Market Snapshot
briefing.com
| Dow | 34552.02 | -214.23 | (-0.62%) | | Nasdaq | 13360.04 | -114.98 | (-0.85%) | | SP 500 | 4381.99 | -23.54 | (-0.53%) | | 10-yr Note | -4/32 | 4.31 |
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| | NYSE | Adv 833 | Dec 2019 | Vol 886 mln | | Nasdaq | Adv 1403 | Dec 2964 | Vol 5.2 bln |
Industry Watch
| Strong: Energy |
| | Weak: Consumer Staples, Consumer Discretionary, Information Technology |
Moving the Market
-- Reacting to better than expected quarterly results and pleasing guidance from Dow component Cisco (CSCO)
-- Reacting to another jump in the 10-yr note yield
-- Digesting the weekly jobless claims data that reflected continued strength in the labor market
-- Ongoing consolidation efforts
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Closing Summary
17-Aug-23 16:20 ET
Dow -290.91 at 34475.34, Nasdaq -157.70 at 13317.32, S&P -33.97 at 4371.56
[BRIEFING.COM] The major indices closed on a downbeat note after trading flattish in the early going. Initially, the S&P 500 was holding steady with 4,400 acting as a level of support. By the afternoon, though, a retreat effort had taken root, leading the major indices to close near their lows of the day and below 4,400.
The afternoon selling was orderly and looked consistent with the consolidation mindset that has driven the price action so far this month. Another jump in market rates gave participants an excuse to take more money off the table. The 10-yr note yield rose five basis points today to 4.31%, settling at its highest level since November 2007.
The 10-yr note yield is now up 35 basis points for the month with participants keying on supply matters and incoming data that continue to validate the soft landing/no landing scenario that presumably will keep inflation above the Fed's 2.0% goal and the Fed itself in a higher-for-longer mindset that includes a consideration of raising rates yet again.
This morning's weekly jobless claims data was indicative of a tight labor market, which also contributed to the move in the 10-yr note. Claims dropped to 239,000 from 250,000 last week.
Mega caps were relative underperformers, pressured by the jump in rates, but many stocks came along for the downside moves. Decliners led advancers by a 5-to-2 margin at the NYSE and a 2-to-1 margin at the Nasdaq. The Vanguard Mega Cap Growth ETF (MGK) fell 1.1% and the Invesco S&P Equal Weight ETF (RSP) fell 0.8%.
Dow component Cisco (CSCO 54.73, +1.77, +3.3%) was a winning standout after its earnings report while fellow Dow component Walmart (WMT 155.69, -3.57, -2.2%) logged a decline after its earnings report.
Only one of the S&P 500 sectors registered a gain -- energy (+1.1%) -- while the consumer discretionary (-1.6%) and consumer staples (-1.0%) sectors saw the biggest declines.
- Nasdaq Composite: +27.2% YTD
- S&P 500: +13.8% YTD
- S&P Midcap 400: +5.8% YTD
- Russell 2000: +5.0% YTD
- Dow Jones Industrial Average: +4.0% YTD
Reviewing today's economic data:
- Weekly Initial Claims 239K (Briefing.com consensus 240K); Prior was revised to 250K from 248K; Weekly Continuing Claims 1.716 mln; Prior 1.684 mln
- The key takeaway from the report is that initial jobless claims -- a leading indicator -- are pacing at levels that are indicative of a tight labor market, which is indicative of an economy that isn't pacing for a hard landing.
- August Philadelphia Fed Index 12.0 (Briefing.com consensus -9.0); Prior -13.5
- July Leading Indicators -0.4% (Briefing.com consensus -0.4%); Prior -0.7%
Vipshop (VIPS), Deere (DE), Estee Lauder (EL), and Buckle (BKE) report earnings ahead of tomorrow's open.
There is no U.S. economic data of note on Friday.
Stocks remain near lows ahead of the close
17-Aug-23 15:25 ET
Dow -262.04 at 34504.21, Nasdaq -142.13 at 13332.89, S&P -30.45 at 4375.08
[BRIEFING.COM] The major indices trade just off session lows.
After today's close, Applied Materials (AMAT), Ross Stores (ROST), and Keysight (KEYS) highlight the earnings calendar.
