Market Snapshot
briefing.com
| Dow | 34543.24 | +148.19 | (0.43%) | | Nasdaq | 14125.01 | -13.94 | (-0.10%) | | SP 500 | 4511.11 | -0.20 | (0.00%) | | 10-yr Note | -6/32 | 3.82 |
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| | NYSE | Adv 734 | Dec 2224 | Vol 815 mln | | Nasdaq | Adv 1344 | Dec 3098 | Vol 5.38 bln |
Industry Watch
| Strong: Health Care, Consumer Discretionary, Consumer Staples |
| | Weak: Energy, Utilities, Materials, Industrials, Financials, Communication Services, Information Technology |
Moving the Market
--Relative strength of mega-cap stocks
--UnitedHealth (UNH) sees big gain post-earnings report and props up DJIA
--Expectation that short-term overbought market is due for some consolidation
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Closing Stock Market Summary
14-Jul-23 16:25 ET
Dow +113.89 at 34508.94, Nasdaq -24.87 at 14114.08, S&P -4.62 at 4506.69
[BRIEFING.COM] There was good earnings news today from JPMorgan Chase (JPM 149.77, +0.90, +0.6%), Wells Fargo (WFC 43.56, -0.15, -0.3%), Citigroup (C 45.78, -1.90, -4.0%), and UnitedHealth (UNH 480.17, +32.42, +7.2%). There was good economic news today that included an increase in consumer sentiment to its highest level since September 2021 in July and some notable deflation in import prices and export prices on a year-over-year basis in June. There were some encouraging ratings actions for Microsoft (MSFT 345.24, +2.58, +0.8%), which was upgraded to Buy from Neutral at UBS, and for NVIDIA (NVDA 454.69, -5.08, -1.1%), which saw Truist raise its price target to $545 from $470.
What there wasn't today was a good market performance. By and large, the stock market languished under the weight of profit-taking expectations following a big run already this week. The Russell 2000, up 4.6% for the week entering today, declined 1.0% and saw the biggest loss among the major indices.
Eight of the 11 S&P 500 sectors closed with a loss, led by the energy sector (-2.8%), which followed oil prices lower ($75.40, -1.51, -2.0%). The energy sector, however, was the only sector down more than 1.0%.
Conversely, the health care sector (+1.5%) was the only sector that gained more than 1.0%. UnitedHealth played a big part in that sector's outperformance and was the reason why the Dow Jones Industrial Average was able to maintain a posture in positive territory throughout the day.
Market internals revealed the profit-taking inclination that took root today. Decliners outpaced advancers by a 3-to-1 margin at the NYSE and a better than 2-to-1 margin at the Nasdaq. Once again, volume at the NYSE was a lower-than-average 815 million shares.
The mega-cap stocks exhibited relative strength during today's trade but faded from higher levels in the afternoon session ahead of the Nasdaq announcing weighting changes for the special rebalance of the Nasdaq 100 on July 24.
The Vanguard Mega-Cap Growth ETF had been up as much as 1.0% but closed the day up 0.2%. The Invesco S&P 500 Equal-Weight ETF (RSP) declined 0.6%.
Separately, the banks stocks were a notable pocket of weakness in spite of the good results from JPMorgan Chase and others. The SPDR Bank ETF (KBE) declined 1.9% and the SPDR Regional Banking ETF (KRE) declined 1.9%. That weakness had a sell-the-news aura about it considering the KBE and KRE were up 6.8% and 7.6%, respectively, for the month before those results were heard.
The profit-taking inclination was not limited to the stock market. It was evident in the Treasury market, too. The 2-yr note yield, down 32 basis points for the week coming into today, jumped 12 basis points to 4.73% while the 10-yr note yield, down 29 basis points for the week coming into today, increased six basis points to 3.82%.
The move in the 2-yr was catalyzed in part by Fed Governor Waller (FOMC voter), who said he sees no reason why the Fed should not raise rates in July and that two rate hikes over the last four meetings this year are likely based on his current read of things.
