Market Snapshot
briefing.com
| Dow | 37468.61 | +201.94 | (0.54%) | | Nasdaq | 15055.65 | +200.03 | (1.35%) | | SP 500 | 4780.94 | +41.73 | (0.88%) | | 10-yr Note | -24/32 | 4.14 |
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| | NYSE | Adv 1528 | Dec 1225 | Vol 912 mln | | Nasdaq | Adv 2191 | Dec 2019 | Vol 5.6 bln |
Industry Watch
| Strong: Information Technology, Communication Services, Industrials, Consumer Discretionary, Materials, Financials |
| | Weak: Utilities, Real Estate, Energy, Consumer Staples |
Moving the Market
-- Relative strength in mega cap stocks; AAPL upgraded to Buy from Neutral at Bank of America
-- Strength in semiconductor stocks after TSMC (TSM) reported earnings
-- Digesting another batch of strong economic data that does not bode well for the market's eager rate cut view
-- Resilience to early selling efforts acting as its own upside catalyst
| Closing Summary
18-Jan-24 16:30 ET
Dow +201.94 at 37468.61, Nasdaq +200.03 at 15055.65, S&P +41.73 at 4780.94
[BRIEFING.COM] The stock market had a solid showing today. Mega cap stocks and semiconductor-related names had an outsized impact on index performance after Apple (AAPL 188.63, +5.95, +3.3%) was upgraded to Buy from Neutral at Bank of America and Taiwan Semiconductor Manufacturing (TSM 113.03, +10.08, +9.8%) reported pleasing earnings results.
The Vanguard Mega Cap Growth ETF (MGK) gained 1.4% and the PHLX Semiconductor Index jumped 3.4%. The broader market, however, was showing signs of softness in the early going. The Invesco S&P 500 Equal Weight ETF (RSP) was down 0.4% at its low of the day, but closed with a 0.5% gain after many stocks rallied in the afternoon trade.
Resilience to early selling efforts, despite a jump in the 10-yr yield and more strong economic data that does not bode well for the market's eager rate cut view, acted as its own upside catalyst for the afternoon rally. There was also some buying on weakness in the afternoon trade following a soft start to the week. With today's gains, the S&P 500 and Nasdaq Composite are up 0.2% and 0.3%, respectively, for the year.
Seven of the 11 S&P 500 sectors closed with a gain and three of them climbed more than 1.0%. The heavily-weighted information technology sector (+2.0%) was the top performer thanks to strength in its mega cap and semiconductor constituents.
The financial sector closed with a 0.2% gain after some components reported earnings results since yesterday's close. Namely, Discover Financial Services (DFS 97.00, -11.74, -10.8%) struggled under selling pressure after disappointing with quarterly results. KeyCorp (KEY 13.20, -0.64, -4.6%), Truist (TFC 35.98, +0.20, +0.6%), and M&T Bank (MTB 132.88, +1.92, +1.5%) are also trading down after reporting earnings.
Meanwhile, the utilities (-1.1%) and real estate (-0.6%) sectors saw the largest declines, pressured by another move higher in the 10-yr note yield.
The 2-yr note yield fell two basis points to 4.34% and the 10-yr note yield settled four basis points higher at 4.14%. This price action was partially related to a batch of strong economic data this morning, including housing starts for December and initial jobless claims that both exceeded expectations.
- S&P 500: +0.2%
- Nasdaq Composite: +0.3%
- Dow Jones Industrial Average: -0.6%
- S&P Midcap 400: -2.4%
- Russell 2000: -5.1%
Reviewing today's economic data:
- Weekly Initial Claims 187K (Briefing.com consensus 206K); Prior was revised to 203K from 202K; Weekly Continuing Claims 1.806 mln; Prior was revised to 1.832 mln from 1.834 mln
- The key takeaway from the report is that the labor market is still not showing sudden signs of stress, which could encourage Fed officials to maintain their hawkish rhetoric with respect to rate cut expectations.
