Market Snapshot
briefing.com
| Dow | 33909.80 | -525.42 | (-1.53%) | | Nasdaq | 11146.19 | -255.16 | (-2.24%) | | SP 500 | 3991.13 | -80.99 | (-1.99%) | | 10-yr Note | -31/32 | 3.60 |
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| | NYSE | Adv 470 | Dec 2582 | Vol 915 mln | | Nasdaq | Adv 1189 | Dec 3461 | Vol 4.4 bln |
Industry Watch
| Strong: -- |
| | Weak: Consumer Discretionary, Consumer Staples, Financials, Industrials |
Moving the Market
-- S&P 500 breaching its 200-day moving average (4045)
-- Rising Treasury yields and strengthening dollar
-- The Wall Street Journal reporting the Fed could raise rates above 5% next year due to wage growth and inflation
-- Stronger-than-expected ISM Non-Manufacturing Index reading for November, aiding the view that the Fed will keep rates higher for longer
| Closing Summary
05-Dec-22 16:25 ET
Dow -482.78 at 33952.44, Nasdaq -221.56 at 11179.79, S&P -72.86 at 3999.26
[BRIEFING.COM] It was a trend-down day for the stock market following the big run we've had in recent weeks. Entering today, the Dow Jones Industrial Average was up 19.9% this quarter, the S&P Midcap 400 was up 16.8%, the Russell 2000 was up 13.7%, the S&P 500 was up 13.6%, and the Nasdaq Composite was up 8.4%.
Those gains were partially predicated on the notion that the Fed may be apt to soften its approach, a view that was presumably aided by Fed Chair Powell's speech last week.
Buyer enthusiasm was dampened today, however, by an article in The Wall Street Journal from Nick Timiraos, who some believe is a preferred source to float the Fed's thinking. Mr. Timiraos suggested that wage inflation could ultimately compel the Fed in 2023 to take its benchmark rate higher than the 5.00% the market currently expects.
Accordingly, market participants were distracted today by the thought that the market may have overreacted to Mr. Powell's speech. In turn, there were festering concerns that the Fed might overtighten and trigger a deeper economic setback, which overshadowed reports discussing relaxed COVID restrictions in China.
The fed funds futures market is pricing in a 64.1% probability of the terminal rate hitting 5.00-5.25% by mid-2023 compared to a 46.9% probability on Friday, according to the CME FedWatch Tool.
Other factors that helped to rein in some of the market's rebound energy included:
- A stronger-than-expected ISM Non-Manufacturing Index for November (56.5% vs 54.4% prior) that bolstered the view that the Fed is apt to keep rates higher for longer.
- An uptick in Treasury yields. The 2-yr note rose nine basis points to 4.38% and the 10-yr note rose nine basis points to 3.60%.
- Notable strength in the U.S. Dollar Index, up 0.8% to 105.33.
- Softness in mega-cap stocks, but some acute weakness in Tesla (TSLA 182.45, -12.41, 6.4%) even though it refuted press reports that it is planning an output cut of at least 20% for the Model Y at its Shanghai plant in December.
The broad-based selling that ensued saw the S&P 500 breach support at its 200-day moving average (4,045) and close just a whisker below the 4,000 level.
All 11 S&P 500 sectors sported losses that ranged from 0.6% (utilities) to 3.0% (consumer discretionary). The latter was weighed down by Tesla and Amazon.com (AMZN 91.01, -3.12, -3.3.%), but also by V.F. Corp (VFC 29.51, -3.71, -11.2%) after the company lowered its EPS guidance for FY23 due to soft demand, particularly in North America.
Along with consumer discretionary, other cyclical sectors like financials (-2.5%) and energy (-2.5%) suffered the biggest losses.
Energy complex futures closed with decent losses today even though OPEC+ agreed to maintain its production cut target of 2 million barrels per day from November until the end of 2023. Separately, the EU and its allies agreed to a $60.00 per barrel price cap on Russian oil. WTI crude oil futures fell 3.5% today to $77.32/bbl and natural gas futures fell 10.4% to $5.62/mmbtu.