- Nasdaq Composite: +34.8% YTD
- S&P 500: +17.3% YTD
- S&P Midcap 400: +10.0% YTD
- Russell 2000 : +9.6% YTD
- Dow Jones Industrial Average: +4.1% YTD
Reviewing today's economic data:
- The preliminary July University of Michigan Consumer Sentiment Index checked in at 72.6 (Briefing.com consensus 65.6) versus the final reading of 64.4 for June. In the same period a year ago, the index stood at 51.5.
- The key takeaway from the report is that consumer sentiment about the economic outlook has improved with the slowdown in inflation and the ongoing stability in labor markets.
- Import prices declined 0.2% in June following an upwardly revised 0.4% decline (from -0.6%) in May. Excluding fuel, import prices were down 0.4% following an upwardly revised 0.0% (from -0.1%) in May. Export prices, in turn, were down 0.9% in June following an unrevised 1.9% decline in May. Excluding agricultural products, export prices were down 0.9% following a downwardly revised 1.9% decline (from -1.8%) in May.
- On a year-over-year basis, import prices were down 6.1%, versus being up 10.7% for the 12-month period ending June 2022, and export prices were down 12.0%, versus up 18.6% for the 12-month period ending June 2022.
Looking ahead to Monday, market participants will receive the following economic data:
- 8:30 a.m. ET: July Empire State Manufacturing Survey (Prior 6.6)
Tech sector pulls back
14-Jul-23 15:30 ET
Dow +126.44 at 34521.49, Nasdaq -48.77 at 14090.18, S&P -6.60 at 4504.71
[BRIEFING.COM] Heading into the final half hour of trading in what has been a great week of returns for the market, the major indices are still laboring under the weight of narrow leadership and profit-taking expectations.
The latter have seeped into the information technology sector (-0.4%) in afternoon action. As the heaviest-weighted sector in the S&P 500, the pullback there has made it challenging for the S&P 500 to get in gear with upside action.
Earlier, the information technology sector was up as much as 1.3%, but with the looming announcement after the close of weighting changes for the Nasdaq 100 special rebalance -- and specifically for stocks like Apple (AAPL 190.32, -0.21, -0.1%) and Microsoft (MSFT 344.92, +2.26, +0.7%) -- the sector has encountered some selling interest.
Microsoft had been up as much as 2.6% earlier following the UBS upgrade to Buy from Neutral, but has relinquished a large portion of that gain.
Fade from better levels
14-Jul-23 15:00 ET
Dow +148.19 at 34543.24, Nasdaq -13.94 at 14125.01, S&P -0.20 at 4511.11
[BRIEFING.COM] The major indices seem to have lost their upward momentum for now, as the Dow Jones Industrial Average stands alone in positive territory -- and only because of the strength seen in UnitedHealth (UNH 481.65, +33.90, +7.6%).
The fade from better levels seen earlier has the S&P 500 and Nasdaq Composite testing their lows for the day (which aren't that low). The pullback has coincided with a fade in many of the mega-cap stocks. The Vanguard Mega-Cap Growth ETF (MGK), up 1.0% earlier, is now up just 0.2%.
Nothing to really hem and haw about there, though, considering the MGK is still up 3.1% for the week.
It has been that kind of winning week. All 11 S&P 500 sectors are up for the week, with gains ranging from 0.7% (energy) to 3.6% (communication services).
Notably, the Invesco S&P 500 Equal-Weight ETF (RSP), down 0.6% after being down 0.8%, has been paring its losses as the Vanguard Mega-Cap Growth ETF has been paring its gains, implying that there is a rotational shift at work that is keeping the broader market from losing more ground.
Juniper Networks slips as European telecoms operators warn of NA slowdown
14-Jul-23 14:30 ET
Dow +161.68 at 34556.73, Nasdaq -8.24 at 14130.71, S&P +0.77 at 4512.08
[BRIEFING.COM] The S&P 500 (+0.02%) is now under one point higher on the day after seeing a move lower in recent trading.
S&P 500 constituents Elevance Health (ELV 441.17, +23.54, +5.64%), D.R. Horton (DHI 129.33, +2.87, +2.27%), and Western Digital (WDC 39.88, +0.52, +1.32%) pepper the top of the standings. ELV follows general strength in the group following widely-covered UNH results, DHI enjoys gains alongside homebuilding peers, while WDC benefits from press reports that it plans to reach a deal on a merger with Kioxia by August.
