Market Snapshot
| Dow | 37983.24 | -475.84 | (-1.24%) | | Nasdaq | 16175.10 | -267.10 | (-1.62%) | | SP 500 | 5123.41 | -75.65 | (-1.46%) | | 10-yr Note | +29/32 | 4.50 |
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| | NYSE | Adv 451 | Dec 2314 | Vol 934 mln | | Nasdaq | Adv 976 | Dec 3292 | Vol 4.5 bln |
Industry Watch
| Strong: -- |
| | Weak: Financials, Consumer Discretionary, Real Estate, Health Care, Information Technology |
Moving the Market
-- Geopolitical worries fueling retreat in stocks, safe-haven buying in Treasuries, jump in oil prices
-- Outsized losses in semiconductor names
-- Weakness in some mega cap stocks
-- Worries about global growth after weak data from China
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Closing Summary
12-Apr-24 16:25 ET
Dow -475.84 at 37983.24, Nasdaq -267.10 at 16175.10, S&P -75.65 at 5123.41
[BRIEFING.COM] The stock market finished the week with solid losses. The Dow Jones Industrial Average logged a 1.2% decline, the S&P 500 fell 1.5%, the Nasdaq Composite slid 1.6%, and the Russell 2000 closed with a 1.9% loss.
Heightened geopolitical uncertainty in front of a weekend contributed to today's sell-off. Concerns were related to reports that Iran could soon attack Israel, which also sent oil prices higher ($85.58/bbl, +0.58, +0.7%) due to worries about supply disruptions.
Treasuries also settled with solid gains today in response to the geopolitical angst, but still registered declines on the week as participants recalibrated rate cut expectations. The 2-yr note yield fell nine basis points today, and jumped 15 this week, to 4.88%. The 10-yr note yield declined eight basis points today, and climbed 12 this week, to 4.50%.
Another sticking point for investors today was global growth concerns after China reported weaker-than-expected exports (-7.5% yr/yr) and imports (-1.9% yr/yr) for March.
Just about everything participated in the broad retreat. The equal-weighted S&P 500 declined 1.6%. Weakness in the semiconductor space had an outsized impact on index losses, though, following news that Chinese telecom companies have been ordered to replace U.S.-made processors in their equipment by 2027. The PHLX Semiconductor Index (SOX) slid 3.3%.
All 11 S&P 500 sectors registered declines ranging from 0.7% (utilities) to 1.8% (materials).
The Q1 earnings reporting period started on a weak note today after JPMorgan Chase (JPM 182.79, -12.64, -6.5%) CEO Jamie Dimon made some cautious-sounding macro comments and the bank left its net interest income guidance for 2024 unchanged from its prior view. Citigroup (C 59.68, -1.03, -1.7%) and Wells Fargo (WFC 56.47, -0.22, -0.4%) also logged declines after their earnings results.
- Nasdaq Composite: +7.4% YTD
- S&P 500:+7.8% YTD
- S&P Midcap 400: +4.3% YTD
- Dow Jones Industrial Average: +0.8% YTD
- Russell 2000: -1.2% YTD
Reviewing today's economic data:
- March Import Prices 0.4% --- prior 0.3%
- March Import Prices ex-oil 0.1% ---- prior 0.2%
- March Export Prices 0.3% --- prior revised to 0.7% from 0.8%
- March Export Prices Ex-Ag 0.4% --- prior revised to 0.6% from 0.8%
- The preliminary April University of Michigan Index of Consumer Sentiment checked in at 77.9 (Briefing.com consensus 78.8) versus the final reading of 79.4 for March. In the same period a year ago, the index stood at 63.7.
- The key takeaway from the report is the uptick in inflation expectations, which follows form with the larger-than-expected increase in the March Consumer Price Index and the view from various Fed officials that stickier inflation readings mean the Fed can be patient before cutting rates.
Looking ahead, Monday's economic calendar features: March Retail Sales (prior 0.6%) and Retail Sales ex-auto (prior 0.3%) at 8:30 ET; February Business Inventories (prior 0.0%) and April NAHB Housing Market Index (prior 51) at 10:00 ET.
Treasuries settle with gains
12-Apr-24 15:40 ET
Dow -553.56 at 37905.52, Nasdaq -291.32 at 16150.88, S&P -84.88 at 5114.18
[BRIEFING.COM] The major indices are little changed over the last half hour.
