Closing Recap

Monday, August 12, 2024

U.S. stocks did a whole lot of nothing this afternoon, initially fading off overnight strength, only to quickly bounce to highs late morning, before fading finish flat in choppy trade much of the afternoon as markets await two key inflation readings in coming days. Tomorrow morning at 8:30 AM, the July producer price index (PPI) inflation reading is expected followed by the more important consumer price index (CPI) data point on Wednesday, hopefully giving investors a clearer picture as to the pace of expected rate cuts at the September meeting (25 bps a given at this point with a 50% chance of seeing 50-bps as per fed fund futures latest look). Estimates for PPI headline M/M for July to rise +0.2% (prior +0.2%) and Y/Y to rise +2.3% (prior +2.6%). The core PPI (Ex: Food & Energy) for July est. +0.2% (prior +0.4%) and Y/Y for July…est. +2.7% (prior +3.0%). Market participants appeared willing to be patient ahead of the reports, not banking on any significant market bets today. Markets also await earnings from a handful of retail market leaders with WMT, HD, BABA among those reporting this week.

Middle East tensions also a focus, weighing on markets late morning after the Pentagon said it is sending a guided-missile submarine to the Middle East and is speeding up the arrival of a second aircraft carrier as the region braces for a possible Iranian response to the killing of Hamas’s political leader in Tehran. Meanwhile Ukrainian forces rammed through the Russian border last week and swept across some western parts of Russia’s Kursk region in a surprise attack. Add to the mix of uncertainty, the U.S. is deeply concerned by reports that Iran is planning to deliver hundreds of ballistic missiles to Russia, State Department deputy spokesperson Vedant Patel told reporters on Monday. The headlines prompted a brief pullback in stocks but led to increased buying in haven assets as gold prices jumped alongside Treasuries as yields declined. In political news, Republican Presidential candidate Donald Trump speaking with Elon Muck tonight on “X: platform.

• Natural gas hits 3-week highs, edging higher 4.6 cents, or about 2.1%, to settle at $2.189 per million British thermal units, supported by a drop in output in recent days and forecasts for hotter weather that should boost the amount of gas power generators burn to keep air conditioners humming. Gold prices rose $30.60 to $2,504 an ounce (hitting highs $2,510) while the US dollar was flat, remains depressed.
• The US dollar fell more than 1% against the Japanese yen to 148.21 per dollar session low, before reversing and finishing around 147.17 as the yen bounce back. The yen fell against the dollar in calmer currency market trading after volatile moves last week, while investors weighed the odds of a deep Fed rate cut next month ahead of a slew of U.S. economic data. Still, investors are pricing 100 basis points of Fed cuts by year-end, according to the CME Group’s FedWatch tool, and U.S. producer and consumer prices numbers due on Tuesday and Wednesday could shift market perceptions.

• Hardline/Broadline retail: Keybanc slightly lowers estimates for DG, as well as HD and LOW in the home improvement sector, consistent with their recent warnings highlighted in its Contractor Survey and Consumer Survey. The firm continues to see risk for home-related spending ahead of 2H, as mentioned in its 2H Outlook. On the positive side, Keybanc is raising estimates on OLLI where its data points to strong Q2 results and its field work indicates favorable closeout activity and a tailwind from air conditioner sales.
• Discount Retail: Jefferies said through the quarter they have observed improving traffic trends at big box, clubs and off-pricers, but also saw decelerating trends at dollar stores. For WMT, now expects US comp sales to grow 4%, ahead of consensus by 60bps with Sam’s Club comp sales increasing by 5%; for TGT, sees comp sales inflecting positively this quarter due to the improved traffic; similarly, traffic accelerated for TJX in Q2, and now believes sales will be up 8%, well ahead of the 3.5-4.2% guided. Jefferies said observed improving traffic trends at Big Box (WMT, TGT), Clubs (BJ, Sam’s Club), and Off-Pricers (TJX, BURL, ROST, OLLI) but decelerating trends at Dollar Stores (DG, DLTR, FIVE).
• In Consumer Staples/Restaurants: SBUX shares advanced on reports Elliott and Starbucks’ directors met last week to discuss the activist’s settlement offer. Activist investor Starboard Value has built a stake in Starbucks (SBUX) and wants it to take steps to boost its stock price, The Wall Street Journal reported. ELF extends Friday declines when shares fell -14.4% Friday post results; further below its 200dma of $165.25; jeweler Pandora (PANDY) reported Q2 operating profit broadly in line with expectations and increased its growth outlook for the year.

• In Travel & Leisure: ABNB mentioned positively in Barron’s saying after shares fell more than 10% on the week, to $115 on disappointing guidance, the selloff offers a good entry point for investors in a company that dominates the short-term rental market worldwide, with eight million active listings, and more than $80B of annual gross bookings
• In Autos: South Korean officials met on Monday to discuss electric vehicle safety and whether to require car firms to disclose battery brands amid growing consumer concern after an EV blaze in an underground garage extensively damaged an apartment block. The fire on Aug. 1, which appeared to start spontaneously in a Mercedes-Benz EV (MBGYY) parked below a residential building, took eight hours to put out, destroying or damaging about 140 cars and forcing some residents to move to shelters.

• In Utilities: HE shares tumbled after raised “going concern” doubts after disclosing that it did not have a financing plan in place for the $1.99 billion Maui wildfire settlement it reached earlier this month. The company and its parent Hawaiian Electric Industries said they were working closely with financial advisers to develop a financing plan for their share of the settlement, and they could finance it through a mix of debt, common equity, equity-linked securities.

