Market Snapshot
| Dow | 33414.13 | -250.91 | (-0.75%) | | Nasdaq | 13186.17 | -128.13 | (-0.96%) | | SP 500 | 4278.00 | -36.60 | (-0.85%) | | 10-yr Note |
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| | NYSE | Adv 583 | Dec 2218 | Vol 973 mln | | Nasdaq | Adv 1009 | Dec 3206 | Vol 5.0 bln |
Industry Watch
| Strong: Communication Services |
| | Weak: Consumer Discretionary, Real Estate, Health Care, Financials, Materials |
Moving the Market
-- Reacting to Fed Chair Powell's speech on the economic outlook, which started at 12:00 ET at the Economic Club of New York
-- Big loss in Tesla (TSLA) following its disappointing quarterly results
-- Digesting a batch of mixed earnings news
-- Relatively strong mega caps
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Closing Summary
19-Oct-23 16:30 ET
Dow -250.91 at 33414.13, Nasdaq -128.13 at 13186.17, S&P -36.60 at 4278.00
[BRIEFING.COM] The stock market closed near the lows of the day. Today's price action was choppy as market participants digested Fed Chair Powell's commentary and monitored the movement in Treasuries.
Fed Chair Powell delivered a speech at the Economic Club of New York today beginning at 12:00 ET. His prepared remarks seemingly corroborated the popular view of late that the jump in long-term rates has helped to tighten financial conditions, paving the way for the Fed to proceed cautiously. In answering a question, though, Mr. Powell did indicate that the economic evidence is not indicating that the Fed is too tight yet with its policy.
Still, the latter acknowledgement did not heighten rate hike expectations. In fact, the probability of another rate hike before the end of the year fell to 0% in November from 6.6% yesterday and 29.8% in December from 39.2% yesterday. The fed funds futures market is also pricing in a 51.5% probability of a rate cut in June versus a 41.1% probability yesterday, according to the CME FedWatch Tool.
Treasuries had a volatile reaction to Fed Chair Powell's comments, which drove some turbulent action in equities, too. The 10-yr note yield, which was at 4.94% before 12:00 ET, quickly dropped to 4.90%, but ultimately settled at a new cycle high yield of 4.99%. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, sat at 5.21% before 12:00 ET, but declined five basis points today to 5.17%.
Many stocks participated in the downside moves. The Invesco S&P 500 Equal Weight ETF (RSP) dropped 1.2% and the market-cap weighted S&P 500 fell 0.9%. Ten of the 11 S&P 500 sectors logged a decline with real estate (-2.4%) showing the biggest loss.
On the earnings front, Tesla (TSLA 220.11, -22.57, -9.3%) is plunging after missing earnings and revenue estimates while Netflix (NFLX 401.77, +55.58, +16.1%) sports an outsized gain after blowing past subscriber addition estimates.
- Nasdaq Composite: +26.0% YTD
- S&P 500: +11.4% YTD
- Dow Jones Industrial Average: +0.8% YTD
- S&P Midcap 400: -0.4% YTD
- Russell 2000: -3.3% YTD
Reviewing today's economic data:
- Weekly Initial Claims 198K (Briefing.com consensus 211K); Prior was revised to 211K from 209K; Weekly Continuing Claims 1.734 mln; Prior was revised to 1.705 mln from 1.702 mln
- The key takeaway from the report is the remarkably low level of initial jobless claims -- a leading indicator -- which conveys a tight labor market that is a good portent for continued strength in consumer spending.
- October Philadelphia Fed Index -9.0 (Briefing.com consensus -6.5); Prior -13.5
- September Existing Home Sales 3.96 mln (Briefing.com consensus 3.90 mln); Prior 4.04 mln
- The key takeaway from the report is that existing home sales continue to be squeezed by a confluence of factors: higher mortgage rates and higher prices that are hurting affordability; limited supply; a lack of mobility due to remote work opportunities; and disinterest in moving by existing homeowners who are reluctant to give up their low-rate mortgage rate.
