Closing Recap

Friday, September 20, 2024

U.S. stocks opened Friday weaker, slipping the first 2 hours of trading in a small pullback after good gains earlier this week, but once again, buyers stepped in, paring market losses into the weekend on another “buy the dip” moment and allowing major averages to put in another good week of returns. Stocks bounced off lows around 11:15, around the same Treasury yields, the U.S. dollar and the VIX (fear) index all peaked and extended the bounce into the end of the day finishing little changed. Markets also had to contend with added volatility amid “Triple Witching”, with $5.1 trillion in options expiring. There were a few Fed speakers that moved markets this afternoon (see below) as bottom-line appears to be: after their 50-bps cut this Wednesday, each and every jobs/inflation data point is going to matter! After closing at all-time highs on Thursday, the S&P 500 finished just below, the Dow made new highs, while the Nasdaq 100 is still 4% below its July 10th high. So, more than halfway through the month, major averages are looking at gains. As @SJD10304 tweeted” “*IF* the S&P 500 finishes September in the black it will record a 2nd consecutive month to trade down more than -4% at the lows, only to reverse higher & finish the month in the black. We’ve seen consecutive reversal months like this exactly 1 other time since 1950, May 2020.

Utilities were the big winners today, with the XLU rising over 2.5% (snapping 3-day losing streak) led by massive gains in nuclear companies CEG after reports this morning of nuclear plant restart on Three Mile Island (lifted other nuclear names VST, NRG and others. NYSE breadth favored decliners by nearly 2:1 margin as 8 of 11 S&P sectors were lower. Strength in some heavily weighted large cap tech names like AAPL, AMZN, GOOGL, META helped major averages maintain modest losses (though AAPL shares fell late). Transports were the biggest losers on the day, with Dow Transports falling about 3.5% after FDX guidance/earnings disappointed, sending shares down as much as 15%.

In a CNBC interview, Fed Governor Waller said he “could imagine going 25 at the next meeting or two if the data comes in fine”, while noting if the labor market worsens and inflation data softens quicker, the Fed could do more and said if inflation data reverses you could argue for maybe a pause. Chris Waller also tells CNBC: The Aug inflation numbers last week suggest core PCE rose 0.14%. If you annualize the last four months, that leaves inflation running at less than 1.8%. So, Wall Street is back to watching data closely next month ahead of FOMC meeting November 6-7^th, with higher inflation leading Fed most likely to pause, but softer jobs data raising chances of more aggressive cuts going forward.

Later in the day, Federal Reserve Governor Michelle Bowman said she dissented over the U.S. Central bank’s half-percentage-point interest rate cut this week, favoring a quarter-percentage-point reduction instead, because inflation remains above the 2% target, and she worried the public would misinterpret the larger move as “a premature declaration of victory.” The job market and the economy remain strong, Bowman said in a statement, while “core personal consumption expenditures prices are still rising faster than 2.5% from 12 months earlier.” Core inflation strips out food and energy components that are volatile on a month-to-month basis and are not thought to reflect underlying price trends.

• U.S. natural gas futures climbed ahead of next week’s October expiration, as the October contract settles +3.7% at $2.434/mmBtu, and gas for November delivery rises 4.8% to $2.719/mmBtu as the focus shifts from the low-demand shoulder period to the coming winter heating season.
• Oil prices slip as U.S. WTI crude dips -$0.03 to settle at $71.92 per barrel, rising 4.76% on the week (up 2-straight weeks), while Brent Crude futures settle at $74.49/bbl, down -$0.39 or 0.52%. Baker Hughes reports that the U.S. rig count is down 2 from last week to 588 with oil rigs unchanged at 488, gas rigs down 1 to 96 and miscellaneous rigs down 1 to 4
• The U.S. dollar finished slightly higher on the day, rising against the yen, but slipped about -0.35% on the week following central bank actions (Fed cut 50bps, BoJ and BoE stayed steady). China unexpectedly leaves lending benchmark loan prime rate (LPR) steady at 3.35%, while the five-year LPR was unchanged at 3.85%. Yuan remains at strongest level against the dollar since May 2023 after Chinese banks leave prime lending rates unchanged. The U.S. dollar gained against the yen after the Bank of Japan policy decision passes without surprises, no changes to rates. Treasury yields end lower, but still up on the week despite the 50-bps FOMC rate cut.

• In Food & Beverages: PEP was downgraded from Overweight to Equal Weight at Morgan Stanley and lowering its OSG/EPS estimates further below consensus, albeit with some downside already expected by the market. CPB was upgraded to Buy from Hold at Argus. DRI was downgraded to Market Perform from Outperform with a price target of $180, down from $190, following the Q1 report at Bernstein while Evercore upgraded to Outperform.

• In office furniture sector: MLKN share fall, the second office furniture retailer to report weak earnings/guidance in as many days (SCS shares fell on Thursday off weak results), as Q1 adj EPS $0.36 misses the est. $0.40 and revs $861.5M below consensus $889.3M and guided Q2 EPS $0.51-$0.57 vs. consensus $0.61

• Autos: Electric vehicles were weak as VFS posted a larger quarterly loss than the previous year on sales of $357M which was below ests $419M; seeing other EV stocks pressured today such as LCID, and RIVN.

