Cover:
-The housing market is currently experiencing a housing-cost crisis, with high prices, low supply, and steep mortgage rates affecting affordability. The Atlanta Fed's affordability index was at 68.5 in June, near its lowest levels since 2006. Ownership costs, including mortgage, taxes, and insurance, are eating up nearly 44% of median household income. Relief is coming with the 30-year mortgage dropping from 7% to the low 6% range, in tandem with declines in the 10-year Treasury note, in anticipation of Federal Reserve rate cuts. However, a quarter-point cut may not push mortgage rates down, but if the Fed opts for half a percentage point, it may pull the 30-year mortgage down a bit more. High housing costs are also a hot topic in the presidential campaign, with Vice President Kamala Harris proposing grants for first-time buyers and incentives for developers, and former President Donald Trump discussing regulatory cuts, building on federal land, and mass deportations of illegal immigrants.
Interview:
-Gibson Smith, a fixed-income investor, is a rising star in the bond market. He founded Smith Capital Investors in 2018 and has since launched an exchange-traded fund, the ALPS/Smith Core Plus Bond, which has attracted over $900M in assets. Smith's firm's flagship ALPS/Smith Total Return Bond fund has returned 1.3% over the past five years, beating the broad bond market's 0.2% return. He believes the Fed is cutting rates to normalize the federal-funds rate, which is restrictive due to the positive real rate created by the Fed. Smith believes the initial cuts the Fed will make in the next four to five months are about reducing the real inflation-adjusted rate, allowing the Fed to be more aggressive about easing rates if necessary. The Federal Reserve's decision to cut interest rates is expected to impact bond markets and investors' reactions to the potential cut.
Tech Trader:
-Oracle shares rose 11% after the company reported solid earnings results and announced a new database partnership with Amazon Web Services. The stock rose again later in the week after Oracle provided a new long-term outlook, calling for $104B in revenue for fiscal year 2029. Oracle's software numbers were solid, but what has Wall Street truly excited is the opportunity and developments in the Oracle Cloud Infrastructure (OCI) business, which competes with Amazon Web Services, Microsoft Azure, and Google Cloud in renting out computing capacity to corporations and start-ups. Analysts believe OCI is gaining market share from larger cloud vendors because it can provide flexibility and a more tailored solution for cloud customers with specialized requirements. In the quarter, OCI grew by 45% to $2.2B in revenue, outpacing the recent growth rates from its cloud rivals.
The Trader:
-Consumer staples stocks have seen a significant increase, with the Consumer Staples Select Sector SPDR exchange-traded fund up almost 8% from a multi-week low in early August. The fund, which includes Procter & Gamble, Colgate-Palmolive, Walmart, Coca-Cola, and PepsiCo, has outperformed the S&P 500 by 5.9 percentage points over the past three months. Investors are seeking the safety of staples, as their sales and earnings don't take much of a hit when consumer spending slows down and there are concerns about the economy. However, fear can push demand for staples too far, as the Consumer Staples ETF rose to a level 10.6% above its 200-day moving average, a level it hit on just two other occasions since 2013. In both previous cases, staples went on to drop more than 5% over the following few weeks.
Price concerns are backed up by fundamentals, as large staples companies don't offer much profit growth and are mature and have grown into the markets they operate in. Consumers aren't significantly ramping up the rate at which they buy household items, groceries, and toothpaste, so staples stocks reach a certain valuation when there isn't enough growth to justify the price investors have to pay. Instead, the stocks will pay the price when that fear dissipates.
-Palantir Technologies, a software company that organizes customers' data on a centralized platform, has gained a spot in the S&P 500 index. The company's main business is providing software systems for government customers, such as the US Army, to identify security threats and bolster military operations. Large private-sector companies use these systems to quickly identify sales opportunities and keep their cost structure efficient. Palantir's growth in its government business is slowing from a larger base, but the pace is increasing for private enterprise as companies adopt new forms of data analytics. Fortune Business Insights predicts that this market will grow in the low-teen percentages annually to over $1T by 2032. Palantir's offerings also keep customers' data private, which has helped enterprise sales grow 32% year over year during the second quarter, with total revenue growing 27% to $678M. This growth does wonders for earnings, especially if it is accompanied by lower costs and higher margins.
