Market Snapshot
briefing.com
| Dow | 34101.04 | -197.99 | (-0.58%) | | Nasdaq | 13664.76 | -25.19 | (-0.18%) | | SP 500 | 4394.24 | -16.62 | (-0.38%) | | 10-yr Note | +25/32 | 3.73 |
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| | NYSE | Adv 921 | Dec 1974 | Vol 1.0 bln | | Nasdaq | Adv 1642 | Dec 2881 | Vol 5.2 bln |
Industry Watch
| Strong: Consumer Discretionary |
| | Weak: Energy, Materials, Real Estate, Financials, Utilities |
Moving the Market
-- Relative strength from the mega cap space
-- Some consolidation efforts after a big run recently
-- Digesting the better than expected housing starts data from May
-- Falling Treasury yields
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Closing Summary
20-Jun-23 16:25 ET
Dow -245.25 at 34053.78, Nasdaq -22.28 at 13667.67, S&P -20.88 at 4389.98
[BRIEFING.COM] The market started this holiday shortened week with losses. Broad based selling was driven by a sense that the market was due for a pullback after a big run of late. The major indices were able to close off their session lows thanks to some mega caps recovering from early weakness.
Apple (AAPL 185.01, +0.09, +0.1%) and Amazon.com (AMZN 125.78, +0.29, +0.2%) were some of the mega caps that underperformed in the early going, down 0.3% and 0.8%, respectively, at this morning's lows before closing with modest gains. The Vanguard Mega Cap Growth ETF (MGK) had been down as much as 0.9%, but closed with a 0.1% decline.
The Invesco S&P 500 Equal Weight ETF (RSP), meanwhile, fell 0.9% and the market-cap weighted S&P 500, which was stuck below 4,400 today, closed with a 0.5% loss.
The broad retreat saw 26 of the 30 Dow components register losses and ten of the 11 S&P 500 sectors decline. The energy sector (-2.3%) was the worst performer by a wide margin, falling alongside oil prices ($71.21/bbl, -0.71, -1.0%).
The consumer discretionary sector (+0.8%) was the lone outperformer in positive territory today. Gains in Amazon and Tesla (TSLA 274.45, +13.91, +5.3%), which extended its rally after announcing a partnership with Rivian (RIVN 15.70, +0.82, +5.5%) regarding its Supercharger network, and strength in the homebuilder stocks were integral to sector performance.
The iShares U.S. Home Construction ETF (ITB) rose 1.0% and the SPDR S&P Homebuilder ETF (XHB) rose 0.6%. D.R. Horton (DHI 118.32, +1.92, +1.7%), Lennar (LEN 121.58, +1.56, +1.3%), and PulteGroup (PHM 74.88, +1.37, +1.9%) were some of the top winners from the space. These moves were in response to this morning's better than expected housing starts data for May.
Total starts surged 21.7% month-over-month to a seasonally adjusted annual rate of 1.631 million units -- the highest since April 2022 -- while total building permits rose 5.2% month-over-month to a seasonally adjusted annual rate of 1.491 million, aided by a 4.8% increase in single-unit permits.
Treasuries initially saw some selling interest after the housing starts data, but settled the session with modest gains, reflecting some safe-haven trading. The 2-yr note yield fell one basis point to 4.70% and the 10-yr note yield fell four basis points to 3.73%.
- Nasdaq Composite: +30.6% YTD
- S&P 500: +14.3% YTD
- Russell 2000: +6.0% YTD
- S&P Midcap 400: +5.4% YTD
- Dow Jones Industrial Average: +2.7% YTD
Reviewing today's economic data:
- Total housing starts surged 21.7% month-over-month to a seasonally adjusted annual rate of 1.631 million (Briefing.com consensus 1.400 million) following a downwardly revised 1.340 million (from 1.401 million) in April. That is the strongest pace of starts since April 2022. Total building permits increased 5.2% month-over-month to a seasonally adjusted annual rate of 1.491 million (Briefing.com consensus 1.425 million) following a revision to 1.417 million (from 1.416 million) for April.
- The key takeaway from the report is rooted in the monthly growth for single-unit permits (+4.8%) -- a leading indicator -- and single-unit starts (+18.5%), which is a good sign for a supply-challenged housing market overall and a seemingly good portent for homebuilders' sales and earnings prospects.
Market participants will receive the following economic data tomorrow:
- 7:00 ET: Weekly MBA Mortgage Index (prior 7.2%)
- 10:30 ET: Weekly crude oil inventories (prior +7.92 mln)
Also, Fed Chair Powell will deliver his semiannual monetary policy report to the House Financial Services Committee at 10:00 a.m. ET and will then appear before the Senate Banking Committee on Thursday at 10:00 a.m. ET.
