Market Snapshot
briefing.com
| Dow | 34176.23 | +109.99 | (0.32%) | | Nasdaq | 13552.07 | +89.77 | (0.67%) | | SP 500 | 4365.19 | +24.99 | (0.58%) | | 10-yr Note | -30/32 | 3.84 |
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| | NYSE | Adv 2003 | Dec 888 | Vol 927 mln | | Nasdaq | Adv 2906 | Dec 1575 | Vol 5.5 bln |
Industry Watch
| Strong: Energy, Materials, Industrials, Financials, Consumer Discretionary, Communication Services |
| | Weak: Utilities |
Moving the Market
-- Reacting to the May CPI report
-- Broad advance
-- Outperforming small caps
-- Weakness in Apple (AAPL) following downgrade to Neutral from Buy at UBS
-- Treasury yields rising
-- Hopeful anticipation that the Fed will skip a rate hike tomorrow
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Closing Summary
13-Jun-23 16:25 ET
Dow +145.79 at 34212.03, Nasdaq +111.40 at 13573.70, S&P +30.08 at 4370.28
[BRIEFING.COM] Today's trade was decidedly upbeat. The major indices all closed near their best levels of the day, paced by the Russell 2000 (+1.2%). There were a few positive catalysts supporting the upside bias, but this morning's pleasing CPI report was the biggest driving factor.
Briefly, total CPI was up 4.0% year-over-year, versus 4.9% in April, marking the smallest change since the 12 months ending March 2021. Core-CPI rose 5.3% year-over-year, versus 5.5% in April, with the shelter index (+8.0%) accounting for over 60% of the total increase.
That report seemed to corroborate that market's view that the Fed will not raise rates tomorrow and diluted expectations of a rate hike in July. Presently, the fed funds futures market is pricing in a 5.8% probability of a rate hike tomorrow (versus 18.5% just before the CPI report) and a 64.2% probability of a rate hike in July (versus 71.0% just before the CPI report).
The price action today was indicative of a belief that the Fed may not overtighten after all and force a worse economic outcome than necessary to bring inflation back down to its 2.0% target. That belief led to a more pro-cyclical trade in today's session and led to the outperformance of the Russell 2000, which is comprised of mostly smaller, domestically-oriented companies. Additionally, value stocks outpaced growth stocks in today's session.
The cyclical S&P 500 materials (+2.3%) and industrials (+1.2%) sectors saw the biggest gains today. The consumer discretionary sector (+1.0%) and information technology sector (+0.7%), which was boosted by Oracle (ORCL 116.68, +0.25, +0.2%) after its earnings report, were also top performers today. The countercyclical utilities sector (-0.1%), meanwhile, was the lone laggard to close with a loss.
Apple (AAPL 183.31, -0.48, -0.3%) went against the grain today after it was downgraded to Neutral from Buy at UBS. The broader market exhibited decent strength, though. The market-cap weighted S&P 500 rose 0.7% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 1.0%.
Market rates declined immediately after the CPI report, but Treasuries ultimately settled the session with losses across the curve despite a strong 30-yr bond auction in the afternoon. The 2-yr note yield rose 11 basis points to 4.70% and the 10-yr note yield rose seven basis points to 3.84%.
- Nasdaq Composite: +29.7% YTD
- S&P 500: +13.8% YTD
- Russell 2000: +7.7% YTD
- S&P Midcap 400: +6.3% YTD
- Dow Jones Industrial Average: +4.0% YTD
Reviewing today's economic data:
- The May NFIB Small Business Optimism Survey rose to 89.4 from 89.0 in April
- Total CPI was up 0.1% month-over-month in May (Briefing.com consensus +0.2%). Core CPI, which excludes food and energy, increased 0.4% month-over-month, as expected, driven by a 0.6% increase in the shelter index and a 4.4% increase in the index for used cars and trucks.
- On a year-over-year basis, total CPI is up 4.0%, versus 4.9% in April, marking the smallest change since the 12 months ending March 2021. Core CPI rose 5.3% year-over-year, versus 5.5% in April, with the shelter index (+8.0%) accounting for over 60% of the total increase.
