Mid-Morning Look

Thursday, September 26, 2024

U.S. stocks adding to record gains yet again, amid a flurry of positive news/events both overnight and this morning, lifting the S&P 500 and Dow to new records and bringing the Nasdaq to within 300 points of its all-time best. Stocks got the first boost last night after Micron (MU) reported better quarterly results and upbeat Q1 guidance for EPS/revs/margins, giving the semiconductor sector another pop (has been market leader), sending shares higher 16%. Next, China announced additional stimulus measures (on top of Tuesday’s pledge) that will step up counter-cyclical adjustments of fiscal and monetary policy and strive to achieve full-year economic and social development targets, state media reported on Thursday (details below). Lastly, well respected hedge fund manager David Tepper in a CNBC interview was extremely bullish given the recent events by the FOMC and China stimulus measures (overly bullish on Asian markets/stocks.  The moves by China have reinvigorated enthusiasm in retailers (RL, TPR, NKE), metals and mining (AA, FCX, CLF, gold), casinos (WYNN, LVS), restaurants (SBUX, YUMC) that have exposure to China/or benefit from strong China economy – as well as US listed China stocks (BABA, PDD, BIDU, JD, etc.). The one sector lagging however is energy, as oil prices tumble further on OPEC+ comments.

Details of the China stimulus news: The PBOC plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43B) this year as part of a fresh fiscal stimulus, according to reports. As part of the package, the Ministry of Finance (MOF) plans to issue 1 trillion yuan of special sovereign debt primarily to stimulate consumption. Part of the MOF proceeds raised via special bonds will be used to increase subsidies for the trade-in and renewal of consumer goods and for the upgrade of large-scale business equipment. The proceeds will also be used to provide a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children, excluding the first child. China also aims to raise another 1 trillion yuan via a separate special sovereign debt issuance and plans to use the proceeds to help local governments tackle their debt problems – Reuters

David Tepper of Appaloosa Management on CNBC very positive on Asian markets based on recent China stimulus news; says “can’t be short the U.S.; says you can’t be short anything in Asia, nothing” and said should be “selectively” long U.S markets. Tepper was also positive WYNN LVS in gaming; says is “exploring the energy side of the tech market” (didn’t name anything specific); says book still owns big tech names like META GOOGL and still owns “some NVDA).

Oil prices not participating with this broader market/commodity/asset rally on reports OPEC+ is set to go ahead with a December oil output increase as its impact will be small should a plan for some members to make larger cuts to compensate for overproduction be delivered in September and later months, two OPEC+ sources said on Thursday, Reuters reported. Earlier on Thursday, the Financial Times, citing people familiar with Saudi thinking, reported that Saudi Arabia is committed to OPEC+ raising production as planned on Dec. 1 and dropping its unofficial $100 a barrel oil price target. OPEC+ is scheduled to raise output by 180,000 barrels per day in December, part of a plan to start unwinding its most recent layer of output cuts.

• Weekly Jobless Claims fell to 218,000 in latest week from 222,000 prior week and vs. consensus 225,000; the 4-week moving average fell to 224,750 in latest week from 228,250 prior week; continued claims climbed to 1.834M from 1.821M prior week and the Insured Unemployment Rate unchanged at 1.2%.
• U.S. Aug Durables Goods ex-transportation orders +0.5% vs. est. +0.1% and vs July -0.1% (prev -0.2%); Aug Durables ex-defense orders -0.2% vs July +10.3% (prev +10.3%); Aug Machinery orders +0.5%, electrical equipment +1.9%, defense aircraft/parts +8.4%; Durables shipments -0.5% vs July +1.1%; Aug nondefense cap shipments ex-aircraft +0.1%.
• Aug. Pending Home sales climb 0.6% m/m vs. est. up 1%; Pending Home sales fall 4.3% from the previous year.