Treasuries settle with modest gains
20-Jun-23 15:30 ET
Dow -227.98 at 34071.05, Nasdaq -28.21 at 13661.74, S&P -19.98 at 4390.88
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Treasuries settled with modest gains. The 2-yr note yield fell one basis point to 4.70% and the 10-yr note yield fell four basis points to 3.73%.
Market participants will receive the following economic data tomorrow:
- 7:00 ET: Weekly MBA Mortgage Index (prior 7.2%)
- 10:30 ET: Weekly crude oil inventories (prior +7.92 mln)
As a reminder, Fed Chair Powell will deliver his semiannual monetary policy report before Congress tomorrow and Thursday.
Energy complex settles lower
20-Jun-23 15:00 ET
Dow -197.99 at 34101.04, Nasdaq -25.19 at 13664.76, S&P -16.62 at 4394.24
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Energy complex futures retreated this session. WTI crude oil futures fell 1.0% to $71.21/bbl and natural gas futures fell 4.8% to $2.51/mmbtu.
On a related note, the S&P 500 energy sector remains buried in last place by a decent margin, down 2.3%.
SolarEdge slips as TD Cowen cuts tgt; Generac outperforms aside power outages, Texas grid warns
20-Jun-23 14:30 ET
Dow -175.78 at 34123.25, Nasdaq -17.85 at 13672.10, S&P -14.26 at 4396.60
[BRIEFING.COM] The S&P 500 (-0.32%) is in second place to this point on Tuesday.
S&P 500 constituents SolarEdge Technologies (SEDG 255.30, -21.40, -7.73%), BorgWarner (BWA 46.29, -2.31, -4.75%), and Celanese (CE 108.71, -5.29, -4.64%) pepper the bottom of the standings. SEDG slips after TD Cowen lowered their tgt on SEDG, instead preferring ENPH in the space, BWA announced the acquisition of Eldor Corp.'s Electric Hybrid Systems business segment for €75 million, while CE continues Friday's slide now down about -7% over the prior two sessions.
Meanwhile, Wisconsin-based generator firm Generac (GNRC 128.61, +9.19, +7.70%) is atop the S&P following storms and power outages in the South.
Gold slips up to start holiday-shortened week
20-Jun-23 14:00 ET
Dow -191.62 at 34107.41, Nasdaq -27.84 at 13662.11, S&P -15.69 at 4395.17
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-0.20%) is hovering near Friday's close, having probed gains in the prior half hour.
Gold futures settled $23.50 lower (-1.0%) to $1,947.70/oz, weaker despite a softer dollar and losses in bond yields.
Meanwhile, the U.S. Dollar Index is up less than +0.1% to $102.56.
Resigned it seems to some early retracement
Coming off the extended holiday weekend, the stock market appears ready to ease into the new week of trading on a modestly lower note.
Currently, the S&P 500 futures are down 11 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 20 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 104 points and are trading 0.3% below fair value.
This move is nothing to write home about. It is part of a normal digestive phase following a big run for the market that has seen the S&P 500 increase in five consecutive weeks and the Nasdaq Composite increase in eight consecutive weeks. Naturally, that extended streak of success is triggering some expectations that the market is due for a cooling-off period.
A little bit of softness in the mega-cap stocks is the primary weight on the futures trade along with a wait-and-see mentality.
Market participants are waiting to see if the major indices are going to continue to defy expectations for a pullback and press higher. That type of resilience to selling efforts has been a driver of the extended winning streaks in that it has prompted short sellers to cover positions and has swayed sidelined investors to redeploy cash for fear of missing out on better inflation-adjusted returns.
The biggest drivers, though, have been the assumption that the Fed is done, or close to being done, raising rates and that the economy can avoid a hard landing. There was a good piece of economic news this morning in the form of the May Housing Starts and Building Permits Report.
Total housing starts surged 21.7% month-over-month to a seasonally adjusted annual rate of 1.631 million (Briefing.com consensus 1.400 million) following a downwardly revised 1.340 million (from 1.401 million) in April. That is the strongest pace of starts since April 2022. Total building permits increased 5.2% month-over-month to a seasonally adjusted annual rate of 1.491 million (Briefing.com consensus 1.425 million) following a revision to 1.417 million (from 1.416 million) for April.
The key takeaway from the report is rooted in the monthly growth for single-unit permits (+4.8%) -- a leading indicator -- and single-unit starts (+18.5%), which is a good sign for a supply-challenged housing market overall and a seemingly good portent for homebuilders' sales and earnings prospects.
