Market Snapshot
briefing.com
| Dow | 33743.75 | +4.49 | (0.01%) | | Nasdaq | 13625.27 | +62.43 | (0.46%) | | SP 500 | 4366.39 | +8.15 | (0.19%) | | 10-yr Note | +28/32 | 4.59 |
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| | NYSE | Adv 1731 | Dec 1092 | Vol 810 mln | | Nasdaq | Adv 1934 | Dec 2336 | Vol 4.1 bln |
Industry Watch
| Strong: Real Estate, Communication Services, Utilities, Information Technology, Industrials |
| | Weak: Energy, Consumer Staples, Health Care |
Moving the Market
-- A drop in long-term rates
--Reacting to reports that Hezbollah made some provocative moves in the north, which Israel called a "false alarm"
-- Relative strength from mega cap stocks
-- Hesitation ahead of the September Consumer Price Index following this morning's hotter-than-expected PPI
| Closing Summary
11-Oct-23 16:30 ET
Dow +65.57 at 33804.83, Nasdaq +96.83 at 13659.67, S&P +18.71 at 4376.95
[BRIEFING.COM] The stock market started, and finished, this session on a positive note. Around 1:45 p.m. ET, however, the three major indices were all in negative territory before bouncing off their session lows. The S&P 500 and Nasdaq Composite closed near their best levels of the day, bolstered by their mega cap components.
Notably, stocks were moving lower mid-morning despite a drop in long-term rates, which has been supportive for stocks of late. The 10-yr note yield declined seven basis points to 4.59% and the 2-yr note yield rose one basis point to 5.00%.
Some participants attributed the downside moves to lingering nervousness related to reports that Iran-backed Hezbollah made some provocative moves in the north. Israel, however, said those reports were a "false alarm," according to Bloomberg.
Other factors cited as a possible catalyst for the mid-morning slide were hesitation ahead of the September Consumer Price Index tomorrow at 8:30 a.m. ET following this morning's hotter-than-expected Producer Price Index, and tax-related selling in front of the October 16 deadline.
Total PPI was up 0.5% month-over-month (Briefing.com consensus 0.3%) and core PPI, which excludes food and energy, was up 0.3% (Briefing.com consensus 0.2%). Those gains left PPI up 2.2% year-over-year, versus 1.6% in August, and core PPI up 2.7%, versus 2.2% in August, reversing the trend of disinflation that had been seen.
Many stocks recovered in the afternoon trade, riding the coattails of the mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) ended the day 0.9% higher after being up just 0.1% at its worst level. The Invesco S&P 500 Equal Weight ETF (RSP), which had been down 0.5% at its low, finished the session up 0.2%. Eight of the 11 S&P 500 sectors closed in positive territory. The real estate (+2.0%), utilities (+1.6%), communication services (+1.1%), and information technology (+1.0%) sectors all jumped more than 1.0%.
The energy sector (-1.4%) was the worst performer, weighed down by Exxon (XOM 106.49, -3.96, -3.6%) after it announced a $59.5 billion all-stock acquisition of Pioneer Natural Resources (PXD 240.82, +3.41, +1.4%), and a 2.5% drop in WTI crude oil futures to $83.75/bbl. The consumer staples (-0.6%) and health care (-0.4%) sectors were the next worst performers.
- Nasdaq Composite: +30.5% YTD
- S&P 500: +14.0% YTD
- S&P Midcap 400: +3.1% YTD
- Dow Jones Industrial Average: +2.0% YTD
- Russell 2000: +0.7% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index rose 0.6% following last week's 6.0% decline
- The Producer Price Index for September was up 0.5% month-over-month (Briefing.com consensus 0.3%) following a 0.7% increase in August. The Producer Price Index, excluding food and energy, rose 0.3% month-over-month (Briefing.com consensus 0.2%) following a 0.2% increase in August. On a year-over-year basis, PPI was up 2.2%, versus 1.6% in August, and core PPI was up 2.7%, versus 2.2% in August.
- The key takeaway from the report is that it marked an interruption in the disinflation seen in producer prices, which will keep market participants worried about pass-through effects to the consumer and rates staying higher for longer because inflation is staying higher for longer than the Fed would like.
Looking ahead to Thursday, the September Consumer Price Index will be released at 8:30 a.m. ET. Other notable data include the weekly jobless claims report at 8:30 a.m. ET, the weekly EIA Natural Gas Inventories at 10:30 a.m. ET, the weekly EIA Crude Oil Inventories at 11:00 a.m. ET, and the September Treasury Budget at 2:00 p.m. ET.
