Market Snapshot
briefing.com
| Dow | 33034.77 | -673.85 | (-2.00%) | | Nasdaq | 12378.59 | -326.58 | (-2.57%) | | SP 500 | 4135.04 | -93.51 | (-2.21%) | | 10-yr Note |
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| | NYSE | Adv 511 | Dec 2570 | Vol 841 mln | | Nasdaq | Adv 1063 | Dec 3315 | Vol 4.2 bln |
Industry Watch
| Strong: -- |
| | Weak: Consumer Discretionary, Energy, Financials, Communication Services, Information Technology |
Moving the Market
-- Waiting game ahead of Fed Chair Powell speaking at the Jackson Hole Fed symposium
-- Feeling market is due for consolidation after recent gains
-- Downside leadership from mega caps
-- Treasury yields on the rise, 10-yr yield moves above 3.00%
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Closing Summary
22-Aug-22 16:30 ET
Dow -643.13 at 33065.49, Nasdaq -323.64 at 12381.53, S&P -90.49 at 4138.06
[BRIEFING.COM] Ahead of Fed Chair Powell's speech at the Jackson Hole Economic Policy Symposium on Friday, the stock market moved distinctly lower with the major indices closing just above session lows. Broad-based selling was fueled by rising Treasury yields and the lingering feeling the market is due for a pullback after July's upside moves.
The latter point was reflected by the price action seen in the meme stocks, like AMC Entertainment (AMC 10.46, -7.56, -42.0%) and Bed Bath & Beyond (BBBY 9.24, -1.79, -16.2%), which saw huge downside moves. These stocks were beneficiaries of speculative excess during the recent rally, but are now suffering from the speculative excess being wrung out of their stock prices while facing some additional company specific drivers. The material losses proved to be a risk-off factor, as they undercut sentiment and weighed on most stocks in today's session.
The 10-yr note yield pushing above 3.00% today also helped fuel selling efforts. The 10-yr note yield rose five basis points to 3.04% while the 2-yr note yield rose eight basis points to 3.33%.
The selling was broad-based, leaving many stocks lower, but mega caps and growth stocks were notably weak. The Vanguard Mega Cap Growth ETF (MGK) closed down 2.6% versus a 2.1% loss in the Invesco S&P 500 Equal Weight ETF (RSP) and the S&P 500. The Russell 3000 Growth Index (-2.4%) closed behind the Russell 3000 Value Index (-2.0%).
S&P 500 sector performance reflected broad selling interest and also downside leadership from mega caps. Every sector closed with losses ranging from 0.3% (energy) to 2.8% (consumer discretionary). Consumer discretionary (-2.8%), information technology (-2.8%), and communication services (-2.7%), home to key mega cap names, brought up the rear.
Energy (-0.3%) closed ahead of its peers after WTI crude oil futures pared session losses on a Bloomberg report, citing Saudi Oil Minister Prince Abdulaziz bin Salman, who said the disconnect between the futures market and supply fundamentals might force OPEC+ and its allies to act. WTI crude oil futures settled 0.2% lower at $90.63/bbl after dipping below $87.00/bbl earlier in the session.
The People's Bank of China cut its 1-year loan prime rate by five basis points to 3.65% and its 5-yr loan prime rate by 15 basis points to 4.30%. The design of that policy move is to stimulate growth; however, it was probably not lost on market participants that the basis for the rate cut is a weakening economy.
JD.com (JD), KE Holdings (BEKE), Macy's (M), Dick's Sporting Good (DKS), Medtronic (MDT), and J.M. Smucker (SJM) all report earnings ahead of tomorrow's open.
Looking ahead to Tuesday, market participants will receive July New Home Sales (Briefing.com consensus 580,000; prior 590,000) at 10:00 a.m. ET. The August IHS Markit Manufacturing PMI preliminary reading (prior 52.2) and IHS Markit Services PMI preliminary reading (prior 47.3) are out at 9:45 a.m. ET.
