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Technology Stocks : Semi Equipment Analysis
SOXX 642.54+1.0%Feb 26 3:59 PM EST

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Market Snapshot

Dow 32800.28 -46.73 (-0.14%)
Nasdaq 12368.94 -21.71 (-0.18%)
SP 500 4118.70 -11.66 (-0.28%)
10-yr Note

NYSE Adv 1692 Dec 1447 Vol 870 mln
Nasdaq Adv 1978 Dec 2225 Vol 4.3 bln

Industry Watch
Strong: Consumer Discretionary, Consumer Staples, Industrials, Utilities

Weak: Energy, Real Estate, Materials, Financials, Utilities

Moving the Market
-- Expectations that market is due for consolidation period after July rally

-- Falling oil prices

-- July ISM Manufacturing Index corroborated the market's thinking that the Fed can ease up on the pace of its rate hikes

-- Geopolitical skittishness on report House Speaker Pelosi to visit Taiwan despite China's warning against it

Closing Summary
01-Aug-22 16:25 ET

Dow -46.73 at 32800.28, Nasdaq -21.71 at 12368.94, S&P -11.66 at 4118.70
[BRIEFING.COM] The stock market opened on a softer note before finding resilience to the selling effort, which was mostly thanks to falling oil prices and leadership from the mega caps. The resilience couldn't stick and the market closed the first session in August with modest losses, but well off early intraday lows.

The trade today was marked by expectations that the market is due for a consolidation period after the July rally. Market participants were also weighing geopolitical concerns after CNN reported that House Speaker Nancy Pelosi would visit Taiwan despite China's warning against it.

Higher growth areas outpaced the broader market in the early going on the heels of the July ISM Manufacturing Index before losing their influence by the close.

The July ISM Manufacturing Index, which fell to 52.8% from 53.0%, highlights a slowdown in the pace of manufacturing expansion. The real attention grabber, however, was the prices index, which plunged to 60.0% from 78.5% in June.

The Treasury market reacted to this welcome indicator of weakening inflation pressures. The 2s10s inversion widened today with the 10-yr note yield falling four basis points to 2.61% while the 2-yr note yield rose one basis point to 2.91%.

The drop in long-term rates and the festering growth concerns contributed to the outperformance of growth stocks early on. The Vanguard Mega Cap Growth ETF (MGK), which was up 0.9% this morning, closed down 0.2% and just a hair in front of the S&P 500. The PHLX Semiconductor Index was up 1.3% at its high but closed with a modest gain of 0.4%.

S&P 500 sector performance was driven by constituents' news catalysts today. The defensive-oriented consumer staples sector (+1.2%) was at the top of the leaderboard with Colgate-Palmolive (CL 81.10, +2.36, +3.0%) being upgraded today to Equal Weight from Underweight at Wells Fargo. The consumer discretionary sector followed, up 0.5%.

The energy sector (-2.2%) was the top laggard in the face of falling oil prices. WTI crude oil futures fell 4.7% to $93.93/bbl. Natural gas futures fell 0.7% to $8.26/mmbtu. Unleaded gasoline futures fell 3.2% to $3.00/gal.

On an individual basis, Dow component Boeing (BA 169.07, +9.76, +6.1%) was a big winner today following reports that the FAA approved the company's plan that would allow for the resumption of 787 Dreamliner deliveries.

Arconic (ARNC), BP (BP), Caterpillar (CAT), DuPont (DD), Eaton (ETN), JetBlue (JBLU), Marriott (MAR), Molson Coors Brewing (TAP), and Uber (UBER) are all due to report earnings ahead of tomorrow's open.

Tuesday's economic data is limited to the June JOLTS Job Openings (prior 11.254 million).

