Cannabis stocks moved lower on a regulatory announcement that the Justice Department has dismissed the suit regulating the sale of cannabis (intrastate).
But I think the markets have misinterpreted the consequence of the legal decision — it may actually be a win for the industry as it validates and acknowledges some of the industry's claims and suggests that the law needs further examination. The suit was meant to move up the suit to a higher court through appeal. I suspect the plaintiffs are going to file such an appeal over the near term.
Tom Lee - As we look into second half of 2024, we recommend investors stick with strong stocks, and stocks that are working. Strength continues to be strong.
This was true in 2023: – 65 stocks gained >30% in 1H 2023 – these 65 stocks gained +12% in 2H – the win-ratio was 77% – the other 385 stocks only gained 6% in 2H – see the difference?
The winners of 1H (up >30%) also outperformed the rest of the market: – in 2022 – in 2021 – so each of the last 3 years – and since 1990, gained 79% of the time
Why does this happen? Arguably, the fundamental factors supporting stocks in the first half continue through the remainder of the year. So, the drivers of 2024 first half are similarly still in place.
The 2024 list of stocks that gained more than 30% in 1H is below.
What is different for 2H 2024 is the Fed is one step closer to cutting. Thus, we think, on the margin, those sectors/stocks leveraged to a Fed cut will see an inflection. Most notably, this is small-caps.
The S&P Index has ignored the generally rising 10-year Treasury yield since the beginning of 2024 (scale on yield is inverted). To me that says that any Fed rate cuts have been both assumed and over-discounted:
The narrowing of the market when combined with the spike in yields (+14 bps on the 10-year!), will — at some point — trigger a monster reallocation out of equities and into bonds.
US manufacturing remains in contraction, further thoughts on broader economy
The June ISM manufacturing index fell a hair to 48.5 from 48.7 and that was under the estimate of 49.1. It’s been above 50 once since the Fall of 2022. New orders did rise 3.9 pts m/o/m but is still below 50 at 49.3. Backlogs were deeply under 50 at 41.7, lower by .7 pts and the least since November 2023 as just one of 18 industries saw an increase in backlogs. Supplier deliveries, something now to watch again with shipping prices and travel lengths increasing again, rose .9 pts to about 50 at 49.8 but around the 6 month average. Prices paid fell for a 2nd month to 52.1 from 57 and back under its 6 month average of 55.2. Inventories remained under 50 at 45.4 and it was down 2.5 pts m/o/m so no signs yet here of any inventory restock. Export orders were in contraction at 48.8, down 1.8 pts and imports fell 2.6 pts to 48.5. Finally, the employment component dipped back under 50 again to 49.3, lower by 1.8 pts.
In terms of breadth, 8 industries of 18 surveyed saw growth vs 7 seen last month but 9 said their businesses were shrinking vs 7 in the month before. The balance of one saw no change.
The bottom line from the ISM was this, “Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions.”
Here were some industry comments from respondents:
“High volume of customer orders.” [Chemical Products]
“Customers continue to cut orders with short notice, causing a ripple effect throughout lower-tier suppliers.” [Transportation Equipment]
“Consumer demand and inventories are no longer stable at retail and food service establishments.” [Food, Beverage & Tobacco Products]
“While orders are still steady, inventory from the previous month is enough to satisfy current- and near-term commitments.” [Computer & Electronic Products]
“Customers ordering more to create buffer stocks (in case of) future shortages.” [Electrical Equipment, Appliances & Components]
“Order levels in two of our main divisions are indicating weak demand, and now we must work to reduce inventory levels.” [Fabricated Metal Products]
“Sales backlog is decreasing. We have furloughed a portion of our workforce as a result.” [Machinery]
“The level of production is lower due to decreased demand for products.” [Miscellaneous Manufacturing]
“Elevated financing costs have dampened demand for residential investment. We have reduced inventories of production components.” [Wood Products]
“Orders have increased slightly due to seasonal restocking.” [Plastics & Rubber Products]
This is what S&P Global said about its June manufacturing survey that while it was above 50 again, the fragility remains as “growth momentum remains frustratingly weak.” And their bottom line, “Factories have been hit over the past two years by demand switching post-pandemic from goods to services, while at the same time household and business spending power has been diminished by higher prices and concerns over higher-for-longer interest rates. These headwinds persisted into June, accompanied by heightened uncertainty about the economic outlook as the presidential election draws closer. Business confidence has consequently fallen to the lowest for 19 months, suggesting the manufacturing sector is bracing itself for further tough times in the coming months.”
