Market Snapshot
briefing.com
| Dow | 37592.98 | -118.04 | (-0.31%) | | Nasdaq | 14972.76 | +2.57 | (0.02%) | | SP 500 | 4783.83 | +3.59 | (0.08%) | | 10-yr Note | +2/32 | 3.95 |
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| | NYSE | Adv 1523 | Dec 1233 | Vol 801 mln | | Nasdaq | Adv 2022 | Dec 2205 | Vol 4.9 bln |
Industry Watch
| Strong: Energy, Real Estate, Utilities, Communication Services, Information Technology, Consumer Staples |
| | Weak: Consumer Discretionary, Health Care, Industrials, Financials |
Moving the Market
-- A drop in yields, especially the 2-yr note, which is most sensitive to changes in the fed funds rate, after the cooler-than-expected December Producer Price Index
-- Increased expectations for rate cuts starting in March
-- Digesting the first batch of Q4 earnings results, which garnered mixed reactions
-- Earnings-related loss in UnitedHealth (UNH) weighing down the price-weighted Dow Jones Industrial Average
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Closing Summary
12-Jan-24 16:25 ET
Dow -118.04 at 37592.98, Nasdaq +2.57 at 14972.76, S&P +3.59 at 4783.83
[BRIEFING.COM] The S&P 500 and Nasdaq Composite closed little changed from yesterday while the Dow Jones Industrial Average and Russell 2000 declined 0.3% and 0.2%, respectively.
The muted finish followed a soft start to the Q4 earnings reporting period, which set a tepid tone as participants look ahead to upcoming earnings results. Dow component UnitedHealth (UNH 521.51, -18.17, -3.4%), Delta Air Lines (DAL 38.47, -3.79, -9.0%), Bank of America (BAC 32.80, -0.35, -1.1%), and Wells Fargo (WFC 47.40, -1.64, -3.3%) were losing standouts in that respect.
JPMorgan Chase (JPM 169.05, -1.25, -0.7%) and Citigroup (C 52.62, +0.54, +1.0%) were also among the notable names that reported earnings. The former initially traded up before rolling over while the latter started out weak and closed with a gain.
Buyers were hesitant after the relatively soft start to earnings season due in part to the fact that the S&P 500 and Dow Jones Industrial Average are trading near all-time highs. The S&P 500 traded above its all-time high close shortly after the open, reaching 4,802.
That initial push higher was partially a reaction to a cooler-than-expected Producer Price Index (PPI) report for December, which ultimately impacted price action in the Treasury market more than the stock market. The 2-yr note yield, which is most sensitive to changes in the fed funds futures market, declined 12 basis points today to 4.15%. The 10-yr note yield fell three basis points to 3.95%.
The pleasing PPI report also had participants recalibrating rate cut expectations. The fed funds futures market now sees a 79.4% probability of a 25 basis points rate cut at the March FOMC meeting versus a 73.2% probability yesterday and a 68.1% probability one week ago.
Notably, rate cut expectations also increased yesterday despite a December Consumer Price Index report that wasn't exactly what the market hoped to see, suggesting the market doesn't believe inflation is likely to reaccelerate.
Geopolitical angst was also part of the narrative today after the United States and the UK conducted strikes against military targets in Houthi-controlled areas of Yemen.
- S&P 500: +0.3%
- Dow Jones Industrial Average: -0.3%
- Nasdaq Composite: -0.3%
- S&P Midcap 400: -1.9%
- Russell 2000: -3.8%
Reviewing today's economic data:
- December PPI -0.1% (Briefing.com consensus 0.1%); Prior was revised to -0.1% from 0.0%; December Core PPI 0.0% (Briefing.com consensus 0.2%); Prior 0.0%
- The key takeaway from the report is that inflation at the wholesale level has been brought under control, with deflation appearing in several components, and is expected to translate into friendlier inflation readings for the PCE Price Index that is the Fed's preferred inflation gauge.
As a reminder, the market will be closed on Monday for Martin Luther King Jr Day.
Treasury yields settle lower
12-Jan-24 15:35 ET
Dow -143.56 at 37567.46, Nasdaq -11.56 at 14958.63, S&P -0.88 at 4779.36
[BRIEFING.COM] There has not been much up or down movement recently.
Treasury yields settled mostly lower. The 2-yr note yield sank 12 basis points to 4.15% and the 10-yr note yield declined three basis points to 3.95%. For the week, the 2-yr note yield declined 24 and the 10-yr note yield declined nine basis points.
As a reminder, the market will be closed on Monday for Martin Luther King Jr Day.
