Market Snapshot
briefing.com
| Dow | 30203.61 | +566.75 | (1.91%) | | Nasdaq | 10670.93 | +349.69 | (3.39%) | | SP 500 | 3679.01 | +95.87 | (2.68%) | | 10-yr Note | 0/32 | 4.02 |
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| | NYSE | Adv 2491 | Dec 551 | Vol 960 mln | | Nasdaq | Adv 3022 | Dec 1215 | Vol 4.3 bln |
Industry Watch
| Strong: Real Estate, Information Technology, Communication Services, Consumer Discretionary |
| | Weak: -- |
Moving the Market
-- UK Finance Minister scrapping most of the tax measures from the prior "mini-budget"
-- Better-than-expected earnings from Bank of America
-- Morgan Stanley Strategist Mike Wilson, who has been right this year with his bear market call, said the S&P 500 could get to 4,150 in a technical rally if a recession or earnings capitulation can be avoided
-- Leadership from strong mega cap stocks
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Closing Summary
17-Oct-22 16:20 ET
Dow +550.99 at 30187.85, Nasdaq +354.41 at 10675.65, S&P +94.88 at 3678.02
[BRIEFING.COM] The stock market started the week with a nice rally after a big sell off on Friday. The major averages logged sizable gains thanks to broad buying efforts.
The positive disposition today was thanks in part to UK Finance Minister Hunt scrapping most of the tax measures from the prior "mini-budget," which led to a rally in the gilt market and British pound. The 10-yr gilt yield fell 42 basis points to 3.97% and the pound surged (GBP/USD +1.5% to 1.1351).
Other tailwinds for stocks today included better-than-expected Q3 earnings from Bank of America (BAC 33.62, +1.92, +6.1%) and Morgan Stanley Chief Strategist Mike Wilson, who has been right this year with his bear market call, saying the S&P 500 could potentially get to 4,150 in a technical rally in the short term if an earnings capitulation or recession can be avoided.
Many stocks moved higher today with the advance-decline line favoring advancing issues by a greater than 4-to-1 margin at the NYSE and a greater than 2-to-1 margin at the Nasdaq.
Gains in mega cap stocks boosted index level performance. The Vanguard Mega Cap Growth ETF (MGK) closed up 3.5% versus a 2.2% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 2.7% gain in the S&P 500. Apple (AAPL 142.41, +4.03, +2.9%) was a key mover after Morgan Stanley named it a top pick in the event of an economic downswing.
All 11 S&P 500 sectors closed in the green with consumer discretionary (+4.2%) showing the biggest gain. That move was bolstered by constructive comments on the state of the consumer from Bank of America following its earnings report. Consumer staples (+1.1%) and energy (+1.2%) brought up the rear.
WTI crude oil futures fell 0.3% today to $85.49/bbl. Natural gas futures fell 7.7% to $5.99/mmbtu.
Buyers in the equity market were not deterred when the 10-yr Treasury note yield breached 4.00%. The 10-yr note yield dropped to 3.91% earlier but settled up one basis point to 4.02%. The 2-yr note yield, which hit 4.40% earlier, settled at 4.43%.
Ahead of Tuesday's open, Johnson & Johnson (JNJ), Albertsons (ACI), Lockheed Martin (LMT), Goldman Sachs (GS), Truist (TFC), and Hasbro (HAS) headline the earnings reports.
Market participants will receive the following economic data on Tuesday:
- 9:15 ET: September Industrial Production (Briefing.com consensus 0.1%; prior -0.2%) and Capacity Utilization (Briefing.com consensus 79.9%; prior 80.0%)
- 10:00 ET: October NAHB Housing Market Index (Briefing.com consensus 44; prior 46)
- 16:00 ET: August Net Long-Term TIC Flows (prior $21.40 bln)
Economic data was limited to the October Empire State Manufacturing Survey, which came in at -9.1 versus the prior reading of -1.5. A number below 0.0 is indicative of a contraction in manufacturing activity in the New York Fed region.
