Closing Recap

Tuesday, October 01, 2024

A day after stocks closed near their highs, ending the month of September with gains (and S&P, Dow rising a 5^th straight month), sentiment literally changed overnight (well, at least for a day), as equity markets were better for sale most of Tuesday amid a confluence of factors, but managed an afternoon rally to pare losses. Oil prices rose as much as 5% before paring gains, its biggest one day move in over a year following news reports that Iran fired roughly 180 missiles in its attack on Israel Tuesday, while Israel’s elite units launched limited ground raids against Hezbollah, an Iran-backed group in Lebanon. Gold prices jumped over 1% on the news and stock markets slumped initially.  That was just one factor in today’s market weakness as the other big story remains U.S. East Coast and Gulf Coast dockworkers began a strike at midnight, their first large-scale stoppage in nearly 50 years, halting the flow of about half the nation’s ocean shipping after negotiations for a new labor contract broke down over wages. So today alone we had oil prices surge back above $70/barrel as investors begin pricing-in potential supply disruptions in the Middle East and a port strike along with recent Fed rate cuts (this type of situation could raise inflation fears again). Meanwhile, the Labor Department’s job openings and labor turnover (JOLTS) survey showed job openings rose 8.04 million in August, compared with estimates of 7.66 million, and the Institute for Management Supply’s (ISM) report showed manufacturing activity stood at 47.2 in September, versus estimates of 47.5. CBOE‘s market volatility index (VIX) jumped as high as 20.70, more than a three-week high before paring gains as equities pared losses late day as stocks rebounded. Also, tonight we get Nike (NKE) earnings after the close and then the Vice President debate tonight between JD Vance and Tim Walz in NY.

More on the port strike: a new supply chain crisis is looming as 45,000 dockworkers from Maine to Texas are on strike as a port strike on the East Coast and the Gulf Coast is halting the flow of about half the nation’s ocean shipping. Retailers account for half of all container shipping volumes and shares of COST, WMT, TGT, among other large and small retailers could see impacts, as it has the potential to pressure margins at retailers, autos, solar panels, medical supplies, and packaged goods and more; some retailers may boost air freight to accelerate delivery schedules. The International Longshoremen’s Association union had been negotiating with the United States Maritime Alliance (USMX) employer group for a new six-year contract ahead of a midnight Monday deadline.

Could we finally see some weakness this month? The S&P 500 index is up 5-straight months and up along with the Dow Jones Industrials (at record highs), 10 of the last 11-months. @RyanDetrick tweeted “S&P 500 up 20.8% heading into October could mean we finally see some red, with October lower 7 of 9 times stocks were up 20% or more heading into this spooky month.” We got another weak start to a month, much like August and September, but question remains, will we see more weakness, or will it be seen as another “buy the dip” moment for investors?

• S&P Manufacturing PMI Final Actual 47.3, in-line with forecast and previous (both at 47.0). The report indicated, “Output and new orders both fell at sharper rates in September amid demand weakness and political uncertainty. Meanwhile, employment decreased at the strongest pace since the start of 2010 if the COVID-19 pandemic period is excluded. More positively, business confidence ticked higher amid optimism that new business will pick up following the Presidential Election. Meanwhile, the rate of input cost inflation softened but remained marked.
• ISM U.S. manufacturing activity index reported at 47.2 in September vs. consensus 47.5 and vs 47.2 in August; prices paid index 48.3 in September below consensus 53.5 and vs 54.0 in August while new orders index 46.1 in September vs 44.6 in August and employment index 43.9 in September vs 46.0 in August.
• Aug construction spending -0.1% (consensus +0.1%); US Aug construction spending -0.1% (consensus +0.1%) to $2.132 trln, vs July -0.5% (prev -0.3%); US Aug private construction spending -0.2%, public spending +0.3%.
• Atlanta Fed drops its Q3 GDP estimate six tenths on today’s data to 2.6% from the highest since it started tracking due to drops in the contributions from consumption (-0.16%), residential investment (-0.05%), nonresidential investment (-0.10%) & inventories (-0.23%)."

