Closing Recap

Monday, June 10, 2024

After closing last week on a down day, US equity futures traded modestly lower again pre-market with no economic data to influence investors. With a Fed meeting ahead on Wednesday, it is easy to imagine a market treading water for the next couple days. Current probabilities see just a 1% chance of a cut with 99% implied no action. The September meeting probabilities continue to favor a cut, but only by a tiny margin of about 51% versus 49% no change. Small caps again underperformed early with IWM -0.4% versus -0.1% for QQQ and -0.08% for SPY, resulting in breadth a bit worse than 3:2 favoring decliners. On a Fear & Greed basis, sentiment continues to waffle between Neutral and Fear. Today’s reading was 44/100 (Fear), versus 45 (Neutral) for the last reading, 44 (Fear) a week ago and 45 (Neutral) a month ago. Last year at this time, the indicator read 76/100 (Extreme Greed). By mid-morning, QQQ had crossed to green while SPY remained slightly in the red. S&P sector ETF leaders included Energy and Utilities among the gainers and Financials and Consumer Staples among the decliners, with remaining sectors about evenly split (slight tilt to gainers).

On the data side today, it was interesting to see the NY Fed Survey of Consumer Expectations year-ahead stock price climb odds rose to the highest since May 2021. Also on stocks, @charliebilello highlights small caps stocks are now down for the year compared to a 12.5% gain in large caps, resulting in the large cap to small cap ratio climbing to its highest since June 2000. On inflation, @RyanDetrick mentions the Manheim Used Car Index has risen only twice in the past 14 months, negative year/year for 21 consecutive months.

Heading into the final hour of trading, US equities were off the highs but still holding gains. Breadth had improved to about 1.2:1, now in favor of advancers, while small caps enjoyed outperformance for a change with IWM +0.33% versus QQQ           +0.30% SPY +0.25%. Only Financials (XLF, -0.30%) and Materials (XLB, -0.06%) were lower among S&P sector ETFs. Upside leaders included Utilities (XLU, +1.23%), Energy (XLE, +1.11%) and Real Estates (XLRE, +0.67%). Value and growth both also saw gains with value the outperformer as the Russell 1000 Value climbed +0.27% versus its Growth counterpart +0.24%.

• NY Fed Survey of Consumer Expectations: Perceptions of current financial situation improved in May, while expected year-ahead stock price climb odds highest since May 2021.

• After a flattish day Friday, July WTI crude futures gained overnight and extended the upside momentum into the close, settling +2.21/bbl, or +2.93%, to $77.74. Brent similarly gained $2.01, or +2.52%, to $81.63. Today’s move was largely attributed to rising expectations around summer fuel demand potentially generating a seasonal deficit.
• The 10-year yield extended gains from Friday as the US Dollar and equities also gained. The upcoming Fed meeting this Wednesday is broadly anticipated to result in no change to rates and a higher-for-longer tone. The September probabilities remain tilted toward a cut, but only by a 51/49 margin, so certainly not seen as a sure thing. Unsurprisingly, few investors seem interested in placing big bets ahead of the meeting and the next economic data points.

• In Food & Restaurants: DNUT was upgraded from Hold to Buy at Truist and raise tgt to $15 from $13 after recently traveled with the company CEO and CFO saying investors are undervaluing the potential of the recently announced partnership with McDonald’s; the partnership will accelerate revenue growth of legacy business in the next few quarters, well before the MCD rollout is complete; and the GLP-1 overhang is fully reflected in the current valuation.
• GME shares furthered Friday’s downward move, losing close to -15% in mid-afternoon as meme-investors continued to digest the prospects of increased share dilution and Keith Gill’s underwhelming live stream and 2 new rather lackluster memes. Additionally, over the weekend MSFT announced their commitment towards more all-digital Xbox consoles, a negative for the brick & mortar GameStop.
• PARA shares were mixed after the entertainment company’s sale drama continued. Today’s twist was news from the WSJ that Edgar Bronfman Jr. was looking to bid $2 to $$2.5B for Shari Redstone’s National Amusement shares.

• In Building Products: MHK was upgraded from Market Perform to Strong Buy at Raymond James with $140 PT saying while the firms constructive thesis is multi-pronged (the historical strong correlation of MHK’s relative stock performance to FNA margins is wildly bullish, WTI prices have fallen since the Q1 print, etc.), its primary tenet is that MHK shares are now below what it derives as theoretical "net asset appraised/replacement value".

