Market Snapshot
| Dow | 34044.51 | -26.41 | (-0.08%) | | Nasdaq | 13245.91 | +21.92 | (0.17%) | | SP 500 | 4328.13 | -1.95 | (-0.05%) | | 10-yr Note | +4/32 | 4.44 |
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| | NYSE | Adv1318 | Dec1489 | Vol876 mln | | Nasdaq | Adv1844 | Dec2457 | Vol4.3 bln |
Industry Watch
| Strong:Energy, Information Technology |
| | Weak:Consumer Discretionary, Financials, Real Estate, Consumer Staples, Industrials |
Moving the Market
-- Afternoon pullback possibly attributed to comments from San Francisco Fed President Daly (a 2024 FOMC voter), but the Treasury market didn't react much
-- Technical element to the afternoon slide after the S&P 500 was unable to clear initial resistance at 4,361
-- Keeping an eye on price action in the Treasury market
-- Relative outperformance of mega cap stocks limiting index level losses
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Closing Summary
22-Sep-23 16:25 ET
Dow-106.58at 33963.80,Nasdaq-12.18at 13211.81,S&P-9.94at 4320.06
[BRIEFING.COM] Today's trade started on a upbeat note with the major indices all showing modest gains following this week's sell-off. The early positive bias was due in part to a buy-the-dip mentality, which was supported by the price action in the Treasury market.
The market started to decline coming out of the New York lunch hour. Downside moves were interrupted by a brief rebound effort, but the major indices ultimately settled near their lows of the day. The deterioration was attributed to San Francisco Fed President Daly (a 2024 FOMC voter), who reportedly echoed the new party line that the Fed may have some more tightening to do. Ms. Daly's comments followed similar remarks from Boston Fed President Collins (not an FOMC voter this year or 2024) and Fed Governor Bowman (FOMC voter).
It is notable, however, that the 2-yr note yield, which is more sensitive to changes in the fed funds rate, didn't react much to Ms. Daly's acknowledgment. The 2-yr note yield was at 5.11% and settled at 5.12%, down two basis points from yesterday. The 10-yr note yield fell four basis points to 4.44%.
Technical factors may have played a bigger role in the afternoon slide after the S&P 500 was unable to clear initial resistance at 4,361, reaching a high of 4,357 today.
Nine of the 11 S&P 500 sectors logged a decline. The consumer discretionary (-0.9%) and financials (-0.7%) sectors saw the steepest losses while the energy (+0.2%) and information technology (+0.3%) sectors outperformed. The latter was boosted by gains inApple(AAPL174.79, +0.86, +0.5%) andNVIDIA(NVDA416.10, +5.93, +1.5%), which were also a source of support for the major indices.
The UAW confirmed reports that progress has been made on labor talks withFord(F12.43, +0.23, +1.9%), but indicated thatStellantis(STLA19.35, +0.02, +0.1%) andGeneral Motors(GM32.58, -0.13, -0.4%) are going to need "serious pushing." Consequently, the UAW extended its strike to all GM and STLA parts and distribution centers beginning at noon ET.
Separately, the Bank of Japan made no changes to its policy stance, as expected.
Today's economic calendar featured the preliminary September S&P Global US Manufacturing PMI, which improved from August (actual 48.9; prior 47.9), but was still indicative of contraction (i.e. below-50 reading). The S&P Global US Services PMI, meanwhile, still reflected expansion, but fell to 50.2 in the preliminary September reading from 50.5 in August.
Looking ahead, there is no U.S. economic data of note on Monday.
- Nasdaq Composite: +26.2% YTD
- S&P 500: +12.5% YTD
- S&P Midcap 400: +2.7% YTD
- Dow Jones Industrial Average: +2.5% YTD
- Russell 2000: +0.9% YTD
Treasuries settle with gains after solid losses this week
22-Sep-23 15:35 ET
Dow+15.45at 34086.37,Nasdaq+53.08at 13277.07,S&P+9.41at 4339.49
[BRIEFING.COM] The major indices have staged a nice rebound in recent action. Index gains range from 0.2% to 0.5%.
Most of the S&P 500 sectors climbed back into positive territory, leaving the consumer discretionary (-0.3%), financials (-0.2%), and real estate (-0.03%) sectors alone in the red.
