Market Snapshot
| Dow | 33602.45 | -404.39 | (-1.19%) | | Nasdaq | 13060.85 | -210.47 | (-1.59%) | | SP 500 | 4272.31 | -65.13 | (-1.50%) | | 10-yr Note | -2/32 | 4.56 |
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| | NYSE | Adv430 | Dec2413 | Vol847 mln | | Nasdaq | Adv1354 | Dec2971 | Vol4.7 bln |
Industry Watch
| Strong:-- |
| | Weak:Utilities, Consumer Discretionary, Real Estate, Information Technology, Industrials |
Moving the Market
-- Relatively weak mega caps having a disproportionate influence on index performance
-- Treasury yields climb again, reaching new high closing levels for the year
-- Specter of rates staying higher for longer
-- S&P 500 slipping below 4,300
-- Reacting to comments from JPMorgan CEO Dimon, along with Minneapolis Fed President Kashkari (FOMC voter)
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Closing Summary
26-Sep-23 16:25 ET
Dow-388.00at 33618.84,Nasdaq-207.71at 13063.61,S&P-63.91at 4273.53
[BRIEFING.COM] The major indices all fell more than 1.0% today, erasing yesterday's modest rebound right out of the gate. The negative bias was due in part to ongoing worries about higher interest rates.
The 10-yr note yield climbed another two basis points today to 4.56%, after hitting 4.48% at this morning's low, despite some weaker than expected new home sales and consumer confidence data released this morning. The 2-yr note yield rose two basis points to 5.12%.
Concerns about higher rates were stoked by JPMorgan Chase CEO, Jamie Dimon, who told theTimes of Indiathat he is not sure the world is prepared for 7%, and Minneapolis Fed President Kashkari (FOMC voter), who said, according toBloomberg, that he thinks another rate hike before year end would likely be needed if the economy is stronger than expected.
Seasonality was cited as another potential factor contributing to the negative price action. September, historically, has been the worst month of the year for the S&P 500. With today's losses, the S&P 500, Nasdaq Composite, and Russell 2000 are now down 5.2%, 6.9%, and 7.2%, respectively, this month.
Mega caps and semiconductor stocks paced broad based losses, but it was the rate-sensitive utilities sector (-3.1%) that saw the biggest decline today. The Vanguard Mega Cap Growth ETF (MGK) fell 1.7% and the PHLX Semiconductor Index fell 1.8%. The market-cap weighted S&P 500, which fell 1.5%, closed below 4,300 for the first time since early June and near its worst level of the day.
Decliners had a nearly 6-to-1 lead over advancers at the NYSE and a greater than 2-to-1 lead at the Nasdaq. Volume picked up from yesterday, but remained below average at the NYSE and Nasdaq.
All 11 S&P 500 sectors closed in the red. The energy sector (-0.5%) saw the smallest decline as oil prices climbed ($90.49/bbl, +0.87, +1.0%). The consumer discretionary sector (-2.0%) was another laggard of note along with the information technology (-1.8%) and real estate (-1.8%) sectors.
Separately,Amazon.com(AMZN125.98, -5.29, -4.0%) was an individual standout of note to the downside following news that the FTC and 17 state attorneys general are suing the company for illegally maintaining monopoly power.
- Nasdaq Composite: +24.8% YTD
- S&P 500: +11.3% YTD
- S&P Midcap 400: +1.7% YTD
- Dow Jones Industrial Average: +1.4% YTD
- Russell 2000: UNCH YTD
Reviewing today's economic data:
- July FHFA Housing Price Index 0.8%; Prior was revised to 0.4% from 0.3%
- July S&P Case-Shiller Home Price Index 0.1% (Briefing.com consensus 0.5%); Prior -1.2%
- September Consumer Confidence 103.0 (Briefing.com consensus 105.0); Prior was revised to 108.7 from 106.1
- The key takeaway from the report is that the drop in consumer confidence was driven by consumers' weakening expectations for future business conditions, job availability, and incomes, all of which has the potential to translate into softer spending activity.
- August New Home Sales 675K (Briefing.com consensus 695K); Prior was revised to 739K from 714K
- The key takeaway from the report is that new home sales activity, which is measured on signed contracts, is being adversely impacted by high mortgage rates that have hurt affordability. New home sales in August were the lowest since March.
