Market Snapshot
briefing.com
| Dow | 34213.35 | +111.63 | (0.33%) | | Nasdaq | 11223.75 | +109.49 | (0.99%) | | SP 500 | 4027.34 | +23.64 | (0.59%) | | 10-yr Note | +4/32 | 3.71 |
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| | NYSE | Adv 1833 | Dec 1158 | Vol 656 mln | | Nasdaq | Adv 2840 | Dec 1702 | Vol 4.3 bln |
Industry Watch
| Strong: Consumer Discretionary, Information Technology, Industrials |
| | Weak: Energy |
Moving the Market
-- Thinner trading conditions ahead of Thanksgiving tomorrow
-- Notable companies like Deere (DE), Nordstrom (JWN), HP, Inc. (HPQ), and Autodesk (ADSK) reported earnings
-- Upside leadership from mega cap stocks
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Closing Summary
23-Nov-22 16:30 ET
Dow +95.96 at 34197.68, Nasdaq +110.91 at 11225.17, S&P +23.68 at 4027.38
[BRIEFING.COM] Today's trade shaped up to be mostly on the positive side, building on yesterday's gains. The upside bias was supported by a pullback in Treasury yields, a weakening dollar, and leadership from mega cap stocks. The main indices hit an air pocket, however, around midday without a specific news catalyst that brought the S&P 500 and Dow Jones Industrial Average into negative territory.
The positive disposition was not unusual for Thanksgiving week, so a seasonal bias was likely another support factor for stocks.
Other supportive factors today included a positive response to earnings from Deere (DE 437.52, +20.96, +5.0%) and renewed interest in stocks that have sold off recently like Tesla (TSLA 183.20, +13.29, +7.8%), which received an upgrade to Neutral from Sell at Citigroup.
In addition to Tesla, other mega caps were important directional drivers today. The Vanguard Mega Cap Growth ETF (MGK) closed with a gain of 1.1%, but fell as low as the unchanged mark. This move coincided with the stock market taking its midday leg lower.
Market participants also had a slew of economic data to digest today. Some reports, like October Durable Goods Orders, October New Home Sales, and the November University of Michigan Index of Consumer Sentiment, were better than expected, but others, like the Weekly Initial Claims and Preliminary November IHS Markit Manufacturing and Services PMIs, were worse than expected.
The Treasury market and dollar seemed to key off the IHS data, which showed contraction readings (i.e., sub-50) for both the manufacturing and services numbers, and the uptick in initial claims, as a reason to think the Fed might not be overly aggressive with its future rate hikes.
On a related note, the FOMC Minutes for the November 1-2 meeting seemed to support that thought. The Minutes revealed that, "a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate."
That view was not entirely surprising; nonetheless, the market liked the implication and rallied to session highs following the release of the Minutes. The indices settled the day just below their best levels of the session on light trading volume.
The 2-yr note yield settled the day down five basis points to 4.47% and the 10-yr note yield dropped five basis points to 3.71%. The U.S. Dollar Index declined 1.0% to 106.12.
Ten of the 11 S&P 500 sectors closed with gains that ranged from 0.2% (real estate) to 1.3% (consumer discretionary). The lone holdout in negative territory was energy (-1.2%).
As a reminder, the market will be closed Thursday and will have an abbreviated session on Friday that ends at 1:00 p.m. ET.
Reviewing today's economic data:
- The final reading for the November University of Michigan Index of Consumer Sentiment increased to 56.8 (Briefing.com consensus 55.5) from the preliminary reading of 54.7. The final reading for October was 59.9. In the same period a year ago, the index stood at 67.4.
- The key takeaway from the report is that the weakening sentiment has been influenced by the ongoing impact of inflation, rising borrowing costs, declining asset values, and expectations for a weaker labor market.
- New home sales increased 7.5% month-over-month in October to a seasonally adjusted annual rate of 632,000 units (Briefing.com consensus 578,000) from a downwardly revised 588,000 (from 603,000) in September. On a year-over-year basis, new home sales were down 5.8%.
- The key takeaway from the report is that it reflects how the spike in mortgage rates has created affordability pressures for lower-income buyers and how the jump in building costs has crimped the supply of lower-priced homes. The jump in median and average selling prices was skewed by higher-priced homes accounting for a larger percentage of total new homes sold.
