| | | Market Snapshot
briefing.com
| Dow | 37525.16 | -157.85 | (-0.42%) | | Nasdaq | 14857.71 | +13.94 | (0.09%) | | SP 500 | 4756.50 | -7.04 | (-0.15%) | | 10-yr Note | +2/32 | 4.02 |
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| | NYSE | Adv 839 | Dec 1917 | Vol 840 mln | | Nasdaq | Adv 1490 | Dec 2734 | Vol 5.0 bln |
Industry Watch
| Strong: Health Care, Consumer Staples, Communication Services, Information Technology |
| | Weak: Energy, Materials, Financials, Industrials, Utilities, Real Estate Consumer Discretionary |
Moving the Market
-- Mega cap stocks recovering from early losses, boosting index performance
-- Q4 revenue warning from Microchip Technology (MCHP) that was tied to a weakening economic environment, and Samsung Electronics indicating its Q4 operating profit will be lower than expected
--- 10-yr note yield moving higher after settling at 4.00% yesterday
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Closing Summary
09-Jan-24 16:30 ET
Dow -157.85 at 37525.16, Nasdaq +13.94 at 14857.71, S&P -7.04 at 4756.50
[BRIEFING.COM] Today's trade had a negative bias. The A-D line favored decliners by a 7-to-3 margin at the NYSE and by a nearly 2-to-1 margin at the Nasdaq. The major indices were able to close off their highs of the day, though, thanks to support from mega cap stocks that recovered from early weakness.
NVIDIA (NVDA 531.40, +8.87, +1.7%) was a standout winner in that respect after being down as much as 1.1% at its low this morning. Alphabet (GOOG 142.56, +2.03, +1.4%), Amazon.com (AMZN 151.37, +2.27, +1.5%), and Microsoft (MSFT 375.79, +1.10, +0.3%) had all been trading down earlier, too.
Losses in Meta Platforms (META 357.43, -1.23, -0.3%), which had been trading up at its best level of the day, Apple (AAPL 185.14, -0.42, -0.2%), and Tesla (TSLA 234.96, -5.49, -2.3%) countered some of the strength from the aforementioned names. The Vanguard Mega Cap Growth ETF (MGK) logged a 0.3% gain.
The overall negative vibe was partially a reaction to a Q4 revenue warning from Microchip Technology (MCHP 85.34, -0.30, -0.4%) that was tied to a weakening economic environment. In a related action, Samsung Electronics said it expects its Q4 operating profit to be down 35% year-over-year and below analysts' expectations.
Four of the S&P 500 sectors logged a gain while seven of them saw a decline. The information technology sector (+0.3%) was the top performer while the energy (-1.6%) and materials (-1.1%) sectors registered the largest declines.
The 2-yr note yield settled three basis points higher at 4.38% and the 10-yr note yield rose two basis points to 4.02%. On a related note, today's $52 billion 3-yr note auction met strong demand.
- Dow Jones Industrial Average: -0.4%
- S&P 500: -0.3%
- S&P Midcap 400: -1.2%
- Nasdaq Composite: -1.1%
- Russell 2000: -1.9%
Reviewing today's economic data:
- November Trade Balance -$63.2 bln (Briefing.com consensus -$64.7 bln); Prior was revised to _$64.5 bln from -$64.3 bln
- The key takeaway from the report is that exports were $4.8 billion less than October exports while imports were $6.1 billion less than October imports. The drop in both exports and imports fits with a weakening global economic environment.
- December NFIB Small Business Optimism 91.9; Prior 90.6
Looking ahead, Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Applications Index (prior -9.4%)
- 10:00 ET: November Wholesale Inventories (Briefing.com consensus -0.2%; prior -0.4%)
- 10:30 ET: Weekly EIA Crude Oil Inventories (prior -5.5 million barrels)
Treasuries settle with modest losses
09-Jan-24 15:30 ET
Dow -189.27 at 37493.74, Nasdaq +6.30 at 14850.07, S&P -10.51 at 4753.03
[BRIEFING.COM] The market traded in a tight range over recently.
The 2-yr note yield settled three basis points higher at 4.38% and the 10-yr note yield rose two basis points to 4.02%.