Looking ahead to Wednesday, participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 5.4%)
- 8:30 ET: August Durable Orders (Briefing.com consensus -0.2%; prior -5.2%) and Durable Orders ex-transportation (Briefing.com consensus 0.3%; prior 0.5%)
- 10:30 ET: Weekly crude oil inventories (prior -2.14 mln)
Indices decline; Yields settle higher
26-Sep-23 15:30 ET
Dow-397.48at 33609.36,Nasdaq-225.56at 13045.76,S&P-67.67at 4269.77
[BRIEFING.COM] The market remains near the lows of the day ahead of the close.
The 2-yr note yield rose two basis points to 5.12% and the 10-yr note yield climbed another two basis points to 4.56%. The US Dollar Index rose 0.2% to 106.23.
The CBOE Volatility Index is up 13.4%, or 2.26, to 19.16.
Sell-off continues
26-Sep-23 15:00 ET
Dow-404.39at 33602.45,Nasdaq-210.47at 13060.85,S&P-65.13at 4272.31
[BRIEFING.COM] The major indices extended their losses in recent action.
WTI crude oil futures rose 1.0% today to $90.49/bbl and natural gas futures fell 1.6% to $2.85/mmbtu. On a related note, the S&P 500 energy sector (-0.8%) has given up its first place spot on the leaderboard.
The rate-sensitive utilities sector (-2.9%) is still at the bottom of the pack followed by the consumer discretionary (-2.1%) and information technology (-1.9%) sectors.
Cintas falls in S&P 500 ranks after earnings/guidance
26-Sep-23 14:30 ET
Dow-395.33at 33611.55,Nasdaq-190.40at 13080.92,S&P-59.91at 4277.53
[BRIEFING.COM] The S&P 500 (-1.38%) is in second place again on Tuesday, down now just shy of 60 points.
S&P 500 constituentsCintas(CTAS 483.07, -22.45, -4.44%),Etsy(ETSY 61.81, -2.91, -4.50%), andBath & Body Works(BBWI 31.72, -1.35, -4.08%) pepper the bottom of the index. In-line Q1 revenues and in-line guidance gave some investors pause on CTAS, while Evercore ISI trimmed their ETSY price target to $85, and BBWI slips alongside fellow consumer discretionary stocks.
Meanwhile, San Diego-based medical supply companyResMed(RMD 143.15, +4.86, +3.51%) is atop the standings.
Gold slips on dollar, yield gains
26-Sep-23 14:00 ET
Dow-376.32at 33630.56,Nasdaq-184.71at 13086.61,S&P-57.04at 4280.40
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-1.39%) is still today's worst-performing major average, having moved to session lows in the last half hour.
Gold futures settled $16.80 lower (-0.9%) to $1,919.80/oz, pressured in part by modest gains in the dollar and treasury yields.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $106.18.
Page One
Last Updated: 26-Sep-23 08:52 ET | Archive
Stock market has plenty on its mind
The major indices managed to record some modest gains on Monday as the 10-yr note yield moved up to 4.55%. It kissed 4.56% in overnight action, but has been sliding most of the morning and currently sits at 4.49%. The curious thing is that the equity futures market is lower despite the dip in the 10-yr note yield.
Currently, the S&P 500 futures are down 23 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 81 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are down 155 points and are trading 0.4% below fair value.
That makes it challenging to figure out where the market's head is at these days. We think it is locked on worries about rates staying higher for longer and that it is contemplating the impact of rates staying higher for longer on borrowers and consumers, which is to say it is contemplating a potential slowdown in growth.
But, today, it may just be thinking about fund flows. The price of the 10-yr note yield could be going up today (sending yields lower), because it has been going down most of the month. In other words, this morning's price action could just be a case of a technical bounce from a short-term oversold condition.
That may be why there isn't as much appreciation in the equity futures market this morning for the dip in rates since some see it only as a technical move rather than a fundamental move. Their fundamental vision has been clouded so to speak by JPMorgan Chase CEO Jamie Dimon telling theTimes of Indiathat he is not sure if the world is ready for 7%.
That wasn't necessarily a forecast, only a warning of sorts in our estimation that it is something that should be thought about and prepared for in the event it comes to pass.
Separately, Minneapolis Fed President Kashkari (FOMC voter) said he thinks another rate hike would be likely before year end and that the Fed will need to stay higher for longer if the economy is stronger than expected, according toBloomberg.
This thinking is in-line with the prevailing view at the Fed, so it isn't a surprise; nonetheless, it is another reminder to the market that rates may not be done going up.
