Closing Recap

Tuesday, May 21, 2024

U.S. stocks remain in a holding pattern near all-time highs (for S&P and Nasdaq) on continued upside momentum and rising hopes of rate cuts by the Fed later this year. Since monthly stock declines in April, U.S. stock markets are on track for a 5^th consecutive weekly advance, posting big returns in May thus far, as hopes of a low-rate environment boost stock prices across the board. Treasury yields have been little changed for over a week now around the 4.4% level for the 10yr, while commodity prices have jumped with precious metals like silver spiking and gold at record highs along with copper prices. Markets doing a whole lot of nothing the last few days (S&P traded in 15-point range for last 4-hours this afternoon) as markets await FOMC Minutes from prior Fed meeting tomorrow and more importantly, earnings results from the face of “AI” with NVDA expected to report after the close on Wednesday. So just how important is NVDA earnings tomorrow (5/22) night? Well, @KobeissiLetter tweets Nvidia $NVDA, earnings alone drove 42% and 37% of the S&P 500 year-over-year EPS growth in Q3 and Q4 2023. The company also accounted for 11% of the entire S&P 500’s return over the last 12 months. In Q1 2024, Nvidia’s contribution to the S&P 500’s EPS growth is estimated to reach ~40%. Nvidia’s Q1 2024 EPS and revenue are projected to grow by 474% and 241%, respectively." Fair to say its results and outlook will have big implications for chip stocks, data centers, software, and AI related sectors. In Fed speak, few comments out today, but the one that garnered attention was Federal Reserve Governor Christopher Waller who said the latest inflation data is "reassuring" and the U.S. central bank’s policy rate is set appropriately. However, Waller also noted that he needs to see several more months of good inflation data before being comfortable to support an easing in policy.

In stock/sector news today, Transports were a major drag on major averages today, with weakness in package delivery (UPS, FDX), truckers (CHRW, JBHT), and rails (NSC) as the Dow Jones Transport Average fell over 1.65% or 250 points back below its 200-day MA support to 15,170. Financials (XLF) bounced back after tumbling Monday on JPM weakness after its Investor Day; Utilities (XLU) continue to be a market leader in 2024, now +8.8% this month and 14.5% YTD. Industrials (XLI) and Materials (XLB) were among the weakest S&P sectors as commodity prices took a breather. Precious metals took a breather weighing on miners, while no S&P sector moved more than 1% on Tuesday, up or down.

U.S. households continued to feel pinched by inflation in late 2023 even as price pressures ebbed, the Federal Reserve reported (survey released today was from Oct 2023): 1) about 72% of adults were doing at least okay financially as of October 2023, down from 78% in 2021 and the lowest rate since 2016. 2) Inflation remained the top financial concern, as 65% of adults said high prices had made their situations worse; 34% said their family’s monthly income had risen in the past year, but 38% said their spending had also increased. 3) Some 63% percent of adults said they could cover a hypothetical $400 emergency expense using cash or its equivalent, the same as in 2022 but down from a record high of 68% in 2021. 4) 19% of renters said they had been behind in the rent at some point in the prior year, up from 17% in 2022.

• Aluminium prices hit a nearly two-year high, the biggest one-day gain in four months rising over 3% to $2,710 a metric ton on the LME (earlier hit $2,765) due to concerns about raw material supply and a recent rally in copper.
• Copper hit a record $11,104.50 on the LME as a rally triggered by short covering created momentum for speculators and funds to bet on a potential long-term shortage of the metal in the transition to green energy.
• WTI Crude June futures settled at $79.26 a barrel, down -$0.54 cents, 0.68%, while Brent Crude futures settle at $82.88/bbl, down 83 cents, 0.99%.
• The dollar index (DXY) with modest gains and Treasury yields little changed as well.

• In Restaurants: EAT was upgraded to Buy from Hold at Argus with a $72 price target saying the company’s new CEO has raised menu prices and scaled back discounting and promotions, while Brinker has also simplified operational processes, revamped its menu, and improved employee retention.

