Market Snapshot
briefing.com
| Dow | 33498.09 | +378.56 | (1.14%) | | Nasdaq | 13447.52 | +227.69 | (1.72%) | | SP 500 | 4317.44 | +59.25 | (1.39%) | | 10-yr Note | -27/32 | 4.78 |
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| | NYSE | Adv 1799 | Dec 1011 | Vol 939 mln | | Nasdaq | Adv 2650 | Dec 1628 | Vol 4.3 bln |
Industry Watch
| Strong: Health Care, Information Technology, Communication Services, Industrials, Materials, Financials |
| | Weak: Consumer Staples |
Moving the Market
-- Digesting the September employment report, which showed a big jump in private payrolls,
-- Treasury yields pulling back from their post-employment report highs
-- Relative strength in the mega cap space
-- Lingering sense that the market is due for a bounce
| Closing Summary
06-Oct-23 16:30 ET
Dow +288.01 at 33407.54, Nasdaq +211.51 at 13431.34, S&P +50.31 at 4308.50
[BRIEFING.COM] The major indices closed out the session near their highs, which had the S&P 500 (+1.2%) above the 4,300 level. The Nasdaq Composite, Russell 2000, and Dow Jones Industrial Average climbed 1.6%, 1.0%, and 0.9%, respectively.
Things looked different at the open, however, with stocks moving lower after a sharp move higher in Treasury yields. The 2-yr yield and 10-yr yield hit 5.13% and 4.87%, respectively, as participants eyed a much stronger-than-expected nonfarm payrolls gain of 336,000 (Briefing.com consensus 158,000) for September and ruminated over how that payroll strength might affect Fed policy.
Additionally, the nonfarm payrolls number for September was accompanied by upward revisions to July and August data that summed to 119,000 more jobs than previously thought.
The fed funds futures market now sees a 31.8% probability of another rate hike in November, up from 20.1% yesterday, and a 42.6% probability of another rate hike in December, up from 33.1% yesterday, according to the CME FedWatch Tool.
Treasury yields quickly pulled back from their post-employment report highs, however, due presumably to a sense that the bond market was oversold in the short-term and as participants found a bit of a silver lining in the understanding that average hourly earnings growth moderated to 4.2% year-over-year from 4.3% in August. The 2-yr note yield settled at 5.06%, which was still three basis points higher than yesterday. The 10-yr note yield rose seven basis points to 4.78%.
With Treasury yields coming off their highs, stocks reacted favorably, staging their own reversal that was likely helped by some short-covering activity. The mega cap stocks led the recovery, evidenced by a 1.7% gain in the Vanguard Mega Cap Growth ETF (MGK), but market breadth saw advancers move comfortably ahead of decliners as the rebound gained steam. Ten of the 11 S&P 500 sectors registered gains. The heavily-weighted information technology sector (+1.9%) led the pack while the consumer staples sector (-0.5%) was alone in the red.
As a reminder, the Treasury market will be closed on Monday for the Columbus Day holiday, which is also referred to as Indigenous Peoples' Day.
- Nasdaq Composite: +28.3% YTD
- S&P 500: +12.2% YTD
- S&P Midcap 400: +1.0% YTD
- Dow Jones Industrial Average: +0.8% YTD
- Russell 2000: -0.9% YTD
Reviewing today's economic data:
- September Nonfarm Payrolls 336K (Briefing.com consensus 158K); Prior was revised to 227K from 187K; September Nonfarm Private Payrolls 263K (Briefing.com consensus 150K); Prior was revised to 177K from 179K; September Avg. Hourly Earnings 0.2% (Briefing.com consensus 0.3%); Prior 0.2%; September Unemployment Rate 3.8% (Briefing.com consensus 3.7%); Prior 3.8%; September Average Workweek 34.4 (Briefing.com consensus 34.4); Prior 34.4
- The key takeaway from the report is that it bodes well for the economy. That is good news, yet that good news is apt to translate in the market's mind into a stubborn Fed standing on guard to possibly raise rates again but certainly not cut them anytime soon.
