Market Snapshot
briefing.com
| Dow | 33025.10 | -122.15 | (-0.37%) | | Nasdaq | 10378.88 | -87.06 | (-0.83%) | | SP 500 | 3816.06 | -23.44 | (-0.61%) | | 10-yr Note | +30/32 | 3.78 |
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| | NYSE | Adv 1840 | Dec 1211 | Vol 909 mln | | Nasdaq | Adv 2507 | Dec 2142 | Vol 4.7 bln |
Industry Watch
| Strong: Communication Services, Financials, Real Estate |
| | Weak: Energy, Consumer Staples, Information Technology, Consumer Discretionary |
Moving the Market
-- Lingering concerns about a weakening economic environment after a series of sub-50.0 (the dividing line between expansion and contraction) manufacturing PMI readings for December out of Asia and Europe
-- Worries about potential cuts to 2023 earnings estimates amid a weakening economic outlook and the potential for a Fed policy mistake
-- Weakness in a few mega cap stocks weighing on index level performance
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Closing Summary
03-Jan-23 16:30 ET
Dow -10.88 at 33136.30, Nasdaq -79.50 at 10386.90, S&P -15.36 at 3824.14
[BRIEFING.COM] It's a new year, but the stock market is dealing with the same issues that plagued investors in 2022. The day started on an upbeat note with the main indices logging decent gains thanks to some bargain hunting activity before those gains quickly evaporated on renewed selling interest. The S&P 500 touched 3,878 at this morning's high before briefly dipping below 3,800 around midday.
Market participants digested a slew of sub-50.0 (the dividing line between expansion and contraction) manufacturing PMI readings for December out of Asia and Europe over the weekend. These reports added fuel to existing concerns about the Fed and other central banks risking a major policy mistake by continuing to raise rates without a full appreciation for the lag effect of prior rate hikes.
The key recognition for stock market participants is that a weaker economic backdrop might cause further downward revisions to earnings estimates, equating to valuation concerns.
Strikingly, the advance-decline line still skewed more positive. Advancers led decliners by a 3-to-2 margin at the NYSE and an 11-to-10 margin at the Nasdaq. Buyers were a reluctant bunch nonetheless, unnerved perhaps by how quickly today's early gains evaporated and the poor showing from some mega-cap issues following a dismal 2022 performance.
Sizable losses in a handful of widely-held and heavily-weighted stocks kept the indices under pressure. Tesla (TSLA 108.10, -15.08, -12.2%), which disappointed with Q4 deliveries, Microsoft (MSFT 239.58, -0.24, -0.1%), NVIDIA (NVDA 143.15, -2.99, -2.1%), and Apple (AAPL 125.07, -4.86, -3.7%), which reportedly told suppliers to build fewer components for several devices in Q1 due to weakening demand, were among the more notable standouts in that respect.
Not all the mega-cap stocks sold off today. Gains in Meta Platforms (META 124.75, +4.40, +3.7%) and Alphabet (GOOG 89.70, +0.97, +1.1%) helped propel the S&P 500 communication services sector (+1.4%) to first place on the leaderboard. Also, Amazon.com (AMZN 85.82, +1.82, +2.2%) helped temper the losses in the consumer discretionary sector (-0.6%) that were driven by Tesla.
Meanwhile, the energy sector (-3.6%) was the worst performer by a wide margin as energy complex futures continued to lose ground. WTI crude oil futures fell 3.9% to $76.97/bbl and natural gas futures fell 10.4% to $3.68/mmbtu.
Treasury yields moved lower today, but that didn't help fuel any buying interest in the equity market. Investors were cognizant that falling Treasury yields are an offshoot of concerns about weakening growth that raises the specter of downward revisions to earnings estimates. The 2-yr note yield fell five basis points today to 4.37% and the 10-yr note yield fell ten basis points to 3.78%.
- Dow Jones Industrial Average: flat YTD
- S&P Midcap 400: -0.5% YTD
- S&P 500: -0.4% YTD
- Russell 2000: -0.6% YTD
- Nasdaq Composite: -0.8% YTD
Reviewing today's economic data:
- Total construction spending increased 0.2% month-over-month in November (Briefing.com consensus -0.4%) following an upwardly revised 0.2% decline (from -0.3%) in October. Total private construction increased 0.3% month-over-month while total public construction spending decreased 0.1%. On a year-over-year basis, total construction spending was up 8.5%.
