Market Snapshot
briefing.com
| Dow | 29238.72 | -60.10 | (-0.21%) | | Nasdaq | 10554.15 | -98.10 | (-0.92%) | | SP 500 | 3615.71 | -24.02 | (-0.66%) | | 10-yr Note |
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| | NYSE | Adv 969 | Dec 2032 | Vol 841 mln | | Nasdaq | Adv 1564 | Dec 2746 | Vol 3.9 bln |
Industry Watch
| Strong: Utilities, Materials, Industrials, Consumer Staples |
| | Weak: Information Technology, Health Care, Energy, Real Estate |
Moving the Market
-- Downside leadership from mega cap stocks and semiconductors
-- Hesitation ahead of inflation data later this week
-- JPMorgan Chase CEO Jamie Dimon saying he believes S&P 500 could fall another 20%
-- Carryover negative momentum from Friday's retreat
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Closing Summary
10-Oct-22 16:25 ET
Dow -93.91 at 29204.91, Nasdaq -110.30 at 10541.95, S&P -27.27 at 3612.46
[BRIEFING.COM] It was another weak session for the stock market. The major indices opened to modest gains before sizable losses in mega cap and semiconductor stocks dragged the market into negative territory. Some concerning remarks from JPMorgan Chase CEO Jamie Dimon coincided with the market falling to session lows while remarks from Fed Vice Chair Brainard coincided with the market climbing off those levels.
According to CNBC, Mr. Dimon said he expects the U.S. to enter a recession in 6-9 months, adding that he thinks the S&P 500 could easily fall another 20%.
Fed Vice Chair Brainard said later today in a speech that, "...moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting to cumulative tightening in order to inform our assessments of the path of the policy rate." Market participants seemingly liked the idea that this could be a bit of a carrot from a Fed official implying that the pace of rate hikes could eventually moderate. Stocks moved off their lows following these remarks.
Mega cap stocks underperformed, as evidenced by the Vanguard Mega Cap Growth ETF (MGK) closing down 1.1% versus a 0.8% loss in the S&P 500. Apple (AAPL 140.42, +0.33, +0.2%) for its part started the session on a weaker note (down 1.1% at today's low) before exhibiting a turnaround in price action that helped boost the broader market off session lows.
Semiconductor stocks were a weak spot today. They continued to suffer following last week's revenue warning from Advanced Micro Devices (AMD 57.81, -0.63, -1.1%) and news of the U.S. imposing new export controls that are intended to degrade China's ability to manufacture advanced military systems, according to CNBC. The PHLX Semiconductor Index closed down 3.5%.
Falling oil prices weighed on the S&P 500 energy sector (-2.1%), which closed in last place on the day after surging 13.7% last week. WTI crude oil futures fell 1.7% to $90.92/bbl. Natural gas futures fell 4.3% to $6.46/mmbtu.
On the flip side, industrials (+0.3%) sat atop the leaderboard with a slim gain.
The Treasury market was closed today in observance of Columbus Day/Indigenous Peoples' Day. Still, with the 10-yr UK gilt yield spiking above 4.50% today, leaving it well above the 4.32% yield it sported when the Bank of England announced an emergency gilt purchase plan on September 28, one can make a case that interest rate jitters were a part of today's trading mix.
There was no U.S. economic data of note today. Participants are in wait-and-see mode ahead of the FOMC Minutes for the September meeting and key PPI and CPI reports later this week.
Looking ahead to Tuesday, economic data is limited to the September NFIB Small Business Optimism reading (prior 91.8) at 6:00 a.m. ET.
Dow Jones Industrial Average: -19.6% YTD
S&P Midcap 400: -20.4% YTD
S&P 500: -24.2% YTD
Russell 2000: -24.7% YTD
Nasdaq Composite: -32.6% YTD
Market well off lows ahead of the close
10-Oct-22 15:30 ET
Dow -16.72 at 29282.10, Nasdaq -82.90 at 10569.35, S&P -19.98 at 3619.75
[BRIEFING.COM] The market remains well off session lows ahead of the close.
Energy complex futures settled the session lower. WTI crude oil futures fell 1.7% to $90.92/bbl and natural gas futures fell 4.3% to $6.46/mmbtu.
Looking ahead to Tuesday, economic data is limited to the September NFIB Small Business Optimism reading (prior 91.8) at 6:00 a.m. ET.
Market moves sideways off lows
10-Oct-22 15:00 ET
Dow -60.10 at 29238.72, Nasdaq -98.10 at 10554.15, S&P -24.02 at 3615.71
[BRIEFING.COM] The stock market is little changed in the last half hour.