- Initial jobless claims for the week ending November 19 increased by 17,000 to 240,000 (Briefing.com consensus 226,000) while continuing jobless claims for the week ending November 12 increased by 48,000 to 1.551 million.
- The key takeaway from the report is that initial jobless claims are moving in a direction the Fed would prefer at this juncture, yet they are still not high enough to suggest that there has been some acute loosening in the labor market.
- Durable good orders, meanwhile, increased 1.0% month-over-month in October (Briefing.com consensus +0.4%) following a downwardly revised 0.3% increase (from 0.4%) in September. Excluding transportation, durable goods orders rose 0.5% month-over-month following a downwardly revised 0.9% decline (from -0.5%) in September.
- The key takeaway from the report is that business spending rebounded, evidenced by a 0.7% increase in new orders for nondefense capital goods, excluding aircraft, which had declined 0.8% in September. Shipments of these orders were up 1.3% month-over-month in October, which will be a positive input for Q4 GDP forecasts.
- The weekly MBA Mortgage Application index rose 2.2% week-over-week after last week's 2.7% increase
- The weekly EIA Crude Oil Inventories showed a draw of 3.69 million barrels after last week's draw of 5.40 million barrels.
- The weekly EIA Natural Gas Inventories showed a draw of 80 bcf after last week's build of 64 bcf.
Dow Jones Industrial Average: -6.2% YTD
S&P Midcap 400: -10.4% YTD
Russell 2000: -17.1% YTD
S&P 500: -16.0% YTD
Nasdaq Composite: -28.6% YTD
Market near highs ahead of close
23-Nov-22 15:35 ET
Dow +100.26 at 34201.98, Nasdaq +114.56 at 11228.82, S&P +22.46 at 4026.16
[BRIEFING.COM] The stock market remains near session highs ahead of the close.
Mega cap stocks recovered from earlier level, bolstering index performance. The Vanguard Mega Cap Growth ETF (MGK) is up 1.2%.
As a reminder, the market is closed tomorrow in observance of Thanksgiving.
Energy complex futures mixed
23-Nov-22 15:05 ET
Dow +111.63 at 34213.35, Nasdaq +109.49 at 11223.75, S&P +23.64 at 4027.34
[BRIEFING.COM] The major indices remain near session highs after market participants digested the FOMC minutes from the last meeting.
EU talks over the price level of a Russian energy cap have stalled, according to Bloomberg.
On a related note, WTI crude oil futures are down 4.0% to $77.76/bbl. Natural gas futures are up 3.9% to $7.69/mmbtu.
Fed minutes show pace of rate hikes could slow
23-Nov-22 14:25 ET
Dow +92.58 at 34194.30, Nasdaq +99.34 at 11213.60, S&P +19.67 at 4023.37
[BRIEFING.COM] The major averages moved modestly higher following the release of the FOMC's November policy meeting minutes. Currently, the S&P 500 (+0.49%) is now up about 20 points.
Importantly, participants said that a slower pace in current circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability. A few participants commented that slowing the pace of increase could reduce the risk of instability in the financial system.
Among other key excerpts from the minutes, a number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee's goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate. In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.
The view from these minutes that a "substantial majority" think it may soon be appropriate to slow the pace of rate hikes should help solidify the thinking that the next rate rate hike at the December 13-14 FOMC meeting will be 50 basis points and not 75 basis points.
Currently, the fed funds futures market sees a 73.5% probability of a 50 basis point rate hike at the December FOMC meeting. The 2-yr note yield is down three basis points to 4.48%, sliding from 4.51% seen just before the release of the minutes.
Gold higher ahead of FOMC minutes
23-Nov-22 13:55 ET
Dow +15.57 at 34117.29, Nasdaq +62.41 at 11176.67, S&P +9.45 at 4013.15
[BRIEFING.COM] The broader market is higher across the board with about two hours to go on Wednesday; the tech-heavy Nasdaq Composite (+0.56%) holds the lead ahead of the November FOMC minutes which will hit at the top of the hour.
Gold futures settled $5.70 higher (+0.3%) to $1,745.60/oz, today's strength due in part to a dip in the dollar as well as treasury yields.
Meanwhile, the U.S. Dollar Index is down about -0.8% to $106.33.