My bottom line, the continued recession in US manufacturing highlights my continued point of how mixed and uneven US economic activity is. To further the point, in housing we have about a 30 yr low in the pace of existing home transactions but better business with new builds. But even with new home construction, the bigger builders are doing better than the smaller ones. With consumer spending on retail/restaurants/consumer products, we not only have a bifurcated consumer in terms of income demographics but still greater spend on services/experiences than on things. With trade, global activity is mixed too with no growth in manufactured goods of note and tourism leading the way with services trade. With capital spending, as seen last week, core durable goods orders have not grown much in two years. Finally, we know anything touching government spending and government induced tax incentives are encouraging activity in building manufacturing plants and other infrastructure.
Treasury yields dropped off their highs only for a few minutes post data release but are back to the highs with the 10 yr yield now at 4.45%. European yields too remain at the highs of the day. I do think we’re getting closer to a September rate cut and some more increases in the unemployment rate from here (off a 2 ½ yr high already) will possibly clinch that.
Tales From Nvidia: AI's Vastly More Scandalous Than LeBron James
* LeBron James is sleeping with his newest teammate's mom!
* More AI hallucinations
* And why many AI companies will end up in a garbage can - much like after the dot.com boom in the late 1990s
The article linked to below, from a sports blogger, explaining why chatbots (Generative AI) do not and cannot work, without realizing he is doing it...
LeBron James plays basketball for the LA Lakers, which at one point in time was a good team.
LeBron James has a son, nicknamed Bronny, who doesn’t seem to be that great at basketball, but who the Lakers just drafted in the 2nd round of the NBA draft, for some reason (dunno what that could be? Just like they just made an interesting decision about their new head coach, but I digress).
This statement is obviously true, and you do not have to be a genius and need $10 billion of compute infrastructure powered by a nuclear reactor to figure that out.
If the Lakers drafted LeBron James son, he is in fact sleeping with his newest teammate’s mom – not complicated.
But not only did the AI flag this as a false tweet, because it is not intelligent and cannot figure out this is a joke, it also hallucinated a completely made up rebuttal from LeBron James, because that is what AI does. At least in this case, the Twitter AI notes that it can make mistakes, and its output needs to be verified. But this is a warning label that will need to stay up into perpetuity, because hallucinations are a feature of generative AI, and not a bug, therefore its value will always be limited - Why does AI hallucinate?
Side point. The rule of thumb in technology used to be never heavily invest in either the bleeding edge, or even leading edge of tech, because you will just waste your time and money on something that will not work. Wait until the technology stabilizes and is proven, before making huge investments. In the upside-down world we live in now (in part because money is no longer treated dearly), certain companies have piled in hand over fist into something that is knowingly unstable and does not work properly, and likely never will work properly.
Even in the early days of the internet, although there was a bubble, and a lot of money was flushed down the toilet, at least the underlying technology worked and was stable. The problem was much too much capacity was put in place, and a lot of the end use applications that the capacity was put in place for turned out not to have sustainable demand, or a business model. Here is a walk down memory lane, before the LeBron James article: List of companies affected by the dot-com bubble - Wikipedia.
I wouldn’t be surprised if a fair bit of today’s investments into Gen AI ends up in the garbage can. The internet stuff worked, and still failed in its first go-around. This stuff doesn’t really work, which makes the fact that these huge investments in unstable and immature technology that does not work right is somehow being used as collateral for loans, even more curious. Maybe the mortgage collateralized debt obligations-squared of 2008 were not the dumbest structured products ever?