Meanwhile, Juniper Networks (JNPR 29.20, -1.93, -6.21%) is near the bottom of the S&P, underperforming after European telecom firms Nokia (NOK 3.95, -0.39, -9.08%) and Ericsson (ERIC 5.06, -0.67, -11.76%) commented on slumping demand in North America.
Gold moves higher this week, adding to monthly gains
14-Jul-23 14:00 ET
Dow +145.36 at 34540.41, Nasdaq +10.08 at 14149.03, S&P +3.13 at 4514.44
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite is now tied with the S&P 500, both up about +0.07% apiece.
Gold futures settled up less than $1 higher to $1,964.40/oz, ending with about +1.6% gains on the week which, in turn, propel monthly gains to +1.8%; the yellow metal was held down today by modest gains in the dollar and yields.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $99.91.
Good earnings news keeps pep in market's step
To say the least, the stock market has been in good spirits this week as investor sentiment has been bolstered by some pleasing inflation data, a drop in market rates, and a broadening out of the buying interest to include stocks not named Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon.com (AMZN), NVIDIA (NVDA), Tesla (TSLA), and Meta Platforms (META).
That's not to say those "Magnificent Seven" stocks have not been bought, only that they aren't being seen as the only buying option in town like they were for most of the first half of the year.
Entering today, the Russell 2000 is up 4.6% for the week, the S&P Midcap 400 is up 3.7%, the Nasdaq Composite is up 3.5%, and the Invesco S&P 500 Equal-Weight ETF (RSP) is up 3.0% versus a tidy 2.5% gain for the market-cap weighted S&P 500.
It doesn't appear either as if the buyers are ready to walk away. By the same token, it doesn't appear as if the sellers are ready to make some serious waves either.
Currently, the S&P 500 futures are up nine points and are trading 0.2% above fair value, the Nasdaq 100 futures are up seven points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 187 points and are trading 0.6% above fair value.
The positive disposition of the futures market follows a batch of better-than-expected earnings results and/or guidance from JPMorgan Chase (JPM), UnitedHealth (UNH), Wells Fargo (WFC), Citigroup (C), and BlackRock (BLK).
Dow components JPM and UNH are up 2.5% and 2.9%, respectively, which is putting some extra pep in the step of the Dow Jones Industrial Average futures along with a UBS upgrade of fellow Dow component Microsoft (MSFT) to Buy from Neutral. Shares of MSFT are up 1.6%.
These are higher-priced stocks, so they have a higher impact on the movement of the price-weighted Dow Jones Industrial Average.
Otherwise, there is a more subdued tone in the broader market, which likely reflects nothing more than some thinking that the market is due to cool off a bit after its hot run this week. The Treasury market seems to be in the same mindset.
A short time ago, there was another round of market-friendly inflation news, yet Treasury yields are backing up in its wake (and had already been backing up ahead of the report).
Specifically, import prices declined 0.2% in June following an upwardly revised 0.4% decline (from -0.6%) in May. Excluding fuel, import prices were down 0.4% following an upwardly revised 0.0% (from -0.1%) in May. Export prices, in turn, were down 0.9% in June following an unrevised 1.9% decline in May. Excluding agricultural products, export prices were down 0.9% following a downwardly revised 1.9% decline (from -1.8%) in May.
On a year-over-year basis, import prices were down 6.1%, versus being up 10.7% for the 12-month period ending June 2022, and export prices were down 12.0%, versus up 18.6% for the 12-month period ending June 2022.
The 2-yr note yield, down 32 basis points for the week coming into today, is up six basis points to 4.67%, and the 10-yr note yield, down 29 basis points for the week coming into today, is up three basis points to 3.79%.
Notwithstanding the pleasing CPI and PPI data earlier this week, Fed Governor Waller (FOMC voter) said he sees no reason why the Fed should not raise rates again at its July FOMC meeting and still thinks there is likely to be two rate hikes over the next four FOMC meetings into year end.
The fed funds futures market still believes it is one-and-done for the Fed, so we can see where a battle line is being drawn. In any case, the stock market is winning the fight for now, because it remains evident in the strong labor market that the economy is still battling well in the wake of the Fed's prior rate hikes.