Flat market supported by some mega caps
12-Jan-24 15:00 ET
Dow -157.66 at 37553.36, Nasdaq -15.90 at 14954.29, S&P -1.22 at 4779.02
[BRIEFING.COM] The market moved slightly lower recently with no specific catalyst.
The Invesco S&P 500 Equal Weight ETF (RSP) is down 0.3% while the market-cap weighted S&P 500 trades flat, presumably due to gains in some mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) is up 0.1%.
Separately, WTI crude oil futures rose 1.0% to $72.63/bbl and natural gas futures rose 3.2% to $2.62/mmbtu. The S&P 500 energy sector sports the largest gain among the 11 sectors, up 1.0%.
BNY Mellon gains on earnings, while United dips in S&P 500 on Delta guidance cut
12-Jan-24 14:30 ET
Dow -99.59 at 37611.43, Nasdaq +8.06 at 14978.25, S&P +6.27 at 4786.51
[BRIEFING.COM] The S&P 500 (+0.13%) is now in the lead, holding just under afternoon highs.
Elsewhere, S&P 500 constituents BNY Mellon (BK 54.84, +2.11, +4.00%), Cognizant Tech (CTSH 78.01, +3.13, +4.18%), and EPAM Systems (EPAM 309.00, +9.30, +3.10%) are among today's best performers. BK is higher on earnings, while CTSH mirrors peer Wipro's (WIT 6.36, +0.99, +18.44%) post-earnings rally.
Meanwhile, United Airlines (UAL 40.25, -4.26, -9.57%) is at the bottom of the S&P, pressured by lowered guidance from peer Delta (DAL 38.88, -3.38, -8.00%).
Gold rallies into the holiday-extended weekend
12-Jan-24 14:00 ET
Dow -112.80 at 37598.22, Nasdaq +10.00 at 14980.19, S&P +3.45 at 4783.69
[BRIEFING.COM] The tech-heavy Nasdaq Composite is tied atop the standings with the S&P 500, each up about +0.07% apiece, as we approach two hours left in the session.
Gold futures settled $32.40 higher (+1.6%) to $2,051.60/oz, Friday's move turning losses to gains on the week (+0.1%); the yellow metal propped up overnight after news that the U.S. military launched airstrikes on Houthi controlled areas in Yemen, but pushed even higher intraday following cooler-than expected PPI data.
Meanwhile, the U.S. Dollar Index is up +0.1% to $102.41.
Page One
Last Updated: 12-Jan-24 09:04 ET | Archive
Market likes friendlier PPI data
There is a three-day weekend ahead, but there is a lot to get through before we get there, including a lot of shoveling for many folks in the Midwest.
The pre-market session today has been dominated by an assortment of factors that have created some misdirection for the market:
- U.S. and UK forces conducted a joint strike on Houthi rebels in Yemen; and the Houthi leader in Yemen has vowed that there will be a response.
- Dow component UnitedHealth (UNH) fell short of earnings estimates and is down 4.8%.
- JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), BlackRock (BLK), and BNY Mellon (BK) reported earnings and the response to those reports has been mixed.
- Delta Airlines (DAL) topped earnings expectations, but investors were not impressed with the airline's FY24 guidance; DAL shares are down 5.5%.
- China reported some better-than-expected import and and export data for December.
- The December Producer Price Index was much more pleasing from a headline perspective than yesterday's December Consumer Price Index.
Currently, the S&P 500 futures are down one point and are trading roughly in-line with fair value, the Nasdaq 100 futures are down 11 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 93 points and are trading 0.1% below fair value.
These indications are all improved from where they were prior to the 8:30 a.m. ET release of the Producer Price Index. The same is true for the Treasury market, which went into rally mode after the report.
The 2-yr note yield, sitting at 4.28% just before the release, is at 4.18% now, down nine basis points from yesterday's settlement. The 10-yr note yield, at 4.00% just before the release, is at 3.95% now, down three basis points from yesterday's settlement.
The knee-jerk reaction was favorable because the report itself was favorable.
The Producer Price Index for final demand declined 0.1% month-over-month in December (Briefing.com consensus 0.1%), driven by a 0.4% drop in prices for final demand goods. The index for final demand, less food and energy ("core PPI"), was unchanged month-over-month.
On a year-over-year basis, the index for final demand was up just 1.0%, versus 0.8% in November, and the index for final demand less food and energy was up 1.8% versus 1.9% in November.
The key takeaway from the report is that inflation at the wholesale level has been brought under control, with deflation appearing in several components, and is expected to translate into friendlier inflation readings for the PCE Price Index that is the Fed's preferred inflation gauge.
