Closing Recap

Thursday, May 04, 2023

Index	Up/Down	%	Last
DJ Industrials	-286.30	0.86%	33,127
S&P 500	-29.38	0.72%	4,061
Nasdaq	-58.93	0.49%	11,966
Russell 2000	-20.48	1.18%	1,718

 

 

 

 

 

 

 

 

 

U.S. stocks slipped for a 4^th straight trading day but finished off the lows as the S&P 500 bounced just short of its 50-day MA support (SPX roughly 4,040) ahead of Apple (AAPL) earnings tonight and monthly nonfarm payroll data tomorrow morning. The S&P Regional Bank ETF (KRE) tumbled as much as 9% before paring losses, hitting a 2-1/2 year low after PacWest Bank (PACW) disclosed it is "mulling strategic options, including a sale," sending shares lower by over 40% while First Horizon (FHN) fell over 30% after terminating its merger deal with TD Bank (TD). So now three large banking institutions have failed in the last 2 months (FRC, SBNY, SIVB), leading to total wipeouts of equity holders while other regional banks (CMA, TFC, MCB, PACW, ZION, KEY) have tumbled. The KRE has fallen nearly 15% in the last four sessions and 38% so far this year, reigniting bank contagion fears. Couple that with an approaching debt ceiling limit for the U.S. (raising concerns of a default) and neither side close, and economic data showing mixed signs (manufacturing has been weak, but jobs remain strong), why are major U.S. markets holding up so well to this point? Answer may be the game of chicken being played between the Federal Reserve and Stock/bond markets with markets widely baking in a Fed “pause” on hikes in June and then rate cuts following into year end with the terminal rate forecast to be 4.12% by the end of this year (vs. current 5%-5.25% Fed rate). The Fed, as recent as yesterday has said that rate “cuts” are not in the current model. With bond yields tumbling in recent weeks, despite the Fed raising rates yet again yesterday, it will be interesting to see which side is right. We are also more than 80% done for quarterly earnings, but Apple (AAPL) results are coming up after the bell and likely carries big implications in markets Friday. Also tomorrow, the monthly nonfarm payroll report, with estimates for +180K jobs, +160K private payrolls, manufacturing to fall -5K jobs, the unemployment rate to hold steady at 3.6% and hourly earnings to rise +0.3%. 

 

Coming into the day: @charliebilello noted “Current market expectations for path of the Fed Funds Rate…Jun 14, 2023: Pause, Jul 26, 2023: Pause, Sep 20, 2023: 25 bps cut to 4.75-5.00%, Nov 1, 2023: 25 bps cut to 4.50-4.75%, Dec 13, 2023: 25 bps cut to 4.25-4.50%, By Dec 2024: cuts to below 3%” (as per current fed fund futures – despite the Fed’s Powell saying different yesterday at FOMC meeting). Those rate levels have changed just today, now pricing in a July rate cut; a change in just one day.

 

Economic Data

·     U.S. Q1 non-farm productivity fell -2.7% vs. consensus (-1.8%) and vs Q4 +1.6%; Q1 non-farm unit labor costs +6.3% topping consensus +5.5% and above Q4 +3.3%.

·     Weekly Jobless Claims rose to 242,000 in the latest week from 229,000 prior and est. 240,000; the 4-week moving average rose to 239,250 from 235,750 prior week; continued claims fell to 1.805 mln from 1.843 mln prior.

·     U.S. March trade deficit $64.2 bln vs. consensus $63.3 bln) and vs Feb deficit $70.6 bln; March goods deficit $86.59 bln, services surplus $22.37 bln; March exports +2.1% imports -0.3%

·     Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 2.7% on May 4, up from 1.8% on May 1.

 

Commodities, Currencies & Treasuries

·     Oil futures finished little changed, with WTI crude down -$0.04 at $68.56 per barrel, shaking off earlier losses (low was $63.64), falling a 4^th straight session, hitting lowest levels earlier in more than a year. Gold prices rose $18.70, or +0.9% to settle at $2,055.70 an ounce (off earlier highs of $2,085.40 an ounce) as investors flocked to "haven" assets.

·     Bond markets are still believing in interest rate cuts by the Fed by end of this year of at least 75-bps, as yields continue to fall with the 2-yr down 19-bps to 3.74% and 10-year down 5-bps to 3.35% (just a day after the Fed raised to 5%-5.25% Fed funds rate). Note the spread between the 2 Year US Treasury yield which is 3.74% (and the Fed Funds rate has increased 67 basis points since the Fed began its meeting two days ago, according to Jeff Gundlach.