- The key takeaway from the report is that inflation rates are moving in the right direction, although core inflation in particular will still be viewed by the Fed as "too high," which is why the prospect of another rate hike in July will be kept alive.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior -1.4%)
- 8:30 ET: May PPI (Briefing.com consensus -0.1%; prior 0.2%) and Core PPI (Briefing.com consensus 0.2%; prior 0.2%)
- 10:30 ET: Weekly crude oil inventories (prior -0.451 mln)
- 14:00 ET: June FOMC Rate Decision (Briefing.com consensus 5.00-5.25%; prior 5.00-5.25%)
Treasuries settle with losses
13-Jun-23 15:35 ET
Dow +126.56 at 34192.80, Nasdaq +88.10 at 13550.40, S&P +25.69 at 4365.89
[BRIEFING.COM] The major indices haven't seen much up or down action over the last half hour.
Treasuries settled with losses across the curve. The 2-yr note yield rose 11 basis points to 4.70% and the 10-yr note yield rose seven basis points to 3.84%.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior -1.4%)
- 8:30 ET: May PPI (Briefing.com consensus -0.1%; prior 0.2%) and Core PPI (Briefing.com consensus 0.2%; prior 0.2%)
- 10:30 ET: Weekly crude oil inventories (prior -0.451 mln)
- 14:00 ET: June FOMC Rate Decision (Briefing.com consensus 5.00-5.25%; prior 5.00-5.25%)
More mega caps slip into the red
13-Jun-23 15:00 ET
Dow +109.99 at 34176.23, Nasdaq +89.77 at 13552.07, S&P +24.99 at 4365.19
[BRIEFING.COM] The major indices are little changed despite renewed weakness in some mega cap names.
More mega cap stocks slipped into negative territory recently. Meta Platforms (META 270.66, -0.39, -0.1%), Amazon.com (AMZN 124.46, -0.11, -0.1%), and Alphabet (GOOG 124.15, -0.20, -0.2%) joined Apple (AAPL 182.94, -0.86, -0.5%), which was downgraded to Neutral from Buy at UBS, in the red.
Energy complex futures settled the session higher. WTI crude oil futures rose 3.6% to $69.47/bbl and natural gas futures rose 2.8% to $2.34/mmbtu.
Norwegian Cruise, United Rentals among top S&P 500 gainers on Tuesday
13-Jun-23 14:30 ET
Dow +151.06 at 34217.30, Nasdaq +87.00 at 13549.30, S&P +28.28 at 4368.48
[BRIEFING.COM] The S&P 500 (+0.65%) is now tied atop the standings with the Nasdaq Composite, slipping modestly lower in recent trading.
S&P 500 constituents Norwegian Cruise Line (NCLH 19.43, +1.02, +5.54%), United Rentals (URI 412.30, +21.73, +5.56%), and Freeport-McMoRan (FCX 39.78, +1.96, +5.18%) are among today's top performers. NCLH and cruise peers are seeing a follow through trade, continuing recent strength, while FCX moves higher alongside strength in metals.
Meanwhile, Biogen (BIIB 303.69, -9.72, -3.10%) is at the bottom of the S&P, weaker after evening news that the company had announced changed to its Board of Directors.
Gold makes it three (losses) in a row
13-Jun-23 14:00 ET
Dow +162.47 at 34228.71, Nasdaq +102.39 at 13564.69, S&P +30.62 at 4370.82
[BRIEFING.COM] With about two hours remaining on Tuesday the tech-heavy Nasdaq Composite (+0.76%) holds a narrow lead atop the major averages, hovering just a stone's throw off HoDs.
Gold futures settled $11.10 lower (-0.6%) to $1,958.60/oz, extending its three session declines to an even 20 points (-1.01%).
Meanwhile, the U.S. Dollar Index is down about -0.3% to $103.30.
Intel reportedly considers large investment in Arm's IPO, giving its AI ambitions a boost (INTC)
While Intel (INTC) struggles through a painful transformation centered on building out its manufacturing base in the U.S., the company has watched rivals like NVIDIA (NVDA) and Advanced Micro Devices (AMD) soar as an emerging AI boom is fueling robust demand for more powerful chips. However, INTC may have identified a way to quickly make up some ground in the AI race by leaning on the old adage, "if you can't beat them, join them."