Market hits the snooze button
It is the Wednesday before Thanksgiving, which means many market participants are likely not going to be participating today. That also means the trading action could be either whippy or snoozy. Right now, it looks snoozy.
The S&P 500 futures are down three points and are trading fractionally below fair value, the Nasdaq 100 futures are up three points and are trading fractionally above fair value, and the Dow Jones Industrial Average futures are down 35 points and are trading 0.1% below fair value.
Strikingly, there isn't a shortage of tradable news.
- Several high-profile companies, including Deere (DE), Nordstrom (JWN), HP, Inc. (HPQ), and Autodesk (ADSK), have reported earnings results.
- The Reserve Bank of New Zealand raised its policy rate by 75 basis points (largest rate hike on record) to 4.25%.
- EU members are meeting to try to reach an agreement on a price cap for Russian oil in the neighborhood of $60-70, according to reports.
- China is pushing targeted, but rather extensive, controls in a bid to stop the spread of COVID.
- Workers at the Foxconn manufacturing facility (where Apple's iPhone is produced) have waged a violent protest over unpaid wages and COVID concerns, according to Bloomberg.
There is also a slate of economic data to consider. Specifically, the flash November manufacturing PMIs for European countries were mostly better than expected but still below 50.0 (the line between expansion and contraction), weekly initial jobless claims in the U.S. were higher than expected, and October Durable Goods Orders were stronger than expected.
Initial jobless claims for the week ending November 19 increased by 17,000 to 240,000 (Briefing.com consensus 226,000) while continuing jobless claims for the week ending November 12 increased by 48,000 to 1.551 million.
The key takeaway from the report is that initial jobless claims are moving in a direction the Fed would prefer at this juncture, yet they are still not high enough to suggest that there has been some acute loosening in the labor market.
The 2-yr note yield is up three basis points to 4.55% and the 10-yr note yield is up one basis point to 3.77%.
Durable good orders, meanwhile, increased 1.0% month-over-month in October (Briefing.com consensus +0.4%) following a downwardly revised 0.3% increase (from 0.4%) in September. Excluding transportation, durable goods orders rose 0.5% month-over-month following a downwardly revised 0.9% decline (from -0.5%) in September.
The key takeaway from the report is that business spending rebounded, evidenced by a 0.7% increase in new orders for nondefense capital goods, excluding aircraft, which had declined 0.8% in September. Shipments of these orders were up 1.3% month-over-month in October, which will be a positive input for Q4 GDP forecasts.
There will be more data released this morning, including the preliminary November IHS Markit Manufacturing and Services PMIs at 9:45 a.m. ET and the October New Home Sales and final University of Michigan Index of Consumer Sentiment for November at 10:00 a.m. ET.
The marquis release today, however, will be the FOMC Minutes for the November 1-2 meeting at 2:00 p.m. ET.
These minutes should ultimately be important for the market in name only. We say that knowing that many Fed officials have spoken since that meeting and have universally driven home the point that the Fed is not done raising rates, will contemplate slowing the pace of rate increases at coming meetings, and expects to hold things at the terminal rate (whatever that ends up being) for a while.
And that's where we will hold Page One today to wish all our readers a Happy Thanksgiving!
As a reminder, the market will be closed Thursday and will have an abbreviated session on Friday that ends at 1:00 p.m. ET.
-- Patrick J. O'Hare, Briefing.com
Guess? roars back on the possibility of FX headwinds peaking coupled with short squeeze action (GES)
Shares of fashion retailer Guess? (GES +1%) are amid a solid comeback today after fighting through a pronounced sell-off on sliding profitability in Q3 (Oct) and downbeat Q4 (Jan) guidance, mainly emanating from intense FX headwinds. These unfavorable exchange rates were a major factor in many of GES's rough-looking Q3 numbers. Another reason for the elevated volatility is GES's relatively high short interest of 17%, fueling potential short squeeze action.
- Around 56% of GES's Q3 revs branched from Europe, explaining the challenging FX situation. To put it in perspective, overall revs in Q3 fell about 2% yr/yr to $633.4 mln but would have jumped 10% in constant currency.