- September Leading Indicators -0.7% (Briefing.com consensus -0.4%); Prior was revised to -0.5% from -0.4%
Friday's economic calendar is limited to the September Treasury Budget (prior $89.2 bln) at 2:00 p.m. ET.
10-yr yield settles at 4.99%; stocks remain near lows
19-Oct-23 15:35 ET
Dow -202.57 at 33462.47, Nasdaq -109.23 at 13205.07, S&P -30.06 at 4284.54
[BRIEFING.COM] The major indices are moving sideways near their lows of the day.
The 10-yr note yield climbed eight basis points to settle at 4.99% and the 2-yr note yield fell five basis points to 5.17%. The U.S. Dollar Index fell 0.3% to 106.21.
Friday's economic calendar is limited to the September Treasury Budget (prior $89.2 bln) at 2:00 p.m. ET.
Stocks fall as the 10-yr revisits early high yield
19-Oct-23 15:05 ET
Dow -198.56 at 33466.48, Nasdaq -100.66 at 13213.64, S&P -28.95 at 4285.65
[BRIEFING.COM] The market moved lower over the last half hour. The Russell 2000 sports the largest decline among the major indices, down 1.3%.
The 10-yr note is revisiting its early session high yield, up eight basis points at 4.98% currently.
At the same time, the CBOE Volatility Index is up 8.5% or 1.63 to 20.85.
Union Pacific, Equifax among S&P 500 post-earnings gainers on Thursday
19-Oct-23 14:30 ET
Dow -67.91 at 33597.13, Nasdaq -37.42 at 13276.88, S&P -10.98 at 4303.62
[BRIEFING.COM] The S&P 500 (-0.25%) is in second place again on Thursday, having consolidated afternoon losses.
S&P 500 constituents Union Pacific (UNP 213.60, +7.68, +3.73%), DaVita (DVA 81.68, +2.94, +3.73%), and Equifax (EFX 180.08, +4.92,, +2.81%) dot the top of today's standings. UNP and EFX move higher following earnings, while DVA continues to rebound off NVO-related kidney drug weakness.
Meanwhile, Atlanta-based automotive parts supplier Genuine Parts (GPC 131.79, -16.94, -11.39%) is the worst-performing constituent following Q3 sales miss and narrowed guidance out this morning.
Gold ends higher on Powell comments
19-Oct-23 14:00 ET
Dow -10.51 at 33654.53, Nasdaq -24.70 at 13289.60, S&P -5.69 at 4308.91
[BRIEFING.COM] With about two hours remaining on Thursday afternoon the tech-heavy Nasdaq Composite (-0.19%) is now today's top laggard.
Gold futures settled $12.20 higher (+0.6%) to $1,980.50/oz, moving off morning losses in light of Fed Chair Powell's comments at the Economic Club of New York.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $106.19.
Page One
Last Updated: 19-Oct-23 09:04 ET | Archive
A lot of plates spinning
We enter today with an image of spinning plates in mind. There are several on the table and whether they keep spinning, or lose momentum and crack on a fall to the surface, is indeed the great unknown.
What is spinning?
- The Israel-Hamas situation
- The House Speaker vote
- The response to earnings news
- A 12:00 p.m. ET speech from Fed Chair Powell about the economic outlook
- Economic data
- A 10-yr note yield flirting with 5.00%
These plates are not spinning in any particular order, but it is dizzying to try to focus on them all at the same time, which is perhaps why the equity futures market is spinning its wheels.
Currently, the S&P 500 futures are up seven points and are trading 0.1% above fair value, the Nasdaq 100 futures are up 57 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 20 points and are trading roughly in-line with fair value.
The overnight trade had a pre-occupation with earnings results from Netflix (NFLX) and Tesla (TSLA), the specter of increased military action in the Israel-Hamas conflict, and a 10-yr note yield that made its way to the doorstep of 5.00%.