Dow Jones Industrial Average: -16.9% YTD
S&P Midcap 400: -18.8% YTD
S&P 500: -22.8% YTD
Russell 2000: -22.7% YTD
Nasdaq Composite: -31.8% YTD
Earnings and economic data out tomorrow
17-Oct-22 15:30 ET
Dow +560.23 at 30197.09, Nasdaq +351.25 at 10672.49, S&P +95.06 at 3678.20
[BRIEFING.COM] The stock market is stuck in a narrow trading range ahead of the close.
Ahead of Tuesday's open, Johnson & Johnson (JNJ), Albertsons (ACI), Lockheed Martin (LMT), Goldman Sachs (GS), Truist (TFC), and Hasbro (HAS) headline the earnings reports.
Market participants will receive the following economic data on Tuesday:
- 9:15 ET: September Industrial Production (Briefing.com consensus 0.1%; prior -0.2%) and Capacity Utilization (Briefing.com consensus 79.9%; prior 80.0%)
- 10:00 ET: October NAHB Housing Market Index (Briefing.com consensus 44; prior 46)
- 16:00 ET: August Net Long-Term TIC Flows (prior $21.40 bln)
Market sticks to narrow range; 10-yr note yield breaches 4.00%
17-Oct-22 15:00 ET
Dow +566.75 at 30203.61, Nasdaq +349.69 at 10670.93, S&P +95.87 at 3679.01
[BRIEFING.COM] The major averages are little changed in the last half hour. The 10-yr Treasury note yield breached the 4.00% level.
Exxon Mobil (XOM 100.88, +1.70, +1.7%) left Russia completely after the country expropriated its properties, according to Reuters.
On a related note, WTI crude oil futures fell 0.3% today to $85.49/bbl. Natural gas futures fell 7.7% to $5.99/mmbtu.
Netflix, outperforming in S&P 500, higher ahead of earnings
17-Oct-22 14:25 ET
Dow +551.67 at 30188.53, Nasdaq +347.85 at 10669.09, S&P +92.54 at 3675.68
[BRIEFING.COM] The S&P 500 (+2.58%) is firmly in second place to this point on Monday, having moved narrowly lower in the last half hour.
S&P 500 constituents DISH Network (DISH 14.09, +1.13, +8.72%), Netflix (NFLX 248.29, +18.29, +7.95%), and NVIDIA (NVDA 118.94, +6.67, +5.94%) are among today's top gain getters. NFLX steps higher ahead of tomorrow's earnings, while beaten-down tech names like DISH and NVDA moves off last week's lows.
Meanwhile, Fox Corporation (FOXA 28.53, -3.02, -9.57%) slides to the bottom of the index following a Credit Suisse analyst downgrade and news that the company plans to form a committee to explore a potential News Corp. (NWSA 16.21, +0.61, +3.91%) deal.
Gold higher as dollar falls to open the week
17-Oct-22 14:00 ET
Dow +617.77 at 30254.63, Nasdaq +360.65 at 10681.89, S&P +100.83 at 3683.97
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+3.49%) remains atop the standings.
Gold futures settled $15.10 higher (+0.9%) to $1,664.00/oz, aided in part by a more than -1.0% decline in the dollar.
Meanwhile, the U.S. Dollar Index is down about -1.2% to $112.01.
Roblox surges on a strong September showing, especially when compared to August (RBLX)
After enduring a sell-the-news reaction following slowing bookings growth in August, Roblox (RBLX +20%) is amid a resurgence today, seeing its shares gain around 20%. The video game company's massive jump today comes from a strong September, which saw daily active users (DAUs) up 23% yr/yr, hours engaged up 16%, and estimated bookings growth between +11-15%.
These metrics may not shine as bright when stacked against numbers posted during the pandemic, which would reach triple digits. However, they illustrate an acceleration compared to August, demonstrating RBLX's ability to capitalize on post-pandemic gaming trends even as inflation pressures spending amongst its DAUs.
