| | | Market Snapshot
| Dow | 42528.36 | -178.20 | (-0.42%) | | Nasdaq | 19489.67 | -375.30 | (-1.89%) | | SP 500 | 5909.03 | -66.35 | (-1.11%) | | 10-yr Note | -3/32 | 4.68 |
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| | NYSE | Adv 904 | Dec 1826 | Vol 1.0 bln | | Nasdaq | Adv 1416 | Dec 2913 | Vol 1.3 bln |
Industry Watch
| Strong: Energy, Health Care |
| | Weak: Consumer Discretionary, Information Technology, Communication Services, Real Estate |
Moving the Market
-- Selling interest picked up after S&P 500 slipped below 50-day moving average (5,950)
-- Losses in some mega caps limiting index performance; AAPL and TSLA receive analyst downgrades
--Digesting a stronger-than-expected ISM Services PMI reading for December and a November JOLTS - Job Openings Report that showed a noticeable increase in job openings
-- Stocks sliding after 10-yr yield jumped to 4.68%
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Closing Summary
07-Jan-25 16:25 ET
Dow -178.20 at 42528.36, Nasdaq -375.30 at 19489.67, S&P -66.35 at 5909.03
[BRIEFING.COM] The stock market initially traded higher, but gains faded quickly as participants responded to the economic releases at 10:00 ET. Treasury yields also shot higher as stocks declined in response to a stronger-than-expected ISM Services PMI reading for December and a November JOLTS - Job Openings Report that showed a noticeable increase in job openings.
The added wrinkle in the ISM Services PMI is that it also featured a notable pickup in the Prices Index (to 64.4% from 58.2%), which topped the 60.0% level for the first time since January 2024. The 10-yr yield was at 4.63% ahead of the data and settled at 4.68%, seven basis points higher than yesterday.
Losses in the major indices were fairly muted until the S&P 500 slid below its 50-day moving average (5,950), which drew in additional selling interest. The S&P 500 closed 1.1% lower and the Nasdaq Composite dropped 1.9%.
Outsized declines in mega cap names had an outsized impact on index losses. Apple (AAPL 242.21, -2.79, -1.1%), which was downgraded to Sell from Neutral at MoffettNathanson, and Tesla (TSLA 394.36, -16.69, -4.1%), which was downgraded to Neutral from Buy at BofA Securities, were standouts in that respect.
NVIDIA (NVDA 140.14, -9.29, -6.2%) was another influential loser after trading up as much as 2.5% at its high following Jensen Huang's keynote address last night at the Consumer Electronics Show.
The price action in NVDA and AAPL contributed to the 2.4% decline in the information technology sector, along with the loss in Microsoft (MSFT 422.37, -5.48, -1.3%). TSLA shares weighed down the consumer discretionary sector (-2.2%), along with the move in Amazon.com (AMZN 222.11, -5.50, -2.4%).
The only S&P 500 sectors that closed higher were energy (+1.1%) and health care (+0.6%).
- Nasdaq Composite: +0.9% YTD
- Russell 2000: +0.8% YTD
- S&P 500: +0.5% YTD
- S&P Midcap 400: +0.5% YTD
- Dow Jones Industrial Average: -0.04% YTD
Reviewing today's economic data:
- November Trade Balance -$78.2 bln (Briefing.com consensus -$77.9 bln); Prior was revised to -$73.6 bln from -$73.8 bln
- The key takeaway from the report is that the import surge likely reflects a bid to get ahead of President-elect Trump's tariff plans, meaning businesses might have more inventory than usual waiting to be utilized/sold that detracts from import demand in coming months (i.e., post-inauguration).
- December ISM Services 54.1% (Briefing.com consensus 53.0%); Prior 52.1%
- The key takeaway from the report is that it was a double-whammy for rate cut expectations in that the expansion in services sector activity accelerated while the prices index picked up noticeably, printing its first reading above 60.0% since January 2024.
