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Market Snapshot
briefing.com
| Dow | 29201.66 | -3.25 | (-0.01%) | | Nasdaq | 10390.38 | -151.57 | (-1.44%) | | SP 500 | 3582.08 | -30.38 | (-0.84%) | | 10-yr Note | -4/32 | 3.93 |
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| | NYSE | Adv 1274 | Dec 1758 | Vol 1.0 bln | | Nasdaq | Adv 1674 | Dec 2621 | Vol 4.6 bln |
Industry Watch
| Strong: Consumer Staples, Heath Care, Real Estate |
| | Weak: Information Technology, Communication Services |
Moving the Market
-- Global slowdown concerns (IMF cuts 2022 forecast to 2.7% from 2.9% and says the worst is yet to come)
-- China reportedly imposing new restriction in some Chinese cities because of rising Covid cases
-- Concerns about financial stability percolate as the BoE sets hard deadline for gilt market support
-- Continued weakness among mega-cap stocks and semiconductor shares
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Closing Summary
11-Oct-22 16:30 ET
Dow +36.31 at 29241.22, Nasdaq -115.91 at 10426.04, S&P -23.55 at 3588.91
[BRIEFING.COM] Today's trade started on a downbeat note and ended on a downbeat note. There was some improvement in between, though, that ultimately got tempered as financial stability concerns came back to the forefront. Along the way, the S&P 500 set a new low for the year (3568.45). That low came shortly after the open, yet it stoked renewed buying interest that would carry the S&P 500 to 3,640.66 at its high for the day.
The opening selling interest stemmed from growth concerns and worries about financial stability. The latter resonated with the Bank of England (BoE) intervening again in the UK gilt market after a nasty selloff yesterday that completely undid the gains registered after the BoE announced its emergency gilt purchase operation on September 28. Today, the BoE said it is going to buy index-linked gilts from October 11 until October 14 to mitigate dysfunction in the market and prevent "fire-sale" dynamics.
Slowdown concerns came to light after the IMF cut its 2022 forecast to 2.7% from 2.9% and said the worst is yet to come. Also, reports indicated that China imposed new restrictions in some Chinese cities because of rising Covid cases.
Notwithstanding these issues, the major indices forged a rebound effort that saw broad based participation and most stocks recouping losses registered in the opening trade. That rebound effort, however, hit a wall in the afternoon.
The second leg lower today followed news of BoE Governor Andrew Bailey advising pension funds that they have three days left to rebalance, keeping in line with the BoE's prior indication that its emergency purchases of gilts would end October 14. The fact that the market would trade lower on this news implied that there was an expectation that the Bank of England would ultimately extend its timeline for purchasing gilts. Now, faced with the potential that this emergency support is going to be pulled soon, as indicated, market participants are fretting about the possibility of some type of market dislocation that could have reverberations elsewhere.
The Dow Jones Industrial Average (+0.1%) squeezed out a modest gain, outperforming from the start with the help of Amgen (AMGN 245.44, +13.29, +5.7%), which was upgraded by Morgan Stanley to Overweight from Equal-Weight. Small and mid cap stocks also outperformed as the Russell 2000 (+0.1%) and S&P Mid Cap 400 (+0.2%) logged modest gains.
For the S&P 500, only four of the 11 sectors closed in positive territory, led by real estate (+1.0%). Communication services (-1.6%) and information technology (-1.5%) sank to the bottom of the pack.
The 10-yr Treasury note yield rose six basis points to 3.94% (after hitting 4.00% overnight) and the 2-yr note yield was unchanged at 4.30%.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures fell 1.9% to $89.18/bbl while natural gas futures rose 2.1% to $6.60/mmbtu.
Today's economic data was limited to the September NFIB Small Business Optimism Index, which rose to 92.1 from 91.8 in August.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Application Index (prior -14.2%) at 7:00 a.m. ET. The September PPI (Briefing.com consensus 0.2%; prior -0.1%) and Core PPI (Briefing.com consensus 0.3%; prior 0.4%) is out at 8:30 a.m. ET. The FOMC Minutes for the September meeting are out at 2:00 p.m. ET.
