Closing Recap

Thursday, May 23, 2024

U.S. stocks opened at their best levels, with the S&P 500 and Nasdaq each touching intraday all-time highs behind great earnings, revenues, comments about growth/outlook for NVDA, the world’s top semiconductor chip leader and “AI” leader. The results were strong, beating lofty expectations and lifted the technology sector with the Nasdaq coming within whiskers of 17,000 for the first time ever (16,996.39 high) and the Semi index (SOX) hitting a record as well at 5,255.63 (topping prior 5,217.82 high in March). However, that was the peak of the day, and markets pulled back (sharply) on profit taking, led by another round of better economic data which softened the case for Fed rate cuts sooner than later. The Nasdaq hit lows below 16,700 and the S&P (SPX) below 5,260 (off intraday highs above 5,340). NVDA shares were strong, rising as high as $1,060 before paring gains, but overall market breadth was weak, as the NYSE decliners outpaced advancers by over 6-1 margin. All eleven S&P sectors were in the “red”, with more than 1% declines for REITs, Utilities, Healthcare, Financials, Staples, Consumer Discretionary, and Communications. The Dow tumbled over -600 points of 1.5% led by a 7% decline in Boeing (BA) after commentary about cash flow and other stories (Dow now 1,000 points below Monday 40,077 high).

With the NVDA earnings catalyst behind us now, today seemed more of a “sell on the news” event for the broader market which up until today had enjoyed a strong May (still is). Smallcaps underperformed as the Russell 2000 fell over -1.75% to 2-week lows. Cautious comments from Doubleline’s Jeff Gundlach also added to sell-off, saying: notes inverted US yield curve is a big problem for leveraged investors; US recession likely this year already; he’s worried about climbing US government interest debt expense. Treasury yields spike after S&P PMI data was strong, as the 10-year hits more than 1-week high above 4.49% from 4.43% prior to data. The CBOE Volatility Index (VIX) rolled more than -6% to $11.53 earlier, lowest since 2020 (Covid times) but finished in positive territory, rising more than 6% above 13. Bitcoin prices roll along with pullback in stocks, -2% below $68K. Gold prices declined over 2%. Dow Transports dropped over -1.25%, breaking below the 15,000 level when stocks were near lows late in the day.

• Weekly Jobless Claims fell to 215,000 from 223,000 last week and below consensus 220,000; the 4-week moving average climbed to 219,750 from 218,000 prior week; continued claims climbed to 1.794M from 1.786M prior week (prev 1.794M) and the U.S. insured unemployment Rate unchanged at 1.2%.
• S&P Global May flash composite PMI at 54.4 (vs 51.3 in April) and S&P Global May flash services PMI at 54.8 (vs 51.3 in April); S&P Global May flash manufacturing PMI at 50.9 (vs 50.0 in April).
• Mortgage rates fell for the third week in a row, pushing the 30-year rate below 7% for the first time in over a month. The 30-year rate was last below 7% in mid-April. The 30-year fixed-rate mortgage averaged 6.94% as of May 23, according to data released by Freddie Mac.

• Treasury yields spiked (10-yr hit highs around 4.5% and 2-yr yield to 4.95%) following better PMI data from S&P Global, raising concerns (along with the FOMC minutes) that rate hikes may not entirely be off the table for the Fed if inflation can’t come down faster and the economy strengthens). @KobeissiLetter tweeted “30-year US Treasuries are on track for their 3rd worst annual return since 1919. 30-year Treasuries have declined by ~15% year to date after a slight gain of ~2% in 2023.”
• Oil prices reversed lower, falling for a 4^th straight session, as WTI crude fell -$0.70 to settle at $76.87 per barrel, while Brent Crude futures settle at $81.36/bbl, down 54 cents, 0.66%. The U.S. dollar pared losses against the euro after data showed U.S. business activity accelerated to the highest level in just over two years in May. The prospect of higher-for-longer U.S. interest rates raised worries around demand growth impacting commodity prices.

