Closing Stock Market SummaryThe stock market logged sizable gains today, building on last week's rally. The day started on a mixed note, however, with the major averages oscillating around the flat line as the 10-yr Treasury note yield tested the 4.30% level. Selling quickly subsided in the Treasury market and stocks built upside momentum. The S&P 500, which slipped below 3,500 on October 13, briefly traded above 3,800 before ending just below that level.
The 10-yr note yield ultimately settled up two basis points to 4.23%. The 2-yr note yield fell three basis points to 4.48%.
Notably, the stock market held up pretty well even as the 10-yr note yield reached its session high. Market participants remain drawn to the notion that the Fed could take a less aggressive rate-hike approach in December and beyond. Today's weak preliminary Manufacturing and Services PMI data for October from IHS Markit supported this thinking.
Many stocks came along for the rally, which left nine of the 11 S&P 500 sectors in positive territory. Health care (+1.9%) held the top spot while materials (-0.6%) fell to the bottom.
One notable area of weakness was Chinese stocks and U.S. stocks with high exposure to the Chinese market. This comes after Xi Jinping secured an unprecedented, third five-year term to serve as China's leader. That wasn't surprising, but it did come as a shock to many investors that he managed to surround himself only with loyalists who are apt to help him pursue tighter regulations and the continuation of China's zero-Covid policy.
JD.com (JD 36.66, -5.49, -13.0%) and Pinduoduo (PDD 44.46, -14.51, -24.6%) were losing standouts for Chinese stocks while Las Vegas Sands (LVS 35.05, -4.02, -10.3%) and Starbucks (SBUX 83.76, -4.85, -5.5%) also suffered losses on concerns related to Xi's power grab.
Energy complex futures settled in mixed fashion. WTI crude oil futures fell 0.3% to $84.64.bbl while natural gas futures rose 5.2% to $5.21/mmbtu.
Also, it has been reported that Rishi Sunak will be the next UK prime minister.
General Motors (GM), Valero Energy (VLO), Centene (CNC), UPS (UPS), Sherwin-Williams (SHW), PulteGroup (PHM), Haliburton (HAL), General Electric (GE), Raytheon Technologies (RTX), Biogen (BIIB), Coca-Cola (KO), and 3M (MMM) headline the earnings reports ahead of Tuesday's open.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 9:00 ET: August FHFA Housing Price Index (consensus -0.7%; prior -0.6%), August S&P Case-Shiller Home Price Index ( consensus 14.0%; prior 16.1%)
- 10:00 ET: October Consumer Confidence (consensus 105.5; prior 108.0)
Economic data today was limited to the preliminary October IHS Markit Manufacturing PMI, which came in at 49.9 versus the prior reading of 52.0 and the preliminary October IHS Markit Services PMI came in at 46.6 versus the prior reading of 49.3.
Dow Jones Industrial Average: -13.3% YTD
S&P Midcap 400: -18.1% YTD
S&P 500: -20.3% YTD
Russell 2000: -22.1% YTD
Nasdaq Composite: -30.0% YTD
Fashion’s Metaverse Obsession Has Cooled – But Don’t Count the Virtual World Out Yet
Meta’s earnings this week will provide an opportunity for the company to defend its vision for the metaverse. Fashion remains enthusiastic about the concept, though skepticism is growing.
For the last two years, fashion brands have unleashed a steady drip of metaverse experiments and experiences. Virtual fashion shows helped brands both big and small grab attention early in the pandemic, and operators of virtual worlds such as Fortnite, Roblox and Minecraft announced collaboration after collaboration. Brands have named executives to head up metaverse strategy.
Fashion hasn’t abandoned its obsession with virtual reality: Tommy Hilfiger’s September fashion show had a metaverse component, and Burberry will launch a Minecraft world in November. But there’s no denying that the pace of announcements has slowed. Fortnite hasn’t announced any new fashion collaborations this year. Many of those Roblox worlds are updated sporadically, if at all, and even on a busy day, see only dozens of users.
