Closing Recap

Wednesday, October 04, 2023

Index	Up/Down	%	Last
DJ Industrials	126.91	0.38%	33,129
S&P 500	34.11	0.81%	4,263
Nasdaq	176.54	1.35%	13,236
Russell 2000	2.02	0.12%	1,729

 

 

 

 

 

 

 

 

 

US equity futures tested support pivots and neared the 200dma for Spuz overnight before rallying back to green pre-open. Rising yields have pressured stocks recently as investors have determined higher rates for longer really is a possibility. Today’s ADP Employment data finally gave bulls a datapoint in their favor. The ADP employment change came in at 89k private sector jobs versus expectations of 153k and last month’s 177k, supporting the pre-market gains in futures as Fed swap contracts assigned lower odds to another rate increase. Stocks faded off the better open after US Factory Orders data came in a bit stronger than estimates, pushing the S&P back to flat, while NASDAQ held modest gains. By mid-morning, breadth remained soft with decliners leading advancers almost 3:2, though both the S&P and NASDAQ enjoyed gains. Consumer Discretionary and Technology were leading the gainers, while Energy, Utilities, Industrials and Healthcare were laggards and all in the red.

 

On the data side today, @bespokeinvest highlighted the disparity between equally weighted and cap-weighted returns for the S&P 500 through September, with cap-weighted outperforming by more than 11 percentage points, the most since 1990. Perfect timing, as @t1alpha points out today the mega-caps are leading again, with MSFT driving about 50% of the relative move higher through mid-morning. On a different subject, @charliebilello notes mortgage applications in the US have fallen the most since 1995, with average home prices shutting many people out of the new home market with mortgage rates at 7.7% for a 30-year fixed. @KobeissiLetter adds, on a post-tax basis the median monthly home payment is nearly 70% of the median household income. Similarly, on the subject of affordability, or lack thereof, CNBC highlighted average monthly payment for new vehicles reached a record $738 in August. 

 

Heading into the final hour of trading, equities were off their afternoon highs but held onto gains with the NASDAQ outperforming. Breadth improved to slightly favor gainers and only Energy (XLE, -3.5%) was really getting hit, while Utilities (XLU, -0.1%) was also in the red. Leading the gainers were Consumer Discretionary (XLY, +2%), Technology (XLK, +1.3%) and Materials (XLB, +1.08%). Growth and value diverged to mirror the leadership of the big-cap techs, with the Russell 1000 Growth +0.94% versus its Value counterpart -0.27%. Small caps also underperformed with the IWM flat.

 

Economic Data

·     Jobs weaker: September ADP Jobs report at 89K, below the 150K consensus and 180K in August (which was revised from +177K). Next jobs data tomorrow in Weekly Jobless Claims then the September Nonfarm Payroll data on Friday.

·     ISM non-manufacturing for Sept 53.6, in-line with consensus and down from the Aug reading of 54.5; business activity index 58.8 vs August 57.3, prices paid index steady at 58.9 in Sept, new orders index 51.8 down from August 57.5 and employment index 53.4 in Sept vs August 54.7.

·     Factory orders rose 1.2% in August vs. est. +0.2%, while orders ex-transportation +1.4% vs July +0.9% (prev +0.8%); factory orders ex-defense +0.8% vs July -2.2%; Aug Durables orders revised to +0.1% from +0.2%; Aug nondurables orders +2.1% vs July +1.5%.

·     S&P Global September final services PMI at 50.1 (vs flash 50.2).

 

Commodities

·     WTI November crude futures took a bit of a beating to settle -$5.01/bbl, or -5.61%, to $84.22 as rising yields spooked investors into expectations of global economic slowdown and pushed futures to the lowest settlement since late August. Brent also fell, settling -$5.11, or -5.62%, to $85.81/bbl. Today was another demand-focused day, but bulls continue to focus on potential supply shocks ahead. Friday’s jobs data will give us another view of how the US economy is doing and whether bulls are correct to focus on potential reacceleration.

·     December gold futures slipped $6.70/oz, or -0.36%, settling at $1,834.80 as investors continue to fear higher for longer rates from the Fed. The move came despite better ADP data pre-open. Expectations seem to be building for ongoing gold pressure in the current rate regime, potentially pushing gold prices back below $1,800/oz. Investor attention now will be focused on Friday’s payroll data and on whether rates and the US Dollar continue to climb. A lighter payroll result may open the door for gold gains.

 

 

Macro	Up/Down	Last
WTI Crude	-5.01	84.22
Brent	-5.11	85.81
Gold	-6.70	1,834.80
EUR/USD	0.0036	1.0502
JPY/USD	0.10	149.12
10-Year Note	-0.061	4.741%

 

 

Sector News Breakdown

Consumer

Consumer Staples & Restaurants:

·     In Food: CALM slides as Q1 EPS $0.02 missed est. $0.33 on sales $459.3Mm vs est. $479.52Mm; Net average selling price for specialty eggs increased 8.4% quarter-over-quarter; Conventional egg net average selling price per dozen was $1.241 for Q1 compared with $2.368 y/y; BGS was downgraded from Neutral to Underweight at Piper and tgt to $8 from $14 saying its US measured retail sales trends are running behind expectations for 3Q23, as measured retail sales declines continue to accelerate.