Treasuries settled with gains today after a week of solid losses. The 2-yr note yield fell two basis points today, but climbed eight basis points this week, to 5.12%. The 10-yr note yield fell four basis today, and jump 12 basis points this week, to 4.44%.
Looking ahead, there is no U.S. economic data of note on Monday.
Market remains near lows
22-Sep-23 15:00 ET
Dow-26.41at 34044.51,Nasdaq+21.92at 13245.91,S&P-1.95at 4328.13
[BRIEFING.COM] The major indices remain near their worst levels of the day. The Nasdaq is trading just above its flat line while the S&P 500 and Dow Jones Industrial Average are stuck in negative territory.
The deterioration is being attributed to San Francisco Fed President Daly (a 2024 FOMC voter) reportedly repeating the new party line that the Fed may have some more tightening to do.
The A-D line is positive at the NYSE, but decliners have a slim lead over advancers at the Nasdaq.
Most of the S&P 500 sector slipped into the red. The consumer discretionary sector (-0.8%) sports the largest decline followed by the financials (-0.7%) and real estate (-0.4%) sectors. The energy sector (+0.4%) leads the outperformers.
Consumer discretionary losses pile up in S&P 500; ON Semi bucks trend following peer M&A chatter
22-Sep-23 14:30 ET
Dow-52.60at 34018.32,Nasdaq+10.39at 13234.38,S&P-2.29at 4327.79
[BRIEFING.COM] The S&P 500 (-0.05%) has moderated its dip to lows in the last half hour, down now just 2 points.
S&P 500 constituentsNorwegian CruiseLine(NCLH 15.96, -0.96, -5.67%),Paramount(PARA 12.64, -0.66, -4.96%), andMohawk(MHK 86.41, -2.87, -3.21%) host some of the steepest losses. Consumer discretionary weakness drags NCLH lower today, while PARA and media companies are lower given the lack of a resolution in the ongoing writers strike.
Meanwhile,ONSemi(ON 93.74, +2.81, +3.09%) is atop the S&P, higher in sympathy following a story suggesting the Japanese firms were eyeing an investment inCoherent's(COHR 31.36, +2.44, +8.44%) silicon carbide business.
Gold modestly higher to cap off the week
22-Sep-23 14:00 ET
Dow-26.93at 34043.99,Nasdaq+38.05at 13262.04,S&P+3.36at 4333.44
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+0.29%), though it's currently near lows of the day, is still today's best performing index.
Gold futures settled $6 higher (+0.3%) to $1,945.60/oz, down less than $1 on the week to chisel out slightly monthly losses of now about -1.0%.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $105.53.
Page One
Last Updated: 22-Sep-23 08:58 ET | Archive
A tentative buy-the-dip bid
Thus far, it has been a losing week for the stock market and it seems unlikely that something will change so dramatically today to make it a winning week. The equity futures market, however, is pointing to a modestly higher start.
Currently, the S&P 500 futures are up 14 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 91 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 35 points and are trading 0.1% above fair value.
This can be considered a tentative buy-the-dip bid following the large losses that have the Russell 2000 and Nasdaq Composite down 3.5% for the week and the S&P 500 down 2.7%.
That weakness can be tied directly to two, driving forces: weakness in the mega-cap stocks and rising interest rates.
The Vanguard Mega-Cap Growth ETF (MGK) is down 3.8% this week; meanwhile, the 2-yr note yield has climbed nine basis points this week to 5.12% (but it had been as high as 5.20%) and the 10-yr note yield has climbed 13 basis points to 4.47% (but it had been as high as 4.49%).
The move in rates has been fueled by a variety of factors ranging from higher oil prices to quantitative tightening to Fed Chair Powell's suggestion that the neutral rate may be higher than the estimated longer-run rate of 2.5%.
The specter of higher rates has cast concerns about a slowdown in borrowing, a slowdown in consumer spending, a slowdown in earnings growth, and a pickup in competition for stocks versus alternative, and less risky, investments.
We are not only witnessing falling stock prices this week, but also multiple compression as stock prices have fallen at a rate faster than earnings estimates. In fact, earnings estimates haven't fallen at all. According to FactSet, the forward 12-month EPS estimate for the S&P 500 sits at $239.17 today versus $238.64 at the end of last week.
