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Technology Stocks : Semi Equipment Analysis
SOXX 318.32-1.8%Sep 30 3:59 PM EDT

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To: Return to Sender who wrote (88709)7/21/2022 8:08:44 PM
From: Return to Sender2 Recommendations

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Market Snapshot

Dow 32038.78 +162.06 (0.51%)
Nasdaq 12059.58 +161.96 (1.36%)
SP 500 3999.02 +39.05 (0.99%)
10-yr Note

NYSE Adv 1938 Dec 1196 Vol 891 mln
Nasdaq Adv 2550 Dec 1794 Vol 4.5 bln

Industry Watch
Strong: Health Care, Consumer Discretionary, Materials, Real Estate, Information Technology

Weak: Energy, Communication Services

Moving the Market
--Strength in mega cap and growth stocks

-- ECB raised its key rates more than expected

-- Drop in oil prices

-- Lingering growth concerns

Closing Stock Market Summary
21-Jul-22 16:25 ET

Dow +162.06 at 32038.78, Nasdaq +161.96 at 12059.58, S&P +39.05 at 3999.02
[BRIEFING.COM] Relatively negative headlines this morning fueled lingering growth concerns that led the stock market to a modestly lower open. The market soon regained upside momentum, though, trending higher for most of the day and finishing near its best levels of the session. The S&P 500, which flirted with 3,600 in mid-June, closed a whisker shy of 4,000.

The headlines this morning included central bank news, corporate news, and U.S. economic data. The Bank of Japan lowered its 2022 GDP growth forecast to 2.4% from 2.9% and the ECB announced a larger-than-expected 50-basis point increase for its key lending rates.

Corporate news included homebuilder D.R. Horton (DHI 75.83, +2.75, +3.8%) cutting its FY22 revenue outlook and saying it saw a moderation in demand in June and July. Also, Microsoft (MSFT 264.84, +2.57, +1.0%) said it will slow its pace of new hire activity.

As for economic data, initial jobless claims topped 250,000 for the first time since last November; the Philadelphia Fed Index was negative in July (-12.3) on a further drop in new orders activity; and the Leading Economic Index for June was down 0.8%.

Buyers were not deterred by these factors, suggesting to some that the growth concerns resonating today were already priced in during the weak first half of year. Market breadth showed some buyer conviction with advancing issues leading declining issues by a roughly 3-to-2 margin at both the NYSE and the Nasdaq.

The mega caps were an important directional driver with the Vanguard Mega Cap Growth ETF (MGK) closing up 1.5% versus a 0.6% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 0.9% gain in the S&P 500.

For the mega caps, the biggest move was made by Tesla (TSLA 815.12, +72.62, +9.8%), which reported better-than-expected earnings after yesterday's close. Tesla's outperformance gave a nice boost to the S&P 500 consumer discretionary sector (+2.3%), which was at the top of the leaderboard today.

Other parts of the market did not fare as well today as the Dow, Nasdaq, and S&P 500. Small and mid cap stocks underperformed on the day with the Russell 2000 (+0.1%) and the S&P Mid Cap 400 (+0.6%) closing behind the broader market.

Another weak spot today was energy as oil prices fell. WTI crude oil futures settled the session down 3.4% to $96.49/bbl. Natural gas futures fell 1.2% to $7.79/mmbtu. Unleaded gasoline futures fell 3.7% to $3.15/gal.

The energy sector (-1.7%) was one of two to close in negative territory. The other sector that closed with losses was communication services (-0.2%). Communication services was held down by AT&T (T 18.92, -1.56, -7.6%), T-Mobile (TMUS 133.18, -4.27, -3.1%), and Verizon (VZ 47.65, -1.42, -3.0%), which all traded down after AT&T beat on earnings but lowered its free cash flow guidance.

Separately, buyers stepped in to the Treasury market after economic data this morning stoked slowdown concerns. The 2-yr note yield closed down 15 basis points at 3.09% while the 10-yr note yield fell 13 basis points to 2.91%.

