That's it from me today and Sarge will be helming the Diary tomorrow with Doug set to return on Monday.

Have a wonderful evening.

P.S. - We added some shares of Morgan Stanley (MS) today over at the Action Alerts PLUS portfolio, and we've been adding stocks to the Bullpen last week and this week.

When Starbucks (SBUX) reports on January 30, developments in the Red Sea could be a guidance issue for the company as Reuters reports:

"Attacks by Houthi militants in Yemen on ships in the Red Sea have led to soaring costs for European coffee roasters, though these are unlikely to be passed onto consumers soon, coffee traders and industry analysts said.

Container freight rates have jumped by some 150% on the Asia-Europe route and many bean deliveries to Europe from top robusta producers such as Vietnam and Indonesia have been delayed by up to three weeks as ships take a detour through the Cape of Good Hope.

The situation is leading roasters to seek substitute beans from places including Brazil and Uganda. Brokers say they have, as a result, seen a jump in regional prices."

Let's crack open my notebook and share something I worked on over the recent long weekend - monthly updates to S&P 500 consensus EPS expectations for 2023 and 2024, tallied by FactSet.

View Chart »View in New Window »

As you can see in the table, the direction for 2023 and 2024 expectations have been in the downward direction but even so the herd thinking still calls for 2024 EPS for that basket to be up more than 11% year over year.

But here's the thing...

Over the last 20 years, the S&P 500 has delivered an average of 4.5% EPS growth in the second half of the year compared to the first half. For 2024 that second-half to first-half growth rate is 9.8% - more than double that 20-year average.

But in recent weeks a growing list of companies have issued weaker-than-expected guidance, and we are hearing more companies share the impact of shipping delays on their businesses due to developments in the Red Sea related to the war in Gaza. As we shared in today's Rundown, we are going to see and hear more of this as the December-quarter earnings season progresses.

Interest rates are also likely to be higher throughout the year than the market expects as the number of rate cuts it is forecasting doesn't materialize. That leads us to think the odds are pretty good second-half EPS growth for the S&P 500 is likely to be closer to the 20-year average than not.

Some basic math suggests the S&P 500's 2024 EPS growth is likely to look more like 6%-8% based on the current outlook. That's a pretty good rate of growth and one that is well ahead of what the S&P 500 posted in 2022 and 2023.

The question, however, is what is the catalyst that will drive the expected second-quarter 2024 EPS of $59.70 above third quarter 2023? The economy is resilient, but odds are it won't get that rate cut the market is looking for. And even if we did, it would still take months to flow through the economy. As you can see in the above chart, it's quite a ramp and one that may not be attainable. That would mean 2024 EPS for the S&P 500 would come in even lower than the 6%-8% range we've outlined.

Despite what we heard from Taiwan Semiconductor (TSM) this morning, there are reasons to be cautious as December quarter earnings season ramps in a big way next week.

Over at Action Alerts PLUS, we hold business development company (BDC) Trinity Capital (TRIN) in the portfolio.

It looks like things may be getting a bit more crowded in that space following the recent IPO of Palmer Square Capital PSBD , and a few more have filed to go public as well before the end of January.

The Senate passed a bill to fund the government through March 8. Onto the House, where it should pass later this evening.

Here are some articles I'm perusing as they relate to some of my thematics as I knock back some food and drink to recharge for this afternoon and our time together into today's market close.

Cloud computing - "Cloud continues to be the foundational transformation platform for organizations that want to be industry leaders and adopt the most impactful emerging technologies. From GenAI and automated shop floors to software-defined vehicles and smart meters, the technology innovations promising to revolutionize industries require strong cloud capabilities and an understanding of how the cloud is evolving." Read more here

Data Privacy & Digital Identity - "In the payments and financial landscape, staying still often means falling behind. And falling behind in today's rapidly digitizing environment can be dangerous. That's because traditional security systems are proving to be increasingly vulnerable to attacks from 21st-century cyber fraudsters using sophisticated tactics and tools that have been democratized by the rise of novel technologies like generative artificial intelligence (AI). As fraudsters grow more emboldened and scale their attacks using new tools, eCommerce sites, and financial institutions trying to meet a digitally native cohort of end users must assess the ways in which they can stay ahead with their own fraud defenses. The proliferation of online banking in particular has provided scammers with fresh opportunities..." Read more here

Digital Infrastructure & Connectivity - "The internet works because of this expansive physical footprint containing underwater fiber optic pipelines, giant routing facilities and last-mile local connections working in harmony. To transport the massive amounts of data generated by a growing internet population and rising demand for highly advanced technologies like AI and IoT, institutions require more fiber networks and capacity. Behind the scenes, digital infrastructure providers are continuously working to build and advance these networks for uninterrupted holiday streaming, surfing, smart home connectivity, and more." Read more here

EV Transition - "America's ability to charge future electric vehicles got a jolt Thursday as the Biden administration announced recipients of $623 million in infrastructure funds, with a focus on disadvantaged communities and freight trucks. The announced grants, split between 22 states and the territory of Puerto Rico, aim to fill numerous and wide gaps in the national EV charging network." Read more here