-- Patrick J. O'Hare, Briefing.com
Citigroup banks another earnings beat, but results don't measure up to peers (C)
Earnings season for the June quarter has kicked into full swing for the banking industry and the early returns show that those with heavy exposure to trading and investment banking are still underperforming their more consumer-centric counterparts, as illustrated by Citigroup's (C) disappointing Q2 results. While it doesn't come as a surprise that those two businesses continue to struggle, it's the significant impact on earnings and the lack of a meaningful recovery that's particularly discouraging.
For instance, while JPMorgan Chase (JPM) and Wells Fargo (WFC) posted yr/yr EPS growth of 58% and 69%, respectively, Citigroup's earnings fell by 39%.
- In Q2, Citigroup's Institutional Clients Group (ICG), which houses its trading and investment banking businesses, experienced a 9% yr/yr decline in revenue to $10.4 bln, representing about 54% of total revenue. As a point of comparison, JPM's Corporate and Investment Banking segment generated revenue growth of 4% and accounted for approximately 29% of total revenue.
- The drop in ICG's revenue would have been worse if not for the strength in the Treasury and Trade Solutions (TTS) unit -- a division that CEO Jane Fraser has characterized as Citigroup's "crown jewel." Bolstered by higher interest rates, TTS delivered revenue growth of 15%, partially offsetting weakness in the Markets and Banking businesses.
- Within Markets, both fixed income and equity trading revenues decreased on a yr/yr basis, slipping by 13% and 10%, respectively. Citigroup cited the uncertainty surrounding the debt ceiling as a key headwind during the quarter, stating that clients "stood on the sidelines" beginning in April as the situation played out.
- It's also worth noting that the company lapped a challenging yr/yr comparison as fixed income trading revenue jumped by 31% in the year-earlier quarter.
- While the investment banking industry still hasn't fully turned a corner -- especially in the IPO market -- it seems that Citigroup also lost some ground to its peers in Q2. The company's banking revenue dropped by 22% (excluding losses on loan hedges), while JPM reported a 6% decline in investment banking fees. Meanwhile, WFC posted a 40% jump in investment banking revenue, although that's off a small base of just $222 mln in revenue in the year-ago quarter.
On the consumer side of the business, Citigroup performed much better, aided by higher interest rates that pushed net interest income higher, and healthy loan growth across U.S. Personal banking.
- More specifically, net interest income in the Personal Banking and Wealth Management segment grew by 7% yr/yr to nearly $6.0 bln, while average loan balances in U.S. Personal banking were higher by 13% to $167 mln.
- Branded cards was another source of strength with revenue climbing by 8% due to higher net interest income as rates increased.
- One area of concern, though, is that net credit losses on loans shot higher by 78% yr/yr to $1.2 bln, reflecting the impact that higher interest rates have on the ability for some consumers to make loan payments on time.
Citigroup edged past Q2 EPS estimates, reaffirmed its FY23 EPS guidance, and nudged its net interest income guidance higher to slightly above $46 bln, but its results underperformed relative to JPM and WFC as its investment banking and trading businesses weighed it down. The weakness in those two areas doesn't bode well for Morgan Stanley (MS) and Goldman Sachs (GS), which are slated to report earnings on July 18 and July 19, respectively.
JPMorgan Chase eases investor fears with another large EPS beat, was generally positive on 2H (JPM)
JPMorgan Chase (JPM +0.4%) is modestly higher after it reported huge EPS upside this morning. JPM has now posted three consecutive EPS beats of $0.40 or more. JPM also eased concerns with its comments about the 2H23 macro picture.
- In its Consumer & Community Banking (CCB) segment, revenue rose a healthy 37% yr/yr to $17.23 bln. New checking account production was very strong, while card loans were up 18%. Banking & Wealth Mgmt was the standout with revenue surging 68% yr/yr to $10.94 bln, driven by higher deposit margins on lower balances. Home Lending revenue was $1.0 bln, up 1%, or down 23% excluding First Republic, driven by lower net interest income from tighter loan spreads. Card Services & Auto revenue rose 5% yr/yr to $5.3 bln, driven by higher revolving balances.