Treasuries responded as you might expect to the strong report. The yield on the 2-yr note backed up to 4.74% from 4.69% and the yield on the 10-yr note jumped to 3.77% from 3.73%.
There wasn't much change in the equity futures market, however, which looks resigned to price in some retracement at today's open, attentive to stretched valuations for leadership stocks and the impending semiannual monetary policy report to Congress that Fed Chair Powell will provide on Wednesday and Thursday.
Other weekend news items drawing some added attention include the 35-minute meeting U.S. Secretary of State Blinken had with Chinese President Xi in Beijing, the People's Bank of China cutting the one-year loan prime rate from 3.65% to 3.55% and the five-year loan prime rate from 4.30% to 4.20%, and the June NAHB Housing Market Index climbing to 55.0 from 50.0 in May.
The center of attention now, though, is the price action for the major indices.
-- Patrick J. O'Hare, Briefing.com
Eli Lilly places a bet with DICE Therapeutics buy out in effort to bolster immunology program (LLY)
DICE Therapeutics (DICE) is rolling today with shares rocketing to all-time highs after Eli Lilly (LLY) announced its intention to acquire the clinical stage biopharmaceutical company for $48/share in cash. The purchase price represents a 42% premium over last Friday's close, further signifying big pharma's willingness to ramp up investments in order to bolster and diversify their drug portfolios with higher growth assets, especially in the areas of oncology and immunotherapies.
- On that note, LLY's buy out of DICE comes on the heels of Novartis' (NVS) acquisition of Chinook Therapeutics (KDNY) from last week. Rewinding a bit further, Amgen (AMGN) announced its acquisition of Horizon Pharma (HZNP) last December -- although that deal is now facing serious regulatory uncertainty -- while Pfizer (PFE) completed a $6.7 bln acquisition of Arena Pharmaceuticals in March of 2022.
- For LLY, the addition of DICE would provide a significant boost to its immunology business, which currently relies on its Taltz treatment for plaque psoriasis. In 1Q23, revenue for Taltz increased by 8% to $527 mln, representing only about 7.5% of LLY's total revenue.
- By far, LLY's largest drug is Trulicity for the treatment of type 2 diabetes, which registered total revenue of $7.4 bln in FY22.
- While LLY's top four drugs (Trulicity, Verzenio, Taltz, and Jardiance) are generating solid double-digit growth, the rest of the portfolio is struggling. For instance, revenue for Humalog, an insulin treatment for diabetes patients, decreased by 25% in Q1. Overall, LLY's revenue slid by nearly 11% for the quarter, following a decline of about 9% in the previous quarter.
In need of future growth catalysts, LLY identified DICE and its immunology program as an intriguing opportunity. Specifically, DICE's two IL-17 inhibitor treatments, DC-806 and DC-853, for psoriasis and other chronic immunology indications are the centerpiece of this acquisition. According to DICE, blocking the pro-inflammatory signaling molecule IL-17 has proven to be an effective therapy in several auto-immune diseases.
- DC-806, for instance, has shown plenty of promise so far in clinical studies. Last October, DICE announced positive topline data from its Phase 1 clinical trial of DC-806 as the mean percentage reduction in Psoriasis Area and Severity Index (PASI) from baseline was 43.7% in the high dose group compared to 13.3% in the placebo group after four weeks of treatment.
- DC-806 was also well-tolerated with a strong safety profile across all dose groups.
- In Q1, the first patient was dosed in the Phase 2 trial in patients with moderate-to-severe psoriasis. The company plans to submit an investigational new drug application with the FDA in the first half of 2023 and initiate Phase 2b development.
- Meanwhile, the Phase 1 clinical trial for DC-853 is continuing with top-line expected to be released in 2H23.
Overall, LLY's proposed acquisition of DICE looks like a good bet in our view, especially since it doesn't need to raise any capital to finance the deal. The 42% premium is steep, although, not egregious, considering the upside potential for DICE's immunotherapy program.
Alibaba's leadership transition could accelerate spin-off plan, but slowing growth an issue (BABA)
In late March, Alibaba (BABA) announced a game-changing reorganization plan that would break the company up into individual business groups, each with its own IPO, in BABA's mission to unlock the value of its various operating segments. This morning, the company seemingly took the next step forward in executing that initiative after announcing a major shake-up at the top that will see Joseph Tsai, Executive Chairman, succeed Daniel Zhang as Chairman of the company. Additionally, Eddie Wu, who currently serves as Chairman of Taobao and Tmall Group, will replace Mr. Zhang as CEO, who will stay on board to lead BABA's Cloud Intelligence segment.