- December Housing Starts 1.460 mln (Briefing.com consensus 1.417 mln); Prior was revised to 1.525 mln from 1.560 mln; December Building Permits 1.495 mln (Briefing.com consensus 1.478 mln); Prior was revised to 1.467 mln from 1.460 mln
- The key takeaway from the report is that single-unit starts decreased 8.6% month-over-month after a solid rise in November, which is a negative for a market that remains constrained by low inventory of existing homes for sale.
- January Philadelphia Fed Manufacturing Index -10.6 (Briefing.com consensus -8.0); Prior was revised to -12.8 from -10.5
Friday's economic calendar features:
- 10:00 ET: December Existing Home Sales (Briefing.com consensus 3.80 mln; prior 3.82 mln) and preliminary January University of Michigan Consumer Sentiment (Briefing.com consensus 68.8; prior 69.7)
- 16:00 ET: November net Long-Term TIC Flows (prior $3.3 bln)
Market climbs into the close; Early resilience to selling acting as catalyst
18-Jan-24 15:35 ET
Dow +212.50 at 37479.17, Nasdaq +195.73 at 15051.35, S&P +40.45 at 4779.66
[BRIEFING.COM] The market continues to press higher. Early resilience to selling efforts has acted as its own upside catalyst.
The 2-yr note yield fell two basis points to 4.34% and the 10-yr note yield settled four basis points higher at 4.14%.
Looking ahead, PPG Industries (PPG), J.B. Hunt Transport (JBHT), F.N.B. Corp (FNB), and Bank OZK (OZK) will report earnings after the close. Dow component Travelers (TRV) reports tomorrow morning, along with SLB (SLB), State Street (STT), Fifth Third (FITB), Ally Financial (ALLY), Regions Fincl (RF), Huntington Banc (HBAN), and Comerica (CMA).
A-D line skews negative, but market trades up
18-Jan-24 15:00 ET
Dow +141.95 at 37408.62, Nasdaq +188.36 at 15043.98, S&P +34.55 at 4773.76
[BRIEFING.COM] The three major indices took a quick dip recently before returning to session highs.
Interestingly, the A-D line in negative, but all the major indices are trading up and the Invesco S&P 500 Equal Weight ETF (RSP) sports a 0.2% gain. Decliners lead advancers by an 11-to-10 margin at the NYSE and at the Nasdaq.
Five of the S&P 500 sectors are trading up while six trade down. The information technology (+2.0%), communication services (+1.5%), and industrial (+1.2%) sectors are all up more than 1.0% while the utilities sector (-1.4%) sports the largest decline.
American Airlines, Caesars among top S&P 500 performers on Thursday
18-Jan-24 14:30 ET
Dow +119.13 at 37385.80, Nasdaq +172.26 at 15027.88, S&P +30.44 at 4769.65
[BRIEFING.COM] The broader market continued to push to session highs over the prior half hour, the S&P 500 (+0.64%) around HoDs.
Elsewhere, S&P 500 constituents American Airlines (AAL 13.62, +0.69, +5.34%), Caesars Entertainment (CZR 46.28, +2.09, +4.73%), and KLA Corporation (KLAC 588.58, +26.08, +4.64%) dot the top of today's standings. CZR is among today's best gainers despite guiding Q4 revs below consensus this morning, while KLAC follows broader strength in semi equipment stocks after Taiwan Semi's (TSM 110.98, +8.06, +7.80%) Q4 beat.
Meanwhile, CVS Health (CVS 73.81, -3.18, -4.13%) is near the bottom of the average, dragged lower by peer Humana's (HUM 405.02, -42.74, -9.55%) guidance cut.