On a related note, though, oil prices are up again today in the wake of the strike against Houthi rebels, which has fostered concerns about a wider conflict breaking out in the oil-rich Middle East. WTI crude futures are up 3.0% to $74.21/bbl and Brent crude futures are up 2.9% to $79.65/bbl.
All things considered, that is a relatively reserved response to the situation, suggesting that the market is not overly bothered -- not yet anyway -- about a major disruption to oil supplies.
-- Patrick J. O'Hare, Briefing.com
Citigroup delivers messy Q4 report filled with one-time charges, but some bright spots emerge (C)
While undergoing a sweeping overhaul of its business that will now include the elimination of 20,000 jobs over the next few years, Citigroup (C) delivered a messy Q4 earnings report that uncovered mixed results in its core businesses.
- Included in that messiness were a number of one-time charges such as a $780 mln charge related to restructuring costs, a $880 mln charge due to the devaluation of the Argentine peso, and a $1.7 bln FDIC special assessment. Altogether, these items drove a $(1.8) bln GAAP loss for Citigroup, but CEO Jane Fraser believes that the company is reaching a turning point in its multi-year transformation plan.
- That transformation plan, which centers on reducing layers of management and streamlining the business down to five core businesses, isn't bearing much fruit yet as Q4 non-GAAP EPS of $0.84 fell by 24% yr/yr. Revenue also slipped lower by 3.1%, although, when excluding divestitures and the Argentina devaluation, revenue edged higher by 2%.
- Staying true to recent form, Services was a source of strength with revenue up by 16%. Within this segment, Treasury and Trade Solutions remained steady as revenue grew 6% driven by market share gains.
- Business is far from booming in the Investment Banking business, but Citigroup's performance can be characterized as better-than-feared -- especially in Advisory. It's no secret that M&A activity has been stifled amid a high interest rate environment and global economic uncertainty, but Citigroup's Advisory group delivered solid 11% growth amid these tough conditions.
- Debt Capital Markets was the standout, though, as underwriting revenues jumped by 43%, offsetting a 17% decline in equity underwriting fees. An IPO market that remains stubbornly in a slump weighed on Citigroup's Investment Banking business once again.
- The Markets business was also mixed, but the strength was flip-flopped compared to Investment Banking. Equity trading fees were higher by 9%, while fixed income suffered a 25% drop due to weakness in currencies on lower volatility as December experienced a significant slowdown.
- Higher interest rates may have weighed on Citigroup's fixed income trading business, but they were a tailwind for the U.S. Personal Banking segment. Bolstered by higher interest income and higher deposit spreads, revenue increased by 12% to $4.9 bln. Branded cards saw a 10% gain on higher net interest margin.
Overall, there are many moving parts to Citigroup's story as it navigates through a transformation that will completely reshape the company. After peeling back the onion, Citigroup's Q4 results show a business that's disjointed with areas of strengths and weaknesses -- although, that's not uncommon in the financial sector right now. As Citigroup continues to streamline the business, its financial performance will likely continue to be lumpy over the next several quarters, but the hope is that much stronger profits await on the other side of this turnaround.
UnitedHealth's rising costs cloud otherwise healthy Q4 results today (UNH)
As costs increased for UnitedHealth (UNH -3%) in Q4, its earnings went down, resulting in the health insurance giant's first EPS miss in over five years. On the other hand, revenue growth was robust, growing by 14.1% yr/yr to $94.43 bln, surpassing analyst estimates easily. UNH also reiterated its FY24 performance objectives outlined in late November. Nevertheless, these highlights are insufficient to keep buying interest alive today.
- UNH's medical care ratio (MCR) -- the percentage of premiums used to cover claims -- ticked 220 bps higher yr/yr to 85.0%, driven by similar care patterns as during the year-ago period, such as more activity in outpatient care for seniors, with orthopedic and cardiac procedure categories among the more prominent. During the colder months, the MCR can inch higher as patients hold off on surgeries until less favorable weather no longer invites outdoor activity. However, the market may not have anticipated it to rise as much as it did. For perspective, in 4Q22, UNH's MCR fell by 90 bps yr/yr.
- Still, UNH was not overly concerned by its rising healthcare costs, expressing confidence that pricing and benefit design actions undertaken last year alongside consistent care patterns support its care ratio forecast of 83.5-84.5% this year.
- Another factor weighing on UNH was its Medicare Advantage (MA) business, a low-margin but fast-growing component of its operations. Management remarked that the selling environment is highly competitive, containing one of the more aggressive years of pricing than it ever saw during the 2024 session. UNH still expects to add 450,000-550,000 lives this year, slightly more modest than in previous years but reflective of its response to new risk changes in outpatient utilization patterns.