Treasuries settle mixed
11-Oct-23 15:35 ET
Dow -1.15 at 33738.11, Nasdaq +61.57 at 13624.41, S&P +9.27 at 4367.51
[BRIEFING.COM] The major indices are trying to climb ahead of the close.
Treasuries settled mixed with the 2-yr note yield rising one basis point to 5.00% and the 10-yr note yield falling seven basis points to 4.59%.
Looking ahead to Thursday, the September Consumer Price Index will be released at 8:30 a.m. ET. Other notable data include the weekly jobless claims report at 8:30 a.m. ET, the weekly EIA Natural Gas Inventories at 10:30 a.m. ET, the weekly EIA Crude Oil Inventories at 11:00 a.m. ET, and the September Treasury Budget at 2:00 p.m. ET.
Energy complex settles mixed
11-Oct-23 15:05 ET
Dow +4.49 at 33743.75, Nasdaq +62.43 at 13625.27, S&P +8.15 at 4366.39
[BRIEFING.COM] The major indices moved mostly sideways over the last half hour. The Russell 2000 is a relative underperformer, down 0.4%.
Energy complex futures settled the session mixed. WTI crude oil futures fell 2.5% to $83.75/bbl and natural gas futures rose 0.2% to $3.39/mmbtu. The S&P 500 energy sector (-1.6%) continues to underperform.
Meanwhile, the real estate sector (+1.7%) shows the biggest gain followed by utilities (+1.5%).
FOMC minutes suggest another rate hike could happen, will proceed carefully
11-Oct-23 14:30 ET
Dow -11.70 at 33727.60, Nasdaq +58.66 at 13621.50, S&P +6.00 at 4364.24
[BRIEFING.COM] The major averages jolted higher following the release of the FOMC's minutes from its Sept. meeting. Recent trading has the S&P 500 (+0.14%) has returned to positive territory.
The minutes highlighted that a majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted. Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided.
All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks.
What's more, a vast majority of participants continued to judge the future path of the economy as highly uncertain while also judging that there is upside risks to inflation from rising energy prices that could undo some of the recent disinflation or to the risk that inflation would prove more persistent than expected.
In recent trading the yield on the benchmark 10-yr treasury note is down about five basis points to 4.611%.
Gold higher ahead of FOMC minutes, treasury budget duo
11-Oct-23 13:55 ET
Dow -107.81 at 33631.49, Nasdaq -3.10 at 13559.75, S&P -9.76 at 4348.48
[BRIEFING.COM] The major averages are all now in negative territory ahead of both the FOMC minutes from the Sept. 19-20 meeting, which are due at the top of the hour. The tech-heavy Nasdaq Composite (-0.02%) has just recently moved into the red.
Gold futures settled $12 higher (+0.6%) to $1,887.30/oz, helped along once again by increased haven demand.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $105.99.
Page One
Last Updated: 11-Oct-23 09:10 ET | Archive
Staying on rebound path
There is a whirl of information confronting market participants this morning, ranging from geopolitical news to corporate news to economic data. It hasn't all been necessarily taken in stride, but the equity futures market suggests the stock market will continue walking a rebound path at today's open.
Currently, the S&P 500 futures are up 17 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 65 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 137 points and are trading 0.4% above fair value.
The geopolitical and economic news, arguably, isn't great.
Israel is stepping up its retaliation in Gaza and reports have suggested that Hezbollah has made provocative actions in the north; however, what stands out mostly to the market at this juncture is that Israel and Iran are not in an armed conflict. That would be a worst-case scenario, so it remains a relief to know that this worst-case scenario remains dormant.
On the economic front, the Producer Price Index for September was up 0.5% month-over-month (Briefing.com consensus 0.3%) following a 0.7% increase in August. The Producer Price Index, excluding food and energy, rose 0.3% month-over-month (Briefing.com consensus 0.2%) following a 0.2% increase in August. On a year-over-year basis, PPI was up 2.2%, versus 1.6% in August, and core PPI was up 2.7%, versus 2.2% in August.
The key takeaway from the report is that it marked an interruption in the disinflation seen in producer prices, which will keep market participants worried about pass-through effects to the consumer and rates staying higher for longer because inflation is staying higher for longer than the Fed would like.
This report triggered some selling interest in the Treasury market, but thus far the selling efforts have been contained. The 2-yr note yield, at 4.95% in front of the release, has risen to 4.99%. The 10-yr note yield for its part is at 4.58%, down a basis point from where it was just before the PPI release and down another eight basis points from yesterday, which has been a support factor for stocks this morning.