There’s no bigger symbol of the technology’s growing pains than Facebook parent Meta, which reports quarterly results on Wednesday. The company has positioned itself as the metaverse’s biggest champion, but has struggled to convince its billions of users to log on amid a seemingly endless storm of bad press. Recent reporting from The Verge, The Wall Street Journal, The New York Times and others has painted a picture of empty virtual worlds that even Meta’s own employees have yet to embrace, as well as the usual issues with harassment and content moderation that come with any online platform. Meta continues to add new brands and items to its avatar store, which includes outfits designed by Balenciaga and Prada. But it’s not clear how many people are buying them, or can even find it.
Fashion brands have often met a similar reaction to their metaverse experiments, albeit on a smaller scale. Critics and ordinary consumers complain the clothes sent down those virtual runways are ugly. The process to create a virtual avatar can be confusing for new users, and it’s not always clear what you’re supposed to do with your mini-me once you create them.
The cooling economy is another impediment. All but the most innovative brands are at least five years away from the metaverse contributing meaningfully to revenue, according to the State of Fashion: Technology report put out earlier this year by The Business of Fashion and McKinsey & Co. That’s a long time to wait, especially when borrowing costs are rising fast and companies are worried about ensuring cash flow to make it through an impending recession.
It’s easy to be cynical about the metaverse. Some high profile projects are troubled, but the underlying concepts are slowly working their way into the fashion mainstream. Young consumers may be ignoring Meta’s Horizon Worlds, but they spend much of their time in the virtual worlds of Fortnite, Minecraft and Roblox. Roblox recently rolled out sleeker graphics that could make it easier for brands to release compelling content. Luxury brands, which are still reporting record sales and profits despite the worsening economic outlook, have plenty of resources to make available to their new chief metaverse officers.
Meta isn’t giving up either, and even incremental successes there will create enormous opportunities for fashion. Perhaps we’ll learn more on Wednesday.
Apple is today increasing the prices of its Apple Music and Apple TV+ subscription services. The Apple One bundle price is also rising in unison.
The Apple Music monthly price has been upped by ~$1 for individuals and ~$2 for families. Apple TV+ is rising by $2 (which only has one tier and supports Family Sharing on all plans). Apple One is also going up by approximately $3 per month. Full pricing changes after the break …
This represents the first time Apple has raised the subscription price of Music, TV+ and Apple One in the United States.
Apple said the increase in Apple Music subscription price was due to increased licensing costs. The company said artists and songwriters will earn more per stream as a result of the pricing tier changes. Regarding Apple TV+, the company said the increased price reflects the growing catalog of original TV shows and movies:
From an Apple spokesperson:
The subscription prices for Apple Music, Apple TV+, and Apple One will increase beginning today. The change to Apple Music is due to an increase in licensing costs, and in turn, artists and songwriters will earn more for the streaming of their music. We also continue to add innovative features that make Apple Music the world’s best listening experience. We introduced Apple TV+ at a very low price because we started with just a few shows and movies. Three years later, Apple TV+ is home to an extensive selection of award-winning and broadly acclaimed series, feature films, documentaries, and kids and family entertainment from the world’s most creative storytellers.
This translates to increases of $1 to $2 per service, with Apple One tiers going up about $3 at the same time. Here’s the full pricing breakdown for the United States:
Apple Music
- Individual: $10.99 per month (from $9.99)
- Family: $16.99 per month (from $14.99)
- Individual Annual: $109 per year (from $99)
Apple TV+
- Monthly: $6.99 per month (from $4.99)
- Annual: $69 per year (from $49.99)
Apple One
- Individual: $16.95 per month (from $14.95)
- Family: $22.95 per month (from $19.95)
- Premier: $32.95 per month (from $29.95)
If you are in an International market, you should also expect to see proportionally similar price increases go into effect beginning today. Current subscribers will receive notifications of the planned price increases 30 days prior to the service renewing at the higher price.
Apple clearly believes the prices of its content services remain competitive. Unlike its competitors, Apple’s services include more features as standard.
For instance, Apple Music includes lossless audio and Spatial Audio at no additional charge, unlike Spotify which doesn’t offer these features today — and is actually expected to charge extra for them when they are introduced. Similarly, TV+ does not upsell for better video quality; 4K HDR is included as standard.
