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Market Snapshot
briefing.com
| Dow | 33911.35 | +176.56 | (0.52%) | | Nasdaq | 13675.85 | +14.76 | (0.11%) | | SP 500 | 4406.23 | +6.01 | (0.14%) | | 10-yr Note | +4/32 | 4.01 |
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| | NYSE | Adv 1995 | Dec 887 | Vol 819 mln | | Nasdaq | Adv 2906 | Dec 1493 | Vol 5.2 bln |
Industry Watch
| Strong: Industrials, Health Care, Financials, Energy, Consumer Staples |
| | Weak: Communication Services, Information Technology, Utilities, Consumer Discretionary |
Moving the Market
-- Wait-and-see ahead of June Consumer Price Index and the start of earnings season later this week
-- Relative weakness in mega cap stocks ahead of the Special Rebalance of the Nasdaq 100, effective prior to the open on July 24
-- Buying on weakness in other areas aside from mega cap stocks
-- Drop in market rates
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Closing Summary
10-Jul-23 16:30 ET
Dow +209.52 at 33944.31, Nasdaq +24.77 at 13685.86, S&P +10.58 at 4410.80
[BRIEFING.COM] The stock market had a fairly strong showing today. Index performance was more modest, however. The market-cap weighted S&P 500 rose only 0.2% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.9%. Advancers led decliners by a roughly 2-to-1 margin at the NYSE and the Nasdaq.
Gains for the three major indices were smaller, largely because of the relative weakness seen among the mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) fell 0.2% with Apple (AAPL 188.61, -2.07, -1.1%), Alphabet (GOOG 116.87, -3.27, -2.7%), and Microsoft (MSFT 331.83, -5.39, -1.6%) registering some of the largest declines from the space. Those losses followed the news from Nasdaq that there will be a Special Rebalance of the Nasdaq 100 to reduce overconcentration in the index by redistributing weights, effective prior to the open on July 24. The new weightings will be determined on Friday, July 14.
Even with lagging mega caps, the broader market held up well today. Small caps, banks, energy and semiconductor stocks all outperformed due to a more positive economic vibe in today's trade. The PHLX Semiconductor Index rose 2.1%, the Russell 2000 rose 1.6%, and the SPDR S&P Regional Banking ETF (KRE) rose 0.8%.
The economically-sensitive S&P 500 industrials (+1.4%) and energy (+0.8%) sectors were among the top performers along with health care (+0.8%) and financials (+0.4%). Meanwhile, the communication services (-0.9%) and utilities (-0.4%) sectors fell to the bottom of the pack.
A pullback in Treasury yields was supportive of equities today. The 2-yr note yield fell nine basis points to 4.85% and the 10-yr note yield fell four basis points to 4.01%.
The improvement in Treasury yields happened ahead of Wednesday's release of the June Consumer Price Index, which promises to be a market-moving catalyst.
- Nasdaq Composite: +30.8% YTD
- S&P 500: +14.9% YTD
- S&P Midcap 400: +8.5% YTD
- Russell 2000: +7.6% YTD
- Dow Jones Industrial Average: +2.4% YTD
Reviewing today's economic data:
- May Wholesale Inventories 0.0% (Briefing.com consensus -0.1%); Prior was revised to -0.3% from -0.1%
Economic data on Tuesday is limited to the NFIB Small Business Optimism Survey for June (prior 89.4) at 6:00 a.m. ET.
Treasuries settle with gains; Key takeaway from Consumer Credit
10-Jul-23 15:35 ET
Dow +168.02 at 33902.81, Nasdaq +3.05 at 13664.14, S&P +3.45 at 4403.67
[BRIEFING.COM] The major indices are little changed heading into the close.
Treasuries settled with gains. The 2-yr note yield fell nine basis points to 4.85% and the 10-yr note yield fell four basis points to 4.01%.
Consumer credit increased by $7.3 bln in May (Briefing.com consensus $21.0 bln) following a downwardly revised $20.3 bln (from $23.0 bln) in April.
The key takeaway from the report is that the pace of credit expansion in May was the slowest since November 2020, having been subdued by a decrease in nonrevolving credit that will raise concerns about a tightening in lending standards and weaker demand for credit in the face of higher financing rates.
Consumer Credit report; energy complex settlement levels
10-Jul-23 15:05 ET
Dow +176.56 at 33911.35, Nasdaq +14.76 at 13675.85, S&P +6.01 at 4406.23
[BRIEFING.COM] The major indices have moved mostly sideways in recent action.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures fell 1.1% to $73.01/bbl and natural gas futures rose 2.4% to $2.63/mmbtu.