Dow Jones Industrial Average: -9.0% YTD
S&P 400: -11.3% YTD
S&P 500: -13.2% YTD
Russell 2000: -14.7% YTD
Nasdaq Composite: -20.9% YTD
Market lifts somewhat into the close
22-Aug-22 15:25 ET
Dow -610.74 at 33097.88, Nasdaq -312.36 at 12392.81, S&P -86.47 at 4142.08
[BRIEFING.COM] The major indices are trying to lift off their lows heading into the close.
After the close, Palo Alto Networks (PANW) and Zoom Video (ZM) report quarterly results.
JD.com (JD), KE Holdings (BEKE), Macy's (M), Dick's Sporting Good (DKS), and J.M. Smucker (SJM) all report earnings ahead of tomorrow's open.
Looking ahead to Tuesday, market participants will receive July New Home Sales (Briefing.com consensus 580,000; prior 590,000) at 10:00 a.m. ET. The August IHS Markit Manufacturing PMI preliminary reading (prior 52.2) and IHS Markit Services PMI preliminary reading (prior 47.3) are out at 9:45 a.m. ET.
Market continues to retreat
22-Aug-22 15:00 ET
Dow -673.85 at 33034.77, Nasdaq -326.58 at 12378.59, S&P -93.51 at 4135.04
[BRIEFING.COM] The major indices continued a steady retreat in the last half hour.
Twitter (TWTR 43.11, -0.88, -2.0%) shares are near their lows for the day following news that Elon Musk has subpoenaed Jack Dorsey ahead of October 17 trial date, according to The Verge.
Treasury yields continue to rise with the 10-yr note yield up five basis points to 3.04% while the 2-yr note yield is up nine basis points to 3.33%.
Also, the CBOE Volatility Index is at its session high, up 18.5% or 3.80 to 24.40.
Separately, CNBC spoke with the Saudi Energy Minister who said he has concerns about lack of liquidity in the futures contract.
Aptiv underperforms to open the week
22-Aug-22 14:30 ET
Dow -632.78 at 33075.84, Nasdaq -305.04 at 12400.13, S&P -87.78 at 4140.77
[BRIEFING.COM] We're still near lows in the major averages, having moved mostly sideways in the last half hour; the benchmark S&P 500 (-2.08%) is in second place.
S&P 500 constituents Aptiv (APTV 96.51, -7.26, -7.00%), CarMax (KMX 90.69, -5.58, -5.80%), and Generac (GNRC 241.05, -14.96, -5.84%) pepper the bottom of today's standings despite a dearth of corporate news.
Meanwhile, Mosaic (MOS 55.23, +1.71, +3.20%) is among a select group of materials names which outperform to open the week.
Gold squeezed by rising dollar, yields
22-Aug-22 14:00 ET
Dow -637.24 at 33071.38, Nasdaq -309.25 at 12395.92, S&P -88.42 at 4140.13
[BRIEFING.COM] With about two hours to go on Monday the major averages remain near session lows, the tech-heavy Nasdaq Composite (-2.43%) still at the bottom of the standings.
Gold futures settled $14.50 lower (-0.8%) to $1,748.40/oz, squeezed by rising bond yields and a stronger dollar.
Meanwhile, the U.S. Dollar Index is up about +0.8%) to $108.99.
Hasbro shares slide on reports it is exploring a possible sale of its entertainment assets (HAS)
According to a Bloomberg article today, toy and board game manufacturer Hasbro (HAS -2%) is exploring a possible sale or restructuring of assets within its Entertainment business, including Entertainment One (eOne), much to investors' disappointment. Making up just 18% of total revenue in FY21, HAS's Entertainment segment is its most minor component of total sales. Furthermore, boasting adjusted operating margins of just under 9%, Entertainment also commands the slimmest margins.