Gold shines as haven demand rises on another chapter of Middle East conflict
18-Jan-24 14:00 ET
Dow +27.10 at 37293.77, Nasdaq +114.97 at 14970.59, S&P +16.94 at 4756.15
[BRIEFING.COM] All three major averages are now positive, the Dow Jones Industrial Average (+0.07%) having cemented a rally into the green over the prior half hour. The tech-heavy Nasdaq Composite (+0.77%) still holds the lead, though.
Gold futures settled $15.10 higher (+0.8%) to $2,021.60/oz, catching a safe-haven bid after further geopolitical tensions in the Middle East owing to Pakistan's airstrikes in Iran.
Meanwhile, the U.S. Dollar Index is up a little less than +0.1% to $103.52.
Page One
Last Updated: 18-Jan-24 09:07 ET | Archive
Mega cap bounce supports broader market
The S&P 500 futures are up 14 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 127 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are down 81 points and are trading 0.2% below fair value.
Pre-open gains in mega cap stocks have boosted futures tied to the S&P 500 and Nasdaq 100 after the market started the week with losses, predicated on the notion that the Fed may not cut rates as soon, or as much, as the market hoped. This rethink was partially related to strong economic data this week, so market participants paid close attention to this morning's release of the weekly jobless claims report and December Housing Starts and Building Permits at 8:30 ET.
Initial jobless claims for the week ending January 13 decreased by 16,000 from last week's revised rate of 203,000 (from 202,000) to 187,000 (Briefing.com consensus 206,000). Continuing jobless claims for the week ending January 6 decreased by 26,000 from last week's revised rate of 1.832 mln (from 1.834 mln) to 1.806 million.
The key takeaway from the report is that the labor market is still not showing sudden signs of stress, which could encourage Fed officials to maintain their hawkish rhetoric with respect to rate cut expectations.
Total housing starts decreased 4.3% month-over-month in December to a seasonally adjusted annual rate of 1.460 million units (Briefing.com consensus 1.417 million) while building permits increased 1.9% month-over-month to a seasonally adjusted annual rate of 1.495 million (Briefing.com consensus 1.478 million).
The key takeaway from the report is that single-unit starts decreased 8.6% month-over-month after a solid rise in November, which is a negative for a market that remains constrained by low inventory of existing homes for sale.
Also, the Philadelphia Fed Manufacturing Index rose to -10.6 in January (Briefing.com consensus -8.0) from a revised -12.8 in December (from -10.5).
Treasury yields turned higher in response to the data. The 2-yr note yield, at 4.33% just before 8:30 ET, is at 4.35% now, which is down one basis points from yesterday. The 10-yr note yield, at 4.09% before the data, sits at 4.12%, which is up one basis points from yesterday.
Separately, the latest batch of earnings news has received mixed reactions. Taiwan Semiconductor Manufacturing Co. (TSM) is a winning standout this morning after beating earnings estimates while Discover Financial Services (DFS) shows a big pre-open loss after its earnings report.
Discover Financial Services gets declined as Q4 results spark outsized concerns today (DFS)
Investors decline Discover Financial Services' (DFS -10%) Q4 earnings miss, increasing delinquency rates, and a sharp uptick in its provision expense. Shares of the credit card company are erasing much of the past two months of gains. It is worth pointing out that Q4 marks the final quarter before incoming CEO Michael Rhodes replaces interim CEO John Owen.
- There were still several positives from Q4. DFS grew its top line by 13% yr/yr to $4.2 bln, reflecting a 15% jump in total loan growth partially offset by a 29 bp compression in net interest margin (NIM). Meanwhile, DFS's Card business increased by 13% yr/yr from the prior year's new account growth and about a 110 bp decline in the payment rate, now just 100 bps above 2019 levels. The declining payment rate also helped spur a 23% uptick in personal loans. Additionally, average deposits climbed by 21% yr/yr and 4% sequentially.
- What is generating such outsized concern today? The 30+ day delinquency rate across DFS's total loan portfolio increased again in Q4, moving 115 bps higher yr/yr and 39 bps sequentially to 3.45%, reflecting ongoing stress among customers.