Vipshop (VIPS), Deere (DE), Estee Lauder (EL), and Buckle (BKE) report earnings ahead of tomorrow's open.
There is no U.S. economic data of note on Friday.
Energy complex futures settle higher
17-Aug-23 15:00 ET
Dow -214.23 at 34552.02, Nasdaq -114.98 at 13360.04, S&P -23.54 at 4381.99
[BRIEFING.COM] The market continues to decline.
Energy complex futures settled the session higher. WTI crude oil futures rose 1.1% to $80.31/bbl and natural gas futures rose 1.0% to $2.62/mmbtu.
On a related note, the S&P 500 energy sector (+1.3%) is the lone outperformer in positive territory.
Semiconductor stocks underperform
17-Aug-23 14:30 ET
Dow -137.59 at 34628.66, Nasdaq -90.81 at 13384.21, S&P -15.15 at 4390.38
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Semiconductor stocks are a weak pocket in the market. The PHLX Semiconductor Index is down 0.5%. Wolfspeed (WOLF 44.48, -8.70, -16.4%) is among the top laggards from the space after reporting earnings.
On a related note, relatively weak semiconductor components has led to the underperformance of the information technology sector (-0.5%).
Gold futures fall, copper futures rise
17-Aug-23 13:55 ET
Dow -96.54 at 34669.71, Nasdaq -55.89 at 13419.13, S&P -9.93 at 4395.60
[BRIEFING.COM] The major indices settled into a narrow ranges near their lows of the day.
Gold futures settled today's session down $13.40 (0.69%) at $1,915.30/oz. Copper futures settled $0.02 higher (0.66%) at $3.68/lb.
Separately, the U.S. Dollar Index has been climbing, up 0.1% to 103.53.
Page One
Last Updated: 17-Aug-23 09:03 ET | Archive
Keeping a close eye on the 10-yr note yield
Walmart (WMT) and Cisco (CSCO) did their part to help spur a rebound effort with better-than-expected earnings results and pleasing guidance, and we are seeing a bit of a rebound bid in the equity futures market, which is also keeping a close eye on the 10-yr note yield (4.29%), which hit its highest level since 2008.
Currently, the S&P 500 futures are up 16 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 71 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 57 points and are trading 0.2% above fair value.
Stocks sold off late yesterday as the 10-yr note yield pushed above its closing high yield of 4.25% from last October. It did so following the release of the FOMC Minutes, so, naturally, there was a rush to pin the action on the "hawkish" minutes.
The thing is, the yield on the 10-yr note had already been going up in front of the 2:00 p.m. ET release of those minutes and it was little changed immediately after their release -- unlike the stock market, which saw some knee-jerk selling right after their release.
In other words, other forces were at work driving yields higher. Those forces included supply concerns, technical selling, and some ruminations that perhaps yields should be higher considering the U.S. economy still has some legs under it -- a point borne out by an Atlanta Fed GDPNow model calling for 5.8% real GDP growth in the third quarter, up from 5.0% previously.
That model isn't exactly forecasting gospel, but on a day that included reports of stronger-than-expected housing starts and industrial production in July, it caught everyone's attention certainly for the direction in which it moved.
There was some more good economic news this morning, too.
Initial jobless claims for the week ending August 12 decreased by 11,000 to 239,000 (Briefing.com consensus 240,000) and continuing jobless claims for the week ending August 5 increased by 32,000 to 1.716 million.
The key takeaway from the report is that initial jobless claims -- a leading indicator -- are pacing at levels that are indicative of a tight labor market, which is indicative of an economy that isn't pacing for a hard landing.
Separately, the August Philadelphia Fed Index jumped to 12.0 (Briefing.com consensus -9.0) from -13.5 in July with indicators for general activity, new orders, and shipments all positive for the first time since May 2022. A number above 0.0 for this series is indicative of an expansion in manufacturing activity in the region.
The future indexes for this survey, however, pointed to less widespread expectations for growth over the next six months, as the diffusion index for general business activity slid to 3.9 from 29.1 in July.
The latter point notwithstanding, the 10-yr note yield is currently sitting at 4.29%, little changed from where it was prior to the release of today's data, which will also include the July Leading Indicators Report at 10:00 a.m. ET.
