Closing Recap

Wednesday, June 07, 2023

Index	Up/Down	%	Last
DJ Industrials	92.76	0.28%	33,666
S&P 500	-16.23	0.38%	4,267
Nasdaq	-171.52	1.29%	13,104
Russell 2000	33.05	1.78%	1,888

 

 

 

 

 

 

 

 

 

Despite weaker China trade data (exports declined more than anticipated) and more cautious OECD comments (see a sluggish recovery for the world economy), US equities managed early gains. Then the markets had a bit of a thematic reversal. By mid-morning the indices had rolled, but breadth was still about 3:2 in favor of advancers. As with the recent run-up, there was a divergence between the mega-caps and the rest of the market, but this time the mega-cap techs were dragging the indices lower with MSFT, AMZN, GOOGL, NVDA and AAPL all in the red. By midday, AMZN, GOOGL and MSFT were all off between 2.5-3.5%. To be fair, those names have enjoyed a nice run and there is plenty of uncertainty ahead to give investors reason to pause. We still need to hear from the Fed (with CPI out a day prior) next week and the implied probability of a pause remains high, at about 70%, while expectations of a +25bps move for July now look to be around 50%. Sector movers at midday were Energy +2.5% and Utilities +1.3% leading to the upside, while Technology (see above), Communications and Consumer Discretionary were primary laggards in the red.

 

On the data side, yesterday B of A noted private clients were net sellers for a 10th consecutive week. Institutional and hedge clients were net buyers for a 3rd consecutive week. Private client selling marks the largest four-week rolling average since October 2021, but historically remains close to levels which have preceded up markets over one, three and six-month periods. Separately, @bespokeinvest highlights other recent reversals in the markets, noting the Russell 2000 has outperformed the S&P 500 by over five percentage points over the past five days and the KRE closed above the 50dma for a third consecutive day for the first time since the regional banking woes began. Lastly, @DataTrekMB takes a stab at what’s embedded in today’s market valuations, noting with the S&P’s cost of capital around 8.5%, and earnings running $212/share, the perpetuity value of the index is 2,494, leaving the remainder tied to expected future growth. But with the existing tech growth already baked in, falling risk-free rates will be important to any bull story.

 

Moving into the final hour of trading, US equities slumped to lows. There wasn’t much in the way of incremental news flow, just a steady deterioration with one small attempt at a bounce as the afternoon progressed. Sector-wise, not much had changed from a leadership perspective. To the upside, Energy (XLE, +2.65%), Utilities (XLU, +1.60%) and Real Estate (XLRE, +1.45%) continued as standouts. On the other side, Technology (XLK, -1.40%), Communications (XLC, -1.15%) and Consumer Discretionary (XLY, -0.60%) remained the laggards’, though equally weighted performance was notably better. Consistent with the sector performance, Growth and Value diverged. The Russell 1000 Growth trailed, -1.17% on the day, while the Russell 1000 Value gained +0.70%. Breadth continued to favor gainers but had tightened a bit to about 1.3:1 as the broader market slipped.

 

Economic Data

·     Light day for economic data but the U.S. April trade deficit was (-$74.6B) vs. consensus (-$75.2B) and compared to March deficit (-$60.6B); April goods deficit $96.11B, services surplus $21.56B; overall, April exports -3.6% vs March +1.8%, imports +1.5% vs March -1.6%. U.S. April exports $249.02B vs March $258.19B, imports $323.57B vs March $318.78B.

 

Commodities, Currencies & Treasuries

·     August gold futures slid to their lowest in more than a week, settling -$23.10, or -1.16%, to $1,958.40/oz. Traders seem to be expecting gold to be range-bound from here as markets await more economic data and the results of the Fed meeting next week. Though rates were moving higher today, the markets continue to price in the high likelihood of a pause from the Fed at the June meeting, but we do still need to get past CPI results ahead of the Fed decision.

·     WTI crude July held early gains throughout the day to settle +$0.79/bbl, or +1.10%, to $72.53; while Brent futures also gained +$0.66/bbl, or +0.87%, to $76.95. The move pushed WTI crude into positive territory for the week. EIA data helped support the gains, marking a modest draw versus an expected build in addition to increased demand for gasoline and distillates. Inventories in the US Strategic Petroleum reserve were off again, -1.9Mm bbl. to 353.57Mm, with replenishment efforts clearly not helped by recent Saudi production moves.

