Closing Recap

Monday, August 05, 2024

U.S. stocks were pressured all day, opening at the lows with the Nasdaq falling as much as 6% in the overnight and S&P futures (Spuz) over 4% before paring losses, but still posting a more than 90% down day for market breadth as no sector, asset class was immune to selling. The Dow Jones Industrial Average fell over 1,000 points (erasing 2,700 points in less than 2 months), while the S&P 500 is just 1.2% away from entering correction territory (defined as 10% off highs). The Nasdaq fell over 3% and is down over 8% in three days thus far in August, led by a 14% drop in the semiconductor (SOX) index. There was nowhere to hide as market sentiment is near lows with the Fear Greed Index at 19 today (extreme fear) and 26 for Crypto. Markets await a busy round of earnings this week, but rates, macro, technical, currency markets are what are driving markets.

There were a number of factors that added to the concerns for investors today including (in no particular order): 1) downward momentum after markets fell 3-straight weeks, as major averages broke below key technical levels leading to further selloff; 2) Warren Buffett’s decision to sell stocks (Berkshire sold BAC for a 12^th straight day on Friday as per filings and Berkshire this weekend noted they have sold about 50% of its Apple (AAPL) position moving to cash); 3) further pullback in growth names/AI such as semiconductors, led by reports of NVDA key AI chip delayed; 4) the yen/US dollar carry trade unwind continues; 5) recession fears grow after weak ISM manufacturing data last week (8-month lows) and jobs data weak a day after the Fed failed to cuts rates while 5 central bank peers have cut in recent months; 6) the Fed seen being behind the curve yet again (was late to raise rates leading to massive inflationary bubble – now taking too long to cut rates as economy weakens); 7) election uncertainty after Trump near assassination, Biden forced to step down from election, Kamala enters; 8) geopolitical uncertainty as Ukraine/Russia war and Israel/Palestine conflict ongoing with no end near. All playing a partial factor, some more than others, but a recap of some of the biggest impacts on stocks, crypto and commodity prices with about all down today.

Japan’s benchmark Nikkei 225 stock index plunged 12.4% overnight, adding to last Friday’s decline falling 4,451.28 points at 31,458.42. The Nikkei 225 dropped 5.8% on Friday, making this its worst two-day decline ever. Its worst single-day rout was a plunge of 3,836 points, or 14.9%, on Oct. 20, 1987, dubbed “Black Monday.” This Monday was gloomy enough: at one point, the benchmark sank as much as 13.4%. One of the major reasons cited for the extended decline from last week is the continued “unwind” of the Japanese yen “carry trade” in which investors borrow Japanese Yen at low/near-zero interest rates then convert Japanese Yen to another currency with a higher interest rate, such as the U.S. Dollar. Investors then take U.S. Dollars and invests in stocks, bonds, etc. which have a higher yield/return than their cost of borrowing the Japanese Yen. This trade “unwinds” if investors begin selling the assets and buying back Yen to repay the original loans. That trade had been in place for a while but the unwind began after the dollar moved above 162 vs. yen two weeks ago and has reversed to lows around 142 today as the Bank of Japan raised rates and the FOMC continues to push rate cuts out down the line.

• S&P Global July services PMI at 55 vs 55.3 last month and S&P Global July final composite PMI at 54.3 (vs flash 55.0).

• Crude oil dropped around -0.8% or -$0.58 to settle at $72.94 per barrel in volatile trade (high $74.46 and low $71.67), while copper prices tumbled over 3% to 4-1/2-month lows amid a deteriorating demand outlook in China and the United States and gold was down around 2%. Gold prices fell -$25.40 or around 1% to settle at $2,444.40 an ounce, off earlier lows 2,403.80 – but also off earlier highs around $2,500 in the pullback in commodity prices. Bitcoin pared losses to -14 just below $54K after earlier lows sub $50K.

• Treasury yields fall to lowest levels in a year as investors flock to the safety of U.S. government debt after Friday’s data showing U.S. unemployment higher than expected stoked fears of recession. The 10-year is at 3.77%, on path for its lowest settle since June 2023, and 2-year at 3.88%. Note the U.S. Treasury yield curve un-inverted for the first time since July 2022 (758 days) this morning as the U.S. 2-year yield (hit 3.67%) moved back below the 10-year as concerns grew that the U.S. economy is heading into a downturn; it lasted about 20-minutes before inverting again over 10-bps late.
• The CBOE Volatility Index (VIX) hit highs of 65.73 this morning, rising over 180% before paring gains (was around 12-13 level on July 16th) after S&P futures rolled (marked first time above the fifty level since April 2020).

