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Market Snapshot
briefing.com
| Dow | 33544.69 | -85.85 | (-0.26%) | | Nasdaq | 10671.85 | +102.64 | (0.97%) | | SP 500 | 3902.60 | +7.52 | (0.19%) | | 10-yr Note | +3/32 | 3.52 |
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| | NYSE | Adv 1832 | Dec 1188 | Vol 924 mln | | Nasdaq | Adv 2732 | Dec 1889 | Vol 5.0 bln |
Industry Watch
| Strong: Consumer Discretionary, Information Technology, Materials, Utilities |
| | Weak: Health Care, Energy, Consumer Staples, Financials |
Moving the Market
-- Strength in the mega cap space boosting the broader market
-- Pullback in Treasury yields from earlier highs; sharp turn lower in the U.S. Dollar Index
-- S&P 500 breaks down below its 50-day moving average (3,906) and takes out the 3,900 level
-- Comments from SF Fed President Daly (not an FOMC voter) and Atlanta Fed President Bostic (not an FOMC voter) indicating the Fed may raise rates as much as previously feared
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Closing Summary
09-Jan-23 16:25 ET
Dow -112.96 at 33517.58, Nasdaq +66.36 at 10635.57, S&P -2.99 at 3892.09
[BRIEFING.COM] Today's trade picked up where Friday's left off, building up gains based on a belief that the Fed won't have to raise rates as much as feared and that the U.S. economy may see a "soft landing" after all. That thinking fueled buying activity in the bond and equity markets to start the day.
The initial push higher was likely also supported by investors putting some money to work driven by the fear of missing out on further gains after the market got off to a good start following a lousy year. The S&P 500, which climbed above technical resistance at its 50-day moving average (3,906), was up 1.4% at its high. The Nasdaq and Dow logged gains of 2.3% and 0.9%, respectively, at their session highs.
The rally effort lost momentum, however, in the afternoon trade. The downturn coincided with Atlanta Fed President Bostic (not an FOMC voter) saying that the Fed is willing to overshoot when it comes to tightening, adding that the Fed should hold rates at 5% for a "long time", according to Bloomberg.
Ultimately, the S&P 500 closed below the 3,900 level despite market internals showing slightly positive margins. Advancers led decliners by a 3-to-2 margin at both the NYSE and the Nasdaq by the close.
Roughly half of the S&P 500 sectors closed with a loss. The consumer staples (-1.0%) and health care (-1.7%) sectors were the top laggards today. The latter was weighed down by some of its large-cap biotech components.
Meanwhile, the information technology (+1.1%) and utilities (+0.6%) sectors sat atop the leaderboard.
Mega cap stocks held up fairly well despite the lower finish for the S&P 500 and Dow Jones Industrial Average. The Vanguard Mega Cap Growth ETF (MGK) logged a 0.8% gain while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat.
The bond market was able to maintain its gains into the close. The 2-yr note yield fell seven basis points to 4.20% and the 10-yr note yield fell five basis points to 3.52%.
As a reminder, Fed Chair Powell will deliver a speech titled "Central Bank Independence" tomorrow at 9:00 a.m. ET.
Today's economic data was limited to Consumer Credit, which increased by $27.9 bln in November (Briefing.com consensus $23.5 bln) following an upwardly revised $29.2 bln (from $27.0 bln) in October. The key takeaway from the report is that total consumer credit continued growing strongly in November despite rising rates and expectations for more fed funds rate hikes in the near future.
- S&P Midcap 400: +2.5% YTD
- Russell 2000: +2.0% YTD
- Dow Jones Industrial Average: +1.6% YTD
- Nasdaq Composite: +1.6% YTD
- S&P 500: +1.4 YTD
Looking ahead to Tuesday, market participants will receive the December NFIB Small Business Optimism survey (prior 91.9) at 6:00 a.m. ET and November Wholesale Inventories (prior 0.5%) at 10:00 a.m. ET.
S&P 500 fights to hold the 3,900 level
09-Jan-23 15:30 ET
Dow -115.93 at 33514.61, Nasdaq +96.76 at 10665.97, S&P +3.92 at 3899.00
[BRIEFING.COM] The market continued to decline in recent trading. The S&P 500 is fighting to stay above the 3,900 level.
Consumer credit increased by $27.9 bln in November (Briefing.com consensus $23.5 bln) following an upwardly revised $29.2 bln (from $27.0 bln) in October.
The key takeaway from the report is that total consumer credit continued growing strongly in November despite rising rates and expectations for more fed funds rate hikes in the near future.