Reviewing today's economic data:

  • July IHS Markit Manufacturing PMI - Final 52.2%; Prior 52.3%
  • July ISM Manufacturing Index 52.8% ( consensus 52.5%); Prior 53.0%
    • The key takeaway from the report is that it connotes a clear slowdown in manufacturing activity, highlighted by the contraction in new order activity, employment, and the biggest monthly drop in the prices index since June 2010 (and fourth steepest decline on record going back to 1948).
  • June Construction Spending -1.1% ( consensus 0.2%); Prior was revised to 0.1% from -0.1%
    • The key takeaway from the report is the downturn seen in residential spending, which featured a 3.1% decline in new single family construction. The latter is consistent with weak homebuilder sentiment, which has deteriorated on the back of higher mortgage rates crimping affordability for prospective buyers.
Dow Jones Industrial Average: -9.7% YTD
S&P 400: -11.6% YTD
S&P 500: -13.6% YTD
Russell 2000: -16.1% YTD
Nasdaq Composite: -20.9% YTD

Market moves sideways ahead of the close
01-Aug-22 15:30 ET

Dow -18.33 at 32828.68, Nasdaq -29.45 at 12361.20, S&P -12.07 at 4118.29
[BRIEFING.COM] The stock market saw some up and down price action in the last half hour, albeit in a narrow range.

After the close, Activision Blizzard (ATVI), Avis Budget (CAR), Pinterest (PINS), Sanmina (SANM), and Simon Properties (SPG) headline the quarterly reports.

Arconic (ARNC), BP (BP), Caterpillar (CAT), DuPont (DD), Eaton (ETN), JetBlue (JBLU), Marriott (MAR), Molson Coors Brewing (TAP), and Uber (UBER) are all due to report earnings ahead of tomorrow's open.

Tuesday's U.S. economic data is limited to the June JOLTS Job Openings report (prior 11.254 million).

Market trends somewhat higher
01-Aug-22 15:00 ET

Dow +16.28 at 32863.29, Nasdaq +14.77 at 12405.42, S&P -4.28 at 4126.08
[BRIEFING.COM] Each major index moved mostly sideways in recent trading before trending somewhat higher again.

Energy complex futures all settled lower. WTI crude oil futures fell 4.7% to $93.93/bbl. Natural gas futures fell 0.7% to $8.26/mmbtu. Unleaded gasoline futures fell 3.2% to $3.00/gal.

Meanwhile, the S&P 500 energy sector (-2.4%) remains the top laggard by a decent margin with every component trading in the red.

Separately, the Treasury market remains mixed with the 2-yr note yield unchanged at 2.91% while the 10-yr note yield is down three basis points to 2.61%.

Jacobs, Loews underperform in S&P 500 after earnings
01-Aug-22 14:25 ET

Dow -81.83 at 32765.18, Nasdaq -24.10 at 12366.55, S&P -16.24 at 4114.12
[BRIEFING.COM] The S&P 500 (-0.39%) is today's worst-performing index

S&P 500 constituents Cboe Global Markets (CBOE 116.05, -7.33, -5.94%), Jacobs Engineering (J 129.89, -7.41, -5.40%), and Loews Corp (L 55.61, -2.64, -4.53%) dot the bottom of today's standings. Jacobs and Loews both underperform following earnings.

Meanwhile, Massachusetts-based diagnostics firm PerkinElmer (PKI 162.60, +9.43, +6.16%) is one of today's better performers following earnings, news of business divestitures.

Gold higher as dollar, yields slip to start the week
01-Aug-22 14:00 ET

Dow -112.03 at 32734.98, Nasdaq -60.66 at 12329.99, S&P -23.18 at 4107.18
[BRIEFING.COM] The markets have fallen off their levels from the previous half hour, the tech-heavy Nasdaq Composite (-0.49%) now narrowly in second place.

Gold futures settled $5.90 higher (+0.3%) to $1,787.70/oz as the dollar and yields lagged.

Meanwhile, the U.S. Dollar Index is down about -0.4% to $105.46.

Builders FirstSource builds nice gains with strong Q2 report, bodes well for peers (BLDR)
Updated: 01-Aug-22 13:53 ET

Builders FirstSource (BLDR +8%) is building some big gains today after blowing away Q2 results with EPS and revenue well ahead of analyst expectations. As the nation's largest supplier of structural building products (roof/floor trusses, wall panels, stairs, windows, doors etc.), we were pretty surprised to see this much upside. In fairness, BLDR did make some cautious comments about 2H22, lowering its base business guide for revenue.