·     In Grocers: Tesco (TSCDY) boosted its annual profit forecast to be between 2.6 billion pounds ($3.14 billion) and 2.7 billion pounds, up from a previous forecast of about 2.5 billion pounds as food inflation eased; in 1H23, retail adjusted operating profit was 1.42 billion pounds, ahead of analysts’ average forecast of 1.35 billion pounds.

 

Retailers:

·     HELE reported top and bottom line beat for Q2 (EPS $1.74/$491.6M vs. est. $1.64/$485M and reiterates full year outlook for this fiscal year but reported a 10% drop in sales in its Beauty & Wellness business dragging company-wide sales down by nearly 6%.

·     ONON said ahead of its Investor Day that it intends to double full year 2023 net sales by 2026, aims to reach 18% plus adjusted EBITDA margin by 2026, while exceeding 60% gross profit margin and reiterates previously provided outlook for the fiscal year.

·     In Broadline/Hardline (BBY, DLTR, BIG, HD, LOW, WMT, TGT, RH): Keybanc said the outlook for consumer spending over the next 6-12 months remains at risk with rising gas prices, higher cost of living, elevated mortgage rates, a slowing labor market, and the resumption of student loan payments remaining an overhang on ability to spend. Believes “trade down” and a pullback in discretionary spending remain bigger risks ahead.

 

Homebuilders, Building Products, Home Furnishing:

·     Mortgage demand drops to the lowest level since 1996, as interest rates head toward 8%; weekly MBA mortgage data showed applications index fell (-6.0%) in latest week, mortgage purchase index falls (-5.7%) and the refinance index falls (-6.6%) as the average 30-year mortgage rate rises 12 bps to 7.53% in Sept 29 week, highest since Nov 2000.

 

Energy

·     The energy sector leading lower as WTI crude falls more than 3% as prices remain under pressure from demand fears driven by macroeconomic headwinds (prices down from highs above $95 just 2-weeks ago). Pledges today by Saudi Arabia and Russia to continue crude output cuts to the end of 2023 were offset by demand fears stemming from macroeconomic headwinds. Shares of APA, OXY, MRO, PXD, VLO, SLB were among biggest losers in the S&P.

·     U.S. crude stocks at the Cushing, Oklahoma, storage hub rose last week for the first time in eight weeks, Energy Information Administration data showed on Wednesday. Cushing stockpiles rose last week by about 130,000 barrels to 22.1 million barrels, the data showed. U.S. crude stocks fell to 414.1 million barrels, the lowest level since December 2022.

·     UBS raised its Brent forecast to $92/bbl from $85 for 4Q23, bringing the 2023 average price to $84/bbl from $81/bbl previously. UBS’s forecast for 2024 is also up $7/bbl on average to $87/bbl: $90/bbl in 1H24, $86/bbl in 3Q24 and 82/bbl in 4Q24. UBS leaves the 2025 forecast unchanged at $80/bbl while it raises 2026 to $80/bbl from $75/bbl.

·     In Solar: Truist downgraded solar installers RUN and NOVA to Hold from Buy saying following the recent broad-based sell-off in Sustainability equities under renewed investor concerns on a "higher-for-longer" rate environment, they re-evaluate the trade-off of NT headwinds vs. LT value creation. Recommend investors instead buy utility-scale/resi suppliers including ARRY, NXT, SEDG, GNRC (all Buy rated). FTCI said it has been selected by Sandhills Energy to supply its Pioneer 1P solar tracker solution for a 225-megawatt project near Columbus, Nebraska.

·     In Utilities: after a brief bounce late Tuesday off 3-year lows for the XLU, prices resumed their downward momentum on higher Treasury yields (making dividend paying sectors less attractive) and as interest rate fears increase. Financing markets question power generation development economics, impair utility valuation, increase ROEs but lower CAPEX outlook. Citigroup noted regulated utilities with low-rate base multiples, and little financing needs seen as more defensive (I.E., SWX, DTE, CNP, ED, CMS, DUK, PEG, NRG, while PPL and EIX) and any name with renewable or financing market exposure as more volatile (AES, ES, AEP, PNM, NFE, EVA, NI, ETR, ATO).

 

Financials

Banks, Brokers, Asset Managers:

·     In Banks: Wells Fargo downgraded Mid-Cap banks ASB, BANC, FHN, FIBK to Equal weight from Overweight in transfer of coverage. 4 Top Picks: short-term into 3Q23: WAL (deposits should create "beat and raise story") and FNB. Core holdings are PNFP (best US mkts; less CRE) and EWBC (rates/credit).

·     In Real Estate Services: Raymond James said following commentary from CBRE at a competitor’s conference in early September and the recent push higher in long-term interest rates, hey lower 2H23 and 2024 revenue and EPS estimates for the CRE services providers under coverage (CWK, JLL, CBRE) and downgraded NMRK to Market Perform to reflect its greater sensitivity to investment sales revenue relative to its peers.