- Consumer credit decreased by $15.6 bln in August (Briefing.com consensus $12.0 bln) after increasing an upwardly revised $11.0 bln (from $10.4 bln) in July.
- The key takeaway from the report is that nonrevolving credit saw the biggest drop since December 2015, reflecting the tighter lending standards and reduced borrowing needs in the face of higher interest rates.
Looking ahead, there is no U.S. economic data of note on Monday.
Key takeaway from consumer credit
06-Oct-23 15:35 ET
Dow +370.33 at 33489.86, Nasdaq +242.69 at 13462.52, S&P +61.20 at 4319.39
[BRIEFING.COM] The S&P 500 and Nasdaq hit new session highs heading into the close.
Consumer credit decreased by $15.6 bln in August (Briefing.com consensus $12.0 bln) after increasing an upwardly revised $11.0 bln (from $10.4 bln) in July.
The key takeaway from the report is that nonrevolving credit saw the biggest drop since December 2015, reflecting the tighter lending standards and reduced borrowing needs in the face of higher interest rates.
Revolving credit increased by $14.7 bln in August to $1.285 trln.
Nonrevolving credit decreased by $30.0 bln to $3.684 trln.
Consumer credit decreased at a seasonally adjusted annual rate of 3.8% in August. Revolving credit increased at an annual rate of 13.9%, while nonrevolving credit decreased at an annual rate of 9.8%.
Consumer credit declines in August; GM nearing a deal with UAW
06-Oct-23 15:05 ET
Dow +378.56 at 33498.09, Nasdaq +227.69 at 13447.52, S&P +59.25 at 4317.44
[BRIEFING.COM] The major indices are little changed over the last half hour.
The UAW announced that it had a major breakthrough with negotiations with General Motors (GM 31.15, +0.84, +2.8%), avoiding a strike at its Arlington, TX plant. GM agreed to place EV battery manufacturing under master agreement, but a tentative agreement is not going to be announced yet.
Consumer credit decreased by $15.63 billion in August (Briefing.com consensus +$12.0 billion) following a revised $10.99 billion increase in July (from $10.4 billion).
Freeport-McMoRan helped by copper prices, Domino's slips amid chatter of weight-loss drug pressures
06-Oct-23 14:30 ET
Dow +354.44 at 33474.01, Nasdaq +214.86 at 13434.69, S&P +55.16 at 4313.35
[BRIEFING.COM] The S&P 500 (+1.30%) is in second place on Friday afternoon, up about 55 points and holding near today's highs.
S&P 500 constituents MGM Resorts (MGM 36.86, +2.07, +5.95%), MarketAxess (MKTX 238.17, +12.56, +5.57%), and Freeport-McMoRan (FCX 36.82, +1.45, +4.10%) pepper the top of the index. MKTX caught a Buy initiation out of UBS this morning, while FCX benefits from today's strength in copper prices.
Meanwhile, Domino's Pizza (DPZ 339.61, -23.62, -6.50%) is at the bottom of the S&P amid weakness in fast/casual dining names which has been tied to weight-loss drugs Wegovy and Ozempic; the company also reports earnings next week.
Gold trims weekly losses on Friday, snaps lengthy losing streak
06-Oct-23 14:00 ET
Dow +325.13 at 33444.70, Nasdaq +197.27 at 13417.10, S&P +51.04 at 4309.23
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+1.49%) still holds the lead among the major averages, hovering near HoDs and a two-week high.
Gold futures snapped their string of nine straight down sessions, rising $13.40 (+0.7%) to $1,845.20/oz on Friday, down then about -1.1% on the week.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $106.12.
Page One
Last Updated: 06-Oct-23 09:03 ET | Archive
Sunny labor market clouds interest rate outlook
The first week of October has not been a good week for the stock market. Entering today, the Russell 2000 is down 3.0%, the S&P Midcap 400 is down 2.7%, the Dow Jones Industrial Average is down 1.2%, and the S&P 500 is down 0.7%.
What about the Nasdaq Composite? It is flat for the week, which is good, but it is also a little self serving in the sense that it has been underpinned by gains in the mega-cap stocks. The Vanguard Mega-Cap Growth ETF (MGK) is up 0.7% for the week. That's all well and good for those stocks, but in general, it has not been an all well and good picture for the stock market, evidenced by the 2.1% decline seen this week in the equal-weighted S&P 500.