- Although bookings growth of +11-15%, which represents a significant upgrade over the +5-7% posted in August, is a solid positive development, we continue to be impressed by RBLX's DAU growth.
- By registering another month of 20+% DAU growth yr/yr, RBLX is continuing to carve out a commanding presence in the video game industry. RBLX now boasts nearly 58 mln DAUs, a 38% climb from 1Q21, its first quarter as a public company.
- Also, even though average bookings per DAU (ABPDAU) continued to trend lower, dropping 7-10% yr/yr, it was not as pronounced as the 14-16% decline seen in August. The sliding ABPDAU also becomes more forgivable, given that RBLX is currently contending with users returning to the classroom. As a reminder, RBLX's most popular cohort is users aged 9-12, with its second-largest cohort being 17-24-year-olds.
Overall, RBLX's solid September metrics are pushing the stock considerably higher today. With RBLX aiming to be a much different type of video game company, leveraging brands to bring in ad revenue, and focusing on the social aspect of gaming, investors like seeing these strategic moves pay off. There are still many headwinds over the near term, especially surrounding ad revenue, as companies look to reduce expenditures to offset widespread cost inflation. However, RBLX's September turnaround shows that August may have been a one-off month, boding well for subsequent months.
Fox Corporation sells off on a potential combination with News Corporation (NWSA) (FOXA)
Fox Corporation (FOXA -9%) is selling off today after its Board, following the receipt of letters from Rupert Murdoch and the Murdoch Family Trust, is exploring a possible combination with News Corporation (NWSA +3%). In typical fashion, the smaller of the two companies, in this case, NWSA, is seeing its shares soar, resembling more of a mirror image of FOXA. Still, there are no guarantees a combination will materialize.
It would not be the first time both companies traded under one name; Mr. Murdoch divided the two entities in 2013. Before the split, some argued that traditional print media, i.e., News Corp, weighed down the much more lucrative entertainment piece -- 21st Century Fox. However, the entertainment powerhouse in Fox Corp did not last long, as Mr. Murdoch also sold the studio and other assets to Disney (DIS) in a deal worth over $70 bln just three years ago.
After Fox Corp divested most of its assets to DIS, rumors swirled that the much smaller Fox Corp would reunite with News Corp. Three years later, and a statement by Fox Corp CEO Lachlan Murdoch that the two would not reunite, speculation is back on the table at a time when both companies are seeing their share of difficulties. For example, shares of FOXA and NWSA have both given up over 20% on the year. In fact, since the 2013 separation, NWSA has been up just around 5%. Meanwhile, since FOXA agreed to sell most of its assets to DIS in 2019, its shares have tumbled roughly 20%.
However, by merging, FOXA and NWSA put together an attractive package.
- FOXA and NWSA together create a solid competitor to Warner Bros Discovery (WBD), which formed from the merger of AT&T's (T) WarnerMedia and Discovery earlier this year. Additionally, Paramount (PARA), formed when CBS Corp and Viacom merged in 2019, would be another contender FOXA and NWSA would be better positioned to contend with as a combined entity.
- Although FOXA divested its 21st Century studio assets, it still manages cable networks, which host a variety of news and sports, as well as the FOX broadcast network. Meanwhile, NWSA contains a range of media, from The Wall Street Journal to book publishing and subscription video services. By being closely related, there are plenty of synergies to extract. Perhaps FOXA will launch a subscription streaming service, following in the footsteps of PARA.
Bottom line, a merger of FOXA and NWSA makes sense. It also shows that since FOXA divested most of its entertainment assets, the two should have possibly combined years ago as shares of both have not seen much appreciation. With media giants slowly consolidating over the past few years, a combination of FOXA and NWSA would create a firmer foundation to remain competitive.