Netflix surprised in a big way with a huge beat on subscriber additions in the third quarter. It is up 14%, which is to say there is a lot of positive spin on that plate. Tesla, though, missed on its top and bottom lines, and saw a sharp, year-over-year downturn in its operating margin. Elon Musk then noted his concerns about higher interest rates and acknowledged that it will be roughly 12 to 18 months before Cybertruck is a significant positive cash flow contributor. TSLA is down 6.5%.
Those reports have been accompanied by results from the likes of Lam Research (LRCX), Las Vegas Sands (LVS), American Airlines (AAL), Taiwan Semi (TSMC), and AT&T (T) to name a few others, but in aggregate, the earnings news is not carrying the day for the broader market so much as it is for individual stocks.
The initial and continuing jobless claims report has done some lifting, however. Initial jobless claims for the week ending October 14 decreased by 13,000 to 198,000 (Briefing.com consensus 211,000). That is the first reading below 200,000 since January. Continuing jobless claims for the week ending October 7 increased by 29,000 to 1.734 million.
The key takeaway from the report is the remarkably low level of initial jobless claims -- a leading indicator -- which conveys a tight labor market that is a good portent for continued strength in consumer spending.
The latter point notwithstanding, Treasury yields have moved lower in a peculiar fashion following the news. This is the type of news that would typically invite concerns about inflation remaining stubbornly high and the the Fed potentially needing to raise rates further.
Our spin on matters is that there was earlier resistance at 5.00% for the 10-yr note yield, and because there was no knee-jerk pop above 5.00% in the wake of this remarkable initial jobless claims data, technical buying efforts have persisted in its wake. Currently, the 10-yr note yield is at 4.92%, up two basis points from yesterday but down from 4.97% just ahead of the initial claims report.
Granted the October Philadelphia Fed Index was weaker than expected at -9.0 (Briefing.com consensus -6.5), but we're not going to give it props for driving the decline in Treasury yields given that (1) it is a survey, meaning it is soft data and (2) it is far less influential as an economic indicator compared to the initial claims data.
On a related note, Fed Chair Powell will be dishing on the economic outlook in a speech at the Economic Club of New York at 12:00 p.m. ET. There are a lot of participants anxious to see what kind of spin he puts on that plate and how it will shape the market's view of the policy outlook.
-- Patrick J. O'Hare, Briefing.com
Alcoa's Q3 earnings miss keeps selling pressure elevated; however, 2024 may be a rebound year (AA)
Alcoa (AA -8%) continues to struggle with mining gains as shares sink to 52-week lows today following the aluminum producer's second earnings miss this year in Q3. Revenue also remained in decline, tumbling nearly 9% yr/yr, AA's fifth-straight quarter of falling sales. Alumina (aluminum oxide) and aluminum shipments did tick 11% and 1% higher sequentially, keeping revenue of $2.6 bln, which matched analyst expectations, from sinking further. However, the higher shipments only partially offset lower realized prices. Management repeated that demand across some key end markets stayed weak in the quarter, which will linger into Q4, reflected in AA's unchanged FY23 shipment forecast.
Nevertheless, although Q3 results appear lackluster on the surface, digging deeper reveals some silver linings ahead of a potential rebound year in 2024.
- CEO William Oplinger, who stepped into the corner office last month, outlined the company's top priorities to position it for a return to growth next year. Mr. Oplinger noted the primary focus is gaining approvals for bauxite mining in Western Australia. AA's recent revised MMP submission is currently under review by regulators. Approval for its two mines is critical given how massive the Huntly and Willowdale mines are, supplying around half of Australia's total alumina.
- AA is also focused on successfully restarting its Alumar smelter in Brazil, which has not gone as planned. AA announced a restart of aluminum smelting capacity at this smelter over two years ago, expecting it to be operational by 4Q22, illuminating how challenging this restart has been.
- Enhancing productivity is AA's third priority, targeting margin improvements across each of its sites. Controlling costs will go a long way to improving AA's margin profile. For perspective, AA has not registered positive earnings since 2Q22.