Looking ahead to Tuesday, market participants will receive the December NFIB Small Business Optimism survey (prior 91.9) at 6:00 a.m. ET and November Wholesale Inventories (prior 0.5%) at 10:00 a.m. ET.
S&P 500 break below 50-day moving average
09-Jan-23 15:05 ET
Dow -85.85 at 33544.69, Nasdaq +102.64 at 10671.85, S&P +7.52 at 3902.60
[BRIEFING.COM] The stock market continues to deteriorate from earlier levels. The S&P 500 dipped below its 50-day moving average (3,906). The downturn coincided with Atlanta Fed President Bostic (not an FOMC voter) saying the Fed should hold rates at 5% for a "long time", according to Bloomberg.
The Dow Jones Industrial Average sank into negative territory, down 0.2%. Roughly half of the 11 S&P 500 sectors sank into negative territory, too.
Energy complex futures settled the session higher. WTI crude oil futures rose 1.2% to $74.64/bbl and natural gas futures rose 4.9% to $3.56/mmbtu.
Advanced Micro, semi stocks outperform on Monday; Baxter underperforms in S&P
09-Jan-23 14:25 ET
Dow +47.50 at 33678.04, Nasdaq +172.32 at 10741.53, S&P +26.37 at 3921.45
[BRIEFING.COM] The S&P 500 (+0.68%) is firmly in second place at this point on Monday afternoon.
S&P 500 constituents Advanced Micro (AMD 68.76, +4.80, +7.50%), Match Group (MTCH 45.20, +2.85, +6.73%), and Generac (GNRC 106.14, +5.39, +5.35%) pepper the top of the standings. Semiconductor names, including AMD, hold solid gains today, while GNRC appears to be benefiting from the potential for more severe weather in California storm surge.
Meanwhile, Illinois-based healthcare product firm Baxter (BAX 44.77, -3.68, -7.60%) falls to the bottom of the S&P, continuing recent losses amid a recent flurry of sell side downgrades.
Gold finds multi-month highs once more
09-Jan-23 14:00 ET
Dow +20.98 at 33651.52, Nasdaq +148.21 at 10717.42, S&P +22.32 at 3917.40
[BRIEFING.COM] With about two hours remaining on Monday the tech-heavy Nasdaq Composite (+1.40%) holds a commanding lead, this despite a decent fade in the last 30 minutes.
Gold futures settled $8.10 higher (+0.4%) to $1,877.80/oz, aided in part by a dip in the dollar to near seven-month lows.
Meanwhile, the U.S. Dollar Index is down about -0.8% to $103.07.
Page One
Last Updated: 09-Jan-23 09:02 ET | Archive
Market has its hopes up
The stock market was on track for a losing week last week, but everything changed in that respect following the release of the December Employment Situation Report. That report set off a big rally effort, predicated on the hope that the economy will achieve a "soft landing" and that the Fed won't raise rates much further before pausing its tightening effort.
The former hope manifested itself in the outperformance of the cyclical sectors, as well as the market's most beaten-up growth stocks, whereas the latter hope was on full display in the 2-yr note yield, which plunged 18 basis points to 4.27%.
There has been some carryover hope this morning, evidenced by a positive bias in the equity futures market along with gains in crude oil futures (+3.2% to $76.16/bbl) and copper futures (+2.2% to $3.99/lb.), which are also being pushed by reopening hopes for China after it removed all border restrictions, according to The Wall Street Journal, in another distancing from its zero-COVID policy.
Currently, the S&P 500 futures are up 16 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 64 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 93 points and are trading 0.3% above fair value.
Other supportive influences this morning include a spate of M&A deals in the small-cap biotech space being struck at some hefty premiums, continued rebound activity in the mega-cap stocks, and brokerage upgrades for Visa (V), Mastercard (MA), Alibaba (BABA), and Oracle (ORCL).
Some retailers have provided guidance updates.
Macy's (M) is down 4.0% after cautioning that its Q4 revenues are likely to be at the low-end to mid-point of its prior guidance of $8.161-8.401 bln and lululemon athletica (LULU) is down 9.7% after narrowing its Q4 EPS guidance to a range ($4.22-4.27) that falls below the current consensus estimate and warning that it expects its gross margin to decline 90-110 basis points versus prior guidance for an increase of 10-20 basis points.
On a better note, both Abercrombie & Fitch (ANF) and American Eagle (AEO) raised their Q4 revenue guidance. They are up 4.3% and 5.3%, respectively.