We will get some insight on the Fed's inflation views when the minutes from the September 19-20 FOMC meeting are released at 2:00 p.m. ET. Overall, the market may have to put its own spin on those views, and other views expressed in the minutes, given the sharp jump in Treasury yields and the increased (geo)political uncertainty since that meeting was held.
Part of that uncertainty revolves around the ouster of Kevin McCarthy as Speaker of the House and a standstill in House business since that decision was made. According to Politico, Republicans will hold an internal vote for House Speaker today, but will need 217 votes before going to the floor with an official vote.
In corporate news:
- Exxon (XOM) is acquiring Pioneer Natural Resources (PXD) in a $59 billion, or $253 per share, all-stock transaction
- Walgreens Boots Alliance (WBA) and Sherwin-Williams (SHW) have both announced new CEOs
- Birkenstock Holding (BIRK) will be going public today
- Samsung reported better-than-feared Q3 operating results
- Kidney dialysis services companies DaVita (DVA), Baxter (BAX), and Fresenius Medical (FMS) are seeing sizable losses on the heels of news that Novo Nordisk (NVO) stopped a kidney outcomes trial of its once-weekly injectable because an independent monitoring committee said the results met certain pre-specified criteria for stopping the trial early for efficacy.
-- Patrick J. O'Hare, Briefing.com
Birkenstock's IPO had high hopes, but investors got cold feet ahead of the launch (BIRK)
Hopes were high ahead of Birkenstock's (BIRK) IPO in the wake of strong pricings from Arm Holdings (ARM), Instacart (CART), and Klaviyo (KVYO), but the Germany-based sandal maker has received a chilly reception in a setback for the IPO market's recovery.
- As reported last night by the Wall Street Journal, BIRK's 32.26 mln share IPO priced at $46, which is slightly below the midpoint of the $44-$49 expected price range. The pricing came as both a disappointment and a surprise because news reports were indicating that the deal would price at the high end of that range.
- We're just speculating, but it seems that BIRK and its investment banking team sensed that the IPO could falter once it opened for trading, perhaps due to concerns over BIRK's lofty valuation.
- Had the deal priced at $49/share as some had anticipated, BIRK's market cap would have been approximately $11.0 bln, equating to a P/Adj. EBITDA of roughly 25x.
- That valuation may be hard for market participants to swallow, especially since consumer spending is slowing -- including for footwear. BIRK's top-line growth has slowed, indicating that it's not immune to the macroeconomic headwinds. Revenue growth for the nine months ended June 30, 2023 came in at 21%. In FY22, the company's top-line growth rate was around 29%.
- Adding to the concern is that those three highly anticipated IPOs -- ARM, CART, and KVYO -- have not performed particularly well in the public markets. In particular, CART has faltered and is currently trading 10% below its IPO price.
- Taking these factors into account, it's understandable that the IPO did stumble out of the gate, opening for trading at $41, or about 11% below the IPO price.
However, all is not lost for BIRK.
- The slow start may entice some investors who otherwise ignored the IPO to take another look at BIRK. With a market cap of about $7.8 bln, the valuation is more attractive as the P/Adj. EBITDA drops to roughly 18x.
- Additionally, BIRK has a strong brand name, has a long history and has weathered many economic downturns, and is consistently profitable. On that note, BIRK generated an operating profit of EUR263 mln with an adjusted gross margin of 62% in FY22.
Overall, though, this was a disappointing and discouraging debut for BIRK, offering a not-so-subtle reminder that the IPO market is still fragile and has not fully emerged from its years-long slump.
Sherwin-Williams' initial gains, fueled by a new CEO, fade; investors cautious ahead of Q3 (SHW)
After electing a new CEO, Sherwin-Williams (SHW) enjoyed a splash of green today, only for shares to turn red toward mid-day. The coatings supplier announced that its current COO, Heidi Petz, would assume the CEO position, succeeding John Morikis, who will maintain his position as Executive Chairman. The news followed a multi-year succession plan to identify a new company leader. Ms. Petz will begin her duties as CEO beginning January 1, 2024.
Albeit a short two-year stint as COO, Heidi Petz has been with the company since 2017, previously serving as President of The Americas Group and Consumer Brands Group, SHW's smallest segment, comprised of retail-related sales.
Although SHW is likely in good hands with Ms. Petz at the helm, it does not mean that SHW is staring at smooth sailing ahead, likely keeping a lid on today's gains.
- Last quarter, the market was encouraged by healthy demand trends across multiple end markets, setting up for a robust second half of the year. However, mortgage rates have only climbed since SHW's Q2 results in late July, potentially weighing on new home starts, a significant component of the company's revenue.
