Closing Recap

Wednesday, October 18, 2023

Index	Up/Down	%	Last
DJ Industrials	-332.30	0.98%	33,665
S&P 500	-58.60	1.34%	4,314
Nasdaq	-219.45	1.62%	13,314
Russell 2000	-36.67	2.08%	1,729

 

 

 

 

 

 

 

 

 

U.S. stocks tumbled all day, closing at fresh weekly lows with no sign of “buying the dip” today. The same fears that weighed on sentiment late last week remained today with surging Treasury yields, rising oil prices, unrest in the Middle East and hawkish commentary from Fed speakers – and add the uncertainty of earnings season into the mix. The situation in the Middle East remains tense, as both sides blamed the other for yesterday’s bombing of a hospital in Gaza, though the WSJ reported U.S. officials say they have intelligence showing that the explosion at the hospital was caused by the militant group Palestine Islamic Jihad, not coming from Israel as Hamas had claimed yesterday. Meanwhile in Washington DC, another failed vote for a new House speaker as Jim Jordan failed again to get majority. Crude oil prices climb after deadly Gaza hospital blast with Iran reportedly calling for Israel oil embargo. Dow Transports tumbled -500 points after weaker results and/or guidance from UAL in airlines and JBHT in truckers. Housing related stocks and interest rate sensitive names pressured as US mortgage rates hit 8%. Financials were largely lower with MS falling to 52-week lows post earnings. Some big earnings expected tonight including two big momentum related plays with TSLA and NFLX, as well as DFS, ZION in financials, AA, STLD in metals, LRCX in semis, and LVS in leisure. Not many places to hide today as stocks and bonds both crumbled as the CBOE Volatility index (CIX) spiked back above 20 late day.

 

The Federal Reserve Beige Book showed: “Prices continued to increase at a modest pace overall. Districts noted that input cost increases have slowed or stabilized for manufacturers but continue to rise for services sector firms. Increases in fuel costs, wages, and insurance contributed to growth in prices across Districts. Sales prices increased at a slower rate than input prices, as businesses struggled to pass along cost pressures because consumers had grown more sensitive to prices. As a result, firms struggled to maintain desired profit margins. Overall, firms expect prices to increase in the next few quarters, but at a slower rate than the previous few quarters."

 

Economic Data

·     Housing Starts for September rose +7.0% to 1.358M vs. 1.394M expected and 1.269M prior (revised from 1.283M) while Building permits declined -4.4% to 1.473M vs. 1.450M expected and 1.541M prior (revised from 1.543M).

 

Commodities

·     U.S. WTI crude oil futures settle at $88.32 per barrel, rising $1.66 or 1.92% while Brent crude settled at $91.50 per barrel, up $1.60, 1.78%. Nymex Natural Gas for Nov. delivery lost 2.30 cents per million British thermal units, or 0.75% to $3.0560 per million Btus, its 6^th straight session decline. The risk of escalating conflict in the Middle East threatened to disrupt oil supplies from the region, with Iran calling for an oil embargo to be imposed on Israel.

·     In weekly inventory data, the EIA said U.S. crude stocks at the Cushing, Oklahoma, storage hub fell last week to the lowest since October 2014. Cushing, Oklahoma, inventories fell to 21.01 million barrels. U.S. exports of total petroleum products fell to 5.36 million barrels per day, lowest since October 2022. Gold prices rose $32.60 to settle at $1,968.30 an ounce.

 

Currencies & Treasuries

·     Treasury yields remained sharply higher, with the 2, 5, 10-yr hitting more than decade highs today following stronger housing data and more “hawkish” Fed commentary today (Waller, Williams). The Benchmark 10-year yield topped 4.92% this morning, the 30-year yield rises to weekly high above 5.01%, the five-year yield rises to 4.9%, highest since July 2007, and the 2-year yield rises to 5.238%, highest since 2006. Yields pulled back slightly this afternoon following a well-received auction of 20-year notes. The U.S. dollar also with solid gains as the DXY rose +0.3% to 106.50 and the greenback hits two-week high vs yen, inches closer to 150 yen again.

