Market Snapshot
briefing.com
| Dow | 33589.64 | +72.06 | (0.21%) | | Nasdaq | 10693.42 | +57.85 | (0.54%) | | SP 500 | 3904.35 | +12.26 | (0.31%) | | 10-yr Note | -7/32 | 3.62 |
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| | NYSE | Adv 2135 | Dec 844 | Vol 788 mln | | Nasdaq | Adv 3121 | Dec 1391 | Vol 4.6 bln |
Industry Watch
| Strong: Health Care, Communication Services, Consumer Discretionary, Materials, Energy, Industrials |
| | Weak: Consumer Staples |
Moving the Market
-- Noticeable rise in Treasury yields
-- Gains in many mega cap stocks help to bolster index performance
-- S&P 500 rising above its 50-day moving average (3,907)
-- Hesitation ahead of December Consumer Price Index on Thursday followed by bank earnings reports on Friday
-- Unwinding some of the enthusiasm seen after last Friday's jobs report and ISM Non-Manufacturing Index
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Closing Summary
10-Jan-23 16:30 ET
Dow +186.45 at 33704.03, Nasdaq +106.98 at 10742.55, S&P +27.16 at 3919.25
[BRIEFING.COM] The stock market traded in mixed fashion to begin today's session after yesterday's rally fizzled out late in the afternoon trade. The major indices spent the first half of the day floating around their flat lines due to a lack of conviction from either buyers or sellers.
Fed Chair Powell gave a speech titled "Central Bank Independence" at 9:00 a.m. ET, but his comments had limited impact on the market. Instead, the fickle start to the trading day was likely driven by hesitation ahead of the December Consumer Price Index on Thursday followed by bank earnings reports on Friday, which marks the official start to the Q4 earnings reporting season.
Shortly after the open, decliners outpaced advancers by a slim margin at the NYSE while advancers led decliners at the Nasdaq.
Buyers exhibited more commitment, though, starting around midday. By the closing bell, advancing issues led declining issues by a roughly 5-to-2 margin at both the NYSE and the Nasdaq. The main indices closed near their best levels of the day, which left the S&P 500 comfortably above a key technical point (its 50-day moving average at 3,907).
The late push higher was fueled by broad buying interest. The Invesco S&P 500 Equal Weight ETF (RSP) closed at its best level of the day, up 0.8%, versus a 0.7% gain in the S&P 500. Ten of the 11 S&P 500 sectors closed in the green led by the communication services (+1.3%) and consumer discretionary (+1.3%) sectors. Meanwhile, the consumer staples sector (-0.2%) was alone in negative territory to close out the session.
Notably, small cap stocks performed better than their larger peers, leading the Russell 2000 to a gain of 1.5%.
Treasury yields rose noticeably today. The 2-yr note yield rose six basis points to 4.26% and the 10-yr note yield rose ten basis points to 3.62%.
Reviewing today's economic data:
- December NFIB Small Business Optimism 89.8; Prior 91.9
- November Wholesale Inventories 1.0%; Prior was revised to 0.6% from 0.5%
- S&P Midcap 400: ++3.5% YTD
- Russell 2000: +3.5% YTD
- Nasdaq Composite: +2.6% YTD
- S&P 500: +2.1%YTD
- Dow Jones Industrial Average: +1.7% YTD
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -13.2%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior +1.69 million)
Clinging to session highs
10-Jan-23 15:30 ET
Dow +108.95 at 33626.53, Nasdaq +69.80 at 10705.37, S&P +16.95 at 3909.04
[BRIEFING.COM] The main indices are sitting near session highs.
Treasury yields rose noticeably today. The 2-yr note yield rose six basis points to 4.26% and the 10-yr note yield rose ten basis points to 3.62%.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -13.2%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior +1.69 million)
Semiconductors build up strength
10-Jan-23 15:05 ET
Dow +72.06 at 33589.64, Nasdaq +57.85 at 10693.42, S&P +12.26 at 3904.35
[BRIEFING.COM] The S&P 500 is fighting to stay above its 50-day moving average (3,907).
Energy complex futures settled in mixed fashion. WTI crude oil futures rose 0.7% to $75.19/bbl and natural gas futures fell 6.9% to $3.32/mmbtu.