• The Euro dropped more than -0.5% against the US dollar back below 1.11 after Euro-area inflation slowed below the European Central Bank’s 2% target for the first time since 2021. The dollar index (DXY) was up about +0.5% overall against rival currencies following mixed economic data this morning (ISM, S&P PMI, Jolts data).
• Treasury prices advanced as yields declined after reports Iran launched a ballistic missile attack against Israel this afternoon. The 10-year yield hit lows below 3.7%, falling as much as 9bps before paring losses while the 2-yr yield ended around 3.6% down 5-bps.

• In Casinos (WYNN, MGM, LVS, MLCO): Macau’s gaming revenue rose 15.5% y/y in September, as casinos gear up for one of China’s biggest holidays. Gross gaming revenue (GGR) reached 17.25 billion patacas ($2.2 billion) for the month, according to data released by the Gaming Inspection and Coordination Bureau on Tuesday. The result is compared to the analyst estimate of a 14.2% increase and has returned to 78% of the pre-pandemic level seen in 2019 – Bloomberg.
• U.S.-listed shares of Chinese EV’s rise after monthly delivery data: BYDDF said it delivered 419,426 units in September, up 46% y/y (first time delivered of 400K EVs), LI delivered 53,708 vehicles during the month, a 49% y/y increase that brought its third-quarter deliveries to nearly 153,000. NIO and XPEV also posted strong numbers, with NIO delivering 21,181 vehicles last month, up 35% y/y, and XPeng delivering 21,352 for a 16% increase. NIO also said it set a new quarterly record with 61,855 deliveries in the third quarter.

• Re Strike: Reuters noted COST had said contingency plans include pre-shipping some products to get in holiday goods early and preparing to use different ports. Shipper Maersk (AMKBY) said on Sept. 30 a longer dispute may exacerbate disruptions, affecting import and export activities, container availability, and overall operational efficiency. The company has said it will introduce a port disruption surcharge on all cargo moving to and from the U.S. East Coast and Gulf Coast terminals from Oct. 21 ranging from $1,500 to $3,780 a container. CHRW told Reuters, “a significant volume shift to the West Coast could challenge rail services, requiring more use of truck and transload services.”
• In Food & Beverages: BUD upgraded to Buy from Neutral at Citigroup and opened a "positive catalyst watch saying although weakness in the U.S. and a slowing Mexico mean Citi’s Q3 volume ests are below consensus, ongoing cost control in the U.S. means the company is on track to deliver fiscal 2024 organic EBITDA growth above its 4%-8% guidance range. The WSJ reported PEP is in advanced talks to buy tortilla-chip maker Siete Foods for over $1B, The Wall Street Journal reported citing people familiar with the matter. The company had also drawn takeover interest from private-equity firms and other food companies in a competitive bidding process. In Food, MKC reported a top and bottom-line Q3 beat and raised both profit and revenue forecast for the year. UNFI shares jumped after reported Q4 EPS and sales beat as well. PEP to pay $1.2 billion to buy Mexican American foods maker Siete.
• In Restaurants: ARCO notified MCD that it will exercise its option to renew its Master Franchise Agreement with McDonald’s. DIN was upgraded to Outperform from Neutral at Wedbush and raised its tgt to $47 from $34 saying they believe the company’s current sales challenges are well understood and reflected in the stock’s depressed valuation. Share catalysts for multiple expansion over the next twelve months exist, as a $100M accelerated share repurchase plan is probable in the 2H’25. EAT was downgraded to Hold from Buy at Argus.
• Other Retail: footwear and apparel sector closely watch ahead of NKE earnings after the close tonight (UA, FL, ADDYY, DECK, etc.). OLLI announced that it was the winning bidder in a bankruptcy sale process to acquire seven former Big Lots, Inc. store leases. SIG shares fell after the jewelry company announced CEO Virginia Drosos would be retiring on Nov. 4.