That is perhaps why there hasn't been the same inclination to buy on weakness that has been seen in the not-so-distant past. Other factors seemingly weighing on the equity futures market include the softness in mega-cap stocks, reports that a unit of Chinese property developer Evergrande missed a bond payment, the specter of a government shutdown, and the ongoing UAW strike.
It is hard to say, but what it is easy to see is that the stock market has plenty on its mind that is getting in the way of a concerted rebound effort at the end of what has a history of being a weak month for the stock market.
-- Patrick J. O'Hare, Briefing.com
NVIDIA's AI-related tailwinds set to accelerate as it eyes advertising agencies (NVDA)
NVIDIA (NVDA)is looking to enhance its AI profile further afterBusiness Insiderreported that the chip giant, whose shares are up nearly 200% on the year following two consecutive quarters of outsized performance, is eyeing the advertising industry as the next market hungry for AI. This is not the first time we have heard of NVDA selling its AI GPUs to the advertising industry, with the company announcing its partnership withWPP (WPP), the world's largest advertising agency, in May. In fact, it does not seem any industry is off limits regarding implementing AI in some form. However, outside the tech field, advertisers appear to be the next best market ripe for AI-related disruption.
- One of WPP's top priorities is bolstering WPP Open, its AI-powered agency operating system. The company discussed its plans surrounding AI at length last month, noting that with ad spending projected to increase over the long term, AI will unlock the ability to tackle growing advertisement projects while significantly reducing expenditures.
- WPP also highlighted AI's advantage in personalizing advertising, one of the most significant drivers of complexity and costs. AI can generate personalized scripts, music, images, and videos, allowing a greater ability to target more personal ads.
- Interpublic (IPG), another advertising firm, was similarly optimistic about the personalization AI brings in late July. At the same time, IPG stated that combining AI and human creativity can better solve challenges associated with marketing, i.e., where to advertise, what content would garner the most attention, etc.
Disruptive technologies must possess the capacity to reduce companies' costs. With AI able to generate media, changing landscapes and artifacts instantly, eliminating the need for many different expensive sets and on-location production, the technology could rapidly alter the advertising landscape.
Still, generative AI remains in the early stages of growth, making it unproven whether consumers will respond to AI-generated ads more than traditional advertisements. Additionally, although generative AI is exceptional at creating eye-catching media, it may not capture emotions to the degree humans can, potentially keeping a lid on ad agencies' usage of the technology.
Nevertheless, when NVDA partnered with WPP, NVDA CEO Jensen Huang remarked that the $700 bln digital ad industry was racing to realize the benefits of AI. As such, these risks will not likely prevent the ad industry from adopting NVDA's AI chips, adding another tailwind for the tech giant.
United Natural Foods looks rotten today as easing food inflation spoils company's bottom-line (UNFI)
While an easing of food prices from last year's sky-high levels is a much-welcomed development for consumers, grocery distributorUnited Natural Foods(UNFI) isn't enjoying the moderating inflation nearly as much as shoppers. The company, which distributes organic food toAmazon's(AMZN) Whole Foods Market, among other grocery chains, is plunging to new multi-year lows after reporting a Q4 loss per share of ($0.25) while also guiding FY24 EPS well below expectations. Unlike last year, when UNFI was able to procure products at lower prices ahead of price swings higher for those same products, the company's margins and earnings are now eroding as inflation dissipates.
- UNFI did beat EPS expectations, but the swing to unprofitability is what really stands out. In the year-earlier quarter, UNFI generated a healthy EPS of $1.27, representing yr/yr growth of about 8%. In fact, the company has a long track record profitability with the Q4 loss being its first loss in over five years.
- Declining margins are partly to blame for the earnings downturn. Due to lower levels of procurement gains, and increased shrink (mainly related to theft), adjusted gross margin contracted by 170 bps yr/yr to 13.5%.
- Softening demand is another issue. Net sales increased by just 2% yr/yr to $7.4 bln -- its weakest growth in two years. Although food prices have come down from a year ago, inflation and rising interest rates are still hurting consumers' spending power. Therefore, many people are looking to lower their grocery bills by buying items in bulk atCostco(COST) or atWalmart's(WMT) Sam's Club, rather than at a pricier Whole Foods Market.