• In Building Materials: EXP reported Q4 revenue of $476.7M, missing the consensus estimate of $484.7M, while Q4 EPS of $2.24 also missed the consensus estimate of $2.69; CEO said results at the cement and concrete and aggregates business were affected by adverse weather conditions with results at the cement division affected by higher costs (shares of MLM, SUM, VMC among movers on results/comments). Homebuilder TOL expected to report earnings tonight.

• In Casinos & Gaming: Benchmark said DKNG and FLUT’s FanDuel both had standout performances in New York’s mobile sports betting market (week ending May 12, 2024) contributing to a record total revenue of $70.9M. Said DraftKings set a state record with $36.5M in revenue, achieving a market share of approximately 51.5% while FanDuel followed closely with $26.9M in revenue, holding a market share of around 37.9%. Raymond James initiated covered on CZR with a Strong Buy rating and $55 tgt making it their top pick in gaming operators, with Outperform ratings for BYD ($67 tgt) and PENN ($20 tgt) saying they expect better results from land-based casinos, improved profitability in online/digital segments and improving balance sheets as we move into 2025. Said they believe disappointing results in 1Q, weaker-than-expected digital/online performance, and macro headwinds have driven the stocks to compelling valuations.

• In Coal, Utilities, Solar: Coal producer CEIX said shipments to international markets have resumed from its marine terminal in Baltimore. Coal exports from the busy U.S. port of Baltimore were disrupted in March following the collapse of a bridge that was struck by a massive cargo ship. CONSOL’s terminal was also shut following the incident. In Renewable & Alternative Energy, Piper downgraded ITRI and NOVA saying Q1 largely validated market expectations. Key themes include load growth, decelerating Ute-solar in ’24; positive storage volume indicators with lower pricing; weaker resi in ’24; tepid onshore wind orders; final hydrogen guidance expected at YE; 2H weighted guidance drives skeptical market; Policy updates (201, 301, AD/CVD, domestic content).
• Industrials and Materials: NDSN shares fell as guides Q3 sales $645-670Mm below est. $705.07Mm and adj EPS $2.25-2.40 vs est. $2.72 and guided FY revs $+0-2% vs est. +5.36% on a lower earnings view citing slow recovery of electronics and semiconductor markets. In Chemicals: PPG to build new paint and coatings manufacturing facility in Tennessee as part of $300M investment in advanced manufacturing in North America. ITRI downgraded from Overweight to Neutral on valuation at Piper noting the company has capitalized on the improving semiconductor component environment and delivered a powerful beat-and-raise story over the past year…but says look for a more favorable risk/reward in the future, and/or datapoints that build its confidence in a more favorable LT trajectory than is reflected in the stock.

• In Financial Services: shares of mortgage/credit reporting co’s EFX, FICO, EXPN, TRU all weaker initially as RBC Capital noted the CFPB is analyzing the rising mortgage closing costs, including credit reporting costs, and is interested in input from lenders and looking for possible new rulemaking and guidance to improve competition, choice, and affordability. Although they do not expect any material impact on mortgage credit report pricing in the near term, we continue to monitor for the headline risks and the potential to raise prices aggressively going forward. US Mortgages account for ~20%, 19%, 8%, and 2% of FICO, EFX, TRU, and EXPN revenues, respectively.
• In Crypto: Bitcoin traded higher again, but Ethereum (ETH) outperformed rising as much as 8% nearing $3,800 on optimism around Ether exchange-traded funds (ETF) receiving regulatory approval. Note the SEC asked exchange operators NDAQ, CBOE and ICE owned NYSE to fine-tune their applications to list spot Ether ETFs, Reuters reported. Bitcoin prices topped $71,000 earlier after holding around $67,000 earlier the day prior, boosting share prices of COIN, MSTR, MARA, RIO, CLSK, HUT and other Bitcoin related names – but Bitcoin rolled back under $70K.
• In Exchanges: the US SEC asked NDAQ, CBOE to fine-tune their applications to list spot ether exchange-traded-funds (ETFs), signaling the agency may be poised to approve the filings, three people familiar with the process told Reuters. While the exchange applications are the first step in a two-step approval process, an SEC green light would mark a major — surprise — win for the cryptocurrency industry that had been expecting the thumbs-down.