The hope has been that the stock market is primed for a sharp rebound from an oversold position. That hope has been clouded, however, by the incessant rise in market rates, particularly long-term rates. As it so happens, it is another cloudy morning for the stock market because, well, the September employment report had an otherwise sunny disposition.
Nonfarm payrolls rose a much stronger than expected 336,000 (Briefing.com consensus 158,000) and upward revision to July and August summed to an additional 119,000 jobs than previously thought. That was a shocker for the market given the soft ADP employment change reading seen earlier this week, but to be fair, maybe it should not have been a shocker given that initial jobless claims have been running at low levels consistent with a tight labor market.
There was a bit of moderation in average hourly earnings growth to 4.2% year-over-year from 4.3% in August, but when that is balanced with the unchanged 3.8% unemployment rate, the dip in the U6 unemployment rate, and the clear and continued strength in hiring activity, this labor market is not going to be labeled a weak labor market.
The key takeaway from the report is that it bodes well for the economy. That is good news, yet that good news is apt to translate in the market's mind into a stubborn Fed standing on guard to possibly raise rates again but certainly not cut them anytime soon.
The 2-yr note yield, at 5.04% just before the release, is up 10 basis points to 5.13%. The 10-yr note yield, at 4.74% just before the release, is up 16 basis points to 4.87%.
Currently, the S&P 500 futures are down 41 points and are trading 1.0% below fair value, the Nasdaq 100 futures are down 178 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 220 points and are trading 0.7% below fair value.
Notable headlines from the September Employment Situation Report:
- September nonfarm payrolls increased by 336,000 (Briefing.com consensus 158,000). The 3-month average for total nonfarm payrolls increased to 266,000 from 189,000. August nonfarm payrolls revised to 227,000 from 187,000. July nonfarm payrolls revised to 236,000 from 157,000.
- September private sector payrolls increased by 263,000 (Briefing.com consensus 150,000). August private sector payrolls revised to 177,000 from 179,000. July private sector payrolls revised to 145,000 from 155,000.
- September unemployment rate was 3.8% (Briefing.com consensus 3.7%), versus 3.8% in August. Persons unemployed for 27 weeks or more accounted for 19.1% of the unemployed versus 20.3% in August. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.0% versus 7.1% in August.
- September average hourly earnings were up 0.2% (Briefing.com consensus 0.3%) versus 0.2% in August. Over the last 12 months, average hourly earnings have risen 4.2%, versus 4.3% for the 12 months ending in August.
- The average workweek in September was 34.4 hours (Briefing.com consensus 34.4), versus 34.4 hours in August. Manufacturing workweek held steady at 40.1 hours. Factory overtime unchanged at 3.1 hours.
- The labor force participation rate held steady at 62.8%.
- The employment-population ratio held steady at 60.4% for the third straight month.
-- Patrick J. O'Hare, Briefing.com
Aehr Test Systems not passing the inspection today as guidance disappoints (AEHR)
Aehr Test Systems (AEHR), a provider of burn-in and testing equipment that detects defects in the production of semiconductors, is plummeting today despite delivering upside 1Q24 results after the close last night. Growth was strong with revenue surging by 93% yr/yr to $20.6 mln, primarily driven by robust demand from electric vehicle (EV) manufacturers as they ramp up orders of silicon-carbide power chips. In fact, CEO Gayn Erickson characterized the performance as the company's "strongest first quarter in its history", which also happens to be the company's seasonally slowest quarter.
So, the question then is, why is the stock selling off so sharply if the company posted such strong results?
- We believe the weakness is due to AEHR's guidance. Despite topping expectations for Q1, the company opted to merely reaffirm its FY24 guidance, rather than nudge it higher. Specifically, the company is still forecasting revenue of at least $100 mln, which is essentially in line with analysts' estimates.
- Furthermore, with a lofty P/S of nearly 20x, that disappointment provided enough of an excuse to head for the exits -- especially since the stock had already rallied by nearly 120% prior to today's selloff.