According to Bloomberg, INTC is in talks with semiconductor giant Arm Ltd. to become an anchor investor in Arm's upcoming IPO, which will undoubtedly be the event of the year for an IPO market that's still trying to break out of a deep slump. There are still many uncertainties at this point, including the amount of capital that INTC is considering investing. Also, the IPO specifics, including an expected date and the projected price range, are currently unknown.
- What is certain, though, is that Softbank (SFTBY) owned Arm is a dominant force in the semiconductor industry with its chip designs powering the technology behind devices and products from Apple (AAPL), Samsung, Qualcomm (QCOM), and INTC.
- In fact, NVDA thought so highly of Arm that it tried to acquire the company for $40 bln in 2020, only to see the deal fall apart a couple years later due to regulatory pressures.
- Arm's portfolio of AI-ready chips is a major reason why NVDA was willing to shell out tens of billions of dollars to acquire the company. Arm's AI-optimized platform architecture is at the center of its GPU, CPU, and NPU product families. By investing in Arm's IPO, INTC would participate in the anticipated upswing in demand for these chips as AI becomes increasingly prevalent in virtually every industry.
While it's clear that INTC has fallen behind the competition, the company does appear to be moving in the right direction.
- Revenue in Q1 did collapse by 36% yr/yr and gross margin did tumble lower by 15 percentage points yr/yr, but INTC issued inline Q2 revenue guidance after guiding revenue below expectations in every quarter last year.
- Additionally, during the earnings call, CEO Pat Gelsinger stated that he's seeing signs of stability in the PC market with inventory corrections proceeding as anticipated.
Lastly, Arm's impending IPO will have massive implications for the IPO market overall.
- Some green shoots have already emerged this year as Kenvue (KVUE), the Johnson & Johnson (JNJ) consumer health spin-off, generated solid demand for its deal in early May.
- However, a strong pricing and debut from Arm could qualify as the catalyst that breaks the door open for other companies waiting on the sidelines to go public.
- With a substantial backing from INTC, and with investors' insatiable appetite for AI-based investments in its corner, a successful IPO for Arm seems highly likely.
The main takeaway is that a sizable investment in Arm's IPO looks like a win-win-win scenario in our view for INTC, Arm, and for the IPO market. Many details are still missing, and an Arm IPO may still be a few months away, but this development inspires some much-needed confidence in INTC's AI-based aspirations.
Urban Outfitters comfortably reaches multi-year highs today after a Morgan Stanley upgrade (URBN)
Urban Outfitters (URBN +4%) is comfortably reaching multi-year highs today, hitting price levels not seen since December 2021, as shares look to fill the gap following the November 2021 sell-off. Today's price movement emanates from an upgrade at Morgan Stanley to "Overweight" from "Equal Weight," citing a reasonable valuation.
Briefing.com notes that after gapping considerably higher on upbeat Q1 (Apr) earnings results last month, URBN demonstrates that its business model can thrive despite a downtrodden retail environment.
- Central to URBN's vision is the young adult demographic, primarily those aged 18-28. The company's Urban Outfitter locations and in-store environment is focused on appealing to younger generations, building a presence in specialty centers, enclosed malls, and university communities, and creating a place conducive for shoppers to congregate and socialize. By developing a reputation amongst a younger population, URBN is looking to carve out an economic moat to better differentiate itself amongst the intensely competitive landscape of apparel retailers.
- Meanwhile, URBN's core Anthropologie Group banner, which accounted for just under 40% of FY23 (Jan) sales, primarily tailors its merchandise to an upscale women's apparel market, which has been proving its resilience to unfavorable macroeconomic conditions lately.
- For example, peer Abercrombie & Fitch's (ANF) women's business led its turnaround in AprQ, delivering its 11th straight quarter of double-digit sales growth. Meanwhile, URBN noted that during AprQ, it planned inventory within its women's category too lean, not allowing sales to bloom as well as they would have.
- URBN also emphasizes expanding its Free People and FP Movement stores, which offer a mix of women's causal and activewear apparel. Given how lululemon athletica (LULU) surprised the market with a superb beat-and-raise in AprQ earlier this month, URBN stands to benefit significantly from a hot athleisure market.