Semiconductor stocks have built up more strength relative to the broader market. The PHLX Semiconductor Index is up 0.9% with NVIDIA (NVDA 158.45, +2.12, +1.4%) and TSMC (TSM 81.16, +0.85, +1.1%) showing some of the biggest gains.
Illumina slips after underwhelming guidance; S&P 500 near HoDs
10-Jan-23 14:25 ET
Dow +106.66 at 33624.24, Nasdaq +82.88 at 10718.45, S&P +19.24 at 3911.33
[BRIEFING.COM] The S&P 500 (+0.49%) is in second place to this point on Tuesday, hovering near HoDs.
S&P 500 constituents Steris (STE 203.23, +12.38, +6.49%), Agilent (A 155.12, +7.65, +5.19%), and First Solar (FSLR 167.49, +8.32, +5.23%) dot the top of the standings. STE moves higher alongside other medical equipment names, while A announced a new repurchase program and caught a Wells Fargo upgrade to Overweight.
Meanwhile, Illumina (ILMN 195.93, -11.38, -5.49%) is today's worst performer after last night's guidance at JPMorgan conference was worse than expected.
Gold ends narrowly lower on Tuesday
10-Jan-23 13:55 ET
Dow +79.57 at 33597.15, Nasdaq +60.58 at 10696.15, S&P +13.58 at 3905.67
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (+0.57%) still holds the lead among the major averages.
Gold futures settled $1.30 lower (flat) to $1,876.50/oz, thumbed lower in part by a modest rise in both the dollar and yields.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $103.31.
Page One
Last Updated: 10-Jan-23 08:56 ET | Archive
Waiting for Powell to push the market one way or another
There was a broad-based rally in the stock market yesterday -- and then there wasn't. The S&P 500 hit 3,950 at its high (+1.4%) but finished the day at 3,892 (-0.1%) and stuck below its 50-day moving average (3,907).
The early rally was a carryover of Friday's buying interest that was predicated on the notion that the Fed might not raises rates as much as feared because of weakening economic data and fading inflation. The subsequent selling was linked ostensibly to remarks from Atlanta Fed President Bostic (non-FOMC voter), who said the Fed is willing to overshoot with its rate hikes and that the Fed should hold rates at 5.00% for a long time.
Strikingly, Treasuries didn't sell off on Mr. Bostic's remarks and the dollar didn't rally, which raises some doubts as to whether those remarks were truly the cause of the stock market failing to sustain its rally effort.
It is conceivable that market participants grew anxious about Fed Chair Powell throwing some cold water on the market's rate-hike thinking when he delivers a speech at 9:00 a.m. ET today. That speech, we would add, is entitled "Central Bank Independence" and it will be given in Sweden, so we are not sure it will be the platform to rein in the market's dovish-minded thinking related to the latest batch of data.
In any case, the market must contend with the fact that the Fed isn't communicating yet in the fashion that the market would like it to communicate, which is to say Fed officials are still largely fighting back against the idea of a pivot to a rate-cut cycle starting this year.
The concern -- or belief -- in the market is that the Fed's stubbornness in that regard is going to lead to a policy mistake that makes any setback in the U.S. economy worse than it needed to be. That is the message of a deeply inverted yield curve.
The anxiousness that took root after yesterday's early rally effort, which had the S&P 500 up 3.7% from Friday's low, has carried over this morning.
Currently, the S&P 500 futures are down 18 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 78 points and are trading 0.7% below fair value; and the Dow Jones Industrial Average futures are down 145 points and are trading 0.4% below fair value.
The negative tilt has been leaned on by renewed weakness in the mega-cap stocks, a Morgan Stanley downgrade of Dow component Boeing (BA) to Equal Weight from Overweight, Coinbase (COIN) announcing that it will be cutting another 20% of its workforce, and a report showing Tokyo's Core CPI hit a 42-year high of 4.0% yr/yr in December.
Treasuries are on the weaker side of things today, too. The 2-yr note yield is up six basis points to 4.26% and the 10-yr note yield is up eight basis points to 3.60%.
Today's start, then, won't have the flair that yesterday's start did. Then again, yesterday proved (again) that it's not how you start, but how you finish that counts.