Dow Jones Industrial Average: -19.5% YTD
S&P Midcap 400: -20.3% YTD
S&P 500: -24.7% YTD
Russell 2000: -24.6% YTD
Nasdaq Composite: -33.4% YTD
Market sell off on BoE news
11-Oct-22 15:35 ET
Dow -11.99 at 29192.92, Nasdaq -157.30 at 10384.65, S&P -32.05 at 3580.41
[BRIEFING.COM] The major averages remain near session lows. The S&P 500 found some support after testing its early intraday low, but maintains a big loss.
The fact that the market would trade lower on the BoE news implies that there was an expectation that the Bank of England would ultimately extend its timeline for purchasing gilts. Now, faced with the potential that this emergency support is going to be pulled soon, as indicated, market participants are fretting about the possibility of some type of market dislocation that could have reverberations elsewhere.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Application Index (prior -14.2%) at 7:00 a.m. ET and the September PPI (Briefing.com consensus 0.2%; prior -0.1%) and Core PPI (Briefing.com consensus 0.3%; prior 0.4%) at 8:30 a.m. ET. The FOMC Minutes for the September meeting are out at 2:00 p.m. ET.
Market plunges on BoE officials comments
11-Oct-22 15:00 ET
Dow -3.25 at 29201.66, Nasdaq -151.57 at 10390.38, S&P -30.38 at 3582.08
[BRIEFING.COM] The stock market is plunging from session highs following comments from Bank of England members indicating that support will be temporary and will end by Friday.
At the same time, the U.S. Dollar Index jumped to 113.25 from 112.42.
Treasury yields moved higher in recent action. The 10-yr note yield is up four basis points to 3.93% and the 2-yr note yield is down one basis point to 4.30%.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures fell 1.9% to $89.18/bbl while natural gas futures rose 2.1% to $6.60/mmbtu.
Viatris atop the S&P 500 amid asset sale rumors, Wynn underperforms on China COVID cases
11-Oct-22 14:25 ET
Dow +289.21 at 29494.12, Nasdaq -24.88 at 10517.07, S&P +9.79 at 3622.25
[BRIEFING.COM] The benchmark S&P 500 (+0.27%) is firmly in second place on Tuesday afternoon.
S&P 500 constituents Viatris (VTRS 9.44, +0.69, +7.89%), Micron (MU 53.60, +2.22, +4.32%), and Walmart (WMT 133.474, +4.15, +3.21%) dot the top of the standings. VTRS outperforms after a Bloomberg story suggested the company is eyeing the sale of certain European OTC assets, while WMT moves higher owing in part to some positive Walmart+ commentary from Morgan Stanley.
Meanwhile, casino giant Wynn Resorts (WYNN 59.07, -5.07, -7.90%) is today's worst performer amid reports of rising COVID cases in China, prompting some closures in light of the country's zero-COVID policy.
Gold shrugs off morning losses as dollar, yields fade into afternoon
11-Oct-22 14:00 ET
Dow +358.09 at 29563.00, Nasdaq +1.05 at 10543.00, S&P +16.80 at 3629.26
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (+0.01%) has regained positive territory.
Gold futures settled $10.80 higher (+0.6%) to $1,686.00/oz, shrugging off morning losses as investors gauged a weaker dollar and a dip in shorter tenured bond yields.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $112.64.
Uber delivering steep losses as Labor Department puts gig economy workers back into focus (UBER)
In November 2020, Uber (UBER), Lyft (LYFT), DoorDash (DASH), and other gig-economy companies claimed a major victory when Proposition 22 passed in California, nullifying a proposed law (Assembly Bill 5) that would have classified drivers as employees, rather than as independent contractors. At the time, the vote removed a huge overhang on these stocks, as the outcome seemed to set a standard for other states to follow.
However, the celebration was short-lived as a court in California ruled Proposition 22 to be unconstitutional several months after the vote. That latest ruling is being appealed, but UBER, LYFT, and DASH now have more pressing concerns to deal with after the U.S. Labor Department said that it's revisiting rules that determine whether workers are classified as employees or as independent contractors.