There are also some political headlines drawing interest, namely that Kevin McCarthy (R-CA) was elected Speaker of the House on the 15th ballot and Brazil suffering an attack on its Congress, Supreme Court, and presidential palace over the weekend by supporters of former President Bolsonaro.
With the election of the Speaker, the U.S. Congress can now get on with its business, which many pundits think will translate to legislative gridlock for at least the next two years given the divisions in the Republican Party and the divisions between the Republican-controlled House of Representatives and the Democrat-controlled Senate.
Like the saying goes, "Time will tell."
What can be told now is that the stock market should start today's session on a higher note, casting an anxious eye toward the release of the December Consumer Price Index on Thursday and the start of the fourth quarter earnings reporting period on Friday.
-- Patrick J. O'Hare, Briefing.com
SpartanNash as 2023 Investment Idea; Wholesale segment offers compelling diversification (SPTN)
Although 2023 is already underway, we wanted to highlight grocery distributor and retail chain operator SpartanNash (SPTN) as one of our Investment Ideas for 2023. Past ideas include Ulta Beauty (ULTA) and AutoZone (AZO).
It is worth noting that SPTN has been an investment idea for the past two years, being a consistent winner, boasting gains of around 50% in 2021 and 18% in 2022. Although shares met resistance around the $36 mark multiple times in 2022, briefly breaking above this level following upbeat Q3 earnings results in early November, there has also been strong support at the $29 mark. Furthermore, SPTN is amid sustained tailwinds jumpstarted by the pandemic, which can fuel strong upside this year.
- Unsurprisingly, at-home consumption demand has remained resilient throughout the past year, even as the economy reopened and individuals resumed normalized activity. Inflationary pressures are easing but remain elevated, especially stacked against pre-COVID levels. This trend appears unlikely to reverse course meaningfully in 2023, keeping at-home cooking relatively popular. Recent quarterly earnings results from grocers like Kroger (KR), Walmart (WMT), and Costco (COST) underscore healthy grocery demand.
- It can be argued that with KR's pending acquisition of Albertsons (ACI), SPTN will be up against an even larger retail grocer. Although KR is becoming a more prominent pure-play grocery retailer in the U.S., it is coming at a high price. KR is acquiring ACI for $34.10/share, valuing the deal at $24.6 bln. Although KR expects the transaction to be accretive to earnings in the first year following the close, with interest rates climbing, higher debt service expenditures could erode this benefit. Regulatory hurdles may also loom over the stock price in the short run.
- Meanwhile, KR's lack of diversity could weigh on shares. A key differentiating factor in SPTN's favor is its revenue diversification. Most of the company's revs (~50% in FY21) stem from its Food Distribution segment, where approximately 90% of sales are covered under supply agreements. Another 21% of FY21 revs branched from SPTN's Military segment. Combined, which the company will be reporting as Wholesale going forward, nearly three-fourths of SPTN's sales are derived from services outside its retail business, keeping revenue streams consistent even during volatile times.
SPTN is not without its share of challenges in 2023. The retail grocery industry is highly competitive. Alongside KR, SPTN is also competing with much bigger fish, like WMT, COST, and Amazon (AMZN), which owns Whole Foods Market. With these giants boasting robust digital offerings, such as delivery and curbside pickup, consumers may choose to frequent these locations, given their convenience. At the same time, larger grocers benefit from volume discounts from their suppliers, allowing them to undercut smaller regional competitors like those operated by SPTN.
However, SPTN's Retail segment still partners with delivery platforms such as Instacart with multiple banners offering curbside pickup, perhaps at higher fees in many cases relative to larger competitors. SPTN's regional presence may come with higher prices than its more prominent rivals, but local communities may prefer the convenient locations and possibly better service, despite higher price tags.
Bottom line, SPTN is a compelling play on the relatively defensive retail grocery industry with added diversification through its Wholesale segment. Valuations are also reasonable, with SPTN trading at 13x forward earnings while also providing investors with a 2.7% dividend yield. Finally, we recommend using a 20-25% stop loss limit, which gives SPTN room to breathe.
Abercrombie & Fitch looking stylish as retailer emerges as a winner in a rough holiday season (ANF)
For many retailers, this holiday shopping season was a forgettable one as a battered consumer tightened their spending amid a highly promotional environment. Macy's (M), lululemon athletica (LULU), and Chico's FAS (CHS) are a few high-profile names to offer disappointing Q4 guidance today, amplifying the dreary tone that hangs over the retail sector. However, one company that bucked the trend is Abercrombie & Fitch (ANF), which raised its revenue and operating margin outlook before the open.