Consumer credit increased by $7.3 billion in May (Briefing.com consensus $21.0 billion) following a downwardly revised $20.3 billion in April (from $23.0 billion).
FMC & agricultural product peers fall on disappointing guidance
10-Jul-23 14:30 ET
Dow +186.03 at 33920.82, Nasdaq +19.65 at 13680.74, S&P +7.68 at 4407.90
[BRIEFING.COM] The S&P 500 (+0.17%) is in second place to this point on Monday afternoon, down now about -1% month-to-date.
S&P 500 constituents Ralph Lauren (RL 128.39, +5.84, +4.77%), Wynn Resorts (WYNN 106.30, +4.98, +4.92%), and Moderna (MRNA 123.33, +4.46, +3.75%) pepper the top of the S&P. Specialty retail stocks, including RL, are stronger today, while WYNN and fellow casino companies continue Friday's bounce off lows.
Meanwhile, Pennsylvania-based agricultural product firm FMC Corp (FMC 93.55, -10.70, -10.26%) is today's top laggard following guidance.
Gold modestly lower ahead of this week's inflation data
10-Jul-23 14:00 ET
Dow +185.86 at 33920.65, Nasdaq -7.32 at 13653.77, S&P +4.62 at 4404.84
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (-0.05%) is modestly lower.
Gold futures settled $1.50 lower (-0.1%) to $1,931.00/oz ahead of this week's CPI inflation report.
Meanwhile, the U.S. Dollar Index is down about -0.3% to $102.01.
Market's eye on inflation data and earnings news
Friday's weak finish for the mega-cap stocks (and the broader market) created some added uncertainty about where this week might go. One thing we know for certain is that more market participants should be back at their desks with the July 4th holiday week in the rearview mirror.
At the moment, the broader market isn't heading anywhere fast.
The S&P 500 futures are down three points and are trading roughly in-line with fair value, the Nasdaq 100 futures are down 27 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are up seven points and are trading roughly in-line with fair value.
The lack of conviction stems in part from a desire to see how the mega-cap stocks will trade after Friday's weak finish. On a related note, CNBC reported that Citigroup downgraded its U.S. market view to Neutral from Overweight, citing an expectation that the mega-cap stocks are due for a pullback.
A different call comes from Fundstrat's Tom Lee, who said in a CNBC interview that he thinks the S&P 500 could rally 100 points after the June CPI report on Wednesday. If he is right, any such move would likely include the mega-cap stocks.
Mr. Lee's call is very much a tactical call, yet he feels that core CPI could come in at 0.2% month-over-month, or lower, and trigger a relief rally at the front of the yield curve that fuels a rally in stocks. The Briefing.com consensus estimate for core CPI is 0.3%.
That CPI report will be a focal point this week and for good reason. Today, one of the focal points is that China's June CPI was flat year-over-year (expected +0.2%) while June PPI was down 5.4% year-over-year (expected -5.0%), falling at its fastest pace in seven years.
Those inflation reports, and worries about deflation, have fueled speculation that China will soon announce additional policy stimulus measures.
Beyond this week's inflation data (June PPI is out Thursday), market participants will be anxiously awaiting the earnings reports from Delta Air Lines (DAL), PepsiCo (PEP), Fastenal (FAST), Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and UnitedHealth (UNH) later in the week.
This string of reports on Thursday and Friday will kick off the start of the June quarter earnings reporting period. According to FactSet, the second quarter blended earnings growth estimate is -7.5%. That would be the largest decline in earnings since the second quarter of 2020; nonetheless, we made the case in The Big Picture column published on Friday that the bar of expectations has gotten higher ahead of this reporting period.
-- Patrick J. O'Hare, Briefing.com
MercadoLibre gaps lower on a BofA Securities downgrade to "Neutral" from "Buy" (MELI)
MercadoLibre (MELI -6%), the dominant e-commerce site in Latin America, gapped down today after being downgraded to "Neutral" from "Buy" at BofA Securities. Shares are below their 200-day moving average (1085.44), although closing above this indicator today may indicate potential support.
Briefing.com notes that MELI has not seen too many analyst changes per our coverage over the past year. However, the two ratings it received in 2023, including today's, were downgrades, underscoring potentially troubling waters ahead. Still, we think today's sell-off is a slight overreaction, especially for long-term investors.
- At over twice the size of the United States, MELI has to cover plenty of square miles, serving 18 countries. Its three largest markets are Brazil, Mexico, and Argentina, which accounted for over 95% of total revenue in FY22. Although most of the countries MELI serves are enduring some form of economic strife, namely inflation, Argentina is currently experiencing some of the worst inflationary pressures ever, with the local currency soaring by nearly 95% yr/yr in 2022, weighing heavily on the end consumer.
