Closing Recap

Thursday, June 01, 2023

U.S. stocks kicked off the new trading month with massive gains, boosted by the passage of the debt ceiling deal in House last night (Senate to vote next), better China manufacturing data (just a day removed from weak data), and rising hopes that the Fed will pause at its upcoming meeting in 2-weeks. The S&P 500 index reclaimed the 4,200 level this morning after a brief dip Wednesday and never looked back, as nearly all eleven S&P sectors saw advances (Utilities/Staples weak). Sector laggards in May saw strength to start the new month with Energy (XLE) among the top gainers after oil prices rebound from an 11% decline last month. Smallcaps also had a strong start to the month after underperformance vs. the Nasdaq in May. Defensive consumer staples one of the few laggards in the S&P, with food names underperforming (K, CPB, POST). Gold prices, which dropped last month amid a bounce in Treasury yields and the dollar, also kicked off the month with big gains. Industrials and Materials recovered from yesterday selling on the better China data. The latest bull-bear spread in the American Association of Individual Investors (AAII) weekly survey was -7.7 vs -12.3 last week as Bulls rise to 29.1% from 27.4% and Bears fall to 36.8% from 39.7%. Overall Nasdaq now on track for its 6^th straight week of gains while the Dow on track of 4^th down week in last five. Momentum clearly remains to the upside.

Last night the debt bill passed the House (was widely expected) and now the next steps are a vote in the Senate, where it is also expected to pass as both Senate leaders are endorsing the bill. Biden will then sign the bill by June 5th, the latest X-date where the US Treasury will run out of funds. The next Fed policy meeting is June 14^th, as Fed speaker “blackout period” begins this Saturday. Focus tomorrow should be on the May nonfarm payrolls, but given the strong jobs data points this week already (JOLTs, jobless claims, ADP private), and stocks rallying all day Thursday, markets appear to no longer fear a “strong” report and its implications on future rate hikes by the Fed.

Fed’s Harker, one of the last Fed speakers before their “blackout period” clearly said his preference, barring any chance in data outside our forecast, is for skipping a rate hike. It’s time to hit the stop button for at least one meeting. He said if we saw an unexpected, significant deterioration in the job market, he would worry, but doesn’t see this. Harker also said if inflation started coming down unexpectedly fast, then could cut rates; but that is not in his forecast. The CBOE Volatility index (VIX) fell as much as -13% for its biggest one-day decline since May 5th when it fell -14.44% as Fed’s Harker stresses a “pause” at the FOMC next meeting on 6/14 (fed fund futures had predicted a roughly 70% chance of a 25-bps rate hike in June just two days ago after hawkish Fed speak – now at roughly 30%).

Economic Data

·     Jobs data remains strong as the ADP national employment report shows U.S. employment increased by 278,000 private sector jobs in May, well above the forecast for a rise of 170,000 jobs, while prior month slightly revised to 291K from 296K).

·     U.S. Q1 non-farm productivity revised to -2.1% vs. consensus -2.5% and vs. previous (-2.7%), while Q1 non-farm unit labor costs revised to +4.2% vs. consensus +6.0% and previous +6.3%.

·     Weekly Jobless Claims rose to 232K in the latest week vs. est. 235K and the prior week was revised to 230K from 229K; the 4-week moving averages fell to 229,500 from 232,000 the prior week; continued claims rose to 1.795M from 1.789M in the prior week.

·     Challenger Gray job cut announcements rose 287% y/y vs. 176% in prior month; tech sector led the pack with 22,887 cuts in May & total of 137k YTD, the most for the sector since 2001.

·     ISM U.S. Manufacturing activity index 46.9 in May (7^th straight time in contraction territory – below 50) vs 47.1 in April (est. 47.0) as prices paid index fell to 44.2 in May vs 53.2 in April; new orders index 42.6 in May vs 45.7 in April and the employment index 51.4 in May vs 50.2 in April.

·     April construction spending rose +1.2% more than the consensus +0.2% to $1.908 trln, vs March +0.3% (prev +0.3%); private construction spending +1.3%, public spending +1.1%.