 

Healthcare

Biotech & Pharma:

·     LLY said Mike Mason, executive vice president and president of Lilly Diabetes and Obesity, will retire from Lilly at the end of 2023.

·     MRNA said it will begin a final-stage trial of a combination flu and Covid vaccine later this year, after the combo shot generated strong immune responses against both viruses in an early-stage human trial.

·     NUVL said preliminary phase 1 dose-escalation data from ALKOVE-1 trial of NVL-655 demonstrated activity in heavily pre-treated patients with ALK-Positive NSCLC and an ALK-selective, TRK-Sparing safety profile.

·     PODD CFO Wayde McMillan has decided to step down from his role effective Oct 23 and join 3M’s Healthcare business.

·     RGNX presented RGX-202 DMD gene therapy Ph1/2 AFFINITY data with microdystrophin protein level achieving 11-39% at 3mon with no SAEs.

·     TEVA and SNY entered an exclusive collaboration agreement for the development of a novel therapy to treat ulcerative colitis and Crohn’s disease. The drug, TEV’574, will be co-developed and co-commercialized by the two companies. Teva to get an upfront payment of $500M as part of collaboration agreement04 and can get up to $1B in development and launch milestones.

·     Hospitals/Managed Care (THC, UHS, CYH, UNH, CI): Coalition of Kaiser Permanente Unions launched the largest-ever health-care strike in the US as 75,000 workers to strike in multiple states and is expected to last for three days. Workers in California, Oregon, Colorado, and Washington state expect to launch a three-day strike.

 

Industrials & Materials

Aerospace, Industrials & Transports

·     In Industrials: FLR upgraded from Neutral to Buy at UBS and raised tgt to $47 from $35 as thinks investors underappreciate FLR’s potential as it continues its turnaround. It has reached an inflection point on legacy risk concerns and is close to returning to more normalized margins.

·     In class 8 trucking (CMI, PCAR): Class 8 Truck North American orders rose 5.1% m/m in Sept to 31,100, according to FTR preliminary data, the highest in 10 months and the biggest monthly rise since Sept. 30, 2022; was down -45% y/y.

·     Defense stocks (GD, LMT, NOC, RTX) weaker Kevin McCarthy, a Republican, was voted out (216-to-210 vote) as the Speaker of the US House of Representatives. Hardline Republicans were angered by McCarthy’s willingness to fund Ukraine’s war while arguing that the money could have been better spent to protect the southern border and restore law and order in imploding major US cities. The historic ouster of the speaker has weighed on defense stocks.

 

Materials, Metals & Mining

·     In Chemicals: LYB was upgraded to Buy at Citigroup and named LIN, APD, PPG new top picks in chemicals preview into Q3 earnings; keeping 3Q23 EPS estimates mostly flat and taking down FY23 EPS 2% on average. Said the prevailing narrative of softer supply and weak primary demand across the broader chemicals space persisted into 3Q23. RPM posted higher Q1 sales, lifted by price increases and strong demand from infrastructure and reshoring projects.

·     In TiO2 sector: Barclays lowered estimates and targets for Titanium Oxide companies following meetings with industry consultant TiPMC and recent conversations with producers. Firm said TROX and CC remain best-positioned to ride out the down-cycle, while thinks KRO has structural headwinds from Chinese exports (CC to $31 from $40, KRO $6 from $7, and TROX $15 from $16).

·     Gold miner GOLD said it will invest almost $2 billion to expand its Lumwana mine in Zambia into a "super pit" and the miner into one of the world’s largest copper producers; expansion project at Lumwana will boost annual production to an estimated 240,000 metric tons of copper from a 50-million ton a year processing plant with a 36-year life of mine, the Canadian company said.

·     In Lithium: LAC announced separation to form two separate companies, with the other, Lithium Americas (Argentina) LAAC, which was initiated at TD Cowen with an Outperform rating and $14 tgt saying its Cauchari project in Argentina is the newest producing lithium brine, with a robust portfolio of future growth projects that will be better understood in the coming year.

 

Technology

Semi’s, Hardware & Software movers:

·     In Hardware: AAPL was downgraded to SW from OW at Keybanc with $200 tgt based on: 1) valuation, as AAPL is trading near ATH multiples and a large premium to the Nasdaq vs history; 2) U.S. sales are likely to struggle based on their view of U.S. upgrade rates, and initial U.S. iPhone promotions from U.S. carriers being restrictive; 3) Int’l growth expectations for reacceleration may be aggressive, in its view; and 4) ests. appear full, from top- and bottom-line perspectives.

·     In networking: ATEN shares tumbled after guiding Q3 revs to be between $56.5M-$58.5M, below consensus of $74.65M and Q4 revs $70M-$80M saying deals they expected to close at the end of the quarter were delayed into future periods.

·     In Software: PLTR is close to securing a contract to overhaul the UK’s National Health Service in a deal worth as much as GBP480M (~$582M), Bloomberg reported overnight.

·     In semis, INTC shares rose early after announcing plans to do an IPO for its Programmable Solutions Group (PSG) unit from its core businesses, saying the move will help “Intel product teams to focus on our core business and long-term strategy.”