TM - Wall Street Breakfast Podcast: Apple Watch Sales Halt; Toyota Suspends Daihatsu Shipments

2023-12-20 07:45:00 ET

Summary

• The US Trade Representative will decide the patent dispute case between Apple and Masimo over sales of the Apple Watch.
• Atlanta Fed President Raphael Bostic does not see an urgency to cut interest rates next year.
• Toyota's unit Daihatsu is temporarily suspending all vehicle shipments after a third-party probe found that its models were not tested properly for collision safety.

Listen above or on the go on Apple Podcasts and Spotify

President Biden has til Sunday to decide on Apple Watch patent dispute (1:25), Atlanta Fed's Raphael Bostic doesn't see an urgency to cut rates (3:18) and Toyota suspends all Daihatsu shipments (5:15).

This is an abridged transcript of the podcast:

In the U.S. on Tuesday, all three major indexes ended higher , as traders piled on bets that the Federal Reserve will start cutting interest rates next year. All 11 S&P sectors ended in the green, with Energy topping the leaderboard.

Sentiment on Tuesday was helped by the latest data on housing starts and building permits . Before the opening bell, the U.S. Census Bureau said housing starts surged 14.8% to 1.56M in November, compared to an expected figure of 1.36M. Building permits slipped 2.5%.

Investors now look ahead to the Fed-preferred core PCE price index due later this week for further guidance.

U.S. stock futures were little changed on Wednesday after the major averages extended the strong year-end rally, with the Dow and Nasdaq 100 hitting fresh all-time highs. In the bond market, the U.S. 10-year Treasury yield was down 2 basis points to 3.90%.

More on our top stories:

The patent dispute case between Apple (NASDAQ: AAPL ) and Masimo (NASDAQ: MASI ) over sales of the Apple Watch will be decided by the US Trade Representative, the White House said on Tuesday.

The White House Press Secretary said that President Biden does not want to “get ahead of any decisions that may come”.

On Monday, Apple ( AAPL ) said it was halting sales of the Apple Watch Series 9 and Apple Watch Ultra 2 from its own channels starting this week after the International Trade Commission ruled in favor of Masimo ( MASI ) in October on an intellectual property dispute between the two companies over blood oxygen sensing. Apple is reportedly planning software changes in an effort to avoid the sales halt.

Sales of the Apple Watch Series 9 and Apple Watch Ultra 2 from Apple.com will be paused starting December 21, and from Apple retail locations after December 24.

The ruling does not pertain to older models of the Apple Watch and the Apple Watch Series 9 and Apple Watch Ultra 2 are still available at third-party retailers such as Best Buy ( BBY ), Amazon ( AMZN ) and Walmart ( WMT ).

Apple does not break down the percentage of revenue it generates from newer Apple Watch models. However, it said revenue from Wearables, Home and Accessories in its most recent quarter, which ended on September 30, came in at $9.32B, down from the $9.65B in the year-ago period.

Medical technology company Masimo ( MASI ) sued Apple ( AAPL ) in 2020 saying the blood oxygen feature infringes on several patents. Masimo ( MASI ) filed a complaint with the ITC seeking an Apple Watch import halt, alleging patent infringement in June 2021.

Following the ITC's ruling in October, the case was sent to the Biden Administration for a 60-day Presidential Review Period, which expires on December 25. President Biden could still veto the ruling.

On Tuesday, Masimo’s ( MASI ) CEO said he would be open to settling with Apple, but did not give details on how much money he would seek.

Reflecting sentiment from other US policymakers, Atlanta Fed President Raphael Bostic doesn't see an urgency to cut interest rates next year. According to a Bloomberg report, Bostic said: "For me, I'm thinking inflation is going to come down relatively slowly in the next six months, which means there's not going to be urgency for us to pull off our restrictive stance.”

He expects that the Federal Open Market Committee will lower rates twice next year, starting in the back half of the year. There hasn't been an active discussion on that at the FOMC, Bostic said.

Last week, the FOMC kept rates at 5.25%-5.50% for the third straight meeting. The policymakers' Summary of Economic Projections signaled three rate cuts, at the median, for 2024.

"There is still a ton of uncertainty," and the Fed needs to be "cautious but resolute" in fighting inflation, Bostic said.

Meanwhile, market participants see a 67.5% probability that the Fed will cut by 25 basis points at its March meeting and only a 25.1% chance that the rate will stay unchanged, according to the CME FedWatch tool .

The continuing normalization of credit card payment extended into November as student loan payments resumed, knocking away one of the last vestiges of pandemic era fiscal relief for consumers.

Both delinquency and net charge-off rates marched higher last month. Jefferies analyst John Hecht notes that on a year-over-year basis, the percentage change in delinquencies remained flat, "a sign we could be approaching peak normalization." If that's the case, "normal credit seasonality may replace normalization in coming months," he said in a note to clients.

Not all banks have seen the metrics exceed November 2019 levels. Credit quality at American Express (NYSE: AXP ), JPMorgan Chase (NYSE: JPM ), Citigroup (NYSE: C ), and Bank of America (NYSE: BAC ) remained stronger than before COVID-19 shocked the U.S. economy.

That leaves Capital One Financial (NYSE: COF ), Synchrony Financial (NYSE: SYF ), Discover Financial (NYSE: DFS ), and Bread Financial (NYSE: BFH ) showing weaker credit quality than before the pandemic, with Bread Financial and Discover both seeing their net charge-off rates more than a full percentage point higher than pre-pandemic levels.

Toyota (NYSE: TM ) said Wednesday its unit Daihatsu is temporarily suspending all vehicle shipments in Japan and abroad after a third party probe found that its models were not tested properly for collision safety.