- On a side note, UNH commented that it still feels as though it is well-positioned in this business ahead of 2025 and 2026.
- The higher-than-anticipated costs resulted in weak adjusted EPS growth of 9.2% yr/yr to $5.83, below analyst expectations.
- Conversely, yr/yr revenue growth remained in double-digit territory for the 11th straight quarter, again driven by Optum Health, which jumped by 24%. The company boosted its number of patients served under value-based care arrangements by about 28% yr/yr by the end of FY23. Value-based care has been health insurers' response to contracting margins in their MA businesses as it cuts much of the administrative costs. Therefore, we suspect Optum will remain a healthy grower in subsequent quarters.
UNH's Q4 results were not dismal, but bubbling expenses are weighing on shares today. The U.S. population is aging, and costs will likely continue to expand. To counter this trend, UNH must find ways to trim expenses. Management touched on this, pointing to greater investments in digital capabilities and identifying more opportunities to leverage technology to reduce admin costs and improve productivity. As the largest health insurer in the U.S., UNH is well-positioned to overcome cost hurdles. However, a lack of progress on this front could lead to more selling pressure.
Delta Air Lines' upside Q4 results overshadowed by tepid guidance, rising oil prices (DAL)
As expected, Delta Air Lines (DAL) delivered solid Q4 results, exceeding top and bottom-line expectations as robust holiday season travel demand provided a major lift. The carrier's strong Q4 performance sets the stage for competitors such as American Airlines (AAL) and United Airlines (UAL) to follow suit when they issue quarterly results in a couple weeks.
- Despite the upside results, DAL shares are experiencing some turbulence today due to it disappointing guidance which calls for EPS to grow by just 4% in FY24 after soaring by 95% in FY23.
- Furthermore, DAL's Q1 unit revenue (TRASM) forecast of flat to down 3% is putting capacity growth concerns back under the spotlight. To improve service and meet demand, airlines have been adding capacity, but this is putting downward pressure on ticket pricing and profitability. In Q4, TRASM decreased by 3%, in line with its guidance of down 2.5-4.5%.
Although today's stock action would suggest otherwise, business is still quite healthy for DAL and there are a number of bright spots.
- In particular, international travel continues to shine with passenger revenue up 25% following last quarter's 35% increase. Strength in international travel, which accounts for roughly 20% of DAL's total revenue, is especially beneficial since it's more profitable than domestic travel. Unlike the domestic business, international unit revenues are increasing, up by 9% yr/yr.
- Corporate travel also continues its upward swing and is now at 90% of pre-pandemic levels. Relatedly, high-margin premium and loyalty revenue were healthy again, growing by 15% and 11%, respectively.
- On the cost side, Non-fuel CASM came in as anticipated, rising by 1.1% versus DAL's guidance of flat to up 2%. However, Mr. Bastian struck a cautious tone about higher maintenance costs this year, while oil prices are also on the rise as the conflict in the Middle East escalates.
The main takeaway is that robust travel demand during the holiday season fueled strong results for DAL and that will be a main storyline for airlines as more earnings reports are released in the coming weeks. However, since strong Q4 results are widely expected, the focus is turning to 2024 and DAL's tepid guidance is creating some concern that this will be a more challenging year for airlines, especially if fuel prices continue to march higher.
JPMorgan Chase hits all-time highs on Q4 results; cautiously optimistic about the economy (JPM)
Even though JPMorgan Chase (JPM) fell short of revenue expectations in Q4, shares are climbing to all-time highs today. The bank's top-line miss was a first in six quarters, with revenues rising just 11.7% year-to-year to $38.57 billion. Earnings were also lighter than expected, but it was due to a $2.9 bln payment to the FDIC to replenish funds sent to uninsured depositors of failed regional banks last year. If not for this payment, EPS would have exceeded analyst forecasts.
- On a firmwide basis, net interest income benefited from higher-for-longer interest rates, surging by 19% yr/yr, or 12%, when backing out the impact from First Republic, the bank JPM acquired last year that fell victim to the regional banking crisis. The provision for credit losses was $2.8 bln, comprised of $2.2 bln in net charge-offs, up $1.3 bln from last quarter, and $598 mln in a net reserve build, driven by loan growth in Card Services. Average loans grew by 17% or 4% when excluding First Republic, with average deposits flat or down 3% without First Republic.