Commodities, Currencies & Treasuries

·     After falling over 11% in May, WTI crude opens the new month higher, rising $2.01 or 2.95% to settle at $70.10 per barrel (off lows $67.51) despite an upside inventory surprise by the EIA in weekly data (reports unexpected build of 4.5M barrels vs. est. drawdown of stockpiles -1.4M barrels) and another batch of SPR release (inventories of crude in U.S. Strategic petroleum reserve off 2.5Mm barrels to 355.44Mm, lowest SPR level since Sept 1983). Better China data, a decline in the U.S. dollar by over -0.7% also helped boost the commodity trade today.

·     Gold prices rose $13.40 to settle at $1,995.50 an ounce (hit highs of just above $2,000 before paring back), getting a boost on dovish Fed comments from Harker, softer prices paid index component of ISM, and a decline in the dollar and Treasury yields. Industrial and Precious metals both saw a strong rebound today following improved China data overnight.

·     Treasuries rallied after the ISM report showed a hefty drop in prices paid and continued weakness in manufacturing. Yields were down across the board, adding to yesterday’s declines (though yields were higher in May). The 2-year yield is 5.5 bps lower at 4.33% and the 10-year is down 3-bps to 3.608% (down sharply from a week ago at 4.56% and 3.82%, respectively). Markets are now pricing in a Fed “pause” to rate hikes at the June 14^th FOMC meeting after dovish Fed comments and mixed data points.

Sector News Breakdown

Consumer

Autos:

·     In Chinese EV sector: For May, NIO delivered 6,155 all-electric vehicles, XPEV delivered 7,506 units and LI blew those two out of the water, delivering 28,277 cars (3^rd consecutive month Li has topped 20,000). Combined, the three delivered 41,938 units, up from 39,418 delivered in April and up about 46% with the 28,645 delivered in May 2022.

·     In Electric Vehicles (EV): FSR said its all-electric Fisker Ocean extreme achieves EPA range of 360 Miles; LCID shares slip as said it plans to raise about $3 bln through a stock offering, nearly two-thirds of which will come from Saudi Arabia’s Public Investment Fund (PIF).

·     In auto retail: GPC upgraded to Buy, AZO upgraded to Neutral from UP and AAP downgraded to Neutral in auto retail space at Bank America saying recent turmoil creates oppty. Notes shares of auto parts retailers traded lower yesterday, led by a severe decline in AAP following its 1Q earnings miss. The firm does not believe that AAP’s challenges should be read through as broad-sweeping challenges across the industry.

·     In auto suppliers: BWA added to short-term Catalyst Call Buy List at Deutsche bank, as believe its upcoming investor days and the Q3 spin-off of much of its ICE could enable a material re-rating of the RemainCo.

Consumer Staples & Restaurants:

·     In restaurants: DPZ upgraded from Neutral to Overweight at JP Morgan and raised tgt to $360 saying its sub-$300 now tilted as a risk adjusted OW recommendation.

·     In Foods: HRL Q2 EPS $0.40, in-line with consensus while Q2 revs $2.98B miss consensus $3.05B; still sees FY EPS $1.70 to $1.82, vs. est. $1.74; reported fiscal second-quarter profit that beat expectations but sales that fell shy, as volumes fell in all business segments.

·     Defensive food stocks one of mkt few weak spots today as investors rotate into riskier assets; shares of K, CPB, POST, SJM, UTZ all lagged.

Retailers:

·     TGT snaps its 9-day losing streak while LULU extended its losing streak to 9-days ahead of earnings tonight.

·     Broadline retail: TGT downgraded to Neutral from Overweight and price tgt cut to $144 from $182 at JPM as believe the consumer is “broadly weakening” while the share of wallet shifts away from goods, which represents 51% of Target’s sales, is ongoing. Also fears share loss could accelerate into back to school and linger into holiday. COST files for debt shelf size not disclosed.