These are the U.S. Select movers before the open, as of 8:37 a.m. ET:
Upside:
-CSLR +78% (announces debt reduction)
-SNTI +50% (awarded California Institute for Regenerative Medicines (CIRM) Grant for Clinical Development of Logic Gated CAR-NK Cell Therapy)
-BW +23% (agreement to sell Denmark-based renewable parts and services subsidiary, Babcock & Wilcox Renewable Service A/S to Zurich, Switzerland-based Hitachi Zosen Inova AG (HZI) for $87M)
-HOLI +18% (Ascendent buyout update)
-CHWY +12% (Roaring Kitty discloses 6.6% stake)
-HUMA +8.3% (Acellular Tissue Engineered Vessel (ATEV) receives FDA’s Regenerative Medicine Advanced Therapy (RMAT) designation for patients with Advanced Peripheral Artery Disease (PAD))
-XELA +6.6% (plans to spinoff BPA Business to maximize shareholder value)
-ZK +5.3% (reports deliveries)
-TNXP +4.7% (enters Other Transaction Agreement (“OTA”) with Defense Threat Reduction Agency (“DTRA”), a DoD agency)
-SPR +4.6% (Boeing confirms to purchase Spirit AeroSystems for $37.25/shr in all stock deal)
-NIO +4.3% (reports deliveries)
-IREN +4.0% (announces 2024 expansion fully funded; has monetization program for power and land portfolio and is considering asset sales, JVs among other options)
-SNOW +2.6% (Goldman Sachs adds Snowflake to America’s Conviction List)
-PBI +2.2% (identifies, initated ~$70M in cost savings; updates progress of cost rationalization program and raises savings targets to $120-160M (prior $60-100M))
Downside:
-SAVA -17% (discloses it has been engaging with the U.S.DOJ and the U.S. SEC in connection with ongoing investigations into the Company and two senior employees of the Company; supervising outside counsel conducting the Internal Investigation and Independent Analysis of Phase 3 Trial Data)
Maybe debts and deficits now do matter?/Rig counts continue to fall/PMI's, pricing pressures bubble up again
With the eternal question of whether rising debts and deficits matter for interest rates and the funding costs a government has to pay, maybe we're getting a taste that now it does? The French 10 yr yield is up about 33 bps over the past 3 weeks ever since Marine Le Pen's National Party did well in the EU parliamentary elections that in turn triggered an early election in France where the party did well yesterday, though not as well as some feared (and why the euro is up, French stocks are rallying and the oat spread to bunds is narrowing a touch). The US 10 yr yield has risen to a 3 week high, maybe following Europe but also after the Presidential debate.
Regardless of who wins in November though, we know the US financial situation is only going to get worse, especially if current federal spending as a % of GDP at 23-24% remains well above the historical trend of about 20%. While taxes will get a lot of focus too with the expiration of the Trump tax rate reductions, federal tax revenue as a % of GDP is currently in line with historical trends at about 17%.
French 10 yr yield in orange/US 10 yr yield in white
French oat/German bund 10 yr yield spread
While we still have a month ish of economic data to see that will finalize how Q2 GDP did in the US (outside of future revisions), the Atlanta Fed on Friday moved its estimate to 2.2% from 2.7% and closer to my 1.5% ish GDP belief.
I have to mention the US crude oil rig count again because even with $80 oil, it keeps falling. It dropped by another 6 rigs w/o/w to 479, the least since December 2021. For perspective, down 6 rigs in one week is the 2nd most in any week since November 2023. US oil production has topped out for now and will roll over at some point if this rig drop continues. As for natural gas rigs being used, just 97 for the week ended 6/28, matching the lowest since June 2021.
We remain bullish and long energy stocks as this data continues to give us reason to be.
US Oil Rig Count
Natural Gas Rig Count
Looking at C&I loans outstanding for the week ended 6/19, they have rebounded over the past few weeks to the upper end of the one yr range at $2.77 trillion. It still is no higher though than were it stood in March 2023 right before credit got tighter after the bank failures.
C&I Loans Outstanding
Here are the manufacturing PMI's in Asia ahead of the US ISM today and does reflect some signs of stabilization, though is still a mixed bag and with confidence still fragile. China's Caixin 51.8 vs 51.7, South Korea 52 vs 51.6, Taiwan 53.2 vs 50.9, Vietnam 54.7 vs 50.3, India 58.3 vs 57.5, Thailand 51.7 vs 50.3, Japan 50 vs 50.4, Australia 47.2 vs 49.7, Indonesia 50.7 vs 52.1, Malaysia 49.9 vs 50.2, and Philippines 51.3 vs 51.9.
A few things of note here. In China's Caixin report, "On the price front, input cost inflation climbed to the highest since June 2022, resulting in the first increase in average selling prices so far this year." It sure does cost a lot more now to procure a container ship or airplane to take stuff from a China port/airport elsewhere. Also of note with the private sector manufacturing outlook, "the level of confidence fell to the lowest in over 4 1/2 years, dampened by concerns over rising competition and uncertain market conditions."
From Taiwan, of course helped by Taiwan Semi and its chip shipments. "Taiwan's manufacturing sector benefited from an upswing in domestic and international demand during June. Amid higher sales, firms ramped up their production volumes accordingly."
Similar to what was said above from China, "Notably, June's survey revealed intensifying inflationary pressures, with input expenses rising markedly and to the greatest degree in two years. A resurgence of rising prices is something to closely watch in the months ahead and is already causing some concern amongst manufacturers, as highlighted by a drop in confidence to its lowest level since February."