- Dow Jones Industrial Average: -6.6% YTD
- S&P Midcap 400: -11.7% YTD
- Russell 2000: -18.1% YTD
- S&P 500: -16.1% YTD
- Nasdaq Composite: -28.2% YTD
Reviewing today's economic data:
- The ISM Non-Manufacturing Index for November increased to 56.5% (Briefing.com consensus 53.5%) from 54.4% in October. The dividing line between expansion and contraction is 50.0%. The November reading marks the 30th straight month of growth for the services sector.
- The key takeaway from the report is that business activity for the non-manufacturing sector, which comprises the largest swath of U.S. economic activity, strengthened in November, aiding the view that the Fed will keep rates higher for longer.
- Factory orders for manufactured goods increased 1.0% month-over-month in October (Briefing.com consensus 0.7%) following an unrevised 0.3% increase in September. Shipments of manufactured goods jumped 0.7% after increasing 0.3% in September.
- The key takeaway from the report is the quick rebound seen in business spending, evidenced by the 0.6% increase in nondefense capital goods orders excluding aircraft, and the sizable jump in shipments of nondefense capital goods excluding aircraft (+1.5%) that will compute favorably for Q4 GDP forecasts.
- The final IHS Markit Services PMI reading for November came in at 46.2 after the last reading of 46.1.
Tuesday's economic data is limited to the October Trade Balance (Briefing.com consensus -$77.2 billion; prior -$73.3 billion) at 8:30 a.m. ET.
Market clings to narrow range ahead of close
05-Dec-22 15:30 ET
Dow -532.10 at 33903.12, Nasdaq -257.46 at 11143.89, S&P -80.86 at 3991.26
[BRIEFING.COM] The main indices are stuck in a narrow trading range just off session lows.
WTI crude oil futures fell 3.5% today to $77.32/bbl and natural gas futures fell 10.4% to $5.62/mmbtu.
The 10-yr Treasury note yield settled the session up nine basis points to 3.60% and the 2-yr note yield rose nine basis points to 4.38%.
Tuesday's economic data is limited to the October Trade Balance (Briefing.com consensus -$77.2 billion; prior -$73.3 billion) at 8:30 a.m. ET.
S&P 500 falls below 4000
05-Dec-22 15:05 ET
Dow -525.42 at 33909.80, Nasdaq -255.16 at 11146.19, S&P -80.99 at 3991.13
[BRIEFING.COM] The S&P 500 fell noticeably below the 4,000 level.
The fed funds futures market is pricing in a 61.6% probability of the Fed's terminal rate hitting 5.00-5.25% by mid-2023 versus a 46.9% probability on Friday, according to the CME FedWatch Tool. This follows an article in The Wall Street Journal suggesting that wage inflation could ultimately compel the Fed to take its benchmark rate higher than the 5.00% the market currently expects.
Separately, declining issues outpace advancing issues by a greater than 5-to-1 margin at the NYSE and a 3-to-1 margin at the Nasdaq.
Zions Bancorp, regional banking names mirror broader weakness in financials
05-Dec-22 14:30 ET
Dow -544.98 at 33890.24, Nasdaq -240.06 at 11161.29, S&P -80.70 at 3991.42
[BRIEFING.COM] The S&P 500 (-1.98%) is firmly in second place on Monday afternoon, lower by about 80 points.
S&P 500 constituents Zions Bancorp (ZION 47.85, -4.40, -8.42%), Paycom Software (PAYC 315.06, -24.81, -7.30%), and DISH Network (DISH 14.60, -0.96, -6.17%) pepper the bottom of the standings. ZION and other financial names underperform today, while general weakness also permeates software stocks including PAYC.
Meanwhile, CME Group (CME 180.44, +3.81, +2.16%) tops the index, pushing to eight-week highs despite a dearth of corporate news.