Earlier, Fed Vice Chair Brainard said, "...moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting to cumulative tightening in order to inform our assessments of the path of the policy rate." Her comments coincided with the market moving off session lows. Market participants liked the idea that this could be a bit of a carrot from a Fed official implying that the pace of rate hikes could eventually moderate.
Separately, a railroad union rejected the Biden-backed labor pack, reviving strike risk, according to Bloomberg TV.
DJIA outpaces peers
10-Oct-22 14:30 ET
Dow -40.59 at 29258.23, Nasdaq -85.57 at 10566.68, S&P -20.39 at 3619.34
[BRIEFING.COM] The Dow Jones Industrial Average outpaces the other main indices, trading flat currently.
Merck (MRK 90.43, +2.84, +3.3%) is a top performer for the DJIA after the company announced positive results from a recent trial and received an upgrade to Buy from Neutral at Guggenheim.
Meanwhile, Salesforce (CRM 145.43, -4.86, -3.2%) and Disney show the biggest losses for the group.
Market shoots higher led by AAPL
10-Oct-22 14:00 ET
Dow -5.86 at 29292.96, Nasdaq -62.50 at 10589.75, S&P -13.80 at 3625.93
[BRIEFING.COM] The stock market shot higher in the last half hour. The Dow Jones Industrial Average flirts with positive territory while the Nasdaq trails its peers, down 1.0%.
At the same time, Apple (APPL 141.42, +1.33, +1.0%), which was down 1.1% at today's low, surged to a gain of 1.0%. As a group, mega cap stocks continue to underperform. The Vanguard Mega Cap Growth ETF (MGK) is down 0.6%.
Fed Vice Chair Brainard said in a speech earlier that monetary policy will be restrictive for some time.
Page One
Last Updated: 10-Oct-22 09:06 ET | Archive
Stock market licking its wounds
The stock market comes into the week licking its wounds from a Friday sell-off that followed the better-than-expected September employment report.
Currently, the S&P 500 futures are up 10 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 16 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are up 108 points and are trading 0.4% above fair value.
The stock market will be trading independently of bonds today, too. Bond markets are closed in observance of Columbus Day/Indigenous Peoples' Day. There won't be any U.S. economic data from government agencies today either.
The stock market nonetheless has its mind on economic data. The Producer Price Index for September will be released on Wednesday, the Consumer Price Index for September will be released on Thursday, and the Retail Sales Report for September will be released on Friday.
The specter of those key data points, along with Q3 earnings reports from a number of leading financial companies on Friday, has helped keep a lid on the futures market.
The futures market, however, has improved from earlier when larger losses for the major indices looked to be in store at today's open. The basis for the improvement hasn't been grounded in a specific news item.
In fact, the general tone of today's news has more of a negative slant. It includes the following:
- A Bloomberg report that Covid cases are on the rebound in China
- Reports that Russia has stepped up its missile attacks on Ukraine after the Crimea bridge blast over the weekend
- China's September Caixin Services PMI falling into contraction territory at 49.3 (54.5 expected) versus 55.0 for August
- PPG Industries (PPG) cutting its Q3 EPS guidance below consensus, citing softer demand conditions that it expects to continue into the fourth quarter
- Goldman Sachs downgrading Procter & Gamble (PG) to Neutral from Buy
- UBS cutting Ford (F) to Sell from Neutral and General Motors (GM) to Neutral from Buy
It is also worth pointing out that the UK's 10-year gilt is up 15 basis points to 4.38%. That is higher than where it was trading (4.32%) when the Bank of England (BoE) announced its emergency gilt purchase plan on September 28. On a related note, the BoE announced new measures to support market functioning leading up to, and following, the expiration of its emergency gilt purchase plan on October 14.
That hasn't seemed to help the gilt market much today as it also girds for the government's announcement of a medium-term fiscal plan on October 31.
The plan for the U.S. stock market today looks like it includes a rebound effort at the open. That is good to see, but once again, how the market closes is more important than how it opens.
-- Patrick J. O'Hare, Briefing.com
Five9 plummets as CEO departs, creating a crisis of confidence as economic risks increase (FIVN)
Five9 (FIVN), a provider of a virtual contact center cloud platform, is plunging to its lowest levels since March 2020, the month when the pandemic began sweeping across the country and shut down the economy. Already mired in a steep sell-off that has seen shares tumble by about 35% since mid-August, FIVN's announcement that CEO Rowan Trollope has resigned is accelerating the stock's free-fall today.