- The key takeaway from the report is that new single family construction continued to decline, clipped by higher interest rates that are making construction projects more expensive to finance at a time when broader economic activity is slowing due in part to the higher interest rates.
- The final IHS Markit Manufacturing PMI reading for December was unchanged from the prior reading of 46.2.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: MBA Mortgage Applications Index for the week ending 12/31
- 10:00 a.m. ET: December ISM Manufacturing Index (Briefing.com consensus 48.5%; prior 49.0%)
- 10:00 a.m. ET: November JOLTS Job Openings (prior 10.334 million)
- 2:00 p.m. ET: FOMC Minutes for the December 13-14
Market clings to narrow range heading into the close
03-Jan-23 15:25 ET
Dow -124.02 at 33023.23, Nasdaq -87.52 at 10378.96, S&P -24.06 at 3815.44
[BRIEFING.COM] Things are little changed in the last half hour. The main indices are stuck in a narrow trading range near session lows.
The 2-yr Treasury note yield fell five basis points today to 4.37% and the 10-yr note yield fell ten basis points to 3.78%.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: MBA Mortgage Applications Index for the week ending 12/31
- 10:00 a.m. ET: December ISM Manufacturing Index (Briefing.com consensus 48.5%; prior 49.0%)
- 10:00 a.m. ET: November JOLTS Job Openings (prior 10.334 million)
- 2:00 p.m. ET: FOMC Minutes for the December 13-14
AAPL and TSLA continue to drag, but internals skew positive
03-Jan-23 15:00 ET
Dow -122.15 at 33025.10, Nasdaq -87.06 at 10378.88, S&P -23.44 at 3816.06
[BRIEFING.COM] The main indices took a turn higher in the last half hour and the S&P 500 lifted comfortably above the 3,800 level.
Losses in Apple (AAPL 124.56, -3.37, -4.1%) and Tesla (TSLA 108.26, -14.90, -12.1%) continue to weigh on index level performance, but the advance-decline line still skews more positive. Advancers lead decliners by a roughly 3-to-1 margin at the NYSE and an 11-to-10 margin at the Nasdaq.
Energy complex futures built on recent losses this session. WTI crude oil futures fell 3.9% to $76.97/bbl and natural gas futures fell 10.4% to $3.68/mmbtu.
APA Corp. falls alongside oil to open 2023, Molson Coors dips after downgrade
03-Jan-23 14:30 ET
Dow -228.31 at 32918.94, Nasdaq -124.78 at 10341.70, S&P -35.89 at 3803.61
[BRIEFING.COM] The S&P 500 (-0.93%) is firmly in second place to this point in on Tuesday afternoon.
S&P 500 constituents APA Corp. (APA 43.45, -3.23, -6.92%), Etsy (ETSY 112.75, -7.03, -5.87%), and Molson Coors Brewing (TAP 49.15, -2.37, -4.60%) pepper the bottom of today's standings. Oil&gas E&P company APA slips alongside losses in crude oil, while TAP falls after Wells Fargo downgraded the stock to an Underweight recommendation.
Meanwhile, PayPal (PYPL 74.45, +3.23, +4.54%) is atop the average after a few analyst upgrades.
Gold higher as yields dip to start the year
03-Jan-23 13:55 ET
Dow -138.26 at 33008.99, Nasdaq -103.27 at 10363.21, S&P -25.50 at 3814.00
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (-0.99%) is still the worst-performing major average, down about 103 points.
Gold futures settled $19.90 higher (+1.1%) to $1,846.10/oz, mostly shrugging off a strong showing from the greenback as investors appear to be eyeing a dip in treasury yields.
Meanwhile, the U.S. Dollar Index is up about +1.0% to $104.54.
Page One
Last Updated: 03-Jan-23 09:02 ET | Archive
Out with the old year and in with the new
Happy New Year! Let's hope 2022 is very much in the past for the stock market, which had its worst year since 2008, and for the bond market, which had its worst year ever!
So far, things look on the up and up for the stock and bond markets, which doesn't make a ton of sense when you get down to it. There is some sense to it, however, on the surface of things.
What we have this morning is some bargain-hunting activity in both markets. The pressure of tax-loss selling on the stock market has eased; meanwhile, a sense that things can't get any worse for the bond market than they did last year has brought back some buyers.