The Treasury market was certainly more responsive to slowdown worries than the stock market was. Stocks for the most part handled worries about an economic slowdown relatively well, as participants were clinging to the notion that stocks have priced in a slowdown already and that the arrival of weak data will compel the Fed to take less aggressive rate hike steps in coming months.

Reviewing today's economic data:

  • Weekly Initial Claims 251K ( consensus 240K); Prior 244K; Weekly Continuing Claims 1.384 mln; Prior was revised to 1.333 mln from 1.331 mln
    • The key takeaway from the report is that it reflects some loosening in a tight labor market that will temper some of the payroll growth expectations for July, as this report covered the period in which the survey for the July Employment Situation Report was conducted.
  • July Philadelphia Fed Index -12.3 ( consensus -1.2); Prior -3.3
  • June Leading Economic Index -0.8% ( consensus -0.5%); Prior was revised to -0.6% from -0.4%
  • Weekly EIA Natural Gas Inventories showed a build of 32 bcf vs a build of 58 bcf last week
Friday's economic data is limited to the July IHS Markit Manufacturing PMI preliminary (prior 52.7) reading and July IHS Markit Services PMI preliminary (prior 52.7) reading at 9:45 a.m. ET.

  • Dow Jones Industrial Average: -11.4% YTD
  • S&P 400: -14.9% YTD
  • S&P 500: -16.1% YTD
  • Russell 2000: -18.2% YTD
  • Nasdaq Composite: -22.9% YTD

More of the same before the close
21-Jul-22 15:30 ET

Dow +71.48 at 31948.20, Nasdaq +125.91 at 12023.53, S&P +26.66 at 3986.63
[BRIEFING.COM] The main indices are near session highs holding to tight trading ranges for the better part of the last three hours.

WTI crude oil futures settled the session down 3.4% to $96.49/bbl. Natural gas futures fell 1.2% to $7.79/mmbtu. Unleaded gasoline futures fell 3.7% to $3.15/gal.

Additionally, Treasury yields also pulled back today. The 2-yr note yield closed down 15 basis points to 3.09% while the 10-yr note yield fell 13 basis points to 2.91%.

Notable earnings reports after the close include Boston Beer Co (SAM), Capital One (COF), Intuitive Surgical (ISRG), Mattel (MAT), PPG Industries (PPG), Seagate Tech (STX), and Snapchat (SNAP).

Ahead of tomorrow's open, earnings reports will be headlined by Dow component American Express (AXP), Cleveland-Cliffs (CLF), HCA (HCA), Schlumberger (SLB), Roper (ROP), Twitter (TWTR), and Dow component Verizon (VZ).

Friday's economic data is limited to the July IHS Markit Manufacturing PMI preliminary (prior 52.7) reading and July IHS Markit Services PMI preliminary (prior 52.7) reading at 9:45 a.m. ET.

Dow Jones Transport Average underperforming
21-Jul-22 15:05 ET

Dow +8.67 at 31885.39, Nasdaq +117.60 at 12015.22, S&P +20.79 at 3980.76
[BRIEFING.COM] The major indices have not made big moves in either direction lately, sticking to a relatively narrow range near session highs.

With oil prices dipping today, the Dow Jones Transportation Average (-0.9%) is still underperforming on the day. Most components trade in negative territory with the biggest losses seen in United Airlines (UAL 37.46, -4.21, -10.1%) and American Airlines (AAL 13.91, -1.29, -8.5%) after both companies reported earnings this morning. The former had worse-than-expected earnings while the latter beat earnings estimates but issued downside guidance.

Additionally, railroad operators CSX (CSX 30.55, +0.82, +2.8%) and Union Pacific (UNP 210.60, -3.85, -1.8%) also reported earnings. Both companies beat earnings expectations, although UNP had increased operating costs.

Earnings movers dominate S&P 500 action on Thursday
21-Jul-22 14:25 ET

Dow +22.80 at 31899.52, Nasdaq +127.09 at 12024.71, S&P +24.39 at 3984.36
[BRIEFING.COM] The S&P 500 (+0.62%) stands firmly in second place on Thursday afternoon.