Bank of America banks higher on strong Q3 report; BAC not seeing macro issues impact consumer (BAC)
Bank of America (BAC +5%) reported nice upside with its Q3 results this morning. BAC followed the lead of several large banks which reported EPS beats last week. BAC also echoed positive comments on the state of the consumer and specifically spending levels. Now with several banks having made similar comments, it makes us think that the US consumer is holding up better than expected, at least in the near term.
- Its standout segment was once again Consumer Banking, its largest segment. It posted solid 12% yr/yr revenue growth to $9.90 bln. Growth was fueled by increased NII (net interest income), driven by higher balances and higher interest rates. Average consumer deposit balances remain above pre-pandemic levels.
- In terms of the consumer, consumer spend remained strong. BAC was pretty emphatic on the call regarding the impact of inflation and recession fears slowing spending growth. The company says it simply is not seeing it at Bank of America. Year-to-date spending of $3.1 trillion is up 12% yr/yr. However, while still strong in September at 10%, BAC did concede that spending growth slowed just a bit from the 12% YTD. However, it is still strong in the first two weeks of October at +10%.
- On the credit front, beginning in 4Q20, BAC saw early stage delinquencies recede below pre-pandemic levels. Late stage (90+ days) credit card delinquencies remain near multi-year lows, resulting in 3Q22 net charge-offs 54% lower than 3Q19. Customer liquidity remains strong. Balances are still multiples of the pre-pandemic periods.
- Its Global Wealth and Investment Management segment saw revenue growth slow to +2% to $5.4 bln in Q3, which was down from +7% in Q2. This was driven by higher NII, partially offset by lower market valuations on noninterest income. BAC's other two major segments (Global Banking and Global Markets) posted roughly flat revenue growth.
Overall, this was a good quarter for Bank of America fueled by good organic customer activity coupled with a significant increase in NII. Investors are happy to see the nice EPS and revenue beat. Also, unlike JPM, BAC has not paused its share buyback activity. Despite macro concerns, bank stocks are benefitting from higher interest rates. However, the stocks have been weak for much of 2022 on inflation/recession concerns that could result in loan defaults. As of yet, the US consumer has remained resilient and defaults are not really materializing at this point. However, that tick down in spend in Sept/Oct will be a metric to watch in Q4.
Church & Dwight looks to press down the hammer on an analyst upgrade; risks still remain (CHD)
By receiving its second analyst upgrade this month following Morgan Stanley's upgrade today, shares of the consumer household and personal care product manufacturer Church & Dwight (CHD +1%) are looking to press down the hammer in early trading.
CHD is best known for its Arm & Hammer brand, where sales through the years allowed the company to become an M&A powerhouse, acquiring numerous brands to bring its portfolio to where it stands today. Most recently, CHD spent $630 mln for Hero Mighty Patch, a purchase not well received by investors, which sent shares tumbling nearly 5%.
Briefing.com notes that although CHD is seeing a nice lift today on Morgan Stanley's upgrade to "Equal-Weight," multiple risks are staring down CHD over the near term.
- CHD's brands may not command similar loyalty as many of its peers, like Proctor & Gamble (PG) and Kimberly-Clark (KMB). CHD's organic volumes dipped by 2.9% yr/yr in JunQ, a more pronounced decline than PG and KMB, which both registered a 1.0% decline during that same timeframe. In an environment ripe with inflationary pressures spurring consumer trade-down to private labels, brand loyalty has been a critical component of companies' ability to raise prices without severe disruption to volumes.
- Sales are slowing, underscoring the possibility that CHD's brands are not holding up against strong macroeconomic headwinds. CHD trimmed its FY22 revenue forecast in late July, expecting +3-4% organic growth yr/yr, down from +3-6%. Although the reduced outlook was mainly attributed to softening discretionary spending on CHD's Waterpik and Flawless brands, further softness could start to materialize in less discretionary categories as CHD continues to take price.
- CHD's M&A activity may not be coming at a very opportunistic time. Investors were not enthusiastic about CHD spending 4.2x forward sales for Hero Mighty Patch. In a time when marketing and innovation are vital to differentiate from private labels, investors may have been more thrilled to see CHD allocate capital toward marketing and R&D to stave off a growing threat of off-brand alternatives.
