Market Snapshot
briefing.com
| Dow | 37711.02 | +15.29 | (0.04%) | | Nasdaq | 14970.19 | +0.54 | (0.00%) | | SP 500 | 4780.24 | -3.21 | (-0.07%) | | 10-yr Note | +26/32 | 3.98 |
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| | NYSE | Adv 1163 | Dec 1597 | Vol 891 mln | | Nasdaq | Adv 1502 | Dec 2758 | Vol 5.1 bln |
Industry Watch
| Strong: Energy, Information Technology |
| | Weak: Utilities, Real Estate, Financials, Materials, Health Care, Industrials |
Moving the Market
-- Digesting hotter than expected CPI data, which isn't likely to persuade the Fed to cut rates as much as the market expects
-- S&P 500 getting rejected at 4,796.50, roughly its all-time high close (4,796.56)
-- Treasury yields ultimately settling lower
-- Major indices following up and down action of mega cap stocks
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Closing Summary
11-Jan-24 16:30 ET
Dow +15.29 at 37711.02, Nasdaq +0.54 at 14970.19, S&P -3.21 at 4780.24
[BRIEFING.COM] Today's trade featured a negative bias throughout most of the session despite an initial move higher that saw the S&P 500 run into resistance at its all-time high close (4,796.56). Decliners led advancers by a nearly 2-to-1 margin at the NYSE and by a 4-to-3 margin at the Nasdaq.
The Russell 2000 closed with a 0.8% loss while the three major indices settled little changed from yesterday after climbing off session lows thanks to positive price action in some mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) was down 0.9% when the indices were near session lows, but the MGK closed with a 0.2% gain.
Market participants were digesting a Consumer Price Index (CPI) report for December that was slightly hotter than the market's hopeful expectations. Total CPI increased 3.4% year-over-year in December, up from 3.1% in November, while the core reading decelerated slightly to 3.9% from 4.0%.
Also, weekly initial jobless claims remain below recession-like levels at 202,000, which is down from 203,000 in the prior week.
The market's rate cut expectations ultimately strengthened despite data that isn't likely to persuade the Fed to cut rates as much as the market hopes, and despite Cleveland Fed President Mester (FOMC voter) saying on BloombergTV that March is probably too early for a rate cut.
The fed funds futures market still pricing in six rate cuts this year, beginning with a 71.4% implied likelihood of a March cut, up from 67.4% that was seen yesterday, according to the CME FedWatch Tool.
Treasuries settled with gains, but buying really picked up in response to a strong $21 bln 30-yr bond reopening rather than this morning's data. The 2-yr note yield fell nine basis points to 4.27% and the 10-yr note yield declined five basis points to 3.98%.
Still, stocks languished under selling pressure despite the increase in rate cut expectations and the positive price action in Treasuries. Nine of the 11 S&P 500 sectors registered a decline. The utilities sector was the worst performer by a decent margin, sinking 2.3%.
In other news, there was a lot of buzz around trading spot Bitcoin ETFs today, and related companies, after the SEC announced yesterday that it had approved 11 spot Bitcoin ETFs.
- S&P 500: +0.2%
- Dow Jones Industrial Average: +0.1%
- Nasdaq Composite: -0.3%
- S&P Midcap 400: -1.8%
- Russell 2000: -3.5%
Reviewing today's economic data:
- December CPI 0.3% (Briefing.com consensus 0.2%); Prior 0.1%; December Core CPI 0.3% (Briefing.com consensus 0.2%); Prior 0.3%
- The key takeaway from the report is that inflation, while improved, has lost some of its downward momentum. Therefore, the Fed isn't likely to be in a rush to cut interest rates -- at least not yet based on this latest CPI reading.
- Weekly Initial Claims 202K (Briefing.com consensus 209K); Prior was revised to 203K from 220K; Weekly Continuing Claims 1.834 mln; Prior was revised to 1.868 mln from 1.855 mln
- The key takeaway from the report is the recognition that employers, in general, are still reluctant to cut employees from payrolls. That is a positive consideration as it relates to the outlook for labor and the economy, which means it may not be a positive consideration as it relates to the market's outlook for rate cuts.
Friday's economic data is limited to the December PPI (Briefing.com consensus 0.1%; prior 0.0%) and Core PPI (Briefing.com consensus 0.2%; prior 0.1%) at 8:30 ET.