- On the plus side, the sequential increase is below last quarter's, underpinning a slowing rate of delinquency formation. CFO John Greene commented that given real wage growth, he believes delinquency formation will continue to slow in 2024 and into 2025.
- Furthermore, the provision for credit losses surged by over $1.0 bln yr/yr to $1.92 bln. Combined with a continuously increasing total net charge-off rate of 198 bps yr/yr to 4.11% in Q4, this put outsized pressure on DFS's bottom line. The spike across both metrics could signal troubles ahead for DFS's competitors.
- DFS added that charge-offs may have spiked but were still at the lower end of its expected range.
- DFS's FY24 outlook was not very reassuring. The company expects flat loan growth yr/yr after a 15% jump in FY23, a slight downturn in its NIM to 10.5-10.8% from 11.1% in FY23, and net charge-offs to continue bubbling to 4.9-5.3% from 3.4% in FY23. Management anticipates four interest rate cuts of 25 bps this year, two more than it forecasted last month. While this can help loan growth, it does put further pressure on DFS's NIM.
Today's pessimistic response is almost exclusively targeted at DFS, with competitors Visa (V) and Mastercard (MA) holding around their flatlines, while American Express (AXP) edges modestly lower. DFS endured a similar sell-off following its Q3 earnings report in October, with action across its peer group resembling today's contrasting sentiment. At the time, we outlined several reasons why DFS's rivals were not mirroring its turn lower, including a more affluent client base for AXP and less internal strife across V and MA. Still, while DFS's Q4 report is triggering a wave of sellers in its shares today, it could have ripple effects ahead of its peers' Q4 reports slated for the next two weeks.
Taiwan Semi sees chip recovery accelerating in 2024, fueling rally for semiconductor stocks (TSM)
Taiwan Semiconductor Manufacturing (TSM), the world's largest contract chip manufacturer, beat Q4 EPS expectations while also forecasting FY24 revenue to grow in the low-to-mid 20% range, signaling a healthy rebound for a semiconductor industry that continues to emerge from a deep inventory glut. The company's encouraging outlook is giving the broader semiconductor space a shot in the arm this morning, but NVIDIA (NVDA), Advanced Micro Devices (AMD), and Qualcomm (QCOM) -- each of which are TSM customers -- are displaying notable strength.
- A key driver underlying TSM's improving results and bullish outlook is the ramp up of its 3-nanometer (N3) chips which help power smartphones as well as high-performance computing (HPC), such as artificial intelligence (AI).
- In Q4, N3 chips accounted for 15% of TSM's total wafer revenue, compared to virtually zero in FY22. As AI-based technologies and applications expand in 2024, TSM expects revenue from its N3 technology to more than triple this year to account for a mid-teens percentage of total revenue.
- However, there is a downside to this explosion of growth. Specifically, as N3 chips become a larger portion of total revenue, gross margin is expected to take a hit -- at least in the intermediate term. In FY24,
- TSM expects N3 to dilute gross margin by 3-4 percentage points, but the company continues to forecast long-term gross margin of 53% or better. An improved utilization rate due to stronger demand will help to offset the N3 headwind.
- Looking a bit further down the road, TSM says that its 2-nanometer (N2) technology development is progressing well with volume production on track to begin in 2025. Encouragingly, TSM added that it's seeing a much higher level of customer interest for N2 as compared to N3 for both smartphone and HPC applications.
- While TSM is expanding its capacity by constructing two new facilities in Arizona, the company still expects capital expenditures to remain roughly flat yr/yr in FY24 at $28-$32 bln. That is partly due to a delay in the construction of one of those two facilities with volume production now slated for 2027-2028 instead of the original forecast of 2026.
Overall, the main story is that TSM's brighter outlook for FY24 signals a healthy recovery for the company and for the semiconductor space, primarily driven by a more balanced supply and demand environment and rising demand from AI-based technologies. TSM did remind market participants that macroeconomic and geopolitical uncertainties remain and could weigh on market demand, but the company still is expecting a stronger year in FY24.