The multiple compression could eventually be the antidote for the sickly-looking stock market, but the cure won't come quickly if interest rates continue to rise. That's why market participants remain fixated on the Treasury market and the Fed's incantations on policy matters.
There are some other distractions in our midst today, however.
The Bank of Japan left its ultra-loose monetary policy unchanged, as expected;Bloomberghas reported that China is looking at relaxing restrictions on foreign investment; the U.S. government appears to be on a path to a shutdown on September 30; the UAW appears to be on a path to an increased strike action today; and many consumers will be on a path to their localApple (AAPL)store today to purchase the new iPhone 15 and/or Apple Watch Series 9.
The path the stock market walks is apt to remain a bumpy one, knowing that the uncertainty factor has been increased this week with the Fed's explicit and implicit signals.
-- Patrick J. O'Hare, Briefing.com
McDonald's plan to hike royalty fees will have new U.S franchisees grimacing (MCD)
Operating aMcDonald's(MCD) franchise has been an especially lucrative endeavor lately, as illustrated by the company's impressive Q2 results that featured robust U.S. comp growth of +11.7%. However, for those looking to get in on the action by opening and operating a new franchise in the U.S., the price is about to go up as MCD looks to cash in on its momentum. According toReuters, franchise royalty fees for U.S. restaurants will increase to 5% from 4% beginning January 1, 2023, for franchisees opening new locations.
Importantly, the increase will not affect current franchisees, who currently operate about 95% of MCD's 13,500 restaurants. While that would have a far more substantial impact on MCD's top-line, the pushback from existing franchisees would be huge, creating a massive schism between MCD's management and those that run the vast majority of its restaurants.
When considering that MCD hasn't raised royalty fees in nearly thirty years and given the fact that franchisees have seen their cash flow grow significantly in recent year, the decision to hike royalty fees on new francisees is understandable. In terms of moving the needle on the top-line, though, it probably won't have much impact.
- Unlike some of its main rivals, such asRestaurant Brands International's(QSR) Burger King, MCD has been quite inactive when it comes to new restaurant openings in the U.S. In fact, in 2022, the company opened a grand total of six net new restaurants, which actually represented its first unit growth since 2014. In contrast, Burger King opened 444 new restaurants in 2Q23 on a yr/yr basis.
- MCD is picking up the pace a bit in 2023, targeting 400 new locations in the U.S. or in its international markets of Germany, France, the U.K., Canada, and Australia. Most of those new restaurants, though, are expected to be in the markets outside of the U.S. After accounting for closures, the net number of new openings in the U.S. will likely still be rather immaterial.
- The much bigger story revolving around MCD is the success of its marketing campaign that's centering around old-school characters like Grimace and the Hamburgler. The company is leaning on nostalgia and the results have been decidedly positive. For instance, last quarter, Grimace became a TikTok star, accumulating over 3 bln views as people wished the purple mascot a happy birthday. MCD parlayed that social media success into strong sales of its Grimace shakes.
MCD's confidence in its ability to bump up its royalty fees on new U.S. franchisees is a reflection of the underlying strength of its business, but it's not expected to impact its financials much. Despite the tough macroeconomic conditions, MCD has been on a roll, easily surpassing analysts' earnings, sales, and comps expectations in the first two quarters of 2023. With the company striking gold with its nostalgic marketing strategy, MCD looks poised for a strong second half of 2023.
Scholastic Corp waiting to turn the page after today's cold reception to seasonal Q1 weakness (SCHL)
Scholastic Corp (SCHL -13%)may need to hit the books after posting a considerable net loss in Q1 (Aug) on a double-digit revenue decline. The children's book publisher did reiterate its FY24 (May) targets. SCHL continues to expect revenue growth of +3-5% yr/yr and adjusted EBITDA of $190-200 mln, a silver lining that may have triggered some buyers to step in, leading to shares recovering modestly from its initial sell-off that took the stock down by -20%.
- What happened?Operating losses expanded to $(99) mln from $(58) mln, driving GAAP EPS of $(2.35) due to previously announced one-time investments and changing seasonality of education revs. Meanwhile, revenue in SCHL's largest Children's Book segment tumbled by 18% yr/yr, causing overall revenue to slip by over 13% to $228.5 mln.
