Mid-Morning Look

Tuesday, July 02, 2024

U.S. stock futures looked notably lower overnight, but quickly rebounded on the open, helped by commentary from Fed Chairman Powell as light volumes and thin trading ahead of the 4^th of July holiday Thursday (markets close all day and early close at 1:00 PM on Wednesday) take hold. Fed Chairman Powell, ECB President Lagarde and Brazil central bank chief speaking in CNBC interview this morning, talking rates, economy and more macro. Lots of choppiness so far to start the day (expect more of same this afternoon and tomorrow) ahead of the abbreviated trading week. No true market leaders early, though interest rate sensitive stocks partially rebound as Treasury yields slip, giving back some of recent gains – 10y yield to 4.44% (hi of 4.493% yesterday), but off lows 4.41%. On the downside, Healthcare (XLV) leading lower -0.85% behind weakness in obesity names (LLY, NVO). Fed Chair Jerome Powell said he was pleased with how inflation had resumed a downtrend following a rebound at the start of the year, indicating it could begin lowering interest rates by the end of the summer even though he declined to endorse such a move. Powell declined to say whether he was setting the table for a rate cut in September. “I‘m not going to be landing on any specific dates here today,” he said. No major earnings this week given the short week, but lots of jobs data to sift through. Quiet start to the day as expected with mkts little changed.

• In Homebuilders: DHI and LEN both downgraded to Neutral from Buy at Citigroup and reduced estimates on builders to reflect softening housing activity this summer. Citigroup said it sees limited near-term catalysts for the stock until ’25, with September rate cuts at least partially priced in. note the homebuilder sector (TOL, KBH, PHM, MTH, CCS) was sharply lower the last few days given the recent resurgence in Treasury yields/mortgage rates.
• In Insurance: PFG was upgraded to Neutral from Underweight at JP Morgan due to the favorable macro backdrop, an expected improvement in PGI results, and the stock’s underperformance. In JPMC’s opinion, PFG has a superior business mix that carries less tail risk and will generate a higher ROE and better free cash flow than other life insurers. P&C stocks (ALL, PGR, TRV, CB, AIG and reinsurers RNR, RE) remain in focus given the powerful Category 5 Hurricane Beryl, becoming the strongest storm to ever form in the Atlantic at this time of the year.

• GNRC +2%; seen as potential play amid impact of Hurricane Beryl.
• PARA +3%; after the New York Times reported Barry Diller is mulling a bid for controlling interest, citing people familiar with the matter. Diller’s digital-media conglomerate, IAC, has signed nondisclosure agreements with National Amusements, Paramount’s controlling shareholder https://tinyurl.com/2up3zw5k
• PYPL +2%; was upgraded from Neutral to Positive with $71 tgt at Susquehanna saying recent conversations with the company, which when coupled with customer and industry observations, seem more constructive.
• TSLA +8%; said for Q2, produced approximately 411,000 vehicles (410,831) and delivered approximately 444,000 vehicles (443,956) vs. Bloomberg est. 439,302.

• INCY -3%; downgraded to Underperform at BMO Capital, spurred by Incyte’s recent $2B Dutch auction, which in its view has cut capacity to acquire, while generating minimal incremental value for holder. Said recent pipeline wins are promising, but revs are in smaller indications/too late to meaningfully resolve Jakafi LOE concerns.
• LAW -9%; downgraded to Underweight at JP Morgan citing a challenging setup ahead and noted fundamentals have been deteriorating since the ex-CEO and Founder’s exit in September 2023.
• MSM -1%; reported in-line Q3 EPS of $1.33 and revs $979.4M (down -7.1% y/y) but guidance weak as now expects average daily sales to fall (-4.7%-4.3%) vs. prior guide for flat to up to 5% growth in average daily sales and guides Ebit margin 10.6% vs 12.4% prior.
• NVO -3%; In obesity/weight loss sector: shares of NVO, LLY, VKTX others saw early weakness after U.S. President Joe Biden and Senator Bernie Sanders urged the Danish pharmaceutical group Novo Nordisk to cut prices for Ozempic and Wegovy drugs for weight loss and diabetes
• PSTG -5%; was downgraded to Sell from Neutral at UBS given an unfavorable risk/reward given and notes slowing growth (est. growth of ~8% over the next 5 years vs 16% the prior 5-yrs), and declining mkt share.
• RNAC -23%; after announced results from a mid-stage study investigating an mRNA-based cell therapy for myasthenia gravis, a type of autoimmune disorder and raised $130M via a PIPE.
• SHLS -3%; double downgraded to Sell from Buy at Citigroup and cut tgt to $5 from $15, after analyzing potential outcomes ahead of the forthcoming initial determination of the company’s patent infringement case against Voltage. The infringement case has an initial determination slated for around July 12.