·     Treasury yields did ease briefly after the US Treasury auctioned $13B in 20-year notes at a yield of 5.257% vs. 5.257% when issued prior as the bid-to-cover was 2.59 as primary dealers take 11.93% of U.S. 20-year bond sale, direct 15.2% and indirect bidders awarded a strong 72.87%. Before the auction, the 30-year yield broke past 5% while the 10-year rate traded around 4.93%.

 

 

Macro	Up/Down	Last
WTI Crude	1.66	88.32
Brent	1.60	91.50
Gold	32.60	1,968.30
EUR/USD	-0.0036	1.0540
JPY/USD	0.06	149.87
10-Year Note	0.042	4.889%

 

 

Sector News Breakdown

Consumer

Retail, Consumer Staples & Restaurants:

·     In Consumer Products: PG Q1 net sales of $21.87B topped the $21.58B estimate on better profit and gross margin improved 460 bps to 52% as prices rose 7% in quarter; said expects volumes to improve sequentially, despite drop in pricing benefits in the next two quarters.

·     In Beverages: Bernstein said for BUD, seeing early signs of Bud Light clawing back lost share noting for the week ending Oct 7th, Bud Light volumes declined 29% YoY, bringing its market share to 9.1%. This is still down ~290bps vs pre-controversy, but ~30bps improvement vs the all-time low share. The firm said TAP share gain has been stable for the last month at approx +230bps compared to 1st April, down from a peak share gain of +310bps in April/May.

·     In Restaurants: Raymond James upgraded EAT and FWRG to Strong Buy from Outperform in Q3 restaurant preview noting restaurant stocks have significantly underperformed amid a growing list of concerns that include: 1) softer y/y industry trends through September, 2) the potential impact of student loan repayments on consumer spending, 3) the impact of higher interest rates on stock valuations and 4) uncertainty regarding the impact on increased GLP-1 usage.

 

Homebuilders, Building Products, Home Furnishing:

·     In Home Improvement retail: FND will replace VICR in the S&P MidCap 400, and Vicor will replace CIR in the S&P SmallCap 600. KKR is acquiring CIRCOR International in a transaction expected to close on October 18.

·     In Homebuilders: UBS lowered ests and tgts for builders to reflect potentially higher incentive levels needed to offset the recent spike in mortgage rates. UBS remains constructive on underlying homebuilding industry fundamentals and continues to view valuations as compelling.

·     In housing data: The US MBA mortgage applications index fell -6.9% in the latest week, the purchasing index fell -5.6%, the refinance index plunged about -10% as the average 30-year mortgage rate rises 3 bps to 7.70%.

 

Energy, Industrials and Materials

·     In Aerospace: SPR shares jumped after signed a new pact with BA to strengthen the two companies’ relationship after problems with Spirit’s fuselages used in Boeing’s 737 MAX jets weighed on production; SPR says Most as result of impact of 787 and 737 recurring shipset pricing adjustments sees 2029 – 2033 rev decrease of about $240M in total.

·     In Chemicals: at Bank America, DOW both upgraded to Neutral from Underperform, HUN upgraded to Buy and WLK cut to Underperform in PetChem saying petrochemical sentiment index bottomed in July but has not yet flipped to a bullish outlook. In Downstream Chemicals, given more potential upside in the upstream names, trimmed valuation multiples on ECL, SHW and cut SHW to Underperform due to potentially weak demand in housing starts, turnover, and remodeling. With the outlook for lithium challenged, take more selective view and downgrading ALB to Underperform. SQM downgraded to Underperform at Bank America and lowered its 2023 and 2024 EBITDA estimates by 17% and 43%, respectively, following 20%-50% cuts in lithium price assumptions made by the firm’s commodities team for 2023-2025.

·     In Transports: Dow Transports fell as much as -460 points behind the weakness in UAL and JBHT post earnings, back below its 200-day MA support of 14,830. airlines UAL reported strong 3Q23 results, with adj EPS of $3.65, 8% ahead of consensus but guide for 4Q EPS is 20% below consensus and rev guide for 4Q is ahead of expectations on less capacity, but the cost guide is much worse than the street has been expecting. In truckers: JBHT reported downside 3Q adj EPS, as total revenue declined 18% YoY, Intermodal margins were 100bps lower than est. In rails, North American freight-railroad traffic falls 2.1% for the week ended Saturday, snapping a three-week upside streak. Carloads fall 2.9% on 12 reporting US, Canadian and Mexican railroads, while the volume of intermodal units slips 1.4%, data from the Association of American Railroads.

·     In Paper & Packaging: IP said production shutdowns to optimize manufacturing will result in about 900 employees losing their jobs and said it will permanently close its containerboard mill in Orange, Texas and permanently cease production on two pulp machines, one in Riegelwood, N.C. and one in Pensacola, Fla, cutting containerboard capacity by about 800,000 tons.

 

Financials

Banks, Brokers, Asset Managers:

·     Several bank earnings:

·     MS new 52-week lows: Q3 profit fell y/y but tops ests, boosted by better-than-expected trading revenue 3Q net revs $13.3B, vs. est. $13.2B; Q3 NII $1.98B vs. est. $2.06B; wealth management net rev $6.40B vs. est. $6.58B; Q3 FICC sales & trading revs $1.95B vs. $1.83B; Q3 sales & trading rev $2.51B vs. $2.41B; Investment-banking revenue dropped 27% to $938M.

·     CBSH Q3 core EPS missed by $0.02 on fees/expenses, though core NII a touch better as deposit mix shift slowed and ramp in IBD costs moderated.

·     CFG slips after Q3 EPS missed by $0.06 driven by in-line NII, a $0.07 miss on core fees, more than offsetting a less than $0.01 beat on core expenses and guide weaker.

·     HWC Q3 EPS $1.12 vs est. $1.04 on NII 272.1Mm vs est. $273.17; CET1 capital ratio 12.04%, total deposits $30.3B +1% seq.

·     USB posted $0.02 EPS beat driven by in-line NII, a $0.01 beat on core fees, and a $0.02 beat on core expenses while provisions of $515M were a miss, as was Q$ guidance.

·     Trust banks: NTRS falls as Q3 EPS missed by $0.02 driven by trust fees, NII, and provision expense, partially offset by lower expenses; Provision for credit losses $14.0M vs. $0.5M y/y. STT reported a top and bottom line miss but shares rose early.

 

Insurance & Services:

·     In Insurance: TRV Q3 core EPS $1.95 well below the consensus $2.99 on better revs of $10.64B as miss mostly reflecting much higher-than-expected catastrophe losses and lower-than-expected reserve releases, with modest core loss and expense ratio misses.

·     In Lending: ALLY reported Q3 EPS beat by $0.04, driven by lower provision, lower taxes, and lower expenses, partially offset by lower total net revenues.

·     In Consumer Finance: MA and Visa (V) shares slip after the WSJ reported the Federal Reserve is preparing a proposal that would lower the fees merchants pay to many banks when consumers shop with debit cards.

·     In Trading & Exchanges: IBKR reported better than expected core earnings ($1.55 vs $1.51 consensus) driven by lower expenses (compensation) but talked down forward LT account growth prospects (from +30% to +20%) even though one of the two large introducing broker wins started in 3Q23. NDAQ flat earnings for Q3 but said its operating revenue rose more steeply than had been expected. ICE shares active after Bloomberg reported that the SEC meets on banning exchange volume-based pricing deals.

 

Healthcare

Biotech & Pharma:

·     ARDX said it the FDA approved tenapanor, marketed under the brand name Xphozah, for control of serum phosphorus in patients with chronic kidney disease on dialysis.

·     AZN shares slip after a new cancer medicine being developed by the drugmaker and Daiichi Sankyo seemed to fall short of investors’ expectations – Jefferies says the worse-than-expected results from the lung study outweigh the in-line results from the breast cancer trial.