  • BLDR posted a record of nearly $7 bln in Q2 revenue and posted a record adjusted EBITDA margin of 21.8%. Results were driven by solid demand for housing, productivity improvements and pricing discipline. Although BLDR continues to face supply chain constraints, it is seeing signs that those constraints are loosening and lead times are starting to return to normal. This has been a persistent problem for BLDR in recent quarters, so it is great to hear there is improvement.
  • Despite the very strong Q2 results, BLDR was realistic about the macro headwinds. Given inflation, higher mortgage rates and cancellation rates in the mid-teens, management now expects full-year single-family starts to be down mid-single digits in its markets. As a result, it is lowering its base business guidance on sales to +8-12% from +10-14%. EBITDA guidance remains unchanged.
  • BLDR concedes that its industry is clearly experiencing pockets of deceleration. However, BLDR counters that narrative by noting that it is a much different company today than it was in 2007, during the last housing downturn. BLDR remains confident it can navigate in this persistently unpredictable environment.
Overall, we think this report bodes well for upcoming earnings reports from other homebuilder suppliers (AMWD, BECN, BXC, DOOR, TREX). However, we expect 2H22 cautious commentary from them as well. On a final note, we have to mention BLDR's massive share buyback activity as it really stood out to us. BLDR repurchased nearly $1 bln in shares in Q2. That is huge for a $12.7 bln market cap. Also, BLDR has now repurchased 25% of its shares outstanding in just the past 12 months, which is almost unheard of. Management is making a big statement that its shares look undervalued and that is can manage well even if the industry slows.

ON Semiconductor feels off as slowing demand in noncore end markets in Q2 spurs some uneasiness (ON)
Updated: 01-Aug-22 13:34 ET

ON Semiconductor (ON -5%) feels slightly off today despite toppling earnings and revenue expectations in Q2 while guiding Q3 numbers ahead of consensus. Like its peer Texas Instruments (TXN), ON benefited drastically from robust demand in its automotive and industrial markets.

Why, then, are shares sliding today? Although nothing glaring stands out, we think ON's comments regarding slowing demand within its noncore end markets are stirring some uneasiness today. Profit-taking may also be in the works as shares have soared roughly 40% from July 1 lows as of Friday's close. Meanwhile, after TXN's sizeable Q2 earnings beat last week, investors may have expected better numbers from ON in Q2. Lastly, the company expressed cautious optimism about the near future, stating that it remains sensitive to dynamic market conditions.

  • Despite these weak points, ON's Q2 report contained plenty of positives. Adjusted EPS surged 113% yr/yr to $1.34 as non-GAAP gross margin expanded 1,130 bps yr/yr to 49.7%.
  • Within automotive and industrial, which ignited ON's explosive earnings growth, high-growth, high-margin businesses such as vehicle electrification and industrial automation paved the way for solid Q2 numbers. Combined, these two industries grew 38% yr/yr, making up around two-thirds of ON's total revs in the quarter, which appreciated 24.9% yr/yr to $2.08 bln.
  • More specifically, ON's Intelligent Power segment, which contains sales to the electric vehicle (EV) market, jumped 31% yr/yr and 10% sequentially. Part of why ON is benefiting enormously from EVs is that they require up to $700 of incremental ON components for drivetrain and onboard charging compared to traditional internal combustion engine (ICE) vehicles. As a result, along with the transition from ICE vehicles to EVs, ON expects Intelligent Power to continue experiencing robust growth over the long term.
  • Supply chain constraints that continue to disrupt industries are also acting as a tailwind for ON, spurring accelerated factory automation growth. This is highlighted by 70% growth yr/yr in ON's scanning business within its industrial end market. Combining this with automotive manufacturers incorporating more image sensors into their vehicles for advanced driver assistance systems (ADAS), ON's Intelligent Sensing segment grew 39% yr/yr and 10% sequentially.
  • Looking ahead at Q3, ON guided adjusted EPS and revs above consensus, predicting 51% growth in earnings yr/yr and 22% growth in revs at the midpoint. ON stated that although demand is expected to continue slowing within its noncore businesses, parts of which it is exiting, strength within automotive and industrial end markets should persist.
Overall, ON's Q2 results were solid. However, weak demand within its noncore businesses and a higher bar following TXN's upbeat Q2 numbers are clouding many positive developments. Nevertheless, ON's exceptional growth within its high-margin, high-growth businesses proves that its move around a year and a half ago to shift focus toward margins and growth is paying off. With a forward P/E ratio of ~14x, a nice discount relative to TXN at ~20x, ON still has plenty of upside over the long run.