Trollope has accepted a CEO role at a privately held pre-IPO company that doesn't compete with FIVN in the Contact Center as a Service (CCaaS) space. Mike Burland, who served as CEO from 2008-2017 before resigning for health reasons (cancer diagnosis), will step back into his old CEO role. As the current Chairman of the Board, Burland should already be up to speed on FIVN's operations, business trends, growth strategies, and financial standing, making the transition a relatively smooth one. He also stated that he is cancer-free now and is in good health.
Presumably in an effort to diffuse the CEO transition news, FIVN also raised its Q3 EPS and revenue guidance to $0.38 and $192.5-$193.5 mln, respectively, from $0.31-$0.33 and $192.5-$193.5 mln. However, the enhanced outlook is doing little to ease investors' concerns. In fact, it may be compounding the problem.
- FIVN is coming off a Q2 report in which it handily beat EPS and revenue expectations. In fact, the margin of its EPS beat was its largest in over five years. Although the company nudged its Q3 guidance higher, the increase on both the top and bottom lines translate into a much more modest upside performance relative to estimates.
- Consequently, fears that macroeconomic headwinds are slowing its growth are likely in play today. Rewinding to FIVN's Q2 earnings conference call, Trollope reminded participants that its installed book of business -- which accounts for roughly half of total revenue -- isn't immune from an economic downturn. With that in mind, FIVN took a more conservative approach with raising its annual revenue guidance.
- If business conditions are indeed softening, then this CEO transition comes at an inopportune time. Burland's extensive history of leadership roles within the company definitely works in FIVN's favor, but any time there's turnover at the top, execution risks increase as the company adjusts to the change. For instance, closing large deals may be more difficult since customers may use the transition as an excuse to hold off on making large scale investments.
- On the positive side, over 90% of FIVN's revenue is recurring, and its dollar-based retention rate was 118% on a trailing twelve-month basis in Q2. Furthermore, despite the macroeconomic volatility, net new bookings reached a new Q2 record, illustrating that key secular trends (automation of manual tasks, transition to the cloud) are still providing a tailwind.
Under normal circumstances, we believe that FIVN's CEO transition would be mostly met with an acceptance from investors, rather than the stampede to the exits we are seeing today. As the former CEO of FIVN for nine years, and as the current Chairman of the Board, Burland is more than capable of taking the helm. The problem, though, is that FIVN's uninspiring guidance raise indicates that this transition is coming at a sensitive time for the company as macroeconomic risks are mounting.
PPG Industries sent lower on reduced Q3 EPS guidance spurred by softness in Europe and China (PPG)
PPG Industries' (PPG -2%) lowered Q3 earnings guidance is spurring a sell-the-news reaction today. The paints, coatings, and specialty materials supplier attributed its downbeat forecast to two main culprits: softness in Europe and slower-than-expected demand recovery in China. PPG now expects Q3 earnings of $1.63-1.66, translating to a 2.7% decline yr/yr at the midpoint, compared to its prior forecast of $1.75-2.00.
Recall in Q2 that PPG expected the unfavorable economic conditions in Europe to linger over the next couple of quarters. Unfortunately for the company, the situation further deteriorated, mainly during September. Additionally, PPG did not foresee a significant COVID-related impact in China, expecting the country to be "fully up and running" with just a "very modest" impact from COVID in Q3.
- PPG's trimmed Q3 guidance is especially glaring after one of its competitors, RPM Inc (RPM), posted meaningful upside in AugQ last week on solid volume growth.
- One of RPM's rough patches in the quarter was its Construction Products Group segment, where margins fell 300 bps yr/yr due to high energy costs and inflation in Europe. However, RPM's roughly 77% sales allocation to North America, where demand remained robust, helped offset weakness in Europe.
- By contrast, PPG derives only about 40% of its sales from North America, with about 33% stemming from the European, Middle Eastern, and African (EMEA) region. Likewise, PPG's Asia Pacific exposure is significantly higher than RPM's, at around 18% versus 2% for RPM.
- As a result, softness in these areas is hitting PPG harder than it did RPM.
- On a side note, approximately 80% of peer Sherwin-Williams' (SHW) sales come from North America. As such, its Q3 earnings, which it reports on October 25, may not be as affected as PPG's.
- On the other hand, Axalta Coatings (AXTA), which also reports Q3 earnings on October 25, derived just 39% of its FY21 sales from North America, while EMEA and the Asia Pacific totaled 37% and 15%, respectively.