These include a total of 64 Daihatsu models, including 22 models sold by Toyota ( TM ). Some Subaru and Mazda models sold in the domestic market have also been impacted.

The independent investigation was conducted after Daihatsu in April disclosed that it had rigged side-collision safety tests for 88K small cars.

Daihatsu produced 1.1M vehicles over the first 10 months of the year and accounted for 7% of Toyota's ( TM ) overall sales. Toyota ( TM ) said a fundamental reform was needed at Daihatsu. "It will require not only a review of management and business operations but also a review of the organization and structure, as well as a change in human resource development."

Bird Global ( OTC:BRDS ) has filed for Chapter 11 bankruptcy protection to undergo restructuring to strengthen its balance sheet, just two years after the electric scooter rental company went public through a SPAC merger.

Bird ( OTC:BRDS ) entered into a stalking horse deal with existing lenders, which effectively sets a floor for the company's value. The bid is subject to better offers, aimed at maximizing value for stakeholders. The sale process is expected to be completed in the next 3-4 months.

Bird ( OTC:BRDS ) will operate as usual during this process and maintain the same service for its riders. Bird Canada and Bird Europe are not part of the bankruptcy filing and will continue operating as normal.

Shares of Bird ( OTC:BRDS ) have lost ~92% in value YTD and ~100% since its trading debut.

The company has been battling a slump in sales, which has eaten into its profits despite aggressive cost cuts. Bird ( OTC:BRDS ) last month flagged substantial doubt about its ability to continue as a going concern based on recurring losses and negative cash flow from operations for the nine months ended September 30.

SA analyst Pacifica Yield warned back in June that "Bird's ( OTC:BRDS ) go-public story has become a classic tale of how SPACs became the harbinger of wealth destruction against initially buoyant expectations of growth.”.

Boeing (NYSE: BA ) received an order from Lufthansa Group ( OTCQX:DLAKF ) ( OTCQX:DLAKY ) for as many as 100 of the plane maker’s 737 Max jets.

Lufthansa, ( OTCQX:DLAKF ) ( OTCQX:DLAKY ) which was privatized in 1997, was the first airline to receive a 737 in 1967, but the final delivery of a 737-300 to Lufthansa was in 1995. The airline retired its last 737 in 2016 with the beginning of a fleet modernization program.

Rite Aid ( OTC:RADCQ ) will not be allowed to use facial recognition technology for surveillance purposes for five years, the U.S. Federal Trade Commission ( FTC ) said on Tuesday, settling allegations that the bankrupt drugstore chain falsely tagged consumers as shoplifters.

The FTC's order will require Rite Aid ( OTC:RADCQ ) to implement safeguards in systems that use biometric information, and will also require the company to stop using any such technology if it cannot control potential risks to consumers.

In a complaint filed by the agency in federal court, the FTC said that from 2012 to 2020, Rite Aid ( OTC:RADCQ ) used artificial intelligence-based facial recognition technology so as to tag customers who may have been engaged in shoplifting or other problematic behavior.

"The complaint, however, charges that the company failed to take reasonable measures to prevent harm to consumers, who, as a result, were erroneously accused by employees of wrongdoing because facial recognition technology falsely flagged the consumers as matching someone who had previously been identified as a shoplifter or other troublemaker," the FTC said in a statement .

The FTC's action comes after the agency earlier this year in May warned that the increasing use of consumers' biometric information raised significant consumer privacy and data security concerns.

Rite Aid ( OTC:RADCQ ) separately said that it was "pleased to reach an agreement with the FTC," though it noted that it "fundamentally" disagreed with the facial recognition allegations brought by the agency.

Yesterday we mentioned FedEx in our earnings spotlight, well, FedEx (NYSE: FDX ) traded lower after missing estimates on both lines of its FQ2 earnings report and setting revenue guidance below expectations.

The shipping giant reported revenue fell 2.6% year-over-year. It also reported an operating margin rate of 6.4% vs. 5.3% a year ago. Operating margins were up primarily due to the execution of the company's DRIVE program, and continued focus on service and revenue quality. FedEx Ground operating income increased primarily due to yield improvement, cost reductions, and higher volumes.

Cost per package declined 2%, driven by lower line-haul expense and improved first- and last-mile productivity. FedEx Freight operating income increased despite a decline in revenue. The profit increase was driven by higher yield and increased efficiency, partially offset by lower shipments. Meanwhile, FedEx Express operating income declined due to lower revenue, partially offset by reduced operating expenses. The revenue decrease was driven by volume declines, lower fuel surcharges, reduced demand surcharges, and a mix shift toward lower-yielding services.

Looking ahead, FedEx sees revenue falling at a single-digit rate in FY24 and EPS of $17.00 to $18.50 vs. $18.22 consensus. The shipping giant expects to buy back $1B worth of stock in FY24 and sees capex spending of $5.7B.

FedEx ( FDX ) ranks third in the U.S. for deliveries behind Amazon ( AMZN ) and United Parcel Service ( UPS ). Worth noting that in 2016, FedEx ( FDX ) CEO Fred Smith called the idea of competing at scale in deliveries "fantastical," saying concerns about industry disruption were overblown.

Shares of FedEx ( FDX ) fell 7.099% in after-hours trading on Tuesday. Peer UPS ( UPS ) was down 1.88%.

In our Earnings spotlight look for General Mills ( GIS ), Micron Technology ( MU ), Toro ( TTC ), and Winnebago ( WGO ) and look for Consumer Confidence and Existing Home Sales reports at 10:00.

For further details see: