Closing Recap

Tuesday, September 03, 2024

US equity futures faded overnight following the holiday weekend and kept going lower after the open before finding some support late morning. Breadth was almost 3:1 favoring decliners as the day exhibited a generally risk-off tone. Small caps lost ground with IWM -1.95%, but split SPY -1.32% and QQQ -2.04%. Welcome to September. Even Tom Lee advised caution over the next eight weeks. Among S&P sector ETF’s, Consumer Staples, Real Estate and Health Care held modest gains into late morning, while all others faded. Technology and Energy paced the laggards, each losing 2.5-3.0%. Even so, today’s Fear & Greed Index registered 69/100 (greed) versus 55 (neutral) a week ago and 27 (fear) a month ago.

In data of note today, the early oil roll erased all Brent’s 2024 gains. In honor of a new month, @bespokeinvest highlights September performance noting the DJIA has averaged -0.37% over the past 20 years, -0.92% over the past 50 years and -1.21% over the past 100 years, with the best % positive of the three being 50% for the last 20 years. Similarly, they note the last time the S&P 500 notched a gain the first trading day of September was 2016. Those are tough stats when considering US households have 42% of their financial assets in stocks, the highest percentage on record back to 1952, per @charliebilello. He also notes the S&P 500’s price to peak earnings ratio has climbed to 25.7, the highest since 2000. Perhaps a little caution is a good thing. Maybe lower the bar a bit.

Heading into the final hour of trading, equities were near lows as buyers apparently chose to wait for payrolls data later this week before adding incremental risk ahead of a Fed meeting. Breadth had expanded to more than 3:1, still favoring decliners but, among S&P sector ETFs, Consumer Staples (XLP, +0.7%), and Real Estate (XLRE, +0.23%) enjoyed gains. Technology (XLK, -4.59%), Energy (XLE, -2.5%) and Industrials (XLI, -2.14%) led the decliners. As expected, given the lackluster performance in Technology, growth underperformed value. The Russell 1000 Growth was -2.81% versus its Value counterpart -1.2%.

• August ISM Manufacturing PMI: 47.2 vs. 47.5 consensus and 46.8 prior; prices paid index 54.0 in August (consensus 52.5) vs 52.9 in July, Ism U.S. manufacturing new orders index 44.6 in August vs 47.4 in July, Ism U.S. manufacturing employment index 46.0 in August vs 43.4 in July.
• July construction spending -0.3% (consensus -0.1%) to $2.163 trln, vs June unchanged (prev -0.3%); Us July private construction spending -0.4%, public spending +0.1%.

• It was a risk-off day and oil did not get a reprieve. October WTI crude futures were hit hard with no bounce and finished down $3.21/bbl, or -4.36%, to $70.34. Brent similarly took a hit to finish lower by $3.77/bbl, or -4.86%, to $73.75. While the Libya outage may have provided some support, it was pretty much invisible and no match for concerns around China demand and excess supply later in the year. 

• TSLA sales in China logged their best month for the year so far in August, selling more than 63,000 cars after a hefty 37% jump from July, but probably still down from August last year when it sold 64,694. However, BYD (BYDDF), the world’s biggest EV maker, said its China passenger vehicle sales surged 35% in August y/y to a record monthly high of 370,854.
• TSLA plans to produce a six-seat variant of its Model Y car in China from late 2025, two people with direct knowledge of the matter said – Reuters.

• In Discount stores: DLTR shares declined for an 8th straight day into earnings tomorrow morning; recall the dollar stores tumbled last week following DG earnings/outlook weighing on sentiment.
• In Sporting Goods: TD Cowen reiterated Buy on DKS and raise tgt to $270 into earnings preview (shares new highs into results) saying they like the stock long into earnings on Wednesday as it sees guidance rising and a cheap valuation relative to other leading brick and mortar retailers such as TJX, WMT, ROST, COST, and BURL.
• In Beverages: STZ said it plans to take a goodwill impairment loss in its wine and spirits business of $1.5B-42.5B, reflecting its FY25 outlook due to continued negative trends primarily in its U.S. wholesale market as raised the low end of its adj profit outlook to $13.60-$13.80 (from $13.50-$13.80 prior) but slashed its FY25 net income to a range of $3.05 a share to $7.92 a share from its earlier forecast for a range of $14.63 a share to $14.93 a share. Separately, STZ estimates were lowered at RBC Capital (prior to co issuing guidance) following preliminary channel work saying they estimate that August depletions growth was in the low-single digits, which brings its overall depletion estimate down to 4%. This level is consistent with scanner data. However, RBC notes the relationship between scanner data and STZ’s depletions has changed and believes STZ’s depletion Gap relative to scanner has collapsed entirely. KOF upgraded from Neutral to Buy at Goldman Sachs saying they expect Coke FEMSA to grow EPS on average by 14% P.A. from 2023 to 2026E, with a 34% average EBITDA-to-cash conversion translating into a 5% free-cash flow yield (for 2024E) and a good 4% dividend yield.

• In Casinos & Gaming: Bank America noted August gross gaming revenue (GGR) came in at 19.8B MOP with an average daily revenue (ADR) of 637M MOP. Las Vegas Strip GGR was down -15% Y/Y, driven by baccarat down -66% Y/Y.

• In Solar: SHLS shares rallied after the US International Trade Commission issued a preliminary ruling that SHLS’ patents are infringed by nearest competitor Voltage. If affirmed in a final ITC ruling expected late this year, Voltage would no longer be able to import its product into the U.S. MAXN said it expects Q3 revenue to decline significantly from Q2, largely due to first-ever detentions of modules being imported into the U.S. from factories in Mexico.
• In Water & Utility: XYL was downgraded to Hold from Buy at TD Cowen while maintains PT of $138 saying they still like the story very much, and core municipal markets should remain firm, but near-term estimates probably don’t have much upside, revenue and margin trends are decelerating.

• In Rel Estate: RDFN was upgraded Redfin to Buy from Neutral at B Riley and raised tgt to $13 from $7.50 citing improving business fundamentals for as it is seeing structural improvements in its core brokerage business with the introduction of Next, which position the business favorably for growth and profitability as real estate cycle turns.
• In Brokers & Exchanges: CME was downgraded to Underperform from Neutral with a $177 price target at Bank America saying it now faces a 3-front battle with BGC Partners, Cboe Global Markets, and Intercontinental Exchange and that the intensifying competition could lead to market share losses and pricing headwinds.
• In Credit Cards: MA was downgraded to Neutral from Outperform with a $470 price target at Exane BNP Paribas saying cash digitization has largely played out in the U.S., leaving Visa and MasterCard to compete for potentially limited opportunities in other regions, particularly in Europe. Exane believes Visa (V) screens well versus peers there (upgraded to OP with $325 tgt), with MasterCard less attractive. It now expects MasterCard’s revenue growth to slow versus Visa’s.
• In REITs: SPG was downgraded to Neutral from Overweight at Piper based on anticipated slower earnings growth vs shopping centers in 2-yrs (represents the first time it hasn’t had an OW rating since late 2009), and is part of its final post-Q224 estimate update, which also includes BXP, KRG, MAC, NMRK, and SOHO.
• In Financial Servies: in credit agencies, FICO initiated Outperform w/ $1,967 PT at Oppenheimer noting FICO its Score segment, which sells the famous 3-digit FICO score, contributes ~51% of total revenue, while the Software segment contributes ~43%. FRGE was upgraded to Buy at UBS as they have increased confidence in further improvement in FRGE’s core private company shares trading business, while new cost savings initiatives now present a path to profitability.

• AXSM was initiated coverage at Wells Fargo with an Overweight rating and $140 price target saying they see favorable risk-reward into AD agitation readout as it thinks the consistent efficacy/safety data in an area of high unmet need warrants higher probability of success.
• DYN shares tumbled after saying Chief Medical Officer Wildon Farwell is stepping down from the role; the company also announced clinical data from the Phase 1/2 trial of DYNE-251 in Duchenne muscular dystrophy.
• JAZZ announces Private Offering of $850M of Exchangeable Senior Notes due 2030.
• MRK’s Keytruda therapy received approval from the European Union, in combination with antibody-drug Padcev, as a first-line cancer treatment.
• NVCR shares fell after saying CEO Asaf Danziger will retire at year end and finance chief Ashley Cordova, will succeed him as the next CEO (Danziger has served as NVCR’s CEO since 2002).
• NVS was downgraded to Hold from Buy at Jefferies.
• PCVX shares jumped after posting positive topline data from a Phase 1/2 study of VAX-31; based on the strength of the results from the study, the company has selected VAX-31 to advance to an adult Phase 3 program.
• TERN obesity drug data preview at JMP in Sept: TERN will enter the obesity field with PoC data from a first-in-human, 28-day, Phase 1 study of its lead oral, small-molecule, GLP-1 receptor agonist. JMP outlines stock moves for three scenarios: 1) best-in-class weight loss (6%) and good AES with +$5 (+62%); 2) good weight loss data (4%-5%) and good AES with + 2 (+27%); 3) bear case with <3.5% weight loss with -$3 (-38%).