• In Solar: shares of FSLR, SEDG lower as the U.S. Commerce Department announced anti-subsidy countervailing duties on solar cells imported by companies in Vietnam, Cambodia, Malaysia and Thailand, a move that could make it more expensive both to produce and buy solar panels in the United States. –The announcement is the first of two preliminary decisions expected by the Commerce Department this year in a trade case brought by Korea’s Hanwha Qcells, FSLR and several smaller companies seeking to protect billions of dollars in investments in U.S. solar manufacturing.
• In E&P Sector: Wells Fargo upgraded RRC upgraded to Overweight from EW as sees an attractive investment outlook and double downgraded AR to Underweight from Overweight and MGY cut to UW from EW in E&P sector, driven by updated commodity price decks and investment outlook. Wells long-term (2027+) OIL/GAS price deck expectations remain $80 Brent/$75 WTI and $3.50 HH. AR cut to UW from Overweight saying despite outperformance driven by capital efficiency and strong LPG pricing, AR’s current premium valuation presents a less compelling outlook. MGY cut also on valuation.

• In Financial Services: UBS initiated coverage on EFX at Buy and $360 PT and neutral ratings on TRU ($110 PT) and FICO ($2,100 PT) in credit score/bureaus saying they are constructive on the ~$14B industry, serving a $45B TAM, as it offers exposure to a unique consumer credit ecosystem with strong secular tailwinds, driving high single-digit long term growth. The sector enjoys high barriers to entry, margin and cash flow expansion, and attractive long-term industry dynamics amid structural demand for data assets and capabilities.
• In REITs: Wells Fargo upgraded CTRE, SBRA, and VTR to overweight and downgraded NHI, WELL to EW in senior housing REITs. Wells notes the entire Healthcare sector has worked in 2024 as it benefits from the secular tailwinds of the often-mentioned acceleration of retirement age individuals, occupancy recovery from Covid, and minimal-to-negative supply growth as development costs and bed moratoriums impede new stock. Given the re-rating and significant premiums to NAV, Wells sees growth-adjusted multiples as the best method of picking Healthcare stocks today.
• In Asset Managers/PE firms: APO shares jumped after unveiled plans to increase its AUM to about $1.5 trillion over the next five years from the $696B it had as of June 30 and said it sees better adj net income per share to be $15 in 2029, led by better-than-expected fee-related earnings growth.

• CVS is exploring options, including a break-up to separate retail and insurance units, Reuters reported late on Monday citing people familiar with the matter.
• GRTS was downgraded to MP from Outperform at JMP Securities after announced updated interim results from the Phase 2 portion of the GRANITE cancer vaccine trial in first-line MSS-CRC, with signals of benefit in the low-risk subgroup, but likely insufficient to excite many investors.  Gritstone disclosed it has engaged a financial advisor to explore and review potential value-maximizing strategies.
• IGMS shares fall after its Chief Executive, Scientific and Medical Officers stepped down amid a pivot to focus exclusively on autoimmunity while pausing development of cancer programs, JPMC, Truist downgrade’s today.
• JNJ announced an investment of more than $2B to build a state-of-the-art biologics manufacturing facility in Wilson, North Carolina.
• NVO said it has mitigation plans in place to minimize or prevent any disruption to its production due to sea port strikes, CNBC reported on Tuesday.
• STTK shares tumbled after scrapping SL-172154, its lead program, and shedding about 40% of its workforce following the failure of an early study in blood disorders.

• In Life Science Tools: Citigroup upgraded BIO to Buy and downgraded both HOLX (to neutral) and CRL (to Sell) in Q3 earnings preview. Heading into Q3, Citi said it expects the key focus to be on Q4 exit rates and implications for 2025, a year in which it again expects slightly below-LRP growth for the group. BIO upgraded as it sees guidance largely derisked and core valuation attractive; HOLX cut to Neutral as it anticipates 2025 guidance to be below consensus, and CRL cut to Sell as it sees price/volume headwinds that are likely to drive downside to 2025/26.
• In MedTech: Citigroup initiated TNDM with a negative catalyst watch in Q3 sector preview while upgraded BDX to Buy from Neutral and raised its estimates to incorporate Critical Care, maintaining its Positive Catalyst Watch on EW, and said is maintaining its Top Picks on BSX, GEHC, and PODD. Despite the messy Q224, or perhaps because of it, MedTech has staged somewhat of a comeback, and Citi wonders if it can hold?
• Cantor previews Managed Care/Hospitals Q3 earnings: Stocks where Cantor thinks investor expectations could prove too bearish and like the 3Q24 setup: UHS, ELV, UNH. Stocks where Cantor thinks there could be some short-term/3Q24 pressure compared to consensus (FactSet) on certain line items, but we still see positives in how the year or 2025 could play out: HUM, CNC. Stocks where they have lingering concerns around expectations and 2025/2026 guidance: CVS, MOH. Stocks where investors are raising concerns on possible peaking valuation levels: HCA, THC. Stocks gaining investor favor at current discounted valuations: CVS, ACHC, CNC, PGNY.

