| | | Market Snapshot
briefing.com
| Dow | 33707.21 | -290.40 | (-0.85%) | | Nasdaq | 11427.24 | -2106.50 | (-15.56%) | | SP 500 | 4317.50 | -55.70 | (-1.27%) | | 10-yr Note | -5/32 | 4.90 |
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| | NYSE | Adv 471 | Dec 2348 | Vol 868 mln | | Nasdaq | Adv 1031 | Dec 3259 | Vol 4.6 bln |
Industry Watch
| Strong: Energy, Consumer Staples |
| | Weak: Industrials, Materials, Real Estate, Financials, Consumer Discretionary, Information Technology |
Moving the Market
-- Geopolitical angst after the summit between President Biden and Arab leaders was called off following the Gaza hospital bombing yesterday
-- Stocks reacting to the 10-yr note reaching new intraday high yield
-- Digesting a mixed batch earnings
-- Broad selling activity
| Closing Summary
18-Oct-23 16:30 ET
Dow -332.57 at 33665.04, Nasdaq -219.44 at 13314.30, S&P -58.60 at 4314.60
[BRIEFING.COM] Today's trade featured a fairly broad retreat. The major indices all fell at least 1.0% and the A-D line favored decliners by a 5-to-1 lead at the NYSE and a greater than 3-to-1 lead at the Nasdaq.
Rising Treasury yields were a big overhang for the market as the 10-yr note hit a new cycle high yield. Rates took a quick dip around midday in response to a solid $13 billion 20-yr bond reopening, but selling picked back up and Treasuries settled near their intraday high yields. The 2-yr note yield rose two basis points to 5.22% and the 10-yr note yield climbed another six basis points to 4.90%.
The negative bias in stock market was also a function of geopolitical uncertainty after a summit between President Biden, who is in Israel now, and regional leaders in the Middle East was cancelled following Tuesday's bombing of a Gaza hospital that killed hundreds of people.
Many stocks participated in the sell off. Nine of the 11 S&P 500 sectors registered a decline with four of them falling more than 2.0%. The energy (+0.9%) and consumer staples (+0.4%) sectors were alone in positive territory at the close.
The industrials sector (-2.4%) was a top laggard, thanks in part to a sizable loss in United Airlines (UAL 36.24, -3.88, -9.7%), which issued a Q4 profit warning tied to higher costs and the uncertainty related to the Israel-Hamas war. J.B. Hunt Transport (JBHT 178.67, -17.34, -8.9%) was another notable loser from the sector after missing on earnings estimates, saying it still sees a freight recession.
Morgan Stanley (MS 74.88, -5.45, -6.8%) was another standout loser after reporting quarterly results which contained some relatively disappointing results for its wealth management division. That weakness weighed on the financials sector, which dropped 1.7%.
Dow components Travelers (TRV 168.11, -1.25, -0.7%) and Procter & Gamble (PG 150.03, +3.77, +2.6%), meanwhile, received mixed reactions after reporting earnings.
Separately, it was reported that Rep. Jim Jordan (R-OH) lost a second vote to become Speaker of the House.
- Nasdaq Composite: +27.2% YTD
- S&P 500: +12.4% YTD
- Dow Jones Industrial Average: +1.6% YTD
- S&P Midcap 400: +1.1% YTD
- Russell 2000: -1.8% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -6.9%
- September Housing Starts 1.358 mln (Briefing.com consensus 1.380 mln); Prior was revised to 1.269 mln from 1.283 mln; September Building Permits 1.473 mln (Briefing.com consensus 1.448 mln); Prior was revised to 1.541 mln from 1.543 mln
- The key takeaway from the report is that the weakness was concentrated in permits for multi-unit dwellings. Single-unit starts were up 3.2% and single-unit permits rose 1.8%, which is welcome for a supply-challenged housing market.
