| | |
Market Snapshot
briefing.com
| Dow | 30370.85 | -54.99 | (-0.18%) | | Nasdaq | 10619.31 | -61.05 | (-0.57%) | | SP 500 | 3669.62 | -25.61 | (-0.69%) | | 10-yr Note | -7/32 | 4.23 |
|
| | NYSE | Adv 928 | Dec 2083 | Vol 943 mln | | Nasdaq | Adv 1874 | Dec 2689 | Vol 4.5 bln |
Industry Watch
| Strong: Communication Services, Information Technology, Energy |
| | Weak: Utilities, Consumer Staples, Industrials, Financials, Consumer Discretionary |
Moving the Market
-- 10-yr Treasury note yield hitting fresh high for the year
-- Tesla selling off after disappointing quarterly results
-- Generally positive earnings reports
-- Philadelphia Fed President Harker saying he expects the fed funds rate to be well above 4.00% by end of the year, which precipitated selling in the Treasury market
|
Closing Summary
20-Oct-22 16:25 ET
Dow -90.22 at 30335.62, Nasdaq -65.66 at 10614.70, S&P -29.38 at 3665.85
[BRIEFING.COM] It was another choppy session for the stock market. The major averages had a lackluster start to the day before shifting into rally mode as longer dated yields pulled back from their overnight high (4.18%) and the S&P 500 found support at the 3,700 level. The stock market quickly shifted into retreat mode as the 10-yr note yield started to climb, ultimately settling at a fresh high for the year and its highest point since 2008 (4.23%).
The Treasury market reacted to Philadelphia Fed President Harker (2023 FOMC voter) saying he expects the fed funds rate to be well above 4.00% by end of the year, according to CNBC, "given our frankly disappointing lack of progress on curtailing inflation." That view ignited renewed selling pressure in longer dated Treasury securities.
The 2-yr note, which is more sensitive to changes in the fed funds rate, had a more mild reaction as the fed funds futures market was already positioned for a fed funds rate well above 4.00% by the end of the year. Still, the 2-yr note yield settled at a fresh high for the year (4.60%).
Market breadth reflected broad selling interest. Decliners led advancers by a greater than 2-to-1 margin at the NYSE and a 3-to-2 margin at the Nasdaq.
There were some bright spots in the market, however, that were driven by better-than-expected quarterly results from notable companies.
A big price gain in AT&T (T 16.74, +1.20, +7.7%) boosted the S&P 500 communication services sector (0.4%) to first place on the day. The information technology sector (+0.1%) held up better than the broader market thanks to the post-earnings responses in IBM (IBM 128.30, +5.79, +4.7%) and Lam Research (LRCX 355.87, +25.79, +7.8%). The latter also boosted the PHLX Semiconductor Index, which closed up 0.7%.
Meanwhile, the consumer discretionary sector (-1.7%) closed near the bottom of the pack thanks to heavy selling of Tesla (TSLA 207.28, -14.76, -6.7%) after it missed on Q3 revenue estimates. To be fair, Tesla said it sees excellent demand in the fourth quarter.
Energy complex futures settled in mixed fashion. WTI crude oil futures rose 0.1% to $84.49/bbl while natural gas futures fell 1.5% to $5.37/mmbtu.
In another notable development today, Liz Truss announced her resignation as UK Prime Minister roughly six weeks after starting the position. She will stay on until a leadership election is held in the next week.
Ahead of Friday's open, Verizon (VZ), HCA (HCA), American Express (AXP), and Schlumberger (SLB) headline the earnings reports.
There is no U.S. economic data of note tomorrow.
Reviewing today's economic data:
- Weekly Initial Claims 214K (Briefing.com consensus 233K); Prior was revised to 226K from 228K; Weekly Continuing Claims 1.385 mln; Prior was revised to 1.364 mln from 1.368 mln
- The key takeaway from the report is that it covers the week in which the survey for the October employment report was conducted. The low level of initial claims will feed expectations for another solid increase in nonfarm payrolls. In turn, it will drive a belief that the Fed is going to stay aggressive with its rate hikes.