Features:
-Schlumberger might be described as “the Nvidia of the 1980’s,” was a leading servicer in the energy industry and had the world's fifth-largest market cap. Despite its current market value of under $60B, SLB is worth a fresh look due to its potential to remain a significant player in the oil-and-gas industry. Demand continues to rise globally, with over 100M barrels a day, and the industry needs the expertise in assessing and developing energy deposits provided by SLB. SLB stock, currently trading near a 52-week low, offers a reasonable 11 times projected 2024 earnings of $3.50 a share and under 10 times estimated 2025 profits of $4.13 a share, while yielding 2.8%. James West, an oil-services analyst at Evercore ISI, calls SLB the industry's technology leader and the go-to company in every major international market. He carries an Outperform rating and a $74 price target, almost double the current price, but views his target as 14.5 times his 2026 earnings estimate of $5.10 a share.
-United Airlines announced a deal with Elon Musk's SpaceX for in-flight internet service, causing shares of alternative Wi-Fi provider ViaSat to plunge. United announced that customers would receive free internet access via SpaceX's Starlink network, which is a blow to ViaSat, which is a competing supplier of space-based Wi-Fi and a supplier to United. The Starlink deal is the industry's largest agreement, covering more than 1,000 aircraft. Testing of the "gate-to-gate connectivity" begins in 2025. United CEO Scott Kirby said that everything on the ground will soon be able to be done onboard a United plane at 35,000 feet, just about anywhere in the world. SpaceX's president and chief operating officer, Gwynne Shotwell, added that they are excited to team up with United Airlines to transform the in-flight experience. ViaSat stock was off almost 15%, closing at $12.79 a share. Gogo also provides Wi-Fi service for planes, but United isn't a Gogo customer. Starlink's growth has been rapid, with Starlink having roughly three million individual subscribers in early 2024 and doubling in 2023 compared to 2022.
European Trader:
-Roche stock fell on Thursday after new data on its oral weight-loss drug, CT-996, revealed side effects. The Swiss pharma giant is attempting to break into the weight-loss market dominated by Eli Lilly and Novo Nordisk. Roche's Swiss stock is up 6.7% this year, trailing Novo and Lilly shares by 31% and 58%, respectively. CT-996, developed to control blood sugar levels and treat diabetes and obesity, is currently in early-stage trials. If approved, it could challenge Lilly's blockbuster drugs Zepbound and Mounjaro and Novo's Ozempic and Wegovy. Roche said the drug was generally well-tolerated but some patients experienced gastrointestinal side effects. The results of CT-996's obesity pill were based on just six patients, but Roche said the data supports continued studies.
Emerging Markets:
-No update
Commodities:
-Oil prices have hit their lowest levels since 2021 due to China's economy slowdown and increased oil drilling in several countries. Analysts predict that by next year, oil will be in oversupply, causing a selloff for oil investors and impacting oil stocks. The Energy Select Sector SPDR exchange-traded fund has fallen 5% in the past five days. However, some analysts believe that prices could rebound, and some stocks may be attractive. In the near-term, weather seems to be helping the industry, with oil prices rebounding slightly after Hurricane Francine in the Gulf of Mexico curtailed some oil production. West Texas Intermediate crude and Brent crude were up 1.1% and 0.9%, respectively. Analysts have been reducing their estimates for oil prices for the rest of the year and next due to China's weakness and expanding production in the US, Canada, and elsewhere. However, most banks still expect demand to grow faster than supply through the end of the year, which is expected to be bullish.
Streetwise:
-Stock market strategists at BofA Securities have noted a shift in the Regime Indicator from upturn to downturn, causing concern among investors. Power companies have outperformed artificial-intelligence giants since June, with the iShares U.S. Utilities ETF returning 12% and the iShares U.S. Technology ETF slipping 4%. However, for S&P 500 fundholders, the working stocks have outperformed the non-working ones, and the fund has returned a couple of percent over the stretch. BofA suggests that it isn't too late to buy tech profits and invest in something boring. Tech is expensive, and earnings growth is impressive but decelerating. The S&P 500 carries extreme concentration risk, with Apple, Microsoft, Nvidia, Alphabet, and Amazon.com together making up over a quarter of the index. Dividends could contribute closer to their historical average of 40% in the future.