·     Treasury yields higher on the long-end of the curve, with the 10-yr up about 8-bps to 3.78%, while 2-yr was up 2 bps to 4.54% and the 1-month down about 8-bps to 5.05%. Markets await key CPI inflation data early next week and the FOMC Policy meeting mid-week.

 

 

Macro	Up/Down	Last
WTI Crude	0.79	72.53
Brent	0.66	76.95
Gold	-23.10	1,958.40
EUR/USD	0.0012	1.0703
JPY/USD	0.44	140.07
10-Year Note	0.078	3.778%

 

 

Sector News Breakdown

Consumer

Autos, Leisure, Gaming & Lodging

·     In autos: TSLA rises a 9^th consecutive day after Bloomberg reported all Model 3 vehicles are all now eligible for the full U.S. tax credit under new criteria for battery- sourcing set by the Treasury Department. Previously, only the performance version of the Model 3 was eligible for $7,500 in tax credits.

·     In Used cars: KMX, CVNA shares slid early; Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased -2.7% in May from April. The Manheim Used Vehicle Value Index (MUVVI) declined to 224.5, down 7.6% from a year ago.

 

Consumer Staples & Restaurants:

·     In food related sector: UNFI shares tumbled after slashing FY adj EPS forecast to $1.80-$2.30 from prior view $3.05-$3.90 after Q3 EPS of $0.54 missed the $0.68 estimate on in-line revs of $7.5B as gross margin contracted to 13.3% from 14.0%. CPB posted slight Q3 EPS beat of $0.68 vs. est. $0.65 on weaker revs of $2.2B and guided FY23 adjusted EPS $2.95-$3.00 vs. consensus $3.01 and sees FY23 revenue up 8.5%-10% vs. est. $9.37B; Q3 gross margin of 30% vs 31.2% a year earlier, average selling price rose 12% in Q3, but posted a -7% decline in total volumes. CVGW shares slide as Q2 adj EPS ($0.01) vs est. $0.18, adj EBITDA $6.9Mm vs est. $9.008Mm on revs $244.7Mm vs est. $265.2Mm. LMNR lowers avocado volume guidance for fiscal 2023.

·     In restaurants: PLAY shares jumped as posted Q1 adj. EBITDA beat and ~in-line comp sales vs. Truist ests as costs decline; Q1 EPS $1.45 vs. est. $1.24; Q1 revs rose 32.4% y/y to $597.3M vs. est. $601.74M; Q1 comps decreased (-4.1%); announces $200M share repurchase.

 

Retailers:

·     In Miscellaneous retail: OLLI raised its sales and earnings guidance for FY23 following strong performance on both fronts in the first quarter; said customers are responding well to deals, which drove better-than-expected sales and earnings.

·     In Apparel retail: VRA shares jump as posted a narrower loss in Q1 despite a decline in sales, while raised its year profit outlook to $0.57-$0.67 from prior $0.40-$0.50; said Q1 loss improved due to controlling costs which helped expand margins.

·     Online retail: SFIX cost cutting drove a beat on the bottom line (adj EBITDA of $10 million vs a loss of $36 million a year ago, and better than guidance of breakeven +/-$5 million); Q3 revs beat but guided 4Q revs $365-375Mm vs est. $379.4Mm.

 

Homebuilders, Building Products, Home Furnishing:

·     Weekly Mortgage Bankers Assoc data showed US mortgage market index fell -1.4% in latest week, the purchase index fell -1.7% and the refinance index fell -0.7%; the average 30-year mortgage rate fell 10 bps to 6.81% in the June 2 week.

·     Wayfair (W) said in a business update that QTD gross revenue is strengthening and now trending in the negative MSD% range YoY; said Chief Commercial Officer Oblak will retire in Q1’24.

 

Energy, Industrials and Materials

·     In energy: PBR upgraded from Equal Weight to Overweight at Morgan Stanley and raise tgt to $16.50 from $12.50 as sees further room for capital appreciation. And the potential total return – 51% after a ~16% dividend yield – looks compelling to justify a more positive stance.

·     In Alternative Energy: PLUG said supplies 8 MW of Hydrogen Fuel Cells to energy vault to displace diesel generators in California Wine Country.

