Market Snapshot
briefing.com
| Dow | 36404.93 | +157.06 | (0.43%) | | Nasdaq | 14432.48 | +28.51 | (0.20%) | | SP 500 | 4622.44 | +18.07 | (0.39%) | | 10-yr Note | -1/32 | 4.24 |
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| | NYSE | Adv 1407 | Dec 1392 | Vol 924 mln | | Nasdaq | Adv 1904 | Dec 2393 | Vol 5.6 bln |
Industry Watch
| Strong: Industrials, Consumer Staples, Health Care, Financials |
| | Weak: Communication Services |
Moving the Market
-- Ongoing consolidation efforts in mega caps weighed on index performance
-- Reacting to today's $50 billion 3-yr Treasury note auction and $37 billion 10-yr Treasury note reopening, which both met weak demand
-- Treasuries pulling back from intraday high yields acting as support for equities
-- Wait-and-see mentality ahead of busy week
| Closing Summary
11-Dec-23 16:30 ET
Dow +157.06 at 36404.93, Nasdaq +28.51 at 14432.48, S&P +18.07 at 4622.44
[BRIEFING.COM] The major indices traded in mixed fashion in the early going. The lackluster price action was due in part to ongoing consolidation efforts and a wait-and-see mentality ahead of a busy week that features the November Consumer Price Index on Tuesday, the FOMC meeting on Wednesday, and the November Retail Sales Report on Thursday. In addition, the ECB and Bank of England have their own policy meetings on Thursday.
Market participants were also hesitant in front of the two Treasury note sales today. The $50 billion 3-yr note auction and $37 billion 10-yr note auction were both met with weak demand, but Treasuries settled off their lows despite the results. The 2-yr note yield fell one basis point to 4.73% after hitting 4.77% earlier and the 10-yr note yield declined one basis point to 4.24% after hitting 4.28% earlier.
Treasuries moving off their intraday high yields coincided with an uptick in buying activity in the stock market. The major indices all settled into a steady climb around 1:00 p.m. ET that left stocks near their best levels at the close.
The equal-weighted S&P 500 closed with a 0.9% gain while the market-cap weighted S&P 500 logged a 0.4% gain, due in part to relative weakness in the mega cap space. The Vanguard Mega Cap Growth ETF (MGK) declined 0.2%.
Semiconductor equipment stocks had a strong showing today following a Wall Street Journal report that New York is joining with semiconductor companies to invest in a research facility at the University of Albany. The Philadelphia Semiconductor Index jumped 3.4%.
Only one of the S&P 500 sectors registered a decline -- communication services (-1.0%) -- while the consumer staples (+1.0%) and industrial (+0.9%) sectors saw the biggest gains.
There was no U.S. economic data of note today.
- Nasdaq Composite: +37.9%
- S&P 500: +20.4%
- Dow Jones industrial Average: +9.8%
- S&P Midcap 400: +8.9%
- Russell 2000: +7.0%
Tuesday's economic calendar features:
- 6:00 ET: November NFIB Small Business Optimism (prior 90.7)
- 8:30 ET: November CPI (Briefing.com consensus 0.0%; prior 0.0%) and Core CPI (Briefing.com consensus 0.1%; prior 0.2%)
- 14:00 ET: November Treasury Budget (prior -$66.6 bln)
Treasuries settle little changed
11-Dec-23 15:35 ET
Dow +107.21 at 36355.08, Nasdaq +11.04 at 14415.01, S&P +12.39 at 4616.76
[BRIEFING.COM] The three major indices are little changed over the last half hour.
The 2-yr note yield fell one basis point to 4.73% and the 10-yr note yield declined one basis point to 4.24%.
Tuesday's economic calendar features:
- 6:00 ET: November NFIB Small Business Optimism (prior 90.7)
- 8:30 ET: November CPI (Briefing.com consensus 0.0%; prior 0.0%) and Core CPI (Briefing.com consensus 0.1%; prior 0.2%)
- 14:00 ET: November Treasury Budget (prior -$66.6 bln)
WTI crude oil futures climb, natural gas futures sink
11-Dec-23 15:05 ET
Dow +112.69 at 36360.56, Nasdaq +16.56 at 14420.53, S&P +14.21 at 4618.58
[BRIEFING.COM] The major indices are trading near their best levels of the day.
WTI crude oil futures settled 0.2% higher at $71.35/bbl. Natural gas futures sank 5.1% to $2.44/mmbtu. On a related note, the S&P 500 energy sector (+0.2%) trades near the bottom of the lineup among the 11 sectors.