With these priorities in place, Mr. Oplinger explained his optimism about the year ahead. Aluminum inventories in terms of days of consumption are at historically low levels, placing the market in a favorable position when demand rebounds. Additionally, the automotive sector is an important market for AA, given how much aluminum is required. While the UAW negotiations add a layer of unease, AA is confident that the industry will experience growth next year as OEMs ramp up to 2019 levels. Meanwhile, construction should begin to pick up next year relative to 2023 as inflation slows and interest rates stabilize. Over the long term, AA remains bullish on aluminum, citing further electric vehicle penetration and upbeat solar installation demand.
Bottom line, AA delivered underwhelming results in Q3, a continuation from previous quarters, hurting its shares' ability to finally find buyers and establish support after a 40% sell-off this year. However, even though headwinds remain, including geopolitical and macroeconomic uncertainties, the steps AA is taking in the immediate term should help position the company to capitalize on what is shaping up to be a possible rebound year in 2024.
Discover Financial Services feeling the pinch of higher rates as delinquencies rise, EPS falls (DFS)
Credit card company Discover Financial Services (DFS) is sinking to multi-year lows after badly missing 3Q23 earnings estimates, sending shares of competitors Visa (V), Mastercard (MA), and American Express (AXP) lower along with it. Notably, AXP is scheduled to report earnings before the open tomorrow morning, while V and MA are set to issue results next week. DFS's earnings miss is a discouraging data point for the group, especially since the shortfall is partly due to increasing delinquencies, but there is an important distinction between DFS and AXP, for example.
AXP tends to cater to a more affluent customer base, making it more resilient to macroeconomic headwinds such as the impact of rising interest rates on consumers. In fact, during DFS's earnings call, CFO John Greene commented that there's a significant difference in how prime customers handle higher interest rates and managing their debt compared to subprime customers.
Another reason why DFS's results don't necessarily portend to a disappointing earnings season overall for credit card companies is that DFS is navigating through some disruptive internal issues. Specifically, on August 14, the company announced that CEO Roger Hochschild is stepping down immediately after disclosing card product misclassifications in its Q2 earnings report. The misclassification, which affected pricing for certain merchants and merchant acquirers, but not for cardholders, played a role in DFS suspending share buybacks.
In Mr. Hochschild's place is John Owens, a Board member who is currently the acting interim CEO. However, DFS is still seeking a permanent successor to Mr. Hochschild.
With that said, certain aspects of DFS's results do raise some red flags.
- The 30+ day delinquency rate for credit card loans was 3.41%, up 130 bps yr/yr and up 55 bps qtr/qtr. CFO John Greene acknowledged during the earnings call that the company is seeing some signs of stress among its customers.
- Although net interest income grew by 17% due to higher interest rates, total loan growth slowed to 17% from 19% last quarter and 21% in Q1, indicating that consumers are becoming a little more cautious with their spending.
- Provision for credit losses will be a key metric to keep an eye on for AXP, V, and MA. In Q3, DFS built its reserves by nearly $300 mln as it prepares for more future loan losses. In addition to $631 mln in net-charge offs, the higher reserve build pushed DFS's provision for credit losses up to $1.7 bln, weighing heavily on its earnings.
The main takeaway is that DFS's earnings miss is both a reflection of company-specific issues as it navigates through a CEO transition and mounting financial pressures on consumers amid a high interest rate environment.
Tesla's results take a wrong turn as price cuts and ramping investments cut into its profits (TSLA)
For the first time since 2Q19, Tesla (TSLA) missed EPS and revenue expectations reflecting a sharp upswing in operating expenses and a simultaneous softening of demand amid a rising interest rate environment.
- As the electric vehicle maker continues to pour capital into its full self-driving (FSD) technology and new product launches such as Cybertruck, its spending has ramped up to the tune of a 43% spike in operating expenses this quarter.
- Meanwhile, TSLA's gross margins are still in decline, falling by 30 bps qtr/qtr to 17.9%, mainly due to its various price cutting actions taken over the past year or so, putting further pressure on its earnings. On that note, EPS dove by 37% yr/yr, which is especially problematic given the that the stock has a rich 1-year forward P/E of about 58x.