- This reconfiguration may indirectly increase the influence of BABA co-founder and former CEO Jack Ma, who stepped down as executive chairman in 2019 after drawing the ire of Chinese regulators while his company became the primary target in President Xi's crackdown on anti-competitive practices.
- Tsai's and Ma's history together goes all the way back to earliest days of BABA when they co-founded the company in 1999. Likewise, Mr. Wu also helped launch BABA and initially acted as the company's technology director.
- The elevation of Tsai and Wu signal that Ma's plan to split up the company into individual businesses could be accelerating. Once the spin-offs are complete -- which BABA estimates will occur within the next twelve months -- there will be six separate companies: Cloud Intelligence Group, Taobao Tmall Business Group, Local Services Business Group, Global Digital, Cainiao Smart Logistics, and Digital Media and Entertainment.
- Ever since the PRC government began its regulatory crackdown, BABA's growth and financial results have greatly suffered. As BABA's dominance in the Chinese e-commerce market eroded, the door was opened for smaller competitors to grab market share.
- Companies like JD.com (JD) and PDD Holdings (PDD) flourished as BABA's struggles intensified.
- Over the past three quarters, BABA's top-line growth has slipped to low-single-digit levels, while its e-commerce gross merchandise volume has declined for four consecutive quarters. Even the company's Cloud business, which was growing rapidly a couple of years ago, is experiencing a huge slowdown in growth with 4Q23 revenue down by 3%.
- By splitting the company up, the hope is that each business will be able to focus more intently on its specific growth opportunities. Furthermore, the regulatory overhangs should be removed after BABA completes the spin-offs, potentially enabling the businesses to be more fairly valued.
The main takeaway is that the leadership transition may be a precursor to BABA carrying out its reorganization plan, but the announcement isn't helping to brighten the gloomy sentiment on the stock as the company's market share losses and sliding growth rates are still the driving force at this point.
US Foods and Performance Food trend in opposite directions on Morgan Stanley's rating changes (USFD)
Shares of food service distributors US Foods (USFD) and Performance Food Group (PFGC) are trending in opposite directions today after Morgan Stanley changed its ratings on each firm, upgrading USFD to "Overweight" from "Equal-weight" while downgrading PFGC to "Equal-weight" from "Overweight." As expected following Morgan Stanley's ratings, USFD is advancing, gapping up to levels not seen since before the pandemic before cooling off slightly as today's session has progressed. Conversely, PFGC is taking out its 200-day moving average (56.21) after consolidating around this indicator over the past two months.
Briefing.com notes that a few discrepancies separate the two closely related firms, which could make a difference if economic conditions remain unfavorable.
- USFD and PFGC each supply thousands of customers nationwide, including restaurants, healthcare facilities, and schools. However, what type of food and to which subsegment of the food service industry varies heavily. One factor that could work against PFGC is its relatively heavy exposure to recognizable family and casual dining chains. With food away-from-home prices continuing to tick higher month/month in May and at a faster clip than at-home prices, consumers will likely continue to become more stringent in their dining-out choices, potentially forgoing chains and opting for independent restaurants.
- Although prominent casual dining firms Darden Restaurants (DRI) and Brinker International (EAT) enjoyed robust comp growth and several other positives during their most recent quarters, both touched on doing fewer promotions going forward, which could hurt traffic. For instance, DRI noted in March that it does not want to risk margins, stating that it can weather a slight traffic decline and still get to the same EBITDA.
- Independent restaurants exhibiting relative strength was further evident in USFD's and PFGC's most recent MarQ results, where the category led overall growth for both firms.
- Independent restaurants also boast higher margins because they typically use more value-added services, such as product selection and procurement. Both companies continually seek to increase the mix of their total sales to these independent restaurants. However, USFD commands the advantage on this front at the moment.
- USFD recently outlined its four strategic pillars: culture, service, growth, and profit. USFD also implemented structural changes, moving pieces of its executive team and simplifying the regional management space. Although both firms have seen market share gains in recent quarters, the disparity between the stock performance of USFD and PFGC highlights investors' enthusiasm surrounding USFD's outline on managing the problematic economic environment.
Despite their similarities, there are some differences between USFD and PFGC that help explain recent stock performance and the capacity they have to navigate the tricky demand landscape ahead. Still, the food service industry may remain an area to avoid, especially if inflationary pressures do not ease more meaningfully. However, USFD's broader exposure to independent restaurants and its operational changes could allow it to outperform PFGC over the near term.