Treasuries settled with solid gains today, but declined on the week. The 2-yr note yield fell nine basis points today, and jumped 15 this week, to 4.88%. The 10-yr note yield declined eight basis points today, and climbed 12 this week, to 4.50%.
Looking ahead, Monday's economic calendar features: March Retail Sales (prior 0.6%) and Retail Sales ex-auto (prior 0.3%) at 8:30 ET; February Business Inventories (prior 0.0%) and April NAHB Housing Market Index (prior 51) at 10:00 ET.
Semiconductor stocks lag; Atlanta Fed President says no rush to cut rates
12-Apr-24 15:05 ET
Dow -545.46 at 37913.62, Nasdaq -302.23 at 16139.97, S&P -87.45 at 5111.61
[BRIEFING.COM] The stock market is trailing sideways near session lows. Small cap stocks are underperforming larger peers, leading to a 2.1% decline in the Russell 2000.
A short time ago, Atlanta Fed President Bostic (FOMC voter) gave a speech and said he is not in a hurry to cut rates. Stocks were at session lows ahead of the acknowledgement from Mr. Bostic.
Semiconductor stocks are weighing down the broader market. The PHLX Semiconductor Index (SOX) is down 3.3% after news that Chinese telecom companies have been ordered to replace U.S.-made processors in their equipment by 2027.
Arista falls in S&P 500 after Rosenblatt downgrade; Progressive outperforms on earnings beat
12-Apr-24 14:30 ET
Dow -493.39 at 37965.69, Nasdaq -272.26 at 16169.94, S&P -76.49 at 5122.57
[BRIEFING.COM] The S&P 500 (-1.47%) is in second place on Friday afternoon, toying with the 5125 level.
Elsewhere, S&P 500 constituents Arista Networks (ANET 271.04, -25.54, -8.61%), Zoetis (ZTS 149.35, -13.38, -8.22%), and ON Semiconductor (ON 66.94, -3.66, -5.18%) dot the bottom of the average. ANET falls after Rosenblatt downgraded their recommendation on the stock two notches to "Sell", while ZTS was the subject of a negative WSJ piece about side effects of its arthritis drugs on pets, and ON caught a negative Mizuho note related to pricing, demand, and inventories.
Meanwhile, Progressive (PGR 205.62, +3.36, +1.66%) is near the top of the standings following this morning's Q1 earnings .beat
Gold adds to weekly gains with modestly higher Friday tally
12-Apr-24 14:00 ET
Dow -518.54 at 37940.54, Nasdaq -280.16 at 16162.04, S&P -79.35 at 5119.71
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-1.70%) holds the "lead" among the major averages with the worst losses, down about 280 points.
Gold futures settled $1.40 higher (+0.1%) to $2,374.10/oz, up +1.2% on the week, as haven demand surged amidst ongoing geopolitical tensions as well as recent disappointing domestic economic data.
Meanwhile, the U.S. Dollar Index is now up +0.6% to $105.95.
V.F. Corp sinks to new lows on a downgrade today; becoming a compelling turnaround play (VFC)
V.F. Corp (VFC -8%) is in need of stitches after being knocked down once again today with a downgrade to "Neutral" from "Outperform" at Exane BNP Paribas, the second downgrade this year. Shares of the outdoor apparel retailer, operating brands The North Face, Timberland, and others, have now sunk by over -30% on the year, reaching 2009 levels.
What has led to such aversion to VFC shares lately? Briefing.com notes that the most obvious issue facing VFC is inflation, weighing heavily on discretionary goods. However, that does not explain why others operating in similar spaces, like Deckers Outdoor (DECK), have been on a tear this year. VFC struggled to overcome a sharp drawdown in consumer demand during 2022, with its former CEO departing unexpectedly at the end of that year. Inventories were piling up, particularly in VFC's Vans brand, forcing retailers to slash orders. Promotions were not generating much demand, and VFC ultimately withdrew its FY24 (Mar) outlook in February and cut its dividend by 70%.
However, despite such calamity, there are reasons not to hastily discount VFC's turnaround potential.