• In Toy Retailers: HAS upgraded to Overweight from Neutral at JPMorgan and raised tgt to $74 from $61 after meeting with management as believes consensus cost efficiency and digital gaming forecasts remain too low while both should ramp into the second half of 2024.
• In Beauty: ELF reported 4Q adj. EPS and net sales that topped consensus estimates (Q4 adjusted EBITDA of $40.9M easily topping a Street figure of $34.7M and sales increased ~71% ahead of a Street expectation of ~56%), while the company’s annual projections for sales and profit failed to meet expectations; guided FY sales of $1,230M-$1,250M, or up around +20-22% YoY (light of street 23.9%).
• Online Retail: CHWY tgt cut to $19 at Raymond James and lower estimates to be further below consensus to reflect negative reads from its channel checks, including ongoing y/y declines in Google Search trends, weakening of mobile app downloads and monthly app user’s q/q, and an increase in promotions y/y.
• In Food: JP Morgan double upgraded consumer goods group Unilever (UL) to Overweight from Underweight as it expects its volume levels to recover, and sees its pricing helping top-line, reinvestments and margin outperformance and the firm downgraded Nestle (NSRGY) to Neutral from Overweight, citing outlook concerns and lower organic delivery against its European peers.

• In Casinos & Gaming: WYNN upgraded from Hold to Buy with $110 tgt at Argus as believes prospects for a faster than-anticipated rebound in Macau, strength in Las Vegas and solid results at the Encore Boston Harbor warrant a higher valuation. Moreover, WYNN’s hotels have been nearly full and sales at its retail tenants in Macau strong. Barclays said regional same-store GGR -5% y/y, but down 2% calendar-adjusted vs -2% in March. For DKNG, the Massachusetts State Senate rejects bid to raise sports betting tax from 20% to 51%.
• In Autos: J.D. Power provides U.S. automotive forecast for May 2024 as: U.S. total new-vehicle sales for May, including retail and non-retail transactions, to reach 1.4M units, up 2.9% on selling day adj basis; forecasts May SAAR for total U.S. new-vehicle sales to be 16.1M units, up 0.5M units; forecasts May U.S. retail sales of new vehicles to reach 1.2M units, up 4.4% on selling day adj basis and forecasts May retail inventory to finish around 1.8M units, up 52.7%.

• In Clean Energy: JP Morgan says HASI, TPC top picks in clean energy; closing preference for ARRY over NXT; removing ARRY and SHLS from Analyst Focus list; downgraded NEP, GNRC primarily on valuation. The firm said resi solar demand remains lackluster, though inverter suppliers ENPH and SEDG are approaching channel inventory normalization in the US and installers RUN and NOVA are off to a good start to a year in which they intend to demonstrate ability to generate corporate cash.
• In Industrial/Machinery: ENS beat F4Q24 top/bottom line consensus and guided FY25 revenue/EPS 4%/5% above the street at the midpoint; TITN shares fall as Q1 revenue of $628.7M missed the $671.7M consensus along with earnings miss of $0.41 vs. est. $0.64 and lowered FY25 EPS to $2.25-$2.75 from prior $3.00-$3.50 and below consensus $3.18; GNRC was downgraded to Neutral at JP Morgan on valuation, while continues to believe that the co is well positioned to benefit from increased grid outage activity given an aging US infrastructure and increasing mix of intermittent renewables, and believe major power outages present upside to estimates. GE tgt was raised to $201 from $191 at UBS as sees both earnings and valuation upside, driven by GE’s 100% EBIT exposure to recurring aerospace aftermarket and dominant narrowbody engine position.
• In Aerospace & Defense: BA shares tumble as the FAA reveals flaw in another major BA plane that could result in fuel tank exploding. The aircraft manufacturer discovered that its 777 liners have poor electrical insulation near its fuel tank, according to a proposed rule the Federal Aviation Administration posted in March, NY Post reported. Separately, BA CFO said that commercial jet deliveries won’t step up in the second quarter compared with the first three months of the year as the company reckons with production quality issues. TGI Q4 sales of $358.6M topped $342.1M consensus but forecast FY25 sales $1.2B vs. est. $1.28B saying cost headwinds could soften with recovery in narrowbody aircraft rates.
• In Materials/Paper Sector: IP upgraded to Buy with $57 tgt at Jefferies saying sees multiple levers to unlock shareholder value and believe the new CEO will act as an agent of change. The firm expects the company will focus on the commercial front, pivoting from volume to maximizing value. Lithium miner SQM posted a net loss of $870 million for the first three months of the year, a loss of $3.04 per share, well below the $0.74 profit expected by analysts, while revenues more than halved to $1.09B vs. est. $1.13B.
• In Transports: railroad NSC upgraded to Outperform from Sector Perform at RBC Capital with an unchanged price target of $270 saying the company’s valuation does not reflect the step-function improvement in operating ration RBC expects the new operating team to enact. Separately, NSC agreed to pay a $15 million civil penalty and $57.1 million for past government response costs under a proposed consent decree to resolve a U.S. government lawsuit over a 2023 train derailment in East Palestine, Ohio

