deal size increased to 22.29M from 18.75M shares and priced above the $15.00-$17.00 range – opened at $24.77. 2) Kodiak Gas Services (KGS) 16M share IPO priced at $16.00 (below expected range of $19-$22) – opened at $15.56. 3) Fidelis Insurance Holdings (FIHL) 15M share IPO (downsized from 17M) priced at $14 per share (below expected range $16-$19) – opened at $13.10.

 

Economic Data

·     U.S. Q1 GDP rises a greater +2.0% vs. +1.4% consensus and the previous estimate of 1.3% and 2.6% in Q4 2022 and Personal Consumption Q1 +4.2% vs. est. 3.8% and 3.8% prior.

·     Inflation reads from GDP: PCE price index for Q1 +4.1% vs. +4.2% consensus and prior estimate of +4.2%, while Core PCE price index: +4.9% vs. +5.0% expected and +5.0% previous estimate.

·     Weekly Jobless Claims fell to 239K in latest week below consensus 265K as the 4-week moving average rose to 257,500 from 256,000 prior; continued claims fell to 1.742M from 1.761M prior week (from prior 1.759 mln) and US insured unemployment rate unchanged at 1.2%.

·     Pending Home Sales for May dropped (-2.7%) M/M to 76.5 vs. (-0.6%) consensus and 0.0% in April. On a Y/Y basis, pending sales fell (-22.2%).

 

Commodities

·     U.S. crude oil futures settle at $69.86 per barrel, up 30 cents, 0.43%, holding yesterday gains after a bigger-than-expected fall in U.S. inventories boosted prices. Brent Crude futures settled at $74.34 per barrel, up 31 cents, 0.42%. Natural Gas for Aug. delivery gained 3.30c, or 1.24% to $2.7010 per million British thermal units helped by a smaller-than-expected weekly storage build last week and forecasts for higher demand over the next two weeks. Extreme heat in Texas likely boosted the amount of gas generators burn to produce power for air conditioning, especially in Texas, which gets most of its electricity from gas-fired plants.

·     Gold prices fell -$4.30 to settle at $1,917.90 an ounce (off earlier lows $1,900.60 an ounce). Prices have been in tailspin of late amid rising expectations of addition rate hikes by the Fed (at least two) after just two months ago, markets were calling for multiple rate cuts in 2023 with no additional hikes. The spike in yields and strength in stocks dulled interest in precious metals.

·     Treasury yields broadly higher, rising to best levels in month on rising bets of additional rate hikes by the Fed in coming months as the economy remains resilient and inflation stubbornly high. Shorter term 2-yr yield spiked +15 bps to 4.87%, the 3-yr +16 bps at 4.50% and benchmark 10-yr +14 bps to 3.85%. US 5-Year tips yield tops 2% for first time since 2008.

 

 

Macro	Up/Down	Last
WTI Crude	0.30	69.86
Brent	0.31	74.34
Gold	-4.30	1,917.90
EUR/USD	-0.0046	1.0865
JPY/USD	0.40	144.85
10-Year Note	0.14	3.852%

 

 

Sector News Breakdown

Consumer

Autos:

·     Autos: TM was upgraded to Buy from Neutral at Citigroup and raises tgt adding an "upside Catalyst Watch" on the stock hopeful Q1 results will be better than expected. Separately, TM posts 10% sales growth in may boosted by improved supply chain logistics.

·     In ride hailing/delivery: UBER, LYFT, DASH: Bank America noted CA State Supreme Court hearing Prop 22 appeal not a positive for industry. The Supreme Court of California granted review of Castellanos v. the State of California after appeal from the SEIU. This will result in another round of briefings, oral arguments, and ultimately a decision on Prop 22.

·     In Electric vehicles: FREY upgraded to OW at Morgan Stanley following their inaugural CMD in NYC featuring several material milestones, including manufacturing batteries at CQP, early discussions to diversify battery tech. WBX shares rose after saying its Pulsar Plus electric-vehicle charger will be available at COST stores nationwide starting in July. Cathie Wood’s ARK Invest Management firm sold 28,368 shares of TSLA stock Wednesday worth $7.27 million based on Wednesday’s closing price of 256.24, according to ARK’s daily trade updates.

 

Consumer Staples & Restaurants:

·     In Food: SMPL beats Q3 sales and profit expectations, boosted by higher prices and reiterates annual sales and profit forecasts; Spice maker MKC beats on adj earnings by 3c as sales were roughly in line and boosted its full-year outlook by 4 cents to the range of $2.60-$2.65.