- Newly-minted CEO Bracken Darrel has a solid turnaround-related past, revitalizing brands Old Spice and Logitech. While apparel is vastly different from those two brands, Old Spice and Logitech were not very similar either, and yet Mr. Darrel's turnaround formula still managed to succeed. What those brands shared was widespread recognition. VFC's brands are no different -- plenty of consumers know the advantages of VFC's products. It is up to the company to market them appropriately and offer them at competitively attractive prices.
- On that note, VFC already has a strategy for turning around Vans, which is off to a healthy start outside North America. During DecQ, Vans revenue grew by 7% in EMEA but fell by 13% in North America. Management attributed the disparity to a more precise growth strategy and more vigorous marketplace execution in EMEA, which it will implement domestically.
- Alongside spurring product demand, Mr. Darrel's turnaround strategy involves aggressive cost-cutting, targeting $300 mln in annual savings, which management noted was on track to achieve in February. Slicing its dividend considerably also aligned with the company's actions toward cutting costs, reducing debt, and preserving cash flow, which it anticipates will reach $600 mln in FY24.
- Divesting of some of its lesser-known brands, such as Timberland, Supreme, and Dickies, is not out of bounds. CFO Matthew Puckett mentioned that, in February, the company began the marketing process to dispose of certain assets over the next few quarters, which could result in the divestment of any brands. Realigning its focus on just The North Face and Vans would likely be a solid move to further its turnaround plans.
Following weak Q3 (Dec) results in February, we noted that VFC's turnaround path is far from smooth. However, with shares slipping by an additional 20% since, VFC is becoming a compelling comeback play. Given the extent of its past struggles, volatility will likely remain elevated. Still, we think VFC is worth a second look.
Citigroup's Q1 results prompt a muted reaction; business performance remained relatively mixed (C)
With the comprehensive organization changes, which included a significant headcount reduction, completed, Citigroup (C -1%) delivered a modestly improved quarterly earnings report in Q1 compared to the rather messy results from Q4. The prominent investment and financial services firm exceeded bottom-line estimates by double digits and toppled revenue expectations, reversing a surprising miss last quarter. However, today's muted reaction reflects a stock already anticipating many of the highlights from Q1, running around +14% higher on the year and over +55% since October's lows.
- Citigroup's sweeping business overhaul centered on cost-cutting via streamlining operations, reducing employee count, and divesting specific businesses across various markets. As a result, the company has consistently cleared analyst earnings estimates handily for three consecutive quarters, registering EPS of $1.58 in Q1. However, on a yr/yr basis, Citigroup's earnings have declined for the previous two quarters, tempering outsized enthusiasm over its business transformation.
- Similarly, revenue fell for the second quarter running, edging 1.6% lower yr/yr in Q1 to $21.10 bln. Like Q4, Citigroup's top line was hindered by divestiture-related impacts (mainly selling its India consumer business in the prior-year period), which totaled $1.0 bln in Q1. If not for this impact, Citigroup's revs would have been over 3% higher in the quarter, supported by Banking, U.S. Personal Banking (USPB), and Services.
- Citigroup's Banking division accelerated in Q1, posting revenue growth of 49% yr/yr, driven largely by a 35% jump in Investment Banking as improved market sentiment led to growth in issuance activity. USPB growth mirrored last quarter's, improving by 10% yr/yr on an 8% jump in net interest income. Likewise, Services remained a star, expanding revs by 8% as Treasury and Trade Solutions maintained its upward momentum.
- Tugging against these upbeat numbers were Markets, which dropped by 7%, and Wealth, which slipped by 4%, an unchanged trend from Q4. Within Markets, equities tried to offset pronounced weakness in fixed income, which was fanned by the same headwinds as last quarter, including lower volatility in rates and currencies versus the year-ago period. The lower Wealth revs stemmed from lower deposit spreads and higher mortgage funding costs.
- Looking ahead to FY24, Citigroup left its targets unchanged, continuing to project revs of $80-81 bln and expenses of $53.5-53.8 bln when excluding the FDIC special assessment. Its medium-term goals were also no different from last quarter, such as +4-5% annualized revenue growth and an 11-12% return on tangible equity.
Overall, Citigroup's Q1 report was mostly already priced in. The market expected the company's business transformation to be finished during the quarter. Meanwhile, the disjointed performance among Citigroup's businesses mirrored that from Q4, albeit modestly improved. As such, the stock may not see a convincing move up or down over the near term, especially as investors digest a continuously uncertain macroeconomic environment.