- Likewise, SHW's continuously resilient businesses, such as Auto Refinish and General Industrial, could begin encountering softness after multiple periods of meaningful growth. Higher interest rates could start eroding auto OEM demand while dragging down demand for housing upgrades, such as furniture, cabinetry, and flooring.
- While it was uplifting to see peer RPM Inc (RPM) tick higher on solid AugQ numbers earlier this month, much of it stemmed from improving overseas conditions, a development SHW may not be able to take much advantage of. SHW derives around a fifth of its total revenue from its international footprint, relying primarily on active domestic demand. Notably, RPM commented that the U.S. housing market continued to be weak, clipping its North American sales during the quarter, a red flag ahead of SHW's Q3 report on October 24.
A new CEO can generate initial enthusiasm among investors as the market grows excited about potential changes. Nevertheless, as the market digests a new incoming CEO, initial exuberance can fade; this is unfolding for SHW today. At the same time, investors are maintaining a healthy dose of caution ahead of SHW's Q3 report in under two weeks as the macroeconomic environment remains uneasy.
Exxon Mobil goes all in on Permian Basin with huge acquisition of Pioneer Natural Resources (XOM)
About one week ago, the Wall Street Journal followed up on its initial report from mid-April regarding a potential blockbuster merger between Exxon Mobil (XOM) and Pioneer Natural Resources (PXD), reporting that a deal worth about $60 bln could be imminent. That mega-deal, which is the largest in the oil and gas industry in over twenty years, came to fruition this morning with XOM agreeing to acquire PXD for $253/share in an all-stock transaction that's valued at approximately $59.5 bln.
The purchase price represents an 18% premium from PXD's closing price on October 5, the day that the Wall Street Journal published its report.
- While shares of PXD are trading higher on the buyout news, they are still trading below the $253/share acquisition price. We believe this is partly due to concerns that the deal will face intense antitrust scrutiny from regulators, adding some doubt that the acquisition will be allowed to go through.
- XOM's and PXD's executives contend that the combination of the two companies would bolster the country's energy independence and it would be a positive for the consumer since drilling and recovery costs would be lower once they combine operations.
- Whether law makers and regulators at the FTC and DoJ agree with that assertion remains to be seen, though, and the gap between PXD's stock price and the take-out price is reflecting some doubt.
If the deal does get the green light to close -- which the companies expect to occur in 1H24 -- then XOM would become the dominant producer in the Permian Basin by a wide margin.
- The numbers are pretty staggering. A combined XOM and PXD would have an estimated 16 bln barrels of oil equivalent resources in the Permian, and XOM's Permian production volume would more than double to 1.3 mln barrels of oil equivalent per day (MOEBD) based on 2023 volumes. By 2027, that figure would jump to approximately 2.0 MOEBD.
- XOM would also hold a key competitive advantage over rivals like Chevron (CVX) and ConocoPhillips (COP). Namely, with an even larger portion of its production coming from the Permian, XOM's flexibility to adjust production and its ability to keep production costs lower would improve.
- Unlike deep water drilling, resources in the Permian can be tapped into relatively quickly and at far lower costs.
- Relatedly, XOM stated that the acquired PXD assets would turn a profit even if crude oil prices drop as low as $35 per barrel.
- In our view, XOM is also paying a reasonable price to become the undisputed leader in the Permian. At a transaction value of $60 bln, PXD is being valued at about 6-7x its expected EBITDA for 2024.
- Despite these positives, XOM is trading sharply lower due to the all-stock composition of the deal. Rather than financing the acquisition with pricey debt, the company is taking advantage of its high stock price, which is up by more than 80% since the beginning of 2022.
XOM's acquisition of PXD is a transformative event that not only has huge implications for those two companies, but also for the oil and gas industry as a whole, and even for the broader stock market. A deal of this magnitude could spark more M&A activity, which could provide a boost for the market. However, regulatory and antitrust concerns are formidable hurdles that this deal and others down the road will have to overcome.
HP Inc. continues to rebound following decent FY24 guidance and improved cost-savings target (HPQ)
HP Inc. (HPQ +1%) is trying to print some gains today after providing in-line FY24 earnings guidance and raising its annual dividend by 5% to $1.1024 per share, giving it a 4.2% yield. Shares of HPQ have endured a rapid and extended sell-off over the past couple of months, sinking around 20% since the beginning of August. The PC and printer manufacturer's Q3 (Jul) earnings results in late August only kept its downtrodden stock tracking lower, as investors disapproved of its third-straight sales miss and mild Q4 (Oct) guidance.
