Closing Recap

Wednesday, May 22, 2024

It started as a very slow, low volume trading day for a third straight, as market participants are clearly waiting for earnings results from semiconductor/AI chip giant NVIDIA (NVDA) after the bell tonight, with a potential read through to the wider technology industry (other chip names, search, data center names etc.). Volumes for the last two trading days were well below normal levels as investors waited to make any big bets and trading ranges remained very narrow. In fact, around 1:00 PM, @bespoke invest tweeted “Still a lot of time in the day, but the S&P 500 ETF ($SPY) is on pace for its narrowest intraday range since the Friday after Thanksgiving. Today, also the 4th day in a row where intraday range was below 0.5%. That would be the longest streak since Sept 2021.” Well, that stat did not hold up, as markets rolled a little before the FOMC minutes at 2:00 PM on some Goldman CEO comments and then accelerated to the downside after the release of the minutes, with the Dow falling as much as 300 points and the Nasdaq falling more than 100 points from high of day to low! Of course, every dip has been a buying opportunity for months and stocks rebounded into the close, finishing well off the lows into NVDA results.

Stocks began to slip before the FOMC Minutes at 2:00 PM after Goldman Sachs CEO David Solomon said he forecasts zero rate cuts this year by Fed, forecasts US economy in "slightly more fragile place" than soft landing, and forecasts global economic environment as "slow and sluggish." Stock markets didn’t like the comments and given the thinly traded markets today/low volumes; major averages took a brief dive lower. Stocks added to losses following headlines from the prior FOMC meeting minutes, with the two headlines on rates standing out. “While the policy response for now would "involve maintaining" the Central bank’s benchmark policy rate at its current level, the minutes, released on Wednesday, also reflected discussion of possible further hikes. "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate." The fact that rate hikes were mentioned by several/various participants was not well received by markets.” This was enough to turn markets lower on light vol.

There were a few notable sector movers on the day: 1) solar stocks surged on reports the main industry body for China’s solar companies called for an end to a profit-slashing price war to halt a slump (big moves in FSLR, ENPH, SEDG, SPWR, etc.); 2) materials, energy, and commodity stocks/prices pulled back after a strong run in copper, gold, oil prices as prices dropped today; 3) semi chip stocks rose into NVDA results tonight, with the SOX moving back to within 90 points of all-time highs (now wider after afternoon sell); 4) vaccine related stocks PFE, NVAX, MRNA saw strong gains; 5) retailers were mixed to lower, led by declines in TGT after guidance and comp sales disappointed and 52-week lows for LULU; 6) Buy Now, Pay Later (BNPL) stocks got hit hard (AFRM, SQ, PYPL) after the CFPB issued an interpretive rule that confirms "buy now, pay later" lenders are credit-card providers and must provide consumers some key legal protections.

In interesting stats: @RyanDetrick tweeted “Take note this year is on pace to be the best start to an election year EVER (after the first five months). 1976 was up 11.1% at the end of May and is the current record holder. @charliebilello noted “S&P 500 is up 11.6% in the first 98 trading days of 2024, the 19th best start to a year going back to 1928.” @RyanDetrick tweeted “Sell in May they told us. S&P 500 currently up >5% in May. This is rare and potentially bullish. Only 6 times did May gain 5% or more and the next 12 months were higher every time and up 19.9% on avg.”

• Rents fell again in April, Realtor.com says, with the median asking rent in the 50 largest metro areas falling 0.7% year-over-year to $1,723. Still, rents are now just $33, or 1.9%, below their August 2022 peak. Renters in Austin, TX, experienced the largest rent relief in April by saving $195 per month. However, renters in Indianapolis, IN, Milwaukee, WI, and Minneapolis, MN, faced new record high rents.