- Nevertheless, MELI registered 43% Gross Merchandise Volume (GMV) growth, excluding currency fluctuations, yr/yr in Q1 (Mar), with its primary markets enjoying accelerated GMV growth sequentially. Although much of Argentina's exceptional 107% GMV growth was due to inflation, MELI noted that it saw a reversal of last year's weakening trend in items sold growth, which expanded by 3% in the quarter.
- Meanwhile, encouraging trends were seen across other regions, like Chile (the largest market in MELI's Other segment), where GMV growth returned to positive territory.
- A significant factor driving MELI's relatively resilient numbers during its most recent quarter has been the company's focus on more consumable goods, like groceries, as well as bolstering first-party sales, which registered GMV growth of 28% in Q1.
- At the same time, Mercado Pago, MELI's financial services business, boasted nearly 25% user growth yr/yr in Q1 to 44 mln. By moving into consumers' and merchants' wallets by offering loans and payment processing, MELI is carving out an economic moat, as clearing regulatory hurdles across multiple countries creates a fairly high barrier to entry that should only move to strengthen its brand over time.
Often compared to Amazon (AMZN), MELI's business is prone to risks, however. For one, AMZN operates in Latin America, commanding the number two spot right behind MELI. Given AMZN's proven dominance in the United States, it could ultimately kick MELI from its top position in many of its markets. For two, Latin America is an emerging market, which could lead to ongoing geopolitical and macroeconomic concerns. Thirdly, cross-border selling and maintenance can be costly and create considerable volatility and swings in financial performance.
Still, MELI has a strong history across many Latin American markets, giving it a leg up on outside competitors like AMZN. The company has also endured its fair share of geopolitical and macroeconomic headwinds, giving it the experience to overcome potential challenges. Meanwhile, MELI has been improving its distribution network and scale to better serve numerous countries.
FMC Corp lower on guidance; makes us nervous for fertilizer stocks heading into earnings season(FMC)
FMC Corp. (FMC -15%) is under pressure today after lowering guidance pretty significantly. FMC is a major supplier of insecticides, herbicides, fungicides and crop nutrition that farmers rely on to protect their crops from disease and pests.
- What struck us was the size of the guidance cut. FMC now expects Q2 revenue of just $1.00-1.03 bln vs. $1.42-1.48 bln prior guidance. FMC did not guide for EPS, but adjusted EBITDA guidance was slashed to $185-190 mln from $350-370 mln. FMC also lowered full year guidance, but the big drop was in Q2. Recall that on May 1, when FMC reported Q1 results, it had already guided Q2 EPS and revs below analyst expectations. So another round of downside guidance was troubling.
- So, what happened? FMC cited substantially lower-than-expected volumes due to an abrupt and significant reduction in inventory by channel partners. FMC says this only became evident towards the end of May and continued through the remainder of the quarter in three out of its four operating regions (North America, Latin America and EMEA).
- The silver lining was FMC also saying that, even as it manages through this market contraction and significant inventory reduction by channel partners, on-the-ground consumption of its products remains strong and at similar levels to last year. So it does not appear to be a demand issue or a competitive loss situation. It's strikes us as more as a decision by channel partners to de-risk by carrying less inventory.
- One thing we have learned about fertilizer stocks over the years is that their earnings can be pretty volatile. That's because the prices they pay for chemical inputs vary quarter-to-quarter, plus it's not always clear how easily they can pass these higher prices on to end customers. Also, end demand can vary quite a bit as weather/droughts play a role as well.
- With that said, we are glad that FMC provides guidance. It would be easier for them to just not guide at all, but we like that they do guide. We think investors understand that FMC's earnings can be volatile.
Overall, this was some rough guidance and makes us nervous about other crop fertilizer/nutrient stocks as we head into earnings season in the coming weeks. We would be wary about names like CTVA, MOS, NTR, CF, IPI, BG, SMG. These stocks are actually holding up pretty well today, which surprises us. However, we would use caution because FMC's guidance seems more industry-based than company-specific.
Helen of Troy charges above February highs on upbeat MayQ results; caution still warranted (HELE)
Helen of Troy (HELE +16%), a houseware and beauty product manufacturer, is charging ahead after delivering its widest earnings beat in a year on improving sales in Q1 (May). Today's upbeat results underscored healthy progress related to restructuring efforts, dubbed "Project Pegasus," HELE, which owns various familiar brands like OXO, Hydro, and Vicks, announced to start the year. Alongside segment consolidation, management shifts, and minor operational tweaks, HELE began an approximately 10% workforce reduction to better contend with macroeconomic headwinds, which drove soft consumption trends across some categories.