Big banks report earnings ahead of tomorrow's open
11-Jan-24 15:35 ET
Dow +7.92 at 37703.65, Nasdaq -4.93 at 14964.72, S&P -4.63 at 4778.82
[BRIEFING.COM] The major indices are trading in narrow ranges ahead of the close.
UnitedHealth (UNH), JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Delta Air Lines (DAL), BlackRock (BLK), BNY Mellon (BK) all report earnings ahead of tomorrow's open.
Friday's economic data is limited to the December PPI (Briefing.com consensus 0.1%; prior 0.0%) and Core PPI (Briefing.com consensus 0.2%; prior 0.1%) at 8:30 ET.
Treasury yields sink after Treasury Budget
11-Jan-24 15:05 ET
Dow +2.57 at 37698.30, Nasdaq -0.23 at 14969.42, S&P -3.07 at 4780.38
[BRIEFING.COM] The S&P 500 briefly tipped into positive territory recently.
Treasury yields turned lower in response to the Treasury Budget data. The 10-yr note yield is down five basis points to 3.98% and the 2-yr note yield is down nine basis points to 4.27%.
Separately, WTI crude oil futures settled 0.7% higher at $71.91/bbl.
December deficit grows as interest on debt continues recent trend
11-Jan-24 14:30 ET
Dow -49.74 at 37645.99, Nasdaq -21.45 at 14948.20, S&P -9.42 at 4774.03
[BRIEFING.COM] The major averages jostled around slightly, but returned to form following the release of the December Treasury Budget which showed a growing deficit in part due to higher interest payments on the government's debt, among other factors; to this point, the S&P 500 (-0.20%) is today's top lagging average.
The Treasury Budget for December showed a deficit of $129.4 bln versus a deficit of $85.0 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the December deficit cannot be compared to the deficit of $314.0 bln for November.
Total receipts of $429.3 bln fell 5.6% compared to last year while total outlays of $558.7 bln increased about 3.5% compared to last year.
The total year-to-date budget deficit now stands at $509.9 bln vs $421.4 bln at this point a year ago.
Gold ends lower following CPI data
11-Jan-24 14:00 ET
Dow -49.12 at 37646.61, Nasdaq -20.19 at 14949.46, S&P -9.29 at 4774.16
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.13%) is tied for "first place" sharing the shallowest losses with the DJIA.
Gold futures settled $8.60 lower (-0.4%) to $2,019.20/oz, slinking off overnight gains after this morning's hotter than expected CPI data.
Meanwhile, the U.S. Dollar Index is up +0.2% to $102.51.
Page One
Last Updated: 11-Jan-24 09:07 ET | Archive
CPI and initial claims data produce some surprises
The wait is over. The December Consumer Price Index (CPI) was released this morning and it was a little hotter than expected.
Briefly, total CPI was up 0.3% month-over-month in December (Briefing.com consensus 0.2%) following an unrevised 0.1% increase in November. Core CPI, which excludes food and energy, was also up 0.3% month-over-month (Briefing.com consensus 0.2%). The shelter index jumped 0.5% and accounted for over half of the monthly increase in total CPI.
With these December changes, total CPI was up 3.4% year-over-year, versus 3.1% in November, and core CPI was up 3.9% year-over-year, versus 4.0% in November.
The key takeaway from the report is that inflation, while improved, has lost some of its downward momentum. Therefore, the Fed isn't likely to be in a rush to cut interest rates -- at least not yet based on this latest CPI reading.
That same thinking also comes into play with the weekly initial jobless claims and continuing jobless claims data.
Initial claims for the week ending January 6 decreased by 1,000 to 202,000 (Briefing.com consensus 209,000). Continuing jobless claims for the week ending December 30 decreased by 34,000 to 1.834 million.
The key takeaway from the report is the recognition that employers, in general, are still reluctant to cut employees from payrolls. That is a positive consideration as it relates to the outlook for labor and the economy, which means it may not be a positive consideration as it relates to the market's outlook for rate cuts.
Following the release of this morning's data, Treasury yields moved higher and equity futures moved lower. The 2-yr note yield, at 4.32% in front of the release, is at 4.38% now, and the 10-yr note yield, at 3.98% in front of the release, is at 4.06% now.
Those aren't big spikes relative to yesterday's settlement levels. In fact, the yield for the 2-yr note is up two basis points, and yield for the 10-yr note is up three basis points, from yesterday's settlement. A mitigating factor perhaps is a deeper look into the CPI report, which reveals a friendlier 2.2% year-over-year increase in the all items index less food, shelter, and energy.