- Good news was relatively hard to come by, but a key positive was that TSLA reaffirmed is FY23 production outlook of 1.8 mln vehicles. However, even this news was accompanied by some cautious commentary by Elon Musk, who stated during the earnings call that it's impossible to sustain a compound growth rate of 50% forever, creating some concern that a production slowdown may be on the horizon.
- Musk also lamented the negative impact that rising interest rates are having on demand. When the company reported Q3 deliveries that missed expectations on October 2, it blamed factory shutdowns as the main cause behind the shortfall. However, it certainly appears that sluggish demand is also playing a role as TSLA implements price cuts to drive down its bloated inventory. In Q3, days of supply were up by 100% yr/yr to 16 days, matching last quarter's mark.
- Another key topic of interest last night was Cybertruck and the latest update on when TSLA expects to begin deliveries. Although Musk stated that deliveries are still on track for later this year, he cautioned that it would take time to reach volume production and that it could be up to a year-and-a-half before Cybertruck is positively contributing to cash flow.
- The only topic that Musk was clearly upbeat about was AI and FSD. Similar to the past few earnings calls, Musk provided some grandiose statements, proclaiming that driverless cars will eventually help make TSLA the most valuable company in the world. Of course, there was no timeframe given as to when that feat may happen, nor did Musk provide much clarity on when robotaxis would become a reality.
The initial knee-jerk reaction to TSLA's earnings last night was positive and was likely viewed as better-than-feared, but sentiment turned sour once the earnings call began. Musk's more downbeat tone matched the company's weakest performance in years. Given the challenging macroeconomic backdrop, it seems likely that further price cutting actions will be needed to reach the company's production and delivery goals, which means additional margin and earnings contraction could be in TSLA's future.
Netflix streams back above $400 on Q3 results; huge net add number and price hikes (NFLX)
Netflix (NFLX +16%) is streaming sharply higher following its Q3 earnings report last night. Just like in Q2, Netflix reported EPS well ahead of prior guidance. The Q4 EPS and revenue guidance was a bit below analyst expectations, but we think investors are focusing on other areas. There is a lot to unpack here, from impressive net adds to success with paid sharing to raising prices to margin performance.
- Let's dig into it. Global streaming paid net adds in Q3 were an impressive +8.76 mln. Its crackdown on password sharing (which Netflix calls "paid sharing") seems to be working. NFLX has now taken action in every region. The cancel reaction continues to be low, exceeding internal expectations, and borrower households are converting into full paying memberships with healthy retention. Good programming and the ongoing expansion of streaming globally also helped net add growth.
- Not only was the Q3 number good, but we were surprised that Netflix provided net add guidance were Q4 after saying it would not longer guide for this metric. Netflix expects Q4 paid net adds will be similar to Q3 (+/- a few million). Netflix used to provide a specific number, but this is good data. It shows us that maybe NFLX is getting a better handle and perhaps more visibility on paid sharing and new ad-tier subs. Providing net add guidance may not be a permanent thing, but we will see.
- A metric for which NFLX still does guide is operating margin. It came in at 22.4%, ahead of the 22.2% prior guidance, and we think that may have helped the strong EPS upside. Netflix guided to Q4 operating margin of 13.3%. Netflix's operating margin can be lumpy given its production schedules and there a lot of changes going on. FY23 operating margin guidance is now expected at 20%, the high end of 18-20% prior guidance, and above FY22's 18%. Assuming no material swing in F/X, NFLX expects FY24 operating margin at 22-23%.
- Pricing was another hot topic. Netflix mostly paused price increases as it rolled out paid sharing. However, starting today, NFLX is raising prices on some plans in the US, UK and France. In the US, its ads ($6.99) and Standard plans ($15.49) will stay the same, while Basic will now be $11.99 and Premium $22.99. We think the price hikes show NFLX's rising confidence. To up prices even with content questions due to the strike and given the macro issues, we think NFLX feels it has pricing power.