This is a potentially devastating development for these companies because it could undermine their business models. If they were required to provide a full range of benefits and protections, including contributions to health insurance, their cost structures would significantly increase to the point where it may be impossible to profitably operate. Both UBER and LYFT threatened to leave California if Assembly Bill 5 was put into law because it would have been so damaging to their businesses. It's difficult to quantify what the exact financial implications would be if UBER and LYFT had to reclassify drivers as employees. For some context, though, CNBC noted that LYFT's bottom line would have taken a 6-16% hit had Proposition 22 not passed in California.
It's highly unlikely that this news is catching UBER, LYFT, and DASH off guard. Rewinding to April 2021, Labor Secretary Marty Walsh put gig-economy companies on notice, stating that their workers should be classified as employees. It's clear what direction the Biden Administration wants to go, but there are still plenty of question marks on how this ultimately shakes out.
- Starting today, interested parties will have 45 days to comment and express their views on the Labor Department's decision to revise these regulations. Other than the ability for companies to voice their dissatisfaction about the proposal, it's hard to imagine that this will really move the needle in terms of the Labor Department changing their course of action.
- Importantly, the revised rule doesn't require a Congressional vote to be enacted. However, the scope of the rule will be limited to laws that the Labor Department has authority over -- such as setting federal minimum wage.
- The concern for gig-economy companies, though, is that the Labor Department will determine whether workers are contractors or employees. Therefore, if it decides that UBER and LYFT drivers are employees, then it's likely that other federal agencies, like the IRS, will follow suit. In that scenario, UBER and LYFT would then be required to classify their employees as workers for tax purposes.
- It's nearly certain that UBER and LYFT will fight this proposal in court. That will take many months to play out, which once again places a major overhang and plenty of uncertainty over these stocks.
Attaining profitability has been a huge challenge for UBER, LYFT, and DASH. In fact, LYFT is the only company out of the three to post positive EPS on a non-GAAP basis, thanks to its cost-cutting measures and ridesharing price hikes. However, ridesharing and food delivery are low margin businesses that have little wiggle room to contend with a significant increase in cost structures. Consequently, the potential reclassification of drivers as employees is a game-changing event, but we expect there to be more twists and turns as this development unfolds.
American Airlines lifts revenue guidance on resilient demand, but capacity still an issue (AAL)
Consumers may be spending much less on categories like clothes, furniture, and consumer electronics, but inflation and rising interest rates still aren't deterring people from buying airline tickets, as illustrated by American Airlines' (AAL) upwardly revised Q3 guidance. After originally guiding for revenue growth of 10-12% compared to 3Q19 in its Q2 earnings report, AAL is now forecasting growth of 13%, equating to revenue of about $13.46 bln. With Delta Air Lines (DAL) set to kick off Q3 earnings season for the airline industry on Thursday morning, AAL's upbeat outlook is a bullish sign for the group.
About one month earlier, rival United Airlines (UAL) lifted its Q3 revenue growth guidance higher to 12% from 11%, stating that the demand environment remained strong exiting a robust summer travel season. Although the increase to UAL's outlook was pretty modest, it calmed investors' fears that macroeconomic headwinds are cooling down a hot market for air travel. The same can be said for AAL's enhanced guidance today.
There are a few reasons why travel demand is holding up better than other areas.
- A major shift in consumer spending patterns continues to play out in the wake of the pandemic. During the height of the pandemic when people were stuck at home, online shopping for categories such as consumer electronics, home decor, seasonal, athleisurewear, fitness, and at-home entertainment exploded. On the other end of the spectrum, spending on travel plummeted. However, over the past year or so, a complete reversal in spending behavior has played out as pent-up demand has ignited a surge in leisure travel activity.
- Consumers who can afford to purchase airline tickets are probably better suited to withstand rising prices and budget pressures than other consumer groups. In the retail space, we have seen this dynamic play out between Costco (COST) and Walmart (WMT), with COST posting stronger financial results due to its more affluent customer base.
- Business and international travel demand continues to recover as employees return to the office and as in-person meetings resume. When DAL reported Q2 results in mid-July, it noted that domestic corporate sales were about 80% recovered compared to 2019.
AAL's customers have been willing and able to absorb higher ticket prices, as reflected in Q3 total revenue per available seat mile (TRASM) increasing by 25% versus its former guidance for up 20-24%. Accordingly, the company also expects pre-tax margin to come in better than it initially expected at 4.5% compared to previous guidance of 2-4%.