Specifically, ANF is now projecting revenue growth of 1-2% compared to its prior forecast of a decline of 2-4%. The teen and tween-focused apparel retailer is projecting operating margin of 6-8%, up from its former guidance of 5-7%. A few key factors drove the better-than-expected Q4 performance, including ANF's solid inventory management.
- A primary challenge facing retailers is the high level of merchandise inventory that's built up over the past year. At a time when inflation was taking a major bite out of consumers' spending power, many retailers looked to rebuild their inventory levels in 1H22 after supply chain disruptions limited their product availability in 2021 and into 2022. Unable to unload all of this inventory, retailers resorted to steep markdowns in order to sell out-of-season product, putting downward pressure on margins. In fact, LULU lowered its gross margin guidance this morning.
- ANF, though, managed to keep a majority of its inventory current and on-trend. In the Q3 earnings press release, the company disclosed that approximately 95% of its inventory was current. Additionally, inventory deliveries were proactively pulled forward to ensure that in-demand product was in stock for the holiday season.
- The company continues to keep a tight lid on expenses due to the difficult macroeconomic climate. Last quarter, operating expenses as a percentage of revenue decreased to 50.2% from 50.5% in the year-earlier period.
- Momentum continues to build for ANF's women's business, which is on track to deliver record quarterly sales in Q4. Encouragingly, the company also highlighted an acceleration of growth in its struggling men's business and improving sales trends for the Hollister brand, driven by product assortment adjustments. For some context, Hollister's sales fell by 12% in Q3, compared to a 10% increase for Abercrombie.
The main takeaway is that ANF's optimized product assortment and solid inventory management strategy positioned the company to outperform many of its peers and emerge as a winner during an otherwise dim holiday shopping season.
lululemon athletica's updated Q4 guidance makes investors feel a little uncomfortable today (LULU)
lululemon athletica's (LULU -9%) updated Q4 (Jan) guidance is not making investors feel too comfortable today. Although the athletic apparel firm increased its sales outlook to $2.66-2.70 bln from $2.605-2.655 bln, it narrowed its earnings forecast, clipping $0.03 off the high end of its prior range missing analyst estimates in the process. LULU now expects EPS of $4.22-4.27 from $4.20-4.30.
- LULU's narrowed Q4 earnings outlook stems primarily from an updated expectation of a 90-110 bp contraction yr/yr in gross margins, a significant reversal from the company's prior estimate of a 10-20 bp improvement. LULU's lowered gross margin outlook is particularly deflating since investors expected the company to snap its streak of three consecutive quarters of sliding yr/yr margins. Now, LULU will be entering FY24 (Jan) without the positive momentum of improving margins.
- After disappointing Q3 (Oct) earnings in early December, which incited a sell-the-news reaction, we commented that LULU's 85% increase in inventory to $1.7 bln was a key concern as it raised the likelihood of higher markdown activity, following in the footsteps of most of the apparel industry lately. LULU's trimmed gross margin outlook does not help alleviate these concerns.
- On a lighter note, LULU's raised revenue guidance points to demand remaining relatively healthy. However, how much inflationary pressures or higher markdowns may have contributed to LULU's hiked sales forecast is unclear. Therefore, investors display a somewhat tepid reaction, especially given the news of declining margins. Still, CEO Calvin McDonald commented that traffic remained strong across LULU's physical and digital channels, underscoring positive overall demand trends.
LULU's revised Q4 forecast is also fueling minor concerns surrounding a few of the company's peers. Under Armour (UAA) and Foot Locker (FL) are missing out on the broader market strength today. Excess inventories have been a recurring theme across these organizations. For example, UAA's elevated inventories adversely impacted how it views the rest of FY23 (Mar) playing out, while FL saw merchandise margins contract due to higher markdowns in OctQ.
Still, LULU did not lower its long-term financial targets, including growing its annual revs to $12.5 bln by 2026, doubling from 2021 net revs of $6.25 bln, noting that it continues to deliver on its Power of Three x2 growth plan. It is also worth mentioning that LULU gained 1.5 pts of market share in the U.S. during Q3, highlighting its brand loyalty and competitive edge in the athletic apparel industry. Lastly, with shares tumbling toward October 2022 lows, filling the gap from October 25, today's pullback offers an attractive price for long-term investors.