The stocks of pharmacy benefit managers, though, are not little changed. Most are down noticeably after Blue Shield of California said it is shifting to Amazon Pharmacy (AMZN) and the Mark Cuban Cost Plus Drug Company to provide more affordable and transparent pharmacy services to its members. CVS Health (CVS) and Cigna (CI), for example, are down 7.4% and 6.0%, respectively.
-- Patrick J. O'Hare, Briefing.com
CVS Health cannot catch a break, sells off after Blue Shield of California mostly cuts ties
CVS Health (CVS -8%) cannot catch a break, falling to its lowest level since November 2020 today following the news that Blue Shield of California, a health insurance firm serving over 4.0 mln members, will no longer utilize CVS's services, instead partnering with Cost Plus Drug (a Mark Cuban outfit) and Amazon (AMZN) Pharmacy. Although worth pointing out, Blue Shield stated that it would continue to rely on CVS for its specialty pharmacy services.
Blue Shield's decision is a significant blow to CVS, not just because of the millions of lost consumers but also because of the potential implications. Other health insurers, non-profit or for-profit, could also move off CVS and other pharmacy benefit managers (PMBs) like Express Scripts (CI), sending a shockwave across the traditional PBM landscape today.
- Specifically for CVS, losing its Blue Shield contract comes at an uncertain time. CVS is facing headwinds related to the partial termination of Centene (CNC) in 2024. Recall in late 2022, CNC decided to move their business to Express Scripts. The decision by CNC placed further pressure on an already-challenged 2024 outlook, given CVS's Star Rating was cut a month earlier.
- CVS's Star Rating for its Aetna National PPO plan was cut to 3.5 from 4.5 in October. The rating cut spooked investors and set its shares' considerable downward move in motion. CVS has discussed actions it will take to mitigate some of the financial impact of a lower rating in 2024, leaning on contract diversification and operational initiatives; CVS announced around 5,000 layoffs ahead of its Q2 report earlier this month. Nevertheless, CVS warned that even if these actions proved successful, they would not close the entire gap from the rating cut.
- Coinciding with these headwinds are CVS's aggressive M&A plans, completing its purchases of Signify Health for $8.0 bln and $10.6 bln for Oak Street Health earlier this year, which could pressure its bottom line even further. Likewise, CVS's medical benefit ratio increased 350 bps yr/yr to 86.2%, underpinning higher outpatient costs.
Bottom line, CVS's lost contract with Blue Shield is concerning. With PBM comprising the most significant chunk of CVS's total sales at around half, future performance could take a material hit. The company already withdrew its FY25 adjusted EPS target of $10.00 earlier this month after slashing its FY24 to $8.50-8.70 from $9.00, translating to flat yr/yr growth. Management noted that it would clarify its longer-term earnings growth outlook in December. After today, we are not holding out breath for much improvement.
Cisco surprises market with surprisingly large EPS beat as supply chain improves (CSCO)
Cisco Systems (CSCO +4%) wrapped up FY23 on a high note. It reported its largest EPS beat since 3Q20. Cisco typically reports EPS upside, but it tends to be very modest. But not this quarter. This large beat was very uncharacteristic for Cisco. Revenue rose 16% yr/yr to $15.20 bln, which also was better than expected. Cisco also guided Q1 (Oct) EPS above analyst expectations and guided in-line for FY24.
- Cisco noted that FY23 sales hit $57 bln, up 11% from FY22. This was Cisco's largest revenue growth rate in over a decade. Overall customer demand remained solid. Cisco says its outlook reflects good visibility and predictability driven by healthy backlog, ARR and RPO. Cisco reported its strongest ever quarter for revenue, non-GAAP operating margin, EPS and operating cash flow in Q4. Also, Cisco achieved over 30% total sequential product order growth in Q4, the second-highest growth in 20 years with double-digit increases across all customer markets.
- Product revenue was up 20% and service revenue grew 4%. Revenue by geographic segment was: Americas up 21%, EMEA up 10%, and APJC up 7%. Product revenue performance was led by growth in Secure, Agile Networks up 33%, Optimized Application Experiences up 15%, and Internet for the Future up 3%. Collaboration was down 12%. End-to-End Security was flat.