• Gold prices fell -$33 to settle at $2,392.90 an ounce in broad profit taking in metals today (copper also dropped today – both off recent record highs); copper prices dropped after having closed at another all-time high on Tuesday and are up over 30% on the year; aluminum appears to be the next metal getting sent as price surges to highest level since June 2022, but also eased today in metals pullback. The dollar index (DXY) rises +0.25% nearing back around 105 level following the FOMC minutes later in the day.

• In E-Commerce/Online Retail: SHOP was upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $74 from $67 noting shares are down 23% YTD due to an investment cycle weighing on margin expansion in 2024 and more mixed consumer spending data point; VIPS shares slip as CEO said in Q1 saw slow business momentum due to softer-than-expected seasonal demand, and forecast Q2 revenue in the range of RMB26.5 bln-RMB27.9 bln, below analysts’ average estimate of RMB29.3B (after Q1 revs missed consensus views). PDD shares jumped after the Chinese e-commerce platform Q1 revs of RMB86.81B ($11.99B), topped consensus of RMB75.66B, powered by strong adoption of Temu, and more price-conscious customers on its Chinese discount e-commerce site Pinduoduo.
• In Apparel Retail: URBN top-line beat (driven by Anthropologie/Free People) and better gross margins drove 1Q’s EPS beat ($0.69 vs. $0.52), Q1 retail comps +4.6% vs est. +2.6%, but management guided Q2 gross margins below. LULU shares touched a fresh 52-week low after announcing multiple adjustments to its product team, most importantly the departure of Chief Product Officer Sun Choe.
• In Specialty Retail: PAR upgraded to Buy from Hold at Benchmark with a price target of $59 based on a sum-of-the-parts analysis – PAR provides enterprise restaurant chains in the QSR and fast casual space with a comprehensive suite of software solutions including cloud-native point-of-sale (POS), online ordering, loyalty, and back-office systems.
• In Food Sector: KHC was upgraded to Overweight from Neutral at Piper with an unchanged price target of $42 saying sees incrementally better visibility on Kraft Heinz’s upside in foodservice, helped by its innovation in time-saving dispensers, which it expects can drive incremental revenues within existing relationships.

• In Home Improvement Retail/Furnishing: WSM Q1 adj EPS $3.48 topped consensus of $2.70 on better adjusted operating margin 19.5% vs. 12.9% y/y, estimate 13.7% and boosted its annual operating margin forecast to 17%-17.4% from prior view 16.5%-16.8% on the back of better merchandise margins, lower supply chain costs and robust demand for brands (shares opened sharply higher but reversed lower).

• Pipelines & MLPs: sector has been strong this month as KMI slipped today after snapping its 13-day win streak yesterday and shares up +5.7% MTD and 9.5% YTD – pipeline stocks have been among the best performing segments of energy this month. Barron’s noted yesterday one reason appears to be the rise of artificial intelligence, and the need for natural gas to power the data centers that run AI programs. (note shares of WMB, ENB, OKE are all up solidly this month). Barron’s also noted Natural gas is the largest source of electricity generation in the U.S., and electricity demand is set to grow in the coming years after more than a decade of stagnation.
• In Industrials: GNRC was downgraded to Perform from Outperform at Oppenheimer without a price target, saying recent strength in the shares now reflects a more reasonable anticipation of business model development prospects. Oppenheimer upgraded AME to Outperform from Perform with a $200 price target which reflects "strong runway" on the Paragon integration and additional acquisition capacity, sturdy end-market mix, and robust operations. MIDD was downgraded to Underweight at JP Morgan predicated on its expectation that MIDD’s consensus numbers are unachievable as it is modeling FY24 and FY25 EBITDA 5% and 12% below consensus, respectively.
• In Materials/Chemicals: ALB was downgraded to Sector Perform from Outperform at Scotia and cut tgt to $135 from $150 saying the firm’s updated cash flow outlook sees deeply negative free cash flow in 2024, followed by moderately negative cash flow in 2025 and 2026 and forecasts will only deteriorate further. IFF was downgraded to Equal weight from Overweight at Morgan Stanley given limited upside to price tgt and saying IFF now has fewer material near-term catalysts, although MSCO retains its positive stance on the Ingredient space.
• In Aerospace & Defense: RTX was upgraded to Buy from Hold and raise tgt to $121 from $104 at CFRA saying Raytheon segment (37% of 2023 revenues before intra-segment eliminations) is a major player in munitions and that the ongoing wars in Ukraine/Gaza, plus risk of partnership between Russia/China, should create appetite for more defense spending. CAE shares tumbled after prelim Q4 revenue C$1.26B was below consensus C$1.29B and said it is re-baselining its defense business which included mgmt changes (was downgraded to Hold at Canaccord).