JELD-WEN tumbles on slashed FY22 guidance as conditions that plagued Q1 intensified in Q2 (JELD)
Updated: 01-Aug-22 11:07 ET

Window and door manufacturer JELD-WEN (JELD -17%) is being shown the door today after missing Q2 earnings estimates and slashing its FY22 revenue guidance. Perhaps most frustrating to investors is that after JELD missed the mark in Q1, the company still expressed confidence in hitting its FY22 targets due to a strong backlog and cost mitigation efforts. It also is not helping that JELD expects elevated input costs and softening demand to linger for the remainder of the year.

  • In Q2, adjusted earnings fell 3.4% yr/yr to $0.57 as cost inflation from raw materials, freight, labor, and energy took a 380 bp bite out of adjusted EBITDA margins. Meanwhile, revenue growth of 6.8% yr/yr to $1.33 bln met analyst expectations.
  • Demand softness was felt throughout all JELD's markets but was particularly problematic in North America and Europe (totaling 88% of FY21 revenue). In North America, sales climbed 13.4% yr/yr, driven by strong price realization but partially offset by flat volume/mix yr/yr. Meanwhile, in Europe, revenue dipped 2.8% yr/yr primarily due to the strengthening of the U.S. dollar. However, core revs did grow 9%, fueled by favorable pricing, but again, partially offset by negative contribution from volume/mix.
  • On the plus side, JELD offered a few positive comments, noting that in North America, order rates remain strong, with revs experiencing growth in channels that primarily serve the residential new construction market.
    • JELD's comments echo the sentiments of homebuilders like D.R. Horton (DHI) and PulteGroup (PHM). Both companies may have noticed a moderation in demand in JunQ. However, they are still seeing qualified buyers remain in the market as household formations persist and inflationary pressures drive higher rents.
  • Furthermore, even though higher mortgage rates and economic uncertainty are likely to continue creating headwinds for JELD in the near term, long-term developments remain positive. For example, the repair and remodeling industry is expected to stay more resilient over the long term due to the level of homeowner equity accumulation, the increasing age of the existing stock of houses, and homeowners' increased focus on investing in their property.
    • Also, it is worth noting that the multifamily housing industry saw solid demand in Q2, which is expected to help offset short-run negative pressures.
  • Nevertheless, these silver linings are doing little to douse the current sell-off, sparked by worsening profitability yr/yr in Q2 and intensified by JELD's FY22 revenue guidance of +4-6% growth yr/yr, coming in well below its prior forecast of +7-10%.
Overall, it was a challenging quarter for JELD. Investors already anticipated rising interest rates to disrupt JELD's financials, illustrated by the stock tumbling over 30% YTD as of Friday's close. However, the market did not foresee the situation crumbling as much as it did in Q2, which led to a meaningful reduction in JELD's FY22 revenue forecast. With multiple home builders also cutting their FY22 outlook recently, we think it is best to remain on the sidelines over the near future until macroeconomic conditions begin to brighten.

Global Payments buying EVO Payments; reports nice quarter (GPN)
Updated: 01-Aug-22 11:04 ET

Global Payments (GPN +6%) reported impressive Q2 results this morning with upside for both EPS and revenue. It also reaffirmed FY22 guidance, which was encouraging to see in this environment. Coming into this report, we had concerns that this payments technology company might report a miss or possibly guide down. Recall that several retailers have lowered EPS or comp guidance in recent weeks (WMT, TGT, BBY etc.) and GPN has high exposure to consumer spend, so it was reassuring to see the upside.