However, today's initial FY24 adjusted EPS forecast of $3.25-3.65, the midpoint of which still fell just short of consensus, alleviates the outsized selling pressure as it translated to a modest yr/yr improvement if HPQ registers Q4 EPS at the midpoint of its quarterly outlook. This is notable since a significant component of why investors sold HPQ's JulQ results was the company struggling to meet its expectations of an improved second half of the year relative to the first half. Given today's FY24 guidance, the demand landscape may just be taking an extra quarter or two before finally getting healthier.
- Management also outlined its cost-savings expectations for the next couple of years, an underlying factor in its yr/yr EPS improvement. HPQ projects its "Future Ready" cost-savings initiative to result in an extra $200 mln in annualized gross run-rate structural cost savings, totaling $1.6 bln by the end of FY25 (Oct), while maintaining charges of approximately $1.0 bln.
- One of the highlights from Q3 was HPQ's Future Ready plan, which buoyed its bottom line and allowed the company to sustain its margins despite market conditions remaining challenging. HPQ mentioned that its cost-saving plan was on track, helping keep pace with its long-term growth priorities. This also showed up in the company's initial FY24 free cash flow outlook of $3.1-3.6 bln, a potential improvement over FY23.
- While HPQ predicted that the macro situation was not improving as quickly as anticipated in August, Dell (DELL) shortly thereafter countered HPQ's remarks, noting the demand environment was better than expected and raising its FY24 (Jan) guidance. Additionally, Gartner stated earlier this week that after a 9% drop in PC shipments during SepQ, they should begin to expand during DecQ.
- However, given HPQ's roughly 30% annual dependency on printing revenue, it may not fully capitalize on an improving PC backdrop. It is also not reassuring that major shareholder Warren Buffett continues reducing his stake in the company, initiating multiple sales over the past couple of months.
Bottom line, HPQ's announcements today were encouraging. After a lengthy sell-off, shares have become more attractive from a valuation standpoint, trading at around 8x forward earnings, a decent discount to DELL at 10x. While a healthy degree of caution is warranted given the near-term headwinds facing HPQ, the company may be carving out a bottom in terms of demand ahead of the typically favorable holiday season.
Unity Software receives a jolt following the retirement of its Chairman and CEO (U)
Unity Software (U +3%) receives a jolt today following last night's news of Chairman and CEO John Riccitiello's retirement, effective immediately. The video game development software provider also reaffirmed its Q3 revenue outlook of $540-550 mln. Stepping in to fill Mr. Riccitiello's shoes is outsider James Whitehurst, who will serve as Interim CEO until the company appoints a permanent successor. Taking on the Chairman position is Roelof Botha, currently the Board's Lead Independent Director.
Given former CEO John Riccitiello's nine-year tenure at Unity, overseeing the company's IPO in 2020, why are investors applauding news of his retirement today?
- Unity has not performed well since its IPO. After peaking in November 2021, shares have lost over 80% of their value and trade around 40% below their IPO price of $52. The rising interest rate environment has not been kind to Unity, as investors stopped paying a sizeable premium for companies struggling to reach profitability during an unfavorable demand environment. For perspective, Unity was trading at over 40x forward sales in late 2021 compared to just 5x currently.
- Mr. Riccitiello sparked controversy after announcing price hikes last month. The floated pricing model essentially eliminated the lowest-tier pricing model, which was free for developers, instead charging them once their game reached a specific download and revenue threshold. After backlash from developers, Unity walked back significant components of its new pricing model but still included new fees, primarily targeting its largest customers.
- Unity's M&A activity was not well-received. The company faced substantial selling pressure after agreeing to purchase app monetization provider ironSource, which was amid underwhelming growth prospects, for $4.4 bln last year. Unity expressed to investors that the idea behind the purchase was not revenue growth but market share growth, making the deal more long-term focused. Although management stated in August that its intentions were playing out exactly as expected, it has yet to spur meaningful buyer enthusiasm.
Alongside the broader market rally, Unity's leadership changes are generating excitement today. Given Unity's presence in the gaming industry, being the engine behind several popular titles, such as Among Us and Pokémon Go, the company has built an attractive foundation for future growth. Meanwhile, video game publishers, like Electronic Arts (EA) and Take-Two (TTWO), have observed signs of stabilization in JunQ after multiple quarters of waning demand, optimistic that comps would improve going forward, reflecting an encouraging demand landscape for Unity. Perhaps a leadership change is precisely what the company needs to capitalize on these favorable developments.
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