JPMorgan Chase pulls back following Q1 results; commentary/guidance weighing on stock (JPM)
JPMorgan Chase (JPM -6%) is banking lower despite reporting Q1 EPS upside this morning. Revenue rose a healthy 9.3% yr/yr to $41.93 bln, which was better than expected. However, NII declined 4% sequentially, and as expected, NII ex. Markets declined 2% sequentially due to deposit margin compression and lower deposit balances, mostly in CCB. Chairman and CEO Jamie Dimon also made some cautious comments that appear to be weighing on the stock.
- In its Consumer & Community Banking (CCB) segment, revenue rose 7% yr/yr to $17.65 bln. Banking & Wealth Mgmt revenue was $10.3 bln, up 3%, or down 4% excluding First Republic. Home Lending revenue was the standout as it jumped 65% yr/yr to $1.2 bln, presumably as lower rates spurred some homeowners to act. Card Services & Auto revenue was $6.1 bln, up 8%. The provision for credit losses was $1.91 bln, reflecting net charge-offs of $1.9 bln and a net reserve build of $34 mln.
- In the Corporate & Investment Bank (CIB) segment, revenue was roughly flat yr/yr at $13.63 bln. Investment Banking revenue jumped 27% yr/yr to $2.0 bln. Markets & Securities Services revenue was $9.2 bln, down 2%. Commercial Banking (CB) revs jumped 13% yr/yr to $3.95 bln while Asset & Wealth Mgmt (AWM) revs rose 7% to $5.11 bln.
- In terms of Dimon's macro comments, he said that many economic indicators continue to be favorable. However, he described the global landscape as unsettling with wars and violence causing suffering. Geopolitical tensions are growing. He also cautioned that there seems to be a large number of persistent inflationary pressures, which may likely continue. Also, we have never truly experienced the full effect of quantitative tightening on this scale and nobody knows how these factors will play out.
- JPM was more positive on the state of the consumer. On the call, management noted that consumer customers are fine, unemployment is low, stock prices are up, home values up. Businesses are in pretty good shape, confidence is up, but we do not really know what will happen from macro issues. JPM says they are ok right now, but that does not mean customers will be down the road.
- Also, on the call, analysts seemed a bit worried about deposit migration, meaning customers are shifting money from checking & saving accounts into higher yielding CDs. JPM said that migration from checking continues and it expects ongoing migration and yield-seeking behavior as rates are higher these days.
Overall, investors are disappointed with JPM's Q1 results. The numbers were good and JPM's comments on the strength of the consumer were encouraging. However, NII trended lower, deposit migration continues and perhaps most troubling was some cautious comments from Dimon. Also, its total NII guidance for 2024 remains approximately $90 bln, which is being viewed as a negative by the market. This report makes us a bit more nervous ahead of several other banks set to report early next week.
Wells Fargo banks on lower costs to drive upside EPS, but loan demand drops under higher rates (WFC)
Along with JPMorgan Chase (JPM) and Citigroup (C), Wells Fargo (WFC) helped kick off the Q1 earnings season for the banking industry and while the company's earnings edged past expectations, its results were a mixed bag overall. Although higher interest rates were providing WFC and its banking peers with a boost in recent quarters due to their ability to charge more interest on loans, that tailwind largely fizzled out in Q1 as loan demand softened and as funding costs increased.
- This combination of slowing loan demand and higher funding costs caused net interest income to decline by 8% yr/yr to $12.2 bln. As interest rates climb higher, more customers are moving to higher yielding deposit products, which is pressuring net interest margin.
- Business wide, average loans fell by a little more than 2% yr/yr to $928.1 mln with auto loans in particular experiencing a sharp drop off, down 23% yr/yr. Given the soaring cost of car ownership -- the average new vehicle now costs about $57,000 -- the sharp decline in auto loan demand doesn't come as a major surprise.
- Higher mortgage rates negatively impacted home lending volume as well, but that was offset by a yr/yr increase in mortgage banking income from those higher rates. Overall, home lending earnings were steady yr/yr at $864 mln.