Looking ahead, Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Applications Index (prior -9.4%)
- 10:00 ET: November Wholesale Inventories (Briefing.com consensus -0.2%; prior -0.4%)
- 10:30 ET: Weekly EIA Crude Oil Inventories (prior -5.5 million barrels)
Energy sector underperforms; oil prices settled higher
09-Jan-24 15:05 ET
Dow -188.85 at 37494.16, Nasdaq +16.15 at 14859.92, S&P -8.54 at 4755.00
[BRIEFING.COM] The market moved slightly lower recently. The S&P 500 is down 0.2%.
Energy complex futures settled with gains. WTI crude oil futures gained 1.9% to $72.14/bbl and natural gas futures jumped 4.3% to $2.70/mmbtu. On a related note, the S&P 500 energy sector is trading down 1.5%.
The materials (-1.2%) and real estate (-0.8%) sectors are also trading down.
S&P 500 in familiar territory
09-Jan-24 14:30 ET
Dow -202.40 at 37480.61, Nasdaq +10.86 at 14854.63, S&P -9.49 at 4754.05
[BRIEFING.COM] The S&P 500 (-0.20%) is in second place on Tuesday afternoon, hovering modestly under yesterday's close.
Elsewhere, S&P 500 constituents Eversource Energy (ES 58.28, -4.59, -7.30%), Moderna (MRNA 109.61, -5.83, -5.05%), and GE HealthCare (GEHC 74.53, -2.83, -3.66%) pepper the bottom of the standings. ES dips on Tuesday after overnight disclosing a $1.4-$1.6 bln after-tax impairment charge which is coming down the pipe in Q4, while MRNA slips alongside fellow biotech stocks.
Meanwhile, ResMed (RMD 181.40, +8.63, +5.00%) is one of today's better performers after catching a target raise to $195 out of JP Morgan.
Gold narrowly lower
09-Jan-24 14:00 ET
Dow -144.39 at 37538.62, Nasdaq +33.19 at 14876.96, S&P -2.46 at 4761.08
[BRIEFING.COM] With about two hours remaining on Tuesday the tech-heavy Nasdaq Composite (+0.22%) is now the only average in positive territory.
Gold futures settled less than a dollar lower (flat) to $2,033.00/oz, holding steady as investors waiting for inflation data later this week.
Meanwhile, the U.S. Dollar Index is up +0.4% to $102.59.
Page One
Last Updated: 09-Jan-24 09:02 ET | Archive
Walking back the rebound effort
We noted yesterday that the market's nine-week win streak came to an end because of weakness in small-cap stocks and mega-cap stocks. Guess which stocks led yesterday's rally effort? Yes, indeed, it was the small-cap stocks and mega-cap stocks in what looked to be a mechanically-controlled rebound effort.
We say the latter knowing that the charts for the Nasdaq Composite, Russell 2000, and S&P 500 all tracked on a smooth line up and to the right and finished pretty much at their highs for the day. The Nasdaq gained 2.2%, the Russell 2000 gained 1.9%, and the S&P 500 gained 1.4%.
The good rebound times, however, are not expected to keep rolling at today's open. Currently, the S&P 500 futures are down 27 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 140 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down 198 points and are trading 0.5% below fair value.
This turn of events has some news behind it and some price action behind it.
The news of note includes a Q4 revenue warning from Microchip Technology (MCHP) that was tied to a weakening economic environment, and Samsung Electronics indicating its Q4 operating profit will be down 35% year-over-year and below analysts' expectations.
The semiconductor space, which had a nice rebound yesterday, should see some selling activity as a result of these announcements, but an important offset will be the continued strength in NVIDIA (NVDA), which is trading 0.3% higher in pre-market action.
NVIDIA is the only Magnificent 7 stock trading higher. The negative price action in the other six is a factor for the weakness in the equity futures. We would add, too, that Netflix (NFLX) is down 1.8% after being downgraded to Neutral from Buy at Citigroup.
Another factor for the weakness is the continued fallout in Boeing (BA) over the 737 MAX 9 plug issue. Shares of Boeing, which dropped 8.0% yesterday, are down 1.1%, this morning.