• In Autos: TSLA shares active ahead of its shareholder vote on Chief Executive Elon Musk’s pay package later this week. Over the weekend, Norway’s sovereign wealth fund revealed that it will vote against Musk’s massive $56 billion pay package at a stakeholder meeting slated for June 13. Aston Martin (ARGGY) said it would raise annual pay by 4% for more than 2,500 employees and contractors across its UK manufacturing sites and offices for 2024 and 2025; said manufacturing technicians will also receive a 1.5% rise in 2025, alongside a one hour reduction in the working week.
• UBER shares sharply fell but drifted back after the ride hailing company lost an appeal to topple California’s gig worker status law. Shares of peers DASH and LYFT mimicked Uber’s price movement.
• In Auto dealers: LAD and ACVA both upgraded to OW from Neutral at JP Morgan in auto dealers and SAH upgraded to Neutral from Underweight while ABG downgraded to Neutral from OW saying given the combination of 1) still tough affordability backdrop for consumers; 2) choppy used car supply as discussed in this note; and 3) industry volumes that have been running below normalized levels and record average car parc age, JPM pivots its rating preference to companies that have a more visible positive earning revision backdrop driven by company specific execution opportunities and/or unique secular tailwinds. Remains Underweight on KMX and PAG and remains OW on KAR, GPI and B2C marketplaces CARG, CARS, TRUE.

• In Energy stocks: OXY shares active after Warren Buffet’s BRKA purchased 2.6 million shares in recent days, lifting its stake to 250.6 million shares, or a 28% interest in the big U.S. energy company. Berkshire bought the stock, valued at more than $150 million, on Wednesday through Friday and paid just under $60 a share, according to a Form 4 filing. In oil drillers, NE to acquire DO for $15.52 per share in cash, stock; As part of the transaction, Diamond shareholders will receive 0.2316 shares of Noble, plus cash consideration of $5.65 per share for each share of Diamond stock, representing an 11.4% premium to closing stock prices on June 7, 2024. In Refiners: DK downgraded to Sell from Hold at TD Cowen and lower PT to $20 from $25 as may generate limited FCF at mid-cycle cracks, apparent from recent results and guidance.
• In Industrials: HON upgraded from Sell to Neutral w/ $215 PT (from $175) at UBS on an improved outlook for IA, with valuation now having fully reset (link) and downside risk diminished, in its view. In Transports: in airlines, LUV shares rose following a report by The Wall Street Journal that Elliott Investment Management has built a stake of nearly $2 billion in the company and plans to push for change aimed at reversing the airline’s underperformance

• In Crypto: Bitcoin miner BITF said it had approved the adoption of a "poison pill" to fend off a potential hostile takeover attempt by rival RIOT just days after Riot disclosed it had built a 12% stake in Bitfarms as it pursues a takeover attempt.
• In Insurance: ICCH shares jump after the insurance holding company agreed to be acquired by peer Mutual Capital Group in a $73.8 million deal, with Mutual Capital saying it would pay $23.50 a share in cash for ICC, a nearly 47% premium.
• KKR and VIRT shares gained after the financial companies were to be added to the S&P 500 and added to the S&P SmallCap 600 respectively.

• RCUS completes patient enrollment in phase 3 trial evaluating a domvanalimab-containing regimen in first-line metastatic upper GI cancers; said domvanalimab plus zimberelimab and chemotherapy regimen was generally well tolerated and said no unexpected safety signals were observed at time of data cutoff, March 12, 2024.
• SKYE announced that its Phase 2a clinical trial of SBI-100 Ophthalmic Emulsion in patients with primary open-angle glaucoma or ocular hypertension did not meet its primary endpoint for lowering intraocular pressure.
• LLY shares rose after the FDA panel voted 11-0 in favor of the drug maker Alzheimer’s drug with safety and potential limits to be reviewed next.
• SWTX disclosed that it received notification of termination of its non-exclusive license agreement studying nirogacestat in combination with low dose belamaf. GSK is expected to continue the on-going trials through completion for the 27 patients currently enrolled. No payment is expected to be made because of this termination.

• In Telecom & Media: Deutsche Telekom (DTEGY) buys ~6.7M shares in TMUS, exercising call options on T-Mobile US shares held by Softbank from Japan, which were agreed in June 2020. Fixed exercise price at that time of $101.46 U.S. per share is being adjusted to $99.51 to account for the cumulative dividend payments by T Mobile US of $1.95 since then.
• DJT shares lost ground after the social media company filed an amended S-1with the SEC.
• AAPL shares moved lower after Day 1 of the company’s WWSC24 event ended without any standout announcements. Apple unveiled “Apple Intelligence,” enabling one’s iPhone, iPad , and Mac to understand and create language, as well as images which built with privacy at its core. Apple also announced a Siri program and a partnership with MSFT and ChatGPT. Shares of GOOGL rose after Apple’s lack of a blockbuster announcement.

• AMD was downgraded to EW from Overweight at Morgan Stanley with $176 tgt saying they continue to see AMD as increasingly well positioned in their core markets, but persistently high AI expectations make US more cautious on their ability to justify a premium multiple.
• Reuters reported a two-year legal battle pitting two tech titans threatens to disrupt an emerging wave of new personal computers powered by artificial intelligence, tech industry executives and experts say, Reuters reports. A contract dispute between ARM and QCOM could abruptly halt the shipment of new PCs.