Mid-Morning Look

Thursday, December 14, 2023

Stock market euphoria continues a day after the Fed changed its policy stance, forecasting 75 bps of rate cuts in 2024 to 4.6% from the current 5.25%-5.50% range (and Fed officials see another four cuts in 2025), a significant change from last FOMC meeting when they echoed the possibility of “higher for longer” on rates. Sentiment has shifted from Bullish (stocks up 6-week straight) to “super bullish” heading into the end of year as PM’s chase performance and investors exhibiting FOMO, buying everything in sight as sector gains are again broad-based. CNBC noted the massive policy shift by the Fed, catching markets off-guard saying on December 1^st, Powell said “it would be premature to…speculate on when policy might ease” while yesterday (12/13) said “rate cuts are something that begins to come into view and clearly is a topic of discussion.” The Dow Jones Industrial Average closed above 37,000 on Wednesday for the first time ever, while the S&P 500 4,796 all-time closing high hit on January 3^rd of 2022 is within reach. Apple (AAPL) hits new all-time (split adjusted) all-time highs. The Russell 2000 index rises to its highest level since late July while the Nasdaq 100 remains on track for a record close with Fed cuts on the table. A year of higher Treasury yields essentially wiped out in recent weeks as the benchmark 10-year yield sank to their lowest since July at 3.932% while two-year yields fell to their lowest since May at 4.28% (down 30-bps yesterday). The dollar also slumped, helping boost gold and other commodity prices. Market in “all-out” buy mode the last 7-weeks, but one would have to assume some profit taking into year end given this massive move. Seeing some pullbacks in large cap tech with AMZN, GOOGL, META, MSFT, NFLX reversing lower, but semis extend gains, with SOX +2.6% around 4,100 (up 10% this month and 57% YTD) in what has been a massive market driving sector.

There were two other major central bank policy meetings today as the Bank of England (BOE) leaves key rate at 5.25% in 6-3 vote (as expected), while the Euro rises to 2-week highs against the US dollar around 1.098 after the European Central Bank (ECB) leaves its benchmark refinancing rate unchanged at 4.50% (also as expected) and notes staff projections for Euro area, inflation is expected to decline gradually over course of next year, before approaching ECB’s 2% target in 2025. Some contra indicators worth watching: The CBOE Volatility index (VIX) remains near multi-year lows around 12 (fear index), while the bull-bear spread in the American Association of Individual Investors (AAII) weekly survey was 32 vs 19.9 last week. Bulls rise to 51.3% from 47.3%, Neutrals rise to 29.4% from 25.3%, Bears fall to 19.3% from 27.4%.

Economic Data

·     November retail sales advanced rose +0.3% m/m above the expected (-0.1%) decrease and above the October reading of (-0.2%) slump; core retail sales rose 0.2% vs. (-0.1%) consensus and +0.1% prior. Nov gasoline sales fell (-2.9%) vs Oct (-1.2%) and ex-autos/gasoline +0.6% vs Oct +0.1% (prev +0.1%).

·     Weekly Jobless Claims reported at 202K vs. est. 220K; the 4-wk moving avg fell to 213,250 from 221,000 prior week; continued claims climbed to 1.876M from 1.856M prior week and the U.S. insured unemployment rate climbed to 1.3% from 1.2% prior week.

·     Export prices for November rose +0.9%, much better than the expected (-1.0%) decline and (-0.9%) prior (revised from -1.1%), while Nov Import prices fell (-0.4%) vs. (-0.7%) consensus and (-0.6%) prior (revised from -0.8%). Nov non-petroleum import prices +0.2%, year-over-year (-0.6%).

·     Business Inventories for October fell (-0.1%) vs. consensus unchanged and vs Sept +0.2%; Oct business sales (-1.0%) vs Sept +0.9% (prev +1.1%) and Oct retail inventories ex-autos unrevised at -0.9% (prev -0.9%).