- Turning to advertising, Netflix continues to caution that it will take time to build a new business from scratch and it reiterated ad revenue would not be material to 2023 sales. However, it remains very optimistic about its long run ad opportunity. Engagement of its ad tier members has been strong. This should be a multi-billion dollar revenue stream over time.
- Content spend came in lower than expected, which fueled NFLX's increase to its FY23 free cash flow guidance to ~$6.5 bln, up from its prior forecast of at least $5 bln. This includes ~$1 bln in lower-than-planned cash content spend in 2023 due to the WGA and SAG-AFTRA strikes. As a result, NFLX expects 2023 cash content spend to be around $13 bln and for that to grow to ~$17 bln in 2024.
Overall, investors are clearly impressed with Netflix's Q3 report. Last month, the CFO made some cautious comments, which led to a downtrend in the share price. As such, expectations were running low heading into this report. However, the huge net adds really surprised the market. We think that will reset expectations for how paid sharing will boost net adds in the coming quarters. The price hikes, margin upside and EPS upside are also being viewed favorably.
Lam Research heads lower as SepQ results pale compared to last quarter's upbeat tone (LRCX)
Lam Research (LRCX -5%) is ticking lower today despite exceeding top and bottom-line estimates in Q1 (Sep) and issuing decent Q2 (Dec) guidance, with the midpoints of its earnings and sales forecasts above consensus. The semiconductor equipment supplier, competing in a similar space as ASML (ASML), KLA Corp (KLAC), and Applied Materials (AMAT), also did not expect new U.S. export restrictions to China to have a material impact on its future financial performance. However, part of this view stems from the fact that LRCX is already under heavy restrictions regarding what it can ship into China, previously projecting a $2.0-2.5 bln overall hit to its revenue. Meanwhile, LRCX adjusted its estimate of CY23 wafer fab equipment (WFE) spending roughly $5.0 bln upward to around $80 bln.
So why is the market responding negatively today? Headline results were mild relative to Q4 (Jun). LRCX's EPS of $6.66 may have exceeded analyst predictions and the midpoint of its previous $5.30-6.80 outlook. Still, it was not as substantial as Q4, when the company smashed analyst and its internal estimates. Also, while sales of $3.48 bln, a 31.4% drop-off yr/yr, topped estimates by a wider margin than in Q4, such a steep yr/yr decline is not overly exciting. While it seems like nitpicking, with shares of LRCX up over 50% on the year, more than doubling its forward P/E multiple to 22x, the company's quarterly reports must contain plenty of reasons to cheer to keep the stock trending positively.
- The macroeconomic environment also remains challenging. During Q1, NAND (flash) weakness persisted as customers reduced spending levels and lowered utilization on their path to supply/demand balance. Management also reiterated the difficulty of calling the timing and pace of WFE recovery.
- However, plenty of encouraging remarks balanced out the unfavorable economic conditions. LRCX noted on the NAND side that supply actions are already starting to have a positive effect; customers have indicated that pricing trends have already stabilized. Meanwhile, NAND bit demand increased to high-teens percentage growth in the quarter. Additionally, DRAM spending edged modestly higher than LRCX's prior view, driven by improving trends in high-bandwidth memory-related demand and upside in China.
- Speaking of China, which comprised 48% of Q1 revs, a massive jump from 26% in Q4, while memory and NAND are at extreme lows in China, LRCX is also benefiting from fewer competitors not investing in the area. Management is upbeat about long-term demand in China but warned that the region may not be as robust in Q2 (Dec) as it was in Q1.
- Looking ahead to Q2, earnings and revs are set to improve sequentially at their midpoints. LRCX expects adjusted EPS of $6.25-7.75 and revs of $3.4-4.0 bln.
Overall, LRCX posted decent Q1 results, but in light of its YTD stock appreciation, they were insufficient to trigger a similarly buoyant response as LRCX observed last quarter. While WFE likely bottomed out, it does not mean that the metric will enjoy a quick snap back to 2021 demand levels. Micron (MU) warned last month that a WFE spending revival may take longer than expected. As such, the market is expressing a level of caution as LRCX heads into the year's final three months.
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