·     Apparel retail: PVH reported a 1Q EPS beat but sales light ($2.05B vs. $2.12b) and reiterated FY EPS with 2Q coming below-Street, hitting some recurring industry trends this cycle; BKE said comparable store net sales, for stores open at least one year, for 4-week period ended May 27, 2023, decreased -6.4% and net sales for 4-week decreased 5.3% to $89.3M.

·     In department stores: Macy’s (M) shares slipped after lowering its full-year sales and adj EPS guidance after underperformed on revenue in 1Q amid weakening demand trends; cuts year EPS to $2.70-$3.20 from $3.67-$4.11 and sales to $22.8B-$23.2B from $23.7B-$24.2B prior. JWN posted better results as Q1 EPS $0.07 vs. est. loss (-$0.08); Q1 revs fell -11.6% y/y to $3.18B vs. est. $3.12B; sees FY23 adj EPS $1.80-$2.20 vs. est. $1.88 and sees FY23 revenue down 4%-6%.

·     In online retail: CHWY reported 1Q results well ahead of expectations, with active customers growing modestly versus expectations of a decline, revenue ahead of the high end of guidance, and a meaningful adj. EBITDA beat given better gross margin; also, better guidance.

·     In dollar stores: DG said the economic environment is more challenging than the discount retailer had previously anticipated and is “having a significant impact on customers’ spending levels and behaviors; Q1 comp sales rose +1.6% below est. +3.8% and sales +6.8% y/y to $9.34B vs. $9.5B est.; DG said assumes no buybacks in 2023 vs. prior expectation for buyback of $500M.

·     In specialty retail: VSCO tumbles after reported a meaningful EPS miss ($0.28 vs. $0.54), as sales came in slightly below and mgmt utilized targeted promos, driving a GM disappointment, noting bra share remained ~flat, panties share declined YoY; guides Q2 EPS $0.10-$0.40 below consensus $0.88 and sees Q2 revenue down mid-single digits. CONN shares slide after Q1 revs fall -16.3% y/y to $284.6M and posts adj loss of (-$1.52) EPS. Swiss watch exports increased +6.8% yoy in April 2023 (vs. +13.8% yoy in March); US saw export decrease for the first time in two years against a tough base of comparison at -4.9% yoy, a slowdown vs +7.8% in March yoy.

·     In footwear, sports and leisure apparel, TD Cowen said its proprietary work around pricing within top sellers by brand in athletic footwear and apparel highlights that pricing is stable within top-selling SKUs for NKE, LULU, SKX, Vans (VFC). Survey work shows mind share/survey preference loss at ADDYY, UAA. HOKA (DECK) scores #1 spot at FL top sellers. CAL reports a 9.8% decline in Q1 revenue to $662.7M, below the $700M estimate and guides Q2 net sales to be down 4%-5% and for the full year, co now expects sales to be down 3%-5%.

Leisure, Gaming & Lodging:

·     In gaming: (WYNN ), casino revenues in Macau surged 366% from a year ago to total 15.6 billion patacas ($1.93 billion) in May, the highest since January 2020, when the COVID-19 pandemic had still to fully grip China. Jump in revs helped by five-day national holiday.

Homebuilders, Building Products, Home Furnishing:

·     Homebuilders initiated at Deutsche Bank with Buy ratings on DHI ($150 tgt), MTH ($200 tgt), PHM ($95 tgt), TPH ($42 tgt), TOL ($94 tgt) while initiated at Sell ratings LEN ($105 tgt), NVR ($4,400 tgt) and Hold rated on KBH, TMHC.

·     In tools: SWK is exploring the sale of its Attachment Arms business that makes excavator buckets for construction equipment according to Bloomberg late last night. SWK acquired the company in 2018 for $690M in cash, which at the time had LTM revenue of $400M.

Energy

·     OPEC+ will be grappling with a divided oil market when it meets this weekend. On one side, global oil inventories are shrinking as the alliance’s latest production cuts take effect. On the other, disappointing Chinese economic indicators and fears of a US recession have emboldened bearish speculators.

