Closing Recap

Monday, October 30, 2023

Index	Up/Down	%	Last
DJ Industrials	510.85	1.58%	32,928
S&P 500	49.41	1.20%	4,166
Nasdaq	146.47	1.16%	12,789
Russell 2000	10.35	0.63%	1,647

 

 

 

 

 

 

 

 

 

Ok, let’s try this again. After a bumpy week last week, US equity futures again looked primed to bounce back a bit with overnight gains in both the Nasdaq and S&P 500. Sound familiar? Friday looked similar but investors sold the early strength and indices ended the week on a down note. While expectations remain for the Fed to be on hold this week, a more hawkish tone also seems to be what investors anticipate and those modest expectations are likely a good thing. Earnings have been mixed but we still have some big names ahead, e.g., Apple, and recent chatter on share shift to Huawei in China seems to have lowered the bar there as well. After an early dip, futures remained in positive territory with breadth holding at about 3:2 in favor of advancers by late morning. Energy was the only sector in the red, following WTI crude (-3.3%) and NatGas (-3.6%) lower. 

 

Today’s data focus is the recent performance of the S&P and performance spread across the cap structure. @bespokeinvest notes only 24.7% of S&P 500 stocks are above their 200 day moving averages, below 25% for the first time in over a year. @DataTrekMB highlights the S&P crossed into correction territory last Friday as higher-for-longer rates impacted equities. Separately, @charliebilello points out the 50 largest S&P 500 names are still up 20% year-to-date versus the equally weighted S&P 500 -4% and small caps -6%. Similarly, @KobeissiLetter reminds us the top 7 tech stocks now make up about 30% of the S&P 500, putting even more focus on rates and the recent pressure on equities from rate hikes. While expectations remain for the Fed to be on hold this week, probabilities continue to imply more than a 30% likelihood of higher rates in January.

 

Heading into the final hour of trading, equities were holding near highs. Even the small caps were getting in on the action, with the IWM +0.9%. Market breadth had expanded to just better than 2:1 still in favor of advancers and all sector groups had turned positive. Communications (XLC, +2.3%), Financials (XLF, +1.95%) and Consumer Staples (XLP, +1.7%) were leaders, while Real Estate (XLRE, +0.07%) and Energy (XLE, +0.09%) remained laggards. Both growth and value gained, with growth the outperformer. The Russell 1000 Growth was +1.5% versus its Value counterpart at +1.0%. It’s nice to get back to a green Monday, but overall, the week is likely to be driven by the Fed so stay tuned.

 

Commodities

·     WTI Dec crude futures slipped $3.23/bbl, or -3.78%, to settle at $82.31. Brent similarly slid $3.03/bbl, or -3.35%, to settle at $87.45. The move pushed WTI to the lowest in more than three weeks despite ongoing fighting in Gaza. Perhaps investors have now adjusted expectations for a drawn-out conflict and anything less than escalation and incremental involvement from third parties has mostly been priced in. The Fed meeting later this week will provide our next most interesting non-Gaza data point.

·     December gold futures followed Friday’s gain with another positive session, settling +$7.10/oz, or +0.35%, to $2,005.60. The move, the fourth consecutive gain, pushed prices through the $2,000 mark to the highest since late July. The “fear” trade on fighting in Gaza continues to drive haven buying even in the recent rising rate environment. This week we will hear from the Fed again, but expectations remain for no change in rates, so perhaps events in the Middle East will remain in control for now.

 

Currencies & Treasuries

·     Treasury yields slipped late in the day following Treasury refunding headlines.

·     The U.S. Treasury Department said it expects to borrow $776 billion in the fourth quarter, $76 billion less than it had anticipated in July, on expectations of higher receipts, which will be somewhat offset by higher outlays. The fourth-quarter financing estimate assumes an end-December cash balance of $750 billion, the Treasury said in a statement.

·     The Treasury also announced it expects to borrow $816 billion in debt in the first quarter of 2024, assuming a cash balance of $750 billion at the end of March. In the third quarter of 2023, the Treasury said it borrowed $1.01 trillion and ended that quarter with a cash balance of $657 billion. That was the largest net debt issuance during the third quarter period. It was, however, well below the almost $3 trillion the Treasury borrowed in the second quarter of 2020.

·     Wednesday there will be quite a bit riding on supply announcements as the recent surge in long-end yields was partly (if not mainly) attributed to the US’s deteriorating fiscal situations with >$1.7 trillion deficits likely to require much larger financing/UST issuance needs.