S&P 500 constituents Danaher (DHR 279.01, +23.01, +8.99%), Nucor (NUE 126.65, +8.90, +7.56%), and Agilent (A 126.72, +6.86, +5.72%) dot the top of today's action. DHR outperforms following earnings, pushing peer A higher as well, while NUE also gains following quarterly results.

Meanwhile, credit card giant Discover Financial Services (DFS 99.63, -10.17, -9.26%) is one of today's top laggards following earnings; peer Capital One (COF 113.66, -1.10, -0.96%) is slated to report tonight.

Gold higher on Thursday as bond yields fall
21-Jul-22 14:00 ET

Dow -91.09 at 31785.63, Nasdaq +71.70 at 11969.32, S&P +9.79 at 3969.76
[BRIEFING.COM] With about two hours remaining on Thursday the tech-heavy Nasdaq Composite (+0.60%) stands atop the indexes.

Gold futures settled $13.20 higher (+0.8%) to $1,713.40/oz, aided in part by a dip in bond yields.

Meanwhile, the U.S. Dollar Index is down about -0.1% to $106.96.

United and American Airlines add to disappointing earnings season for airline industry (UAL)
Updated: 21-Jul-22 14:14 ET

United Airlines (UAL) is following a similar flight path as Delta Air Lines (DAL) from last week, when DAL badly missed Q2 EPS expectations, causing its stock to nose-dive lower. Although American Airlines (AAL) managed to edge past top and bottom-line estimates, its shares are also trading sharply lower due to a soft Q3 revenue outlook. The disappointing set of earnings reports from these major airlines may seem surprising, considering that air travel demand has been red hot for quite some time. Indeed, AAL noted in its press release that domestic leisure travel demand surpassed 2019 levels in Q2, and that the company experienced improved demand for corporate and international travel.

Bolstered by this surge in travel demand, UAL and AAL posted positive earnings for the first time since 4Q19 -- the quarter preceding the start of the pandemic. DAL was the first major airline to turn a profit in the post-pandemic era, generating EPS of $0.30 in 3Q21. As encouraging as this progress is, these airlines are all grappling with the same serious issue: namely, they are under-staffed, under-trained, and, therefore, unable to reliably increase capacity. Incredibly, it's been reported that 2022 already has more total flight cancellations than all of 2021.

Not only is this situation harmful from a customer satisfaction perspective, but it's also creating difficulties from a financial standpoint.

  • UAL lowered its FY23 capacity outlook, saying that it expects to increase capacity by no more than 8% over 2019, compared to is prior guidance of about 20% growth. Meanwhile, AAL's downside Q3 revenue guidance of $13.1 bln is based on an expected 8-10% decrease in capacity compared to 3Q19. For some context, AAL's capacity in Q2 was 8.5% lower than 2019 levels.
  • The main problem is that costs are increasing across the board, but airlines are unable to spread those higher costs across more seats since they are capacity constrained. This is evident in the CASM (cost per available seat mile) metric, which increased by 32% for UAL in Q2. Similarly, AAL's operating cost per ASM jumped by 45% this quarter.
    • In addition to boosting wages to shore up staffing levels, airlines are contending with surging jet fuel prices. AAL reported that jet fuel prices more than doubled in Q2 to $4.03/gallon. The good news is that prices have eased recently, leading AAL to forecast jet fuel costs of $3.73-$3.78 per gallon in Q3.
  • Some of the challenges behind expanding capacity are beyond the airline's control. For instance, air traffic control towers are also contending with staffing shortages, forcing airlines to cancel flights. If air traffic control towers are struggling to keep up with the current pace of flights, it wouldn't make sense to put even more stress on the system by adding more flights.
While demand remains strong, UAL CEO Scott Kirby warned that the economy may slow -- and potentially enter into a recession -- in the near-to-medium term. That ominous prediction is souring sentiment even further on UAL and its peers. Overall, it's a mixed picture for the airline industry right now with downside risks seemingly rising for the back half of the year.