To raise prices of Apple Music, Apple TV+, and Apple One subscription services - press
- To raise Apple TV+ to $6.99 from $4.99
- Apple Music raised to $10.99 from $9.99
- Apple One bundles to $16.95 and $32.95
Morgan Stanley: Mortgagepocalypse Soon
Unsafe as houses
Rishi Sunak is prime minister, after the UK managed to get through an entire BoJo Cycle (opportunism, boosterism, lies, humiliating betrayal of the loyalists) in a matter of mere days — who says the national productivity puzzle can’t be solved?
Given the brief boost given to the pound by Johnson demonstrating he can, in fact, pull out, FT Alphaville is inclined to speculate the former PM simply wanted to make his next holiday a bit more affordable. With stable leadership now in place, it’s now plain sailing for the United Kingdom.
Oh, but the economy.
A lot of discussion over the past year has been about the cost of living crisis in terms of price inflation and energy bills. But the other major element is of course mortgage costs. Another vicious cycle: price are soaring —> your friendly, local central bank hikes rates —> now your mortgage is more expensive too. Thanks.
For anyone feeling relieved that the future of the UK is no longer in the hands of the Conservative party membership (we’re not going to get on our high horse about who has a mandates here), Morgan Stanley has a note out today that’s perfectly-timed to wipe the smile off your face. 🥰
Given the brief boost given to the pound by Johnson demonstrating he can, in fact, pull out, FT Alphaville is inclined to speculate the former PM simply wanted to make his next holiday a bit more affordable. With stable leadership now in place, it’s now plain sailing for the United Kingdom.
Oh, but the economy.
A lot of discussion over the past year has been about the cost of living crisis in terms of price inflation and energy bills. But the other major element is of course mortgage costs. Another vicious cycle: price are soaring —> your friendly, local central bank hikes rates —> now your mortgage is more expensive too. Thanks.
For anyone feeling relieved that the future of the UK is no longer in the hands of the Conservative party membership (we’re not going to get on our high horse about who has a mandates here), Morgan Stanley has a note out today that’s perfectly-timed to wipe the smile off your face. 🥰
A new PM for the UK is incoming, but we think the fiscal course is already changed. A recession awaits, and we forecast the BoE to hike much less than markets next year as growth slows…
Given short fixed-rate periods, 35-40% of UK mortgages may see higher rates in the next 12 months. Resets are significant for both banks and borrowers; ~6% new rates versus ~2% rates in the back book. With higher utility bills, a 6% mortgage rate could mean that 30-40% of UK households struggle to pay their mortgage.
Read that again. Up to four in ten UK mortgaged households may struggle to stay current on their house over the next year.
On the plus side, Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, argues that “mortgage underwriting was of significantly higher quality than pre-GFC”. Bank investors may be (a little) relieved; households are probably not.
The further slides are . . . grim:
When Johnson’s leadership fell apart in the early summer, there was a sense that the Conservatives were operating in effectively suspended animation: determined to spend the summer playing to the party faithful despite the tough looming winter.
Now, three-and-a-half months later, we‘re down a monarch and a chunk of credibility, and up some kind of energy bill relief (although exactly what form it will take still seems somewhat up in the air). It would be a great thing to have a fully-functioning government right now. We know that’s a lot to ask though.
Picking the next wave of takeover targets in the Rishiconomy
Hoist those UK-for-sale signs, we’re doing fantasy M&A again
Here’s a meaningless statistic: Liz Truss’s premiership will probably be the first in modern times in which no UK-listed companies were bought. Several takeover offers arrived during her Downing Street layover — Aveva, RPS, Biffa — but of the 13 takeouts and take-privates completed so far this year, none has been on her watch.
OK, it’s probably not the most surprising datapoint. Truss’s six weeks in office were during a relatively slow year for global M&A, due mostly to the seizing up of LBO financing. But things look a bit different for incoming premier Rishi Sunak.
The market for articles about how UK plc is on sale has remained buoyant, after all. Weak sterling, record institutional underweighting, docile laws, value obsession, Brexit effects — you know the kind of thing, since you’ve probably been reading about it for decades.
And it’s consensus that Britain will be picked apart again once credit markets right themselves. Half of private equity investors see the UK as more attractive than other markets available to them, with another 41 per cent saying it was significantly more attractive, a Numis survey of PE professionals found. Institutional owners are too biased towards value (say 38 per cent) so are expected to be receptive or highly receptive to public-to-private offers (say 83 per cent).