However, Entertainment has been growing at a decent pace over the years, most recently seeing sales jump 27% yr/yr in FY21, mightily exceeding HAS's largest segment's (Consumer Products) only 9% growth. Additionally, HAS's potential sale or restructuring comes just three years after it spent approximately $4.0 bln in cash for eOne in an effort to further bolster its foray into the entertainment industry. At the time, HAS expected to realize in-sourcing and other global annual run rate synergies of approximately $130 mln by 2022. In early February, HAS noted that it was on track to achieve this target.
Unfortunately for HAS, much has changed since then. In addition to CEO Brian Goldner, who was at the helm when HAS purchased eOne, passing away late last year, activist shareholder Alta Fox Capital looked to shake up HAS's Board. Alta Fox also sent a letter to shareholders outlining the opportunity of a full or partial sale of eOne. Therefore, although investors rejected a board nominee by Alta Fox, HAS's reported strategic review of its Entertainment division may not have come as a total surprise.
Like competing toy company Mattel (MAT), HAS may find better success licensing its IP to Hollywood studios instead of producing film and TV itself. HAS already found great success in entertainment and licensing before its eOne purchase, seeing this business post positive yr/yr growth in FY16 through FY18 and outperforming total revenue in two of these years.
Furthermore, HAS already divested its music division housed within the Entertainment segment in April 2021. Although the company noted that music was not the primary driver of its eOne acquisition, it may have foreshadowed broader weakness within the segment. HAS is slated to host an investor day in October to provide further details on its current strategic review.
Tesla veering off course after Elon Musk announces price hike for FSD system (TSLA)
During Tesla's (TSLA) Q2 earnings conference call on July 20, Elon Musk commented that the price of FSD (full self-driving) technology would go up "sometime later this year." That time has now arrived with the cost of FSD increasing to $15K in North America, starting on September 5, according to a tweet by Musk.
- After starting the year with a price tag of $10K, TSLA bumped FSD up to $12K in January. This latest increase coincides with the release of FSD Beta 10.69.2, which Musk has touted as a major step forward for the software. Specifically, the new FDS version reportedly has improved pedestrian protection and is better at making unprotected left turns.
- It's important to point out, though, that FSD does not provide full autonomous driving. In fact, it only qualifies as a Level 2 driver assistance system, meaning that it can control two functions -- steering and accelerating/decelerating.
- Unsurprisingly, TSLA has been accused of false advertising with the California DMV recently filing a lawsuit against the company.
- Meanwhile, the company's Autopilot system, which is a step down from FSD, is under investigation from the National Highway Traffic Safety Administration (NHTSA) following a spate of recent crashes. According to a report by NHTSA, there have been 273 crashes involving TSLA's advanced driver assistance systems, more than any other EV maker by a wide margin.
- The troubles don't end there. On July 13, TSLA announced that its Director of AI, Andrej Karpathy, stepped down. Karpathy led the computer vision team for the Autopilot product. That development followed news from a couple weeks earlier that TSLA cut its Autopilot staff by 200 positions at its San Mateo, CA office.
Although it's been a very bumpy ride for TSLA's autonomous driving ambitions, developing self-driving vehicles remains a top priority for the company. In his typical dramatic fashion, Musk recently stated that TSLA's ability to charge more for FSD is the difference between the company "being worth a lot of money or worth basically zero." That statement is rooted in Musk's vision of developing software that's capable of supporting EVs that actually are fully self-driving. If TSLA succeeds and does produce a driver-less vehicle, than the software alone would be worth billions to the company.
According to Musk, TSLA's first fully autonomous vehicle will be a robo-taxi that will be mass-produced at the new Austin, Texas plant. The vehicle, which will not have a steering wheel or pedals, is expected to reach volume production in 2024. Of course, like other Musk timelines, this one is far from set in stone. In the meantime, TSLA will look to cash in on software updates and price increases. With Musk claiming that FSD is "ridiculously cheap", customers and investors can anticipate more price hikes down the road. Based on the stock's negative reaction today, though, there may be some concern about customer push-back on those price hikes, especially given the pre-existing affordability concerns for EVs.