Atmus Filtration is filtering some nice gains as recent IPO nabs some bullish initiations (ATMU)
Atmus Filtration (ATMU +6%) is making a nice move today after this recent IPO garnered some bullish initiations from several firms this morning. At least five firms initiated with Buy/Overweight ratings with price targets ranging from $24-30. The stock has not really done much since pricing at $19.50 in late May, but maybe these initiations will generate some buzz. Atmus is the Filtration business unit of Cummins (CMI), but clearly Cummins wanted to see how Atmus can trade on its own.
- The company makes filtration products (fuel filters, lube filters, air filters, crankcase ventilation), principally under the Fleetguard brand, for on-highway commercial vehicles (59% of 2022 revs) and off-highway (41%) agriculture, construction, mining and power generation vehicles and equipment.
- Atmus primarily focuses (84% of 2022 sales) on aftermarket sales, where its products are installed as replacement or repair parts. This results in a strong recurring revenue base. The other 16% are installed as components for new vehicles. The company also notes that its large installed base protects against cyclicality in truck sales and creates a long tail of revenue due to the long lifespans of commercial vehicles and equipment. Aftermarket product sales tend to have a higher profit margin than first-fit systems.
- The company sounds pretty bullish on its future. It believes broader economic growth is a strong indicator for its business. Also, the US Bureau of Transportation forecasts that, between 2020 and 2050, US freight activity will double in value, and it's expected that trucks will remain the predominant freight carrier in the future.
- Atmus also sees international expansion as an important growth catalyst. In particular, Asian markets, including India, are currently positioned for high growth driven by the build-out of infrastructure. The company also says the desire by governments and customers to generate cleaner emissions is another macro driver which bodes well for future sales. More stringent regulatory standards on emissions drive the need for higher quality, increased content and higher priced filtration systems.
- Cummins is currently its largest customer at 19% of sales, but the relationship appears poised to endure thanks to long-term supply agreements that should provide Atmus with visibility and stability. Also, Atmus partners with Cummins channels in all regions to win end-user accounts in the aftermarket and create a preference for the Fleetguard brand.
Overall, the stock is reacting positively to these initiations of coverage. While the ratings came in as positive, as we expected, we think the pretty robust price targets are adding to today's move. Also, we are generally fans of the strategy of parent companies to spin off attractive subsidiaries, so they can garner better multiples. We are fans of Atmus as well. We like its high exposure to after market sales, which tend to carry higher margins. Plus the Asia expansion / emissions angle looks compelling as well.
Humana the next health insurer to warn about rising medical claims costs, sending shares lower (HUM)
On Wednesday, health insurance giant UnitedHealth (UNH) warned at a Goldman Sachs conference that its medical care ratio is trending towards the high-end or slightly above its full year guidance range of 82.1-83.1%. That update not only sent shares of UNH spiraling lower, but it also reverberated across the health insurance space, hitting stocks such as Molina Healthcare (MOH), Cigna (CI), and Humana (HUM). The fear was that if UNH is experiencing an uptick in medical cost coverage, then it's likely that its peers are as well. This morning, HUM confirmed those concerns by announcing that it too expects its benefit expense ratio to be at the top end of its full year guidance range of 86.3-87.3%.
- Benefit ratio measures the amount of claims that are paid out compared to the amount of revenue taken in by insurance premiums. When an insurer's claims rise, its benefit ratio also increases, which is a negative sign for earnings.
- On that note, HUM did reaffirm its FY23 EPS guidance of at least $28.25, but that was not enough to stave off another sell-off for the stock. We believe the issue may be that market participants are anticipating a more prolonged upswing in HUM's claims trend.
- During the height of the pandemic and in its aftermath, many people -- especially those in retirement age -- postponed elective surgeries such as hip and knee replacements. This created a backlog of procedures with a lot of pent-up demand, which is now beginning to unwind as health and government officials have deemed the health crisis to be officially over.
- Furthermore, in the wake of the pandemic, many people are seeking help for mental and emotional health issues, adding to health insurers' claims expenses.
- More specific to HUM, the company is also seeing strong growth for its individual Medicare Advantage program. While that's a positive for the top-line, the mix of new members is skewing towards a higher-than-expected proportion of age-ins, which tends to have a higher benefit ratio that the average new member.
- It is worth pointing out that during HUM's Q1 earnings call in late April, the company did state that it expects its full year benefit ratio to be biased towards the upper half of the range. Therefore, today's update shouldn't come as a huge surprise. The slightly worse outlook is primarily due to higher-than-anticipated non-impatient utilization trends, such as dental services, outpatient surgeries, and emergency room visits.
The main takeaway is that the unwinding of pent-up demand for elective surgeries and other procedures may only be in the early innings, creating a headwind to earnings growth for the industry.
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