Currently, the S&P 500 futures are down 12 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 22 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 83 points and are trading 0.2% below fair value.
Again, those readings aren't a picture of true shock or disappointment. They strike us more as a recognition of knowing that the element of a negative headline surprise with this report was higher than the element of a positive surprise. They might also suggest that the market continues to believe that the inflation data will go its way and the Fed's way in coming months.
In any case, the market will have to contend with the "will they cut in March or won't they" question, which is apt to drive some choppy trading conditions. According to the CME FedWatch Tool, the probability of a 25 basis points cut in the target range for the fed funds rate at the March meeting is at 63.0% now versus 67.4% yesterday.
Today's data and "that question" have partly overshadowed the other big market news of the morning, which came late yesterday in the SEC's approval of 11 spot Bitcoin ETFs. It remains to be seen how that will impact trading behavior today, but there is no doubt that the approval is a watershed moment for Bitcoin enthusiasts.
-- Patrick J. O'Hare, Briefing.com
Smith Douglas Homes feeling right at home as public company as IPO draws solid demand (SDHC)
Given the fundamental strength of the homebuilding industry and the accompanying stellar performance of homebuilding stocks such as D.R. Horton (DHI), Lennar (LEN), and KB Home (KBH), it's fitting that the first major IPO of 2024 would be a homebuilder. Earlier this morning, Smith Douglas Homes (SDHC) capitalized on the bullish sentiment for homebuilders, pricing its 7.7 mln share IPO at $21/share, the high end of the $18-$21 projected price range. The stock subsequently opened for trading at $23.50, good for a 12% opening pop.
As a Georgia-based company, SDHC's geographic footprint centers on the southeast and southern U.S. with operations in GA, NC, TN, AL, and TX. The company believes that these markets are characterized by favorable attributes and trends, such as strong employment and wage growth, desirable lifestyle and weather, and consistent population growth.
There are a couple notable items that distinguish SDHC from other homebuilders.
- For instance, the company utilizes a "land-light" business model in which it typically purchases finished lots through lot-option contracts from land developers. This reduces its up-front capital needs and SDHC believes this also reduces its financial and operating risks relative to other homebuilders that own a higher percentage of their land supply.
- With more than 93% of SDHC's closings derived from fewer than 30 floor plans, SDHC benefits from a more streamlined approach to construction, resulting in improved economies of scale.
- Therefore, even though its ASPs are much lower than most homebuilders at $333,000 for the nine months ended September 30, 2023, its home closing gross margin is very healthy at 29% for this same period. For a point of comparison, KBH, which report upside Q4 results last night, saw housing gross profit margin decline by 310 bps yr/yr to 20.8% as it lowered prices to improve home affordability.
- Similar to KBH, though, SDHC experienced an upswing in demand as mortgage rates cooled in December. In its IPO prospectus, SDHC estimated that net new home orders spiked by 57% from November. Overall, for the three months ended December 31, 2023, net new home orders jumped by 24% yr/yr to 525 homes.
- Thanks to the favorable industry conditions, including a persistent undersupply of existing homes on the market, and SDHC's land-light business model, the company is comfortably profitable, generating net income of nearly $95 mln for the nine months ended September 30, 2023.
The main takeaway is that it's unsurprising that SDHC's IPO drew healthy demand considering the enthusiasm surrounding homebuilder stocks. Its strong pricing is a positive development for an IPO market that's still trying to fully emerge from a longstanding slump, but more will be needed to generate real momentum. We believe that SDHC will likely perform well as it represents a new opportunity for investors within the hot homebuilding space, and its differentiated attributes such as its more affordable price points and its exposure to strong housing markets in the southeast and southern U.S.
KB Home tops Q4 estimates, but profit-taking and fear of higher rates for longer hits shares (KBH)
Coming on the heels of blowout Q4 earnings reports from homebuilding peers Lennar (LEN) and Toll Brothers (TOLL) last month, the bar was set very high last night for KB Home (KBH), which followed suit and delivered better-than-expected Q4 results. With shares trading at their highest levels since the spring of 2006, though, an initial sell-the-news reaction transpired after the earnings release. Also, a hotter-than-expected CPI reading for December has dampened hopes that the Fed will soon begin to cut interest rates, which could put upward pressure on mortgage rates again.