• In Transports: in airlines, LUV was upgraded to Outperform from In-Line at Evercore ISI, and raised the tgt to $35 from $30 citing the airlines transition to capacity discipline, new revenue initiatives and strong underlying fleet value. Separately, Reuters reported that Elliott Investment Management now holds 10% of LUV’s common stock, crossing the threshold that allows the hedge fund to call a special meeting at the carrier. In package deliver, Morgan Stanley previewed FDX earnings (reports on Sept 19^th) saying they model a modest miss in FQ1 but believes the debate/focus should be on the walk to FQ2/FQ3 given timing of USPS contract end, peak season seasonality, tougher DRIVE comps and other items that could drive significant earnings.
• In Aerospace & Defense: BA was downgraded to underweight from equal weight at Wells Fargo and cut tgt to $119 from $185 saying they sees FCF/share peaking by 2027 as aircraft development costs offset further production growth, while an equity raise likely further dilutes shares.
• In Metals & Mining: copper stocks (FCX, TECK, SCCO) tumbled as copper prices slumped to their lowest in more than two weeks amid concerns that a weak Chinese economy is curbing demand in the world’s biggest metals consumer. Recent data from China showed that manufacturing activity sank to a six-month low in August and growth in new home prices slowed in August. China’s factories are major consumers of copper and other industrial metals.
• In Building Aggregates/Building Materials; Stephens reiterated OW rating on MLM, VMC, SUM, EXP, ACA and KNF saying Aggregates pricing is set to have another very strong year, with most guiding to LDD increases in 2024.
• In Chemicals: ag chemicals (CF, NTR, MOS) were volatile as state-owned urea producer Qatar Energy announced plans to build a new urea production complex by 2030, doubling its urea production capacity to 12.4M t/yr. IFF was upgraded to Outperform from Neutral at Mizuho with a price target of $120, up from $109 saying consumer spending is returning to a normal balance of goods versus services, and IFF is focused on processed foods and home and personal care customers.

• In Telecom & Media: DIS and satellite TV provider DirecTV (owned by AT) failed to reach a new distribution deal for ESPN, ABC and other Disney-owned networks, the companies said on Sunday, resulting in more than 11 million DirecTV subscribers losing access to those networks. REA Group, the property listings company majority owned by News Corp (NWSA), is considering buying Rightmove to create a global real estate company, the Australian firm said on Monday, sending the British housing portal’s shares soaring. SPHR was downgraded to Sell with a $40 price target at Benchmark, driven by concerns over scalability, high production costs, and a potentially underwhelming profitability outlook.

• In Optical & Components: AAOI was upgraded from Market Perform to Outperform at Raymond James and $17 price tgt following a non-deal roadshow and model reassessment, saying they expect shares to remain volatile as investors debate both the size of AOI’s opportunity and its ability to execute in both Datacenter and CATV.
• In Storage: NTAP upgraded to Buy and $150 PT at Loop Capital saying it has been chasing for > 12 months. Loop believes the transition to Transition to QLC NAND could last multiple years and recommends taking advantage of the 9% pullback in shares last week noting that NTAP’s differentiated hyperscale storage software could serve as a catalyst.
• In Hardware: IBM added to Americas Conviction List at Goldman Sachs saying IBM is on track to complete its pivot to long-term growth driven by stronger software performance and market share gains in consulting.

• Philly semi index (SOX) falls -7.75%, led by big declines in NVDA, ARM, AMD, MU, QCOM and others; UBS reported an 11.1% month-on-month decline in semiconductor sales in July. The firm said memory business sales, which dropped by 31% on a month-on-month basis, has impacted the total semiconductor sales. After jumping on Friday, INTC shares pulled back; INTC CEO Pat Gelsinger and key executives are expected to present a plan, later this month, to the company’s board to slice off unnecessary businesses and revamp capital spending, Reuters reported.