• In Rates: KBW Inc noted the 2/10 curve has been inverted for 546 trading days (longest in 47 years), though it has become nearly flat recently (-12bps) with the downdraft in interest rates. Although banks’ NIMs are historically correlated with the 3-month/5-year rate, which remains inverted by 142bps, we believe the recent improvement in the 2/10 curve benefits banks, as we are in a unique environment in which several banks’ valuations have been depressed owing to commercial real estate credit concerns.
• In Insurance: Wells Fargo upgraded ALL and PRU to Equal Weight from Underweight at Wells Fargo saying that dealing with a potential recession, combined with potential lower interest rates, and the prospects for an extremely active wind season, it believes the best sectors within insurance include personal lines plus insurance brokers. BHF was downgraded to Underweight and cut tgt to $40 coming out of the quarter incrementally negative on the company, mainly due to its high macro sensitivity on both GAAP/statutory earnings and capital. In Insurance brokers, Wells also moves PGR and AJG up to be its top ideas and upgraded BRO to Overweight.
• In REITs: MAA was double upgraded from Underperform to Buy at Bank America and raised tgt to $189 from $144 saying with the winning formula of attractive valuation + low expectations the firm sees a significant spread between current applied and implied cap rates. CPT was upgraded to Buy at Bank America as well saying valuation looks very attractive relative to recent trade.
• In Asset managers: APAM reported that its preliminary assets under management as of July 31, 2024, totaled $162.7B. LAZ reported that its preliminary assets under management as of July 31, 2024 totaled approximately $246.1B. The month’s AUM included net outflows of $3.6B, market appreciation of $3.5B and foreign exchange appreciation of $1.5B

• HUMA shares fell after the FDA informed Humacyte that the Agency would require additional time to complete their review of the Biologic License Application (BLA) for the company’s Acellular Tissue Engineered Vessel (ATEV) used in the vascular trauma indication.
• LLY was upgraded to Buy from Hold at Deutsche Bank and raised tgt to $1,025 from $725 primarily driven by 4 factors including: unlocking Mounjaro in ex-US, U.S. Zepbound & Mounjaro strength, IQVIA’s injector data suggests LLY blew past ≥1.5x sellable doses for Tirzep back in April 2024, competition is looming, but still a ways out.
• PCRX was downgraded to Sector Perform from Outperform and tgt lowered to $14 from $37 at RBC Capital and cut to Underweight at JP Morgan (tgt slashed to $10) after late Friday, Judge Cox Arleo ruled that Pacira’s ‘495 patent on Exparel is not valid (thus no infringement on eVenus product) and eVenus is now free to launch gExparel at risk.
• RVNC shares jumped after saying private skincare company Crown Laboratories agreed to take them private in a deal worth $924 million, including debt, with RVNC holders to receive $6.66 apiece in cash, representing about 89% premium to the stock’s last closing price.
• WVE said it won FDA rare-pediatric-disease designation for its WVE-N531 drug candidate in the neuromuscular genetic disease Duchenne muscular dystrophy.

• In Aerospace & Defense: HII was downgraded from Buy to Neutral at Davidson and reduced its FY24E and FY25E, noting ongoing softness with respect to mid-sized project bookings within APS, and prolonged sluggishness within MTS will likely make it very difficult for HI to deliver EPS growth in FY25, noting most of consensus seems to agree. TGI was downgraded from Buy to Hold at Jefferies saying despite another DD down move on EPS, which appears to be a pattern, they downgrade given the EBITDA and FCF ramp post FQ1:25 (June results).
• In Precious metals: Gold prices and miners advanced following a bounce in the precious metals back above $2,500 an ounce. GFI has entered into a definitive agreement with Osisko Mining to acquire all the common shares of Osisko Mining on the Toronto Stock Exchange. Gold Fields has agreed to acquire the Osisko Mining shares at a price of C$4.90/share in an all-cash transaction. The offer price implies a fully diluted equity value for Osisko Mining of approximately C$2.16B (US$1.57B) and enterprise value of C$1.48B (US$1.08B).

• Telecom & Media: SATS was downgraded to Underweight from Neutral at JP Morgan due to 1) leverage/ funding concerns, 2) increased opex/capex related to wireless ramp, and 3) continued pressure in the company’s core legacy businesses (Pay-TV and Broadband). LBTYA upgraded to Neutral at Bank America as reviews Sunrise spin / Liberty Global valuation implications, pre Sunrise CMD 9th Sept and Q4 spin.

• SNOW positive checks at Keybanc saying after conducting a survey of 13 SNOW partners and customers, KEYB is incrementally positive as 1) Cortex driving upside to FY25 guidance; 2) SNOW is a beneficiary of GenAI 3) customer breaches unlikely to be a material headwind; and 4) a still meaningful on-prem migration opportunity but KEYB comes away more cautious on ramp in Snowpark

• COHR upgraded to Buy from Neutral at Bank America with $75 tgt as sees improved prospects for the company to double earnings per share to $4 by fiscal 2026 (40% CAGR) due to the "surging" artificial intelligence optical transceiver market, operational improvements and gross margin expansion under the new CEO, and balance sheet de-levering.
• QCOM was downgraded to Peer Perform from OP at Wolfe Research citing view that AAPL’s internal modem will finally have an impact, premium Android has by now normalized, and IOT growth (QCOM’s likely focus at their Nov. analyst day) will likely be a tougher sell to investors.
• POWI was upgraded from Market Perform to Outperform at Northland and raised tgt to $80 saying POWI tends to lead the cycle by two quarters; do not expect the need to cut numbers; and channel inventory is cleared.