- What's really weighing on the stock, though, is UNFI's downside guidance for FY24. Specifically, the company guided for EPS of ($0.88)-$0.38, which badly missed analysts' estimates. The main issue is that UNFI will continue to lap the elevated inflationary benefits from a year ago in 1H24. Putting even more pressure on the company's bottom-line is its plan to restore performance-based incentive cash compensation in FY24.
- In a separate press release, UNFI announced that it has added three new independent board members as it simultaneously enters into a new cooperation agreement with hedge fund firm JCP Investment Management. One of those new board members, James Pappas, is the founder and managing partner of JCP Investment Management. With these new board members in place, the company will aim to identify opportunities to unlock shareholder value creation while strengthening the balance sheet.
The main takeaway is that the inflationary benefits that UNFI enjoyed a year ago are now working against the company as it laps unfavorable yr/yr comparisons. Compounding the problem for UNFI is that many consumers are trading down to less expensive grocery stores in order to save money.
Cintas heads lower despite upside results; guidance and margin expansion were highlights (CTAS)
Cintas (CTAS -4%)is trading lower despite starting out FY24 with upside results for Q1 (Aug). Cintas beat on EPS although the upside was more modest than usual. We did not get the usual double-digit EPS upside we typically see. Also, revenue was just in-line while Cintas typically reports modest upside. Probably the highlight of the quarter was Cintas raising its FY24 EPS and revenue outlook by more than the Q1 upside, which implies upside for Q2-Q4.
We like to keep an eye on Cintas because it is a window into how businesses see their near term prospects. Cintas is best known as the largest supplier of work uniforms in the US, but it also gets more than half of its revenue from facility services (cleaning supplies, mops, first aid cabinets, PPE, fire extinguishers, alarms etc.)
- The smaller EPS upside was a bit of a letdown. Cintas came into this report having posted double-digit EPS beats in 17 of the past 18 quarters, but that was not the case this time. A concern we had coming into this report was that investors perhaps have gotten spoiled with monster beats from Cintas. The stock is lower, but holding up better than we would have expected.
- Cintas says its operating segments continue to execute at a high level, leading to robust volume growth and a record high operating margin.
- A bright spot with the report was margin expansion. Gross margin improved to 48.7% from 47.5% last year while operating margin improved to a record high of 21.4% vs 20.3% a year ago. Cintas cited lower energy expenses comprised of gasoline, natural gas and electricity. Cintas drives a lot of trucks to make uniform deliveries, so gas prices make a big difference. However, given the recent rise in gas prices, that makes us a bit nervous about Cintas' Q2 (Nov) margins.
- The Uniform Rental and Facility Services segment is by far the larger segment. Revenue grew 7.6% yr/yr to $1.83 bln, while other revenue jumped 10% yr/yr to $516 mln. The call has not started as of the time of this publication, but on the last call, Cintas noted that FY23 pricing was certainly above historical norms with FY24 pricing likely to return closer to historical norms.
- Quickly on the EPS guidance, Cintas bumped up its FY24 outlook to $14.00-14.45 from $13.85-14.35 prior guidance. Typically, companies do not like to raise full year guidance with only one quarter in the books. That way, they have more wiggle room with a lot of the year still remaining. As such, we think this guidance increase is a key positive and a big reason why the stock is holding up pretty well.
Overall, the Q1 headline results were a bit of a letdown. However, we think the margin expansion and increased FY24 guidance is helping to offset those results. Also, the stock had pulled back over the last week and a half heading into this report. As such, we think perhaps a more muted Q1 result was somewhat priced in already. More broadly, we generally remain a fan of Cintas. Its business tends to be consistent and predictable. Also, Cintas benefits from the trend toward businesses wanting to outsource functions so that its employees can focus on their core business.
Thor Industries amid a cloud day despite upbeat JulQ results; mild FY24 guidance weighs (THO)
Thor Industries (THO)is stuck in the mud today despite delivering solid upside on its top and bottom lines in Q4 (Jul). The world's largest recreational vehicle (RV) manufacturer also issued FY24 guidance in line with consensus.
So why are investors selling today?
- THO's FY24 revenue outlook was mild, projecting revs of $10.5-11.0 bln, another year of contraction against sales of $11.12 bln in FY23. This forecast did not align with peers' recent remarks regarding a return to growth in 2024. Although THO's fiscal year ends mid-way through the calendar year, it does include the bulk buying months, underpinning pockets of lingering demand weakness still seeping into next year.