- Relatively weak demand still existed during MayQ, evidenced by total revenue slipping by 6.6% yr/yr to $474.7 mln. However, several of HELE's Leadership Brands, i.e., OXO, Hydro, Vicks, etc., outperformed the broader market, gaining market share within the U.S. HELE's Home & Outdoor segment was the leader in MayQ, registering 21.0% growth yr/yr. Conversely, Beauty & Wellness sales tumbled by 21.2%. Internationally, sales remained relatively steady, climbing 3.4% yr/yr.
- Meanwhile, cost reduction initiatives helped drive a 380 bp expansion in gross margins yr/yr to 45.4% and a respectable 30 bp improvement in adjusted operating margins, fueling HELE's sizeable earnings beat in the quarter. Adjusted EPS still contracted 19.5% yr/yr to $1.94, but it was nicely above analyst expectations.
- Also worth noting was HELE's progress in reducing excessive inventory to $433.91 mln, a 29.3% drop yr/yr and a 4.7% decline sequentially. Management remarked that it is operating with more normalized inventory levels and is increasingly aligning orders to consumer demand.
- With Project Pegasus remaining on track toward lowering costs by $20 mln this year, HELE stayed confident in achieving its FY24 (Feb) financial goals, including EPS of $8.50-9.00 and revs of $1.96-2.02 bln, a 3.9% dip yr/yr at the midpoint. Management cautioned that its FY24 outlook continued to incorporate heightened uncertainty in spending patterns, particularly on the discretionary side, and a generally slower economy. HELE already noticed some reduction of trade inventory compared to Q4 (Feb) as many retailers reduce their inventory on hand.
HELE's MayQ report was encouraging, especially after the company announced restructuring to start the year, sparking worries surrounding consumer spending. We commented in January that the initial progress regarding Project Pegasus was promising, as it paved the way for margin and market share growth.
Still, caution remains the key theme as HELE heads into the back half of 2023. Many of HELE's competitors have acknowledged that the economy is challenging recently, such as KitchenAid parent Whirlpool (WHR), which anticipates U.S. sales to be down 4-6% yr/yr in FY23, and Newell Brands (NWL), which expects inflation to continue constraining discretionary spending for the next 12-18 months. Even though HELE's FY24 outlook is relatively conservative, baking in a slowing economy, maintaining a healthy dose of caution over the near term is still warranted. We should have more clarity after many of its peers report earnings over the next several weeks.
Costco's comp growth dips again in June, but sales for non-discretionary items remain healthy (COST)
Sluggish demand for big-ticket discretionary items continued to weigh on Costco's (COST) comparable sales growth in June, which slipped to +3.0% when excluding the impacts from changes in gas prices and foreign exchange. That's down slightly from May and April, when the company generated comp growth of +3.3% and +4.3% respectively.
- Similar to recent months, the primary culprit that slowed COST's growth in June was a decline in average ticket size of 5.4%, reflecting the pullback in spending for pricier product categories such as electronics, appliances, jewelry, and home furnishings. For some context, average ticket size decreased by 4.2% in Q1.
While COST's comp growth in June is a far cry from the double-digit performances seen a year ago, its results still indicate that business is healthy overall.
- For instance, it's worth pointing out that COST is lapping a very challenging year-ago number when total company comps jumped by 13.0% and e-commerce comps were up by 8.3%. The e-commerce channel, which has substantial exposure to big-ticket product categories (~60% of total e-commerce sales), only declined by 0.4% yr/yr in June.
- That also marks a meaningful improvement from May, when e-commerce sales fell by 7.0%.
- Furthermore, customer traffic remained strong, increasing by 3.6% in the U.S., indicating that consumers are still looking to save money by purchasing food and everyday items in bulk. Staying true to recent form, COST's strongest product categories in June included food, sundries, and health and beauty.
- COST's consistent traffic growth is also a function of membership increases and its very high renewal rates. In Q1, household members increased by about 7% to 69.1 mln, while renewal rates remained at record highs of 92.6% for the U.S. and Canada.
Despite these positives, shares are sliding lower today. However, with the stock up by about 10% since COST reported Q3 results on May 26, some profit-taking is likely in play. Overall, we have a positive view of COST's sales results for June as they likely reflect continued share gains in the food and everyday item categories, while demand for big-ticket items has at least steadied.
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