For the bond market, however, it is more than that. Today's activity, which has the 2-yr note yield down five basis points to 4.37% and the 10-yr note yield down 13 basis points to 3.75%, is also rooted in slowdown concerns and a fear of central banks making a policy mistake by continuing to raise interest rates.
In that regard, nothing has changed in the weekend switchover from 2022 to 2023.
The impetus for the rally in the Treasury market and other sovereign bond markets stems from a batch of manufacturing PMI readings out of Asia and Europe that were all tilted below 50.0, which is indicative of manufacturing activity in a state of contraction.
There has been some allowance for the understanding that several of the reports were better than feared, particularly out of Europe, yet the understanding in the bond markets is that economic conditions are weak and central banks are still poised to raise rates further to fight inflation, potentially inviting a policy mistake that makes economic conditions worse. The IMF Director told BBC that it is likely that 33% of the world's economies will be in recession this year.
The disconnect, therefore, with the strength in both markets this morning is that weak economic conditions are not good for earnings prospects.
Still, stock market participants seem to be casting aside that concern for the moment.
Currently, the S&P 500 futures are up 24 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 99 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 157 points and are trading 0.5% above fair value.
We are seeing pre-market gains in Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon.com (AMZN) that are bolstering the futures market. Tesla (TSLA) is a noticeable absentee on the rebound list. It is down 4.0% after reporting Q4 delivery data that was weaker than analysts expected.
Tesla's struggles are largely its own at the moment. The equity futures market has other things on its mind, namely trying to get 2023 off to a good start despite a fear of economic problems that were wrung out of stocks in 2022 but which, unfortunately, rang in with the new year as well.
-- Patrick J. O'Hare, Briefing.com
Coty avoids the market sell-off after an upgrade at Piper Sandler (COTY)
Beauty product manufacturer Coty (COTY +2%) is avoiding the current market sell-off today after receiving an upgrade to "Overweight" from "Neutral" at Piper Sandler. Shares of COTY, which fell roughly 18% in 2022, have not seen the same outperformance as its less-expensive competitor, e.l.f. Beauty (ELF), which saw its stock soar by over 65% in 2022.
Briefing.com notes that although COTY's brands tend to command a premium price compared to competing products, these higher price points have not weighed significantly on results during the current inflationary environment. In fact, this premiumization has demonstrated resilience over the past year. Instead, supply chain hiccups and weaknesses in particular areas like China have clipped some sales growth.
Therefore, with supply chain woes continuing to improve and China returning to growth in Q1 (Sep), COTY may be staring at much prettier numbers in the quarters ahead.
- COTY noted last quarter that its presence in China makes up only 4% of its net revenue, so the weakness throughout much of FY22 (Jun) did not have a glaring negative effect on results. Furthermore, with such a small footprint in the region, COTY is looking to possibly step on the throttle, capitalizing on a massive total addressable market and a robust rebound as COVID-19 restrictions ease.
- COTY already saw positive results with its Lancaster skincare brand, where sales exploded by 400% yr/yr in Q1, underscoring the brand's desirability toward the most demanding Chinese consumers.
- Even though ELF has had great success given its lower price points, COTY commented in early November that it has yet to see any trade-down. In fact, the company remarked that retailers ordered in advance during Q1 for the Q2 (Dec) season. Additionally, COTY's Consumer Beauty business saw like-for-like sales growth of +12% in Q1.
- COTY added that it has also not seen any volume decline despite implementing low-to-mid single-digit price hikes, which has helped drive gross margin expansion by 70 bps in Q1.
- Supply continues to be outstripped by demand, but COTY noted in Q1 that it is seeing some improvements in specific segments, like skincare. There are also fewer suppliers producing quality glass used to package many of COTY's products. This will likely remain the case for the foreseeable future. However, the good news is that despite the glass shortage, COTY noted that during Q1, it was not any worse off than its peers. Its reaffirmed FY23 earnings and adjusted EBITDA guidance is also encouraging that this shortage will not materially dent profitability.
Bottom line, 2023 may bring lingering supply chain woes and some demand pressure as inflationary pressures remain elevated. However, COTY's possible aggressive penetration into the enormous Chinese market and its brands' defensive premium characteristics give it a solid footing to overcome these headwinds.
