Mid-Morning Look

Friday, October 04, 2024

U.S. stocks surge to kick off the trading day, rallying behind a monthly jobs report that was strong on all counts, lowering recession fears as the economy stays strong, but also lowers the expectations of aggressive cuts by the Fed. Odds that the Fed will cut by a total of 50 basis point this year rise to 73% from 44% yesterday, while odds of 75-bps in cuts fall to 25% from 45%, CME data show. Bets on a 50-bps trim in November are down to 9%, from 32% yesterday. The change in rate expectations comes as September added 254,000 payrolls, coupled with upward revisions of previous months totaling 72,000 and a decrease on unemployment to 4.1% on better wages. Treasury yields (10-yr spiked to 3.97%, highest since September, and 2-yr to 3.87%) and the dollar strengthened sharply after the big upward surprise in the September jobs report. Focus will turn now to inflation data due next week with CPI and PPI on Thursday/Friday respectively). No major new developments amid the conflict in the Middle East between Iran and Israel. Stocks mostly higher this morning though names that are interest rate sensitive such as homebuilders, and high dividend paying stocks such as Utilities and REITs are seeing weakness given the broad spike in Treasury yields and the dollar following the healthy jobs report. Stocks still higher, but off their best levels.

Among other highlights, dockworkers agreed to end a three-day strike that had halted trade on the US East and Gulf coasts as The International Longshoremen’s Association and the US Maritime Association extended their previous contract through Jan. 15, the two groups said in a joint statement. Some 45,000 dockworkers at East and Gulf coast ports are returning to work after the agreement improved wages by 62% from about 50% over six years (but was below their 77% asking request). The ILA said they are going to have other talks about protecting them from automation over the next few months. The news a sigh of relief for supply chain in autos, retailers, food, medical supplies, etc. and eases inflation concerns. Asian markets big gains again this week as the Hang Seng resumed its rally after a day of profit-taking, now up 34% YTD and at a new 52-week high as well. China’s Shanghai index has been close most of the week amid its Golden Week holiday.

• In Electric Vehicles: RIVN lowered its full-year production forecast to be between 47,000 and 49,000 vehicles, down from its earlier forecast of 57,000 vehicles and delivered fewer vehicles in Q3 than analysts had expected, at over 10,018 vehicles in the quarter ended Sept. 30, compared with estimates of 12,078. In Chinese EVs: The European Union voted to impose tariffs as high as 45% on electric vehicles (BYDDF, NIO, LI, XPEV) from China. The European Commission, the bloc’s executive arm, can now proceed with implementing the duties, which would last for five years. Ten member states voted in favor of the measure, while Germany and others dissented.
• In Airlines: SAVE shares tumbled after the WSJ reported the company has been in discussions with bondholders over the terms of a potential bankruptcy filing in the wake of its failed merger with JBLU. Spirit has been struggling with losses and declining revenue as it aims to address coming maturities within its $3.3B debt load, including more than $1.1B of secured bonds that are due in less than a year. https://tinyurl.com/yv3sxfvz . Other airlines seeing strength on the headlines as well UAL, AAL, DAL, SKYW, JBLU.

• APOG +23%; after better results and margins; Q2 adj EPS $1.44 vs. est. $1.23 and revs fell -3.2% y/y to $342.4M vs. est. $335.7M; guides adj. EPS $4.90-$5.20, above prior $4.65-$5.00 vs. consensus est. $4.71 and guides revenue -4% to -7%; Q2 adjusted operating margin improves by 110 bps to 12.6%.
• CVS +3%; was upgraded to Buy from Hold at TD Cowen and raised tgt to $85 following the release of 2025 MA plan benefits, which show that CVS meaningfully lowered OTC benefits across its plans
• DECK +3%; strength in food, retail, auto supply chain after dockworkers suspend strike on East Coast as reach temporary pay raise; dollar and discount stores higher.
• MMLP +10%; to be acquired by Martin Resource Management Corporation in an all-cash transaction where holders would receive $4.02 per common unit owned.
• SILV +7%; as CDE agreed to is acquire smaller peer SILV for about $1.7B, as SilverCrest shareholders will receive 1.6022 of CDE common shares per SILV share, implying a value of $11.34 per SilverCrest share – a 22% premium.
• VST +2%; came into the day rising 18 of the last 19 trading days, up 243% YTD amid the ongoing need for more power; other nuclear plays CEG, SMR, NRG have remained strong.

• DHI 3%; weakness in homebuilders (KBH, LEN, TOL) after the better payrolls report boosted Treasury yields/mortgage rates on expectations the Fed can be less aggressive on its rate cut cycle.
• DIN -5%; was downgraded from Buy to Hold at Truist and slashed tgt to $37 from $66 as potentially severe Applebee’s comp store sales underperformance vs peers (based on Truist Card Data) shakes its confidence that improving comps will be a NT catalyst for the shares.
• RIVN -7%; lowered its full-year production forecast to be between 47,000 and 49,000 vehicles, down from its earlier forecast of 57,000 vehicles and delivered fewer vehicles in Q3 than analysts had expected, at over 10,018 vehicles in the quarter ended Sept. 30, compared with estimates of 12,078.
• SAVE -28%; after the WSJ reported the company has been in discussions with bondholders over the terms of a potential bankruptcy filing in the wake of its failed merger with JBLU https://tinyurl.com/yv3sxfvz  
• WMG -2%; was downgraded to Underperform at Bank America and cut tgt to $30 from $33 saying the longer-term growth potential and visibility of the music labels may not be as significant and predictable as initially thought.
• ZIM -12%; as US East Coast and Gulf Coast ports began reopening late on Thursday after dockworkers and port operators reached a wage deal but clearing the cargo backlog will take time.