·     In Tobacco: TD Cowen downgraded the medium-term outlook for U.S. cigarette volume declines to a 6-7% CAGR, as believes much of that pressure reflects the migration of younger consumers to more novel nicotine. While margin accretive to Outperform PM, it’s a drag for MO, BATS and IMB, who continue to scale in RRPs, and TDCowen thus lower estimates.

Retailers:

·     NKE expected to report earnings after the close tonight, a big look into retail.

·     AOUT rises on earnings: 4Q adj EPS $0.06 vs est. ($0.13) on revs $42.2Mm vs est. $39.28Mm, adj EBITDA $1.8Mm vs est. (-$0.598Mm); says believe FY24 net sales by as much as 3.5%.

·     SVV – Savers Value Village 22.29M share IPO priced at $18 as deal size increased to 22.29M from 18.75M shares and priced above the $15.00-$17.00 range.

·     AMZN: JPMorgan said it projects its Prime Day July 11-12 will drive incremental revs of ~$5B, up +13% Y/Y from the ~$4.4B of incremental revs they disclosed for Prime day last year.

·     AMZN: The U.S. antitrust regulator is planning to file a suit targeting Amazon’s core online marketplace in the coming weeks, Bloomberg News reported. The main allegation by the U.S. Federal Trade Commission (FTC) is expected to be that Amazon uses its power to reward those online merchants that use its logistics services and punish the ones that don’t.

 

Leisure, Gaming & Lodging:

·     In theme parks: Keybanc said y/y full week traffic trends for SEAS, SIX, FUN came in largely consistent with 2Q23-to-date trends. For FUN, traffic for the full week came in at -23.3% y/y including Monday-Friday at -24.6% and the weekend at -21.2%; SEAS traffic for the full week came in at -14.0% y/y; this was consistent with 2Q23TD (-13.7%) and said for SIX, traffic for the full week came in at -7.3% y/y, consistent with 2Q23TD (-8.2%); Monday-Friday (-4.7%), which included strong Monday trends, outperformed relative to the weekend (-11.3%).

·     In Casinos & Gaming: Deutsche Bank said for regional gaming names (BYD, CZR, GDEN, MGM, PENN, RRR), following several challenging months of Y/Y comps, which were weaker than expected / forecast, operators are tracking below Consensus net revenue forecasts for Q2; DKNG tgt raised to $39 from $36 at Susquehanna following industry analysis for online gambling, it increased its projections for DKNG in 2Q23 and in 2H23+. Las Vegas May hold-adjusted GGR -4% y/y (-2% as reported) and +38% vs. ’19 (as reported), though helped by hold (+22% vs. ’19 hold-adjusted). Strip RevPAR was up 6% y/y on +2% occupancy and +4% ADR.

 

Homebuilders, Building Products, Home Furnishing:

·     Home Improvement retail: Wedbush said they came away incrementally positive on the long-term outlook of HD after investor meeting, but warns risks remain in 2024. Firm said importantly, HD indicated confidence in its flat gross margin outlook over time despite potential for outsized growth in Complex Pro, as it is not leading with lower-margin commodities in this initiative, and it should be able to charge a premium for its “one-stop-shop” service.

·     In Home Furnishing: OSTK said revs are tracking down in the low-20%’s YoY (~inline w/ cons) w/ profitability "under pressure" due to a "highly competitive promotional and marketing environment within a challenging economic backdrop"; despite this, OSTK still anticipates delivering positive adj EBITDA (cons +$6.8M); in addition, confirms it will buy Bed Bath & Beyond IP for $21.5M. RH was downgraded to Hold from Buy at Loop Capital with $300 tgt.

·     Real Estate: RDFN reports the typical US home is selling for just $4,000 less than last year’s all-time high; said the median US home-sale price is down just 0.9% year over year, the smallest decline in nearly four months due to a lack of homes for sale.

 

Energy, Industrials

·     In Energy: Berkshire Hathaway bought 2.1M shares of OXY in recent days, lifting its stake to just over 25%, according to a filing late Wednesday; BRKA now owns 224.1M shares. Kodiak Gas Services (KGS) 16M share IPO priced at $16.00 (below expected range of $19-$22)

·     In Industrials: Deutsche Bank names both CMI and OSK as new catalyst call Buys in machinery/industrials and a short-term Sell on ITW; AYI posted mixed Q3 results as adj EPS $3.75 vs. est. $3.71; Q3 revs slid -5.7% y/y to $1B vs. est. $1.05B as Revenue from its lighting and light-control business fell 6.7% to $940.7M.