- For investors and traders looking for an excuse to sell the stock and lock in profits, the yr/yr declines in EPS and revenue could fit the bill. Primarily driven by a 4.5% yr/yr drop in average selling price to $487,300 and an increase in construction costs, revenue and EPS declined by 14% and 25%, respectively.
- During the quarter, mortgage rates climbed each week from late September through October, ultimately reaching the 8% mark, slowing net orders. On a yr/yr basis, net orders surged by 176% yr/yr to 1,909, but that growth rate is skewed by a very favorable yr/yr comparison. More specifically, in the year-earlier period, net orders plummeted by 80% to just 692.
- However, since the end of KBH's fiscal year (November 30, 2023), rates have cooled, and demand has improved significantly. In fact, over the first five weeks of Q1, net orders have more than doubled yr/yr to 904, with orders in December outpacing November. That is quite unusual considering that December is a slow month for the housing market.
- The underlying factors supporting the homebuilding industry remain in place. Low inventory levels of existing homes on the market, combined with favorable demographic trends, including millennials and Gen Z generations looking towards home ownership, are continuing to drive strong demand for new homes.
- From a company-specific standpoint, KBH has significantly improved its build times, enabling it to close on more than 3,400 homes during Q4. These improving build times have become a key selling point for KBH since quicker delivery dates allow home buyers to lock in mortgage rates for a shorter period of time, helping to lower financing costs.
Barring a major economic setback, 2024 is setting up to be another strong year for KBH, as reflected in its FY24 housing revenue guidance of $6.40-$6.80 bln. Bolstered by healthy demand for new home construction, KBH is planning to grow its community count by 12% in 2024 for a total of 270. With momentum building ahead of the spring selling season, KBH is off to a fast start in achieving its targets.
Plug Power sells off after another analyst downgrade today; many hurdles cloud near term (PLUG)
Hydrogen fuel cell maker Plug Power (PLUG -8%) extends its losses today following a downgrade at Susquehanna, marking the tenth consecutive downgrade the company has received in just the past six months. PLUG's share price reflects analysts' bearish sentiment toward the company, tumbling by over 60% over that timeframe.
Briefing.com notes that PLUG certainly has its challenges cut out for it, especially being an early entrant into the on-road transport hydrogen fuel industry. Before making the ambitious leap toward manufacturing hydrogen fuel cells for light commercial vehicles and expanding into the large-scale stationary power market, i.e., powering data centers and building electric vehicle (EV) charging infrastructure, PLUG was focused on developing fuel cell systems for forklifts. This is still a part of its business, but lately, PLUG has gravitated toward becoming an all-in-one hydrogen fuel provider, building the fuel cells and the infrastructure, and branching out to several different markets.
While PLUG's long-term vision is commendable, it may not be entirely viable.
- Financial constraints have significantly limited PLUG's ability to move on its goals with much vigor. For example, while revenue has been growing each year, it has not kept pace with increasing input costs and operating expenditures, resulting in widening net losses. In Q3, management stated that the company will need to access additional capital given its forecasted capital expenditures and existing liquidity position.
- PLUG is exploring different routes to tap into additional funding, including debt, the Department of Energy loan program, and certain equity partners. If unsuccessful, PLUG could be staring at a serious liquidity crunch.
- Limited hydrogen availability is placing further pressure on PLUG. Shares plummeted in early November following steep earnings and sales misses in Q3, fueled by plant outages across the entire hydrogen network. For many days throughout the quarter, demand outpaced supply, doubling the hydrogen price for the end consumer. While management noted that the network stabilized as of November, with many outages subsiding, these setbacks do not instill confidence in wider hydrogen fuel adoption.
- Battery electric vehicles (BEVs) remain the mainstream alternative to gas-powered vehicles. Competition will likely remain stiff over the long term as OEMs will do their best to maintain and expand their position in the electrified on-road transportation and charging infrastructure markets. At the same time, PLUG is competing against the gas industry by not just looking to expand into on-road transportation but also into powering buildings. As such, it competes on several fronts, making things all the more difficult given its dwindling liquidity position.
PLUG is amid several battles, from a deteriorating balance sheet to supply constraints and broad competition. Shares have plunged by over 90% from all-time highs in early 2021, reflecting PLUG's ongoing obstacles. While this does present a more attractive entry point for a turnaround play, there are still too many uncertainties that could keep PLUG from mounting a speedy comeback.