Safety & Security - "Much of Europe's industrial capacity to make weapons has eroded over years of budget cuts, and turning that around is a challenge at a time when most governments face budget constraints amid slow economic growth and aging populations, as well as large political opposition to cutting back on welfare spending to fund defense. Europe has "systematically demilitarized itself because it didn't need to spend the money," thanks to the lack of an apparent threat and U.S. military dominance around the globe, said Anthony King, a professor of war studies at the University of Warwick. "They have basically gone to sleep." Read more here

With the market rebounding, let's look at the 20 stocks that are the most heavily shorted:

Smart for Life Inc. (SMFL)

Riley Financial Inc. (RILY)

Imperial Petroleum Inc. (IMPP)

RiskOn International Inc. (ROI)

First Wave BioPharma Inc. (FWBI)

Fisker Inc. (FSR)

Maison Solutions Inc. (MSS)

Novavax Inc. (NVAX)

Upstart Holdings Inc. (UPST)

Beyond Meat Inc. (BYND)

Carvana Co. (CVNA)

Trupanion Inc. (TRUP)

C3.ai Inc. (AI)

Frontier Group Holdings Inc. (ULCC)

Cassava Sciences Inc. (SAVA)

Sunnova Energy International Inc. (NOVA)

Lemonade Inc. (LMND)

Savers Value Village Inc. SVV

Biomea Fusion Inc. (BMEA)

Blink Charging Co. (BLNK)

Here's the skinny on Bank of America's (BAC) upgrade of Apple (AAPL) to a Buy rating:

"We upgrade Apple to Buy From Neutral, given:

1) stronger multi-year iPhone upgrade cycle driven by need for the latest hardware to enable Generative AI features to be introduced in 2024/2025 (large part of installed base still on iPhone 11). 2) higher growth in Services as Apple better monetizes its installed base.

3) silicon roadmap to morph from PC to Servers to Autonomous, driving higher margins. 4) capital returns strong (buybacks, dividend) even post approaching net cash neutral.

5) GM stable to higher over time (mix, price, vertical integration. 6) AAPL remains under-weighted vs. S&P 500 and anticipation of Al features could induce institutional investors to increase positions.

7) risk around legal issues is manageable, and 8) recent relative under-performance suggests many risks baked into expectations "

For now at least, it appears we have a little more clarity from Atlanta Fed's Bostic on the timing for rate cuts this year, according to Bloomberg:

"Federal Reserve Bank of Atlanta President Raphael Bostic said he wants to see more evidence inflation is on track toward the central bank's 2% target, repeating that he doesn't expect policymakers to cut interest rates until the third quarter."

Atlanta Fed President Raphael Bostic is speaking not once but three times today, and following his initial engagement earlier this morning we have a pretty good idea of what he's going to be saying today.

No real surprise given the December Retail Sales and Industrial Production reports yesterday, and today's December Housing Starts report. I also continue to think what's happening in the Red Sea will be a headwind for further inflation progress as well as something companies discuss as they trim guidance for 1H 2024.

Charles Schwab (SCHW) : KBW cuts rating to market perform from outperform and reduces target price to $70 from $75, noting the management's cautious tone on near-term cash trends.

Cummins (CMI) : JPMorgan cuts target price to $245 from $255, expecting headwind to sales in second half of 2024.

Masonite International (DOOR) : JPMorgan raises target price to $120 from $115, citing the company's recent acquisitions and strategy will likely improve margins.

Meta Platforms (META) : Bernstein raises target price to $435 from $375, citing several positive tailwinds to revenue growth.

Palo Alto Networks (PANW) : Bernstein initiates coverage with outperform rating and target price of $402, referring to products' strong performance and well-established customer base.

Reports point to Reddit making its IPO filing public in February and then launching it in March.

This is likely one of the deals Morgan Stanley (MS) referred to when it mentioned building its IPO pipeline on the earnings call earlier this week.

In a 2022 listing, both Morgan Stanley and Goldman Sachs (GS) were listed as working with Reddit.

TD Cowen bumps its AMD (AMD) target to $185, lifts the one for Intel (INTC) to $45.

OPEC maintained its forecast for continued growth in global oil demand this year and predicted world oil demand will rise by 1.85 million barrels per day (bbl/day) in 2025 to 106.2 million bbl/day after growing by 2.25 million bbl/day for 2024.

The group forecasts global economic growth will pick up in 2025 and reach 2.8% from an estimated 2.6% this year.

While rate cuts in 2H 2024 and 2025 should stimulate the global economy, I have to wonder if OPEC is simply talking its book so to speak.