Some attention is also being diverted to the 10-yr note yield holding stubbornly above 4.00%. It is currently at 4.03% after touching 3.96% at its low in yesterday's trading session. It would be remiss not to mention that the yield on the 10-yr note was nearly 100 basis points higher less than three months ago. Where it stands today isn't a major factor in the disposition of the equity futures market, but where it stands after Thursday's release of the December Consumer Price Index will be.
Treasuries are digesting remarks from Fed Governor Bowman (FOMC voter), who walked a middle ground in saying that it would be appropriate to cut rates should inflation fall closer to 2%, but in her view "we are not yet at that point." The 2-yr note yield is up three basis points to 4.38% in front of today's $52 billion 3-yr note auction at 1:00 p.m. ET.
Separately, the November trade balance was better than expected, showing a deficit of $63.2 billion (Briefing.com consensus -$64.7 billion) versus a downwardly revised $$64.5 billion (from -$64.3 billion) in October.
The key takeaway from the report is that exports were $4.8 billion less than October exports while imports were $6.1 billion less than October imports. The drop in both exports and imports fits with a weakening global economic environment.
-- Patrick J. O'Hare, Briefing.com
Jefferies Q4 results indicate mixed conditions remain in place for financial sector (JEF)
Investment banking and asset management firm Jefferies (JEF) has the distinction of kicking off earnings season for the financial sector and that remained the case last night as it reported Q4 results that beat expectations. However, JEF's earnings report also shows that conditions remain mixed across business lines with advisory in particular still struggling due to low M&A volume amid a high interest rate environment.
- In total, Investment Banking & Capital Markets revenue inched higher by 1% to $1.06 bln, led by a 110% surge in debt underwriting to $129.4 mln and a 21% increase in equity underwriting to $132.2 mln. While those growth rates look impressive, it's important to put them into context. In the year-earlier period, equity underwriting fees plummeted by 70%, while debt underwriting fees collapsed by 72%.
- Still, as interest rates stabilized, the equity markets strengthened, paving the way for a more active IPO market in Q4. This bodes well for other financial companies that are set to report earnings in the coming weeks, including Goldman Sachs (GS) and Morgan Stanley (MS), each of which are scheduled to release Q4 results on January 16.
- A rebound in the debt and equity underwriting markets helped to offset the persistent weakness in JEF's Advisory business, which saw revenue slide lower by 18% to $312.3 mln. The good news, though, is that JEF believes that the investment banking industry has reached the bottom of this current cycle, adding that "there's a lot of reason to believe that M&A activity will pick up this year from low levels in 2023..."
- Should that recovery transpire, JEF would be in a solid position to capitalize. Unlike most of its competitors, JEF has been investing in its talent with its recruiting efforts largely centering on investment banking. Over the past three years, the company has added 182 Investment Banking Managing Directors, either from other firms or through internal promotion.
- Meanwhile, JEF's trading business in Q4 was relatively stable with Capital Markets revenue lower by just 2% to $481.3 mln. Thanks to the upswing in the stock market, equity trading fees increased by 9% to $271.5 mln, largely offsetting a decline of 13% in fixed income.
Overall, JEF delivered a solid performance given the challenging conditions and its results indicate that Q4 earnings results for the financial sector probably won't be spectacular, but they may be better than anticipated.
Acuity Brands' Q1 earnings performance shines, sending shares to one-year highs today (AYI)
There is no turning the light off on Acuity Brands (AYI +10%) after the lighting product manufacturer crushed Q1 (Nov) earnings estimates despite delivering mild revenue, underscoring healthy success in increasing product vitality, enhancing service levels, and leveraging technology to drive productivity improvements. AYI has also held prices relatively steady while input cost headwinds are easing, giving margins that extra push.
- AYI expanded its adjusted operating margins by 250 bps yr/yr and 40 bps sequentially, providing the fuel needed to lift its EPS by 13.1% yr/yr to $3.72, topping analyst estimates by an even wider margin than last quarter's double-digit beat. AYI bolstering its margin profile despite a 6.3% drop in revs yr/yr to $934.7 mln, consistent with consensus, was quite meaningful.
- Management touched on a few factors underlying such strong margin performance in Q1. For one, AYI is removing costs from the production of its products. Secondly, AYI continues to demonstrate its brand power by hiking prices, implementing an increase earlier last year, without enduring a meaningful drop in demand.