·     In Majors: RBC Capital upgraded CVX from Sector Perform to Outperform and raised tgt to $180 from $165 as believes the macro environment is likely to remain volatile, however weaker end-product demand and OPEC+ managing the oil market leaves CVX’s upstream heavy weighting well-placed. RBC downgraded XOM from Outperform to Sector Perform noting it has outperformed most global peers over the last year, supported by strong refining margins and improving perception on the duration of its free cash flow profile.

·     In refiners: PSX was upgraded from Market Perform to Outperform and raising PT to $123 from $110 at TD Cowen as the firm said it anticipates refining ops returning to pre-Covid, top-tier performance as it refocuses energies toward that segment. VLO price tgt was reduced from $130 to $113, maintains Sell at Goldman Sachs.

·     In Utilities: NRG said its $1.75B sale of its 44% stake in the South Texas Project Electric Generating Station nuclear plant exceeds the energy company’s 2023 asset sale goal of $500M, and it plans to direct the net proceeds after $500M of deleveraging toward stock buybacks. CEG said it is acquiring NRG’s 44% ownership stake in the South Texas Project Electric Generating Station, a 2,645-megawatt, dual-unit nuclear plant.

Financials

Banks, Brokers, Asset Managers:

·     Banks bounce after selling pressure to end the month of May.

·     Blackstone (BX) Limits Withdrawals from BREIT for 7th Straight Month; the $69B fund saw redemption requests of $4.4B in May and paid out $1.3B – Barron’s.

·     In credit cards (AXP, COF, MA, V): Bank America said total card spending per household fell (-0.4%) y/y in the week ending May 27, according to its aggregated credit and debit card data. Several categories improved on a y/y basis in the last week, including lodging, entertainment, and home improvement.

·     In Financials Services: ZIP announced a plan to reduce its global headcount by ~270 employees (~20% of headcount) in response to current market conditions.

Healthcare

Biotech & Pharma:

·     ACET downgraded to neutral from overweight at JPMorgan noting the lack of near-term catalysts for the stock.

·     BIIB shares rose early after CMS says will broaden Medicare coverage for new Alzheimer’s drugs after full approval.

·     CHRS plans to sell a biosimilar version of ABBV’s Humira — one of the world’s best-selling medicines at a steep discount and will work with Mark Cuban’s generic drug company to make the medicine available directly to consumers for even less. Specifically, the Coherus medicine will carry a $995 list price for a carton of two autoinjectors, 85% discount less than the $6,922 that AbbVie charges for Humira – STAT News https://tinyurl.com/4jbhj56d

·     LXRX 23.9M share Spot Secondary priced at $2.60.

·     NOVN downgraded to Perform at Oppenheimer and remove tgt afternoon Novan announced a strategic restructuring, including a reduction in force of ~ 50%, and an ongoing process to sell some, or all its commercial portfolio.

Industrials & Materials

Transports

·     In airlines: LUV raised the low end of Q2 RASM guidance to (10%) to (8%) vs. prior (11%) to (8%) and reiterated Q2 ‘solid profit’ and ASMs of ~+14%; guided Economic fuel costs per gallon to $2.55 vs. prior guide $2.45-$2.55.

·     In rails: CSX upgraded from Neutral to Buy at UBS saying with intermodal volumes likely bottoming y/y in 2Q, the co sees a path to volume growth for CSX in 2024 with intermodal growth of +4% offsetting a -1% decline in merchandise.

·     In freight/logistics: TFII upgraded to Buy from Neutral at UBS, supported by its expectation of strong free cash flow plus improving US LTL margin performance despite the current soft backdrop in freight activity.

·     In tankers: The Baltic Dry Index Falls 4.09% to 937 in London, down for a fifteenth day and has fallen 41% in the past month. Other dry cargo indexes, expressed in USD/day: Capesize down-6.06% to $9,487, Panamax down -1.67% to $7,934, and Supramax down -3.91% to $9,312.

·     In aerospace, BA CEO said the company should focus on current competition, not get ‘overly anxious’ about Chinese c919 narrowbody plane; said China’s c919 narrowbody plane will take a ‘long time’ to meet capacity demands; said is ‘not particularly worried’ that a stretched Airbus a220 could challenge 737 max 8 sales; AL announces lease placement of four new Airbus A220 aircraft with Czech Airlines.