Over at Goldman Sachs they have put some data behind the theory in a note advising clients to go long UK mid-caps. Foreign investors eat about 5 per cent of London’s market cap a year after the pound falls 10 per cent, from 2 per cent in a normally, it says:
Goldman’s not particularly bearish on the UK economy, setting its base case to trough GDP halfway through 2023 after four consecutive negative quarters. Yet the FTSE 250 is heading towards its worst year on record so looks cheap on current earnings forecasts, it says:
Plus, oddly, the UK mid-caps outperform in periods of economic flux:
Goldman Sachs’s UK target list has few surprises. It’s full of lapsed targets (Entain), active targets (Micro Focus), corporate clients (Pearson) perma-speculation names (ITV, Burberry, Sage), bond proxies (United Utilities, SSE, Pennon) and geographical aberrations (Experian, Network International).
The most politically charged names above are defence contractor Babcock and aerospace/engineering roll-up Melrose. Any offers in that direction would give the new PM a chance to try out the veto powers provided by the UK National Security and Investment Act, whose introduction last year was championed by former chancellor Rishi Sunak.
EY denies negligence over audits of collapsed NMC Health
Big Four firm defends $2.7bn claim as role of auditors in detecting fraud comes under scrutiny
EY’s UK business has denied it was negligent in its audits of NMC Health, the collapsed former FTSE 100 hospital operator, in a $2.7bn court battle that will renew focus on the scope of auditors’ duty to detect fraud.
Abu Dhabi-based NMC entered administration in April 2020 after it was targeted by short sellers in 2019 and the subsequent discovery of $4bn of debt that had been hidden from its balance sheet. The case is one of the biggest frauds ever alleged at a FTSE 100 company.
The legal claim, filed in London’s High Court by NMC’s administrators in May, alleged a string of shortcomings by EY, including a failure to spot that its client’s accounts were fraudulently misstated and that NMC did not keep proper accounting records.
The claim also alleged that the Big Four auditor failed to verify NMC’s bank and debt balances, similar to claims against EY in its role as auditor of collapsed German company Wirecard.
Administrators Alvarez & Marsal, tasked with securing funds to repay NMC’s creditors, claimed that more than $1.5bn was transferred from the group to its founder BR Shetty and two of his associates.
Shetty, himself the subject of a criminal complaint in the UAE, has claimed he was a victim of the fraud.
The case, which is not expected to reach a full trial until 2024, is the latest flashpoint in the debate over an auditors’ duty to spot fraud after UK regulators toughened requirements last year.
Auditors have long complained of an “expectation gap” between the public perception of their role and their actual duties.
In its defence filed this month, EY said audits were designed to give “reasonable assurance” the accounts were not materially misstated but they do not guarantee this and do not absolve company directors of “primary responsibility for the accuracy of those financial statements”.
The firm said the alleged fraud “involved the falsification and concealment of accounting records and other documents”.
It added it was “not aware that there were a large number of payments to and from Dr Shetty’s personal bank accounts” and denied it should have taken steps that would have revealed manipulated entries.
EY argued the amount of damages it was ordered to pay to the administrators should be reduced to reflect NMC’s negligence. It said “many of those charged with governance within NMC, including at the most senior levels, were themselves guilty of perpetrating the fraud (including by making deliberately false representations to EY)”.
The firm’s defence also rests on its outsourcing of much of the NMC audit to its Middle East business. EY UK, which signed off NMC’s group accounts and is the defendant in the legal case, argued it should not be liable for any failings in so-called component audits of overseas operations. EY did not admit any failings by its Middle East business.
EY UK said it carried out its duties as group auditor by giving “proper instructions” to overseas auditors, primarily EY Middle East, and satisfying itself that it could rely on their work. The firm said it had “no reason to think” EY Middle East was not carrying out its work properly.
EY is a network of separately owned national and regional practices that share a brand globally, in a similar way to its rivals, a structure that has helped firms to limit legal liabilities in one country from hitting their finances elsewhere.
EY, which charged almost £14mn for its work since NMC floated in 2012, said most of the administrators’ claims were invalid because of contractual and statutory limitation periods.