- In the Corporate & Investment Bank (CIB) segment, revenue was up a modest 4% yr/yr at $12.52 bln. Markets revenue was down 10% to $7.0 bln. Investment Banking fees were down 6%, driven by lower advisory fees. Payments revenue was $2.5 billion, up 61%, predominantly driven by higher rates. Commercial Banking (CB) revs jumped 49% yr/yr to $3.99 bln while Asset & Wealth Mgmt (AWM) revs rose 15% to $4.94 bln. As you can see, most segments performed pretty well.
- The provision for credit losses was $2.9 bln, up from $2.28 bln in Q1. Excluding First Republic, the provision was $1.7 bln, reflecting net chargeoffs of $1.4 bln and a net reserve build of $326 mln. We think investors are pleased with these numbers.
- JPM says the US economy continues to be resilient. Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong. However, there were some notes of caution. Specifically, JPM says consumers are slowly using up their cash buffers, core inflation has been stubbornly high, fiscal deficits are large, and the war in Ukraine continues.
- Quickly on the First Republic transaction, JPM said it worked around the clock to onboard an unprecedented number of new First Republic clients across all lines of business as a result of the recent banking turmoil. Also, the systems integration is on pace and JPM is targeting being substantially complete by mid-2024. First Republic employees formally joined on July 2 and JPM is pleased to have had very high acceptance rates on its offers.
Overall, investors are very happy with JPM's robust Q2 results. Consumer banking and commercial banking were both notably strong and even investment banking seems like it is finally starting to stabilize. We think the huge EPS and revenue beat coupled with a sequential decrease in PCL (ex-First Republic) is easing investor concerns. We also think investors were glad that JPM was generally positive on the consumer and the US economy generally as we enter 2H23.
JPM did caution about some macro concerns, but this language was generally similar to past comments. All in all, this was a very good quarter for JPM and eased investor fears. This report, coupled with several other bank earnings beats this morning, bodes well for other banks set to report early next week.
UnitedHealth's beat-and-raise report the right prescription for an ailing stock (UNH)
One month ago today, UnitedHealth (UNH) warned that its medical care ratio, the percentage of premiums used to cover claims, was trending above the high end of its FY23 guidance range of 82.1-83.1%, spurring a sell-off that sent shares to new 52-week lows. Heading into last night's earnings report, the main concern was that an upswing in deferred care, particularly for UNH's Medicare Advantage business, may have pushed the medical ratio even higher, pressuring Q2 earnings and its FY23 outlook. As it turns out, though, UNH's costs were better-than-feared while revenue grew by nearly 16% yr/yr -- its strongest growth in over five years -- leading to a solid beat-and-raise performance.
- In Q2, UNH's medical care ratio came in at 83.2% compared to 82.2% last quarter and 81.5% in the year-earlier period. Although the ratio ticked higher, the increase was in line with analysts' expectations, providing a sigh of relief for investors.
- There are a couple factors that are pushing the medical ratio higher, but the main driver is that many people who postponed elective procedures during the pandemic are now taking care of those operations. This is especially true for those in the retirement age bracket.
- Additionally, in the wake of the pandemic, many people are seeking help for mental and emotional health issues, adding to health insurers' claims expenses.
- The good news for UNH is that this unwinding of pent-up demand for care is primarily occurring on the outpatient side, which carries lower costs compared to inpatient. However, the magnitude of the volume increase for procedures is still enough to drive UNH's medical care ratio higher.
While most of the attention is centering on UNH's costs, the company's top-line growth certainly warrants some recognition.
- Growth was well-balanced across UNH's segments as the total number of members with health coverage increased by over 1.1 mln on a year-to-date basis.
- A standout was the Optum business, which saw a 25% increase in revenue to $56.3 bln. For some quick background, Optum has three core offerings -- OptumRx, OptumHealth, and OptumInsight -- focusing on data/analytics, pharmacy care services and healthcare delivery.
- Optum's overall operating margin did slip by 70 bps yr/yr to 6.6% as UNH ramped up investments in services provided, but the segment's earnings from operations still grew by 12% yr/yr to $3.7 bln.
UNH delivered solid Q2 results and healthy EPS growth of 10%, while nudging the low end of its FY23 EPS guidance range higher to $24.70-$25.00 from $24.50-$25.00. The main takeaway is that the earnings report and outlook eased fears that medical care costs would keep trending higher, further cutting into UNH's margins and earnings.