- However, SCHL typically records losses in Q1 and Q3 (Feb), coinciding with summer and winter school vacations in the Northern Hemisphere (SCHL has a presence in Australia and New Zealand). As a result, SCHL remained confident in its FY24 outlook, optimistic of a typically solid Q2 (Nov) and Q4 (May). This optimism is further reflected in SCHL's continued commitment to repurchasing its shares, buying back over $42 mln during Q1.
- SCHL also remained bullish on a few macroeconomic trends, pointing to literacy staying a top priority amongst families and educators. Additionally, SCHL did not waver from its confidence in the long-term demand for children's books, reinforced by positive same-fair sales during last year's Book Fairs. Finally, supply chain costs (paper, freight, shipping) have started falling, benefiting inventory purchases and operating margins.
- Nevertheless, today's sell-off is not entirely unwarranted. Global retail bookselling continues reverting to pre-pandemic levels, reflected in retail softness and ongoing backlist inventory reductions by booksellers. Based on SCHL's data, children's and young adult books in the U.S. (SCHL's most prominent market) dropped by 8% yr/yr in Q1.
The main takeaway is that although SCHL endured typical seasonal weakness in Q1, it was more pronounced than the market was expecting, generating significant selling pressure today. Although today's reaction might be overblown, given that SCHL retained its confidence in achieving FY24 targets, investors could be increasingly worried about the global economy. It is no secret that FY24 will likely be plagued by meaningful economic headwinds as families pull back spending to traverse the stubborn inflationary environment. As such, it is not out of bounds to think management might expect too much from an unfavorable demand landscape, potentially making the company fall short of its FY24 guidance.
Disney may be wishing on a star in its desire to shed struggling cable TV business (DIS)
Walt Disney(DIS) CEO Bob Iger has made his intentions clear regarding the company's struggling Linear Networks segment, which houses its ABC, FX, and National Geographic cable TV channels. Specifically, he has described those assets as potentially not being "core" to DIS's operations, and that the company is considering "strategic options" for the unit. A couple weeks ago, it seemed that Mr. Iger's wish to cut the cord on its broadcast and cable TV channels may come to fruition afterBloombergreported thatNexstar(NXST) has emerged as a potential buyer. This morning, however, theNew York Postthrew some cold water on the idea that a deal would be forthcoming any time soon.
- According to the article, reports that DIS is nearing a deal to sell its ABC Network are "greatly exaggerated", noting that the company hasn't hired any bankers to work on a transaction and that NXST likely wouldn't be willing to pay what DIS would likely be asking for.
- There's also the question of how many potential suiters are actually out there looking to acquire a business that's been in a downward spiral for the past several years. As consumers continue to ditch cable TV for streaming services, such as DIS's Hulu, advertising revenue has dried up. With no end in sight to the cord-cutting trend, any potential buyer would likely be seeking a bargain-basement price.
- If DIS can pull off a deal to sell some or all of its Linear Network assets, we do believe that would translate into a much-needed catalyst for the stock. The segment has been an albatross on DIS's results for quite some time, weighing on its profitability. Last quarter, revenue for Linear Networks fell by 7% to $6.7 bln, while operating income plummeted by 23% to $1.9 bln.
- The company could also use an infusion of capital. Earlier this week, DIS disclosed that it intends to increase and expand its investments in its theme parks business to the tune of $60 bln over the course of a 10-year period. That news caught investors off-guard since DIS has been focused on cutting costs and pulling back on its content spending.
The main takeaway is that there's no guarantee that DIS will be able to shed its cable TV assets, and, if it does, the price tag may be substantially lower than what the company is seeking. Overall, there's plenty of uncertainty swirling around DIS these days, including whether it can reignite growth at its Direct-to-Consumer segment while it simultaneously looks to achieve profitability for the unit. All these moving parts and uncertainties help explain why the stock has been mired in a prolonged slump with shares down by nearly 50% since the beginning of 2022.
Deere hit by a downgrade today at Canaccord; several developing tailwinds worth considering (DE)
Deere (DE -2%)was hit by a downgrade today at Canaccord to "Hold" from "Buy." While some firms reiterated or initiated a "Buy/Outperform" rating, DE has not received an upgrade all year per the analysts Briefing.com tracks, underpinning growing caution surrounding the ag equipment industry. Today's downgrade has triggered shares to take out previous lows from last month that followed relatively decent Q3 (Jul) earnings.