Gold slides as dollar, yields gain following stronger than expected econ data
05-Dec-22 14:00 ET
Dow -460.35 at 33974.87, Nasdaq -220.25 at 11181.10, S&P -71.54 at 4000.58
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-1.92%) remains at session lows, cemented at the bottom of the major averages with about two hours to go on Monday.
Gold futures settled $28.30 lower (-1.6%) to $1,781.30/oz owing to gains in the dollar and yields following this morning's stronger-than expected ISM services data.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $105.20.
Page One
Last Updated: 05-Dec-22 09:02 ET | Archive
Backing up a bit after a big move
There is some weakness in the futures market this morning that is looking for a cause. In other words, the line between the news and the futures market isn't a straight one.
Currently, the S&P 500 futures are down 31 points and are trading 0.8% below fair value, the Nasdaq 100 futures are down 87 points and are trading 0.7% below fair value, and the Dow Jones Industrial Average futures are down 246 points and are trading 0.7% below fair value.
Rising oil prices ($82.70, +2.72, +3.4%) and a disappointing Caixin Services PMI reading for November (46.7 vs 48.4 prior) out of China are drawing some blame for the negative disposition, yet those excuses fall short knowing that the Hang Seng surged 4.5% on Monday and the Shanghai Composite jumped 1.8% on some hopeful COVID-related news.
Specifically, several major cities in China announced relaxed testing requirements to use public transportation and to buy certain medicines, according to Bloomberg.
The relaxed guidelines have been viewed as another step toward pivoting the country from a zero-COVID policy approach. That, in turn, is a step in the right growth direction that should presumably stoke demand for oil, other goods, and services, which is why the Chinese markets traded well today and why rising oil prices and the soft Caixin Services PMI number fall short as excuses for the weakness in the futures market this morning.
That weakness is predominately a byproduct of the strength seen this quarter. Entering today, the Dow Jones Industrial Average is up 19.9% this quarter, the S&P Midcap 400 is up 16.8%, the Russell 2000 is up 13.7%, the S&P 500 is up 13.6%, and the Nasdaq Composite is up 8.4%.
With moves like that, it is natural for the market to encounter some consolidation activity as early arrivals to the rally effort move to take some money off the table.
It is worth pointing out that most of the mega-cap stocks are tipped lower in pre-market trading. Alphabet (GOOG), for example, is down 0.8%, and Microsoft (MSFT) is down 0.5%. Tesla (TSLA) is the biggest laggard, down 2.6% on a Reuters report that it is going to cut Model Y output at its Shanghai plant by at least 20% in December versus November.
Despite their struggles this year, the mega-cap stocks still have some outsized influence on the market.
The EU for its part is trying to exert some influence over the sale of Russian oil, having agreed to a $60.00 per barrel price cap over the weekend that preceded EU sanctions on seaborne Russian oil going into effect today.
In other developments, Delta Air Lines (DAL) has reached a tentative deal with its pilots union, according to CNBC, and apparel company V.F. Corp (VFC) announced a CEO transition at the same time it issued a FY23 warning, citing weaker than anticipated consumer demand across its categories, primarily in North America.
Today's economic calendar features the ISM Non-Manufacturing Index (Briefing.com consensus 53.5%; prior 54.4%) at 10:00 a.m. ET.
-- Patrick J. O'Hare, Briefing.com
Dollar General keeps its head above water today as shares find support after a weak Q3 report (DG)
Dollar General (DG) is keeping its head above water today as one of a handful of S&P 500 components trading in positive territory after a hot ISM Non-Manufacturing Index report sent the markets downward. Shares recently slid considerably after a double-digit Q3 (Oct) earnings miss and downbeat Q4 (Jan) earnings guidance last week.
However, beginning in the year's second half, the stock has found support around the $236 mark, further evidenced by a quick jump off these levels the day after DG's underwhelming Q3 report. There were also a few highlights from Q3, explaining why shares are still up around 4% on the year.
- Same-store sales jumped +6.8%, edging past estimates, despite DG encountering softer-than-anticipated discretionary spending and a reduction in basket size during the quarter. DG also saw store traffic climb.