 

 

Macro	Up/Down	Last
WTI Crude	-0.04	68.56
Brent	0.17	72.50
Gold	18.70	2,055.70
EUR/USD	-0.0033	1.1026
JPY/USD	-0.75	133.93
10-Year Note	-0.051	3.52%

 

 

Sector News Breakdown

Consumer

Consumer Staples & Restaurants:

·     In food & beverages: Kellogg (K) forecast a smaller drop in annual profit than previously estimated and raised lower end of sales outlook, boosted by multiple price hikes after Q1 results topped views; BUD earnings solid beat and reit EBTIDA guide. In grocers, WSJ reported the biggest grocery union opposes $20 billion ACI deal https://on.wsj.com/3LUBVJf

·     In restaurants: SHAK posted a smaller-than-expected adjusted loss and revs of $253M tops $245.7M estimate as Q1 Same-Shack Sales up 10.3%; PZZA shares outperformed following the release of its quarterly results.

·     In Retail: COST reported slightly weaker April comp sales as overall total comp sales +1.4%, vs. est. +1.5%; April US comp sales ex-gas, FX +2.9%, vs. est. +3.8%; SHOP spikes as Q1 earnings and revenue topped analyst estimates, announced the sale of its delivery and logistics business to Flexport; said will let go 20% of its workforce in a second round of layoffs; RVLV posted mixed results in 1Q; revenue was softer, but adj. EBITDA came in line with expectations. CROX extends losses to 6-straight days since lower guidance late April.

 

Leisure, Gaming & Lodging:

·     In leisure/fitness: PLNT Q1 EPS $0.41 misses $0.46 estimate as revs rise 19% y/y to $222.2M but below ests $238.3M; reaffirms year outlook; PTON Q3 results were better than expected and rev guidance above views too ($630M-$650M vs. est. $614M) but shares fell on additional commentary that expects q4 hardware sales to be lower versus q3; LESL missed across the board but maintained (2Q low vol qtr), citing weather.

·     In Lodging: Hyatt (H) EPS missed while RevPAR beat, International strong, EBITDA $316m tops ests and guidance raised RevPAR +12-16% v prior 10-15%

·     In casinos & Gaming: PENN posted rev beat and raised FY Revs to include Barstool but is neutral to EBITDAR as the EBITDAR margins worse weighed on shares.

·     In cruise lines: RCL posts smaller-than-expected loss of (-$0.23) vs. est. (-$0.70) on better revs of $2.89B and raises year adj EPS $4.40-$4.80, vs. prior $3.00-$3.60 and said yields are now exceeding record highs; expect this trend to continue for rest of the year and beyond.

 

Homebuilders, Building Products, Home Furnishing:

·     In home services: ZG posted better-than-expected Q1 results, with a narrower loss and revenue above estimate (Q1 revenue $469M vs. est. $424.08M), while Q1 residential revenue decreased 14% y/y and traffic to websites was flat y/y; in home retailers: Wayfair (W) shares jump after smaller Q1 EPS loss and better revs of $2.82B with smaller EBITDA loss $14M, -88% y/y.

·     In building products: MLM rises after earnings results, hitting 52-week highs as revs rose 10% y/y to $1.35B topping $1.22B estimate and better EPS while backed year outlook; VMC shares also spike about 6% after its Q1 top and bottom-line beat in building products space; BLDR upgraded to OP from SP at RBC Capital and raises tgt to $135 from $78 following Q1 earnings.

 

Energy

·     In the E&P sector: APA reported top and bottom-line beat and MRO reported adj EPS/EBITDA of $0.67/$1.12B, above consensus of $0.58/$1.10B on a gas volume beat (Permian, Mid-Con) and FCF was light ($309m vs consensus; CPE to sell all its Eagle Ford assets to Ridgemar Energy Operating LLC for $655M in cash.

·     In solar: space has been mixed bag this earnings period, with SEDG a positive report last night as Q1 EPS $2.90 vs. est. $1.92, Q1 revs $943.9M vs. est. $932.5M and guided Q2 revenue $970M-$1.01B vs. est. $986.4M, sees Q2 gross margin expected to be within the range of 32% to 35% (FSLR, SPWR, ENPH among solar names that have disappointed in recent weeks). RUN reported a wider-than-expected Q1 loss but said sales rose 20% y/y and orders placed by customers rose 30%, with 80% gains in California ahead of a major policy change in the State.

·     Utilities very active with surge of earnings results this week: AEP, CEG, NJR, PPL, SRE, WES and XYL all reporting today; earlier this week, WEC, OTTR, PEG, EIX, EXC, and AVA reported 1Q23 results. In other news, D files an IRP with the VA SCC; ICC Staff files testimony in SO’s Nicor Gas rate case; VA Staff files testimony in SO’s Virginia natural gas rate case.