Alcoa posts another loss, but also provided a measure of optimism heading into 2024 (AA)
Alcoa (AA +1%) is trading higher following its Q4 earnings report last night. As expected, the aluminum giant reported its sixth consecutive quarter of losses. However, its $(0.56) adjusted loss was a good bit narrower than expected and was a notable improvement from its $(1.14) loss in Q3. Revenue fell 2.6% yr/yr to $2.60 bln, which was in-line.
- Of note, this was the first full earnings report since new CEO William Oplinger abruptly took the helm in September. The aluminum industry has been hurt by weak prices and weak demand. Alcoa has also been impacted by operational issues in Australia that has hurt profits.
- There was some good news on the operational front. On the Q3 call, the new CEO said Alcoa's top priority will be gaining approvals for bauxite mining in Western Australia and that happened in Q4. In addition, Alcoa began the restart of additional smelting capacity at Warrick in Indiana. Alcoa also has initiated engagement with Spanish stakeholders regarding a path forward for the San Ciprián complex.
- Turning to the Q4 results, Alcoa benefitted from higher aluminum realized prices, but lower shipments for both alumina and aluminum more than offset that benefit. Adjusted EBITDA, excluding items, in Q4 increased to $89 mln, up 207% yr/yr and 27% sequentially. Improved raw material costs and shipment volumes offset energy and price mix challenges.
- Alcoa noted that alumina prices rallied at the end of Q4, driven by announced Chinese refinery curtailments, and have continued to increase in January. In aluminum, for 2024, Alcoa expects the balance to slight surplus market, depending on the speed of demand recovery during the year. On the supply side, there are a few announced restarts or new projects, and China has held to its 45-mln-ton capacity cap.
- What stood out to us on the call was Alcoa saying that demand has stabilized in North America and Europe, and Alcoa sees the potential for a moderate recovery throughout the year. In China, Alcoa expects government stimulus will prompt demand growth. Globally, growth in aluminum-intensive EVs and renewable power infrastructure will continue to support this positive trend. Alcoa also sees demand improving in packaging as inventory destocking has been largely accomplished.
Overall, we think investors are reacting to the narrower loss than expected. More importantly, investors liked hearing that demand has stabilized in North America and Europe. Plus the talk about a possible moderate recovery throughout the year was a notable highlight. This was some pretty positive commentary from Alcoa, which has really been struggling. It makes us think the change at CEO was the right move and provides a measure of optimism heading into 2024.
Fastenal pushed to all-time highs on accelerating growth in Q4 aided by new Onsite locations (FAST)
Fastenal (FAST +7%), a prominent fasteners and industrial and construction-related supplies distributor, squeaked out beats on its top and bottom lines in Q4, propelling its shares to all-time highs today. While the stock has been steadily moving higher in recent trading, it experienced a swift downturn to start the year, likely due to a combination of profit-taking after reaching all-time highs toward the end of December and some light concerns over industrial and construction activity in 2024. However, after a few of its peers expressed relative optimism over these end markets in the past several days, investors began growing warmer toward FAST, with its Q4 report affirming their brewing enthusiasm.
- Net sales grew by 3.7% yr/yr to $1.76 bln, an improvement over the +2.4% posted last quarter, fueled by growth at FAST's Onsite locations. Meanwhile, pricing contributed an estimated 350-380 bps to overall growth. We mentioned ahead of FAST's Q4 report that the company's expanding Onsite network would likely be the reason behind the company's outperformance in the quarter and will likely remain as such over the next several quarters.
- Onsite locations provide an expanding economic moat for FAST as it keeps customers from branching out to competitors for supplies, given that FAST's products are on-location and consistently replenished.
- FAST opened 58 new Onsite locations in Q4, bringing its FY23 total to 326 additional signings, slightly below its 350 target. Management noted that the goal for FY24 is 375-400 new locations.