Separately, the Russell 2000 is up 0.2% and the S&P Mid Cap 400 is up 0.6%.
S&P 500 creeps into the lead
11-Dec-23 14:25 ET
Dow +99.88 at 36347.75, Nasdaq +19.56 at 14423.53, S&P +13.87 at 4618.24
[BRIEFING.COM] The S&P 500 (+0.30%) has taken a narrow lead in the last half hour, up just shy of 14 points.
Elsewhere, S&P 500 constituents Broadcom (AVGO 1033.82, +89.52, +9.48%), Etsy (ETSY 85.35, +5.27, +6.58%), and Illumina (ILMN 117.62, +4.68, +4.14%) pepper the top of the standings. AVGO gains amid a Buy resumption out of Citigroup, while ILMN was raised to Neutral from Sell at Citigroup alongside news that it had confidentially submitted a draft registration statement on Form 10 related to its potential divestiture of GRAIL to the SEC, pursuant to an order Illumina received from the European Commission (EC) directing the company to divest GRAIL.
Meanwhile, Paramount Global (PARA 16.22, -0.63, -3.74%) is today's top laggard. Reports suggest Shari Redstone is in discussions to sell her stake in PARA's parent company, National Amusements.
Gold underperforms to open the week, pressured by familiar foes
11-Dec-23 14:00 ET
Dow +131.72 at 36379.59, Nasdaq +24.37 at 14428.34, S&P +14.89 at 4619.26
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+0.17%) is the shallowest gaining major average, albeit now up 24 points vs. losses of 79 points at this morning's lows.
Gold futures settled $20.80 lower (-1.0%) to $1,993.70/oz, pressured by the trio of gains in the dollar, equities, and treasury yields.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.10.
Shake Shack heats up on CEO Randy Garutti's upcoming retirement and reiterated Q4 guidance (SHAK)
Shake Shack (SHAK +7%) heats up today after shaking up the leadership role and reiterating its Q4 financial forecasts. CEO Randy Garutti announced his retirement today, departing SHAK in 2024 upon the Board naming a successor. Mr. Garutti served as SHAK's CEO for over a decade, moving into the corner office in April 2012. Throughout his tenure, Mr. Garutti launched SHAK's IPO, steered through the pandemic despite having relatively few drive-thru locations, and expanded SHAK's footprint overseas. When stacked against some of its closest rivals, including MCD, WEN, and QSR, shares of SHAK have also performed well, up approximately 100% since pandemic lows.
So why is the market excited about Mr. Garutti's retirement?
- A fresh face tends to ignite enthusiasm as investors buy into the potential of a newcomer tapping into the company's potential. We suspect the new CEO will further Mr. Garutti's existing central pillars of adding more Shacks boasting the newer, drive-thru format domestically and abroad. The current CEO has also discussed entering several new markets in the United States and internationally over the coming years.
- While same-store sales momentum picked up in October, helping SHAK achieve +2.3% comp growth in Q3, traffic trends have declined. During Q3, SHAK endured a 4.2% drop in traffic, a deterioration from the 1.3% decline posted in Q2. Macroeconomic challenges certainly play a role, as consumers reduce their dining out frequency in light of cumulative inflationary pressures. A new CEO could implement new ways to reverse SHAK's recent traffic woes, perhaps enhancing menu items, offering discounts, or finding ways to cut expenses.
- Speaking of which, increasing labor costs remain a meaningful headwind. SHAK was upbeat about how higher wages have lowered turnover but mentioned that continued wage increases would not settle anytime soon, causing it to be part of its pricing structure going forward. Therefore, SHAK must improve profitability in other areas. This will likely be a focal point of the new CEO.
Alongside bubbling excitement over a new CEO, SHAK reiterating its Q4 revenue and same-store sales growth targets are contributing to today's solid price appreciation. SHAK continues to expect revs of $276.25-281.75 mln and comps of low-single digits. Additionally, the company left its Q4 operating profit margin outlook of approximately 19% unchanged. The reiterated guidance illustrates that the improving trends SHAK witnessed in October, such as accelerating comps, sustained their upward momentum.
Current CEO Randy Garutti has done a solid job over his 10+ years as SHAK's leader. The company is focused on where it wants to go and how it wants to get there, a credit to Mr. Garutti's leadership. We suspect the new CEO will continue these initiatives. However, whoever takes the reigns will likely have to contend with lingering headwinds, including wage inflation and traffic declines, which could inhibit more aggressive long-term plans.