Thursday's economic calendar features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 211,000; prior 209,000), Continuing Claims (prior 1.702 mln), and October Philadelphia Fed survey (Briefing.com consensus -6.5; prior -13.5)
- 10:00 ET: September Existing Home Sales (Briefing.com consensus 3.90 mln; prior 4.04 mln) and September Leading Indicators (Briefing.com consensus -0.4%; prior -0.4%)
- 10:30 ET: Weekly natural gas inventories (prior +84 bcf)
Treasuries settle with losses
18-Oct-23 15:30 ET
Dow -301.95 at 33695.66, Nasdaq -213.95 at 13319.79, S&P -55.13 at 4318.07
[BRIEFING.COM] The major indices continue to hit fresh session lows.
The 2-yr note yield rose two basis points to 5.22% and the 10-yr note yield climbed another six basis points to 4.90%.
Thursday's economic calendar features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 211,000; prior 209,000), Continuing Claims (prior 1.702 mln), and October Philadelphia Fed survey (Briefing.com consensus -6.5; prior -13.5)
- 10:00 ET: September Existing Home Sales (Briefing.com consensus 3.90 mln; prior 4.04 mln) and September Leading Indicators (Briefing.com consensus -0.4%; prior -0.4%)
- 10:30 ET: Weekly natural gas inventories (prior +84 bcf)
Energy complex settles mixed
18-Oct-23 15:05 ET
Dow -290.40 at 33707.21, Nasdaq -2106.50 at 11427.24, S&P -55.70 at 4317.50
[BRIEFING.COM] The market continues to fall. The major indices sport losses ranging from 0.8% to 1.7%.
Energy complex futures settled the session mixed. WTI crude oil futures rose 0.8% to $87.43/bbl and natural gas futures fell 0.9% to $3.05/mmbtu. The S&P 500 energy sector (+0.7%) remains in first place on the leaderboard.
The consumer staples sector (+0.5%) also trades in positive territory while the nine remaining sectors sport losses ranging from 0.7% (health care) to 2.5% (materials).
Beige Book shows economy little changed compared to prior report
18-Oct-23 14:30 ET
Dow -168.36 at 33829.25, Nasdaq -156.85 at 13376.89, S&P -38.53 at 4334.67
[BRIEFING.COM] The broader market had a muted reaction to the release of the Fed's latest Beige Book which said that the most districts indicated little to no change in economic activity since the September report. Currently, the S&P 500 (-0.88%) is in second place, hovering modestly off session lows.
Other points of interest from the report included: Labor market tightness continued to ease across the nation. Most Districts reported slight to moderate increases in overall employment, and firms were hiring less urgently. Most Districts still reported ongoing challenges in recruiting and hiring skilled tradespeople. A few highlighted that older workers are remaining in the labor force, either staying in their existing position or returning in a part-time capacity.
There were multiple reports of firms modifying their compensation packages to mitigate higher labor costs, including allowing remote work in lieu of higher wages, reducing sign-on bonuses or other wage enhancements, shifting compensation to more performance-based models, and passing on a greater share of healthcare and other benefits costs to employees.
Also, prices continued to increase at a modest pace overall. Districts noted that input cost increases have slowed or stabilized for manufacturers but continue to rise for services sector firms. Overall, firms expect prices to increase the next few quarters, but at a slower rate than the previous few quarters. Several Districts reported decreases in the number of firms expecting significant price increases moving forward.
Gold finds consolation in Israel-Hamas war chaos
18-Oct-23 13:55 ET
Dow -192.34 at 33805.27, Nasdaq -154.23 at 13379.51, S&P -39.59 at 4333.61
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-1.14%) is narrowly off session lows. The Fed's October Beige Book is due at the top of the hour.
Gold futures settled $32.60 higher (+1.7%) to $1,968.30/oz, ending comfortably higher fueled in part by geopolitical angst in reaction to yesterday's bombing of a Gaza hospital that killed hundreds of people.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $106.43.
Page One
Last Updated: 18-Oct-23 09:04 ET | Archive
Macro news flow not working in stock market's favor
There is a good bit of news flow this morning, but as of now, there isn't a good bit of flow in the equity futures market.
Currently, the S&P 500 futures are down 23 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 113 points and are trading 0.7% below fair value, and the Dow Jones Industrial Average futures are down 101 points and are trading 0.3% below fair value.
Buyers have been slow to step up this morning for a variety of reasons, yet we would argue that geopolitical worries are at the top of the list. President Biden is in Israel. He had been scheduled to have a summit with Arab leaders in Jordan, but that summit got called off in the wake of yesterday's bombing of a Gaza hospital.