Five Below bucks retail trend; supports our view that off-price retail is shaping up (FIVE)
The first Monday in January is becoming known as Guidance Monday. There were a ton of companies issuing guidance/commentary today and it was generally downbeat for retailers. It started with Macy's (M -8%) after the close on Friday with the mid-point of its guidance coming in below consensus and it made cautious comments. lululemon (LULU -9%) was the main headline today and the stock is sharply lower on weak Q4 (Jan) guidance. It was not uniformly bad as Abercrombie (ANF +8%) had good guidance.
- Another big name guiding today was Five Below (FIVE +5%). The stock is nicely higher after the company said it expects Q4 (Jan) results will be near the high end of prior guidance. FIVE did not provide a specific number, but it said sales for the Holiday period rose 11.2% yr/yr, which is quite good. FIVE will report final results in March.
- Comparable sales for the Holiday Period increased by +0.9%. Prior guidance for Q4 comps was -1% to +1%, so that also seems to be trending toward the high end. In Q3 (Oct), FIVE reported comps of -2.7%, well ahead of prior guidance of -9% to -7% and a nice bounce back after missing on comps in Q2 (Jul). So we are seeing a much better trend on comps in the second half of the fiscal year.
- What is helping is a much better merchandise inventory. FIVE was much better stocked with merchandise this year after dealing with out-of-stocks on some items last holiday season. FIVE also improved the quality of its holiday offering from toys to pet beds to holiday decor to Bluetooth speakers. FIVE also used more targeted marketing. The goal is to have something for everyone at a value price, which is good with inflation remaining high.
This guidance supports a view we espoused in a story stock on November 25, namely that the off-price retail space looks like a good way to play consumers' desire to trade down. Ross Stores (ROST) recently reported a nice beat-and-raise for Q3 and TJX Cos (TJX) beat on EPS. Burlington Stores (BURL) posted a sizable EPS miss, but it was more of an outlier. Also, its commentary about the off-price retail space in 2023 was quite bullish and the stock was up sharply despite the miss.
Overall, we continue to think the off-price retail space is setting up nicely for the holiday season and 2023 as consumers trade-down. FIVE is a little different than the other off-price names (ROST, TJX, BURL) but all should benefit from the trade-down effect. Also, FIVE will be lapping some easy comps in Q1 (-3.6%) and Q2 (-5.8%), which sets it up well in 2023.
Southwest Air to pay heavy price for late December meltdown, but shares fly higher anyway (LUV)
As Southwest Air's (LUV) debacle played out over the last ten days of 2022, leaving tens of thousands of passengers stranded for the holidays, it was difficult to pinpoint exactly how severe the financial impact would be for the company. That question was answered this morning, though, when LUV disclosed that it's anticipating a pre-tax negative impact of $725-$825 mln in Q4, resulting in the company taking a net loss for the quarter.
- After registering back-to-back profitable quarters in Q2 and Q3, driven by robust leisure travel demand and an upswing in business travel, analysts were expecting healthy profits once again for Q4. However, those projected profits have vanished due to an estimated $400-$425 mln in lost revenue and travel reimbursement costs of up to $400 mln.
- Part of those reimbursement costs include an offer of 25,000 frequent-flier points for any traveler impacted by LUV's flight cancellations, which totaled a whopping 16,700 from December 21 - December 31.
- In the aftermath of this mess, LUV's antiquated crew scheduling system has fallen under the microscope. Essentially, the system became crippled and couldn't handle the surge in flight cancellations as the massive winter storm swept across most of the country.
- Likewise, CEO Bob Jordan is taking serious heat from multiple sides, including from regulators, politicians, the media, and, of course, from customers. Earlier this week, Bloomberg reported that LUV intends to keep Jordan, who now has the tall task of repairing both LUV's battered reputation, and the technology issues that instigated this disaster.
- While Jordan has pledged to identify and fix the problems that led to the avalanche of cancellations, details about what those remedies might include have been very limited. To be fair, the lack of a detailed plan of action may simply be due to the company's ongoing investigation into what happened. Nevertheless, restoring confidence -- for both customers and investors -- will be critical moving forward and assuring stakeholders that the problem is solved is key from a longer-term perspective.
Indeed, we don't believe that LUV's breakdown will have a permanent or lasting effect on its business. Perhaps some would-be customers will look to other airlines over the next couple of months as LUV's meltdown remains fresh in travelers' minds, but history suggests that the shelf-life for avoiding specific airlines over previous blunders or catastrophes is short-lived. On that note, the stock is trading higher and is outperforming its peers today as investors assess the financial damage that was already priced into the stock, and refocus on the healthy demand environment for airlines.
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