• In Retail: ASO downgraded to Neutral from Overweight at JP Morgan given ongoing sales headwinds from hardgoods category pull forward that are exacerbated by a weakening middle-to-lower income consumer with its assortment lacking sufficient newness, particularly on the footwear side.
• Airlines (AAL, DAL, UAL), lodging (HLT, MAR, H), and casino stocks (WYNN, CZR, MGM) saw weakness weighing on the consumer discretionary and travel industries on rising fears of a recession, weaker economy in the face of softer economic data recently.

• In Homebuilders: KBH downgraded from Neutral to Sell w/ $65 PT, TOL cut to Sell with $18 tgt and MTH cut to Sell, all at Seaport Global. The firm thinks KBH’s build-to-order approach is effective in managing backlog, but lags other builders’ capacity to maintain closings, as orders feed backlog, whereas other builders close home from speculative inventory. Seaport thinks TOL’s shift to 40-50% speculative units, which is beneficial to WIP turns, and Land to a lesser degree, position it to have lower margin visibility than its prior (~20% units spec) approach. MTH’s past shift to production building was successful, lifting margin, turns, and ROE/ROI, though Seaport sees rising concerns in its approach to mirror existing inventory by selling homes 60 days out from close.

• In Industrials: shares of GNRC, PWR, HD, LOW, WMT, COST among names to watch for some hurricane bump from preparations and power outages; already 214k outages reported in FL impacting over 10Mm customers. Storm expected to rise along the East Coast and hit South Carolina in the next few days with record flooding.
• In Defense: LMT upgraded to Outperform from Sector Perform at RBC Capital as believes investor sentiment is improving as the company has seen a positive inflection in its sales growth, the resumption of F-35 deliveries is lifting an overhang, and the outlook for the MFC segment is improving.

• In Brokers/Exchanges: HOOD upgraded to Neutral from Sell at Citigroup noting shares finished down 12% on Friday given the potential impact from lower rates. The fundamental story has been improving in recent periods with healthy growth in deposits, margin balances, options/equities trading. CBOE upgraded to Neutral at JP Morgan and raised tgt to $195 from $168 after quarterly results saying they had maintained an underweight rating concerned about decelerating trends in VIX and SPX open interest and the maturation of 0DTE trading. Customers of Charles Schwab, Fidelity, and Vanguard complained about login troubles Monday morning, unable to access accounts amid a stock market selloff.
• In Regional Banks: Morgan Stanley upgraded PB to Overweight given strong NIM expansion story coupled with best-in-class capital and growing liquidity, upgraded VLY to equal weight thesis has played out with the bank reducing CRE exposure, while downgraded WBS to Equal weight despite attractive valuation given lack of near-term catalysts, headwinds to NII and cut CFR to Underweight given fuller valuation, while upgrading MidCap Bank industry to Attractive (see median 225 upside for group) saying rate cuts are a tailwind for revenues and help alleviate credit stress. At 10x 2025 EPS, valuations are still significantly cheap vs historical avg of 14x, providing a positive risk-reward.
• Financial Research: KBW Research said they are highlighting buying opportunities in eleven stocks after the two-day market rout. The stocks recommended represent asymmetric positive return potential and are bucketed into two broad themes: 1) Oversold quality; and 2) Idiosyncratic with catalysts. Under the "Oversold quality" theme, KBW recommends AIG, BPOP, CRBG, ESNT and LPLA. For the "Idiosyncratic with catalysts" theme, KBW recommends BK, UMBF, RNST, and MCB. Meanwhile, KBW’s COF and DFS recommendations fit under both categories given their economic sensitivity and idiosyncratic (deal) components.

• MRNA downgraded to Sector Perform from Outperform and cut tgt to $90 from $125 citing an uncertain outlook for both RSV and COVID.
• THC to sell five Birmingham hospitals for $910m; reaffirms FY24 adjusted EBITDA outlook and sees after-tax proceeds of about $790m; sees recording gain of $375m; says deal expected to be completed in the fall of 2024.
• VRTX downgraded to EW from OW on valuation at Barclays noting the drug maker reported Q224 in line, with 2024 guidance modestly raised. The firm expects consistent solid CF launch with modest Casgevy uptake, and do not see major near-term upside to its already bullish assumptions for both acute and neuropathic pain opportunities.

• NVDA shares dropped after a report in The Information said design flaws could cause a delay of three months or more in the launch of Nvidia’s upcoming artificial intelligence chips. The setback could affect customers such as Meta, Google, and Microsoft who have collectively ordered tens of billions of dollars’ worth of chips. https://tinyurl.com/4fbejvs7
• GOOGL shares slipped to lows late after a U.S. judge ruled Google broke the law with its monopoly over online searches and related ads, in the U.S. Justice Department’s first victory against a monopoly in more than 20 years.
• Just a broad-based technology pullback with no segment immune as AI, semiconductors, Internet, software, data, hardware all sharply lower with selling in space.