It was unclear who perpetrated the attack on the hospital, but President Biden said what he has seen leads him to believe that it was Palestinian militants, and not Israel, that fired the missile that blew up the hospital. That finding aside, the finger-pointing and the saber-rattling has increased, including a contention from Iran, according to Reuters, that there should be an oil embargo against Israel.
The energy market isn't boiling over on account of the latest developments, but it is simmering. WTI crude futures are up 1.6% to $88.04/bbl and Brent crude futures are up 1.7% to $91.39/bbl.
Geopolitics, which includes Presidents Xi and Putin glad-handing each other at China's Belt and Road Forum in Beijing, have created an uneasy backdrop for the equity market, which is also contending with the uncertainty of the House Speaker position here at home.
Rep. Jim Jordan (R-OH) failed in the first ballot yesterday to secure the 217 votes needed to be elected Speaker. Another vote is slated to be held today at 11:00 a.m. ET.
Other "newsy" happenings include the Bank of Japan conducting another unscheduled bond purchase operation to try to keep Japanese government bond yields in check, China reporting some better than expected GDP, retail sales, and industrial production data, and the Mortgage Bankers Association reporting a 6.9% week-over-week decline in its mortgage applications index, driven by a 6% decline in purchase applications and a 10% decline in refinance applications.
In other economic news, housing starts increased 7.0% month-over-month in September to a seasonally adjusted annual rate of 1.358 million units (Briefing.com consensus 1.380 million) while building permits declined 4.4% month-over-month to a seasonally adjusted annual rate of 1.473 million (Briefing.com consensus 1.448 million).
The key takeaway from the report is that the weakness was concentrated in multi-unit dwellings. Single-unit starts were up 3.2% and single-unit permits rose 1.8%, which is welcome for a supply-challenged housing market.
There has been a fair share of micro news to go along with today's macro news. Several companies have reported their quarterly earnings results since yesterday's close, including Dow components Procter & Gamble (PG) and Travelers (TRV), as well as U.S. Bancorp (USB), Morgan Stanley (MS), and United Airlines (UAL).
A fourth quarter profit warning from United Airlines, which it attributed to higher costs and the uncertainty of the Israel-Hamas War, has captured a good bit of the headline attention. That seems only fitting since there is a macro component to that warning. Shares of UAL are down 4.9% and the stocks of other airlines are also weaker in sympathy.
Finally, stocks in general are looking weaker with Treasuries again looking weaker. The safe-haven bid isn't necessarily flowing there, as deficit concerns presumably continue to weigh on sentiment. The 2-yr note yield is unchanged at 5.20% after flirting with 5.15% earlier, and the 10-yr note yield is up one basis point to 4.86% after skimming 4.81% earlier.
-- Patrick J. O'Hare, Briefing.com
Winnebago stuck in the mud after an earlier rebound attempt following AugQ results (WGO)
After digging itself out of a roughly -3% hole to start today's session, turning positive briefly, Winnebago (WGO) shares are back in the mud. The RV and boat manufacturer, primarily competing against Thor Industries (THO), delivered a similar quarterly report in Q4 (Aug) as it did in Q3 (May). WGO exceeded earnings handily but missed sales estimates, reflecting success in reducing costs while struggling to find buyers against a lackluster demand environment. Management has been blunt over the past several quarters regarding the state of the economy, noting today that entering FY24 (Aug), it expects an unfavorable retail market landscape to continue, mired by dealer hesitation to add to their inventories.
However, on the bright side, WGO anticipates inventory levels to continue normalizing and consumer demand to stabilize toward the back half of FY24 (Mar-Aug), consistent with what we heard from THO and the RV Industry Association (RVIA), which expected a return to growth during CY24.
This silver lining may be what the market needs to rebuild its confidence in WGO after shares slid by around 17% since 2023 highs posted in July. Pockets of strength from Q4 also reinforce a potential turnaround brewing.
- Earnings of $1.59 per share may have represented an over 47% drop yr/yr, but it was far better than analysts expected. Conversely, revenue of $771 mln, a 35% decline, missed expectations. However, as inventories continue to normalize, revenue should start to see improvement going forward.