·     In Steel sector: Wolfe research downgraded US Steel (X) from Peer Perform to Underperform w/ $19 PT while upgraded NUE to Peer Perform from Underperform, switching to more defensive positioning and argues that the recent selloff leaves the shares more fairly valued as likes Nucor’s strong free cash flow and infrastructure exposure. Notes for US Steel, Headwinds have grown from falling Central European sheet and global oil country tubular goods (OCTG) prices.

Technology

Internet, Media & Telecom

·     META CEO revealed the company’s next generation mixed reality headset, the Quest 3, in an Instagram post with price starting at $499, the device will be 40% thinner than the company’s previous device and feature color mixed reality.

Hardware & Software movers:

·     Cloud software: CRM Q1 revenue / cRPO results (+12% y/y vs. +11% est.) showed only modest upside and cRPO growth guidance (+10%) fell a bit short of consensus, as management pointed to incremental demand softness for multi-year transformational projects. VEEV reported solid F1Q results with revenue and billings exceeding expectations while FY24E outlook for billings, revenue edged higher, and OFC was raised $30M.

·     In Internet Security: CRWD shares fall as reported top and bottom line beat for Q1 but mkt disappointed as reported over $170mn in net new ARR in Q1, below Q4 net new ARR of $222mn; other metrics better as margins improved and raised FY24 guidance; OKTA reported solid Q1 results, though mgmt provided cautious guidance for CRPO due to increasing macro headwinds; said cRPO grew 20% y/y (below expectations) but operating margin made considerable strides at 7% (300bps over consensus).

·     Computer Hardware: DELL reported late day as Q1 adj EPS $1.31 tops the $0.86 estimate while revs fell a 3^rd straight quarter, down -20% y/y to $20.9B but above est. $20.27B; client solutions unit posted a -23% fall in sales, while the infrastructure solutions unit, which includes servers, storage devices and networking hardware, saw an -18% decline. NTAP reported Q4 revenue of $1.58B (down 6% y/y), above the Street at $1.54B, driven by higher Hybrid Cloud revenue, specifically higher margin Support and Services revenue. CSFB notes Hybrid Cloud gross margin was 69.4% (above CSFB’s estimate of 66.6%), and operating margin was 269 bps above CSFB’s estimate. PSTG shares jump as Q1 revs $589.3Mm vs est. $559.34Mm, adj gr mgn 72.2%, adj op mgn 3.3%; sees 2Q revs $680Mm vs est. $656.1Mm.

·     In research: AYX upgraded at Bank America to Buy from Neutral and raise tgt to $70 from $60 saying Analytics cloud strategy working, should be good growth driver and base is resilient, AiDEN should drive differentiation and higher monetization, 3) LT target date expresses confidence in positioning.

·     In “AI” sector, shares of AI declined initially after announced F4Q23 results consistent with its May 14 preannouncement but sees 1Q revs $70M-$72.5M vs. est. $72.1M and sees 1Q adj operating loss $25M-$30M; sees 2024 revs $295M-$320M vs. est. $317M.

Semiconductors:

·     The Philly semi-index (SOX) rose just shy of yest highs 3,531 after one day pull; its 52-week high was Tuesday of 3,643.94 (up over 36% YTD); AVGO earnings after the close.

·     In “AI” impact for semis: JPMorgan said they estimate that the high-end custom ASIC chip market is a $13-$15B per year market growing at a 20% CAGR and it believes that AVGO (#1 market share leader- 35% share) and MRVL (#2 market share leader – 15% share) will be the biggest beneficiaries of this resurgence in custom chip design.

·     AEHR shares jumped after signed an initial order and a long-term supply agreement with a new silicon carbide semiconductor customer.

·     CRDO rises after reported an in-line AprQ at $32.1M and guided to a better JulQ at $34M (cons. $31.5M) with GMs at ~59% (cons. 57.6%) and noted AI content for AEC potentially 5x vs general compute, MarQ should be the trough with revenue up q/q through F24 and improving GM.