- More broadly speaking, the prospect of "higher rates for longer" could dampen demand for EVs -- a market that AEHR is currently very dependent upon.
- There is still plenty of good news for AEHR, though. Over the past nine months, the company has seen its design volume triple as more EVs models are launched, fueling strong demand for AEHR's FOX WaferPak Contactors.
- Additionally, the company is seeing increasing interest from customers outside of the EV industry. Notably, the company's last two customer wins were for applications outside of EVs, and included systems for solar, industrial, and commuter electric trains.
- Longer term, AEHR believes it has substantial growth potential in gallium nitride, which is a semiconductor material that's uniquely suited for lower power converter applications relative to silicon carbide. Although the company only expects to generate a small amount of revenue from gallium nitride applications this year, that market could become a more meaningful contributor down the road.
Overall, AEHR's results were impressive in Q1 as revenue and non-GAAP EPS soared by 93% and 260%, respectively. Today's weakness seems to be driven by a "sell the news" reaction as the company's reaffirm of guidance didn't live up to the lofty expectations in the wake of a triple-digit gain for the stock in 2023.
Levi Strauss traded to new lows on earnings; weak US wholesale offsetting strong DTC growth (LEVI)
Levi Strauss (LEVI) is trading flat after an initial downside move after reporting a slight EPS beat for Q3 (Aug) results last night. Unfortunately, revs were a bit light and LEVI said it was taking a "cautious approach" to its outlook for Q4 (Nov). This caused management to say it expects FY23 adjusted EPS to at lower end of its $1.10-1.20 prior guidance. It also lowered its FY23 revenue growth outlook to +0-1% from +1.5-2.5%.
- Basically, the strong double-digit growth of its DTC (direct-to-consumer) business, which includes ecommerce and company-operated stores, was offset by continued softness in the wholesale channel, particularly in the US. The company has been accelerating its transition to be a DTC-led company. Along with that, LEVI announced last night it has commenced an initiative to review its operating model and cost structure that should drive material cost savings beginning in 2024.
- Its DTC channel posted 14% growth (+13% CC), driven by broad-based growth in both stores and e-commerce. DTC comped positively in every region and across mainline, outlet and e-commerce. Revenue from e-commerce grew 19% (+18% CC), reflecting double-digit growth across all brands. In the US, its DTC business grew 10%, and US mainline, which sells its most premium product, comped double-digits. DTC comprised 40% of total revenue in Q3.
- Wholesale remains the laggard as revenue declined -8% (-10% CC). Growth in Asia and Latin America was offset by declines in North America and Europe. LEVI is seeking to stabilize the wholesale channel, and it is showing sequential improvement. LEVI says early indications from the price reductions implemented in US wholesale late in Q3 are positive. LEVI has begun to see the impact of lower inventories and improved fill rates.
- LEVI expects sequential improvement in US wholesale trends with customer fill rates normalizing in Q4. This will also ensure greater newness on the floor heading into the critical holiday period. While DTC is its channel priority, LEVI says its wholesale business remains important because it amplifies its brands, creates access for consumers and contributes to the bottom line. However, wholesale will continue to be a smaller part of its mix over time.
- Despite the weakness in US wholesale, LEVI says its brand is arguably the strongest it has ever been. AURs continued to grow despite LEVI strategically lowering prices in the US wholesale channel at the end of Q3, primarily driven by mix. Specifically, LEVI continues to grow share with the higher income consumer and it sees strength in its full-price mainline (non-outlet) store business. Also, the Levi's brand continues to gain US market share.
Overall, investors are clearly not too pleased with LEVI's Q3 results and outlook. The stock has traded to a new 3-year low today. It is clear that LEVI's US wholesale business continues to struggle. DTC and international remain bright spots, but US wholesale has been a notable laggard. It shows that even top notch brands like Levi's are not immune from macro headwinds. We would be cautious about bottom fishing down here just yet. We would want to see its US wholesale segment at least stabilize first. Its peer Kontoor Brands (KTB), which owns Wrangler and Lee jeans, was lower in sympathy. KTB typically reports in early November.