-- Patrick J. O'Hare, Briefing.com
Cleveland-Cliffs (CLF) as Investment Idea for 2023; steelmaker with heavy automotive exposure
With the new year upon us, we have started posting profiles we call Investment Ideas for 2023. These are longer term buy-and-hold ideas that we post around this time every year. See 2022 Recap. Importantly, we recommend using a 20-25% stop loss limit. Today we wanted to profile Cleveland-Cliffs (CLF). Also, see our other recent profiles: Carter's (CRI), Conagra (CAG).
If the name sounds familiar, it's because we chose CLF as an Investment Idea in 2022. The steelmaker was a big winner initially, up +63% for us at one point. However, we got stopped out when it pulled back along with automakers as persistent component shortages hampered vehicle production. However, we wanted to take another stab at it in 2023. Here is why we like it:
- CLF is a steelmaker with heavy exposure to automotive. It supplies 2.5x more steel to the automotive industry than the #2 and #3 players combined. Automotive production remains hampered by chip shortages and other supply chain issues, but our hope here is that production picks up steam. Many are predicting that unit sales will increase in 2023 after a 2022 that was hampered by supply chain issues.
- We understand that the recovery may take some time. But the hope is that the stock will trade higher months before the actual production improves. We hope that some positive commentary from GM or Ford this spring or summer might get the stock moving. Another concern is the state of the consumer. Rising rates, recession concerns, and general concerns may hurt demand. In fact, we think it is possible the industry will shift from a supply problem to a demand problem. However, we think pent-up demand from 2022 could help unit sales in 2023.
- CLF had some good things to say in its Q3 report in late October. It missed on EPS and revenue, however, results were affected by the delayed inventory impact of higher input costs and maintenance activities from prior periods. Now, that all major projects have been concluded and production levels are back to normal, CLF expects costs to decline meaningfully, into Q4 and further into 2023.
- Furthermore, shipments to its automotive clients significantly improved in Q3, achieving a level among the highest in six quarters. CLF expects this positive trend in automotive shipments to continue into Q4, with the added benefit of improved pricing from a successful renewal of annual contracts starting on October 1. As the automotive industry increases production, supply on the spot trade should tighten which should support pricing going forward.
- Subsequent to its Q3 report, Cleveland-Cliffs had more good news when it announced it was able to secure higher fixed contract steel prices for 2023. And it is not just automotive. CLF says it achieved significantly higher contractual fixed prices for its grain-oriented electrical steels for 2023 as well as meaningful increases in prices for its non-oriented electrical steel and stainless steel products.
- Fixed-price contracts are expected to represent 40-45% of CLF's steel volume sold in 2023, and 50+% of total steel revenue, so these new contract prices are a big deal. CLF expects direct carbon steel automotive sales will average approximately $1,400 per net ton in 2023 vs $1,300 in 2022. Cliffs also expects significantly lower steelmaking unit costs in 2023 compared to 2022.
Overall, we admittedly are a bit uneasy taking another bite at the CLF apple. However, it did make a 63% move soon after our report. We are hoping for some of that magic in 2023, but use the stop loss limits. We are hoping production picks up in 2023, but there are definitely some risks here. With that said, we like the risk-reward here. We also like the stock action as it has consolidated nicely in the $14-20 range since mid-June.
Finally, the author of this report formerly worked on the sell side at Citigroup covering steel stocks, so we know the group well and we keep an eye on the industry. Our other steel pick in 2022 (CMC +47%) was a big winner and we remain a fan. But we are hoping this is the year for CLF.
Robert Reid, Briefing.com; rreid@briefing.com
CVS Health goes full throttle in healthcare provider push with bid to buy Oak Street Health (CVS)
CVS Health's (CVS) fervent ambition to become a more diversified healthcare provider appears to be kicking into an even higher gear as the company is reportedly ready to tap into the M&A market once again. According to Bloomberg, CVS is mulling a $10+ bln acquisition of Oak Street Health (OSH), which has sent shares of OSH soaring higher today. The potential acquisition of OSH would provide CVS with significant exposure to primary care centers for Medicare recipients -- a market that CEO Karen Lynch has previously pegged as a key area of interest for the company.
Market participants, however, don't seem as enthusiastic about the possibility of CVS making another sizable deal.
- Shares have been trading lower throughout the session, signaling that investors are apprehensive about CVS's aggressive M&A approach.