Despite the reduced outlook, PPG still provided a few encouraging remarks. Although current demand conditions and unfavorable FX impacts are expected to persist into Q4, PPG's raw material costs are beginning to moderate across some regions. With PPG estimating selling prices jumping 10-12% yr/yr in Q4, the moderating cost inflation should help margins continue to recover. For instance, in Q2, PPG saw operating margins expand by 200 bps sequentially as it capitalized on higher selling prices.
Bottom line, PPG's trimmed Q3 earnings outlook and the lingering softness in Europe and China make for a tough road ahead. However, moderating raw material costs is an encouraging development for ongoing margin improvement in subsequent quarters.
Kraft Heinz's second upgrade at Goldman highlights its successful ongoing transformation (KHC)
Kraft Heinz (KHC +2%) is receiving a nice push higher today following an upgrade at Goldman. What makes today's upgrade stand out is that it is Goldman's second upgrade in less than three months, underscoring the healthy progress the consumer packaged goods giant, which owns brands Miracle Whip and Heinz Ketchup, has made on its ongoing transformation.
Briefing.com notes that although KHC is seeing a favorable reaction today, its shares have yet to recover from the mid-September market sell-off, trading roughly 7% lower. Nevertheless, before the market tumbled, investors applauded KHC's reaffirmed FY22 organic sales growth and adjusted EBITDA forecasts. KHC commented at the time that it successfully completed two phases of its transformation, resetting its foundation and putting its operating model into gear.
- KHC embarked on its transformation during the pandemic, selling parts of its business, such as its nuts business, to Hormel Foods (HRL), as well as focusing on its key brands. Furthermore, KHC outlined three major initiatives it would set its sights on in the next few years: establishing a solid base of sales and earnings, rebuilding underlying businesses, and reducing debt while maintaining its dividend.
- By reaffirming its FY22 targets, KHC will have thus far succeeded in establishing a strong base of top- and bottom-line growth. For instance, in FY21, adjusted EPS expanded by +1.7% on +1.8% organic sales growth. Furthermore, in February, KHC already upped its long-term growth targets, expecting organic sales growth of +2-3% (up from +1-2%) and adjusted earnings growth of +6-8% (up from +4-6%). KHC also reiterated these projections last month.
- Debt has also steadily declined over the past two years, with KHC retiring around $8 billion in debt over the past six quarters alone. Meanwhile, KHC expects to deliver at least $2 bln of gross efficiencies, helping its margins and allowing it to better compete against the growing demand for private-label alternatives.
- Speaking of which, KHC does not have significant exposure to private labels, stating in late July that a "very small" percentage of its portfolio competes with off-brands. Furthermore, KHC commented that part of its strategy to compete with private labels is to ensure consumers can continue purchasing its brands by offering a wide range of price points through multiple options. For example, KHC sells three tiers of its Oscar Mayer branded products. In fact, in some cases, KHC brands are also priced below the private label substitute.
KHC may be trending higher on an upgrade today, but its ongoing transformation can help the stock rebound to 52-week highs of around $44.00. We like seeing KHC maintain its dividend -- currently at 4.7% -- over the past few years, even through COVID-19. Also, even with private labels threatening name brands lately in the wake of widespread inflation, Walmart (WMT), which comprised 22% of KHC's FY21 sales, noted in August that middle- and higher-income shoppers are trading down to Walmart. This allowed the company to take share in grocery, boding well for KHC's brands going forward.
Rivian Automotive speeds in reverse as recall sparks renewed concerns about production target (RIVN)
Just one week after Rivian Automotive (RIVN) reaffirmed its annual production guidance of 25,000 vehicles, the EV maker is being side-tracked with a major recall that will impact nearly every vehicle it has produced since September 2021. The Wall Street Journal first broke the recall story, reporting that the improper installation of a fastener is causing a potential steering issue. Fortunately, no injuries have occurred because of the defect, and RIVN estimates that only about 1% of its vehicles are affected by this flaw.
Of course, vehicle recalls are quite common, including for EV leader Tesla (TSLA). On September 22, reports surfaced that TSLA recalled nearly 1.1 mln vehicles in the U.S. due to an issue with the window's automatic reversal system. The stock sold off sharply that day, but the stock market also dove lower. Typically, the shelf-life for recall news is pretty short and limited as investors digest the development and quickly move on. For instance, on June 17, the New York Times reported that Ford (F) was aiming to recall 2.9 mln vehicles over a gear shift issue. After dipping modestly lower that day, the stock was marching back higher again the following day.