- Management commented that current margins are at extraordinary levels, so it would not need to hold at this level for the rest of the year to hit internal financial goals. Nevertheless, the company feels good about maintaining its buoyant margin levels.
- Unlike last quarter, AYI did not provide formal guidance during its conference call. Instead, management discussed what it is seeing this year. Encouragingly, the company is observing order rates growing yr/yr and sequentially. Operations are back to typical lead times, and if not for the excess backlog from last year, AYI noted it would be enjoying positive sales growth.
- AYI also mentioned its strategy this year for its two segments: Acuity Brands Lighting (ABL), which comprises roughly 94% of revs, and Intelligent Spaces Group (ISG), which makes up the remaining 6%.
- The company is focused on delivering margin and cash flow growth in ABL. In ISG, it will continue to grow geographically.
AYI is off to a strong start to FY24 (Aug), delivering outsized Q1 performance, particularly regarding margins. We like seeing order rates returning to positive growth at the same time lead times are normalizing, setting up AYI to reverse its three straight quarters of negative sales growth this year.
Microchip cuts Q3 outlook as customers work through inventory, but bad news seems priced in (MCHP)
Less than a week after Mobileye Global (MBLY) guided FY24 revenue far below expectations, fellow semiconductor company Microchip (MCHP) cut its Q3 revenue guidance citing a similar inventory buildup across its customer base. After initially forecasting a 15-20% sequential decline in revenue, MCHP now expects Q3 revenue to plunge by 22% as it receives more requests to push out or cancel backlog.
- Similar to MBLY, macroeconomic headwinds are causing MCHP's customers to scale back on orders as they work through excess inventory. As a chip maker focused on ADAS and self-driving technology, MBLY and MCHP share the automotive industry as a key end market.
- Clearly, the automotive end market is a soft spot, but the weakness for MCHP is broad-based. During the Q2 earnings call in early November, CEO Ganesh Moorthy commented that it's volume, not pricing, that's driving the downturn and that the weakness is very broad-based across geographies and end markets. The two exceptions have been aerospace and defense, which continue to be resilient.
- MCHP's outlook for Q3 was already gloomy. When the company reported Q2 results, it guided for Q3 EPS of $1.09-$1.17 and revenue of $1.803-$1.916 bln, badly missing expectations on both accounts. At that time, the company warned that business was slowing as customers started to rebalance their inventories and push out delivery schedules. Furthermore, MCHP warned that it anticipates revenue for Q4 to likely decline again sequentially, although to a lesser extent compared to the Q3 decline.
- One positive is that MCHP intends to increase free cash flow return to shareholders by 500 bps every quarter until it reaches 100% of adjusted free cash flow returned to shareholders. The company projects that this will take five more quarters to achieve. On November 2, MCHP bumped its quarterly dividend higher by 7% to $0.439/share.
The main takeaway is that the deep inventory correction that has plagued MCHP worsened in Q3, and it remains uncertain as to when the supply/demand imbalance will materially improve. MCHP is only trading with minor losses, though, as market participants look ahead to better business conditions in 2024 as this inventory correction plays out.
Hewlett Packard Enterprise drops on reports it is in discussions to buy Juniper Networks (JNPR)
Activity in the technology M&A arena is starting to pick up after a WSJ report stating that Hewlett Packard Enterprise (HPE -7%) was in advanced talks to take over Juniper Networks (JNPR +22%) for up to $13.0 bln, an over 30% premium over its current market cap. Right before the new year, WSJ reported that Synopsys (SNPS) was potentially considering acquiring Ansys (ANSS), valuing the company at over $30.0 bln.
Just like with the possible Synopsys/Ansys deal, shares of the takeover candidate, JNPR, are soaring while the buyer, HPE, is sinking. The two companies engage in similar business lines, providing networking equipment to enterprises and offering AI-enabled services. Although JNPR commands decent adjusted gross margins at just under 60%, there may be further room for improvement through additional cost savings, possibly unlocked through synergies between HPE and JNPR. While price always plays a factor, at $13.0 bln, HPE is paying a reasonable sum at just over 2x JNPR's estimated FY24 revenue.
So why are HPE investors expressing disappointment today?
