Market Snapshot
| Dow | 37735.11 | -248.13 | (-0.65%) | | Nasdaq | 15885.02 | -290.08 | (-1.79%) | | SP 500 | 5061.82 | -61.59 | (-1.20%) | | 10-yr Note | -7/32 | 4.23 |
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| | NYSE | Adv 435 | Dec 2326 | Vol 967 mln | | Nasdaq | Adv 925 | Dec 3351 | Vol 4.9 bln |
Industry Watch
| Strong: -- |
| | Weak: Information Technology, Real Estate, Consumer Discretionary, Communication Services, Utilities, Energy |
Moving the Market
-- Initial buying activity related to relief that Iran's attacks on Israel didn't result in any economic damage
-- Early buying efforts faded with no specific catalyst, but selling accelerated in response to reports that Israel's Chief of Staff says "there will be a response" to Iran attacks
-- Ongoing consolidation efforts and technical selling after S&P 500 dropped below 50-day moving average
-- Jump in market rates after this morning's economic data |
Closing Summary
15-Apr-24 16:30 ET
Dow -248.13 at 37735.11, Nasdaq -290.08 at 15885.02, S&P -61.59 at 5061.82
[BRIEFING.COM] The stock market started the new week on an upbeat note. The major indices were all trading higher thanks to some buy-the-dip action following recent declines, which was helped by a sense of relief that Iran's attacks on Israel didn't result in any economic damage.
Initial buyer enthusiasm started to fade, however, shortly after the market opened. There was no specific news catalyst coinciding with the early deterioration that was likely driven by continued consolidation efforts. Selling picked up steam, though, in the afternoon trade following reports that Israel's Chief of Staff said "there will be a response" to Iran's attack on Israel.
The major indices ultimately settled at or near their worst levels of the session. The S&P 500, which dropped below 5,100 and its 50-day moving average (5,114), declined 1.2% today.
Geopolitical worries were not the only factor fueling the afternoon selling. Defense-related stocks didn't react much to the afternoon reports related to the Middle East. Lockheed Martin (LMT 453.08, +2.68, +0.6%), RTX (RTX 100.02, -0.08, -0.1%), and others were outperforming before the new developments. RTX slid below its prior close late in the session, settling near its low of the day.
Also, Treasury yields remain elevated, indicating that there wasn't a strong safe-haven trade in the Treasury market. The jump in market rates itself acted as a contributing factor to the afternoon pullback. The 2-yr note yield settled six basis points higher at 4.94% and the 10-yr note yield jumped 13 basis points to 4.63%.
The outsized impact of weakness in mega cap stocks and chipmakers also contributed to the index level deterioration. The Vanguard Mega Cap Growth ETF (MGK) fell 1.9% and the PHLX Semiconductor Index (SOX) logged a 1.4% loss.
All 11 S&P 500 sectors registered decline, reflecting a broad retreat. The financials sector logged a 0.5% decline despite sizable earnings-related gains in Goldman Sachs (GS 400.88, +11.39, +2.9%), M&T Bank (MTB 140.94, +6.38, +4.7%), and Charles Schwab (SCHW 71.23, +1.20, +1.7%).
- S&P 500:+6.1% YTD
- Nasdaq Composite: +5.8% YTD
- S&P Midcap 400: +3.1% YTD
- Dow Jones Industrial Average: +0.1% YTD
- Russell 2000: -2.5% YTD
Reviewing today's economic data:
- March Retail Sales 0.7% (Briefing.com consensus 0.4%); Prior was revised to 0.9% from 0.6%; March Retail Sales ex-auto 1.1% (Briefing.com consensus 0.5%); Prior was revised to 0.6% from 0.3%
- The key takeaway from the report is that the U.S. consumer, fortified by a strong job market, continued to spend freely in March in an act that will continue to support the soft landing/no landing outlook for the U.S. economy.