 

 

Macro	Up/Down	Last
WTI Crude	-3.23	82.31
Brent	-3.03	87.45
Gold	7.10	2,005.60
EUR/USD	0.0048	1.0612
JPY/USD	-0.51	149.09
10-Year Note	0.039	4.884%

 

 

Sector News Breakdown

Consumer

Autos:

·     The United Auto Workers (UAW) reached a tentative contract agreement with Jeep maker STLA this weekend. There were reports this morning that GM and the United Auto Workers (UAW) union have reached tentative contract agreement, Reuters reported, effectively ending the first simultaneous strike against the Detroit Three automakers with record wage and benefit hikes.

·     In China EV: China’s BYD Co Ltd posted record Q3 earnings, its highest ever for any quarter; Q3 net profit reached 10.4B yuan ($1.42B), am 82.2% increase y/y on a 38.5% rise in revenue to 162.2B yuan – was a smaller increase than Q2 when profit was up 145%.

·     In EV Battery makers: Panasonic Holdings (PCRFY), which supplies TSLA, said it had cut automotive battery production in Japan in the September quarter and shrank the division’s annual profit forecast by 15%. Panasonic lowered its full-year operating profit forecast for the energy unit to 115B yen ($769M) from 135B yen on an adjusted basis.

 

Retailers, Consumer Staples & Restaurants:

·     In Restaurants: Dow component MCD reported Q3 comp sales +8.8%, vs. est. +7.79%; US comparable sales +8.1% vs. +7.5% and Int’l comps +8.3% vs. est. +8.51% and Q3 adj EPS of $3.19 and revs $6.69B both topped consensus est. of $2.98/$6.52B; in research, DNUT downgraded from Buy to Hold at Truist and cut tgt to $13 from $20 based on the belief the current GLP-1 overhang on packaged food stocks will not dissipate for 6-12 months, if not longer.

 

Energy

·     In Solar: JKS shares jumped after Q3 revs rose 59% y/y to $4.36B topping expectations of $4.18B on better gross margins 19.3% vs. 15.7 y/y and said solar module shipments 21,384 mw vs. 10,286 y/y; DQ shares rebounded despite earnings and sales coming in way below prior year period (revs $484.8M vs. $1.22B last year); ENPH announced the launch of IQ8 Microinverters and the IQ Energy Router family of devices in Switzerland.

·     In Utilities: ETR said it had entered into an agreement to sell its gas distribution business to Bernhard Capital Partners, a services and infrastructure-focused private equity management firm, for approximately $484 million in cash, subject to certain purchase price adjustments.

 

Financials

·     In Lending: SOFI rises as Q3 EPS loss of (-$0.03) was smaller than the consensus loss (-$0.08) on better revenue of $537M vs $511.13M estimate and raised its rev guidance to $2.045-$2.065B from its prior guidance of $1.974-$2.034B.

·     In Insurance: AON was downgraded to underweight at Wells Fargo as thinks the price performance will be muted vs peers at least until they see a rebound in organic growth; noted Q3 organic growth was 6%, below all insurance broker peers (broker average was 8.2%). Loews (L) Q3 EPS $1.12 on revs $3.93B vs. (9c)/$3.46B last year and book value per share, excluding AOCI, increased to $79.92; Revenue at the company’s Boardwalk pipeline business rose to $363M from $339M while the hotels unit posted revenue of $196M, up from $180M last year.

 

REITs:

·     There were two M&A deals in the REIT sector:

·     In Commercial REITs: Realty Income Corp. (O) agreed to acquire Spirit Realty (SRC) in an all-stock transaction valued at about $9.3B, where Spirit shareholders will receive 0.762 newly issued Realty Income common shares for each Spirit common share they own. SRC shareholders would receive about $37.34/share, which is 15.4% premium https://tinyurl.com/45cfnyx4

·     In Healthcare REITs: Healthpeak Properties Inc. (PEAK) and Physicians Realty Trust (DOC) said they would combine in an all-stock merger of equals valued at about $21B where DOC shares will be converted into 0.674 of a newly issued share by PEAK https://tinyurl.com/3jvv3krx

·     INVH upgraded to Outperform from Perform at Oppenheimer with a $35 price target saying rent growth and occupancy are normalizing but should remain above pre-COVID levels next year. This is driven by challenges for homeownership due to elevated mortgage rates and limited inventory.

 

Healthcare

Biotech & Pharma:

·     ABBV upgraded to Overweight at Barclays and raised its price tgt to $170 saying Friday’s sell-off looks like an overreaction to external sector dynamics, against a backdrop of Immunology momentum and commentary de-risking ’24 pricing.