 

Financials

Banks, Brokers, Asset Managers:

·     Regional banking concerns not going away as PACW tumbles after reports last night the company has been weighing a range of strategic options, including a sale https://on.wsj.com/3ASDscj . The Bloomberg report follows three bank failures over the last month (SBNY, SIVB, FRC) and took shares of other regional bank stocks lower today (CMA, BKU, WAL, MCB, TFC, ZION, etc.)

·     FHN also tumbles after mutually agreeing to end their merger agreement with TD Bank (TD). TD informed First Horizon that TD does not have a timetable for regulatory approvals to be obtained for reasons unrelated to First Horizon,” the companies said in a release. TD to make a $200 mln payment to FHN https://on.mktw.net/3nxpzNN

·     WAL a crazy story today: overnight provided an update saying there was no unusual deposit activity over the last weekend (during FRC failure) as deposit balances held stable at $48.8B from Friday 4/28 to Tuesday 5/2. The Co also reaffirmed 2Q guidance for $2B of EOP deposit growth. Further, insured deposits % held stable, making up 74% of total deposits as of 5/2 vs 73% at 3/31. Shares extended losses after the Financial Times reported bank to explore potential sale https://on.ft.com/3I2fm35 . Western Alliance then about 30-minutes later released a statement flat out denying the FT story about exploring a possible sale…says it is NOT up for sale…nor has it hired any advisors to explore strategic options.

·     In insurance sector: ALL reported operating loss per share of $1.30 reflective of better-than-expected improvement to the personal auto core loss ratio, which declined roughly six percentage points sequentially to 82%; MET announces new $3B share buyback authorization; Q1 adj EPS $1.52 vs. est. $1.81; Q1 revs $16.13B vs. est. $17.06B.

·     In FinTech: Bank America said total card spending per HH fell 0.7% y/y in the week ending April 29, according to BAC aggregated credit and debit card data; FLT solid 1Q results that featured upside to both revenue (+230 bp) and EPS (+300 bp) relative to the Street and 2Q outlook was mixed as revenue was largely in line and EPS was below at the midpoint (~200 bp).

·     In REITs: EQIX delivered a strong quarter with upside across most key metrics, including AFFO/share of $8.59 that was meaningfully above consensus of $7.97; INN s RevPAR growth increased over 19%, which exceeded the high end of management’s 1Q23 RevPAR growth expectation; PSA strong $0.07/share beat vs. consensus, though management tweaked higher the low end of its SSREV growth forecast by 25 bps; RPT reported a 1Q beat and management affirmed FY23 FFO guidance; TRNO reported 1Q23 FFO that missed consensus by $0.02/share, though SSNOI growth accelerated sharply to 15.9% y/y.

·     In Financials Services: VRSK was upgraded to Buy at Bank America and raise tgt to $243 from $167 as think shares look attractive here due to 1) defensive business model 2) accelerating sales growth 3) a more focused mgmt.

 

Healthcare

Biotech & Pharma:

·     KVUE, the JNJ big consumer-healthcare business priced its initial public offering at $22 a share in the biggest new-stock listing of the year; 172.8M share IPO priced at $22.00.

·     MRNA said its prepping for 6 major vaccine launches from respiratory franchise with expected annual sales of $8 bln to $15 bln by 2027; follows Q1 revs $1.828B vs. est. $1.178B; said Cash & Cash Equivalents $3.44B (vs. est. $2.69B).

·     NVO said demand was so strong for its weight-loss injectable medicine that it will have to reduce the supply temporarily.

·     REGN Q1 results beat EPS and sales while Eylea sales of $2.28B missed ests and co lowered margin guidance for 2023 to a range of 87% to 89% from 88% to 90% previously.

·     SNGX surges following late-stage study data evaluating its light-based cancer therapy, HyBryte.

·     BDX F2Q results were ahead, with strength in Medical and Interventional, and EPS ahead $2.86 (vs. $2.74 cons); low end of guidance was raised marginally.

·     CAH reported F3Q results, with revenue and EPS ahead, with outperformance in its Pharma distribution business partly offset by weakness in Medical.

·     In M&A news: OPCH said it is acquiring AMED in an all-stock deal valued at $3.6 billion, including debt; AMED stockholders will receive 3.0213 shares of OPCH common stock for each share held (values AMED around $97.38).

 

Industrials & Materials

Transports

·     In Industrials & Transports: tanker DHT downgraded to Hold at Jefferies saying OPEC’s recent production cut and weaker refining margins are a headwind that are likely to impact the earnings outlook as 3Q approaches. Dow Transports declined over 1% as recession fears still weighing.