- Recall that last September, the company made a big splash when it acquired Signify Health (SGFY) for $8.0 bln, which is expected to close in 1H23.
- That deal was generally well-received from investors, but market conditions were more favorable at that time and investors' tolerance for risk was much higher.
Strategically, we think the idea of becoming a more well-rounded healthcare company and becoming less reliant on the slowing/competitive retail business makes sense. We also believe that OSH is a solid target for CVS based on its strong growth.
- For instance, in Q3, OSH generated top-line growth of 40% as its membership base jumped by 51% to 134,000. On the downside, OSH is not profitable despite its healthy growth as it contends with rising labor costs and COVID-related expenses.
- On the latter point, OSH estimated that COVID represented $18 mln in medical claims expense on a year-to-date basis when it reported Q3 earnings. Those expenses should continue to ease, though.
Assuming a price tag of about $10 bln, CVS would be paying a reasonable price for OSH. Specifically, that pencils out to CVS paying roughly 3-4x estimated FY23 revenue. Therefore, the reported valuation likely isn't the primary issue for investors.
- Rather, the timing of acquiring two large companies at a time when macroeconomic pressures could slow their growth this year is probably making some investors uncomfortable.
- Also, the thought of integrating two major acquisitions at nearly the same time elicits concerns about execution risk and whether CVS is biting off more than it can chew.
- Finally, CVS will be taking on more debt if it does acquire OSH. As of December 31, 2022, OSH had a long-term debt balance of 1.07 bln.
The main takeaway is that CVS is moving full steam ahead in its mission to become a full-service healthcare company, while distancing itself from rivals like Walgreens Boots Alliance (WBA) and Rite Aid (RAD). While we applaud the company's vision and efforts, it's unsurprising that its aggressive approach is being met with some doubt and hesitance given the uncertainties facing the market and the economy.
Urban Outfitters' record holiday sales report fits the bill today (URBN)
Urban Outfitters' (URBN +7%) record holiday sales report fits perfectly with investors today. The apparel retailer posted a 2.3% jump in total net sales yr/yr for the two months ending December 31. Meanwhile, URBN's Retail segment comps saw a +2% bump.
Although URBN's numbers do not exactly jump off the page, they underscore healthy demand, an encouraging sign after Macy's (M) concerning Q4 (Jan) guidance and comments spooked the retail department landscape yesterday. Macy's noted that it believes consumers will continue to be pressured in 2023, particularly in the first half, based on macroeconomic indicators and its credit card data.
- URBN encountered similar negative trends as much of the broader apparel industry lately, including rising inventories and sliding margins. In Q3 (Oct), total inventory climbed 18.6% yr/yr to $116.5 mln, but wholesale inventory soared 39.0% due to department store sales softness.
- This softness was still present during the holiday season, evidenced by wholesale sales falling 22% yr/yr. However, this was mostly expected after URBN cautioned in Q3 that wholesale sales would continue to experience a yr/yr decline in Q4 and into next year as department store partners plan future orders more conservatively.
- The elevated inventory forced URBN to implement increased markdowns across each of its banners, causing gross margins to tumble 410 bps yr/yr to 30.4%.
- However, the good news is that URBN was optimistic inventory would show further reduction by the end of Q4 as each brand worked to improve their inventory to sales alignment.
- URBN also projected retail comps in the low single-digits in Q4. With the company meeting this target for the holiday season, investors are optimistic that it will achieve its target for Q4.
Overall, URBN's holiday sales report is an optimistic sign that the apparel industry is demonstrating healthy demand characteristics, a bullish signal heading into FY24 (Jan). With supply chain costs starting to fall from peak levels in Q3, margins may begin to recover nicely, especially as URBN works through excess inventory. Inflationary pressures on the consumer are also showing signs of easing, possibly providing additional kindling needed to keep shares of URBN trending in the right direction.
Jefferies advancements in rough investment banking space focal point in a difficult Q4 (JEF)
With M&A activity remaining subdued and with the IPO market still suffocating under the weight of volatile market conditions, expectations were quite low heading into Jefferies (JEF) 4Q22 earnings report. The investment banking and trading firm managed to surpass analysts' depressed estimates, but the results on an absolute basis were not pretty.