- April NY Fed Empire State Manufacturing -14.3 (Briefing.com consensus -6.0); Prior -20.9
- February Business Inventories 0.4% (Briefing.com consensus 0.3%); Prior 0.0%
- April NAHB Housing Market Index 51 (Briefing.com consensus 51); Prior 51
Separately, Tuesday's economic calendar features:
- 8:30 ET: March Housing Starts (Briefing.com consensus 1.485 mln; prior 1.521 mln) and Building Permits (Briefing.com consensus 1.518 mln; prior 1.518 mln)
- 9:15 ET: March Industrial Production (Briefing.com consensus 0.4%; prior 0.1%) and Capacity Utilization (Briefing.com consensus 78.6%; prior 78.3%)
Defense stocks did not react much to recent reports
15-Apr-24 15:40 ET
Dow -218.55 at 37764.69, Nasdaq -271.64 at 15903.46, S&P -58.56 at 5064.85
[BRIEFING.COM] The market is moving mostly sideways ahead of the close.
The pickup in selling activity this afternoon has been attributed to reports that Israel's Chief of Staff said "there will be a response" to Iran attacks. Defense stocks did not see a pickup in buying activity, though. Lockheed Martin (LMT 454.26, +3.86, +0.9%), RTX (RTX 100.32, +0.22, +0.2%), and others were trading up in front of the reports.
Separately, Tuesday's economic calendar features:
- 8:30 ET: March Housing Starts (Briefing.com consensus 1.485 mln; prior 1.521 mln) and Building Permits (Briefing.com consensus 1.518 mln; prior 1.518 mln)
- 9:15 ET: March Industrial Production (Briefing.com consensus 0.4%; prior 0.1%) and Capacity Utilization (Briefing.com consensus 78.6%; prior 78.3%)
Chipmakers and mega caps lead downside moves
15-Apr-24 15:00 ET
Dow -231.41 at 37751.83, Nasdaq -269.77 at 15905.33, S&P -56.79 at 5066.62
[BRIEFING.COM] The major indices hit fresh session lows over the last half hour.
Weakness in the mega cap and chipmaker space has weighed over the broader market, but many stocks are participating in downside moves. The PHLX Semiconductor Index (SOX) is down 1.4% and the Vanguard Mega Cap Growth ETF (MGK) is down 1.7%.
Meanwhile, the equal-weighted S&P 500 trades down 1.0%.
S&P 500 in second place again; Florida Medicaid contracts jostle managed care stocks
15-Apr-24 14:30 ET
Dow -229.75 at 37753.49, Nasdaq -250.26 at 15924.84, S&P -53.08 at 5070.33
[BRIEFING.COM] The S&P 500 (-1.04%) is in second place on Monday afternoon, down about 53 points.
Elsewhere, S&P 500 constituents Molina Healthcare (MOH 359.24, -17.33, -4.60%), Globe Life (GL 56.56, -2.53, -4.28%), and Enphase Energy (ENPH 112.01, -5.01, -4.28%) dot the bottom of the average. MOH is impacted by Florida's RFP awards, GL volatility continues in light of last week's Fuzzy Panda short report, while ENPH slides amidst general weakness in solar stocks.
Meanwhile, Centene (CNC 73.11, +2.38, +3.36%) is outperforming after retaining its Medicaid contract with Florida.
Gold higher alongside yields, dollar
15-Apr-24 14:00 ET
Dow -155.78 at 37827.46, Nasdaq -221.94 at 15953.16, S&P -42.66 at 5080.75
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-1.37%) holds the worst losses among the major averages on the session with about two hours to go on Monday.
Gold futures settled $8.90 higher (+0.4%) to $2,383.00/oz, even as bond yields and the greenback show modest strength.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $106.22.
The Big Picture
Last Updated: 12-Apr-24 15:29 ET | Archive
Shed some risk
"Everything is okay today, but we need to be prepared for a range of outcomes."
Those were the words spoken by JPMorgan Chase CEO Jamie Dimon in the Q&A portion of the company's March quarter earnings conference call. He said a lot more than that of course, but these words resonated as a guide, not just for JPMorgan, but for investors in general.
Taken by Surprise
The March Consumer Price Index caught the market by surprise this past week. That was plain to see in the sharp rise in Treasury yields following the release, the fed funds futures market pushing back the likelihood of the first rate cut to the July/September FOMC meetings, and stock prices seeing some knee-jerk selling.
There was heightened nervousness in the market this past week, too. The CBOE Volatility Index spiked as much as 17% from last week's closing level. The entirety of that move came on Friday following press reports that said intelligence officials think Iran could launch an attack on Israel soon.
A concurrent spike in oil prices above $87.00 per barrel and a sharp increase in the U.S. Dollar Index above 106.00 underscored the market's attention to this risk factor.