• In Lending: The Biden administration says it’s canceling another $7.7 billion in student loans for 160,000 borrowers. That brings the total student debt relief it has approved to $167 billion. In Buy No, Pay Later (BNPL), the U.S. Consumer Financial Protection Bureau (CFPB) will apply some credit card consumer protection rules to buy now, pay later (BNPL) lenders, the agency said. BNPL providers include AFRM, Klarna and Afterpay. Under an interpretive rule issued by the CFPB on Wednesday, BNPL lenders will be required to investigate customer disputes, refund products that have been returned, and provide periodic billing statements.

• BIIB bolsters late-stage pipeline, expands immunology portfolio with agreement to acquire privately held Human Immunology Biosciences paying $1.15 billion upfront and up to $650 million in potential milestone payments.
• DYN 10.5M share Secondary priced at $31.00 (deal size increased to $325.5M from $300M)
• GTHX said it will partner with Deimos Biosciences on a global licensing agreement, which excludes the Asia-Pacific region, for drug lerociclib for radioprotective uses and GTHX is expected to receive common stock representing 10% of Deimos’ outstanding equity capitalization, in addition to a 20% royalty on aggregate annual net sales of lerociclib.
• MRNA rises for an 8^th day and NVAX trades to its highest levels since December 2022 as vaccine names strong and PFE shares outperformed as Australia reports first human avian flu infection.
• NBIX announced the publication of data from a post hoc analysis of the Phase 3 KINECT-4 study of INGREZZA capsules in the Journal of Clinical Psychopharmacology.
• RZLT said its study of a potential eye-disease treatment met its primary endpoints; said that RZ402, a potential Diabetic Macular Edema treatment, had met its primary endpoints of change in macular edema and a good safety profile in the Phase 2 proof-of-concept study.
• SNY experimental drug showed promise in treating asthma, supporting the French drugmaker’s plan to begin more late-stage studies of the medicine.

• In Life Sciences: Citigroup downgraded TECH to Neutral in life science tools and diagnostics Q1 recap as it sees valuation as less compelling following the >30% move higher in shares. Firm said most notable include constructive order commentary from the bioprocessing players (DHR, AVTR, TMO), the continuation of broad macroeconomic weakness in China and the lingering budgetary pressures on instrumentation demand.

• In Media & Telecom: VSAT falls as Q4 revenue (+5% y/y) and EBITDA came in above consensus, driven again by strong gov’t sales, but its FY25 guidance calls for flat y/y pro-forma revenue and 3-6% y/y EBITDA growth, below consensus and impacted by increasing competitive pressure in fixed BB and slower IFC installs due to Boeing production delays; BZFD rose after Vivek Ramaswamy disclosed a 7.7% stake in the digital media company, according to a filing.
• In Hardware & Components: GRMN was downgraded from Neutral to Underperform at Bank America and cut tgt to $150 on worries the momentum is decelerating which implies the current valuation is unsustainable; BOX was downgraded to Equal Weight from Overweight, stepping to the sidelines given lack of near-term catalysts, prolonged macro challenges impacting Box’s seat-based model, continued FX headwinds pressuring growth, and constant competitive overhang – all making NT multiple-expansion and positive estimate revisions less likely.