• In Lodging & Leisure: Lodging REIT rating changes at Wolfe Research downgraded PK to Peer Perform from Outperform, largely driven by its view that the Hawaii recovery story hasn’t come to fruition and could end up being challenged again in 2025. The firm also downgraded RLJ to Peer Perform as well, primarily driven by its shift in preference to resorts and group-focused assets. TNL was downgraded at Barclay’s to Underweight saying they remain cautious on the broader leisure demand travel backdrop and expect further deterioration of Timeshare, while Fed cuts won’t benefit near-term.
• Semiconductors surging, led by gains in MU which reported Q4 results ahead of expectations, with EPS of $1.18 topping consensus of $1.12 and sales of $7.75B above Street $7.65B on better margins of 36.5% vs. Street 34.6%. There was concern about guidance, but they called sales of $8.7B above Street $8.31B and EPS $1.74 vs. Street $1.52; the impact was broad based on semis, but particularly for WDC, STX, though the whole group rallied. AVGO files for four-part senior notes offering; size not disclosed
• In Chemicals: FUL shares weaker after reported Q3 adj EPS $1.13 below consensus $1.23 and revs $918M misses Street est. $944.25M; said volume growth during the quarter was impacted by slowing market demand in certain durable goods markets in EA, and lowers its FY organic revenue view to 0%, vs. prior forecast 0% to +2%. (shares of AXTA, PPG, RPM weak in sympathy early before bouncing). BASFY CEO says no sign of economic pickup in Europe, we don’t forecast slowing down in U.S.

• BABA +8%; rallied along with other US listed China stocks (BIDU, JD, PDD, BILI, NIO, LI, XPEV, FUTU, IQ, KWEB) after China’s central bank unveiled a bumper monetary stimulus.
• JBL +13%; Q4 profit and revs topped consensus expectations and disclosed up to $200 million in restructuring costs for headcount reductions in its manufacturing units; Q4 EPS $2.30 topped ests $2.22 as revs of $6.96B beat the $6.59B estimate and guided Q1 EPS $1.65-$2.05 a share above ests $1.83 and approved a $1B stock buyback program.
• KMX +4%; reverses losses; the used-vehicle retailer posted better-than-expected Q2 sales $7.01B vs. est. $6.83B (but was down -0.9% y/y) but said its Auto Finance (CAF) income was $115.6M, down -14.4% y/y as a higher provision for loan losses outweighed growth in CAF’s average managed receivables (shares of CVNA, COF, SYF weak).
• LUV +10%; board authorizes new $2.5B share repurchase program; now sees Q3 RASM up 2%-3% vs. prior view flat to down 2% while still sees Q3 ASMs up 2% y/y, with CASM-x up 11%-13% y/y.
• MU +16%; reported Q4 results ahead of expectations, with EPS of $1.18 topping consensus of $1.12 and sales of $7.75B above Street $7.65B on better margins of 36.5% vs. Street 34.6%. There was concern about guidance, but they called sales of $8.7B above Street $8.31B and EPS $1.74 vs. Street $1.52 (WDC, AMAT, LRCX rise in reaction).
• NRG +2%; raised its 2024 adj core profit forecast to be in the range of $3.5B-$3.7B, above its prior view of $3.3B-$3.6B; CEO said they are “confident in our ability to drive growth and capitalize on the emerging opportunities in our markets”

• FUL -2%; after reported Q3 adj EPS $1.13 below consensus $1.23 and revs $918M misses Street est. $944.25M; said volume growth during the quarter was impacted by slowing market demand in certain durable goods markets in EA, and lowers its FY organic revenue view to 0%, vs. prior forecast 0% to +2%.
• GEHC -2%; was downgraded to Sell and tgt cut to $74 from $84 at UBS saying risks are not priced in. UBS noted shares are up 20% YTD and close to all-time highs, a 5% PE premium to close peer SHL vs their 15% 18- month average discount which the firm said they view as hard to justify given the lower growth outlook.
• HSY -2%; downgraded to underperform from hold at Jefferies saying elevated prices and a stretched consumer are finally impacting the US snack category.
• SONO -5%; was double downgraded to underweight from Overweight at Morgan Stanley as believes the top and bottom-line impact of the company’s app redesign is likely greater than the market currently perceives, and the firm is 5% below FY25 Street revs and 13% below FY25 Street Adj. EBITDA.