The Cigna Group in much better health today after scrapping blockbuster deal to acquire Humana (CI)
In what would have been the largest merger of the year by far, health insurance companies The Cigna Group (CI) and Humana (HUM) decided to scrap a massive deal to combine forces, according to The Wall Street Journal. The development comes as a relief to investors who were concerned that the potential cash-and-stock deal, which The Wall Street Journal first reported on back on November 29, would be significantly dilutive to CI's earnings.
- Since that story broke in late November, shares of CI have tumbled by about 10%. That drop likely played a role in CI's decision to pull the plug on the deal since the transaction was expected to largely be funded by its stock.
- A lower stock price means that CI would have to increase the number of shares offered to pay for the acquisition, thereby making the deal more dilutive than originally anticipated.
- According to The Wall Street Journal, CI and HUM also couldn't come to an agreement on the final price tag.
- Although EPS growth bounced back in Q3, increasing by 12% to $6.77, CI's EPS fell by 1% and 10% in the preceding two quarters. Taking another step backward in terms of earnings growth simply wasn't palatable to investors, even though the addition of HUM would transform CI into a health insurance powerhouse with a much stronger presence in the Medicare business.
- Moving forward with the merger would also cast an overhang on both stocks due to the heightened regulatory uncertainty. The deal would certainly face significant antitrust scrutiny from the FTC and DoJ, creating time-consuming litigation obligations for the executive teams of both companies.
- On that note, Reuters reported on November 6 that CI is considering selling its Medicare Advantage business in a move that perhaps would have made its acquisition of HUM look more acceptable to regulators. As the country's second largest Medicare insurer, HUM would instantly transform CI into a leader in that business, alongside its strong positioning on the commercial side.
- Instead of moving ahead with a dilutive acquisition that may ultimately get shot down by regulators, CI is taking a much more shareholder-friendly approach with its capital. Specifically, the company approved an increase of $10 bln to its share repurchase program with at least $5 bln of its buybacks occurring between now and the end of 1H24. That is music to investors' ears as CEO David Cordani added that shares are significantly undervalued in his view.
- CI will also pursue smaller, bolt-on acquisitions, and will consider value-enhancing divestitures. Investors have generally rewarded companies that have streamlined their operations and taken expenses out of their cost structures, so the possibility of future divestitures adds another bullish element to today's news.
The bottom line is that CI's near-to-intermediate term earnings growth potential took a major turn for the better as it scraps a blockbuster merger with HUM in favor of a sizable share repurchase program.
Macy's gives investors an early stocking stuffer as investor group makes reported bid (M)
Macy's (M +19%) is giving investors an early holiday gift. The department store retailer is trading sharply higher today following a Wall Street Journal report that an investor group has made a $21 per share offer to buy Macy's in a bid to take the company private. Before investors get too excited, and as the article notes, Macy's has been the target of shareholder activists in the past to no avail.
- It has been a tough environment for department store chains. Problems from online competition have been well documented over the years. There were pandemic-related supply chain problems, especially last year. Also, the stores are frankly, too large. They harken back to the retail days of yesteryear. They are expensive to operate and there has been increased shrink/theft in recent years. Not surprisingly, there also have been bankruptcies.
- Also, it is a tough macro environment. With higher rates and inflation, consumers are watching what they spend more closely. This is especially the case for discretionary categories, which is where department stores have high exposure. Mass retailers, especially WMT and TGT albeit to a lesser extent, have benefitted from having grocery exposure to offset weakness in consumer discretionary categories.
- The timing of the deal is pretty interesting. CEO Jeff Gennette is set to retire at the end of this fiscal year. He has been spearheading a turnaround effort, which has included closing underperforming stores, opening smaller format stores, focusing more on ecommerce and improving efficiencies. Macy's has also been doing pretty well with its off-price division, Backstage, which outperformed the Macy's full-line stores in Q3 by about 720 basis points.
- In terms of the specifics of the deal, the $21/sh price tag represents a 21% premium over Friday's close. That computes at a P/E of just 7x, which is below peers like KSS (10.5x) and JWN (8.4x). The attraction with Macy's is that it owns some attractive real estate, especially its flagship store at Herald Square. If the investor group were to buy Macy's, we suspect they would put its turnaround efforts into overdrive by closing more stores, monetizing the real estate and perhaps spinning off the ecommerce unit. The investor group is not saying this, but we think that would be a likely outcome.