- October Philadelphia Fed Index -8.7 (Briefing.com consensus -5.0); Prior -9.9
- September Existing Home Sales 4.71 mln (Briefing.com consensus 4.70 mln); Prior was revised to 4.78 mln from 4.80 mln
- The key takeaway from the report is that higher mortgage rates are taking a bite out of existing home sales, having created affordability pressures for prospective buyers and deferred listing decisions for potential sellers who see an expensive repurchase proposition.
- September Leading Economic Index -0.4 (Briefing.com consensus -0.3%); Prior was revised to 0.0% from -0.3%
Dow Jones Industrial Average: -16.5% YTD
S&P Midcap 400: -20.3% YTD
S&P 500: -23.1% YTD
Russell 2000: -24.1% YTD
Nasdaq Composite: -32.2% YTD
Market sits at session lows ahead of close
20-Oct-22 15:30 ET
Dow -124.56 at 30301.28, Nasdaq -78.52 at 10601.84, S&P -33.33 at 3661.90
[BRIEFING.COM] The stock market is trading at or near session lows heading into the close.
Whirlpool (WHR), Tenet Healthcare (THC), CSX (CSX), Snap (SNAP), and Boston Beer Co (SAM) are set to report earnings after the close.
Ahead of Friday's open, Verizon (VZ), HCA (HCA), American Express (AXP), and Schlumberger (SLB) headline the earnings reports.
There is no U.S. economic data of note tomorrow.
Small and mid caps lag larger peers
20-Oct-22 15:00 ET
Dow -54.99 at 30370.85, Nasdaq -61.05 at 10619.31, S&P -25.61 at 3669.62
[BRIEFING.COM] The major averages continue to lose ground as Treasury yields continue to rise. The 10-yr note yield is up ten basis points to 4.22%.
Small and mid cap stocks are faring worse than their larger peers. The Russell 2000 (-1.3%) and S&P Mid Cap 400 (-1.5%) show some of the steepest losses for the major averages.
Energy complex futures settled in mixed fashion. WTI crude oil futures rose 0.1% to $84.49/bbl while natural gas futures fell 1.5% to $5.37/mmbtu.
Allstate, Union Pacific underperform in S&P 500 following earnings
20-Oct-22 14:25 ET
Dow -120.88 at 30304.96, Nasdaq -88.29 at 10592.07, S&P -34.44 at 3660.79
[BRIEFING.COM] The S&P 500 (-0.93%) is at the bottom of the standings on Thursday afternoon, notching session lows in recent trading.
S&P 500 constituents Allstate (ALL 118.06, -17.09, -12.65%), Union Pacific (UNP 187.77, -12.29, -6.14%), and Pool Corp. (POOL 282.07, -16.05, -5.38%) dot the bottom of the standings. ALL is today's worst-performing constituent following worse than expected prelim Q3 results, while UNP slips despite beating Q3 expectations as commentary about labor shortages impacting volume hurt the stock, and POOL, too, falls after earnings/guidance commentary.
Meanwhile, Quest Diagnostics (DGX 133.06, +6.40, +5.05%) is still holding decent gains following earnings/guidance.
Gold gains capped by late-session advance in yields
20-Oct-22 14:00 ET
Dow -70.71 at 30355.13, Nasdaq -64.09 at 10616.27, S&P -26.07 at 3669.16
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.60%) is in second place among the major averages.
Gold futures settled $2.60 higher (+0.2%) to $1,636.80/oz, off morning highs owing in part to a recent rise in treasury yields, while the dollar posts a somewhat muted loss thus far today.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $112.86.
Dow takes a hit from rising energy costs, but resilient demand in mobility provides buffer (DOW)
Page One
Last Updated: 20-Oct-22 09:05 ET | Archive
Topsy-turvy action in futures market and UK politics
The equity futures market is pointing to a mixed start for the major indices. There is some skittishness in the early trade because of the volatility that has been seen in the Treasury market.