- Higher rates and macroeconomic headwinds are negativity effecting loan demand, but credit quality still isn't a major issue for WFC. Net charge-offs decreased by 8% qtr/qtr to $1.16 bln, while non-performing assets were down 2%, driven by lower commercial real estate nonaccrual loans, mainly in the office portfolio.
- Similar to the Consumer Banking business, the performance was mixed on the Corporate and Investment Banking side with total revenue inching higher by 2% yr/yr to $4.98 bln. On the positive side, investment banking rebounded nicely in Q1 as revenue jumped by 69% yr/yr to $474 mln, buoyed by the recovering IPO market. FICC (fixed income, currency, commodities) trading was another area of strength with revenue up 6% to $1.36 bln.
- However, treasury management and payments saw a sharp 13% revenue decline to $686 mln. Once again, higher rates were the culprit here as deposit costs increased.
- Looking beyond WFC's operating results, the company is still contending with regulations and restrictions placed upon it due to its fake accounts scandal from 2016. Until regulators find that WFC has resolved all of the issues resulting from that scandal, the company will have a $1.95 trillion asset cap placed on it. The good news for WFC is that the Office of the Comptroller of the Currency (OCC) announced the termination of a consent order it issued in 2016, although there are still eight consent orders remaining.
The main takeaway is that it was a mediocre quarter for WFC as high interest rates took a toll on loan demand, net interest income, and EPS, which fell by 2.4% yr/yr. In the wake of this week's hotter-than-expected CPI report, more of the same is expected in the upcoming quarters as hopes for interest rate cuts diminished. On that note, WFC reiterated its FY24 guidance for a 7-9% decline in net interest income.
General Mills' recent pullback offers attractive entry, especially after improved Q3 results (GIS)
Resting at number #39 on our most recent Yield Leaders rankings, General Mills' (GIS) recent pullback following Q3 (Feb) results last month offers a compelling entry point for investors seeking meaningful upside potential and an attractive annual dividend yield of 3.5%. The consumer packaged goods giant enjoyed uplifting trends during Q3, resulting in an initial pop in its share price.
However, we warned that a few lingering headwinds would likely cause the market to eventually fade the initial buoyant reaction. With shares now down around 10% from highs reached on Q3 numbers, tagging their 200-day moving average (67.14), we view now as a solid time to buy in, especially after food away-from-home prices have continued to edge higher while at-home prices have remained flat for the past two months following the March CPI report. In fact, over the trailing twelve months, at-home prices have edged just 1.2% higher compared to a 4.2% bump in the away-from-home category.
- One significant and stubborn headwind facing GIS is inflation, making the flat month/month uptick in at-home food prices so important. Higher prices have resulted in constant volume declines for GIS, delivering its 12th straight quarterly drop in Q3. However, although volumes dropped by 2 pts yr/yr in Q3, it was far better than the 4 pt decline in Q2 (Nov), especially considering that GIS was lapping flat growth in Q3 compared to a 12 pt dive in Q2. This notable improvement reflects healthy brand loyalty.
- Speaking of which, despite the substantially improved on-shelf availability of private labels, GIS's off-brand competitors have not materially enhanced their overall market share. Management remarked last month that private label shares are tracking essentially in-line with pre-pandemic levels. Private labels, which compete in only around 10% of the categories GIS is in, struggling to encroach on the company's position in an inflationary environment speaks to the competitive advantages GIS's brands hold over less expensive substitutes.
- Inflation also creates issues on the supply side, leading to GIS's Holistic Margin Management (HMM) cost-savings initiative. This program centers on finding areas across numerous product lines where costs could be cut, such as using just one lid color for multiple yogurt flavors. It also focuses on limiting supply chain disruptions. The result has been solid gross margin expansion recently, bumping the figure up by 100 bps yr/yr in Q3.
While GIS left its FY24 (May) financial goals unchanged last quarter, continuing to project organic net sales growth of negative 1% to flat yr/yr and adjusted EPS growth of +4-5% in constant currency, the final quarter of the year contained unfavorable yr/yr comparisons. Once GIS clears this headwind, it should be staring at sunnier skies, particularly given the improving performance in its two major segments, North America Retail and Pet, alongside healthy volume improvements and firm brand loyalty, which could provide meaningful upward momentum heading into FY25. As always, a 15-20% stop loss should be used.
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