The news isn't completely positive, though. Staffing issues, both within the company and at various airports, continue to curtail capacity. During Q3, AAL's available seat miles (ASMs), or capacity, was lower by nearly 10% compared to 2019 levels. With fewer flown miles to spread costs across, cost per available seat mile (CASM) is expected to up by about 14%, at the high end of AAL's guidance of 12-14%.
Overall, the main takeaway is that AAL's improved revenue guidance once again highlights the resiliency of air travel demand, which should set the stage for a solid earnings season for the airline industry.
New Relic guidance calms nerves following recent restructuring, but stock heads lower anyway (NEWR)
New Relic (NEWR -0.5%) provided investors with some welcome news on the guidance front. This provider of observability tools which helps companies monitor the performance of their apps and networks did not provide specific guidance today, but it did say it expects to achieve upside to the high end of its Q2 (Sep) prior guidance for both revenue and operating income, which currently stand at $219-224 mln and $(5)-(3) mln, respectively.
- The guidance was encouraging for several reasons. First, New Relic has been struggling in recent years relative to its Application Performance Monitoring (APM) peers Dynatrace (DT) and DataDog (DDOG). In Q1 (Jun), NEWR reported upside relative to prior guidance, it then guided SepQ above consensus and now it expects to exceed the high end of that guidance. It does not completely change the narrative, but is good to see some progress.
- Another positive to the guidance is because it followed some cautious comments on the last call. Specifically, NEWR said that the business climate seemed a bit tougher on the margins. Also, sometimes customers' actual consumption exceeds their commit by a material amount, which causes clients to artificially constrain consumption to more align with their internal budgets. This impacts CRR and revenue. That made us nervous about SepQ, so it was good to see some upside.
- The other reason we think the guidance is reassuring is because, in August, management embarked on a restructuring plan, which included 90 layoffs. One of the main goals was to focus more on profitability. That is a bit of a shift in strategy in recent years which has been to focus more on closing the sales growth gap with its peers. While we applaud a more determined focus on reducing costs, we had concerns that revenue growth could suffer. At least initially, NEWR seems to be holding up well.
- The other aspect to the restructuring is that it sort of threw cold water on a Reuters report in July that said NEWR was exploring a potential sale. NEWR has not commented on this, but the restructuring was announced a month after the sale report hit the wires. That makes us think that NEWR has likely decided to focus on fixing its problems rather than seeking a buyer, or maybe the potential sale price was too low.
Overall, this was some solid guidance for NEWR. Given the overall negative vibe for tech names heading into earnings seasons, this was encouraging to hear. It provides a measure of confidence that maybe NEWR's increased focus on profits will not hinder the financial results, at least in the near term. Despite this guidance, we still sort of view NEWR as a work-in-progress that needs to show some improved results before we get more positive on them. On a final note, we were surprised to see the stock lower following this news, but we think that may be caused more by overall weakness today in tech names today.
Leggett & Platt tumbles after slashing its FY22 outlook as global economic conditions worsen (LEG)
Shares of Leggett & Platt (LEG -7%), a manufacturer of bedsprings, seat suspension systems, and other furniture hardware used across multiple industries, are tumbling today following the company's slashed FY22 guidance. LEG already lowered its outlook in August, citing softening consumer demand and rising input costs. However, yesterday's reduction was much more severe than in August, underscoring how quickly economic conditions deteriorated.
LEG now expects FY22 EPS of $2.30-2.45, down from its prior prediction of $2.65-2.80 and initial projection of $2.70-3.00. For FY22 sales, LEG now expects $5.1-5.2 bln, down from its August forecast of $5.2-5.4 bln and original outlook of $5.3-5.6 bln.
- LEG outlined multiple factors for its trimmed FY22 outlook, including an increasingly challenging global economic environment and consumer backdrop. The silver lining was that demand is fairly stable in the U.S. bedding market, LEG's largest market and business. However, LEG noted that demand still remains relatively weak. This is highlighted by the company's new FY22 forecast of just +1.5% sales growth yr/yr at the midpoint, far below the +18.5% growth in FY21 and +11.3% in FY19.