- Without further details of the transaction, it is unclear how HPE will finance the deal. However, with just around $4.3 bln in cash on hand, HPE will likely have to tap into debt and/or equity to seal the deal with JNPR. HPE has done a decent job lowering its debt profile over the years; a debt-financed acquisition would immediately erode this progress. Meanwhile, leaning on equity would be dilutive to shareholders.
- JNPR's revenue growth has tailed off rapidly in recent quarters. In Q3, JNPR's top line slipped into negative territory for the first time since its pandemic quarter, falling by 1.2% yr/yr, a quick deterioration from the +12.6% and +17.4% growth recorded in 2Q23 and 1Q23, respectively.
- On the bright side, JNPR did note that the rate of yr/yr order decline improved in Q3 compared to previous quarters, potentially marking a turning point for the company.
- HPE is facing its own host of challenges and may be looking at a multi-billion dollar acquisition at the wrong time. Last quarter, HPE issued weak FY24 (Oct) guidance, signaling a troubling year ahead despite the increasing number of enterprises implementing AI systems across their organization.
HPE's possible acquisition of JNPR could lead to several benefits, particularly surrounding AI, given JNPR's sustained upward momentum in that space, boasting a record 43% pop in revs in Q3 within its AI-Driven Enterprise business. However, HPE's timing could be off, given the ongoing headwinds within the enterprise software market, with elongated sales and elevated deal scrutiny weighing on orders and top-line growth. Nevertheless, over the long run, we view the addition of JNPR as an ambitious move to bolster HPE's product offerings and strengthen its competitive advantage.
lululemon athletica's recent slide continues as raised guidance fails to impress (LULU)
After a remarkable 2023 in which shares soared higher by about 60%, lululemon athletica (LULU) is off to a sluggish start in 2024 and this morning's upwardly revised Q4 guidance isn't helping to turn the tide. The exercise and athletic apparel retailer faces high expectations and trades at a premium valuation. Therefore, even though LULU enjoyed a strong holiday shopping season as sales grew by 14-15% yr/yr, the modest increase to its Q4 sales and EPS guidance is failing to spark much excitement.
- Specifically, LULU now expects Q4 revenue of $3.17-$3.19 bln, up slightly from its prior outlook of $3.135-$3.170 bln, and EPS of $4.96-$5.00, compared to its former outlook of $4.85-$4.93. It's important to note that LULU's original revenue and EPS guidance fell short of expectations. This new revenue guidance is now essentially in line with analysts' initial expectations, while EPS is slightly above the original forecast.
- LULU commented that sales trends remained balanced across channels, categories, and geographies in Q4, but the women's business has been the standout recently. In Q3, the women's business grew 19%, fueled by new product launches, strength in bottoms and ongoing performance in key franchises.
- Last quarter, LULU was a bit more cautious about the men's business, commenting that the uncertain macro environment could cause men to scale back on their apparel purchases. We wonder if some softness in the men's business prevented LULU from raising its sales guidance by a more substantial amount.
- Rival NIKE (NKE) is certainly feeling the impact of slowing apparel sales. When NKE reported Q2 results on December 21, it disclosed that revenue in North America fell by 4% with wholesale revenues declining by 2%. The company also lowered its FY24 revenue growth outlook to approximately 1% from its prior forecast of mid-single-digit growth.
- LULU seems to be in better shape than NKE at the moment, though, as its brand continues to command full pricing amid a highly promotional retail environment. Accordingly, LULU nudged its Q4 non-GAAP gross margin guidance higher to 58.6-58.7% from 58.3-58.6%.
Overall, LULU experienced a successful holiday shopping season, and it remains a bright spot in a rough retail climate. However, given the stock's rich valuation with a P/E north of 60x, LULU's modest guidance increase is making the premium valuation a little more difficult to justify today.
The Big Picture
Last Updated: 05-Jan-24 14:26 ET | Archive
Will the Fed fight the market?
There is an adage in the stock market that "you shouldn't fight the Fed." What that means is that you should zig when the Fed zigs and zag when it zags.
If the Fed is cutting rates, you should take more risk. If the Fed is raising rates, you should be more risk averse. Okay, it isn't always that straightforward. 2023 was a case in point. The Fed raised rates four times in 2023 and the S&P 500 still gained 24.2%.