·     In tankers: the Baltic Dry Index Rises 0.39% to 1.020 in London, up for a Third Day, but has fallen 35% in the past month. Other dry cargo indexes, show Capesize +0.29% to $11,503, Panamax +3.23% to $8,916, and Supramax 58k tons -1.97% to $8,422.

 

Financials

·     In Banks, Regional banks outperformed the large caps, with the KRE up 4%.

·     In Payments: AFRM shares jump as announced that eligible U.S. merchants offering Amazon Pay (AMZN) can now seamlessly add Affirm’s Adaptive Checkout™ as a payment option at checkout. This brings Affirm’s pay-over-time technology, used by millions of customers at Amazon.

 

Healthcare

Biotech & Pharma:

·     COGT 12.5M share Secondary priced at $12.00.

·     DAWN 11.538M share Spot Secondary priced at $13.00.

·     FGEN said its experimental drug, pamrevlumab, to treat patients with a rare neuromuscular disease did not meet the primary goal in late-stage study.

·     GKOS upgraded to overweight at Piper and raise tgt to $80 from $55 given what it considers to be amongst the most exciting upcoming product launches in Midcap MedTech; said conservatively sees ~$10M of top-line upside potential in 2024 and ~$80M in 2025.

 

Technology

Internet, Media & Telecom

·     In Online Retail: AMZN shares active after Bernstein said in an open letter to CEO Jassy & AMZN’s board, says that while it recently upgraded AMZN to top pick and is "one of the greatest Co’s of our generation," it’s "time to get back to Day One" to ensure the Co remains this way for the next generation; while optimistic about the road ahead, believes there’s a significant amount of self-help AMZN can take to quell investor concerns around the current investment strategy & investor communications, and together could propel the stock into the $180-200 range.

·     In Online Services: DUOL downgraded to MP from OP at JMP Securities, noting shares are now trading 8% ahead of prior $155 price target after gaining 96% YTD. YEXT shares surge after Q1 results beat expectations and raised its full-year guidance, positioning itself as a play on generative artificial-intelligence but is also benefiting from cutting its workforce.

·     In Media: WBD announced that Chris Licht, Chairman and CEO of CNN Worldwide, has stepped down, effective immediately; Reddit is cutting about 90 people, or 5% of its staff, and plans to slow hiring going forward, becoming the latest tech firm to reduce headcount, announced late yesterday.

 

Hardware & Software movers:

·     AAPL tgt raised to street-high $220 from $205 at Wedbush saying FV could be in the $3.5T range w/ a bull case $4T valuation by FY25; as many more Apple customers, especially in China, choose the premium Pro variant, the co’s ASP could approach ~$925 for the iPhone 15 cycle.

·     BASE shares fell on wider loss than expected and weaker Q2 revs ($41.2M-$41.8M vs. consensus $43.31M); note shares had rallied nearly 70% YTD run into the print.

·     CRM and Google Cloud announce expanded strategic partnership to unlock the power of ai, data, and CRM.

·     PLTR new 52-week highs after announced it signed multi-year pact with Panasonic Energy; Palantir will operationalize data and introduce automated efficiencies for the Panasonic Energy of NA facility in NV, under a multi-year agreement.

·     RBLX shares slumped after Yippit data indicated May Y/Y growth decelerated from April, while engagement accelerated slightly QTD.

·     SKIL posted above-consensus 1QF24 revenue ($135.6M/$133.5M) with bookings, EBITDA and FCF falling short of arguably above seasonal Street forecasts ($108.5M/$21.6M/$17.1M vs. $114.9M/$23.5M/$24.1M). Content bookings were relatively stable.

 

Semiconductors:

·     MRVL shares advanced following a Taiwan press report overnight (Liberty Times) suggesting MRVL has won an order for AMZN’s 2nd gen AI chip. Marvell is expected to start entrusted design in the second half of the year and TSMC (TSM) will adopt a 5-nanometer process.

·     SMCI was upgraded to Buy at Rosenblatt with $300 tgt saying its long history in "green" computing, building block architecture, plug-and-play, twin architecture, rack scale integration, and software platform optimization have "resulted in a formidable business model aligned with the critical factors for success in an AI driven world.

·     STM and Sanan Opto signed a JV for silicon carbide (SiC) to support auto/industrial demand in China; JV to support STM’s >$5B SiC revenue by 2030, in line w/ prior communications. Follows IFX’s recent comments on China SiC substrates being competitive.