- DG also commented that it is seeing a continual increase in customers with household incomes up to $100K, underscoring the company's value and convenience proposition.
- The combination of value and convenience should not be understated as it plays into the current demand for lower-price-point products while keeping miles driven to take advantage of these values low, a plus given the relatively high gas prices. DG boasts around 19,000 stores within just five miles of about three-quarters of the U.S. population.
- DG also reaffirmed its FY23 sales growth forecast of +11% yr/yr. Meanwhile, its expectation of around +6-7% comp growth in Q4 translates to FY23 same-store sales growth toward the upper end of its target of +4.0-4.5%.
Still, although the stock has built a floor over the past few months, by that same token, it has also found a ceiling, right around the $260 mark. Challenges have kept shares in check, including intense inflationary pressures, which could have been why DG exceeded analysts' comp expectations in the quarter. DG also noted that it experienced significantly higher-than-expected cost pressures in Q3, including internal supply chain strife, sales mix pressures, and higher inventory damages, which dented gross margins, leading to Q4 EPS missing estimates. On the plus side, DG remarked that some capacity pressures have already been alleviated by opening additional warehouses.
Bottom line, economic woes are taking their toll on DG. However, some of the company's issues are internal. DG is already taking the necessary steps to improve its supply chain, which should boost margins after Q4. Meanwhile, DG has focused on many strategic initiatives to bolster its margin profile even further, including enhancing private brand sales and global sourcing. With bargain-hunting still gaining popularity due to inflationary pressures, DG and its massive footprint are positioned to potentially gap above previous highs.
Science Applications' hot streak continues as strong military demand leads to upside report (SAIC)
Science Applications' (SAIC) impressive run in 2022 is hitting another gear today after the government and military contractor reported a solid beat-and-raise 3Q23 earnings report. Year-to-date, the stock has gained nearly 40% compared to a loss of about 15% for the S&P 500. The company's consistent financial performance, highlighted by ten consecutive EPS beats, and its favorable positioning as a leading defense contractor in a turbulent geopolitical environment has supported the stock's run.
This urgency to enhance the country's technological capabilities within various branches of the military is stoking strong demand for SAIC's solutions. For instance, the company is winning large contracts centered on cloud migration and cloud management. Over the past twelve months, SAIC's Secure Cloud platform has accumulated over $500 mln in total contract value.
Additionally, SAIC has become a major partner in its customers' JADC2 strategy. For some quick background, JADC2 (Joint All Domain Command and Control) is a Department of Defense strategy that aims to regain and maintain the military's information advantages by empowering Joint Force Commanders with cutting edge technologies. As an example, SAIC recently won a $300 mln award to help the Air Force modernize and advance a command-and-control system using the company's cloud migration and big data integration technologies.
There are more substantial awards on the horizon, too. Currently, SAIC's pipeline of submitted proposals exceeds $20 bln on a trailing 12-month basis. The company anticipates this figure to increase in FY24 based on its expectations for upcoming submissions over the next few quarters. New business capture is only part of the story, though.
- In recent quarters, SAIC has had some struggles regarding re-compete losses. In fact, the company estimates that contract losses accounted for a three-point revenue headwind in Q3. However, SAIC believes that it will return to historical norms in terms of win rates, providing it with the confidence to raise the low end of its FY23 EPS and revenue guidance.
- An expanding backlog, which now totals $24.4 bln, and healthy free cash flow generation of $309 mln for the nine months ended October 28, 2022, are supporting factors in SAIC's capital deployment plans. Those plans will center around share buybacks in FY24, which is music to investors' ears. During the earnings call, the company stated that it believes the repurchase program represents its best ROI due to its ability to deliver earnings and free cash flow in excess of market expectations.
SAIC's top-line growth rate isn't going to excite anyone -- it was a paltry 0.6% in Q3. What the company is lacking in revenue growth, though, it is more than making up for with consistent earnings beats, healthy cash flow generation, a massive and expanding backlog, and a shareholder-friendly capital allocation strategy.
