Wall Street Lunch: What Recession?

Summary:

• Easing unemployment data, solid Walmart results indicate a strong consumer, lowering recession fears.
• Sirius XM rallies after Warren Buffett more than tripled his stake in the company in Q2.
• Check out Jefferies’ updated “Battleground” portfolio for stocks shorted by hedge funds while owned by many long-only investors.

Listen below or on the go on Apple Podcasts and Spotify

Retail sales allay recession worries with 1% July gain. (0:14) Walmart rallies on earnings. (2:03) Final prices for first 10 Medicare Part D drugs out. (4:49)

This is an abridged transcript of the podcast.

The recession-imminent calls that dominated Wall Street last week are, in Keyser Soze fashion, just like that—gone.

A combo of a strong consumer (indicated in the official retail sales figure and Walmart’s results) and unemployment claims easing back juiced stocks and Treasury yields.

The Nasdaq (COMP.IND) is up +1.5%, leading the S&P (SP500), which is up +1%.

Both 2-year (US2Y) and 10-year (US10Y) yields spiked, with the 2-year back above 4.1% and the 10-year back at 3.95%.

While it is just one day of data and recession worries could return quickly, today’s data gives the Fed some breathing room before Jackson Hole next week and puts to bed any calls for an emergency rate cut.

The market odds of a cut of 50 basis points at the September meeting tumbled down to 25% from around 45% in the previous session as the odds for 25 basis points jumped to 75%.

Retail sales rose 1% in July, resurging from a 0.2% slip in June (which was revised down from flat). It handily topped expectations of up +0.3%, helped by strong motor vehicle sales.

Raymond James’ Chief Economist Eugenio Aleman says: “If these results are not changed in the coming months, it is clear that the U.S. consumer was ‘alive and well’ at the start of the third quarter of the year and that market overreaction several weeks ago is not supported by economic conditions from the largest sector of the economy, the US consumer.”

Core retail sales, which excludes motor vehicles and parts, rose 0.4% M/M, handily beating the 0.1% consensus. The 3-month annualized rate for the retail control group came in at 4.9%, which economist Joseph Brusuelas says “strongly suggest that the economy is not in recession nor is at risk of one in the near term—before the end of 2024.”

Bolstering the retail enthusiasm were Walmart’s (NYSE:WMT) results. Shares rose after the company lifted its annual outlook and said all parts of the business were clicking.

Comparable sales in the U.S. rose 4.2% to top the consensus estimate of 3.4%. Transactions were 3.6% higher during the quarter, and the average ticket was 0.6% higher compared to a year ago. E-commerce sales rose 21% during the quarter and contributed ~300 basis points to comparable sales.

Looking ahead, Walmart sees Q3 sales growing at a 3.25% to 4.25% clip and EPS of $0.51 to $0.52 vs. $0.55 consensus. The company expects full-year EPS of $2.35 to $2.43.

Recession fears were also allayed on the employment side of the Fed’s mandate.

Weekly initial jobless claims unexpectedly fell to 227,000, trailing the 236,000 consensus. The four-week moving average was 236,500, a decrease of 4,500 from the prior week’s average of 241,000.

Guy LeBas, strategist at Janney, says normally he wouldn’t bother “mentioning weekly claims, but since the markets are worried we’re at a turning point, they’re getting lots more attention.”

“Historically, we’d normally be looking to PMIs (ISM Manuf especially) to signal the early start of a downturn, but those measures have had so many false negatives in the post-COVID period that I’m not convinced they have the same signaling value they once did,” he said.

Among other active stocks. Alibaba (BABA) reported fiscal Q1 non-GAAP earnings per American depositary share of $2.26, topping estimates by 17 cents. But revenue of $33.47 billion missed analysts’ expectations by $1.15 billion.

Seeking Alpha Investing Group Leader Lillian Cheung of Livy Investment Research said, “Despite the mixed results, Alibaba continues to demonstrate consistent positive progress on executing its revamped business model in the new fiscal year.”

JD.com (JD) reported second-quarter net profit that beat estimates, despite revenue missing expectations.

CFO Su Shan said: “In the second quarter, our total revenues increased by 1.2% year-on-year, as we navigated a high base in our electronics and home appliances category from last year, while growth in our general merchandise category, particularly supermarket, remained robust.”

JD is facing competition to gain market share from rivals such as Alibaba (BABA) and PDD (PDD) at a time when consumers are turning cost-conscious.

And Sirius XM (SIRI) rallied a day after Warren Buffett’s Berkshire Hathaway (BRK.B) (BRK.A) disclosed that it more than tripled its stake in Q2. Berkshire increased its holdings in SIRI to 132.9 million shares in the quarter, from 36.7 million shares at the end of Q1.

In other news of note. The U.S. government announced the final prices for the first 10 Medicare Part D drugs negotiated under the Biden administration’s Inflation Reduction Act.

According to the Centers for Medicare and Medicaid Services, Merck’s (NMRK) diabetes medication Januvia will see a 79% price cut from the 2023 list price, marking the steepest discount in percentage terms.

Novo Nordisk’s (NVO) insulin therapy Fiasp followed with a 76% discount, while AstraZeneca’s (AZN) diabetes therapy Farxiga sees a 68% cut.

The program introduced in 2022 allowed the CMS to negotiate drug prices for Medicare Part D beneficiaries for the first time in history.

Before the announcement, government officials said the pricing negotiations would save U.S. taxpayers $6 billion in 2026 as the first set of revised prices takes effect for Medicare recipients, mostly Americans aged 65 and over.

And in the Wall Street Research Corner. Digging into a headline from Wall Street Breakfast, Jefferies updated its “Battleground” portfolio. Those are stocks shorted by hedge funds while owned by many long-only investors.

Analyst Ron DeSanctis says: “One of the many reasons why the equity market has struggled recently could be that hedge funds reduced their risk exposure.”

Hedgies came into summer trading with their highest equity exposure since January 2023.

Jefferies looked at hedge fund holdings through May 31 and found “more changes” than normal for the portfolio, with five additions and deletions.

Exxon Mobil (XOM), J.P. Morgan (JPM), Wells Fargo (WFC), Constellation Brands (STZ), and RTX (RTX) fell off the list. Analog Devices (ADI), Diamondback Energy (FANG), Cigna (CI), Procter & Gamble (PG), and Fiserv (NFI).

Other names include Tesla (TSLA), Texas Instruments (TXN), Disney (DIS), Caterpillar (CAT), and Super Micro Computer (SMCI).

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