·     In agriculture and machinery, LNN shares dropped after big Q3 EPS miss ($1.53/$164.6M below consensus $2.15/$208.4M) saying general economic uncertainty has negatively impacted farmer sentiment, tempering order activity (watch shares of DE, AGCO).

·     In distributors: MSM pricing and margins weigh on FAST, GWW; MSM Q3 EPS $1.74 vs. est. $1.75; Q3 revs $1.05B vs. est. $1.02B; said expect to achieve double-digit ads growth for FY; sees FY adj. Operating margin 12.7%, lower end of prior 12.7% to 13.3% range after Q3 GM’s of 40.7% vs. 41.6% est.

 

Financials

Banks, Brokers, Asset Managers:

·     Financials leading market gains after the Federal Reserve said all 23 banks that went through their “stress test” showed projected losses of $541 bln in stress test but maintain capital ratios well above required levels. Fed says banks saw capital decline 2.3% points in test to 10.1%, smaller decline than 2022 test. New Stressed Capital Buffers (SCBs) suggest higher required capital ratios at COF, CFG, TFC, C. Lower at JPM, BAC, GS, MTB, PNC, WFC. Biggest negative surprises? COF, CFG. Biggest positive surprises? JPM, GS, BAC, MTB as per Morgan Stanley. All banks have sufficient capital in our models under the new reg mins. The test showed the average capital ratio for the 23 banks was higher than last year when the central bank had reviewed 34 lenders against a slightly easier scenario.

 

Payments, Services, Insurance:

·     In Credit Cards: Visa (V) said it has signed a definitive agreement to acquire Pismo, a cloud-native issuer processing and core banking platform with operations in Latin America, Asia Pacific, and Europe, for $1 billion in cash; AXP, COF, DFS: Bank America notes weekly total card spending per household was -2.0% y/y in the week ending Jun 24, and total card spending ex gas fell to -0.1% y/y in the week ending Jun 24, while retail spending ex auto was even lower at -4.2%.

·     In Insurance: FIHL 15M share IPO (downsized from 17M) priced at $14 per share (below expected price range $16-$19); LMND said on June 28, entered customer investment deal in which investors will provide up to $150 mln over 18 months to Co as per filing.

·     In Crypto, Services: Fidelity Investments refiled paperwork with the SEC Thursday for a spot bitcoin ETF, which would hold the cryptocurrency as the underlying asset and track its price; ratings agencies SPGI and MCO had estimates and tgts raised at Oppenheimer, primarily driven by higher revenue in Ratings than it had previously expected.

 

Healthcare

Biotech & Pharma:

·     ALVO said the FDA declined to approve co’s second marketing application for AVT02, a biosimilar to ABBV’s arthritis drug Humira noting certain deficiencies.

·     BMRN said the FDA approved its ROCTAVIAN, the first and only gene therapy for adults with severe Hemophilia A.

·     BTAI plunges after saying it’s investigating data integrity at one of the clinical trial sites of its study for the treatment of Alzheimer’s disease- related agitation, after it found a principal investigator fabricated email correspondence.

·     PFE downgraded from Outperform to Neutral at Credit Suisse and cut tgt to $40 from $47 saying Pfizer enters a period of uncertainty and limited pipeline catalysts and sees greater opportunity for growth among other US Major peers.

·     RNXT announces new positive interim phase iii data demonstrating RenovoGem delays cancer progression by eight months in locally advanced pancreatic cancer.

·     SGTX soars over 400% after LLY agreed to acquire the nano-cap biotech for $14.92 per share, in a deal valued at about $35M https://tinyurl.com/y2e4syut

·     VKTX shares defended at William Blair noting shares down over 20% this week after better-than-expected oral GLP-1 data from LLY (orforglipron), elevating the bar for investigational oral obesity drugs. Then Tuesday, significant liver fat reduction data from LLY’s “triple G” (retatrutide): read-through is that GLP-1s creates obsolescence risk for Nash drugs.

 

Industrials & Materials

Transports

·     In airlines: TD Cowen previews quarter as expects record revenues and higher operating margins. The firm said potential positive surprises: DAL, UAL, AAL, ALGT, CPA, VLRS. And said its Top Picks: UAL, DAL, CPA

·     In shipping: Baltic Dry Index falls 2.28% to 1,112 in London, down for a fourth Day; Other dry cargo indexes, expressed in USD/day: Capesize -3.47% to $14,589, Panamax -1.93% to $8,032, and Supramax 58k tons -0.19% to $8,251.