- Likewise, THO's FY24 earnings guidance was on the lighter side, expecting $6.25-7.25, the midpoint of which missed analyst forecasts; THO stated that due to sizeable long-term investments, including R&D, its bottom line would lag next year. Given that the demand backdrop is still unfavorable, with inflation and interest rates creating considerable headwinds, investors are not approving of THO's investment timing.
- Speaking of economic challenges, with rates set to likely go up from here, the market has slowly grown more cautious on the RV industry, reflected by shares of THO slipping around 18% lower since August highs. Peers, including RV makerWinnebago (WGO)and RV dealerCamping World Holdings (CWH), have seen similar declines over that period.
There are still reasons to view the glass half full.
- THO executed against a lackluster demand environment quite well in Q4, registering EPS of $1.68, sufficient for a double-digit beat, and revs of $2.74 bln, translating to a much narrower decline than expected at 28.4% yr/yr.
- THO has been laser-focused on achieving through-cycle profitability, which has consistently shown up over the past few quarters. THO's production schedule remains conservative, learning from past mistakes when inventories piled up, leading to an extended period of promotional activity.
- As a result, inventories are leaner ahead of the seasonal updated model year rollout, putting dealers in decent positions where a promotional environment may not be as active compared to the past. CWH touched on this last month, noting that while Q3 (Sep) may grow more promotional, trends shifted as the company worked through the beginning of July.
- Longer-term dynamics remain positive. Pandemic-related tailwinds are still generating new RV buyers, while many who jumped into the lifestyle have stayed in. THO is also investing in automation projects to improve labor efficiencies and build out aftermarket strategies, a segment of the RV industry that remains relatively underserved, to enhance the end consumer experience.
After rising interest rates and inflation led to a tumultuous 2022, investors have been betting on a turnaround this year, pushing shares roughly 25% higher TYD. However, THO is amid substantial uncertainty as the fears about deteriorating macroeconomic conditions begin to weigh on the stock. While we like THO's long-term picture, given how the pandemic-induced popularity has sustained despite higher ownership costs, the near-term may remain volatile.
Li Auto stuck in reverse as rising economic concerns in China could put a dent in demand (LI)
Chinese electric vehicle makerLi Auto(LI) has emerged as one of the brightest up-and-coming EV producers in that country, but its growth has tapered off from the sky-high levels seen earlier this year and in 2022. For instance, August vehicle deliveries grew by just 2% month-on-month, after jumping by 21% in July and by 10% in June. These slowing growth concerns have weighed on the stock -- shares are down by nearly 25% since early August -- and escalating macroeconomic troubles in China are adding fuel to the fire today.
- Many Chinese ADRs are trading lower today as China's troubled real estate and property sector fall under the microscope yet again. Evergrande, the massive Chinese property developer that filed for U.S bankruptcy protection in August, disclosed over the weekend that it can no longer issue new debt. Therefore, the company's restructuring plans are now in doubt, creating fears that its demise could create a ripple effect across the Chinese economy.
- In the meantime, competitorNIO(NIO) is pushing back on aBloombergreport that said that the company is seeking to raise about $3 bln from investors. NIO issued a press release this morning stating that it currently has no reportable capital raising activity, other than the $1 bln convertible-debt offering that closed today. While the stock has recouped most of today's losses, it is still lower by about 19% since last Monday.
- When combined with the rising anxieties surrounding China's economy, the idea of NIO raising a substantial amount of capital gives the impression that the company is looking to shore up its capital base ahead of more challenging times. However, since NIO is refuting the accuracy of that article, perhaps this concern is overblown.
- LI is by far the weakest of the Chinese EV stocks today. The much steeper selloff may be due to the fact that LI makes higher end vehicles that are more expensive than most of its competitors. In August, the company once again held the top sales spot among high end new energy SUVS priced above RMB300,000 in China. In a more uncertain macroeconomic environment, consumers may look to trade down to more affordable vehicles, and/or they may have trouble securing financing for more expensive cars.
- Lastly, we also noticed that U.S.-based EV makers such asTesla(TSLA),Rivian(RIVN), andLucid Group(LCID) are all moving higher today, perhaps partly due to some capital flowing out of Chinese EV names and into U.S. EV names.
The bottom line is that Chinese EV stocks remain a very volatile bunch and the near-term outlook looks shaky-at-best as cracks within China's economy begin to resurface. We do believe that the Chinese government will continue to support the EV market through various incentives, but sentiment likely won't materially improve on these names until investors are feeling more confident about China's economy. |