·     EDIT was upgraded from Underweight to Neutral at JP Morgan as believes the early clinical validation from its EDIT-301 program in sickle cell disease and beta-thalassemia is encouraging and believes downside is relatively protected at this valuation.

·     FRLN rises as 57.9% stakeholder Syncona and affiliates proposed to acquire the remaining shares of FRLN that are not currently owned by Syncona for an upfront of $5 per ADR.

·     GILD: Jefferies said SMO LBAs were released early and two Phase III studies for Trodelvy competitor Dato-DXd reported showing more similar rather than hugely better data than GILD.

·     NTLA announced FDA clearance of investigational new drug application to initiate a pivotal phase 3 trial of NTLA-2001 for the treatment of transthyretin (ATTR) amyloidosis with cardiomyopathy.

·     SAGE said the U.S. FDA has granted orphan drug designation to its therapy SAGE-718 for the treatment of Huntington’s disease (HD).

·     VKTX said its GLP-1/GIP receptor agonist VK2735 significantly reduced liver fat and plasma lipid following 28 days of treatment in a Phase 1 trial.

 

Healthcare Services & MedTech movers:

·     In MedTech: ABT posted a better-than-expected Q3 profit on better sales ($10.14B vs. est. $9.8B) and raised its earnings guidance for the full year to $4.42-$4.46 from $4.30-$4.50 prior. ABT also said the market was overestimating the hit to sales of its glucose monitoring products, adding that the treatments could end up boosting sales of the medical device maker (the headlines lifted shares of DXCM, PODD, TNDM); BIO shares stumbled after its CFO resigned.

·     In Managed Care: ELV followed the better results from UNH last week with its own earnings beat and raised its profit outlook for the year as higher premiums helped the insurer beat analysts’ expectations for quarterly earnings.

 

Technology

Internet, Media & Telecom

·     In Media: the WSJ reported that the NBA’s biggest partners, DIS ESPN and WBDs TNT together pay about $2.6B a year for media rights, but aren’t looking to agree to big spending increases and are exploring signing up for smaller packages. With an exclusive negotiation period set to expire in April, those companies already are in renewal talks with the NBA, but if ESPN and TNT buy fewer games, that would allow the league to create a package for a streaming video player and both AMZN and AAPL have expressed interest https://tinyurl.com/bdcwn97v . ROKU tgt cut to $70 at Wells Fargo noting ROKU pre-announced Q3, but thinks Q4 could see softness, from ad trends as expects Q4 rev per streaming hour to fall -8% y/y vs -4% y/y in Q3.

 

Hardware & Software movers:

·     ESTC was upgraded to Buy at Jefferies with $100 tgt on two solid quarters of execution, revenue acceleration heading into FY25, and shares trading at a discount to publicly traded peers, and 1.5 turns below the SPLK takeout.

·     IBM is expanding its collaboration with Amazon Web Services, or AWS, to bring generative artificial intelligence, or AI solutions to clients.

·     MSFT to add Amazon as 365 Cloud customer in $1B deal; Amazon has committed over $1B over 5 years to secure over 1M Microsoft 365 license seats, citing an internal document.

 

Semiconductors:

·     Philly semi-index (SOX) dropped a second day after the White House tightened restrictions on China’s ability to buy advanced semiconductors.

·     AMBA reaffirms Q3 revenue view of $50M plus or minus 4%, vs. consensus $50.02M, gross margin on a non-GAAP basis of 62% to 64% and operating expenses of $46M-$49M.

·     ASML warned of flat sales in 2024 as customers conserve cash; said it expects 2024 to be a "transition year" with revs similar to 2023; reported Q3 earnings of 1.9B euros, in line with analyst expectations, and repeated its forecast for full year sales growth of about 30%.

·     NVDA touted an expanded partnership with iPhone maker Foxconn (also known as Hon Hai Precision) to build a new class of data centers powering artificial-intelligence technology.

·     VMW sets Oct. 23 deadline for electing AVGO deal consideration.