- Each of WGO's businesses experienced substantial declines. Sales of Towable RVs fell 30.9% yr/yr, driven by a decline in unit volume. Motorhomes fell 42.8% due to similar factors. Marine dropped by the slimmest percentage but was still down 21%.
- While gross margins contracted by 130 bps yr/yr to 16.5%, driven by higher discounts and allowances, the decline was not too glaring, given how challenging the current climate is. WGO's ability to hold margins relatively steady shows that demand is still present, and consumers continue to like the value WGO's brands offer.
- Looking ahead, WGO remains committed to maintaining healthy margins and reinforcing its market share. Like THO, WGO does not want to overproduce, an error it made in 2018. Reducing labor hours and maintaining the optimal product mix are ways WGO can avoid past mistakes.
WGO registered decent figures in Q4. Its sales miss was a rough patch, but it delivered plenty of highlights to help offset this blemish. Valuations remain attractive at around 8x forward earnings. While WGO's 2.2% dividend yield is no longer as alluring as before interest rates started spiking, it still offers investors a decent income. The RV industry may not return to the banner years it had in 2020 and 2021 over the near term. However, 2024 looks like it will assist in WGO's recovery after a tumultuous past couple of years.
United Airlines in for a bumpy ride as Q4 earnings outlook falls well short of expectations (UAL)
United Airlines (UAL) is losing altitude today after issuing a weaker-than-expected outlook for Q4 that takes into account higher fuel and labor costs as well as flight suspensions into Israel as the conflict with Hamas intensifies. Like Delta Air Lines (DAL), the company topped Q3 expectations, largely in part due to robust international travel demand and ongoing strength for premium products, which grew by 20% yr/yr. Relatedly, business travel also continues to strengthen as corporations implement return-to-office policies.
However, market participants are looking past UAL's solid Q3 results that also featured a 30% increase in EPS and are instead focusing on the surprisingly disappointing guidance. Recall that DAL issued Q4 EPS guidance that was ahead of estimates at the midpoint of the range, setting the expectation that other airlines may follow suit and provide earnings guidance that at least met analysts' forecasts.
Since UAL's EPS forecast of $1.50-$1.80 didn't just miss expectations, but it fell badly short of projections, the guide down is catching investors off guard.
- It's important to note that UAL has more flights into and out of Israel than any other U.S. airline. With that in mind, the company's guidance contemplates two scenarios: flights into Tel Aviv resuming at the end of October, and flights being suspended until the end of the year.
- Considering that tensions are only heating up following a horrific bombing of a hospital in Gaza, it seems that market participants are bracing for flights to be suspended for quite some time.
- If those suspensions last until the end of the year, then UAL believes that EPS would come in at the low end of the range with revenue increasing by 9% yr/yr to $13.516 bln, slightly missing estimates.
- Making matters worse, UAL anticipates that fuel costs will climb higher again after enjoying a reprieve in recent weeks. Specifically, the company is forecasting average fuel price per gallon to jump to $3.28 in Q4 from $2.95 in Q3.
- It's not just rising fuel costs that UAL has to contend with. Labor costs are also pressuring earnings after the company raised pilot's pay by up to 40% over a four-year period. Accordingly, UAL expects CASM ex-fuel in Q4 to increase by 3.5-5.0%, up from the 2.6% increase seen in Q3.
- Finally, as the company expands capacity, yields are simultaneously declining. Passenger yields, which represents the amount of revenue generated per passenger for one mile flown, declined by 1.7% in Q3 as available seat miles grew by nearly 11%.
The main takeaway is that while demand remains healthy overall, UAL's profitability is facing some stiff headwinds, the magnitude of which is catching market participants by surprise. Strong demand has helped UAL to navigate around some of these issues, such as rising labor costs, but if demand starts to slip, then UAL's earnings would be at risk of falling further.
Procter & Gamble's uplifting SepQ results may mark a turn of the tide (PG)
With shares flat on the year and down 6% since August, Procter & Gamble's (PG +2%) uplifting Q1 (Sep) results may mark a turn of the tide. The consumer durables giant, manufacturing brands like Pampers and Tide, exceeded bottom-line estimates by its widest margin in nearly three years, registered a beat on its top line, and issued relatively promising FY24 (Jun) guidance.