• AZN has set out a target to grow revenue to $80 billion by 2030; said it will develop 20 new medicines throughout the next six years and expects significant growth across all its therapy areas; said aims for a mid-30s percentage core operating margin by 2026; expects sustained growth post 2030.
• BMY said the FDA’s decision date for a subcutaneously injected version of its cancer medicine Opdivo was moved forward to Dec. 29 (from Feb. 28, 2025, previously); the new Opdivo formulation is made using drug-delivery technology from Halozyme.
• LLY rises after its tirzepatide, receives approval from Chinese regulators. Also helping, co said its pivotal Phase 3 VIVID-1 study, patients with moderately to severely active Crohn’s disease, with or without previous biologic failure, achieved statistically significant and clinically meaningful improvements.
• LRMR shares rallied after saying the FDA removed the partial clinical hold on its Nomlabofusp program in Friedreich’s Ataxia, after the agency reviewed data from its Ph 2 dose exploration study. The hold lift will allow the company to dose escalate to the 50 mg dose in its OLE study.

• In Ortho: ZBH was upgraded Zimmer Biomet to Buy from Hold with a $150 price target at Argus noting the company has a tailwind from favorable population demographics as replacement knee and hip joints will aid the mobility and quality of life for the aging populations in the advanced economies of Asia, Europe, and North America.
• In Medical Equipment: GH said FDA staff reviewers raised concerns that Guardant Health’s experimental blood test for a cancer of colon or rectum may fail to detect some types of tumors that can later become cancerous.

• Internet: Piper with advertising metrics data: Firm said TEMU ad units on META set a record in mid-April & improved again m/m, while PINS remains the largest net share gainer of outbound traffic in the US +7% y/y, followed by RDDT +4% y/y while GOOGL Search share worsened again although Piper has less confidence in the data following the Q1 result. Piper’s Digital Market growth estimates ticked up ~60ps y/ y for Q2 although is set to decelerate ~200bps.

• In Software: MSFT talked up new tools on Tuesday aimed at encouraging programmers to build the AI-focused technology into Windows-related software at its event; said 1.8 million developers are now using GitHub Copilot, Microsoft’s generative AI tool and promoted new application programming interfaces, or APIs. ZM delivered a ~1% rev beat, relatively in line w/ recent trends and representing 2% y/y rev growth (adjusted for extra day), operating income beat by ~10%, also ~in-line with typical beats; and operating margins saw 200bps expansion y/y (to 40% from 38.7%) despite 100bps headwind on GMs and very strong free cash flow of $569.7M (consensus $434.0M); mgmt noted GM headwinds will continue through FY25 and guidance was mixed. GLBE upgraded from Equal Weight to Overweight at Morgan Stanley after results, optimistic that the company will be able to execute on the planned 2H24 acceleration, achieve faster-than-modeled GAAP profitability.
• In Storage & Hardware: Barclay’s with two ratings changes as they upgraded HPQ from Underweight to Equal Weight and raise tgt to $30 from $24 after the stock has underperformed the group for the past 1.5 years; said are still a little concerned about margins and the embedded 2H PC ramp but see less downside to the shares. The firm downgraded PSTG to Equal Weight from Overweight after a strong run (shares are up 70% YTD vs the COMP up 10%). Barclay’s expects continued strong subscription growth at the expense of product growth. KEYS Q2 beat expectations slightly, but both top and bottom-line guidance for FQ3 is light as orders were flat q/q, in-line with expectations, anticipating slow demand in electronics industrial markets amid high borrowing costs. APH announced a 2 for 1 stock split.

• LRCX announces $10B share buyback and reports a 10-for-1 stock split; share repurchase "is consistent with our plan to return 75% to 100% of free cash flow to stockholders in the form of dividends and share buybacks.”
• MU boosted its FY capital expenditure forecast spending to $8B from earlier expectation of $7.50B at J.P. Morgan conference saying they expect high bandwidth memory (HBM) chips to be multi-billion-dollar business in 2025.
• ASML and TSM have ways to disable the world’s most sophisticated chipmaking machines if China invades Taiwan, Bloomberg reported; the Firms can remotely shut off advanced EUV chip-making machines; US officials concerned over risk of conflict to chip industry.