Signify Health shares soar on takeover interest from multiple firms, including Amazon (SGFY)
Shares of Signify Health (SGFY +34%) are feeling tremendous today after reports surfaced that the company is garnering takeover interest from several organizations, including UnitedHealth (UNH), Amazon (AMZN), CVS Health (CVS), and Option Care Health (OPCH). SGFY, a healthcare platform that leverages analytics to provide at-home care, has already seen its shares rocket over 90% from June 13 lows prior to today's massive leap.
Part of SGFY's meteoric rise came from reports that CVS was interested in acquiring the tech firm earlier this month. We outlined at the time why CVS's interest in SGFY made sense, commenting on how it would bolster CVS's long-term full-service health care strategy and that SGFY still looked appealing from a financial standpoint. However, a possible bidding war made investors nervous that CVS may pay too much for SGFY, which could lead to CVS exploring routes to raise the capital despite boasting significant cash on hand.
A bidding war appears to have materialized. Today's reaction stems from reports that SGFY is for sale in an auction valued at more than $8.0 bln, a roughly 60% premium as of Friday's close. Bids for SGFY are reportedly due within the next two weeks, and SGFY, which is actively exploring strategic alternatives, could choose to remain an independent company.
Still, of the companies reportedly competing to acquire SGFY, AMZN has the most cash on hand. Combining this with CEO Andy Jassy's aggressive pursuit to bolster the company's healthcare services, AMZN is best-positioned to end up on top.
- The e-commerce giant has been aggressively pursuing health care offerings, expanding its telehealth service Amazon Care last year to further compete with other telehealth firms like Teladoc (TDOC). Then, in late July, AMZN announced it was acquiring 1Life Healthcare (ONEM), which offers healthcare membership services such as walk-in immunizations and lab services, for $3.9 bln in cash.
- Despite the high price tag on ONEM, it is not expected to generate huge numbers for AMZN. Although the company has been accelerating its quarterly revenue growth considerably, going from roughly 60% on average in FY21 to over 100% thus far in FY22, annual sales are only expected to be $1.07 bln this year. Meanwhile, AMZN is expected to register over $522 bln in revenue in FY22.
- Likewise, analysts estimate SGFY's FY22 revs just under $1.0 bln as quarterly sales growth has begun to slow slightly. SGFY posted sales growth of just +15.7% yr/yr in Q2, down from +20.3% in Q1.
- Nevertheless, AMZN is showing its thirst for enhancing its healthcare business, and SGFY complements its ONEM acquisition nicely. AMZN already has a massive membership network through its Prime offering and could tack on medical services for an additional fee.
We think AMZN purchasing SGFY makes sense. However, just as we saw with CVS, investors are wary that AMZN may overpay for a company with slowing revenue growth, leading to the possibility of raising capital to finance the acquisition.
Bottom line, SGFY still has room to run if reports on its possible auction value are correct. However, we urge caution trading SGFY at current prices as there is still the risk that SGFY will choose to remain an independent company and that shares are trading at a lofty 40x FY23 earnings.
Wendy's heads lower on E. coli investigation for sandwich lettuce (WEN)
Wendy's (WEN -4%) is trading lower today on an Investigation Notice published by the CDC detailing an E. coli outbreak. A specific food has not yet been confirmed, but the CDC noted that many sick people reported eating sandwiches with romaine lettuce at Wendy's restaurants in Michigan, Ohio and Pennsylvania before getting sick.
So, what does this mean?
- Wendy's has agreed to take the precautionary measure of removing romaine lettuce being used in sandwiches from restaurants in that region. Importantly, Wendy's uses a different type of romaine lettuce for salads, so that is not part of this incident. Wendy's is fully cooperating with the investigation.