Carter's (CRI) as Investment Idea for 2023; dominant market share and insider buying
With the new year upon us, we will be posting several profiles we call Investment Ideas for 2023. These are longer term buy-and-hold ideas that we post around this time every year. See 2022 Recap. Importantly, we recommend using a 20-25% stop loss limit. Today we wanted to profile Carter's (CRI).
Carter's is the largest branded marketer in North America of apparel exclusively for babies and young children. It owns the Carter's and OshKosh B'gosh brands, two of the most recognized brands in the marketplace. These brands are sold in department stores, national chains, and specialty retailers. They are also sold through 970 company-operated stores and online. Here is why it sparks our interest:
- Carter's has an enviable market position as the leading brand in the zero to 10-year-old market in the US. Its 10% market share is roughly double that of the next largest brand, according to the company. It is particularly dominant in the 0-2 age group with a 21% share, nearly 4x larger than the #2 brand.
- The company focuses on essential core products, which families have to buy. This includes bodysuits, towels, bibs, blankets, blanket sleepers and pajamas. Also, children grow through these rapidly in the early years of life, which drives traffic. The company notes that all major retailers carry the Carter's brand because it is a traffic driver. CRI has also launched exclusive brands with Target and Walmart and more recently with Amazon.
- The company concedes that 2022 was a bit of a down year as inflation has been weighing on the consumer, including gas, groceries and shortages in baby formula. However, the hope is we see improvement in 2023.
- Profit margins have increased meaningfully since 2019 after CRI made what it describes as significant structural changes. This includes reducing SKUs to focus on fewer but better and higher-margin merchandise. It also focused on higher-margin stores and accelerated the closure of underperforming stores.
- CRI concedes it had significant supply chain delays in the second half of last year. However, the supply chain is meaningfully better this year, although still not back to the pre-pandemic levels due to backups at the ports. But the inventory levels and mix of inventory was much better going into the holidays. At the same time, gas prices are falling, which should also help.
- The company also cites birth rates trending higher as a potential catalyst. During the pandemic, there was a reversal of a 14-year trend of declining births in the US. Also, with so many weddings delayed during the pandemic, there was a 40-year high in weddings in 2022. And more weddings tend to lead more births.
CRI hit our radar because it has been a recent member of our YIELD rankings. It is clear that management sees value in the stock down here as they have stepped up share buybacks in hopes of a turnaround. CRI sports a hefty buyback yield of 11.4%, plus it pays a healthy 4.0% dividend yield, for a total shareholder yield of 15.4%, good enough for a Top 10 ranking in our most recent report.
The stock has been in a downtrend over the past year, although it has stabilized since June, mostly trading sideways since then. We like to see that pattern, namely a multi-month consolidation following a downtrend. The hope is that it is building a foundation for a possible leg higher. It is not clear when business will improve, but the buyback activity, its strong market position, the recent uptick in birth rates all make us think the risk-reward looks good down here. With these being longer term ideas, we recommend using a 20-25% stop loss limit, which gives them room to trade around a bit.
Tesla starts off the new year in the wrong gear as Q4 deliveries miss estimates (TSLA)
Shares of Tesla (TSLA -9%) are pulling back today following the EV maker's Q4 Delivery and Production report. Growth was substantial, with TSLA's total vehicle production jumping 44% yr/yr to 439,701 while deliveries climbed 31% to 405,278. However, TSLA's record deliveries still missed analyst expectations, its third consecutive miss. It also does not help that analysts trimmed their estimates in the weeks leading to TSLA's report.
- Meanwhile, the gap between production and deliveries grew wider sequentially in Q4, keeping demand concerns in the spotlight. However, the gap remains related to TSLA's transition towards a more even regional mix of vehicle builds to contend with the increasing difficulty of securing vehicle transportation at a reasonable cost.
- This was set in motion last quarter, resulting in an uptick in cars in transit at the end of Q3. The same held true in Q4; TSLA commented that its ongoing transition again led to a further increase in vehicles in transit at the end of the quarter.
- Still, in China, competition is heating up as TSLA's Chinese competitors, NIO (NIO), Li Auto (LI), and Xpeng (XPEV), are all punching it today after posting upbeat delivery data. NIO and LI each grew deliveries by over 50% yr/yr during December, while XPEV's deliveries surged 94% from the prior month in December.
