Wall Street Breakfast Podcast: The Few, The Tech, The Stock Leaders

Stock market leadership continues to narrow, the framework for a debt limit deal could be in place and the war of words between Carl Icahn and Bill Ackman heats up.

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Transcript

Leading today’s news: Tech bulls no doubt cheered the market rally on Thursday. But the action put a major concern of Wall Strategists into stark relief – that’s the lack of breadth.

Thanks to Nvidia (NVDA) soaring, the Nasdaq (COMP.IND) (NASDAQ:QQQ) jumped 1.7%, while the S&P (SP500) (NYSEARCA:SPY) gained nearly 1%. But the Dow (DJI) (NYSEARCA:DIA) closed down slightly.

Allianz Advisor Mohamed El-Erian tweeted that the "price action is another reminder that this year’s favorable equity market performance is still about a handful of tech stocks."

DataTrek notes that year to date the 7 US Big Tech names are now responsible for all the S&P’s positive performance and then some - 10.5 percentage points of the index’s 8.1 percent gain. Nvidia alone is a third of the S&P’s 2023 returns, adding 2.7 points.

Even with Big Tech strength, the S&P has been unable to top 4,200 after several attempts.

JPMorgan says that underlying market breadth, by some measures, is the weakest ever, with the narrowest stock leadership in an up market since the 1990s. Equity upside has been driven by a combination of very narrow growth leadership and rotation into safety. The AI theme appears to be stretched, it adds.

Meanwhile, the Dow is badly underperforming with very little exposure to AI.

DataTrek’s Nick Colas says that’s a problem "because the Dow remains the predominant way Americans track the US stock market.”

“There’s 7 times as many US Google searches for ‘Dow Jones’ than ‘S&P 500’ and double those for ‘stock market’ over the last 5 years. Therefore, the Dow is a direct transmission mechanism for the wealth and economic confidence effect between Wall Street and Main Street.”

The question now is if this narrow tech leadership is so stretched that a correction in those names is due.

"At more than 6x sales, the S&P 500 info tech index (NYSEARCA:XLK) continues to trade at a multiple to sales rarely seen prior to the current cycle," Roth MKM notes, adding "Even if we are more generous and use forward earnings estimates, a 25x forward multiple is not far from the 28x peak seen during late 2021 - which preceded a more than 30% slide for the sector."

Investors are probably taking more risk than they realize if they are chasing the sectors and stocks that have been leading the market this year, they add.

In other market news -

There are reports that debt ceiling negotiators are closing in on the framework for a deal.

While there is nothing concrete, Bloomberg reports that an agreement to cap federal spending for two years in return for raising the debt limit is in the works.

Defense spending would be allowed to rise 3% next year, in line with President Joe Biden’s budget. There would also be a measure to improve the electrical grid to accommodate renewable energy in return for speeding up permits for pipelines. And $10 billion would be trimmed from the $80 billion increase earmarked for the IRS.

Reuters says the two parties are just $70 billion apart on discretionary spending.

Icahn Enterprises (NASDAQ:IEP), run by activist investor Carl Icahn, dropped another 14% as hedge fund manager Bill Ackman suggested there could be more downside for the stock amid the Hindenburg short call and potential issues with margin loans.

The Icahn holding company has now plunged 36%this week and has fallen for the last five days. IEP shares have plummeted 60% since the Hindenburg short report was released on May 2, erasing billions from Icahn's net worth.

Ackman had a famous showdown with Icahn a decade ago on CNBC over Ackman's Herbalife (HLF) short call. The billionaire has now injected himself into the IEP fight with a tweet on Wednesday, writing that IEP still trades at a 50% premium to net asset value - even after its tumble this month.

"Its performance history and governance structure do not justify a premium; rather, they suggest that a large discount to NAV would be appropriate," Ackman tweeted.

Icahn responded to Ackman in a statement to CNBC.

"Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia."

Icahn Enterprises pared some of yesterday’s decline after a report that Icahn is planning a counterattack against Hindenburg, potentially legal action or a buyback of IEP shares.

Ackman also suggested that Icahn's margin lenders may be "extremely concerned" with the current situation. Hindenburg, which has said it is short the stock and IEP's bonds, originally raised concerns about margin loans in its report earlier this month, saying IEP's NAV is "overvalued."

Jonathan Weber - Investing Group Leader of Cash Flow Club at Seeking Alpha - says IEP offers an incredibly high dividend yield. But if maintained, that will go hand in hand with massive dilution.

Ulta Beauty (ULTA) became the latest retailer to point the finger at organized shoplifting hampering its financial results.

While “shrinkage” as its known in the business, has always been a problem, Target (TGT) said that it could hit profitability this year by as much as $500 million. Dollar Tree (DLTR), Foot Locker (FL) and Home Depot (HD) have also called out the problem.

Ulta shares fell in extended hours on sales concerns and as it trimmed operating margin guidance.

On the earnings call, CEO Dave Kimbell "we continue to see pressure from inventory shrink this quarter and we have updated our full year guidance to reflect the persistence of this trend."

“While shrink is the result of various factors, theft, specifically Organized Retail Crime or ORC is an increasingly concerning challenge, especially as we've seen a rise in violence and aggression during these incidents.”

While investing in security, Kimbell said the problem will not be solved by retailers alone, but will require efforts from manufacturing, law enforcement and legislators.

I discussed this issue in more detail with consumer editor Kevin Curran earlier this week. You can check it out wherever you get the Wall Street Breakfast podcast.

Other market headlines to watch for on Seeking Alpha:

Ford works out electric charging partnership with Tesla

Costco falls after U.S. sales come in lighter than anticipated

The Dollar Index hits its highest level since mid-March

Oil slides as Russia downplays more OPEC+ cuts

Tilray slumps following convertible note offering

Gap soars after recording an unexpected profit

JPMorgan Chase notifies 1,000 First Republic employees that they won't get job offers