Tesla speeding higher with company poised to hit the accelerator on production in 2H22 (TSLA)
Updated: 21-Jul-22 11:20 ET

Tesla's (TSLA) revenue and automotive gross margin declined significantly on a sequential basis in 2Q22, ending a string of increases for both key metrics over the past several quarters. While the electric vehicle maker easily surpassed EPS expectations as operating expenses also fell on a qtr/qtr basis, its free cash flow of $621 mln came up short of analysts' estimates. Despite these blemishes, the initial reaction to TSLA's earnings report has been positive for a few reasons.

  • Due to the COVID-related lockdowns in China and the associated shutdown of TSLA's Shanghai facility, a rough quarter was anticipated and baked into the stock. Since early April, shares have plunged by 35%, setting up a rebound on results that are better-than-feared. Ahead of the print, there was some concern that TSLA would post a free cash flow number that was much closer to breakeven.
  • More importantly, TSLA maintained its delivery guidance, stating that it still expects to achieve 50% average annual growth in vehicle deliveries over a multi-year horizon. During the earnings conference call, Elon Musk commented that the company has the potential for a record-breaking second half of the year.
    • To reach that 50% growth target this year, the company will need to produce about 1.4 mln vehicles in 2022.
    • So far in 2022, TSLA has produced approximately 564K vehicles. Therefore, the company will need to make an average of 418K vehicles in Q3 and Q4 to achieve its goal. To put this into perspective, TSLA's highest quarterly production number was 305,840 in 4Q21.
    • It may seem unrealistic for TSLA to ramp up production that substantially, especially since the company is going through "supply chain hell", as Musk put it. However, the new Berlin factory is becoming a major factor, churning out 1,000 vehicles per week. Additionally, the Shanghai plant was upgraded earlier this month and it is now capable of ramping its weekly production higher by roughly 5,000 vehicles to 22,000 vehicles per week.
  • Musk offered an optimistic view on inflation and the supply chain, stating that costs may come down later this year. He even suggested that TSLA may reduce car prices after the company lifted prices several times recently to offset inflationary pressures. An easing of raw material costs in 2H22 could coincide with improving manufacturing efficiencies at its new Berlin and Austin factories, enabling automotive gross margin to reverse higher.
It was a difficult quarter, as reflected in the 10% sequential drop in revenue and the 500 bps contraction in automotive gross margin from Q1. In fact, the quarter was so turbulent that Musk decided to sell 75% of the company's Bitcoin holdings to shore up the balance sheet. This quarter, though, is now in the rearview mirror and a more bullish sentiment is brewing as TSLA is poised to ramp up production in a major way. There are still macroeconomic risks and uncertainties that can stymie TSLA's momentum, though, including the threat of future lockdowns in China if virus cases increase again.

AT&T struggles to find a connection as lowered FCF outlook weighs heavily on the stock (T)
Updated: 21-Jul-22 11:06 ET

Even though AT&T's (T -8%) Q2 results appear solid on the surface, posting earnings and revenue upside while increasing its FY22 Mobility service revenue outlook, there is some static upon further inspection. AT&T trimmed its FY22 free cash flow guidance from a $16 bln range to a $14.0 bln range. The lowered guidance reflects an anticipated $3.0 bln cut to vendor device payments, coupled with a $2.0 bln benefit from lower capital investment, price increases, and lower cash interest payments partially offset by reduced distributions from DirecTV and pressure on cash collections.

Drilling deeper, inflation is taking a toll on consumers and businesses. For example, AT&T is seeing heightened pressure on Business Wireline (fiber optic). At the same time, on the consumer side, bad debt is beginning to increase to slightly higher than pre-pandemic levels while cash collection cycles are extending.

AT&T countered these rough patches by pointing to historical patterns during prior economic cycles showing customers managing their accounts similar to the current situation. Additionally, AT&T delivered numerous highlights in Q2.