Exxon Mobil nears blockbuster deal to acquire Pioneer Natural Resources, but timing is risky (XOM)
In mid-April, the Wall Street Journal first reported that Exxon Mobil (XOM) was in discussions with Pioneer Natural Resources (PXD) to acquire the oil and gas producer and now it appears that a blockbuster deal may only be days away. Last night, the Wall Street Journal followed up on that initial report, stating that a takeover worth approximately $60 bln is in the works, although an agreement hasn't been finalized just yet.
With a market cap of about $50 bln as of yesterday's close, the development has shares of PXD spiking sharply higher. XOM, on the other hand, is drifting lower as market participants digest the possibility of the company consummating the largest acquisition of the year. With a market cap of nearly $435 bln, XOM can easily absorb the much smaller PXD, but it will need to tap into the capital markets to finance the deal. As of June 30, 2023, XOM held cash and cash equivalents of about $29.5 bln, while its total debt balance was quite high at $41.5 bln.
Beyond the possibility of adding more debt to the balance sheet, there also may be some concerns regarding the timing of this mega deal. Crude oil prices have been diving lower and they may continue to do so if the dollar strengthens further, and/or if the economy sours, causing demand for oil to weaken. On that note, today's strong September jobs report sent yields and the U.S. dollar higher, which could put more pressure on commodity prices.
From a strategic standpoint, though, XOM's interest in acquiring PXD is clearly understandable.
- For starters, the addition of PXD -- which held oil and gas reserves of 2,376,628 MBOE as of December 31, 2022 -- would make XOM the dominant producer in the Permian Basin. Due to the attractive drilling economics of the Permian Basin, XOM has sought to significantly expand its operations there. In fact, in 2022, the Permian accounted for over 50% of XOM's net U.S. oil and gas out as production grew by 20% to more than 550,000 oil-equivalent barrels per day.
- Given XOM's size, there are few M&A opportunities out there that would really move the needle, but PXD is one of them. In 2022, PXD generated revenue and cash flow from operations of $24.3 bln and $11.3 bln, respectively. For some context, XOM's operations generated cash flow of $25.7 bln for the six months ended June 30, 2023.
- At a transaction value of $60 bln, XOM would be paying a reasonable price with a Price/EBITDA of around 6-7x, based on PXD's expected EBITDA in 2024.
- Although the deal is massive, the integration risks should be relatively manageable since XOM already has a major presence in the Permian and since there wouldn't be a significant change to XOM's business model.
An acquisition of PXD would be a transformative event for XOM with the company placing a huge bet on fossil fuels while other energy companies like Shell (SHEL) and BP (BP) increasingly focus on renewable energy. While the prospect of becoming the dominant player in the oil rich Permian Basin is certainly compelling, our concern is that a downward slide in crude oil prices could make the timing of this transaction less than ideal. In other words, if crude oil prices continue to slide lower in the coming months, XOM would likely be able to pay a significantly lower price for PXD as its market cap declines alongside a decline in commodity prices.
Exxon Mobil pumped out stronger profits in Q3, but falling oil prices negate the good news (XOM)
Exxon Mobil (XOM), which is scheduled to report 3Q23 earnings on November 4, disclosed in an SEC filing last night that its business benefitted from high oil and natural gas prices during the quarter. In essence, the company's update, which included an estimated operating profit of $5.2-$6.7 bln for the oil and gas business, indicated that its Q3 earnings will roughly match analysts' earnings expectations. Since XOM is typically one of the first oil and gas companies to report quarterly earnings, its Q3 update is a positive sign for the sector as earnings season approaches.
However, the good news for Q3 is being overshadowed by a sharp decline in crude oil prices this week. Yesterday, it was reported that gasoline inventories saw their largest weekly increase since early 2022, jumping by 6.5 mln barrels to 227 mln barrels, signaling that demand is falling as macroeconomic concerns rise in the face of higher interest rates.
Furthermore, with XOM shares rallying by about 10% since the beginning of August, prior to this week's selloff, it seems that a solid quarter was already priced in. It was indeed a good quarter for XOM as business improved from Q2 across most of its businesses.