- The silver lining is that demand remains robust even as China faces a spike in COVID-19 cases. However, with China comprising just under a third of TSLA's total revs in FY21, fiercer competition in the region adds another obstacle to TSLA's growing list of headwinds.
This list of headwinds, including rising interest rates, pronounced inflation, and an energy crisis in Europe, will likely make for a bumpy ride in FY23. As a result, TSLA's Q4 deliveries miss was not what the company needed to be added to its plate. Although deliveries set another record, the miss adds further speculation that the demand landscape is souring. The news that TSLA shut down production at its Shanghai plant just over a week ago, the company reportedly doubling its discount on select vehicles, and CEO Elon Musk's engagement with Twitter only adds to this concern.
Bottom line, TSLA is starting off the new year in the wrong gear, keeping its shares stuck in a downward trend. The stock fell roughly 70% in 2022, tumbling by 60% over just the past three months. However, with the new EV tax credits kicking in and Mr. Musk noting he would abide by the results of a recent Twitter poll and step down as CEO, perhaps investors will buy today's news, helping TSLA to begin turning a corner.
Five Below trending higher in recent months, investors betting on a strong holiday (FIVE)
- Five Below (FIVE) has caught our attention because it has been in a nice and steady uptrend since late July. The most recent catalyst was a surprisingly strong Q3 (Oct) report in late November. The report included impressive guidance for the all-important Q4 (Jan) holiday season. Same store comps of -2.7% in OctQ were well ahead of prior guidance of -9% to -7% and a nice bounce back after missing on comps in JulQ.
- We also think investors are getting excited about how FIVE may perform during the holiday season. FIVE's current guidance for JanQ comps is -1% to +1%, but after the big beat in OctQ maybe investors are looking for upside here. FIVE typically reports Q4 results in March.
- FIVE said recently that it had a strong Black Friday weekend. Also, FIVE is much better stocked with merchandise this year after dealing with out-of-stocks on some items last holiday season. FIVE also has improved the quality of its holiday offering this year. The goal is to have something for everyone at a value price, which is good with inflation remaining high.
- We just wanted to flag Five Below for subscribers given its recent trading action. In fairness, FIVE can be pretty hit-or-miss when it comes to earnings, but investors seem to be banking on a solid holiday period for FIVE.
Etsy is particularly weak today as it looks to maintain recent momentum into 2023 (ETSY)
Etsy (ETSY -3%) is showing particular weakness on the final trading day of 2022 as shares head toward their 50-day moving average of $117.03. The e-commerce platform focused on handmade items endured a challenging year as pandemic-related tailwinds dwindled and inflationary pressures took hold. However, since ETSY posted solid and steady performance in Q3 in early November, the stock has climbed over 35%, underscoring healthy momentum as 2023 approaches.
- ETSY's major advantage when stacked against competitors like Amazon Handmade (AMZN) is its massive number of unique visitors, which stood over 200 mln earlier this month. Although sellers tend to sell across multiple sites, including their own, ETSY remains a staple for these sellers as over 80% of the company's sales are derived organically. This underscores the benefits sellers receive by listing their items on ETSY, which we do not expect to tail off anytime soon.
- Overall Q3 results were solid, but there were a few issues, a broad slowdown in consumer spending being one of them. ETSY commented earlier this month that despite its gross merchandise sales (GMS) dipping by 3.3% yr/yr in Q3, it still grew over 150% from 2019 levels. This vastly exceeds rival eBay's (EBAY) gross merchandise volume (GMV) numbers, which saw an 18.4% decline versus 2019 levels in Q3.
- Buyers are also flocking to ETSY more often than before the pandemic. Most of the company's buyers purchased an item roughly once a year, with 40% buying two or more things annually before the pandemic. Fast-forward to the present day, repeat buyers are up to half of all ETSY shoppers, with average annual purchases of up to five.
These positive developments are certainly encouraging heading into a year where interest rates will continue to climb, and inflation could remain at elevated levels. Still, it is worth employing a healthy dose of caution when viewing ETSY as a possible turnaround play. Valuations will carry significant weight in 2023, and ETSY still trades at a relative premium of ~32x forward earnings. Its reach outside the U.S. may also pose some challenges, especially in Europe, where macroeconomic conditions are relatively worse.
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