- In Consumer & Community Banking (CCB), net revs grew by 15% yr/yr to $18.1 bln, driven by a 14% increase in Banking & Wealth Management, a 99% surge in Home Lending, and an 8% increase in Card Services & Auto.
- JPM's Corporate & Investment Bank (CIB) segment registered a 3% bump in net revs yr/yr to $10.96 bln. Each business in this segment enjoyed decent gains outside of Equity Markets, which experienced an 8% drop in revenue due to lower revenue in Derivatives and Cash.
- Commercial Banking (CB) and Asset & Wealth Management (AWM) expanded their top lines by 18% and 11%, respectively. In CB, revs were fueled by higher net interest income partially offset by lower deposit balances. Meanwhile, in AWM, higher management fees on strong net inflows pushed sales higher.
- FY24 guidance was relatively upbeat, anticipating around $88.0 bln in net interest income excluding Markets, with loan growth partially offsetting interest rate cuts.
The market is also focusing on the more uplifting side of JPM's comments about the U.S. economy. CEO Jamie Dimon remarked that the economy remains resilient, as consumers have not stopped spending and market prices in a soft landing. However, Mr. Dimon added that the federal government's copious amounts of deficit spending and past stimulus are driving much of the current economy. Meanwhile, inflation could remain sticky due to the need for increased spending triggered by the green economy, the restructuring of global supply chains, expanding military spending, and bubbling healthcare costs. All in, JPM is treading with caution, hoping for the best but preparing for any environment.
Given its footprint and dominance in the financial markets, JPM can likely traverse just about any economic backdrop. Still, its Q4 results and accompanying commentary bring to light economic headwinds that could begin to unravel, inflationary pressures that could stay with the U.S. consumer for an extended period, putting the Fed in a corner over whether to keep interest rates high and risk a hard landing or lower them before inflation returns to its long-term target. Nevertheless, while caution is warranted, especially at current price levels, JPM remains a top choice among its peers.
Smith Douglas Homes feeling right at home as public company as IPO draws solid demand (SDHC)
Given the fundamental strength of the homebuilding industry and the accompanying stellar performance of homebuilding stocks such as D.R. Horton (DHI), Lennar (LEN), and KB Home (KBH), it's fitting that the first major IPO of 2024 would be a homebuilder. Earlier this morning, Smith Douglas Homes (SDHC) capitalized on the bullish sentiment for homebuilders, pricing its 7.7 mln share IPO at $21/share, the high end of the $18-$21 projected price range. The stock subsequently opened for trading at $23.50, good for a 12% opening pop.
As a Georgia-based company, SDHC's geographic footprint centers on the southeast and southern U.S. with operations in GA, NC, TN, AL, and TX. The company believes that these markets are characterized by favorable attributes and trends, such as strong employment and wage growth, desirable lifestyle and weather, and consistent population growth.
There are a couple notable items that distinguish SDHC from other homebuilders.
- For instance, the company utilizes a "land-light" business model in which it typically purchases finished lots through lot-option contracts from land developers. This reduces its up-front capital needs and SDHC believes this also reduces its financial and operating risks relative to other homebuilders that own a higher percentage of their land supply.
- With more than 93% of SDHC's closings derived from fewer than 30 floor plans, SDHC benefits from a more streamlined approach to construction, resulting in improved economies of scale.
- Therefore, even though its ASPs are much lower than most homebuilders at $333,000 for the nine months ended September 30, 2023, its home closing gross margin is very healthy at 29% for this same period. For a point of comparison, KBH, which report upside Q4 results last night, saw housing gross profit margin decline by 310 bps yr/yr to 20.8% as it lowered prices to improve home affordability.
- Similar to KBH, though, SDHC experienced an upswing in demand as mortgage rates cooled in December. In its IPO prospectus, SDHC estimated that net new home orders spiked by 57% from November. Overall, for the three months ended December 31, 2023, net new home orders jumped by 24% yr/yr to 525 homes.
- Thanks to the favorable industry conditions, including a persistent undersupply of existing homes on the market, and SDHC's land-light business model, the company is comfortably profitable, generating net income of nearly $95 mln for the nine months ended September 30, 2023.
The main takeaway is that it's unsurprising that SDHC's IPO drew healthy demand considering the enthusiasm surrounding homebuilder stocks. Its strong pricing is a positive development for an IPO market that's still trying to fully emerge from a longstanding slump, but more will be needed to generate real momentum. We believe that SDHC will likely perform well as it represents a new opportunity for investors within the hot homebuilding space, and its differentiated attributes such as its more affordable price points and its exposure to strong housing markets in the southeast and southern U.S.
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