- November JOLTS - Job Openings 8.098 mln; Prior was revised to 7.839 mln from 7.744 mln
Looking ahead, market participants receive the following economic data on Wednesday:
- 7:00 ET: Weekly MBA Mortgage Index (prior -21.9%)
- 8:15 ET: December ADP Employment Change (Briefing.com consensus 131,000; prior 146,000)
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 218,000; prior 211,000) and Continuing Claims (prior 1.844 mln)
- 10:00 ET: November Wholesale Inventories (Briefing.com consensus -0.2%; prior 0.2%)
- 10:30 ET: Weekly crude oil inventories (prior -1.18 mln)
- 12:00 ET: Weekly natural gas inventories (prior -116 bcf)
- 14:00 ET: December FOMC Minutes
- 15:00 ET: November Consumer Credit (Briefing.com consensus $9.1 bln; prior $19.2 bln)
Moderna surges as S&P 500 declines; Palantir, Take-Two, Southwest hit hard
07-Jan-25 14:30 ET
Dow -47.08 at 42659.48, Nasdaq -287.26 at 19577.71, S&P -42.71 at 5932.67
[BRIEFING.COM] The S&P 500 (-0.71%) is in second place on Tuesday afternoon, down about 43 points.
Briefly, S&P 500 constituents Palantir Technologies (PLTR 70.97, -4.95, -6.52%), Take-Two (TTWO 182.79, -6.19, -3.28%), and Southwest Air (LUV 32.79, -1.04, -3.07%) dot the bottom of the standings. PLTR falls in part due to executives disclosing stock sales overnight pursuant to 10b5-1 trading plans, TTWO slips after BofA Securities note suggesting risk to Take-Two's mobile growth targets amid sluggish in-app purchase trends.
Meanwhile, vaccine firm Moderna (MRNA 48.54, +5.97, +14.02%) is today's best-performing constituent, reacting favorably to news of the first death reported in the U.S. from H5N1 bird flu.
Gold gains as dollar strength tempers rate cut hopes
07-Jan-25 14:00 ET
Dow -54.67 at 42651.89, Nasdaq -297.65 at 19567.32, S&P -43.38 at 5932.00
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-1.50%) is down more than double the percentage losses of the S&P 500 (-0.73%).
Gold futures settled $18.00 higher (+0.7%) to $2,665.40/oz, easing back slightly from earlier gains as dollar strength, job openings data tempers rate cut expectations.
Currently, the U.S. Dollar Index is up about +0.3% to $108.56.
Dow slips as tech stocks lag, Chevron leads gains
07-Jan-25 13:30 ET
Dow -2.71 at 42703.85, Nasdaq -228.76 at 19636.21, S&P -29.93 at 5945.45
[BRIEFING.COM] The Dow Jones Industrial Average (-0.01%) is narrowly lower on Tuesday afternoon, having continued to shave off losses from the prior half hour.
A look inside the DJIA shows that NVIDIA (NVDA 143.25, -618, -4.14%), Amazon (AMZN 223.54, -4.07, -1.79%), and Salesforce (CRM 327.07, -3.46, -1.05%) are underperforming.
Meanwhile, Chevron (CVX 150.35, +3.09, +2.10%) is atop the standings.
The DJIA is now +1.25% higher off last Thursday's lows.
Elsewhere, longer-dated U.S. Treasuries continue hovering just above lows that were set in the wake of the strong ISM Services report for December (54.1%; Briefing.com consensus 53.0%) while shorter tenors have shown a bit more resilience. The market has not shown much of an immediate reaction to the just-completed $39 bln 10-yr note reopening, which met demand that was on the softer side. The sale drew a high yield of 4.680%, which tailed the when-issued yield by 0.2 basis points while the bid-to-cover ratio (2.53x vs 2.54x average) and indirect takedown (61.4% vs 67.4%) were a bit below the prior 12-auction average. The U.S. Treasury will cap this week's note and bond auction slate with a $22 bln 30-yr bond reopening tomorrow.