  • Standalone adjusted EPS, which backs out recently divested business (WarnerMedia, DirecTV, Xandr, Vrio), showed positive growth of 1.6% yr/yr to $0.65. Meanwhile, standalone revs grew a respectable 2.2% to $29.6 bln, led by AT&T's Mobility and Fiber segments.
    • In Mobility, AT&T continued to see record customer additions, like in Q1, boasting over 800K postpaid phone net adds in Q2, driving sales growth of 5.2% yr/yr.
    • In Fiber, AT&T's 316K Fiber net adds nearly broke previous Q2 records, fueling a 5.6% jump in broadband revs. Also, average revenue per user (ARPU) grew 5.3% yr/yr, reinforcing AT&T's improved value proposition rather than increased promotional activity.
  • AT&T is also continuing to use the hefty $40 bln proceeds from completing the WarnerMedia Discovery (WBD) transaction in April to pay down debt. Likewise, the company is confident of achieving more than $4.0 bln of its $6.0 run-rate cost savings target by year's end.
  • Outside the disappointing free cash flow guidance, AT&T offered up some positive remarks. The company expects to continue seeing favorable ARPU trends in Fiber, accelerating in 2H22. Also, AT&T raised its FY22 Mobility service revenue guidance to +4.5-5.0% growth yr/yr. AT&T also anticipates improved cash conversion of EBITDA in FY23 from better Mobility cash flow and broadband revenue benefiting from a shift to higher-priced fiber optic offerings.
Although there were plenty of positive developments in Q2, investors are not budging from focusing on powerful headwinds, such as inflation, impacting costs, collection cycles, and free cash flow. It is worth pointing out that the struggles experienced in Business Wireline are primarily due to AT&T's efforts to reposition the asset, as this business has been pressured by customers replacing traditional voice services with other collaboration technologies. Also, part of AT&T's reduced free cash flow outlook is due to the timing of its investments, which should seasonally moderate through the course of the year as it achieves its $24 bln capital investment plan.

Bottom line, we think the long-term health of the new streamlined AT&T is positive. However, the company is beginning to see some cracks brought on by a souring economic backdrop. As a result, despite upbeat comments, AT&T is experiencing a poor reception today.

Nucor and Steel Dynamics both report strong upside quarters (NUE)
Updated: 21-Jul-22 10:43 ET

Steel giants Nucor (NUE +4%) and Steel Dynamics (STLD +2%) both reported "riveting" Q2 earnings results with strong EPS upside and bullish comments about Q3. However, given the macro headwinds, has concerns about steel demand heading into 2H22.

  • Nucor reported a healthy beat for EPS at $9.67, well ahead prior guidance of $8.75-8.85. Revenue had nice upside after being just in-line in Q1.
  • Nucor says demand remains stable and resilient across its major end-use markets. We try not to nitpick too much here at However, in June, Nucor said end use demand "remained strong," so maybe the slight downtick to "stable and resilient" is worth noting but maybe we are parsing words too closely.
  • Importantly, customer inventory levels appear right-sized relative to economic conditions. This was good to hear as we do not like to see inventories too high, which causes customers to use that up before buying new steel.
  • Steel Dynamics also reported nice EPS and revenue upside for Q2. STLD went on to say that customer order entry activity continues to be healthy, conflicting with the more pessimistic emotion in the marketplace.
  • The company also says that, while flat roll steel pricing has been softening, order activity remains solid from the automotive, construction, and industrial sectors, with energy continuing to improve. STLD seems a bit more sanguine in this report, relative to its Q1 report, when it said it expects steel consumption to remain strong this year and into 2023.
Overall, steel demand and pricing does appear to be softening a bit as we head into 2H22. Like many industries, people are concerned about the impact of rising rates and there has been talk of a possible recession. Steel is the ultimate cyclical industry, so it will rise and fall with the overall economy. The good news is that both NUE and STLD sound pretty positive about Q3, although we did detect perhaps a little less enthusiasm in their commentary relative to recent quarters.

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