The 10-yr note yield climbed as high as 4.18% overnight before getting rolled back to 4.11%. It is now at 4.16%.
Market participants recognize that stocks languished Wednesday as Treasury yields rose, so there is a bit of anxiousness about the "next turn" in the Treasury market. However, because the latest turn has been higher, the equity futures market has floundered from earlier.
IBM (IBM), Lam Research (LRCX), AT&T (T), American Airlines (AAL), and Danaher (DHR) have led a brigade of companies reporting mostly better-than-expected earnings results since yesterday's close. Those stocks are all trading higher. Tesla (TSLA), though, is not in their company. It is indicated 6.3% lower after coming up shy of third quarter estimates, although the company said it has excellent demand for the fourth quarter.
The weakness in TSLA has been a drag on the Nasdaq 100 futures and it will be a drag on the S&P 500 consumer discretionary sector when trading begins.
Currently, the S&P 500 futures are down six points and are trading 0.2% above fair value, the Nasdaq 100 futures are down 42 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are up nine points and are trading in-line with fair value.
It has been a topsy-turvy morning in terms of interest rates and equity futures movement. Moments ago, things got even more topsy-turvy on the political front as Liz Truss announced her resignation as UK prime minister after roughly six weeks on the job. She will remain as prime minister until a successor has been named pending a leadership vote to be held in the next week.
The 10-yr UK gilt yield is down one basis point to 3.86% and the British pound is up 0.4% against the dollar to 1.253.
Ms. Truss's resignation won't cure what ails the UK economy, but at the least it might calm the financial markets for the time being, which would be a positive, assuming there isn't a sense of dismay about the leadership uncertainty affecting one of the world's largest economies.
There are big issues looming for the UK and elsewhere, like rising interest rates that are seen as a headwind for the global economy and global equity markets.
The Bank of Japan doesn't like those rising rates and has announced an emergency JGB purchase program in adherence to its yield curve control policy. The yen, meanwhile, continues to get trampled by the low rates the Bank of Japan wants to maintain. Earlier, the yen hit a 32-year low against the dollar when it reached 150.09.
The latest initial jobless claims report isn't going to help the yen since it was essentially dollar positive.
Initial jobless claims for the week ending October 15 decreased by 12,000 to 214,000 (Briefing.com consensus 233,000). The low level of initial claims is somewhat remarkable given the seeming lack of claims in the wake of Hurricane Ian. Continuing jobless claims for the week ending October 8 increased by 21,000 to 1.385 million.
The key takeaway from the report is that it covers the week in which the survey for the October employment report was conducted. The low level of initial claims will feed expectations for another solid increase in nonfarm payrolls. In turn, it will drive a belief that the Fed is going to stay aggressive with its rate hikes.
-- Patrick J. O'Hare, Briefing.com
Chemical giant and DJIA component Dow (DOW) is rallying after reporting better-than-feared 3Q22 results that included a sizable revenue beat, led by a strong showing from the company's Performance Materials & Coatings segment. That division, which produces ingredients and additives for paints and coatings, and silicon-based specialty materials, was the only unit to post positive yr/yr sales growth. Its 5% growth rate was driven by price increases and resilient demand in the mobility and home care end markets. Dow's largest segment, Packaging & Specialty Plastics (52% of Q3 revenue), experienced an 11% qtr/qtr decrease in sales to $7.3 bln, worse than the company's guidance for a decline of 5-8%.
Since DOW reported Q2 earnings on July 21, expectations have fallen significantly due to skyrocketing energy and feedstock costs in Europe and persistent supply chain disruptions. Last quarter, DOW estimated that higher energy costs in Europe and supply imbalances would create a headwind of about $450 mln in Q3. With operating EBIT margin diving by 670 bps versus 2Q22, it's clear that rising energy costs in DOW's EMEAI region (Europe, Middle East, Africa and India) presented a major challenge this quarter.
Looking ahead, there isn't much relief in sight as DOW is forecasting another $400 mln EBITDA headwind for Q4. However, the news isn't all negative for DOW.