- FAST continued experiencing a divergence in the performance of its fastener versus non-fastener products in Q4, which it chalked up to three factors. For one, fasteners are typically used toward the end of a project rather than ongoing maintenance, resulting in greater susceptibility to periods of relatively weak industrial production. Secondly, fastener prices have decelerated rapidly compared to non-fastener products. And finally, improved holiday-related sales increased demand for FAST's safety products.
- FAST's pricing actions, combined with moderating product costs, kept its margin profile intact. The company expanded gross margins by 20 bps yr/yr to 45.5%, modestly improved from the flat growth in Q3. Still, it aided FAST's bottom-line growth of 7.0% yr/yr to $0.46 per share, accelerating from the +4.0% growth in Q3.
- Formal guidance was not provided, which is typical for FAST. Instead, management offered brief comments on what it sees across its verticals. Sluggish demand remains an underlying issue. For example, inventories fell by 10.3% in Q4, reflecting slower customer demand. However, FAST stated it is constructive about 2024, given easier comps, shapely channel inventories, and generally favorable customer outlooks.
A modestly better-than-expected Q4 report was all that investors were after to spring FAST right past its all-time highs set just last month. Confidence in growth across the industrial and construction markets is simmering as interest rate cuts stay on the horizon, potentially boosting FAST's financial growth this year. While this development could occur this year, the stock may be getting ahead of itself, pricing in a resulting boom in end-market activity, which remains uncertain. Therefore, we urge caution at current price levels, as any dip in demand could trigger a quick downturn.
Calavo Growers ripe for selloff after issuing soft sales guidance, delaying earnings release (CVGW)
Calavo Growers (CVGW), a leading provider of avocados and fresh-cut fruit, vegetables, and prepared food, is ripe for a sell-off today after postponing the release of its Q4 results last night while also issuing downside FY23 revenue guidance of $972 mln. The cause for the earnings and financial statement filing delay is due to findings from the Audit Committee that merit additional investigation, particularly as it relates to CVGW's operations in Mexico. While the company does not believe that any matters under investigation affect any previously issued financial statements, this development shakes investors' confidence as it pertains to CVGW's internal controls.
To complete the busy news morning, CVGW also announced that it has signed a non-binding letter of intent to evaluate a sale of its Fresh Cut business with F&S Fresh Foods. The total transaction value is estimated to be $100 mln with the proceeds going towards debt reduction and to shareholder return actions.
- Since Lee Cole returned to his CEO post last April, his priority has centered on growing and improving the profitability of CVGW's core avocado and guacamole business. Divesting the Fresh Cut business, which has struggled recently, aligns with this strategy and it should help to improve the company's financial performance.
- In Q3, the Prepared Segment, which includes Fresh Cut, saw net sales decline by 14% to $115.8 mln, while overall gross profit decreased by $3.1 mln yr/yr to $3.7 mln. The main driver for the gross profit decline was an $8.1 mln drop in the Fresh Cut division as softer volume and higher input costs pressured its results.
- Although CVGW didn't offer specifics behind its weaker-than-expected FY23 guidance, it's reasonable to assume that Fresh Cut remained a laggard, especially since CVGW is willing to part ways with the business.
- The avocado business, on the other hand, has performed well, even in the face of sharply lower prices. More specifically, the average selling price of avocados in the Grown segment plunged by 38% yr/yr in Q3, but Grown gross profit still increased by $9.6 mln to $21.4 mln. The company credited an enhanced focus on operational execution and customer service as key factors behind the improvement.
Clearly, the downside FY23 revenue guidance, combined with the revelation of some kind of error or issue related to CVGW's 10-K filing, is front and center in investors' minds today. However, we do believe that the decision to divest the Fresh Cuts business will bear fruit down the road as SG&A costs and long-term debt is reduced, while the company looks to maximize the profit potential of its avocado business.
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