Overall, we think investors should be wary that a deal will get done. This is not the first time Macy's has been targeted and nothing happened. Given this skepticism, we were a little surprised to see Macy's trading so close to the offer price. However, we think investors are betting the investor group will increase its bid at some point.
In terms of the timing with the CEO retiring, we are not sure what to make of that. Maybe it is just a coincidence, or maybe the group is hoping the board will opt for an off ramp rather than continue turnaround efforts with a new CEO. More broadly, we think department stores are in a tough spot for the reasons mentioned above. Maybe a buyout and turnaround is the way to go.
Sea Limited sinks on reports TikTok Shop will resume operations in Indonesia (SE)
Shares of Sea Limited (SE -6%) are being hit by a wave of sellers today, heading back toward one-year lows following news that TikTok found a way to compete within the Indonesia e-commerce market. Multiple reports suggest that the China-owned social media giant will pour $840 mln to acquire most of GoTo Group, an Indonesian tech giant offering ride-sharing, delivery, and financial services. GoTo also owns an e-commerce platform, Tokopedia, in which TikTok would invest an additional $660 mln. From there, TikTok can restart TikTok Shop, its e-commerce business that already operates across several countries, including the United States.
In October, TikTok Shop was shut down by Indonesian regulators concerned over predatory pricing. The country banned e-commerce on social media platforms, prohibiting social media firms from facilitating product sales on their sites. The protectionist laws were also said to protect user data.
However, by forming a joint venture with GoTo, TikTok can now capitalize on the lucrative Indonesian e-commerce market. Tokopedia, which would now be a majority-owned company by TikTok, will acquire TikTok Shop. That way, TikTok users can purchase products from the app since TikTok Shop is now owned by a separate entity, not the social media platform, thus circumventing Indonesia's recently enacted protectionism laws. However, it is unclear how user data fits into this, given that it was cited as another reason behind the ban. The partnership will begin with a pilot period in close connection and supervision with regulators.
Why is this bad news for Sea Limited?
- SE's e-commerce arm, Shopee, is its most critical business, comprising two-thirds of its total revenue. SE has built up Shopee to become the largest e-commerce platform by monthly visitors by a substantial margin. Tokopedia and Alibaba-owned (BABA) Lazada have historically been the region's next two largest e-commerce competitors. However, their monthly visitors combined are still well below Shopee.
- Enter TikTok Shop, which launched in April 2021; SE immediately had an intense competitor on its hands. TikTok Shop overtook Lazada this past summer to become the third-largest e-commerce platform in Indonesia, underscoring how rapidly the social media e-commerce platform was expanding. Live stream shopping, the central component of TikTok Shop, has become so popular across Southeast Asia that it is one of SE's two main investment areas.
- SE's shift toward growth after a short stint focusing on profitability has been met by outsized investor selling pressure. Intensified competition was a factor behind management's decision to move back toward growth. SE noted that it must now invest in market share gains to better position it for sustainable profitability once economic conditions stabilize.
Sea Limited was struggling this year since it shifted its attention to growth above profitability. The news of Indonesia banning TikTok Shop in October did not provide much of a boost for SE, underpinning concern that TikTok would not give up its efforts to continue expanding its e-commerce business across the region. With today's reports cementing this concern, SE's headwinds have grown stronger.
RH's margins take a hit in Q3 as the elevated promotional retail environment refuses to budge (RH)
RH's (RH -14%) considerable earnings miss in Q3 (Oct) and downbeat FY24 guidance are not making investors feel very comfortable today. Leading into its Q3 results, RH was benefiting immensely from falling U.S. Treasury yields and several uplifting reports from peers, including luxury home builder Toll Brothers (TOL), Pottery Barn owner Williams-Sonoma (WSM), and furniture maker La-Z-Boy (LZB). Excellent performance from these counterparts signaled that despite weakening discretionary spending and elevated interest rates, consumers were not entirely forgoing their willingness to spend.
However, following RH's first net loss in over five years on its fifth consecutive yr/yr revenue decline, consumers are not springing toward RH's relatively pricey products. CEO Gary Friedman, who does not tend to sugarcoat situations, continued to blame the increasingly promotional home furnishing markets. The end consumer is placing value at the top of their priorities, a common theme throughout the retail industry, gravitating toward clearance products and pressuring RH's margins in the process.
- RH's adjusted operating margins plummeted 13.5 pts yr/yr to 7.3% in Q3. At the same time, revenue continued to contract, slipping by 13.6% yr/yr to $751 mln. The result was an adjusted net loss of $(0.42) per share, the first time RH has registered negative earnings in years.