For RIVN, though, the disappointment from investors could linger a little longer.
- RIVN's progress in ramping up production is the main focal point right now. That's why the stock soared last Monday when the company missed Q3 delivery expectations but reaffirmed its annual production guidance. It's also why the stock is diving lower today because there's concern that the recall will set RIVN's production timeline back. Time and energy that could be spent building new vehicles will shift to repairing vehicles that are already built.
- There is some precedence for an EV maker recalling nearly its entire fleet of manufactured cars. Last May, Lucid (LCID) issued a recall for every vehicle it had made -- totaling about 1,000 vehicles at the time -- due to a defect in the car's wiring harness. Since then, LCID has struggled to get back on track, missing Q2 delivery estimates and significantly cutting its FY22 delivery outlook. Supply chain issues were mainly to blame, but the recall certainly didn't help matters.
- RIVN's financial performance at this point isn't closely scrutinized. However, when the company reported that its Q2 adjusted EBITDA loss ballooned to $(1.305) bln from ($559) mln in the year-earlier period, it did raise some eyebrows. Now, with the company on the hook for recall-related repairs, its losses could continue to swell higher. RIVN did state that it expects the financial impact to be negligible, so that's encouraging. After all, the company has only produced about 15,000 vehicles so far.
The main takeaway is that RIVN continues to encounter speedbumps and hurdles as it tries to scale production. Recall that in March, the company cut its 2022 production target in half to 25,000 vehicles. With COVID cases also reportedly on the rise in China, concerns about fresh supply chain disruptions are adding to the negative sentiment emanating from the recall news.
DraftKings may become royalty in sports betting space with potential Disney partnership (DKNG)
Whether entertainment and media powerhouse Disney (DIS) would branch out into the lucrative sports betting arena has been a hot topic lately, especially after activist investor Dan Loeb put the issue under the spotlight in mid-August. At that time, it was disclosed that Loeb reestablished a significant stake in DIS, providing him with a platform to push for certain initiatives, including spinning off ESPN in order to open the door to sports betting. About a month later, Loeb surprisingly changed his tune regarding his proposed ESPN spin-off, tweeting that he now has a "better understanding" of DIS's plans for sports.
With The Action Network reporting last night that DIS and online sports betting company DraftKings (DKNG) are nearing a landmark partnership, it's now clear why Loeb has backed off. According to the report, DIS would exclusively license the ESPN brand to DKNG, and integrate live shows and betting odds into game broadcasts. While financial details are unknown -- including the amount of the licensing fee -- this looks like a win-win scenario for both companies.
- For DKNG, its audience would multiply thanks to ESPN's massive viewership. For context, ESPN's 1Q22 daily viewership during primetime hours soared by 40% yr/yr to 2.07 mln viewers. A seamless avenue for those viewers to simultaneously watch and bet on live sports would be a windfall for DKNG.
- Currently, DKNG is the second largest online sports betting app in the U.S., behind only privately held FanDuel. A partnership with DIS could give FanDuel a run for its money at the top spot, while distancing itself from other competitors like PENN Entertainment's (PENN) Barstool Sportsbook and Caesar Entertainment's (CZR) Sportsbook.
- The primary issue for DKNG is how much it would cost to secure a licensing agreement with DIS. Several reports have indicated that DIS is seeking around $3 bln, but that amount doesn't seem to be set in stone. Either way, it will be a substantial sum of money, and DKNG is burning through cash at a rapid rate.
- For the six months ended June 30, 2022, the company's cash flow from operations was $(529.3) mln.
- Most likely, the licensing fee would be spread out over a period of time, easing the immediate burden on DKNG. That's good news because the company's balance sheet isn't equipped to handle a huge up-front payment with cash and equivalents of $1.5 bln as of June 30, 2022.
- For DIS, which already owns a 4% stake in DKNG, the partnership would allow it to capitalize on the fast-growing sports betting market -- without actually having to offer sports bets. The family oriented DIS is never going to offer its own sports book, but this approach further monetizes its sports content, while creating cross-selling opportunities on its direct-to-consumer platforms.
- As a possible example, a DKNG/ESPN betting show that airs during a live sports broadcast could steer viewers to ESPN+ to access information/stats that could be used to make an informed sports bet.
Although more details are needed, we generally like the idea of DKNG and DIS teaming up. The partnership has the potential to be a game changer for DKNG, and we believe the stock would be much higher today if not for the sharp sell-off across the broader market.
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