From the South Korea report, "South Korea's manufacturing sector continued to record improving operating conditions at the end of the 2nd quarter...Solid expansions were seen in both new orders and output, with factory sales rising at the fastest rate since February 2022." That said, "there was a further marked softening of business confidence, which dipped to its lowest level in the year to date."
"As for prices, June data signaled the quickest rate in input costs for 8 months, with greater raw material prices and exchange rate fluctuations cited as sources of inflation. That said, output charges increased at the softest pace since March."
Have you heard me say that inflation is not dead, that inflation volatility is here to stay?
We also heard out of Japan its quarterly Tankan report which improved for large companies on the manufacturing side, was unchanged though for smaller ones and dipped a touch for service related businesses, both large and small. Cap ex expectations rose to 11.1% growth from 4% in the quarter before but a bit less than expected.
The BoJ has every reason to raise rates and trim QE at the end of the month but the FX market continues to see a wide spread between rates there and elsewhere. The yen is now above 161. The 10 yr JGB yield closed at 1.06%, unchanged while the Nikkei was little changed too. We still like Japanese stocks with our most recent purchase Seven & I Holdings, the owner of 7-11 stores.
The June Eurozone manufacturing PMI remained weak at 45.8 for its final read vs 47.3 in May, though up a hair from the first print of 45.6. The UK manufacturing PMI was revised down to 50.9 vs 51.2, though above 50 for the 3rd month in 4.
S&P Global said on the Eurozone report, "the PMI indices for all Eurozone countries, except Italy, deteriorated in June."
On pricing, "input costs at euro area factories increased for the first time in 16 months during June. The price of goods leaving the factory gate continued to fall, although the rate at which charges were discounted was only marginal and the softest seen across the current 14 month sequence of deflation."
As for the pricing comment in the UK PMI, "On the costs front, June saw average purchase prices rise for the sixth successive month and at the quickest pace since January 2023. Companies continued to report a wide range of inputs as up in price, including energy, food, metals, packaging, paper, plastics and timber. Tight supply lines, higher import costs and freight (air, land and sea-based) issues also contributed to higher purchase prices. Increased costs led to higher selling prices, which rose for the eighth successive month."
US: Futs are flat. Pre-mkt, MegaCap Tech (ex. NVDA) are modestly higher: AMZN +39bp, GOOG/L +28bp, MSFT +26bp; Semis are weaker: NVDA -2.8%, MU -74bp, AMD -52bp. Bond yields are 1-2bp higher, following the higher EU yields. USD is lower. Commodities are higher led by oil and base metals. Today, the macro focus will be June ISM-Mfg: Feroli expects ISM-Mfg to print 48.5 vs. 49.1 survey vs. 48.7 prior.
and...
EQUITY AND MACRO NARRATIVE: SPX finished nearly flat last week (-0.1%). We ended June and Q2 with +3.5% and +3.9% gains, respectively. 5 out of 11 sectors in SPX finished higher in 2Q, led by the strong outperformance in Mag 7: the group (JP1BMAG7) rallied +17.1% in Q2 after its robust +17.3% gain in Q1. Last Friday, Core PCE printed the lowest in 3yrs at +0.08% MoM, or 2.6% YoY; the data suggested that the disinflationary trends were back on track now and supported the Goldilocks narrative. The macro data of this week will be growth-focused: we will receive ISM releases and labor market data (JOLTS on Tuesday, ADP on Wednesday and NFP on Friday). On ISM, Feroli expects ISM-Mfg to print 48.5 vs. 49.1 survey vs. 48.7 prior and ISM-Srvcs to print 53.0 vs. 52.5 survey vs. 53.8 prior. The upside surprise in May ISM-Srvcs, along with a softer Prices Paid, led to a +1.2% rally in SPX that day as it implied a strong signal on growth momentum. This week’s data will reassess if the growth-without-inflation narrative still holds. Feroli expects ISM-Srvcs to retrace some of its strong gain in May (from 49.4 to 53.8). On labor market data, Feroli looks for NFP to print 200k vs. 190k survey vs. 272k prior and unemployment rate to stay flat at 4.0%, in line with the consensus. The next three NFP release will be critical to assess if the Fed may open to a September cut vs. November; the OIS forwards sees ~58% prob. in September vs. November. Feroli and team expects November but sees upside risks of earlier ease if any of the next three labor market reports show material weakening.