- The same situation presented itself with GES's guidance. FY23 (Jan) revs would have been estimated to reach 10.5% growth yr/yr, but due to unfavorable exchange rates, revs are now expected to grow just under 2%. Meanwhile, GES was also forced to reduce its FY23 (Jan) adjusted EPS by $0.30 due to a strong U.S. dollar.
- On the flip side, despite even worse economic conditions in Europe, this region managed to register 17% growth yr/yr in Q3 in constant currency, driven by GES's wholesale and retail businesses, which continued to capture market share.
- GES's smallest market, Asia, saw revs leap even further, growing 28% in constant currency, mainly due to favorable comps in many of its regional markets as the year-ago period was plagued by COVID-related store closures.
Still, not every blemish in Q3 resulted from unfavorable exchange rates. In GES's Americas Retail and Wholesale segments, revs fell 2% and 10%, respectively, yr/yr. Even worse, operating profits plummeted by 53% and 41%. GES chalked this up to expanding inflationary costs and increased order cancellations as retailers worked through excessive inventory levels. At the same time, while some retailers like Walmart (WMT) and Target (TGT) experienced strong back-to-school momentum in OctQ, GES saw a deceleration in sales of casual products, a rarity for the company during its back-to-school quarter.
Nevertheless, GES still expects sustained momentum around Europe and a couple other countries, where brand demand has remained resilient, with traffic increasing. The company anticipates similar traffic patterns in the U.S. as well. Also, GES commented that most of the FX headwinds baked into its forecast already materialized in Q3, signaling possible signs that the problem may not intensify going forward.
Deere in the green and running higher after plowing through Q4 estimates (DE)
Deere (DE) is running higher after reporting blow out 4Q22 results and issuing a bullish outlook for FY23 that calls for net income to increase by about 16% yr/yr, based on the mid-point of its $8.0-$8.5 bln forecast. Demand for farming and construction equipment has been robust this year, but supply chain disruptions and part shortages have thrown a wrench into DE's production capacity.
After the company badly missed EPS expectations in Q3, while also lowering its FY22 net income guidance, there was some concern that the same supply chain issues would rear their head again in Q4. However, higher shipment volumes in each of DE's segments indicates that the situation improved this quarter, enabling the company to more fully meet demand.
Similar to peer Caterpillar (CAT), which posted its own blowout earnings report in late October, DE capitalized on its price increases across its fleet of machinery. Along with better production efficiencies from higher shipment volumes, the price increases pushed margins and profits sharply higher in each of DE's businesses. For instance, in DE's large farm equipment segment, operating margin expanded by 670 bps yr/yr to 23.4%.
DE is able to successfully increase prices because the fundamentals underlying the farming industry and healthy. There are a few key factors supporting these strong fundamentals.
- Commodity and crop prices have remained elevated in this inflationary environment, creating higher incomes for farmers. With many farmers still working with aging fleets of tractors and combines, the rising income is providing an opportunity to upgrade their equipment.
- Increased investments in infrastructure projects are bolstering demand for heavy machinery within DE's Construction and Forestry segment. In Q4, revenue in this business grew by 20% to $3.37 bln and operating profit jumped by 53% to $414 mln.
- Technology improvements, including smart technology, have made DE's equipment more efficient and cost effective. With expenses climber higher across the board for farmers, more efficient equipment is one way to mitigate the cost pressures.
DE is firing on all cylinders now that the supply chain disruptions have finally eased. CEO John May struck an upbeat tone about the company's prospects in 2023, stating that positive farm fundamentals and favorable fleet dynamics are setting it up for another strong year.
HP Inc. ends FY22 on a decent note, but guidance tells us a near term turnaround is unlikely
HP Inc. (HPQ +1%) has been trading up or down slightly following its Q4 (Oct) earnings report last night. The PC and Print giant reported slight upside on EPS and revs. However, it issued downside EPS guidance for both Q1 (Jan) and FY23. It also announced a cost reduction plan that includes a headcount reduction of 4,000-6,000. Then, in a bit of an odd twist, HPQ also increased its dividend by 5%, not exactly a recipe for saving cash.
- On the Personal Systems (PS) side, revenue fell 13% yr/yr (or -9% constant currency) to $10.3 bln with a 4.5% operating margin. Weakness was mainly on the consumer side with revs dropping 25% while commercial was down 6%. HPQ was disappointed in the margin performance as it is below its long-term target range due to increased competitive pricing, particularly in EMEA. Recall that HPQ closed on its acquisition of Poly, a supplier of audio and videoconferencing products, on August 29. So the quarter included two months of that. HPQ says the Poly integration is going well with the business performing better than expected.