- During Q3, DOW reduced its natural gas consumption at its European sites by more than 15%, and in August, the company temporarily lowered its polyethylene capacity by 15% to align production rates with demand and supply chain constraints. In total, the company believes it has the potential to deliver over $1 bln in cost savings in FY23.
- While the Eurozone is struggling under oppressive energy costs, and lockdowns in China are pressuring consumer spending, there are some notable areas of strength. For instance, the mobility end market is still seeing healthy demand in China as automobile sales jumped by 25% in September. Also, the U.S. continues to be resilient in the face of high inflation, supporting stable demand for consumables, food packaging, and home care.
- DOW's strong cash flow generation is a desirable trait in volatile market and macroeconomic conditions. In Q3, the company achieved cash flow from operations of $1.9 bln and free cash flow of $1.5 bln, enabling it to return $1.3 bln to shareholders in the form of stock buybacks ($800 mln) and dividends ($493 mln). DOW's focus moving forward will continue to center on cash flow generation, as reflected in its decision to cut its FY22 CapEx guidance to $1.9 bln from $2.1 bln.
After peer Eastman Chemical (EMN) cut its Q3 guidance on September 13, shares of DOW have fallen by about 12%. That drop comes on the heels of a 25% decline from early June through mid-September. This weakness produced a low bar for DOW to hurdle as expectations have sunk lower. DOW managed to outperform those rock bottom expectations, but the company is still facing some very formidable headwinds. A considerable cost reduction plan, combined with DOW's healthy cash flow generation, is helping to offset concerns about rising energy costs and supply imbalances.
Lam Research surges on much better-than-feared Q1 results (LRCX)
After hitting 52-week lows last week following the U.S. Commerce Department's new export restrictions on the sale of semiconductor equipment to Chinese companies, Lam Research (LRCX +6%) is amid a roaring comeback today after its Q1 (Sep) results came in considerably better than feared.
Before the new export restrictions, LRCX was already dealing with Micron's (MU) decision to slash its CapEx by 30% for FY23 with a 50% reduction in wafer fab equipment (WFE), LRCX's bread and butter. MU cited a poor demand backdrop that did not look likely to turn around anytime soon. MU's decision sent LRCX, alongside its peers, such as ASML (ASML), Applied Materials (AMAT), and KLA Corp (KLAC), lower.
However, with expectations low following this series of setbacks, LRCX's Q1 results, including its guidance for Q2 (Dec) and commentary on CY23, stood out in a positive way.
- LRCX's FY23 commentary was the biggest story from Q1. The company does not typically provide guidance on the upcoming calendar year until January. However, in light of the current environment, it touched on a few noteworthy developments.
- Demand fundamentals have rapidly deteriorated, mainly within the memory industry, forcing customers to adjust their investment plans and reduce channel inventories to more normalized levels, which will persist into next year.
- Meanwhile, LRCX anticipates a $2.0-2.5 bln hit to CY23 sales due to the company being forced to cease shipments to China.
- In total, including the China restrictions, LRCX expects WFE sales to tumble over 20% yr/yr in CY23, with memory investment accounting for a sizeable portion of the decline.
- Still, on the bright side, LRCX is confident that customer actions to reduce inventory will form a good foundation for memory mix to increase as a percentage of overall WFE beyond 2023.
- Also, LRCX has not changed its upbeat tone regarding long-term fundamentals. The company continues to see the expansion of semiconductor content in end devices, growing device complexity, and larger die sizes as structural factors supporting long-term WFE growth.
- LRCX's bullish attitude on the long-term picture echoes what ASML noted yesterday after crushing SepQ earnings estimates. ASML remains confident in the industry's growth, pointing to many of its customers boasting healthy balance sheets and sharing similar optimistic sentiments.
- This positive mindset was illustrated through LRCX's superb Q2 (Dec) guidance, expecting adjusted EPS of 9.25-10.75 and revs of $4.8-5.4 bln, both of which soared past analyst expectations and call for solid growth yr/yr.