PriceSmart shares being bought in bulk today following upside Q1 results (PSMT)
Based on PriceSmart's (PSMT) upside 1Q24 results, it's evident that purchasing food and other essential items in bulk in order to find better value isn't just a U.S. phenomenon. Last night, the membership warehouse club operator with a presence in Central America, Colombia, and the Caribbean reported strong comparable net merchandise sales growth of 8.0%, fueling an 11% increase in adjusted EPS to $1.24.
- Similar to its U.S.-based counterpart Costco (COST), PSMT is experiencing steady membership growth and very healthy renewal rates. This is reflected in PSMT's 11% increase in membership income to $17.7 mln. Although the company didn't disclose its renewal rate in the Q1 earnings press release, the metric has been hovering around the upper-80% range in recent quarters.
- Unlike COST, PSMT has implemented a membership price hike recently, announcing a $5 increase in most of its markets last quarter. These fee increases will take hold on a staggered basis in most of its markets throughout FY24. This will help to support healthy membership income growth in the coming quarters.
- The foods category has been a consistent standout, and that likely remained the case in Q1, but PSMT's health services have generated very strong growth. Last quarter, health services -- including optical, audiology, and pharmacy -- achieved growth of 91%. PSMT will likely hash out the specific category growth rates when the earnings call begins at noon E.T.
- Store expansion is a key pillar of PSMT's growth strategy. The company ended the quarter with 53 clubs, up from 50 as of November 30, 2022, and it has plans to open another club in El Salvador in February. For a point of comparison, COST currently operates over 870 warehouses on a global basis.
The main takeaway is that, like COST, PSMT continues to benefit from a budget-conscious consumer, positioning the company to achieve strong comp growth and membership growth. In terms of its total addressable market, PSMT is only scratching the surface and has a long runway ahead in terms of club expansion.
WD-40 surges following top and bottom-line beats in Q1, aided by sustained positive trends (WDFC)
WD-40's (WDFC +13%) top and bottom-line beats in Q1 (Nov), accompanied by reiterated FY24 guidance, are stirring up considerable enthusiasm today, pushing its shares to levels not seen since April 2021. Carrying the household and multi-use product maker, most known for its WD-40 brand, to such solid quarterly results was sustained improvements in trends seen last quarter.
- Volume-related sales growth occurred across each of WDFC's geographies. The company estimates that approximately 65% of its constant currency revenue increase stemmed from volume gains, underpinning healthy demand and not just inflation-driven growth.
- In total, revenue climbed by 12.4% yr/yr to $140.4 mln, led by WDFC's EIMEA segment (Europe, India, Middle East, Africa), which headed 20% higher. Meanwhile, the Americas (United States, Latin America, and Canada) and Asia-Pacific (including Australia and China) recorded sales growth of +10% and +6%, respectively.
- Within WDFC's markets, there were a few items worth mentioning. WDFC's core maintenance products sustained robust demand from the last quarter across the Americas. In Europe, volumes did slip as customers continued adjusting to price hikes. Meanwhile, in Australia, sales turned positive after a double-digit decline in Q4 (Aug), while demand in China remained buoyant.
- WDFC's top-line gains are flowing to its bottom line, which, combined with a 240 bp improvement in gross margins yr/yr, led to a 25.4% expansion in the company's EPS to $1.28.
- Management briefly updated its homecare and cleaning business, which comprised just 6% of total sales in Q1. WDFC is undergoing a strategic review regarding the future of this business. Given how its maintenance products represent much more favorable margins, it would not be shocking to see WDFC offload this division in the near term.
- Looking ahead, WDFC reiterated its FY24 (Aug) outlook, continuing to project EPS of $4.78-5.15 and +6-12% net sales growth yr/yr. Management again discussed its strategic longer-term framework this quarter, reiterating its commitment to building brand awareness, penetrating additional markets, and accelerating premiumization. WDFC has made excellent progress on these fronts, boasting strong growth of 49% in the DACH region (Germany, Austria, and Switzerland), 23% in Mexico, 42% in France, and 59% across Spain and Portugal. Meanwhile, WDFC's decent margin expansion in Q1 showcases its premiumization focus.
WDFC faced several setbacks over the past two years, exacerbated by relentless supply chain hiccups and uneven post-pandemic recoveries across its global markets. However, underneath the problems was sound end-market demand. With many headwinds that plagued WDFC since late 2021 now beginning to ease, a new wind is propelling the company forward, built on top of resilient demand dynamics, boding well for WDFC to make further in-roads on its strategic pillars in 2024.
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