There are some silver linings. CHD has repeatedly addressed the threat of private labels eating its market share, most recently noting last month that its exposure is low, with its weighted average share hovering around 12%. CHD added that only 5 of its 18 categories are exposed to private labels. Also, regarding M&A, CHD commented that its strategy of targeting a top one or two brand that commands high growth, margins, and is asset-light has proven successful over the years, boasting an additional +1.0-1.5% of organic annual sales growth.
Nonetheless, CHD's risks are significant, especially since it is likely that more than five of its categories are competing against private labels. Even if cost inflation begins to moderate, CHD's price hikes are still in effect, which, without meaningful brand loyalty, could continue to pressure top and bottom-line growth over the near term.
Kroger's and Albertsons' plan to merge may give regulators and investors some indigestion (KR)
Yesterday, grocery chain Albertsons (ACI) launched higher by as much as 14% as reports surfaced that the company and competitor Kroger (KR) were engaged in merger talks. Shares of KR also rallied, gaining more than 5% before giving back some of the gains late in the session. Before the open today, the companies confirmed the speculation, announcing a blockbuster tie-up that has KR acquiring ACI for $34.10/share in cash in a deal valued at $24.6 bln. The reaction to the actual announcement, though, is far less positive than the initial response to the possibility of a merger.
Both stocks are facing selling pressure as the terms of the merger are digested and as investors weigh the likelihood of a regulatory roadblock.
- A combined KR/ACI would have a massive footprint of nearly 9,000 stores across the country, consisting of banners such as Mariano's, Fred Meyer, Copps, and King Soopers from KR, and Jewel-Osco, Vons, and Safeway from ACI. KR argues that ACI has a complementary store base with a presence in parts of the country where it has few or no stores. That is true in the northeastern part of the U.S., but there is plenty of overlap in many other markets -- especially in the west.
- In an effort to get ahead of potential regulatory concerns, ACI will create a subsidiary consisting of 100-375 stores that operate near KR stores. This subsidiary would be spun off in conjunction with the closing of the merger, and it could reduce the $34.10/share acquisition price by the per share value of the divested subsidiary.
- Whether the maneuver is enough to sway competitive concerns is debatable since the combined KR/ACI would still have a sprawling footprint that makes it the largest pure grocery chain in the country by a large margin.
- ACI shares are also factoring in a special cash dividend that will reduce the $34.10/share acquisition price by $6.85/share.
- KR plans to fund the deal with a combination of cash and new debt. Considering that the company already has nearly $12.5 bln in long-term debt as of August 13, 2022, and that it will assume about $4.7 bln of ACI's debt, investors may be uncomfortable with the idea of KR taking on more debt.
- Given the complexity and moving parts associated with the deal, it could take well over a year for the merger to close. Specifically, KR and ACI are targeting early 2024 for the transaction to close. That is a long time for regulatory uncertainties to hang over both stocks.
In defense of KR and ACI, the companies can rightly point out that Walmart's (WMT) 20%+ market share in the grocery industry will still exceed their combined market share. In fact, the companies believe that a more robust supply chain and national distribution network resulting from the merger will drive their prices lower, putting more competitive pressure on WMT. To further bolster their case, KR says that it will reinvest about $500 mln of cost savings from merger synergies to lower prices for consumers.
On that note, the companies anticipate the combined company to generate approximately $1 bln of annual run-rate synergies, net of divestitures, within the first four years of the merger. Additionally, KR expects the transaction to be accretive to earnings in the first year following the close, with double-digit accretion by year four.
The main takeaway is that this deal looks complex with many moving parts. It would also create a grocery powerhouse that would have major competitive implications. While we can envision the shareholder value that the merger could create, it's hard to imagine that this deal will find favor among regulators, especially since concerns about food costs are already at a fevered pitch.
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