That was surprising, but only in the sense that the market hasn't been overly risk-minded since last October when it started its run to the new record high it set only a few weeks ago.
Actually, we should clarify that. The stock market for its part has been very risk-minded, having adopted what has been an indefatigable risk-on demeanor. Perhaps that will change... or perhaps it should change.
Seeing Less Risk
The equity risk premium (ERP), which the New York Fed defines as the expected return on stocks in excess of the risk-free rate, is plumbing its lowest levels in the last 20 years.
When equity risk premiums fall, investors see less risk. The chart above, then, could be construed as a contrarian signal. The less risk seen in the stock market, the more risk there is for a surprise factor to upset things.
In any case, an equity risk premium just north of 30 basis points doesn't seem to offer a lot of incentive to take on the added risk of investing in the stock market relative to risk-free Treasuries. That doesn't mean stocks have to underperform bonds; however, it does suggest the return incentive for investing in stocks isn't as attractive as it used to be.
The same assertion is embedded in the premium valuation at which the market-cap weighted S&P 500 is trading. At 20.3x forward 12-month earnings (versus 20.7x when the past week began), the S&P 500 is trading at a 14% premium to its 10-year average.
The equity risk premium is still positive, so the incentive to invest in the stock market is still there, only the risk to achieve the excess return is now much greater than it used to be, which is exactly why one should be prepared for a range of outcomes that includes the prospect of a larger pullback.
What It All Means
The stock market has had a fantastic run, bolstered by some favorable economic outcomes, lower rates, and better-than-expected earnings.
The economy is still faring well, and the earnings outlook (based on consensus estimates) has yet to shift in any meaningful way. That's a good thing. The interest rate picture, however, has shifted in a manner that poses more risk for stocks trading at premium valuations.
It is prudent, in light of the premium valuations and deteriorating equity risk premium, to take some profits, which isn't the same as selling everything.
Taking some profits is simply preparing for a range of outcomes, one of which or several of which could leave you with more risk and less premium on the equity side of your portfolio.
-- Patrick J. O'Hare, Briefing.com
Salesforce and Informatics (INFA) both endure selling pressure on talks of a potential merger (CRM)
Salesforce (CRM -5%) and Informatica (INFA -9%) are seeing their shares slip today despite a potential M&A deal between the tech firms. The WSJ reported today that CRM is in talks to acquire INFA, which currently commands a market cap of around $10.5 bln, making it potentially CRM's largest purchase since paying $27.7 bln for Slack in 2021.
Typically, the acquired firm tends to enjoy a healthy bump in its share price on news of a possible takeover. However, INFA is enduring a sell-off worse than CRM. The cause lies in reports noting that CRM wants INFA below Friday's closing price of $38.50. Meanwhile, CRM shares are also taking a hit as investors question whether now is a good time to snatch up INFA, which could come at a hefty price, and embed it into its long-term vision revolving around generative AI.
- What does INFA do? The company offers an AI-powered data management cloud platform, allowing its customers to connect all types of enterprise data and pursue strategies based on cloud analytics. Given its attention to AI, shares of INFA have benefited enormously from the surging interest in the relatively new technology, doubling as of Friday's close since November and flirting with all-time highs achieved shortly after its October 2021 IPO.
- However, despite the secular AI-induced tailwind, INFA's revenue growth has not been overly impressive, climbing by 11.6% yr/yr in Q4 and ending FY23 with a mild 6.0% improvement. Furthermore, INFA expects FY24 revs to edge just 6.3% higher. As such, CRM investors are concerned that, despite possibly presenting a takeover offer below INFA's recent highs, the company may be overpaying.
- CRM is also exploring a massive acquisition during a measured buying climate, which weighed on its recent FY25 (Jan) revenue outlook. CFO Amy Weaver commented in February that the impact of a muted buying environment from the past year takes time to ultimately flow through its subscription revenue stream.
- Still, even if CRM offers around $35.00/share to acquire INFA, it would translate to a 6x forward sales multiple, tracking closely to CRM's. Also, with AI being thrown into the ring, tech firms are quickly hunting for ways to either maintain their leadership position in their respective fields or overtake a close rival. Given INFA's software and extensive customer base, including Marathon Oil (MRO) and Lenovo (LNVGY), the company appears to be a good fit for CRM, helping it lead the customer relationship management industry.