- A metric that stood out to us was non-GAAP operating margin, which improved significantly to 35.4% from 32.4% last year and was above the high end of the 34-35% prior guidance. Cisco says it benefitted from positive pricing and product mix. It also realized the benefits from actions taken in the prior fiscal year, including driving productivity improvements with lower freight and logistics, component, and other costs. Cisco guided to Q1 non-GAAP operating margin of 34-35%.
- Cisco also noted that as its backlog cleared, it knew it would see corresponding market share gains and it did. In calendar Q1, Cisco gained over 3 percentage points of market share yr/yr in its three largest networking markets, campus switching, wireless LAN and SP routing. Cisco expects further share gains in these areas when calendar Q2 market share numbers are released.
Overall, this was a surprisingly strong quarter for Cisco. The company tends to be pretty predictable with consistent but small EPS beats and cautious guidance. But not this time. Cisco beat by a lot on EPS and provided upside OctQ EPS guidance. Cisco had been plagued by supply chain issues. It was not an issue of demand, it was more about its inability to make enough product. Lead times have since normalized, going from being fairly lengthy to going back to a normal levels. That reinvigorated ability to ship product really helped results in Q4 vs a year ago.
Tapestry's JunQ results fall short due to value-conscious consumers in North America (TPR)
Tapestry (TPR +1%), the company behind luxury apparel brands Coach, Kate Spade, and Stuart Weitzman, is oscillating around its flatline today after posting Q4 (Jun) earnings and revs below consensus while providing a bearish FY24 (Jun) outlook. After bagging Capri Holdings (CPRI), announcing its intent to purchase the parent company of several fashion brands like Versace and Jimmy Choo last week for around $8.5 bln, an over 60% premium, TPR has been selling off, tumbling roughly 17% over five trading days. Alongside the sticker shock associated with the CPRI price tag, investors were also displeased with the company's decision to pause its buybacks to help finance the deal.
- Turning to JunQ results, earnings of $0.95 per share translated to a 21.8% improvement yr/yr but failed to meet analysts' expectations. Gross margins also expanded yr/yr, inching 120 bps higher, reflecting decent price realization as consumers generally accepted higher price tags, particularly since TPR's brands lean toward luxury.
- Revs of $1.62 bln, a 0.3% dip yr/yr, also missed estimates. North America proved worse than TPR anticipated, with sales declining 8%, outside the company's mid-single-digit projection. With two-thirds of total sales emanating from North America, the soft consumer backdrop in the region weighed meaningfully on TPR's top line and eclipsed pockets of strength seen across other geographies.
- In China, TPR's second-largest market, top-line growth reached 50%, consistent with the company's prior forecast, as it lapped favorable numbers from the year-ago period plagued by COVID. In Japan and "Other Asia", sales edged 12% and 7%, respectively, underscoring continued traction among local customers. Europe was the inverse of China, with revs falling 13% as TPR lapped last year's +50% gains.
- Travel demand is a key component of TPR's quarterly performance. Therefore, seeing sales to tourists improve yr/yr was encouraging. However, they remain below pre-pandemic levels, a minor disappointment since travel firms like Airbnb (ABNB) and Expedia (EXPE) have noticed demand exceed pre-pandemic levels.
- Looking ahead, TPR issued downbeat FY24 guidance, targeting EPS of $4.10-4.15 and revs approaching $6.9 bln. With the company remaining focused on maintaining margins over increasing volume, the modest revenue guide was expected. However, the light earnings forecast was a bit of a letdown. Gross margins are expected to expand during the year, primarily due to moderating freight costs.
TPR's JunQ performance did not offer much optimism about the state of luxury apparel. There were already red flags leading into TPR's report, particularly from Ralph Lauren (RL) last week, which noted challenges lingering in North America as consumers remain value-conscious. Meanwhile, in late July, Louis Vuitton (LVMUY) stated that there was distinct softness from American consumers compared to other Western clientele during Q2.
Bottom line, TPR's JunQ report did not point to many positives ahead. At the same time, the CPRI deal may remain an overhang.
Walmart trades flat on Q2 results; WMT's high grocery exposure explains why it's beating TGT (WMT)
Walmart (WMT -1%) is heading modestly lower after reporting Q2 (Jul) results this morning. What strikes us is that its results were much better than Target's (TGT) results yesterday. Both had nice EPS upside, however unlike TGT, Walmart beat on revs and reported positive comps. And probably the most glaring difference was that WMT raised full year EPS guidance while TGT lowered its EPS guidance. That was a pretty stark contrast.