Disney gives Bob Iger keys to Magic Kingdom for next two years as transformation progresses (DIS)
It doesn't stay quiet for very long at Walt Disney (DIS), especially lately, and that assertion is certainly holding true today. After yesterday's close, DIS announced that Bob Iger has agreed to stay on as CEO through December 31, 2026, following a surprise resignation from CFO Christine McCarthy about one month ago. When Mr. Iger returned to his CEO role in November of 2022, there was a sense of excitement on the hope that he would quickly fix the issues that are ailing DIS -- most prominently, the mounting losses for the streaming business, including Disney+.
However, as Mr. Iger acknowledged during an interview on CNBC earlier this morning, the challenges facing DIS have been more difficult than anticipated. This is reflected in the company's mixed financial performance and the stock's 2% loss since his return. While Iger has overseen a major improvement in profitability for the direct-to-consumer (DTC) segment, which saw operating loss shrink by $200 mln to ($700) mln last quarter, DIS's Linear Networks segment continues to be a thorn in Iger's side.
- On that note, Mr. Iger also disclosed during the interview that the company may sell some of its TV assets as they "may not be core to Disney" anymore. While he didn't specify which assets were under consideration, ABC and FX could both be on the chopping block.
- With DIS rapidly moving towards a streaming/subscription-based model, the possibility of the company dismantling its legacy TV network business would be fitting and would represent a major step in its transformation. There seems to be no end in sight to the cord-cutting trend that has battered the traditional TV market.
- Making matters worse, advertisers have cut back on their spending budgets due to macroeconomic headwinds. Amid this tough business environment, revenue for DIS's Linear Networks segment fell by 7% in Q2, while operating income plunged by 35%.
On the other end of the spectrum, the DTC segment is benefitting from the trend towards streaming services. Although Disney+ receives most of the attention, Hulu has also grown rapidly and is becoming a larger piece of the overall pie. In Q2, total Hulu subscribers grew by about 6% yr/yr to 48.2 mln. Currently, DIS holds an approximate 67% ownership stake in Hulu, with Comcast (CMCSA) owning the other third.
- Rounding off today's set of news, Mr. Iger also stated that he believes DIS and CMCSA will come to an agreement regarding DIS purchasing the remaining stake in Hulu. That syncs with the comments that CMCSA CEO Brian Roberts made in mid-May when he stated that “it's more likely than not” that CMCSA will sell Hulu in 2024.
- Exactly when a deal may be struck is uncertain. What is certain, though, is that DIS will have to shell out a massive amount of cash to purchase the rest of Hulu. When DIS purchased its initial stake in Hulu, part of the contract stipulated that the remainder of the streaming service couldn't be purchased for less than $9 bln. However, the actual purchase price is likely to be multiples higher than that -- perhaps in the neighborhood of $35-$40 bln, or more.
There's plenty of news for DIS investors to digest today, but the main takeaway is that the company is moving full steam ahead with its streaming transformation and Mr. Iger will continue to lead that charge over the next two years.
Conagra's initial pop on solid Q4 results fades as investors digest lingering headwinds (CAG)
After an initial pop following a Q4 (May) earnings beat and a 6% dividend increase, shares of Conagra (CAG) have since cooled off. Today's weakness reflects the broader trend, with shares of the consumer-packaged goods giant, operating familiar banners like Orville Redenbacher and Slim Jim, struggling this year, giving up just under 15% YTD.
Several factors are weighing on the stock today.
- CAG just squeaked out a beat on its bottom line in Q4, a stark contrast from the double-digit upside the company delivered in Q3 (Feb) and Q2 (Nov). Similarly, revs expanded by just 2.2% yr/yr to $2.97 bln, a deceleration from the 5.9% growth delivered last quarter to $3.09 bln.
- Volume recovery is lagging, suggesting new consumer behavior shifts beyond initial elasticity effects that coincided with pricing actions. The dynamic is broad-based across many categories. CAG added that it is not so much consumers trading down, but hunkering down, buying fewer items overall as higher prices weigh on budgets.