- On the Print side, revenue fell 7% yr/yr (-6% CC) to $4.5 bln but posted healthy 19.9% operating margin. The revenue decline was largely due to continued softness in the consumer market, for both hardware and supplies, and supply constraints. However, operating margin was well above the target range, reflecting disciplined cost management and pricing. Also, its Commercial business made a good recovery during Q4, with office hardware revenue growing double digits yr/yr and sequentially.
- In terms of the cost reduction plans, HPQ plans to achieve significant structural cost savings through digital transformation, portfolio optimization and operational efficiency. For example, HPQ wants to significantly reduce its number of unique SKUs on the PS side. It also wants to focus on growth areas like hybrid work, and the Poly deal was a big step there. Another goal is reducing its core fixed cost structure on the Print side and align it with the post-pandemic market size.
- HPQ estimates an annualized gross run rate savings of at least $1.4 bln by the end of FY25. We find the dividend increase a little curious in light of the belt-tightening. Also, HPQ was already paying a healthy 3.6% yield. However, it may be HPQ saying its cash flow is fine, it just wants to become more efficient.
Overall, it was a decent way to wrap up FY22. We think investors were not surprised to see the downside guidance for Q1 and FY23 given that Dell (DELL) was pretty cautious on 2023 when it reported on Monday. Investors are also likely to see the cost cutting and right-sizing moves as positives. And we see the dividend increase as more of a statement that hey, everything is ok here from a cash flow standpoint. It also removes any concerns that a cut to the healthy dividend yield was in the cards.
Autodesk tumbles on weak demand in Europe and China; U.S remains strong (ADSK)
Shares of CAD software provider Autodesk (ADSK -5%) are tumbling today on cautionary comments made by management regarding sales outside the U.S., as well as a reduction in the company's FY23 (Jan) billings guidance. ADSK's growth is largely dependent on robust demand within manufacturing and industrial sectors around the globe, as around 60% of sales stem from the EMEA and APAC regions. Therefore, manufacturing and industrial weakness in Europe and China weighed heavily on Q3 (Oct) results and FY23 billings.
- Drilling deeper, ADSK commented that its channel partners are still optimistic about the demand backdrop, with some hints of caution. Usage rates still grew modestly in the U.S. and APAC, excluding China, but were flat in Europe.
- Additionally, ADSK is seeing less demand for multi-year upfront payments and more demand for annual contracts than expected, resulting in its reduced FY23 billings forecast. ADSK now expects FY23 billing of $5.57-5.67 bln, down $135 mln at the midpoint from its prior projection. Management was hopeful that this development indicated a positive signal for its transition next year to annual billings for multi-year contracts.
- FX headwinds also played a minor part in FY23 billings, clipping the figure by about $10 mln.
- Looking beyond Q3, new business growth is slightly decelerating in EMEA and APAC, outside of Russia and China, but ADSK remarked that overall growth remained "good." Its Q4 (Jan) guidance was in-line with estimates, forecasting adjusted EPS of $1.77-1.83 and revs of $1.303-1.318 bln.
- On the plus side, ADSK remained confident in its long-term growth potential, continuing to target double-digit revenue growth, adjusted operating margins of 38-40%, and double-digit free cash flow growth on an annualized basis. Although not doing much to help shares today, these metrics provide a floor to ADSK's long-term growth profile.
- ADSK also authorized $5.0 bln for share repurchases, which equates to over 10% of its current shares outstanding, in addition to its already roughly 3.8 mln shares remaining on its current authorization.
We were nervous ahead of ADSK's Q3 report that even though its peer Procore (PCOR) posted excellent SepQ results earlier this month, it derives only around 15% of its total revs from outside the U.S., well below ADSK's ~60%. With many companies operating in the construction, manufacturing, and industrial markets noting softness in Europe and China, this was a red flag for ADSK.
Bottom line, ADSK's geographic diversity acted as a net negative in Q3. However, we think this will remain a net positive over the long term. Secular tailwinds also remain, like the acceleration in the convergence of workflows within the industries it serves.
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