- Gross margins are healthy, expanding 260 bps yr/yr in AprQ to 33.3%, exceeding pre-pandemic levels. URBN's emphasis on continuously improving its brands has been a meaningful contributor to its ongoing margin gains, as has been an easing inflationary environment, which looks unlikely to return to peak levels, allowing URBN to continue delivering margins around current figures.
- URBN's fundamentals are attractive. URBN boasts zero long-term debt and around $4.00 per share in cash, a healthy balance sheet to navigate any worsening economic conditions.
The retail apparel market still has its fair share of potential troubles ahead. Discretionary spending remains weak amid sticky inflation, possibly setting up a heightened promotional environment in the near future. Multiple retailers are already feeling this trend, which could begin materially eating into URBN's future sales and margin growth. As such, we caution buying into URBN at current levels.
Still, URBN's recent earnings results illustrated an ability to succeed despite a challenging environment, making it a good long-term choice after a decent pullback, potentially if shares find support at previous resistance around the $29.50 mark.
Oracle ends FY23 on an impressive note; cloud business has been very strong (ORCL)
Oracle (ORCL +3%) is trading nicely higher after it wrapped up FY23 on an impressive note. Last night, Oracle reported its largest EPS upside of the fiscal year when it reported Q4 (May) results. It also guided Q1 (Aug) revenue above analyst expectations while EPS guidance was in-line.
- The company did not provide specific FY24 guidance, but did provide some initial thoughts. Oracle is seeing unprecedented demand for its Cloud services and especially its AI services. As a result, Cloud revenue, excluding Cerner, is expected to grow at rates that are at least similar to what Oracle achieved in FY23. And that is despite Oracle's base being much larger now.
- It's worth noting that Oracle's revenue reached a new milestone, reaching an all-time high of $50 bln in FY23. Annual revenue growth was led by its cloud applications and infrastructure businesses which grew at a combined rate of 50% in constant currency. Oracle also said its infrastructure growth rate has been accelerating: 63% growth for the full year, and 77% growth in Q4. Its cloud applications growth rate also accelerated in FY23.
- Basically, its two strategic cloud businesses are getting bigger and growing faster. That bodes well for another strong year in FY24. Management also noted that this is happening while competitors have seen their growth rates drop precipitously over the last year. Oracle's Cloud Infrastructure growth rate has essentially doubled from last year to 77% this quarter with Gen 2 OCI growth even higher.
- Non-GAAP operating margin is a metric we track. In Q4, including Cerner, it grew sequentially to 44% from 42% in Q3, as Oracle continued to integrate Cerner. As Oracle drives Cerner profitability to Oracle standards and continues to benefit from economies of scale, Oracle expects to grow operating margin further. As its high growth Cloud revenue becomes a larger and larger portion of total revenue, that should continue to boost margins.
- Finally, we noted in our preview that there was a report from TheInformation on Friday saying that Oracle had invested in Cohere, an AI startup that competes with OpenAI. On the call, Oracle said it's launching a generative AI Cloud service for enterprise customers in partnership with Cohere. We think that is adding to the stock movement today.
Overall, we are quite impressed with Oracle's earnings and outlook for FY24. We have to admit we had some reservations about why Oracle would want to acquire healthcare IT giant Cerner, which was Oracle's largest ever acquisition. However, with a full year now in the fold, we see the benefits. It has really helped to scale up Oracle's cloud business in healthcare, which is an enormous market. While other IT names talk about tighter deal scrutiny, Oracle seems to be clicking on all cylinders. We had reservations coming into this report that maybe too much good news was priced in given the 90% run in the stock from its late September lows. However, Oracle surpassed all expectations.
Bunge stagnates after Viterra merger news; fortifies its corn and soybean export position (BG)
Global agribusiness and food processing giant Bunge (BG) is seeing its shares stagnate after announcing it will combine with Viterra, a prominent agribusiness and grain handler firm, in a deal valued at around $18.0 bln, including debt. Under the terms of the agreement, Viterra shareholders would receive roughly $6.2 bln worth of Bunge stock alongside an additional $2.0 bln in cash -- a 75/25 split of stock and cash. The merger is expected to close in mid-2024.