Research Calls
- Upgrades:
- ANSYS (ANSS) upgraded to Buy from Neutral at Rosenblatt; tgt lowered to $270
- AT&T (T) upgraded to Strong Buy from Outperform at Raymond James; tgt $24
- Avis Budget (CAR) upgraded to Overweight from Neutral at JP Morgan; tgt raised to $231
- HEICO (HEI) upgraded to Outperform from Sector Perform at RBC Capital Mkts; tgt raised to $175
- ServiceNow (NOW) upgraded to Buy from Neutral at Guggenheim
- Stoke Therapeutics (STOK) upgraded to Outperform from Mkt Perform at SVB Leerink; tgt $30
- Suzano S.A. (SUZ) upgraded to Overweight from Neutral at JP Morgan
- Teladoc (TDOC) upgraded to Neutral from Sell at Guggenheim
- Texas Instruments (TXN) upgraded to Equal Weight from Underweight at Barclays; tgt $150
- Visteon (VC) upgraded to Neutral from Underweight at JP Morgan; tgt raised to $129
- Wolfspeed (WOLF) upgraded to Overweight from Neutral at JP Morgan; tgt raised to $160
- Downgrades:
- Adidas AG (ADDYY) downgraded to Hold from Buy at Stifel
- Analog Devices (ADI) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $140
- Baidu (BIDU) downgraded to Neutral from Outperform at KGI Securities; tgt $90
- CapStar Financial (CSTR) downgraded to Mkt Perform from Outperform at Keefe Bruyette; tgt lowered to $20
- CapStar Financial (CSTR) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $19
- Chevron (CVX) downgraded to Hold from Buy at HSBC Securities; tgt $177
- CNH Industrial (CNHI) downgraded to Neutral from Buy at Goldman; tgt lowered to $12.14
- Continental Resources (CLR) downgraded to Mkt Perform from Outperform at Raymond James
- Danaher (DHR) downgraded to Hold from Buy at The Benchmark Company; tgt $325
- Ericsson (ERIC) downgraded to Neutral from Conviction Buy at Goldman; tgt lowered to $6.10
- FedEx (FDX) downgraded to Equal Weight from Overweight at Wells Fargo; tgt lowered to $160
- Green Plains (GPRE) downgraded to Market Perform from Outperform at BMO Capital Markets; tgt lowered to $31
- Huntington Banc (HBAN) downgraded to Equal-Weight from Overweight at Stephens; tgt raised to $16
- MDU Resources (MDU) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $26
- Meta Platforms (META) downgraded to Neutral from Buy at BofA Securities
- MorphoSys (MOR) downgraded to Sell from Hold at Deutsche Bank; tgt lowered to $150
- NovoCure (NVCR) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $70
- NXP Semi (NXPI) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $140
- Qorvo (QRVO) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $90
- Silicon Labs (SLAB) downgraded to Underweight from Equal Weight at Barclays; tgt lowered to $95
- Southern (SO) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $59
- Tattooed Chef (TTCF) downgraded to Market Perform from Outperform at Cowen; tgt lowered to $4.50
- The Aaron's Company (AAN) downgraded to Underperform from Neutral at BofA Securities; tgt $6.50
- Tremor (TRMR) downgraded to Mkt Perform from Outperform at Raymond James
- Williams-Sonoma (WSM) downgraded to Underperform from Hold at Jefferies; tgt lowered to $100
- Others:
- Advanced Micro (AMD) initiated with a Hold at HSBC Securities; tgt $60
- Doximity (DOCS) initiated with an In-line at Evercore ISI; tgt $28
- Flywire (FLYW) initiated with a Buy at Loop Capital; tgt $25
- Futu Holdings (FUTU) initiated with a Buy at DBS Bank; tgt $55
- Harley-Davidson (HOG) initiated with a Neutral at Citigroup; tgt $40
- Intel (INTC) initiated with a Reduce at HSBC Securities; tgt $23
- LiveWire Group (LVWR) initiated with a Neutral at Citigroup; tgt $8.70
- Ollie's Bargain Outlet (OLLI) initiated with a Buy at Gordon Haskett; tgt $60
- Qualcomm (QCOM) initiated with a Buy at HSBC Securities; tgt $180
- R1 RCM (RCM) initiated with an Outperform at Evercore ISI; tgt $25
- UP Fintech (TIGR) initiated with a Buy at DBS Bank; tgt $5
- WeWork (WE) initiated with an Overweight at Cantor Fitzgerald; tgt $8