Midday Summary
07-Jan-25 13:05 ET
Dow -61.09 at 42645.47, Nasdaq -277.09 at 19587.88, S&P -40.49 at 5934.89
[BRIEFING.COM] The stock market started the day on a higher note, but gains faded quickly as participants responded to the economic releases at 10:00 ET. Treasury yields turned sharply higher after a stronger-than-expected ISM Services PMI reading for December and a November JOLTS - Job Openings Report that showed a noticeable increase in job openings.
The added wrinkle in the ISM Services PMI is that it also featured a notable pickup in the Prices Index (to 64.4% from 58.2%), which topped the 60.0% level for the first time since January 2024. The 10-yr yield was at 4.63% ahead of the data and sits at 4.68% now.
Outsized losses in many mega cap names have contributed to the downside bias. The Vanguard Mega Cap Growth ETF (MGK) trades 1.8% lower.
Apple (AAPL 241.50, -3.49, -1.4%), which was downgraded to Sell from Neutral at MoffettNathanson, and Tesla (TSLA 394.81, -16.31, -4.0%), which was downgraded to Neutral from Buy at BofA Securities, into other areas of the market.
NVIDIA (NVDA 141.97, -7.46, -5.0%) is another influential loser after trading up as much as 2.5% earlier following Jensen Huang's keynote address last night at the Consumer Electronics Show.
Losses in the aforementioned names have pinned their respective S&P 500 sectors to last place on the leaderboard among the 11 sectors. Consumer discretionary (-1.8%) and information technology (-1.7%) are the only sectors trading down more than 0.6%.
On the flip side, the energy sector leads the pack by a wide margin, showing a 1.4% gain. Health care stocks are also showing some strength, leading the sector to trade 0.6% higher.
Reviewing today's economic data:
- November Trade Balance -$78.2 bln (Briefing.com consensus -$77.9 bln); Prior was revised to -$73.6 bln from -$73.8 bln
- The key takeaway from the report is that the import surge likely reflects a bid to get ahead of President-elect Trump's tariff plans, meaning businesses might have more inventory than usual waiting to be utilized/sold that detracts from import demand in coming months (i.e., post-inauguration).
- December ISM Services 54.1% (Briefing.com consensus 53.0%); Prior 52.1%
- The key takeaway from the report is that it was a double-whammy for rate cut expectations in that the expansion in services sector activity accelerated while the prices index picked up noticeably, printing its first reading above 60.0% since January 2024.
- November JOLTS - Job Openings 8.098 mln; Prior was revised to 7.839 mln from 7.744 mln
Stryker strikes a deal to acquire Inari Medical, bolstering its neurotechnology business (SYK)
Medical device company Stryker (SYK) has struck a deal to acquire Inari Medical (NARI) for $80/share in an all-cash transaction valued at $4.9 bln, sending shares of NARI skyrocketing higher, while SYK drifts lower on the M&A news. Near the end of yesterday's session, speculation began swirling that a deal could be imminent after Reuters reported that SYK was closing in on an acquisition of NARI, which launched the stock higher. Excluding yesterday's gains, the $80/share purchase price represents a hefty premium of about 61% from last Friday's unaffected price.
Although SYK isn't issuing any new equity or debt to finance the transaction, the lofty valuation that it's paying for NARI may not be sitting too well with shareholders, especially since NARI has posted four consecutive quarterly losses. Based on NARI's FY24 revenue guidance of $601.5-$604.5 mln, SYK is paying roughly 8.1x expected FY24 sales. For a point of comparison, NARI competitor Penumbra (PEN) was trading with a trailing P/S of about 7x prior to today's M&A fueled gains.
Beyond the high price tag, though, the addition of NARI looks like a good fit for SYK.
- NARI, a fellow medical device company, manufactures products that treat deep vein thrombosis (DVT) and pulmonary embolisms (PE). The company's product portfolio complements SYK's neurotechnology business well, which focuses more on stroke treatment with products such as implants, stents, sealants. According to SYK, venous thromboembolism impacts up to 900,000 people in the U.S. alone each year, so its total addressable market will expand considerably with the addition of NARI.