·     BLUE entered into an agreement to sell a Rare Pediatric Disease Priority Review Voucher (PRV), if received, in connection with the potential approval of lovotibeglogene autotemcel (lovo-cel) for sickle cell disease.

·     CHRS said the FDA late Friday approved its combination therapy as a first line treatment for adults with a certain type of cancer called NPC.

·     DCPH said the company’s Phase 3 study of vimseltinib met the primary endpoint and all key secondary endpoints; also reported Q3 rev beat of $43.3M vs. est. $39.4M.

·     MGTX said it has received a $30Mmn investment from French pharmaceutical company SNY and said the company has been approached by multiple parties about certain assets.

·     MIRO agreed to be acquired by UTHR for $3.25 per share in cash, or about $91 million which includes a potential milestone payment of $1.75 per share in cash https://tinyurl.com/mryt6vkv

·     VYNE said that it saw positive data from its Phase 1b trial evaluating once-daily dosing of VYN201 in patients with nonsegmental vitiligo; the 16-week trial assessed the safety, tolerability, and pharmacokinetics of once-daily topical VYN201 in 29 patients across three dose cohorts.

 

Industrials & Materials

·     In Truckers/Freight: XPO Q3 adj EPS $0.88 vs. est. $0.63; Q3 revs $1.98B vs. est. $1.93B; the uptick y/y was driven by higher tonnage per day and yield, excluding fuel, in the North American less-than-truckload business, which more than offset lower fuel surcharge revenue. SAIA was upgraded from Peer Perform to Outperform at Wolfe Research saying while near-term expectations got a bit ahead of themselves, SAIA should still be the biggest beneficiary from YELL’s bankruptcy over time with the biggest volume tailwind.

·     In Aerospace & Defense: defense stocks GD, TDG, NOC pulled back early afternoon; LHX upgraded to Outperform at Raymond James with $210 tgt as business appears to be bottoming post 3Q print and says margins bottoming as EAC adjustment headwinds appear to have peaked and NeXt generates $500 million in savings and > $2 of incremental EPS in ’25.

 

Technology

Internet, Media & Telecom

·     In online dating: Per media reports, X (formerly Twitter) plans to launch a full-fledged dating site in 2024. Bank America said it sees limited risk to MTCH and BMBL users given moats including scale, brand investments & verification & content processes. Meta launched a dating product in ’19 with limited impact to MTCH & BMBL as consolidated users grew 11% 2yrs post Meta launch.

·     In Advertising: OMC, in its largest acquisition ever, is spending $835M in cash to buy eComm shop Flywheel; the co, which is part of Cannes Lions owner Ascential, aims to help brands sell on digital marketplaces such as Amazon.

 

Hardware & Software movers:

·     Security Software: CHKP Q3 adj EPS $2.07 vs. est. $2.02; Q3 revs rose 3.2% y/y to $596M vs. est. $591.51M; Products and licenses and security subscriptions revenue rose 4.2% to $362.5M and software updates and maintenance revenue was up 1.8% at $233.8M.

·     In Comm & Networking: COMM guided prelim Q3 revs $1.6B (core $1.35B), below consensus $1.98B and reports preliminary Q3 core adjusted EBITDA $246M saying the weaker macro backdrop and customer inventory digestion continues to negatively impact revenues. LITE to acquire Cloud Light for ~$750M cash to accelerate data center speed and scalability.

 

Semiconductors:

·     Earnings this week from: Keybanc notes looking into this week, they have ten companies scheduled to report (AMD, CRUS, LSCC, MCHP, MPWR, ON, QCOM, QRVO, SLAB, and SWKS).

·     AVGO said that it expects its $61 billion deal to buy software maker VMW to close before a November deadline, working to reassure investors amid concerns that a slowdown in China’s review process could quash the deal. Broadcom and VMware didn’t say how close they might be to an approval from Chinese regulators https://tinyurl.com/fnhfrhtd

·     ON shares tumbled after reported a mixed Q3 with EPS missing ests by $0.05 but revs $2.18B topped estimates but guided Q4 results below estimates – sees Q4 EPS $1.13-$1.27 vs. est. $1.36 and sees Q4 revenue $1.95B-$2.05B below the consensus $2.18B. Other semis that get revs from autos such as WOLF, NXPI were pressured.

·     WDC shares rally behind earnings/guidance and news that its Board of Directors has unanimously approved a plan to separate its HDD and Flash businesses in 2H’24 by creating two independent, public companies with market-specific, strategic focus. WDC reported a larger Q1 EPS loss of (-$2.17) on better revs $2.75B and Q2 guide slightly above views.