Daily Rundown: August 9

CHRIS VERSACE: Good morning, Action Alerts Plus members. It's Tuesday, August 9. Diving into today's markets, we have another barn burner day of earnings with about 350 reports being had, the passage of the CHIPS Act, Micron cut its outlook, and we also had some 2Q 2022 inflation data. Let's break it all down.

Stocks are trading off as we start the day for a few reasons. First, Micron, as I just said, cut its outlook for the back half of 2022 citing a confluence of macroeconomic supply chain and inventory destocking issues. Now while we don't own Micron, it's a big change in expectations to the downside. And it reinforces the weakness primarily in the PC and graphics market that we heard from AMD last week and NVIDIA yesterday.

Meanwhile, GlobalFoundries, another significantly large foundry company, competitor to Taiwan Semiconductors, reported better than expected quarterly results and upped its outlook for the current quarter. Comparing and trasting these two, it's a great reminder that not all chip companies are the same. They sell into different end markets. So you have to really close attention to what those are telling us.

For example, GlobalFoundries, its two largest end markets are smart devices and connective infrastructure and data center-- very, very different than what micron is telling us, very different than what we're seeing from the weakness in the PC and gaming sector. From our perspective, the comments out of GlobalFoundries are very positive for the expected smartphone launch and ramp in the second half of the year, particularly for Apple. So we continue to lean in on those. But remember, not all chip companies are the same.

The second issue that's impacting markets today is the preliminary read on the second quarter unit labor costs. It was significantly hotter than expected, clocking in at 10.8% versus the expected 9.5% reading, granted it was down from the upwardly revised 12.7% figure for the first quarter of the year. But still it remains at extremely elevated levels.

Here's the thing, we saw with the July employment report that wage gains year-over-year continued to come in hotter than expected. There was also data contained inside the latest NFIB small business index that points to continued difficulties in hiring people. More than likely, this means that these pronounced wage inflation pressures are going to remain. More than likely, we're going to see expectations skew even more so to a 75 basis point rate hike from the Fed at the September meeting. We'll be checking the CME Fed watch tool for that later today.

However, as we talked about earlier this week, we have a lot of inflation data coming. Tomorrow brings the July CPI report. And then the day after, we have the July PPI report. This is arguably fresher data than the 2Q unit labor cost data. So we think the market should rightly put a lot more emphasis on this even so, though. We might see some nice tick lower in the CPI and the PPI. But given the wage inflation data, food price data, we continue to expect it to remain at elevated levels.

Switching gears. Today, we also have the signing of the CHIPS Act. This is a huge catalyst for a number of domestic manufacturing companies, particularly, again, for semiconductors. The bill has roughly 52.7 billion for research, development, manufacturing, and workforce development, 39 billion in manufacturing incentives; and this is the big one for Applied Materials, a 25% investment tax credit for capital expenses for the manufacture of chips and related equipment. 

Already this morning, micron announced it's going to spend $40 billion through the end of the decade. We've had other announcements previously from Intel, and we expect even more as the CHIPS Act is signed. All of this points to the reshoring of semiconductor capacity. Again, a very, very positive catalyst for our shares of Applied Materials.

In terms of the AAP portfolio this morning, we did have some action. We trimmed our shares of Morgan Stanley and we added to our shares of Verizon. Last week, on the August monthly call, we noted that, yes, Morgan Stanley has had a great run up, about 18-19%. But it was starting to hit the top of its trading range. We do like the company long term given the transformation in its business model towards higher AUM in fee-generating fixed fee-generating income.

However, the IPO market continues to remain rather cold. And on a year-over-year basis, the M&A market has slowed. So for that reason, we're going to take some Morgan Stanley chips off the table, but we're going to recycle those profits into Verizon. We continue to like that business model, particularly in a slower economic environment.

Let's be candid here, connectivity-- is at a premium, especially mobile connectivity? It's increasingly, in our view, a utility, a need-to-have, a must-have. We also like the 5% dividend with Verizon as well. So we're going to funnel some of those proceeds into that.

And that, AAP club members, is today's Daily Rundown Thanks for joining. We'll be back with you tomorrow.