Rumors swirled surrounding the possible combination between Bunge and Viterra, whose major shareholder is Glencore (GLNCY), for the past few weeks, beginning with a Bloomberg report that Viterra was in merger talks with Bunge in late May. Then last week, Reuters reported that Bunge was finalizing the deal. As a result, today's tepid price movement is largely due to a buy-the-rumor, sell-the-news reaction. Shares experienced an intraday gain of +11% following initial merger reports on May 25. Although traders faded this move, the stock still traded up around 5% as of yesterday's close. Meanwhile, investors may not be thrilled about Bunge absorbing $9.8 bln of Viterra's debt, albeit $9.0 bln is highly-liquid marketable inventories.
Still, we think the merger will ultimately yield net gains for Bunge, which, following the combination with Viterra, will be a much stronger organization, one worth in the $30 bln range (including debt), to take on its primary rival Archer Daniels Midland (ADM).
- Bunge is present globally as a food manufacturer, consumer packaged goods provider, and food oil refinery in Brazil, the U.S., Canada, Europe, and Asia. Viterra boasts a similar footprint, bolstering Bunge's current market presence while expanding its capabilities in underserved regions.
- Given the two organizations' similarities, Bunge expects the combination to generate approximately $250 mln of annual gross pre-tax operational synergies within three years of closing the merger. At the same time, Bunge noted that other efficiencies will be achieved across certain verticals and from a logistics standpoint.
- Part of the terms of the deal involves Bunge repurchasing $2.0 bln of its common stock to improve adjusted EPS accretion. As a result, Bunge expects the merger to be accretive to its bottom line within the first full year after closing.
Overall, even though it is not cropping up in Bunge's price action today, its merger with Glencore-backed Viterra enhances its already dominant position as a grain merchant. Even before adding Viterra, Bunge was among just three other significant companies in the crop trading space. However, after incorporating Viterra's reportedly ~$35 bln in annual sales, Bunge is staring at annual revenue on par with ADM. With global corn and soybean (Bunge's and Viterra's primary crop exports) sales set to increase anywhere from +4-8% annually over the next five years, particularly as soybean popularity surges in China, Bunge is making the right move to fortify its position in these markets, which should provide meaningful benefits over the long term.
Home Depot looks to repair damaged investor confidence by reaffirming FY24 outlook (HD)
Coming off a disappointing Q1 earnings report in mid-May in which it badly missed sales expectations and sharply cut its FY24 guidance, Home Depot (HD) eased concerns that business has worsened by reaffirming its FY24 guidance this morning. Ahead of its 2023 Investor and Analyst Conference, the leading home improvement retailer reported that it still expects sales and comparable sales to decline by 2-5% with EPS falling by 7-13%.
With a full month passing since HD issued that downbeat forecast, its reaffirm of guidance is not only comforting for HD investors, but it's also a positive sign for consumer spending trends in general.
- When HD and rival Lowe's (LOW) reduced their FY24 outlooks, both companies cited a pullback in discretionary spending, especially for big-ticket items like appliances and grills, as a primary cause.This slowdown was reflected in HD's Q1 average ticket size increasing by only 0.2%, compared to increases of 5.8% and 8.8% in 4Q23 and 3Q23, respectively.
- By reaffirming its FY24 comp guidance, HD is signaling that demand has at least stabilized in Q2, which is encouraging for LOW and other big box retailers like Costco (COST), Target (TGT), and Walmart (WMT).
HD also provided a base case forecast over the longer-term, forecasting sales growth of 3-4% per year and mid-to-high single-digit EPS growth. Driven by sales leverage and improved productivity, the company anticipates stronger operating margins in the coming years.
- CFO Richard McPhail also commented that HD may outperform these projections due to market share gains and a stronger-than-expected recovery in the home improvement market. Although the company is the largest home improvement retailer, CEO Ted Decker noted that HD still has a relatively small share of a large, growing, and highly fragmented market.
- It's worth pointing out, though, that LOW has been gaining some ground on HD in the Pro business -- a business that HD has historically dominated and accounts for about half of its revenue. In the Q1 earnings report, LOW CEO Marvin Ellison noted that Pro comparable sales were positive, while HD stated during its Q1 earnings call that DIY outperformed Pro and that both businesses were negative for the quarter.
However, the main takeaway is that HD provided some reassurance by maintaining its FY24 guidance, indicating that demand and sales trends have stabilized, or perhaps even improved a bit, since the end of Q1.
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