  • But its earnings report was not the only big news today. The company also announced a major acquisition. It will acquire EVO Payments (EVOP), a provider of payment technology integrations, in an all-cash deal at $34 per share, a 24% premium over Friday's closing price. The deal expands GPN's presence in new and existing faster growth geographies. Importantly, it also boosts GPN's offering in the B2B space with the addition of accounts receivable software with broad third-party acceptance.
  • As part of the deal, Silver Lake will make a strategic investment of $1.5 bln in Global Payments in the form of a convertible note. We would not overlook the importance of this aspect to the deal. Not only does it provides funding, but Silver Lake has a well known impressive track record of successful investments in tech companies. Clearly, they like the direction GPN is heading.
  • Speaking of which, we think the B2B element of the EVOP deal is important. Recall that, in February, GPN announced a strategic review of its Netspend consumer business so that it can focus on its core corporate clients. As such, GPN is announcing a deal today to sell Netspend's consumer assets to Searchlight Capital for $1 bln. GPN will retain Netspend's B2B assets, which will be included in its Issuer Solutions segment starting in Q3. Netspend's consumer portfolio is attractive, but there is limited overlap between its customer base and GPN's traditional corporate clients. Clearly, GPN wants to focus more on the B2B side of the business.
  • GPN sees the B2B market as substantially under-penetrated and it wants to take advantage of that opportunity. Last October, it acquired MineralTree, which provided GPN with a cloud Accounts Payable business and GPN has been on the lookout for an Accounts Receivable corollary business and with EVOP, it now has that. GPN believes that EVOP provides that missing link and allows GPN to offer an end-to-end platform.
GPN initially traded flat, but has started to move higher. We think that is because there are so many cross currents with all the news today. There is a good quarter and we have to think the Silver Lake investment is a stamp of approval from a well-respected tech investor. We also find the guidance to be reassuring, calming our nerves about consumer spending.

However, the convertible note does cause some dilution and perhaps investors are a little concerned about the rich premium being paid for EVOP. Overall, we like the deal as it fortifies GPN's already dominant position in existing markets and opens up new geographies. Also, we like GPN's increased focus on the B2B side, which we think is a more lucrative business and less volatile than the consumer side.

Last Updated: 29-Jul-22 15:00 ET | Archive
Shelter costs create difficult proving ground for policy pivot
From time to time, the market sees what it wants to see and hears what it wants to hear. This is one of those times.

The month of July has been a splendid month-- and we're not talking about the weather. It has been splendid for investors who, frankly, needed a splendid month given that the first six months of the year were anything but splendid.

Alas, we write this with the Nasdaq Composite up 12.2% in July and the S&P 500 up 9.0%. As we alluded to last week, the stock market has gotten better as the economic and earnings news has gotten relatively worse and sometimes just bad.

The stock market has rallied like it has partly because bearish sentiment hit extreme levels and partly because the market has allowed itself to believe that the Federal Reserve will become a friend again by cutting rates as soon as the first half of 2023.

Ironically, that thinking rests on a belief that the unfriendly rate hikes in 2022 will kill the economy or at least put the economy on its back. The connection, it seems, is that the market loves the idea of the Fed turning soft on rate hikes more than it fears the economy turning soft and/or falling into a recession.

It is not surprising considering a new generation of market participants has grown up on rock-bottom interest rates that were the foundation for a prolonged bull market. Who wouldn't want that back? Hence, this market loves to hear bad news at the moment, because what it sees in the bad news is a path back to a friendlier Fed.

Rate Hikes on the Chopping Block

The fed funds futures market is pricing in another 100 basis points of rate hikes for the remainder of 2022, with the target range for the fed funds rate topping out at 3.25-3.50% in December, according to the CME's FedWatch Tool. Then, the fed funds futures market thinks the Fed will cut rates two times in the first half of 2023, leaving the target range at 2.75-3.00% in June 2023.

