DXC - Wall Street Lunch: Ackman Vs. Treasuries

2023-08-03 12:55:00 ET

Summary

• Bill Ackman bets against 30-year U.S. Treasuries; Q2 nonfarm labor productivity up 3.7%.
• COP misses on Q2 adj EPS, QCOM tumbles on mixed Q3 report; Tesla sold 64.3k China-made EVs in July.
• BofA Securities adds 20+ companies in its quantamental Alpha Surprise Portfolio.

Listen below or on the go on Apple Podcasts and Spotify .

Bill Ackman hedges with a 30-year Treasury shor t as yields could hit 5.5% (0:15). Tesla China deliveries drop to 2023 low . (3:15) New names in the BofA Alpha Surprise Portfolio . (4:08)

This is an abridged transcript of the podcast.

Our top story in today’s session –

Bill Ackman's hedge fund is betting against 30-year U.S. Treasuries, calling it a hedge on the impact of higher long-term rates on stocks as well as a "high probability" standalone bet.

Ackman tweeted that a long bond short was one of the few "macro investments" that still offers a reasonably probable asymmetric payoff. Pershing Square will hedge by using options rather than shorting outright.

He adds that if long-term inflation is 3% instead of 2%, the 30-year yield (US30Y) could reach 5.5% soon.

"There are many times in history where the bond market reprices the long end of the curve in a matter of weeks, and this seems like one of those times," Ackman adds.

He also notes that long-term Treasuries look overbought, and with "$32 trillion of debt, large deficits, and higher refinancing rates, an increasing supply of such Treasuries is assured."

Adding QT into the mix, it’s "hard to imagine how the market absorbs such a large increase in supply without materially higher rates."

Now a look at today’s trading –

Stocks are adding to the big selloff in the previous session, mainly due to the drag from corporate earnings.

The S&P (SP500) is off less than 0.5%, with the Nasdaq (COMP.IND) and Dow (DJI) faring better.

Yields are higher on the long end of the curve amid a slew of economic numbers. The 10-year Treasury yield (US10Y) is up 10 basis points to 4.17%, while the 2-year yield (US2Y) is flat around 4.9%. If this holds up, it will be the continuation of a trend for the 2s10s curve, with eight straight days of steepening.

Amid the data, the first reading of Q2 nonfarm labor productivity showed a 3.7% increase, stronger than the 1.3% expected and reversing the 2.1% decline. Unit labor costs rose 1.6%, compared with the 2.6% increase expected and down from the 4.2% increase in Q1.

Weekly jobless claims remained low, while July construction spending came in close for forecasts. The ISM services index fell slightly in July to 52.7, right about in line with forecasts.

Oil (CL1:COM) was higher, back above $80 per barrel. Gold (XAUUSD:CUR) was slightly up.

Among active stocks –

DXC Technology fell sharply. RBC Capital Markets downgraded shares to Sector Perform, while BMO Capital Markets moved to Market Perform after Q1 results missed estimates and the company reduced its fiscal 2024 outlook.

ConocoPhillips (COP) reported Q2 adjusted earnings that missed estimates as record quarterly production was not enough to overcome oil and gas prices that dropped sharply from a year ago.

Qualcomm (QCOM) shares tumbled after the semiconductor company reported mixed third-quarter results with weak guidance, resulting in some harsh commentary from Wall Street. Deutsche Bank analyst Ross Seymore downgraded shares to hold from buy, noting "soft commentary" from management.

Anheuser-Busch InBev (BUD) said Q2 revenue increased by 7.2%. Total volume declined by 1.4%, with own-beer volumes down by 1.8% and non-beer volumes up by 0.5%. Growth was seen in a majority of BUD's markets, offsetting lower sales volume in the U.S. amid the Bud Light controversy.

Among other stories of note -

Tesla (TSLA) deliveries in China for July fell to the lowest level for 2023.

The China Passenger Car Association says Tesla sold 64,285 China-made EVs. That’s up 128% from a year ago, when the Shanghai Gigafactory was being upgraded for a few weeks. But the level of production was down 31% from June and was the lowest for 2023.

By comparison, BYD (BYDDF) reported a 61% year-on-year rise in July sales to 261,105 passenger vehicles, including 18,169 that were exported. Nio (NIO) reported deliveries of 20,462 (+91% month-over-month). Li Auto (LI) reported deliveries of 34,134 (+5% M/M), and XPeng (XPEV) reported deliveries of 11,008 (+28% M/M).

In the Wall Street Research Corner –

BofA Securities has updated its Alpha Surprise Portfolio for the month, adding several more names.

The quantamental screen uses BofA’s Dividend Discount Model, which is the Alpha part, and the surprise factor is the Consensus Earnings Surprise Model.

While the model has outperformed the S&P and the equal-weight S&P (RSP) since 2021, it has struggled recently. Last month, it trailed both benchmarks. Year to date, it is also trailing, up 5.4% compared with an equal weight gain of 9.6% and a market rally of 19.5%.

The portfolio is most overweight in Communication Services (XLC), Consumer Discretionary (XLY), and Financials (XLF). It is most underweight in Info Tech (XLK), Materials (XLB), and Energy (XLE). Alphabet (GOOGL) is the stock longest in the portfolio at 70 months.

Among the new additions are Goldman Sachs (GS), Hasbro (HAS), Biogen (BIIB), Waste Management (WM), and Royal Caribbean (RCL).

Deletions included Microsoft (MSFT), J&J (JNJ), 3M (MMM), and Ralph Lauren (RL).

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