Talks between CRM and INFA surrounding a possible merger are driving a sell-the-news reaction on both sides today as CRM shareholders are concerned about the price it could pay, while INFA shareholders are upset about a below-market price it could receive. Nevertheless, despite today's reactions, both companies are engaging in complementary lines of business and could each benefit from the other. Perhaps the more overarching issue centers on when the broader spending environment will rebound more meaningfully.
Tesla heads in reverse after reports of sizable round of job cuts and more Cybertruck issues (TSLA)
It's another busy news day for Tesla (TSLA), which has struggled to find traction in 2024 as slowing growth and rising competition concerns have dragged shares lower by 33% on a year-to-date basis. The biggest story is that the electric vehicle maker is eliminating more than 10% of its global workforce, according to Electrek. This would amount to approximately 14,000 job cuts and those layoffs come at a time when TSLA is planning to launch its next-generation vehicle platform and a new robotaxi in the 2025/2026 timeframe.
- Generally speaking, cost-cutting measures, including layoffs, have been applauded by investors in recent history. However, in the case of TSLA, the action further hammers home the idea that the company's near-term growth prospects are dimming. About two weeks ago, TSLA reported that Q1 deliveries declined by 8.5% yr/yr to 433,000 missing analysts' expectations, which followed a rough Q4 report in late January that included its slowest growth rate (+3.5%) since 2Q20.
- TSLA's troubles are especially acute in China -- the company's second largest market -- where fierce competition from BYD Company (BYDDY), NIO (NIO), Li Auto (LI), and XPeng (XPEV) have cut into its market share. In early March, Bloomberg reported that TSLA's shipments from its Shanghai factory fell to the lowest level in more than a year. Due to slowing demand in China, TSLA lowered production at its Shanghai facility in March.
- There was plenty of hope that the oft-delayed launch of Cybertruck would provide the next significant growth catalyst for TSLA, but that has only brought on more disappointment. This morning, reports surfaced that TSLA has temporarily halted Cybertruck deliveries due to problems with the accelerator pedal getting stuck.
- Considering that TSLA is only delivering somewhere between 3,000-5,000 Cybertrucks per month at this point, the temporarily halt won't have a major impact on its overall delivery numbers.
- The more pressing concern is whether demand for Cybertruck will live up to expectations following a very slow start in which only the most expensive version was made available for purchase. TSLA's goal is to produce 62,500 Cybertrucks per quarter.
- Lastly, TSLA also announced that it's reducing its Full Self-Driving (FSD) subscription price to $99/month from $199/month. This is another attempt to drum up demand after many rounds of vehicle price cuts in China and the U.S. It's also a way for Elon Musk to tout the improvements in FSD after billions of dollars were invested in improving the technology.
The main takeaway is that while the job cuts should help bolster TSLA's earnings in the coming quarters, the layoffs also solidify the notion that TSLA's growth prospects are heading in reverse. With the company preparing for the launch of its next-generation platform, which is expected to support the production of a mass market vehicle, the timing and magnitude of the layoffs is also a bit surprising, even if TSLA's growth is slowing.
Encore Wire seeing nice gain after agreeing to be acquired; will create massive cable co (WIRE)
Encore Wire (WIRE +12%) is stringing up some nice gains today after this US-based manufacturer of copper and aluminum electrical wire and cables agreed to be acquired. Italy-based Prysmian is also a huge supplier of cable. The price tag is $290 per share, for a total enterprise value of €3.9 bln. This represents an 11% premium from Encore's $260.98 closing price on Friday and a 20% premium vs the 30-day volume weighted average share price (VWAP).
- A main benefit is that the deal greatly increases Prysmian's exposure to the North American market. Prysmian also cited Encore Wire as being highly complementary to its strategy and that the deal will allow Prysmian to increase its exposure to secular growth drivers. Prysmian expects to generate ~€140m in run-rate EBITDA synergies within four years.
- Prysmian also plans to leverage Encore Wire's operational efficiency across Prysmian's portfolio while broadening Prysmian's product offering. Specifically, Encore Wire is known for being a low-cost producer via its expansive single-campus model and centralized distribution. Following the transaction, Prysmian expects to maintain a significant presence at WIRE's single-site Texas campus.