• In Refiners: Piper downgraded shares of VLO, PARR to Neutral and downgraded PBF to Underweight saying they prefer names with non-refining streams such as PSX, DINO. Piper said the combination of incremental refined product capacity and weaker-than-expected demand (led by distillate) have led them to adjust their 2025 refined product outlook, where it now expects global S/D balances to be roughly flat with 2024. Given macro headwinds, Piper has lowered its 2H24/FY25 refining margin outlook and lowered Q324/FY24/FY25 EPS estimates by 232%/57%/52%.
• In Power Generation: CEG shares advanced after signing a deal to restart Pennsylvania’s Three Mile Island nuclear plant to help power MSFT’s growing artificial intelligence plans; the companies signed a 20-year power purchase agreement. The deal sets in motion the launch of the Crane Clean Energy Center and the restart of the Three Mile Island Unit 1 (shares of grid names MTZ, PWR, PRIM were also active on news as well as other nuclear names VST, SMR and uranium names URA, UUUU, CCJ). Goldman Sachs said they come away bullish on a Texas power demand inflection after toured data centers this week in Dallas and note that data center customers are prioritizing time-to-market for reliable power over clean energy solutions (SRE, PWR best positioned).
• In Utilities: FE was upgraded to Buy from Hold at Argus; Jefferies initiated coverage on sector with Buys on DUK ($138 PT) PPL ($38 PT) EXC ($46 PT) PNW ($104 PT) EVRG ($70 PT) AEE ($97 PT) OGE ($46 PT) and Hold rated on LNT, XEL, WEC, IDA, SO, AEP, D and POR saying Utilities are viewed as boring bond proxies by many, but the sector is as exciting as it has been in decades now amid data center demand, reshoring, energy transition, political uncertainty, increasing weather events, spreading wildfire exposure, and an uncertain economic backdrop create tremendous opportunities. In Water Utilities: Bank America initiated WTRG at Buy ($45 tgt), SJM at Neutral ($55 tgt) and Underperforms on AWK ($140 tgt) and FTS ($60 tgt).

• In Mortgage REITs/Specialty Finance: Wells Fargo upgraded AGNC, NLY to Overweight from EW on new rate outlook and downgraded ACRE, CMTG to Underweight from EW and VEL cut to Underweight from OW largely on valuation. Wells said after underperforming through the rate hike cycle, now sees a favorable risk/reward for the shares, including double-digit div yields. For commercial real estate (CRE), Wells says has been the unintended consequence of Fed hikes as for Claros (CMTG), has a larger weight to construction loans and its 4/5-risk rated loans are 35% of the portfolio, well above peers and Ares (ACRE) has the largest office exposure at 37% versus peers at 10%-26%.
• In Financial Services: INTU was named a strong sell by short seller SprucePoint saying after conducting a forensic financial review of Intuit Inc., Spruce Point raises concerns about the underlying trends in its core franchises, questionable large M&A transactions, credibility and transparency of accounting and financial reporting, consumer-unfriendly behavior and sustainability of its current premium valuation. Based on their investigation, they estimate a 40% – 80% potential long-term downside and market underperformance risk. https://www.sprucepointcap.com/research/intuit-inc

• AXSM positive mention at RBC Capital saying they remain bullish on shares and “see a favorable reward/risk into the 2H24 ADVANCE-2 and ACCORD-2, with as much as 50% upside on success.”
• JNJ is raising its offer to settle thousands of talc suits to $8.2B (from $6.5B), with settlement talks continuing. More than 75% of the claimant group had supposedly agreed via a private ballot to the prior settlement offer back in mid-August.
• NVO shares dropped after reported data from its Monlunabant phase 2a obesity trial. NVO reported 7.1 kg weight loss after 16 weeks treatment, from a baseline of 110 kgs. STAT news noted, “mild to moderate neuropsychiatric side effects, primarily anxiety, irritability, and sleep disturbances, was more frequent and dose dependent with monlunabant compared to placebo”. Shares of CRBP fell, VKTX rose on data.
• SNY said that its MS drug candidate tolebrutinib was shown to delay worsening of a Progressive form of the disease by 31%, as they eye a request for approval later this year.

• In Telecom: In Latin America telecom, Scotia upgraded shares of TIGO, TIMB to Buy and downgraded TEO to Sell saying as broadband penetration in LatAm hits saturation levels in key markets such as Argentina, Brazil, Chile or Mexico, organic growth will increasingly rely upon taking customers away from rivals, which entails a risk to competitive dynamics. Scotia’s preference is for carriers with exposure to the wireless segment as consolidation trends are leading to (some) price restoration and CAPEX rationality in countries such as Brazil, Chile and Colombia.
• In Security Software: CRWD shares jumped after Jim Cramer of CNBC said CrowdStrike retained almost every piece of business following July’s disastrous software upgrade that led to a global IT outage. CEO George Kurtz told Cramer on "Mad Money" that Crowdstrike is now working with MSFT. CYBR was initiated Outperform and $328 PT at RBC Capital as believes CyberArk is in a good position to consolidate identity spending and maintain durable and increasingly profitable growth. RPD downgraded to Sector Perform from Outperform and cut PT to $40 from $50 at RBC Capital.

• ASML was downgraded to EW from Overweight at Morgan Stanley and trim PT to EU800 from EU925 given late cycle dynamics. The firm said in Europe, sees semis capital equipment names such as ASML exposed to a spending slowdown.
• INTC got a late day pop after Dow Jones reported QCOM made a takeover approach to Intel in recent days, according to people familiar with the matter. https://tinyurl.com/yvuhr4bx
• Analog semiconductor stocks (TXN, MCHP, NXPI, ON) saw weakness after Mercedes (MBGGY) profit warning, guidance cut yesterday the day prior which weighed on STM, IFNNY shares in Europe.
• Mizuho cut tgts and ests for semi equipment names; AMAT to $225 from $245, LRCX to $950 from $1050, but maintain Outperform on both saying now sees 2024E/25E WFE at flat/up 2% y/y (CY25E: vs its prior up 3-4% y/y and cons up 7-10% y/y) and sees some challenges with INTC CAPEX cuts into 2025E (~$18B+) and China potential HBM/DDR5 restrictions a combined $5-8B WFE headwind. However, Mizuho sees strong AI a strong demand driver into 2025E.