Falling commodity prices, fading inflation expectations, improving supply chains, and the Fed's stated effort to drive growth below potential with frontloaded rate hikes that weaken demand (and the labor market as a result) are primary selling points for the rate-cut view.

The Fed and other central banks might stamp out growth with their rate hikes but stamping out inflation might not be such a cooperative endeavor.

Current indications point to Europe remaining stuck with an energy crisis this winter, a lot of companies have announced plans to raise prices further in coming months or at least see inflation pressures persisting, any weakening in the dollar would be a boon for dollar-denominated commodity prices, and shelter costs are expected to remain inflated.

In short, getting from here (tightening policy) to there (easing policy) involves a lot of proving ground to cross, including the Fed's own median projection that the target range for the fed funds rate will hit 3.80% in 2023.

One of the potentially sticky points on that proving ground -- for the Fed anyway -- will be shelter costs.

Landlords Land a Raise

The Personal Income and Spending Report for June was not good. It featured high inflation, weak real spending, a decline in real disposable personal income, and a drop in the personal savings rate as a percentage of disposable income to 5.1%, which is the lowest since August 2009.

Another thing that jumped off the pages of that report to us was the month-over-month increase in rental income of persons with capital consumption adjustment. That's a fanciful economic description for the income of landlords. That income increased 2.5% month-over-month on the heels of a 2.6% monthly increase in both April and May. The monthly gains from January to March ranged from 0.1-0.2%.

The more robust income gains of late for landlords stem from rising rental rates and/or occupancy rates. To be sure, the high prices for new and existing homes, combined with the spike in mortgage rates this year, has created a good deal of affordability pressure for prospective buyers.

Many have been "priced out of the market" from the economics alone while others have been driven out by the psychological view that they might be buying at the top of a housing cycle. In either case, it is necessary to fall back on a rental unit until the forces and economics align to allow for the purchase of a home.

That, however, creates more demand for rental units, which inevitably leads to higher rental costs.

The June CPI report showed shelter costs increasing 0.6% month-over-month and 5.6% year-over-year. That increase was driven by a 0.8% gain in the rent of primary residences (+5.8% year-over-year) and a 0.7% increase in owners' equivalent rent of residences (OER), which was up 5.5% year-over-year.

Those two components -- the rent of primary residence and OER -- make up nearly the entirety of the shelter cost, which accounts for 41.4% of core CPI. Accordingly, shelter costs have a disproportionate influence on the measurement of core CPI.

That matters greatly because Fed Chair Powell has conceded that the Fed's policy tools don't work on commodity price shocks (namely food and energy) that factor into total CPI. Hence, when making policy decisions, the Fed keeps a closer watch on core inflation, which wouldn't include commodity price shocks.

What It All Means

The Fed has stated that its preferred inflation gauge is the core-PCE Price Index, but that doesn't mean it won't take the core-CPI reading into account, especially when the general public's inflation expectations are influenced by the CPI data.

The problem the Fed is going to face, and which the market will need to get its mind around, is that shelter costs aren't expected to fall off sharply in the near term, regardless of further rate increases. That's because the manner in which the Consumer Price Index measures rent and OER lags home prices.

According to research done by Fannie Mae, house price gains on a year-over-year basis historically lead changes in the CPI shelter costs measures by about five quarters1. Home price gains have started to weaken, but the latest Case-Shiller Home 20-city Composite Price Index still showed prices up a hefty 20.5% year-over-year.

A moderation in house prices will work in favor of core CPI readings eventually, but there is still more catching up to do in terms of shelter costs that capture the home price appreciation. That is why core CPI levels could remain stuck at elevated levels that keep the Fed from turning friendly with its monetary policy as soon as the fed funds futures market thinks it might.

That understanding isn't a problem now because the market is only projecting preferred outcomes at the moment for the path of monetary policy. That path, however, still needs to cut through a difficult proving ground.

-- Patrick J. O'Hare,

1Brescia, Eric. (2021, June). Housing Insights: Housing Poised to Become Strong Driver of Inflation. Fannie Mae.
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