·     In Aerospace & defense: KTOS 1Q adj EPS $0.06 vs est. $0.05 on revs $231.8Mm vs est. $223Mm; guides 2Q revs $230-240Mm vs est. $241.27Mm, adj EBITDA $14-18Mm vs est. $20.15Mm; affirms FY forecast; SPR slides after TDCowen downgrades Outperform to Market Perform and cut tgt to $28 from $38.

 

Materials, Metals & Mining

·     In metals: ARNC confirmed an agreement to be acquired by private-equity firm APO for 430 per share in a deal valued at $5.2 billion, which represents a 33% premium to Wednesday’s closing price https://on.mktw.net/413iAtB ; NEM rising along with other gold miners GOLD, AEM in flight to safety as gold rises.

·     In lithium sector: ALB posted large 1q beat but even larger cut for full-year 2023 on 30% lower li price forecast; EBITDA is expected to be just $2,054M in the remaining three quarters of 2023, down 33% y/y, and meaningfully below current consensus of $3,045M.

·     In chemicals: MOS reports Q1 adj. EPS of $1.14, missing analysts’ expectations of $1.29 while revs were down -7.7% y/y to $3.6B but beat ests $3.27B; CTVA reported 1Q23 EBITDA of $1,231M, compared to consensus of $1,085M as the Company beat expectations in both Seed and Crop Protection.

·     In packaging, paper, and containers: EVA shares pummeled over 60% after company cuts guidance to net loss of ($186M-$136M) from prior loss (-$48M-$18M) and eliminates dividend (double downgraded to Sell at Truist). BALL Q1 EPS and revs topped consensus and said is well positioned to achieve long-term targets.

 

Technology

Internet, Media & Telecom

·     BABA rises early after news its international online shopping unit is exploring a US initial public offering as it weighs options to spur growth for the business that includes major e-commerce brands Lazada and AliExpress https://bloom.bg/3NFRHc

·     In e-Commerce: ETSY reported solid Q1 results, with active buyers, GMS, revenue, and adj. EBITDA all came in ahead of expectations as FX headwinds continued to ease and the company saw improving buyer trends in March relative to February. MELI Q1 EPS $3.97 vs. est. $3.08; Q1 revs $3B vs. est. $2.87B; Q1 total payment volume $37B, up 96.1% y/y, with GMV of $9.4B up 43.3% y/y; added 3.9 million new users.

·     In media: PARA tumbles after lowers dividend, reports Q1 revenue of $7.27B missing the $7.42B estimate on weaker earnings, and said it added 4.1Mm subscribers, compared with 9.9Mm in the prior quarter.

 

Hardware & Software movers:

·     AAPL earnings tonight after the close: Digitimes reported AAPL MacBook shipments will likely register a single digit decrease in 2023 due to a disappointing first half of the year, according to industry sources. Digitimes also reported camera module and other component suppliers for Apple’s iPhones are bracing for the off-season which will be even weaker in the first half of 2023, according to industry sources.

·     In software: CFLT delivered a solid 1Q, with revenue, non-GAAP OM, and non-GAAP EPS nicely ahead of consensus; DDOG rises after Q1 beat for EPS and sales and raised Q2 and year profit and sales views; HUBS reported strong Q1 beats on sub rev (27% Y/Y) and op margins (13.5%), driven by a record 9,900 net customer adds and consistent 3% y/y (6% y/y CC) growth in revenue per customer/2023 CC rev guide maintained at 20% y/y.

·     In research: PCOR upgraded to Buy from Neutral at Goldman Sachs and up tgt to $75 following the company’s 1Q print that saw revenue, op. income, FCF and cRPO all outperform expectations; UPWK downgrade to Neutral at Bank America and slash tgt to $9 from $28 citing solid 1Q but revenue guide below on a slowing economy. WEAV upgraded to Outperform from Market Perform at Raymond James following strong 1Q23 results that exceeded consensus expectations including a +4% revenue beat and its first quarter of positive FCF.

 

Semiconductors:

·     QCOM reported mostly in-line Q2 results, but shares slumped after guiding guides 3Q revs $8.1-8.9B vs est. $9.1B and adj EPS $1.70-1.90 vs est. $2.16 and said sees larger-than-normal sequential decline in qtr revs.

·     AMD shares popped midday after headlines MSFT is helping finance AMD’s expansion into AI processors, working with co on bolstering options for AI chips (NVDA shares slipped).

·     QRVO reported strong F4Q (Mar) results and F1Q (Jun) guidance, which were above expectations, bucking the weak earnings results seen among smartphone semis.

·     SYNA slides as Q3 results beat but guides Q4 revenue $210M-$240M, significantly below consensus $330.39M, citing that demand for consumer IoT products has deteriorated.

·     MKSI reported Q1 EPS of $0.48, well above consensus of ($0.13) as revenue of $794M was +7% y/y (-34% organic) and was above consensus of $770M.