• In Insurance: CB upgraded to Neutral from Underperform at Bank America and raised tgt to $266, increasing its EPS outlook for 2024-2026, assuming a modestly higher investment yield on the company’s investments and float.
• In Real Estate: KBW Inc. said In the CRE panels they hosted; the discussion conveyed a cautiously optimistic tone. Three key points: 1) CRE market could be nearing a bottom; 2) Significant opportunity in real estate credit; and 3) Credit migration expected to continue. KBW continues to see risks for CMTG, GPMT, and RC due to credit caution while LADR and STWD are better positioned. KBW thinks it’s too early to get positive on BXMT and ABR.

• CYTK expanded a strategic funding collaboration with RPRX for up to $575MM in additional funding (incl. $250MM upon closing) in return for increased royalties on aficamten and other assets. CYTK also announced an equity offering of $500MM; new funds are earmarked for aficamten’s commercial launch.
• LLY shares rose to new all-time highs topping $818.
• MDT reported Q4 adj EPS of $1.46 vs. est. $1.45 while revs $8.59B topped $8.44B estimate but forecast Q1 adj. profit $1.19 to $1.21 per share below consensus estimates of $1.25 per share.
• MRNA, PFE are in talks with U.S. on HSN1 bird flu vaccine, the head of the U.S. government’s pandemic response administration said late Wednesday.
• TNGX said it would stop the development of its experimental cancer therapy TNG348 due to liver toxicity experienced by patients in an early-to-mid stage trial (is jointly developed by AZN and MRK).

• In Internet/Online: Reuters reported GOOGL is planning to make its Pixel smartphone in India’s southern state of Tamil Nadu and has tied up with Taiwan’s Foxconn, two sources with direct knowledge said. Foxconn already assembles AAPL iPhones at a facility near Chennai in Tamil Nadu.

• SNOW posted strong FQ1 results as product revenue of $790M was 5% ahead consensus while non-GAAP operating margins of 4.4% were better and offered strong product revenue guidance, raising the full-year outlook from 22% to 24% growth, but profitability guidance gets trimmed.
• SNPS rises after mixed results; Q2 adj EPS $3.00 vs. est. $3.05; Q2 revs $1.45B vs. est. $1.52B; sees Q3 adj EPS $3.25-$3.30 vs. consensus $3.22 and revenue $1.505B-$1.535B vs. est. $1.58B; said raising full year tgts for EPS and revs.
• TTWO was upgraded to Buy from Neutral at Bank America saying they previously assumed co’s release of 7 immersive core titles included two remasters, but on clarification with co, releases to include the launch of two game sequels – Borderlands 4 and Civilization 7.
• Unity Software (U) trades to all-time lows, breaking below $20 per share.
• ZUO rises as Q1 adj EPS $0.11 vs. est. $0.07; Q1 revs rose 6.5% y/y to $109.8M vs. est. $108.9M; sees Q2 adjusted EPS $0.09-$0.10 vs. est. $0.07; Q1 Subscription revenue rose 10% year-over-year.

• The Philly semiconductor index (SOX) traded new all-time highs behind the spike in NVDA, etc. rising to 5,255.63 (taking out prior 5,217.83 high in early March) but ended much lower on the day.
• GFS shares slide after announced pricing of $950M secondary offering of ordinary shares at a price to public of $50.75 per share; a unit of Abu Dhabi’s sovereign wealth fund Mubadala Investment Company PJSC, which is the largest shareholder, is looking to sell $950M worth of shares in the company.
• TSM says it sees 2024 dedicated foundry industry growing 15-20% to $150B; sees >10% semiconductor industry growth in 2024 to $650B, excl memory chips – Overall sees semiconductor and foundry market on trajectory to reach $1.0T by 2030 – Exec comments last night at HQ event.