- High costs have weighed on NARI's profitability -- operating expenses jumped by 34% in Q3 -- but the company's growth has been solid. In each of the past four quarters, revenue growth has been in the low-20% range and the company's FY24 guidance implies that trend will continue with growth of 21.5% projected for Q4. Furthermore, SYK should be able to attain some cost synergies as it integrates the much smaller NARI into its operations.
- The acquisition of NARI provides SYK with another growth catalyst to go alongside its recent platform launches. Specifically, the company is expected to launch its Pangea Plating system in the Orthopedics segment later this year, while the LIFEPAK 35 defibrillator and monitor is seeing strong interest with sales beginning to ramp.
Overall, we believe that NARI is a good strategic fit for SYK. While we would have liked to have seen more color regarding the financial implications of the deal in today's press release, SYK did state that it will provide the expected impacts to 2025 financial results during the Q4 earnings call on January 28.
Carter's at a crossroads; long time CEO to retire; new CEO has big decisions to make (CRI)
Carter's (CRI) is pulling back following news that its Chairman/CEO Michael Casey will retire. This baby/toddler apparel company has enlisted a search firm to find a permanent replacement. Carter's also reaffirmed full year guidance.
- Despite its large size with its #1 market share in the US (brands include Carter's and OshKosh B'gosh), the company has been struggling, especially in its US Retail segment. The main problem here is that Millennials and Gen Z consumers, CRI's target demographic, have shifted to value apparel retailers beginning mid-year 2022 as they deal with inflation.
- Carter's is a value apparel retailer with average prices per piece in the $6 range. And despite apparel prices being up only modestly from 2019, significant increases in grocery prices has driven them to value apparel retailers. CRI's goal is to reengage and attract these consumers who shifted over to the mass channel and off-price retailers.
- Its US Wholesale segment (38% of YTD sales) is not quite as large as its US Retail segment (48% of YTD sales) but still very important. The strength of its wholesale business is in its exclusive brands sold to mass channel retailers. Carter's has a huge competitive advantage as the largest supplier of children's apparel to Target, Walmart, and Amazon. US Wholesale unit volumes are up 15% YTD while US Retail segment units was down 4%.
- A key decision for the new CEO will be whether it makes sense to pare back its store footprint and focus more on the wholesale side and online. CRI has a large retail presence with 1,000+ company-operated stores in the US, Canada, and Mexico. Also, without having to pay for physical stores, its wholesale operating margins are higher than retail.
- On its Q3 call, Mr. Casey sounded like a big believer in physical stores. He explained that nearly 70% of children's apparel is purchased in stores and CRI's stores are the number one source for new customer acquisition. He also argued that its stores drive its online sales. When CRI opens stores, it sees a lift in online sales and when it closes stores, online sales in the related market decrease. Also, consumers enjoy the convenience of shopping online and picking up same day in its stores. About 38% of its digital orders were supported by physical stores, up from 35% last year. These are margin accretive transactions and reduce the need for shipping online purchases to consumers.
Overall, whomever Carter's hires as its next CEO will have some big decisions to make, especially with regard to whether it makes sense to focus so much on physical stores. Another issue is how to lure back those shoppers who have migrated to value apparel retailers due to inflation. Carter's price points are also in the value realm, but shoppers like the convenience of also grabbing groceries and diapers all in one trip. So, fixing this may not be easy. Regardless, we think Carter's needs a shake-up. The current CEO has been in place for 15 years, perhaps a new perspective would be beneficial. We will be watching closely to see who they choose as the next CEO and maybe see if they can get the stock moving again.
Silicon Motion moves lower after reducing Q4 revenue outlook as soft retail SSD market weighs (SIMO)
The mixed business conditions that Silicon Motion (SIMO) has been experiencing recently appear to have continued throughout its fourth quarter. Earlier this morning, the manufacturer of NAND flash controllers and solid-state drives (SSDs) reduced its Q4 revenue outlook, forecasting revenue to come in at the low end of its prior guidance range of $191-$202 mln. When SIMO issued that previous outlook in its Q3 earnings report in late October, the guidance was already below expectations, making today's cut even more discouraging.