Bottom line, LRCX's Q1 numbers stood out nicely, especially considering the numerous obstacles thrown in the company's way over the past few weeks. The upcoming year will likely be volatile, but LRCX's long-term characteristics remaining unchanged gives it a solid footing to continue to win new customers and experience solid top and bottom-line growth.
IBM computes nice gains on Q3 results; bodes well for tech names heading into earnings season (IBM)
IBM (IBM +3%) is heading nicely higher today despite reporting just a slight EPS beat for Q3. The main highlight is that Big Blue raised its full year revenue outlook. IBM now expects constant currency (CC) revenue growth above its mid-single digit model. The company also reaffirmed guidance for $10 bln in consolidated free cash flow.
Before digging into it, recall that IBM spun off Kyndryl (KD) last November. This was a massive change for IBM, but the transaction allows the company to focus on hybrid cloud and AI. The new IBM also has a higher mix of recurring revenue, dominated by Software, so results should be more predictable.
- What stood out to us was that all three segments performed well, especially on a CC basis. Software revenue was up 7% (+14% CC) while Consulting revenue was up 5% (+16% CC). IBM sees these two sectors as its growth vectors and represent over 70% of revenue.
- Infrastructure was the real star with revenue up 15% (+23% CC) but this segment ebbs and flows more on product launches. Results were fueled by the recent launch of its z16 mainframe computer. It had been three years since the last major update, so clients clearly had been eagerly awaiting this launch.
- We also think that investors are pleased to see gross margin down only modestly yr/yr at 52.7% vs 53.6% a year ago. This follows a larger yr/yr decline in Q2. Margins were helped by a shift toward higher value Software sales. Also, IBM has been dealing with escalating labor costs, particularly at its Consulting segment, and higher prices for components. IBM has been addressing this through pricing and it looks like that may be starting to filter into margins.
Overall, this was a solid quarter for IBM. We now have three full quarters of the new IBM in the books (post-Kyndryl). The upside EPS results in all quarters have been pretty underwhelming, however, some of that has been some fierce FX headwinds. We still like IBM's new profile, with a higher growth and a higher value mix. But it is going to take some time. What stood out in Q3 was the double-digit CC revenue growth in all segments and the raised FY22 top line guidance. And we saw a big result from its Infrastructure segment as Q3 was the first full quarter following the z16 launch. We think this report bodes well for other tech names as earnings season hits its stride next week.
Tesla's top and bottom line miss and Musk's mixed messages on demand send shares into reverse (TSLA)
For the first time since 2Q19, Tesla (TSLA) fell short of analysts' earnings and revenue expectations in 3Q22, feeding into concerns that demand is wavering under escalating macroeconomic pressures. TSLA's eccentric CEO, Elon Musk, sent mixed messages about the demand environment during the earnings conference call, stating that he expects an "epic end of the year" and that the company will sell every car it produces in Q4.
However, Musk acknowledged that "demand is a little harder than it would otherwise be" as the Federal Reserve raises interest rates more than it should, in his opinion. He also said that Europe and China are experiencing different types of recessions, with the former getting hit hard by soaring energy prices, and the latter dealing with plunging property prices.
TSLA's actual results and outlook, though, don't depict a company that's struggling to find customers.
- While TSLA did slightly miss Q3 estimates, revenue grew by a robust 56% yr/yr to $21.45 bln, marking a new quarterly sales record. Meanwhile, operating margin expanded by more than 260 bps yr/yr to 17.2%, despite the rising costs associated with the ramp up of TSLA's Berlin, Germany and Austin, TX plants. The strong top-line growth, coupled with the margin expansion, drove a 75% yr/yr increase in non-GAAP net income to $3.65 bln.
- Each of TSLA's factories produced a record number of vehicles in Q3. Since the end of Q2, Berlin has doubled its weekly output to 2,000 from 1,000 vehicles with the Austin factory not far behind. Automotive gross margin still decreased by nearly 260 bps yr/yr to 27.9%, but the metric was flat on a sequential basis. Considering that the prior quarter's ASP benefitted from lower production at Shanghai (due to COVID lockdowns), the flat qtr/qtr performance looks pretty solid.