• In Aerospace & Defense: Defense stocks NOC, LMT, RTX, LHX advanced following headlines that the United States has indications that Iran is preparing to imminently launch a ballistic missile attack against Israel (Iran later did attack Israel) and the US said it defend Israel. BA shares tumbled initially after Bloomberg reported it is weighing to raise at least $10 billion selling stock, as the planemaker is on cusp of seeing credit rating cut to junk; Boeing working with advisers on possible infusion to replenish cash reserves depleted further by an ongoing strike. https://tinyurl.com/yc73kxcn . In Defense, GD was downgraded to Equal Weight from Overweight at Wells Fargo.
• In Metals & Mining: Bank America upgraded AA from Neutral to Buy (tgt to $52 from $43) saying Alcoa should benefit from stronger alumina prices, the precursor to aluminum. FNV was downgraded from Buy to Neutral at Bank America (tgt to $139 from $142) citing its fulsome valuation as well as now lower than peer average growth. Lastly, Bofa upgraded STLD from Neutral to Buy (tgt to $155 from $140 as sees STLD garnering relatively greater benefit from higher HRC (and coated steel) prices and is unique among peers via its aluminum rolling mill project.

• In Advertising: IPG was downgraded to Neutral at JP Morgan and Reiterate Overweight for OMC into Q3 earnings saying while they remain broadly positive on the sector, it cuts Interpublic rating given limited upside to its price target following forecast changes, and within the group maintain a preference for OW-rated OMC due to its higher forecast organic and EPS growth and better new business track record; see below for more on this.
• In Media Sector: DIS was downgraded to Market Perform from Outperform at Raymond James saying they see demand moderating at the company’s amusement parks after a strong post-Covid surge and says the shares are expected to remain range bound as it contends that consumers are still digesting price increases. MoffettNathanson upgraded ROKU to Neutral from Sell and raises PT to $80 saying Roku can enhance their financial results due to an improving mix of ad revenues and continued focus on cost management and free cash flow generation.

• In Software: DDOG was upgraded from Neutral to Buy at DA Davidson and raised PT to $140 from $115 as it increases focus on the select few companies that can carry 20%+ growth into 2025 and beyond. TEAM was upgraded from Market Perform to Outperform at Raymond James w/ $200 PT noting shares have been a laggard, falling nearly 20% over the past six months and one-year periods, and nearly 60% over the past three years (S&P500 up 30%+).
• In Hardware & Components: Citigroup downgraded both HPQ, CDW to Neutral from Buy citing a more cautious view on PC recovery in 2H’24. Citi said recent checks in the PC ecosystem suggest the near-term PC refresh opportunity remains protracted, given macro uncertainty and Windows 10 EOL security patch extensions, while AI impacts are likely further out into 2026/2027.

• SMCI 10 for 1 stock split takes effect today.
• STM and QCOM enter strategic collaboration in wireless IOT; initial products from collaboration expected to be available to OEMs in Q1 2025
• COHR was upgraded to Positive at Susquehanna with $120 PT (up from $80) and downgraded MXL to Neutral with $15 PT as believe new CEO Jim Anderson and his platform optimization program will ultimately transform COHR’s long-term financial model, potentially providing the company with over +1,000 bps of net margin expansion. MXL was downgraded citing a few high-profile pending lawsuits, some with historically key customers, that create uncertainty around future cash payments and customer relationships (Silicon Motion, Entropic and Comcast)