PG's upbeat headline numbers did come on a 1% drop in volumes yr/yr, consistent with last quarter but not representative of management's remarks in late July that volumes would begin to show moderate growth. Nevertheless, two consecutive quarters of volumes declining by just 1%, far better than past quarters, may signal demand stabilization, a sufficient silver lining following PG's recent downward trend.
- In Q1, PG expanded EPS 16.6% yr/yr to $1.83 and revs 6.1% to $21.87 bln, both well ahead of its FY24 growth targets of +6-9% and +2-4%, respectively. Organic revenue growth, which backs out FX impacts, jumped 7%.
- Price drove PG's positive top-line growth in Q1, ticking 7% higher, similar to last quarter. PG's ability to pull specific levers to keep prices elevated without giving up much volume is a testament to its unwavering brand power. In fact, PG has defended its positioning despite private labels extending their market share, particularly in Europe, where off-brands grew at about an 80 bp clip month/month during the quarter.
- Geographically, PG enjoyed organic sales in five of its seven regions. Sales across PG's most profitable Focused Markets edged 6% higher, grew by 7% in the U.S., and soared by 15% in Europe Focus Markets. In Enterprise Markets, including Latin America, sales were also resilient, increasing by 13%.
- China contracted by 6% as market growth was soft and choppy due to persistently weak consumer confidence. In fact, if not for China, volumes would have grown 20 bps sequentially in the quarter. Management reiterated its forecast that recovery in China will not be quick, extensive, or linear. Total market volume continues to be down around 7-9%, highlighting how unfavorable the region is for PG.
- Still, with PG's other regions holding up nicely, the company felt confident in achieving its previously outlined FY24 EPS growth target of +6-9% or $6.25-6.43, despite an incremental $600 mln after-tax FX-related headwind, up $200 mln from last quarter. Higher labor costs and fewer FX headwinds also led PG's revenue growth estimate to expand on the lower end by 1 pt to +2-4% from its prior guidance of +3-4%. Organic revenue growth projections remained the same at +4-5%.
- Encouragingly, these forecasts illustrate a normalization in underlying market growth rates as it laps the last wave of cost recovery pricing and volumes begin growing again.
Bottom line, after a tumultuous past couple of years, headlined by stubbornly weak volumes and elevated inflation, PG is seeing light at the end of the tunnel. Given the numerous challenges PG has faced over the past several quarters, its consistently healthy performance underpins a resilient business model, fortifying its position to reaccelerate volumes entering a more favorable year ahead.
Abbott Labs trades higher on solid Q3 earnings, strong organic growth (ABT)
Abbott Labs (ABT +3%) is trading nicely higher following strong Q3 results this morning that mirrored what peer Johnson & Johnson (JNJ) reported yesterday. Abbott reported EPS upside that was roughly in-line with the prior two quarters. Revenues dipped 2.6% yr/yr to $10.14 bln, but that was better than analyst expectations and Abbott was lapping robust COVID-19 sales last year. The company also raised the mid-point of its FY23 adjusted EPS guidance.
- Abbott's largest segment is Medical Devices and sales there rose a healthy 16.6% yr/yr to $4.25 bln. Sales growth was led by double-digit organic growth in Diabetes Care, Electrophysiology, Structural Heart, and Neuromodulation. Several recently launched products and new indications contributed to the strong performance, including Amplatzer Amulet, Navitor, TriClip, and AVEIR.
- In Diabetes Care, FreeStyle Libre sales were $1.4 bln, up a robust 30.5% yr/yr. The global Libre user base now exceeds 5 mln people with nearly 2 mln of those in the US where the Libre user base has nearly doubled in the last two years. Abbott also addressed concerns about GLP-1 drugs. Basically, the reaction is being impacted more by emotion than facts and data. Abbott estimates maybe 10-15 mln people will be on these drugs in 4-5 years, but that's a small fraction of the size of these medical device markets. About half a billion people have diabetes.