- TSLA maintained its outlook of achieving 50% average annual growth in vehicle deliveries over a multi-year horizon, although CFO Zachary Kirkhorn cautioned that deliveries this year may not meet that growth target. According to Kirkhorn, the issue isn't demand related -- rather, it's due to transportation and logistics constraints.
- Recall that when TSLA reported Q3 production and delivery results on October 3, there was a large discrepancy between production (365K) and deliveries (343K). This difference was caused by challenges in loading huge batches of vehicles onto ships and trains during a timeframe of just a few days. For some context, roughly one-third of Q3 deliveries occurred in the final two weeks of September, with many of those vehicles still in transit when TSLA issued its production and delivery report.
- This issue is expected to play out again in Q4, creating another gap between production and deliveries. TSLA is working to remedy this situation by smoothing out regional builds throughout the quarter, which should reduce its peak needs for outbound logistics.
Overall, it was a solid quarter for TSLA, but the stock's rich valuation with a forward P/E of ~37x leaves little room for error, especially since the company's demand picture is under such intense scrutiny. Musk tried to ease those valuation concerns last night by predicting that TSLA will someday be worth more than Apple (AAPL) and Saudi Aramco combined. Based on today's stock action, it's clear that investors are taking that declaration with a huge grain of salt.
AT&T establishes full bars on reiterated FY22 Mobility service revs and free cash flow guidance (T)
AT&T (T +8%) has full bars today following its Q3 earnings beat and reiterated Mobility service revs and free cash flow guidance for FY22. Today's favorable reaction is a pleasant reversal from the heavy selling pressure AT&T endured last quarter despite its earnings beat as investors recoiled at the $2 bln reduction in FY22 free cash flow guidance due to AT&T's sizeable investments.
With the trimmed free cash flow outlook in the rear-view mirror, AT&T is confident in achieving its updated $14 bln target, a level it notes is more than sufficient to support its $8 bln dividend commitment. AT&T's confidence stems largely from excellent numbers posted in Q3, which underscored the success of the company's transformation it embarked on over two years ago.
- Headline numbers were solid. Adjusted EPS climbed $0.06 yr/yr to $0.68. Reported revs did dip 4.1% yr/yr to $30.04 bln, but on a like-for-like basis, which backs out DIRECTV, which AT&T sold last August, revs climbed 3.1%. The like-for-like sales growth was primarily driven by strong wireless growth, partly offset by ongoing struggles in Business Wireline.
- In Mobility (AT&T's largest segment by revs at ~68% of the total), sales were up 6.0% yr/yr on similar growth in service revs fueled by subscriber and postpaid average revenue per user (ARPU) growth. More specifically, AT&T delivered over 700K postpaid phone net adds in the quarter, with postpaid phone ARPU expanding by 2.4% yr/yr to $55.67 as more customers traded up to higher-priced unlimited plans.
- The other growth driver in Q3 was a respectable 1.4% jump in Consumer Wireline revs. The standout in this segment branched from AT&T Fiber, which saw its second-best quarter with 338,000 net adds. Since AT&T's transformation, it has gone from 4.3 mln Fiber subscribers to nearly 7 mln.
- We expect Fiber to maintain a positive trajectory, especially with AT&T reportedly discussing creating a joint venture to expand its fiber-optic network to many more states.
- The laggard in Q3 continued to be Business Wireline, where revs fell 4.5% yr/yr as demand for legacy voice and data services remained weak. AT&T continues to restructure and rationalize its portfolio in this segment, shifting focus on core connectivity, where it is still seeing growth.
Overall, AT&T's Q3 results shined brightly compared to Q2, allowing investors to breathe a heavy sigh of relief that the company's $24 bln capital investment plan is not putting further pressure on free cash flow. Furthermore, inflation's impacts on the consumer last quarter did not worsen in Q3, indicating that this headwind is stabilizing. AT&T's Q3 report is a good sign for Verizon (VZ) ahead of its Q3 earnings tomorrow before the bell.
|
|