- The combination will create a massive wire and cable company with global reach. The combined group posted annual sales above €17.7 bln and adjusted EBITDA of approximately €2.1 bln. The transaction has been unanimously approved by each company's Board of Directors and is expected to close in 2H24. An interesting wrinkle is that the deal provides WIRE with a 35-day go-shop period wherein it can seek higher bids.
Overall, we think the $290 price tag, all-in cash, is an attractive price tag for WIRE shareholders. You have to keep in mind that WIRE's financial results are known to be volatile over the years. They tend to rise and fall with copper prices because copper makes up nearly 80% of its raw material costs. Right now, times are good for WIRE as you can see in the share price rising from $165 last September to $261 on Friday. It is good to strike while the iron is hot.
We also think the go-shop provision adds another layer of benefits for WIRE shareholders. If shareholders think they are being short-changed, this gives management the opportunity to find a better deal and see what the market will bear. After that is concluded, it would be difficult to argue WIRE shareholders did not get maximum market value.
We also believe this is a good deal for Prysmian, which greatly expands its exposure to North America and it picks up a very efficient producer. Perhaps Prysmian can apply WIRE's efficient practices to other parts of its business.
Goldman Sachs bounces back on buoyant Q1 results; upbeat tone surrounding U.S. economy shifted (GS)
An energetic equity market, an uptick in leveraged finance activity, and a favorable yr/yr comparison in Private Banking provided enough of a tailwind for Goldman Sachs (GS +3%) to topple Q1 earnings and sales estimates and break out from its recent slump. Shares of the prominent investment bank and financial services firm have been sliding over the past two weeks, down around 7% from the multi-year highs reached at the end of March.
A few worrisome developments touched on in Q1 by peers JPMorgan (JPM), Wells Fargo (WFC), and Citigroup (C) on Friday, such as softening loan demand, fixed income declines, and lower deposit spreads, only kept selling pressure elevated. JPM CEO Jamie Dimon's worrisome remarks surrounding the global economy did not help either. However, GS, which does not have much retail consumer exposure following the sale of its GreenSky platform, did a solid job avoiding many of these pitfalls.
- With GreenSky divested, GS concentrates on its Global Banking & Markets (GBM) and Asset & Wealth Management (AWM) segments, both of which fueled the company's 16.1% jump in overall revs yr/yr to $14.21 bln and adjusted EPS of $11.58, each topping estimates handily.
- GBM, which comprised 68% of Q1 revenue, recorded a 15% improvement in sales yr/yr -- a reversal from last quarter's decline -- on broad-based growth. Investment Banking fees were 32% higher yr/yr, underpinned by higher net revs in Debt underwriting, M&A activity, and increased initial public and secondary stock offerings. Meanwhile, FICC grew by 10% yr/yr, driven by mortgages and structured lending. Likewise, Equities revs climbed by 10%, underscoring a healthy equity market.
- AWM performed even better, registering 18% higher revenue yr/yr, reflecting significantly higher net revs in Private Banking, Equity investments, and Management fees. Private Banking growth was helped by the impact of the sale of Marcus's (consumer banking platform) loans portfolio last year. Meanwhile, private equities supported sizeable net gains for GS's Equity investments, which, in turn, pushed Management fees higher.
- One of the points of interest ahead of today's Q1 report was GS's commentary surrounding interest rates. At the time of its Q4 conference call in January, the market was pricing in six rate cuts in 2024 (according to the CME FedWatch Tool). Now, the market is staring at maybe one or two. CEO David Solomon mentioned today that the company will remain constructive on the health of the U.S. economy as rate-cut expectations continue to evolve.
- Mr. Solomon added that he is mindful about the U.S. equity markets hovering near record levels despite several lingering economic concerns, including inflation, commercial real estate, and geopolitical tensions. Even though the U.S. has proven resilient, Mr. Solomon noted that the economy's trajectory is still uncertain. While the CEO was still confident about GS's operations, his tone represented a noticeable transformation from the optimism expressed last quarter.
After a meaningful dose of concern was injected into shares of GS ahead of its Q1 report, its relatively uplifting results triggered a quick bounce back toward multi-year highs today. Still, CEO David Solomon's comments were not very reassuring, mirroring those made by Jamie Dimon last week, and the potential problems he touched on could present material challenges for GS.
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.
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