- Alongside the heightened promotional environment, RH is also undergoing a broad product transformation to disrupt multiple markets and position it to capture market share throughout FY24 (Jan), placing more pressure on margins. However, RH anticipates the dilutive effect on margins to be short-lived, remaining optimistic that the investments will become margin-accretive over the long term.
- Nevertheless, the housing market will remain a significant headwind for RH in the interim. Mr. Friedman commented that given how many homeowners enjoy mortgage rates below 5%, the housing market will likely remain frozen until interest rates and/or home prices fall meaningfully.
- As a result, RH narrowed its FY24 revenue forecast to $3.06-3.08 bln from $3.04-3.10 bln. Additionally, RH trimmed its adjusted operating margin outlook for the year to 13.6-14.0% from 14.5-15.5%, reflecting the aforementioned margin headwinds.
On a more positive note, RH expects demand trends to accelerate during 1H24 as its ongoing product transformation unfolds and it introduces its new Sourcebooks, i.e., catalogs. The company anticipates its inflection point will peak during 2Q24 as its new collections fully ramp. Mr. Friedman also stayed steadfast in his long-term optimism, pointing to the massive potential of moving beyond the home furnishing market into the North American housing market with the launch of RH Residences (fully furnished luxury homes).
Still, it could be some time before the promotional environment stabilizes and RH can return to margin growth. Even though more affluent incomes are better cushioned from economic downturns, it does not mean they will not engage in trade-down activity. We already saw most of Dollar Tree's (DLTR) new customers this year coming from households with incomes over $125,000. As such, until macroeconomic conditions turn, it may be better to hold off on RH for now.
Page One
Last Updated: 11-Dec-23 09:03 ET | Archive
Walking a quiet line
It is shaping up to be a fairly quiet start to the trading session after the market made some welcome noise Friday in the wake of the solid November employment report. That noise was synthesized into a sixth straight winning week for the S&P 500 and Nasdaq Composite.
Currently, the S&P 500 futures are down two points and are trading roughly in-line with fair value, the Nasdaq 100 futures are down 12 points and are trading roughly in-line with fair value, and the Dow Jones Industrial Average futures are down 10 points and are trading fractionally above fair value.
The quiet disposition comes in front of a big week of news that will feature the November Consumer Price Index on Tuesday, the FOMC meeting, updated Summary of Economic Projections, and press conference on Wednesday, the November Retail Sales Report on Thursday, and a gaggle of policy meetings from other central banks, including the ECB, Bank of England, Swiss National Bank, Hong Kong Monetary Authority, and Norges Bank, interspersed throughout the week.
Today won't feature any U.S. economic data of note, but a smattering of corporate news items has drawn some extra attention:
- Occidental Petroleum (OXY) is acquiring CrownRock in a $12 billion cash-and-stock deal.
- Macy's (M) received a $5.8 billion, or $21.00 per share, buyout offer from Arkhouse Management and Brigade Capital Management, according to The Wall Street Journal.
- The Cigna Group (CI) announced a $10 billion increase to its share buyback authorization, reaffirmed its FY23 outlook, and, according to The Wall Street Journal, ended talks to acquire Humana (HUM).
- Boeing (BA) named Stephanie Pope to be COO, effective January 1, 2024.
- Citigroup upgraded Nike (NKE) to Buy from Neutral.
- TD Cowen named NVIDIA (NVDA) its Best Idea for 2024.
The S&P 500 itself is drawing some attention for closing above 4,600 on Friday, something it hasn't done since March 2022. It now stands roughly 500 points, or 12.2%, above its low on October 27.
Accordingly, it continues to battle the notion, along with the other indices, that it is due for a pullback. That notion, however, continues to clash with the good bones of momentum and seasonality that have yet to show any signs of real fracture.
The technical translation for many in that understanding is that the trend is their friend... until it isn't.
With the some key market-moving events on the near horizon, market participants will be forgiven for taking a non-committal line at this juncture. Still, no one is jumping the line to force a downside break, so the price action itself continues to keep sellers at bay.
Separately, the 2-yr note yield is up two basis points to 4.76% and the 10-yr note yield is up two basis points to 4.27% in front of a $50 billion 3-yr note auction at 11:30 a.m. ET and a $37 billion 10-yr note auction at 1:00 p.m. ET.
-- Patrick J. O'Hare, Briefing.com
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