·     In truckers/logistics: Citigroup provided trucking earnings preview (XPO ) saying 2Q estimates are falling for much of its truck and logistics coverage, as truck pricing remains at a bottom and seasonality disappointed in early 2Q. June activity, however, has improved modestly, and with the freight cycle near the bottom the firm is closing in on the early cycle and would expect names like the TLs and JBHT to outperform; also prefer XPO, KNX.

·     In Rails/railcars: GBX shares surge over 20% after Q3 results easily beat (EPS $1.02 on revs $1.04B vs. est. $0.60/$899.2M) and raises FY revenue to $3.8B-$3.9B from prior $3.4B-$3.7B and boosts delivery outlook to 25,000 to 26,000, saw 23,000 to 25,000; raises dividend by 11%.

 

Aerospace & Defense

·     JOBY extends gains as welcomes $100M investment as it expands partnership w/SK Telecom (comes a day after rising 40% after U.S. aviation regulator gave nod for flight testing of its electric air taxi, taking it step closer to securing approvals for commercial operations).

·     SPCE historic first commercial spaceflight could lay the foundations for a time when “everyday people,” not just billionaires, can one day visit space, according to former NASA astronaut Eileen Collins. The private spaceflight company is targeting Thursday for its Galactic 01 mission.

 

Materials, Metals & Mining

·     In paper packaging: PKG downgraded from Buy to Hold at Deutsche Bank and cut tgt to $26 from $30 due to an estimated 5% decline in EBITDA in 2024 whereas consensus is currently assuming close to 2% growth next year. Sees a lack of earnings growth next year as price-cost turns negative and with labor inflation offsetting productivity benefits.

·     In chemicals: ASH issues Q3 guidance $545M-$550M vs. est. $625.61M and cuts FY23 revenue view to $2.2B from $2.3B-$2.4B citing unprecedented reset impact from customer de-stocking actions across many supply chains (downgraded at Evercore/ISI) – stock helped by $1B buyback news; FUL reports top and bottom line miss as Q2 adj EPS $0.93 vs. est. $1.04; Q2 revs $898M vs. est. $969.6M; Q2 adj EBITDA $143M vs. est. $146M; guides FY adj EPS $3.80-$4.20 vs. est. $4.15. RBC Capital lowered estimates for CE, EMN and HUN on continued destocking and weak demand, particularly in housing/construction and industrial end markets.

·     In Metals: another downdraft in gold miners early (AEM, NEM, GOLD) as gold drops to $1,900 an ounce as the dollar and Treasury yields jumped following stronger economic data. In steel sector, WOR Q4 adjusted EPS of $2.74 vs. Street’s $1.87 as capitalized on favorable steel price-cost across its platform, positively arbitraging the upshot in carbon sheet steel substrate volatility during C1H23 according to Keybanc (notes adjusted EBITDA was >$200M vs. their $141M).

 

Technology

Internet, Media & Telecom

·     In media: DIS downgraded to Sector Weight from Overweight at KeyBanc saying it has doubts, as: 1) DIS Domestic Parks expectations appear high; 2) DTC subscriber growth has stalled, and has failed to differentiate its DTC churn vs peers; 3) ESPN moving to streaming is materially harder than it initially thought, 4) structural changes in content distribution have resulted in DIS content sales segment business that is unlikely to make money for the foreseeable future. NFLX tgt raised to $500 at Citigroup (after Opco raised to %500 yesterday) and opens a positive catalyst watch ahead of Q2 results as sees more bullishness around its advertising tier.

·     In social media: SNAP shares rise after saying it reached 4 mln paid subscribers for its Snapchat+ paid service in its first year. SNAP launched the test version of Snapchat+ in June last year to give subscribers access to exclusive and pre-release features.

 

Semis, Hardware & Software movers:

·     BB shares rose as narrowed its Q1 loss to $11M from $181M loss y/y as adj EPS topped views and revs rose to $373M from $168M prior and above est. $161M as IoT revenue was $45M while cybersecurity revenue was $93M.

·     MU reported a smaller-than-expected quarterly loss and provided a better-than-feared forecast, while Piper upgraded shares to neutral based on improving end-market inventory conditions with a potential improvement in volumes and pricing in 2H23. Micron noted on its earnings call that the revenue trough is behind and inventory for PCs and smartphones is close to normal.