- Management discussed a few reasons why this trend is occurring. Travel is in high demand, taking a bite out of food-at-home consumption. Meanwhile, prices on some ingredients have started to come down, spurring corporate to make the appropriate price adjustments. Also, CAG anticipates a decline in contribution from Ardent Mills, a massive commercial flour mill, in FY24.
- As a result, CAG's FY24 adjusted EPS forecast of $2.70-2.75 missed analyst estimates, a significant blemish given that supply chain issues have been almost entirely resolved, with only a few pockets of disruptions occurring.
- For instance, service levels were at 95% to exit the quarter as fewer hiccups in the supply chain allowed CAG to rebuild its inventory. However, at the same time, CAG experienced a setback from one of its frozen logistics partner Americold, denting sales and earnings in Q4.
- The company's FY24 organic sales growth projection of approximately +1% yr/yr was also on the lighter side.
While headwinds remain an issue, CAG is still amid some nice tailwinds. The overall operating environment has mostly normalized, helping the company grow its adjusted gross margins over 200 bps yr/yr to 27% in Q4. Furthermore, although elasticities did soften slightly in Q4, they remained consistent and well below historical norms. CAG's brand investments also continued to pay off, driving another quarter of market share gains, tacking on nearly 500 bps in the frozen category, which, combined with snacks, represents around 70% of CAG's total domestic retailer dollar sales.
CAG's Q4 report was strong, highlighting its competitive positioning and relative brand loyalty. However, FY24 may be a challenging year, especially if current headwinds, mainly consumers reducing their basket sizes, do not abate.
The Big Picture
Last Updated: 13-Jul-23 09:58 ET | Archive
Resistance for Treasury yields means support for stocks
Technical analysts have had a lot to write about when it comes to analyzing the breakout effort by the S&P 500, which recently hit a 52-week high. Their work, however, isn't just limited to stocks. Bonds have given them plenty to write about as well.
Something Is Afoot
For stocks, a double-top formation is often painted as a bearish development. The reason being is that it connotes an inability of a stock to clear the same resistance level on two separate occasions, which in turn foments a belief that the stock is at risk of pivoting from an uptrend to a downtrend.
To be clear, a double top doesn't mean a subsequent downtrend is assured, only that the possibility of experiencing a downtrend has increased.
Getting back to bonds, an interesting technical development is afoot with longer-dated Treasury yields showing the semblance of a double-top formation. The recent move higher in yields took them back to where they were just before the mini banking crisis in March, but that is where stronger resistance came into play.
Reasons to Buy Bonds
In the world of bonds, yields go up as prices go down and vice versa; therefore, a double-top formation in yields connotes a potentially bullish development for bond investors.
Why would Treasury yields move lower beyond the obvious explanation that there are more buyers than sellers?
- There is a belief that economic activity will be slowing.
- There is a belief that inflation pressures will be easing.
- There is a belief that monetary policy will be less hawkish.
- There is a quantitative easing policy being employed by the Federal Reserve.
- There is an increased bid for capital preservation.
- There is an effort to mitigate the volatility of the equity portion of an investment portfolio.
- There is a desire to have a guaranteed and predictable income stream.
- There is a safety trade because of a geopolitical development.
- There is rebalancing activity following a period of underperformance versus stocks.
The reasons above are all fundamental in nature, but of course there can be a technical reason, too, as technical traders watch levels and respond accordingly.
Sometimes, the responses are short-lived, but other times they last longer as the general price action adheres to technical trading considerations and even more so when there is a fundamental catalyst that validates a security hitting resistance or finding support.
What It All Means
Longer-dated yields are running into resistance -- for now anyway. That has a lot to do with the first three bullet points: a belief that economic activity will be slowing, a belief that inflation pressures will be easing, and a belief that monetary policy will be less hawkish which, in this case, means the Fed will be done raising rates soon.
The June Consumer Price Index was fundamentally supportive for bonds as it revealed an ongoing and encouraging trend of disinflation in both total CPI and core CPI, which excludes food and energy.
That could very well mean that the resistance longer-dated Treasury yields have encountered will hold up and that further price appreciation will be seen in longer-dated Treasury securities. If so, that would be constructive for stock prices, which often find support when rising Treasury yields run into resistance.
-- Patrick J. O'Hare, Briefing.com
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