- Within JEF's Investment Banking unit, equity underwriting fees plummeted by 70% yr/yr, while debt underwriting collapsed by 72%.
- Since JEF's report sets the stage for the upcoming earnings season for the financial sector, its gloomy results may set the bar even lower for companies like Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase (JPM).
- On that note, JPM is slated to report earnings on Friday morning, while GS and MS are scheduled for next Tuesday.
It's important to note, though, that JEF and its counterparts are lapping a fairly strong period in the year-earlier quarter. In 4Q22, JEF achieved record quarterly advisory net revenue, pushing total revenue for its Investment Banking and Capital Markets higher by 5%.
Furthermore, the company is making progress in its mission to elevate its investment banking business and to cut into the market share of established leaders like GS and MS. To put this progress into perspective, JEF says it ended 2022 as the 6th largest investment banking firm in global M&A and equity capital markets, compared to #12 and #13, respectively.
Meanwhile, JEF continues to unwind and monetize its merchant banking business, which primarily consists of its investments in various assets. During the quarter, JEF sold its Oak Hill investment, and later this week, the company will spin off Vitesse Energy to its shareholders.
As the company moves ahead with this transition, it will likely continue to face stiff headwinds in its Investment Banking business due to uncertain macroeconomic conditions. However, the Capital Markets unit could benefit from the volatility, as it did this quarter. In Q4, total Capital Markets revenue climbed higher by about 13% to $478 mln, led by a 70% yr/yr surge in Fixed Income trading revenue to $226.7 mln. Equities remained weak, though, with trading revenue sliding by 14%.
The main takeaway is that JEF's results were not strong, but they were better-than-feared, and that is good enough to provide the stock with a spark today.
Shake Shack's upbeat Q4 sales guidance not sparking much enthusiasm today as headwinds linger (SHAK)
Fast casual restaurant chain Shake Shack (SHAK) is losing some steam today despite delivering upbeat Q4 revenue guidance. The company expects revs to grow 17.4% yr/yr to $238.5 mln, edging past estimates. However, SHAK's same-store sales growth of +5.1% fell just short of analyst expectations, making today's news less appetizing.
Since early May 2022, the stock has struggled to break out of a long consolidation pattern as investors weigh numerous challenges still on SHAK's plate. The most substantial headwind has been cost inflation. SHAK has experienced massive inflationary pressures on every line item in its business, forcing the company to take more price than it ever has. In October, SHAK implemented another price hike in the 5-7% range following an increase in March, putting prices around 10% higher than they were in 2021. SHAK commented last month that it will continue to monitor the situation, possibly taking more price to offset the intense inflationary pressures, where some costs of goods have soared 40%.
With elevated costs eating into SHAK's margins, its updated Q4 operating margin forecast of approximately 19% is a positive development. In Q3, SHAK expected Shack-level margins to hover around 16-18%. However, in late November, SHAK hinted that some inflationary pressures, such as commodities and labor, have begun easing a bit. With the stock seeing a slight bump following these comments, perhaps investors already priced in higher-than-expected margins for Q4.
Nevertheless, other tailwinds may help SHAK spark a turnaround.
- The pandemic wreaked particular havoc on SHAK as it is mostly located in densely populated city centers. However, as Airbnb (ABNB) has repeatedly mentioned during earnings calls, individuals are increasingly returning to cities, with urban nights booked rebounding toward pre-pandemic levels. This trend has been reflected in SHAK's traffic growth, which has seen an upward trend throughout 2022.
- Another challenge SHAK encountered during the pandemic was a lack of drive-thru options. SHAK addressed this in recent quarters, adding nine drive-thrus in 2022 and planning 10-15 for 2023. SHAK drive-thru investments cost around $2.4-3.0 mln and result in over $4.0 mln in annualized average unit volume.
- Although SHAK is monitoring whether to hike menu prices again in 2023, it may not have to take price if inflationary pressures continue to ease. Cloud-based restaurant management software provider Toast (TOST) noted in November that it was seeing at-home food costs begin to rise quicker than away-from-home food costs, possibly causing a shift back toward dining out over time.
Bottom line, SHAK's upside Q4 revenue guidance is encouraging, but the numerous lingering headwinds are causing a somewhat tepid reaction today. Still, on the bright side, positive developments are brewing, possibly spurring turnaround action in the near term.
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