- Walmart US comps (excl fuel) in Q2 grew +6.4%, which was quite good compared to TGT's -5.4% comp decline. Comps were down a bit from +7.4% in Q1, +8.3% in Q4 and +8.2% in Q3, but we think investors are quite happy with that comp especially because WMT was lapping a pretty tough +6.5% comp last year. That was a much higher hurdle than Q1 comps had to face. Also, this was a good comp considering that grocery inflation moderated by more than 400 bps vs Q1 levels.
- Walmart US comps, not surprisingly, were led by grocery and health & wellness, while general merchandise sales declined modestly. Food remains a strength, but what stood out to us on the call was WMT saying that it was "encouraged" by its general merchandise comp performance which was better than internal expectations at the start of the quarter. That language was notably more positive than we heard on the Q1 call. Also, eCommerce, pickup & delivery and advertising performed well. WMT no longer guides for comps, but did say back-to-school sales are ahead of plan.
- Sam's Club comps (excl fuel) were strong as well at +5.5%, although that is down from +7.0% in Q1, +12.2% in Q4 and +10.0% in Q3. But that is a very good number considering it was lapping robust +9.5% comps last year. Sam's Club comps were led by food and consumables, and healthcare as well as positive unit growth overall.
- In terms of its general outlook, WMT says there continues to be a reasonable level of uncertainty in the economic backdrop for the balance of this year. While inflation has moderated and employment levels have been steady, credit markets have tightened. Energy prices are higher and some customers will face the resumption of student loan payments in October. Given this outlook, it's impressive that WMT raised full year EPS guidance.
Overall, this was a decent report although we are not seeing much reaction in the share price. What stood out to us were the good comps, despite lapping a tough year ago result and despite inflation moderating. Higher grocery prices have been a tailwind for comps in recent quarters, but that is now slowing a bit. We think perhaps investors are nitpicking that its comps were not as impressive as last quarter. Also, WMT was a bit cautious on its macro outlook.
The other thing that stands out is that WMT is significantly outperforming TGT. We can sum it up in a word: groceries. About 59% of Walmart US sales are from groceries while Target's Food & Beverage segment is just 21% of revs. That is a huge difference and explains much of the relative outperformance. In other words, TGT has much higher exposure to discretionary items and that's an area where consumers spending less. WMT's high exposure to groceries is really helping it.
Brinker pulls back despite EPS beat; we think comps could have been better (EAT)
Brinker Intl (EAT -3.5%) is heading lower following its Q4 (Jun) earnings results this morning. This restaurant operator (Chili's, Maggiano's) posted solid EPS upside with in-line revenue. It also guided FY24 EPS and revs in-line.
- Same restaurant comps were decent but not as strong as MarQ. Comps came in at +6.6% (Chili's +6.3%; Maggiano's +9.1%), which is down from +10.8% (Chili's +9.6%, Maggiano's +21.6%) in Q3 (Mar). FY23 comps were +8.1% (Chili's +7.0%; Maggiano's +17.3%). Comps in JunQ were driven by higher menu pricing and favorable item mix.
- What makes the comps a bit disappointing is that EAT was benefitting from higher menu prices. Also, it was lapping fairly easy comps in the year ago period, especially at its Chili's unit: +3.1% (Chili's +0.3%, Maggiano's +30.1%). Restaurant operating margin (non-GAAP) moved higher to 13.4% from 12.5% a year ago.
- During FY23, EAT says it made significant shifts to its strategy to drive its core dining channel business and help drive margin improvement. EAT pulled back on discounting and reduced its focus on investment in virtual brands. It also aimed to simplify operations, it invested in labor which has reduced manager turnover, and it returned to national advertising for the first time in more than three years. EAT saw good progress with its JunQ results.
Overall, we think these were decent results given the macro headwinds. EAT's comps were a bit underwhelming given the easy comparison. With that said, we like EAT's strategy of moving away from aggressive promotion, which allows it to more appropriately price its menu and offer premium trade-up options. Its menu prices were too low, in our view.
The stock has remained rangebound in the $34-42 area for much of 2023 and it does not look like this report will cause a change there. However, the stock is now at the low end of that range, which makes us a bit nervous.
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