Tesla hits another speed bump as report of large production cut rattles investors (TSLA)
Concerns about softening demand have been percolating in the background for Tesla (TSLA) over the past few months as rising interest rates and inflation take a toll on the global economy. Those concerns were ratcheted up a notch this morning after Bloomberg broke a story that the electric vehicle maker is cutting its December Model Y production by 20% at its Shanghai plant. TSLA has since refuted the story, but the stock is still trading sharply lower, signaling that investors remain uneasy about the demand situation.
The report also comes on the heels of a 5-10% price cut in October for TSLA's Model 3 and Model Y in China, and this ominous tweet from Elon Musk on November 30: "Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession."
- A slowdown in demand would be especially problematic right now because TSLA has aggressively ramped up its production. Not only is the company boosting output at its recently launched Austin, Texas and Berlin, Germany facilities, but it also recently modernized and reconfigured its Shanghai plant to increase production. In fact, Shanghai churned out a record 100,290 vehicles in November, according to CPCA data, which represents a new monthly record for TSLA.
- The good news is that higher production leads to greater manufacturing efficiencies, which is a positive for automotive gross margin and operating margin. In Q3, automotive gross margin remained flat sequentially at 27.9%, despite facing a difficult comp in Q2 when ASPs jumped due to a lower mix of production coming from Shanghai. However, if demand wavers, the increase in output could translate into ballooning inventory levels and ultimately more price cuts and sagging margins.
China's strict zero-COVID policy has strained the supply chain in the automotive industry, and in other industries, putting pressure on both businesses and consumers in that country. The competitive landscape is also intensifying with NIO (NIO), XPeng (XPEV), and Li Auto (LI) gaining ground in China. Each of those stocks began the session with sizable gains, likely on reports of some Chinese cities loosening COVID restrictions, but those gains have since been wiped out.
While there seems to be plenty of smoke building around the slowing demand narrative for TSLA, there's a couple key points to keep in mind.
- Some buyers in the U.S. are holding off on making a purchase until January 1, when the new $7,500 tax credit kicks in. Therefore, any weakness seen in December could be made up in January as buyers look to take advantage of the incentives.
- Last week, Electrek reported that TSLA is planning a major increase of Model Y production at its Austin, Texas facility in 1Q23. Specifically, it's believed that the company is expecting to ramp the production rate up to 5,000 vehicles per week throughout the entire quarter. For context, TSLA reported that Austin was making about 1,000 Model Y's back in June. If TSLA was anticipating a significant deceleration in demand, it wouldn't be as aggressive in its production plans for Q1.
The bottom line is that the demand environment has become more challenging for TSLA. During the Q3 earnings conference call, Musk admitted as much, stating that "demand is a little harder than it would otherwise be" as the Federal Reserve raises interest rates. With that said, sales are certainly not falling off a cliff, as illustrated by the 90% increase in November deliveries from TSLA's Shanghai plant.
Allegro Microsystems adds to its massive rally on news it will join the S&P MidCap 400 (ALGM)
Allegro Microsystems (ALGM +5%) continues to add to its recent run today following news aftermarket on Friday that it will join the S&P MidCap 400. Shares have been surging surrounding ALGM's Q2 (Sep) earnings report in late October, climbing by roughly 65% from October 14 lows as they eye breakeven on the year.
ALGM is a fabless manufacturer of semiconductors primarily for the automotive market, which comprised ~66% of Q2 sales. The company supplies power and magnetic sensor integrated circuits (ICs), enabling power management and measuring motion, speed, position, and current. ALGM also boasts a portfolio of other ICs for various uses, such as 3D imaging.
Although today's solid stock appreciation is fueled by the news of it joining a new index, shares have still mightily outperformed the broader semiconductor sector this year. Therefore, it is worth diving deeper into why and if momentum can be sustained.
- ALGM has experienced accelerating revenue growth over the past four quarters, stepping on the gas from +13.5% in 3Q22 (Dec) to +22.8% in 2Q23 (Sep). With most of its revs stemming from the automotive industry, it has been helpful that this market has been steadily recovering from supply constraints throughout the year. For example, one of ALGM's primary suppliers, Taiwan Semi (TSM), has consistently noted steady growth in automotive-related end markets over the past few quarters.