- Its Nutrition segment performed well, with sales growing 15.5% to $2.07 bln, fueled by 20.9% growth in Pediatric Nutrition. The US was the standout market with US sales surging 41.8%. In fairness, Abbott was lapping easy results due to the infant formula voluntary recall last year. Abbott continues to see market share recovery in the infant formula business. Adult Nutrition sales rose a healthy 10.8%, led by strong global sales growth for its Ensure nutrition brand.
- The big laggard for Abbott, which dragged down overall sales was its Diagnostics segment. Sales slumped by a third to $2.45 bln. However, that is not a total surprise as this segment was severely impacted by declines in COVID-19 testing-related sales. Worldwide COVID-19 testing sales were just $305 mln in Q3, down from $1.67 bln last year. Excluding COVID-19 sales, global Diagnostics sales increased 8.8%.
- Abbott's smallest segment is Established Pharmaceuticals, which saw sales decrease 3.2% yr/yr to $1.37 bln. Of note, these are all international sales as Abbott does not sell in the US. Rather, Abbott focuses on emerging countries for its branded generics product portfolio. This segment is most vulnerable to FX swings. Organic growth, which excludes FX, for this segment rose 11.1%.
Investors are responding positively to this report. Abbott was lapping major one-time events last year in two key segments, one helped sales growth (infant formula) and one hurt sales growth (COVID-19). So we think investors were not sure what to expect. However, organic sales growth on the base business, which excludes COVID, increased double digits for the third consecutive quarter. Also, the stock has been trending lower in recent months, we think partly on concerns over the GLP-1 drugs and how that might impact Libre sales. However, we think management calmed some nerves on the call.
V.F. Corp extends yesterday's relief rally on a report of Engaged Capital's growing stake (VFC)
V.F. Corp (VFC +13%) extends its relief rally today after bouncing off 52-week lows yesterday. Today's upbeat sentiment stems from a WSJ report mentioning Engaged Capital building a stake in the apparel and footwear company known for The North Face and Vans brands. With VFC hitting one-year lows yesterday, Engaged Capital is buying shares on the cheap, confident that with its reportedly proposed changes, it can lean on the powerful brands from VFC to turn the company around. Some of the plans WSJ noted Engaged Capital is targeting include costs-savings potentially worth at least $300 mln annually and exploring a strategic review of VFC's noncore assets and real estate.
- Although VFC's brands are known globally, turning the company around will be no simple task, especially in the immediate term. While retail sales data for September indicated consumers' willingness to continue spending, apparel and footwear brands have struggled in the current climate. Management conceded in August that macroeconomic conditions remain complex and volatile, acknowledging a potentially higher hurdle this month with the end of the student loan pause.
- Still, VFC remained confident in delivering increasing operating earnings through improved gross margins and healthy cash flow, even if it was slightly more cautious about its top-line growth over the near term. Its current cost-saving initiatives include implementing additional automation across its facilities and enhancing its consumer-facing digital ecosystem. Direct-to-consumer sales drove growth last quarter, reflecting early success from management's focus on this channel.
- Under a new CEO, since the former executive Steven Rendle retired in December, VFC has already started mounting its comeback story. CEO Bracken Darrell stepped in to fill the CEO role earlier this year, taking part in VFC's quarterly conference call for the first time in August. The change in leadership was another factor Engaged pointed to regarding its optimism in reversing VFC's string of lackluster earnings reports.
- While not a former executive within the apparel business, Mr. Darrell's experience is in corporate turnarounds, lifting Logitech's (LOGI) market share by expanding into new categories and products. The former LOGI CEO succeeded in this strategy, increasing the company's revenue by over 100% during his tenure, which helped boost shares by around 10x.
Bottom line, Engaged Capital's growing stake in VFC is a vote of confidence in the company, its brands, and its new CEO's ability to emulate his success at LOGI. While the retail demand backdrop has endured softening demand as discretionary spending wanes in light of higher interest rates and sticky inflation, VFC commands brand loyalty and a stable long-term outlook. More individuals have shown a desire to spend time outdoors since the pandemic, evidenced by sustained travel and camping demand, an encouraging trend given VFC's emphasis on outdoor footwear and apparel.
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