- The largest impact came from higher crude oil prices, which pushed operating profit higher by $900 mln to $1.3 bln in the upstream business. During the quarter, crude oil prices jumped by about 30%, prompting oil and gas producers like XOM to ramp up production.
- Meanwhile, refining margins shot sharply higher in Q3, even as crude output in the U.S. increased. Supply cuts from OPEC+, combined with strong global demand for gasoline, jet fuel, and other products, have facilitated strong refining margins. XOM estimates that a positive change in industry margins drove operating profit higher by $900 mln to $1.1 bln in Q3.
- Partially offsetting these gains is the continued weakness in the Chemicals business, which makes products that are used in economically sensitive industries such as automotive, industrial, and consumer packaging. In Q3, the Chemicals segment experienced an operating profit decline of $400-$600 mln due to contracting industry margins.
The main takeaway is that while higher crude oil and natural gas prices led to a strong Q3 for XOM, market participants are looking beyond those results as commodity prices dive lower, signaling a rougher quarter ahead.
Lamb Weston mounting a turnaround following upbeat AugQ results (LW)
Lamb Weston's (LW +9%) Q1 (Aug) earnings results were no small potatoes, topping bottom-line estimates by its widest margin in over five years and hiking its FY24 (May) outlook. The global potato producer, whose largest customer is McDonald's (MCD), comprising 13% of FY23 (May) sales, did experience 8% lower volumes yr/yr in the quarter. However, this minor weak point was primarily due to the company exiting lower-priced, lower-margin businesses, with some lingering effects from ongoing inventory destocking. Notably, LW anticipates volumes to improve as the year progresses.
- Headline numbers shined in Q1. LW delivered adjusted EPS of $1.63, a 117% spike yr/yr. Meanwhile, revs exploded by 48.0% to $1.67 bln, LW's second-consecutive quarter of above-40% growth. However, it should be noted that most of LW's buoyant sales growth branched from recent acquisitions, primarily from its EMEA business. When backing out acquisition impacts, sales grew just 15% yr/yr.
- By exiting lower-margin businesses, LW has enjoyed meaningful margin improvements over the past few quarters. In fact, despite Q1 typically being LW's lowest-margin quarter due to seasonality, gross margins expanded by roughly 400 bps yr/yr to nearly 28%. Helping LW's margins were higher potato prices, including a 20% jump in prices in North America and a 35-40% increase in Europe.
- LW was quite upbeat about the current operating climate despite a few pockets of lingering weakness. Management mentioned that the global frozen potato category remains healthy, boasting balanced supply and demand dynamics. Furthermore, the rate at which consumers order fries at food service outlets across LW's key markets remained steady and above pre-pandemic levels.
- On a side note, LW commented that quick-service-restaurant traffic growth offset further declines in full-service-restaurant channels, reflecting the effects of inflation nudging consumers toward lower-priced QSR venues.
- This dynamic is a positive sign for QSR chains, such as MCD, Wendy's (WEN), and Restaurant Brands International (QSR).
- Conversely, shifting away from full-service chains could hinder the growth of companies like Brinker International (EAT). We already witnessed underwhelming figures from casual dining firm Darden Restaurants (DRI) last month.
- Regarding the upcoming potato crop harvest, LW was also bullish, expecting crops in North America in line with pre-pandemic historical averages. Likewise, in Europe, LW anticipates crops in line with historical norms due to improved growing conditions in the region.
- As a result of sound Q1 results and upcoming crop harvests, LW raised its FY24 outlook, forecasting adjusted EPS of $5.50-5.95, up from $4.95-5.40, and revs of $6.8-7.0 bln, a $0.1 bln improvement.
After a discouraging Q4 (May) report in late July spurred investors to drop LW like a hot potato, its Q1 results signaled that much of its woes may have been short-lived. After spooking the market last quarter, projecting a challenging global demand backdrop to persist, LW appears to be amid improving dynamics. Although inflationary pressures could intensify, weighing on the end consumer, LW has already secured price hikes within around 80% of its contracts. Given positive harvests and improving traffic trends, LW might be amid a broader turnaround.
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