Sector Movers Today

·     In Oil E&P: in energy outlook call, Wells Fargo said they lean into unhedged gas on favorable risk/reward as upgrade AR, CTRA and downgraded EOG, RRC; at UBS, they downgraded MRO and CHK while upgraded CTRA saying they see a more balanced risk/reward for Energy entering 2024. To the positive side, they see WTI recovering to $75-80/bbl, further consolidation improving capital efficiencies, and financial strength supporting shareholder returns above S&P500 levels but see little growth, a lack of visible catalysts, and potential for declining interest rates, limits upside.

·     In Metals & Mining: in steels, NUE guided Q4 EPS in range of $2.75-$2.85 per share, below consensus of $3.18 saying they expect decreased Q4 earnings due to moderating average selling prices at most of product groups within segment and lower volumes; gold miners (NEM, AEM, GOLD) resumed upward momentum early with a 2% jump overnight in gold prices as the US dollar and Treasury yields slide initially. In aluminum, AA shares rise after decision from the Western Australian Government that will allow the Company to continue bauxite mining and downstream alumina refining in the State.

·     In Retail: FL was upgraded from Neutral to Overweight at Piper and raise tgt to $33 from $24 as think FL can realize >180 bps of operating margin expansion in 2024. FL saw 250 bps of merch margin pressure in 2022 followed by ~300 bps of merch margin pressure in 2023 due to higher promotions. DECK was downgraded to Hold from Buy at Stifel but raise tgt to $709 from $600 and in footwear sector said their bias favors premium and innovative brands with proven consumer connection and high-return growth vectors (top picks, ONON and LULU) and sees favorable risk reward for brands with relative momentum, strong cash flow, and balance sheet optionality (CROX and KTB).

Stock GAINERS

·     AA +9%; after decision from the Western Australian Government that will allow the Company to continue bauxite mining and downstream alumina refining in the State.

·     BLUE +7%; said in advanced discussions with some other large commercial payers, more than 15 Medicaid agencies in U.S. following FDA approval of Lyfgenia.

·     GKOS +9%; said the FDA approved the application for a single administration per eye of iDose TR for the reduction of intraocular pressure in patients with ocular hypertension or open-angle glaucoma.

·     HOOD +1%; said equity notional trading volumes jumped 18% to $52.9B in November y/y while options contracts traded rose 17% to 95.3M in November and net cumulative funded accounts up 1% at 23.3M for the month.

·     MRNA +10%; revealed new data from a continuing early-stage trial of the personalized cancer treatment it is testing with MRK, saying that the updated results help build the case that the drug works.

·     ZION +5%; Wells Fargo positive on banks, while low interest rate outlook boosts financials.

Stock LAGGARDS

·     ADBE -6%; posted better-than-expected Q4 EPS of $4.27 (consensus $4.14) and a 46.4% operating margin on revenue of $5.05B (consensus $5.01B), up 12% y/y (13% in cc), up from 10% last quarter but flat on a cc basis, butFY24 guide disappointed high expectations (new ARR $1.90B vs. St. $2.02B), sending shares lower.

·     APLS -21%; said it was informed of a negative trend vote by the European Medicines Agency’s Committee for Medicinal Products for Human Use for its treatment for the eye disease geographic atrophy.

·     ASYS -31%; said it sees Q1 revenues in range of $21-$24M, down from Q4 revs of $27.7M, with EBITDA nominally negative saying the overall near-term outlook for revs/earnings is challenging.

·     DECK -2%; downgraded to Hold from Buy at Stifel but raise tgt to $709 from $600 and in footwear sector said their bias favors premium and innovative brands with proven consumer connection and high-return growth vectors.

·     NUE guided Q4 EPS in range of $2.75-$2.85 per share, below consensus of $3.18 saying they expect decreased Q4 earnings due to moderating average selling prices at most of product groups within segment and lower volumes.

·     OCUL -12%; as 30.8M share Spot Secondary priced at $3.25; shares -17% premarket on offering.