- Restaurant chains really need to be careful when these types of outbreaks occur. A prominent example was Chipotle (CMG), which had an outbreak in 2015, which caused widespread and long-lasting damage to its brand. In 2018, the FDA and CDC investigated a multi-state outbreak of cyclosporiasis illnesses, likely linked to salads from McDonald's (MCD).
- This incident seems more closely related to MCD than CMG. Whereas CMG was more related to food safety procedures at its restaurants, this Wendy's outbreak seems more related to third party suppliers of lettuce. However, WEN needs to be really careful as fear can spread quickly and customers may become leery of all of Wendy's menu offerings. We think WEN is doing the right thing by cooperating quickly and fully with the CDC and discarding the sandwich lettuce.
Overall, the good news for Wendy's is that this incident seems limited to sandwich lettuce, which could be removed and most consumers may not even notice. Fortunately, it is not related to its core burgers or chicken menu items. It is not even related to its salads. As such, we think this blows over quickly. Nevertheless, the stock is lower today as we think investors are more concerned that there may be lingering fear and perhaps misperception from consumers who may decide to avoid Wendy's entirely just to be safe in the near term, which may tamp down Q3 comps.
Deere running lower after missing earnings expectations as supply chain issues crop up again (DE)
Ahead of Deere's (DE) Q3 earnings report, shares were plowing higher, rallying by 25% since mid-July in a reflection of budding optimism regarding its business prospects. That positive sentiment was bolstered by solid earnings beats from competitors Caterpillar (CAT) and AGCO (AGCO) a few weeks ago. While both companies struggled with lingering supply chain constraints, strong demand for equipment supported their price increases, mitigating the impact from lower sales volumes. A similar scenario was anticipated to play out for DE, but the company badly missed EPS expectations and lowered the midpoint of its FY22 net income outlook.
As expected, the same supply chain issues that inhibited CAT's and AGCO's ability to meet demand also hindered DE's results. However, DE's revenue growth of 24.8% easily outpaced the 10.5% and 2.3% growth for CAT and AGCO in their most recent quarters. It's worth pointing out that both DE and CAT lapped growth of 29% in the year-earlier period, so DE didn't benefit from an easier comp. The same can't be said for AGCO, which generated an increase of 44% last year, but it's evident that the demand environment for DE is quite healthy relative to its peers.
Although commodity crop prices, such as corn, wheat, and soybeans, have fallen recently, they were very strong for most of the quarter. Consequently, farming incomes improved, providing the impetus for farmers to upgrade and buy new equipment. This is illustrated by DE's Production & Precision Agriculture segment reporting a 43% surge in revenue to $6.1 bln, which is by far the strongest growth among its divisions. Small Agriculture & Turf fared pretty well, too, posting an increase of 16% as demand for riding lawn equipment and utility tractors remained firm.
The question, then, is this: Why did DE fall considerably short of EPS estimates if sales were so strong?
- Despite implementing price increases across its product lines, operating margin still slipped in two of the three main operating segments. Supply chain disruptions created production inefficiencies, particularly in the Small Agriculture & Turf business, where operating margin decreased by 330 bps yr/yr to 15.2%.
- Construction & Forestry experienced a 30 bps improvement to 15.7%; as the company's smallest business, the modest bump had little impact.
- Total expenses jumped by 23% to $11.6 bln, as compared to a 7% increase in AGCO's operating expenses. While inflationary pressures afflicted both companies, foreign exchange headwinds due to a stronger dollar are having an outsized effect on DE's expense line.
- The unfavorable impact from foreign exchange also played a roll in DE cutting its FY22 net income guidance to $7.0-$7.2 bln from $7.0-$7.4 bln.
On the positive side, DE CEO John May stated that demand is still strong, and that early-order programs are encouraging as farming fundamentals remain healthy. If the company has success in streamlining its supply chain, then it should be poised for improved earnings performance, especially if input costs continue to ease.
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