Why? Well, everyone can point to the performance of the "Magnificent 7" as the driving factor, but by the end of the year, that wasn't the only factor. Let's not forget that the S&P 500 Equal-Weighted Index gained a respectable 11.6% in 2023.
It took a while for the equal-weighted index to get in gear, but it found its footing when the market resolved inflation is on a downward path to the 2% target rate, that a soft landing is possible, and that 2024 will be a year of multiple rate cuts.
Perhaps, then, the adage would be more clearly defined if it said "you shouldn't fight expectations about the Fed." What if the Fed, though, wants to fight the market?
Words Speak Louder than Actions
The Fed doesn't typically want to surprise the market -- not the Powell-led Fed anyway. Instead of fighting, the Powell-led Fed tries, first, to let its words speak louder than its actions.
So, when one hears the Fed Chair say, "we are not even thinking about thinking about cutting rates," one gets a little nervous. Conversely, when one hears the Fed Chair say, "our policy rate is likely at or near its peak for this tightening cycle," and that "the question of when will it become appropriate to begin dialing back the amount of policy restraint in place" was a topic of discussion at the December FOMC meeting, one gets a little excited from a risk-taking standpoint.
And sometimes one gets overly excited, as we saw in the stock market rally that persisted from October 27 to December 29. During that span, the Russell 2000 gained as much as 26.8%, the Nasdaq Composite gained as much as 20.2%, and the S&P 500 gained as much as 16.8%, floating like a butterfly and stinging short sellers like a bee.
At the same time, the yield on the 2-yr note went from 5.21% to 4.23% while the yield on the 10-yr note went from 5.02% to 3.88%. Those moves were a springboard for stocks, having been rooted in a friendly monetary policy outlook.
There were a few attempts by Fed officials to try to temper the market's expectations, but the market was having none of it.
In fact, the market grew even more confident in the idea of a rate-cut cycle unfolding in 2024, so much so that it soon went from pricing in four rate cuts in 2024 to six rate cuts. The important point here is that it did so after the Fed's Summary of Economic Projections in December showed a median estimate of three rate cuts in 2024 versus only two at the time of the September projection.
What It All Means
Notably, it was apparent in the minutes for the December 12-13 FOMC meeting that the discussion around when the Fed might want to dial back some restraint wasn't a lively one. We don't doubt that it happened, but the minutes also revealed that there was some talk of possibly needing to raise rates further or keeping the current target range for the fed funds rate (5.25-5.50%) in place longer than anticipated.
In other words, the discussion around rate cuts seemed lacking relative to the market's current expectation, measured by the CME FedWatch Tool, that there will be six rate cuts by the end of 2024.
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| March | 5.00-5.25% | 66.4% | 62.7% | | May | 4.75-5.00% | 55.5% | 48.3% | | June | 4.50-4.75% | 50.8% | 40.2% | | July | 4.25-4.50% | 42.6% | 32.7% | | September | 4.25-4.50% | 78.0% | 70.1% | | November | 4.00-4.25% | 62.2% | 51.4% | | December | 3.75-4.00% | 54.9% | 43.8% | FOMC Meeting Expected Rate Current Probability Month Ago Probability Source: CME FedWatch ToolThe Fed could cut rates six times in 2024. That isn't the Fed's baseline forecast, which goes to show there is a wide range of variability for a self-described data-dependent Fed. Basically, anything is possible depending on circumstances that have yet to avail themselves.
The market has a sense of how it thinks things will go, so the question is, will the Fed move closer to the market's way of thinking, or will the Fed use its communication tool to rein in the market's expectations?
The answer will be in the data, but perhaps not definitively in the data. That is a blueprint for some roller-coaster action like we saw following the release of the better-than-expected December employment report (not good for the market's rate-cut outlook) and the weaker-than-expected ISM Services PMI for December (better for the market's rate-cut outlook).
This is a market right now that doesn't want to fight the Fed or, looked at another way, doesn't want the Fed fighting the market.
If the data forces the Fed to go toe-to-toe with the market with some more forceful communication, it will be a cold-stone jab for a market still warm to the notion that there will be at least six rate cuts in 2024.
-- Patrick J. O'Hare, Briefing.com
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