- Within its automotive portfolio, ALGM has intensified its focus on e-mobility, representing its EV and advanced driver-assistance system (ADAS) applications. ALGM has also strategically moved into select industrial markets, such as renewable energy and data centers. These two initiatives have provided a clear course to traverse the choppy macroeconomic environment.
- However, a few warning flags have been raised recently. With inflation and interest rates rising, 2023 could prove more challenging for ALGM as demand may dry up, posing a more substantial threat than the supply issues it contended with this year. This is because if ALGM cannot move product, its tech components can quickly become outdated. In mid-October TSM remarked that it is starting to see the possibility of adjustment within its automotive and data center end markets down the road.
- During its Q2 earnings call, management cautioned that although overall demand is outstripping near-term capacity, creating over a year's worth of order backlog, macroeconomic uncertainty is rising, including clear signs of slowing consumer demand. Thus far, ALGM has seen this slowing demand primarily within its computer and consumer applications, representing less than half of total sales.
Still, ALGM has proved its ability to overcome numerous obstacles this year. The markets it serves remain underpinned by strong secular trends, such as vehicle electrification and digital transformations, bolstering the long-term backdrop. However, it is critical to approach the stock with caution after its exceptional rally, as the near term could add significant turbulence.
UiPath topples its prior expectations in Q3, sending shares to their 100-day moving average (PATH)
Shares of UiPath (PATH +11%) are making a solid push today as better-than-feared Q3 (Oct) numbers are propelling a breakout from the consolidation pattern the stock has been stuck in since PATH's previous earnings report. The past few quarters have been a story of intense foreign exchange (FX) headwinds, weighing heavily on the robotic process automation (RPA) software developer's financials. Although FX impacts were worse than PATH anticipated in Q3, it persevered, battling this obstacle and exceeding its guidance in the process.
- Revs expanded 19% yr/yr to $262.74 mln, despite a strong U.S. dollar clipping around $22 mln of sales, nicely surpassing PATH's $243-245 mln forecast, which incorporated a $10 mln FX headwind.
- A significant contributor was PATH's larger customer cohort, those with over $100K in annualized recurring revenue (ARR), which grew a respectable 3% sequentially to 1,711. PATH noted that these customers utilize its software not just to reduce or remove tedious work but also as part of their long-term growth plan and operating model. This comment highlights the importance placed on RPA, a bullish sign for the long-term health of PATH.
- Meanwhile, PATH shattered its prior adjusted operating income forecast of negative $30 mln to negative $25 mln, delivering operating income of positive $18 mln in Q3. Two factors contributed to this massive beat: excellent top-line growth and early success from PATH's ongoing reorganization where it implemented a hiring freeze.
- Looking ahead to Q4 (Jan), PATH may have guided revs slightly below consensus, predicting $277-279 mln. However, the company upped its ARR forecast slightly, expecting $1.174-1.176 bln from $1.153-1.158 bln.
- Going beyond Q4, PATH did not provide further details on its FY24 guidance, first outlined during its Investor Day in late September. At that time, PATH noted that the anchor point for sales and ARR growth was +18%, as well as operating margin expansion of around 300-400 bps. However, we suspect its anchor points remain sturdy after upbeat Q3 numbers and decent Q4 guidance.
Although today's favorable reaction is helping PATH shares break out, economic battles are far from over. Most of PATH's revenue stems from overseas, primarily in Europe, where economic conditions are worse than domestically, and war is ongoing in Ukraine. Still, it was encouraging to hear that PATH's European business is now in good shape, with its sales force ready to overcome a tricky demand backdrop.
Bottom line, PATH's Q3 results are giving its shares much-needed relief after tumbling around 70% on the year. Although the path ahead is anything but easy, there are encouraging developments on the horizon, enabling PATH to wade through the choppy macroeconomic environment.
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