Let's see what Wall Street has to say this morning for stock rating upgrades, downgrades and more: 

Upgrades

Analog Devices (ADI) upgraded to Outperform from Peer Perform at Wolfe Research; target $225

Apple (AAPL) upgraded to Buy from Neutral at BofA Securities; target raised to $225

Hertz Global (HTZ) upgraded to Overweight from Equal-Weight at Morgan Stanley; target lowered to $15

Microchip (MCHP) upgraded to Outperform from Peer Perform at Wolfe Research; target $105

Microsoft (MSFT) upgraded to Outperform from Neutral at Exane BNP Paribas; target $471

NXP Semi (NXPI) upgraded to Outperform from Peer Perform at Wolfe Research; target $255

Pinterest (PINS) upgraded to Buy from Hold at Argus; target $45

Tempur Sealy Int'l (TPX) upgraded to Overweight from Neutral at Piper Sandler; target raised to $61

Downgrades

Adobe (ADBE) downgraded to Underperform from Neutral at Exane BNP Paribas; target $499

BAE Systems (BAESY) downgraded to Underperform from Neutral at Exane BNP Paribas

Charles Schwab (SCHW) downgraded to Market Perform from Outperform at Keefe Bruyette; target lowered to $70

Shopify (SHOP) downgraded to Underperform from Neutral at Exane BNP Paribas

Spirit Airlines (SAVE) downgraded to Sell from Neutral at Citigroup; target lowered to $4

Wells Fargo (WFC) downgraded to Hold from Buy at Odeon

Zoom Video (ZM) downgraded to Underperform from Neutral at Exane BNP Paribas; target $60 

In Addition:

Cloudflare (NET) initiated with a Market Perform at Bernstein; target $85

CrowdStrike (CRWD) initiated with an Outperform at Bernstein; target $334

Enbridge (ENB) initiated with a Hold at Stifel

Equinox Gold (EQX) resumed with an Outperform at BMO Capital Markets

Fortinet (FTNT) initiated with a Market Perform at Bernstein; target $65

Jack Henry (JKHY) initiated with a Neutral at Citigroup; target $177

Palo Alto Networks (PANW) initiated with an Outperform at Bernstein; target $402

Red Rock Resorts (RRR) initiated with an Overweight at Barclays; target $60

SentinelOne (S) initiated with an Outperform at Bernstein; target $34

Zscaler (ZS) initiated with an Outperform at Bernstein; target $311

Following yesterday's December Retail Sales and Industrial Production reports, we've seen upward revisions to December quarter GDP expectations. The Atlanta Fed's GDPNow model puts 4Q 2023 GDP at +2.4% and that upward adjustment means we will be tuning into this morning's December Housing Starts report.

Out at 8:30 am ET, headline housing starts are expected to fall to 1.426 million from 1.56 million in November. A stronger-than-forecasted print would be another data point indicating the economy continues to hum, supporting the patient path to rate cuts for the Fed.

As the market chews through this morning's housing data, it will be factoring comments from Atlanta Fed President Raphael Bostic, who is scheduled to speak on three different occasions today. We doubt the recent string of data will change Bostic's view about only two or three rate cuts this year, and the odds are high he reiterates his view rates need to remain as is until at least the summer.

As of now, we remain in the camp that sees 2-3 rate cuts this year with the bulk of them in 2H 2024.

Let's dig a little deeper into Taiwan Semiconductor's (TSM) quarterly results by parsing the end-market figures shared in its earnings call slide presentation:

Source: Taiwan Semiconductor

Comparing that against the company's revenue for Q3 2023 and that quarter's revenue breakdown we find the following:

• Smartphone revenue in Q4 2023 rose 25% quarter over quarter
• Higher performance computing (Data center, AI) was up 16.2% on the same basis
• Auto rose 13.5% quarter over quarter while IoT fell 36%

Doing the same analysis compared to Q4 2022 shows the following:

• Smartphone revenue rose 11.4% year over year
• HPC was up ~1%
• Auto fell 18% and the rest of the segments posted revenue declines as well

With smartphone being a strong factor in TSM's results, it's lifting shares of Qualcomm (QCOM) , Skyworks Solutions (SWKS) , Qorvo (QRVO) and others tied to that market, including Apple (AAPL) .

And speaking of Apple, research firm IDC pegs its Q4 2023 iPhone shipments at 80.5 million units, well ahead of Samsung's 53.0 million, putting it in the leadership position with almost 25% of the smartphone market. IDC estimates Apple's iPhone shipments rose 11.6% year over year and 15% compared to Q3 2023.

Good morning, folks, while the temps outside the nation's capital induced chattering teeth on an early morning dog walk, equity futures are up thanks in part to quarterly results and an upbeat outlook from Taiwan Semiconductor (TSM) .

While December quarter revenue matched the consensus forecast, it was management's comment that it sees 2024 revenue growth in the low-to-mid 20% range "on booming demand for high-end chips used in artificial intelligence (AI) applications" that's resonating.

As you can likely guess, shares of Nvidia (NVDA) , Advanced Micro Devices (AMD) , Marvell Technology (MRVL) and others in the AI-chip arena are all moving higher in pre-market trading.

Shares of chip equipment companies, such as Applied Materials (AMAT) and Lam Research (LRCX) are being lifted by TSM's 2024 capital spending budget guidance of $28 billion-$32 billion this year.