Briefing.com notesthat investors were not fixated on the positives from DE's JulQ report. Instead, they feared macroeconomic conditions would begin taking their toll on the company. These concerns were not unfounded, given that inventory levels have steadily risen throughout the year. However, some tailwinds deserve discussion, making DE's roughly 15% correction from July highs an attractive entry point.
- Dealer inventory levels are still well below seasonally adjusted historical averages. This has been the case all year despite inventory rising to pre-COVID levels in some circumstances. In fact, in DE's largest business, Large Ag, by the end of 2023, inventory to sales levels will be lower than historic and target levels.
- Management also repeated over the past few quarters that there are many benefits in returning to normal seasonality, mainly since it contributes to a healthier pace of used trades for DE's dealers and customers.
- Fleets are aging. During the pandemic, DE's supply lines were challenged, resulting in demand rapidly outpacing supply and hindering the company's ability to bring down the average age of its outstanding fleet. This delays/defers the replacement cycle, which can act as a favorable tailwind over the near term.
- Crop prices are forecasted to be the third-highest in over ten years in 2023. DE noted that while crop prices are down yr/yr, in North America, farmers are projected to have another year of a healthy income, supporting equipment purchases and upgrades.
- DE's bullishness has not wavered. The company summarized its Q2 results by stating that ag fundamentals remain healthy in North America, supported by downward trending input costs and a continued constraint on global grain supplies. Meanwhile, in Europe, order books stretch into 2Q24 (calendar year). Although, the European market will likely remain dynamic going into 2024.
Headwinds are present, especially overseas, where economic conditions are weighing on the end consumer more heavily than in the U.S. Asia is a notable laggard, with DE mentioning that industry sales in the region will likely be down moderately this year. However, the recent selling pressure appears to be overdone when considering the several favorable short and long-term developments for DE.
KB Home can't build on upside report to push shares higher as lower margins, sale prices weigh (KBH)
Following in the footsteps ofLennar(LEN) andToll Brothers(TOL), which each posted blowout quarterly results over the past month,KB Home(KBH) delivered its own upside report last night, easily surpassing Q3 revenue and EPS estimates. Demand clearly remains strong for new homes -- as illustrated by a 54% surge in new orders for KBH -- with the supply of existing homes on the market remaining extremely tight. However, rising mortgage rates are taking a toll on KBH and the industry as home affordability becomes a more pressing concern.
- In order to mitigate the impact of rising mortgage rates on home buyers, KBH has increased its incentives and concessions. This is reflected in the average selling price dropping by 8% yr/yr to $466,300. Total revenue also declined by 14% yr/yr, representing its steepest decline in three years.
- Lower selling prices leads to lower margins, which was the case for KBH in Q3. Excluding inventory related charges, housing gross profit margin plunged by 550 bps yr/yr to 21.5% with higher construction costs adding further pressure.
- With margins contracting, it then follows that earnings are also on the decline. Although KBH's EPS of $1.80 handily beat expectations, it was still down by 37% on a yr/yr basis.
- On the positive side, the jump in new orders indicates that the incentives are working from a demand standpoint. Furthermore, the cancellation rate improved significantly to 21% compared to 35% in the year-earlier period.
- It's worth pointing out, though, that KBH is lapping a very favorable yr/yr comparison. In 3Q22, net orders dove by 50% as the rapid rise in mortgage rates and inflation caused many prospective home buyers to postpone their home buying decisions.
The bottom line is that it's really a mixed bag for KBH and other homebuilders. If looking at the situation from a "glass half full" perspective, higher mortgage rates are benefitting KBH and others because it's exacerbating the under-supply issue for existing homes on the market. However, if looking at it from a "glass half empty" view, higher mortgage rates are forcing homebuilders to ramp up incentives in order to improve affordability and keep demand strong. Since rising mortgage rates are ultimately compressing margins and profitability through lower average selling prices, we believe it's hard to see higher rates as a net positive. Longer-term, though, we do believe that KBH and its peers are in good position once rates cool down due to the supply and demand dynamics. |