- Volume and cost recovery may be improving sequentially in LEG's automotive business. However, it is at a slower-than-expected rate. Furthermore, improving volumes in automotive are tempered by the fact that only a minor portion of LEG's total revs are derived from this business. Although the company does not break it down, automotive sales are encompassed in its Specialized Products Segment, which includes aerospace and hydraulic cylinders and comprised just 19.7% of FY21 revenue.
- The slow cost recovery rate is partly why LEG cut its earnings guidance. The company expects EBIT margins of 9.5-10.0%, down from its prior expectations of 10.5-10.7%.
One of the few bright spots within the myriad of problems facing LEG is that, at the very least, it expects a sequential improvement in earnings in Q4. This positive development shows that perhaps the worst of LEG's woes occurred during Q3. Still, with its end markets being highly exposed to discretionary spending, any worsening of the economy will likely have pronounced effects on LEG's future financial performance. It is also worth noting that although just 11.6% of FY21 sales stemmed from Europe, which is enduring a more difficult economic situation than in the U.S., LEG does have 17 of its 131 manufacturing locations in the region. With energy prices skyrocketing around multiple European countries, margins could take a further hit in subsequent quarters. Therefore, we think it is better to remain on the sidelines over the near term.
Lastly, with retailers, office furniture manufacturers, and even automotive OEMs as LEG's primary customer base, its reduced FY22 forecast suggests a rough road ahead for companies operating in these industries. La-Z-Boy (LZB), Wayfair (W), and MillerKnoll (MLKN) are a few that come to mind. Meanwhile, automakers still struggling with supply chain issues creates another headwind for one of LEG's best-performing businesses.
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Last Updated: 11-Oct-22 09:02 ET | Archive
The BoE returns with another band aid
There is a problem in the capital markets that is searching for a solution. The Bank of England (BoE) is trying to provide a solution. Once again, the BoE has intervened to provide liquidity support to the UK gilt market.
Yesterday, it was learned that the BoE is doubling the upper limit of its daily gilt purchases to GBP10 billion and today the BoE said it will expand its purchase operations to include index-linked gilts from Oct. 11 to Oct. 14, which is when it also plans to end its emergency purchases of gilts.
The plan -- for now anyway -- is to go back to the original plan of starting to sell gilts on October 31.
The latest move by the BoE has helped stabilize things after a nasty selloff yesterday in the gilt market, but notably, the response today isn't nearly as robust as the response seen when the BoE stepped in on September 28. That is likely owed to some reservations about the purchase operations having a set end date that is only three days away and the specter of the BoE selling gilts by the end of the month.
In other words, there is some latent fear and loathing about the gilt market turning back into a dysfunctional mess in short order given how limited this emergency operation has been in time and scope.
Well, time will tell if this band-aid is enough to stop the bleeding or whether a larger operation is going to be needed to close the wound.
The BoE's palliative care has seemingly provided some comfort for market bystanders. The 10-yr note yield, which hit 4.00% overnight, is back down to 3.92%, little changed from Friday's settlement.
In turn, the S&P 500 futures, which had been down as many as 41 points, are now down just six points and are trading slightly below fair value. The Nasdaq 100 futures, down as many as 130 points, are now down 20 points and are trading fractionally below fair value. The Dow Jones industrial Average futures, down as many as 312 points, are now down eight points and are trading 0.1% above fair value.
These readings are suggestive of a somewhat flattish start for the major indices, which is standing out as an encouraging indication relative to the earlier disposition.
This is an opening indication, however, so there is still much to prove today in terms of a comeback effort, which has other obstacles that include reports of China imposing restrictions again in some Chinese cities due to rising Covid cases, Russia's stepped up bombing of Ukraine, ongoing weakness in semiconductor stocks, and an earnings warning from Leggett & Platt (LEG) that was linked to an "increasingly challenged global economic environment and consumer backdrop."
On a better note, American Airlines (AAL) raised its Q3 revenue growth guidance to up ~13% from 2019 levels from prior guidance of up 10-12%. That has given its stock a nice 4.0% boost and it should help other airline stocks.
-- Patrick J. O'Hare, Briefing.com
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