SIMO didn't offer any specific details in the press release about what's causing the weakness. However, it's likely that the same headwinds that were responsible for SIMO issuing downside Q4 guidance in October are to blame once again.
- Specifically, ongoing softness in the retail aftermarket for SSD has weighed on SIMO's top line. A combination of lower consumer spending and the associated drop in demand for PCs and smartphones, and high NAND prices has negativity impacted this business. In the Q3 earnings report, the company warned that seasonal holiday demand is expected to be more muted than in years past, and that prediction appears to have come to fruition.
- The company is optimistic, though, that an anticipated PC replacement cycle and smartphone upgrade cycle, alongside the launch of AI processors from Intel (INTC), Advanced Micro Devices (AMD), and Qualcomm (QCOM), will reignite growth in these markets this year.
- Furthermore, SIMO is now entering the high end of the PC market for the first time via the launch of its PCIe Gen5 controllers, which are suited for AI notebooks, desktops, gaming, and workstation PCs. High end PCs represent 10-15% of the overall PC market, so its entrance into this market not only should boost its margins due to higher ASPs, but it also significantly expands its total addressable market.
- Finally, SIMO is also expanding into the data center market, although the company is only in the early innings here and isn't generating material revenues just yet. The company's MonTitan industrial controller is currently shipping to only a handful of customers, but production is expected to ramp up in 2H25, paving the way for this new product platform to anchor a multi-year growth cycle for SIMO.
Persistent weakness on the retail SSD side of the business continues to hang over SIMO, creating a stiff headwind for the stock. Looking beyond Q4 and 1H25, the future does look brighter for SIMO, especially if the anticipated PC and smartphone upgrade cycles do play out in a meaningful way.
Getty Images and Shutterstock take a selfie together, image giants to merge (GETY)
There is some big M&A news in the licensed visual content space. Getty Images (GETY +29%) and Shutterstock (SSTK +24%) announced a merger of equals transaction, creating a premier visual content company. The deal was not a total surprise given than Bloomberg reported a possible deal on Friday. However, shares of both companies are surging on the news as perhaps the terms were more favorable than expected.
- The combined company will be named Getty Images and will continue to trade on the NYSE under the GETY ticker. GETY shareholders will own 54.7% of the combined company and SSTK shareholders will own 45.3%. SSTK shareholders get the option of $28.8487 per share all in cash or they can choose all GETY shares or a mix of shares and cash. As a combined company, Getty Images and Shutterstock will offer a content library with greater depth and breadth for customers.
- In terms of the rationale for the deal, the companies explain that the deal will facilitate greater investment in innovative content creation, expanded event coverage, and improved capabilities such as search, 3D imagery and generative AI. They also note their complementary portfolios, creating a broader set of visual content products across still imagery, video, music, 3D and other asset types.
- The companies also cite a strengthened balance sheet and greater cash flow generation. Expected annual cost synergies are expected at $150-200 mln by year 3 and it's expected to be accretive to earnings and cash flow beginning in year 2.
- A knock on Getty Images has been a pretty levered balance sheet and that partly explains why its share price has been trading in the low single digits. Shutterstock has some debt, but it's not as levered as Getty. The deal should deleverage the combined balance sheet and the combined company should be well positioned to accelerate debt repayment and reduce borrowing costs.
Both companies have seen their share prices trend lower over the past year. In an era where generative AI applications can create images in seconds and with camera phones getting better and better, there has been less need for content creators to pay fees for licensed visual content. Combining together will certainly lower costs, but how a combined company would combat these larger macro problems is not readily apparent to us. Another wrinkle is whether the deal might raise some anti-trust concerns from regulators. Perhaps that impacted the timing of this deal after the election with the incoming Trump administration being seen as more lenient but there are no guarantees.
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