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Eve rises to top industrial gainer amid tough week while outlook woes pull down Arconic

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All eyes will be on the U.S. Federal Reserve’s meeting this week with markets expecting another significant increase in interest rates. Bank of America is expecting a 75-basis point rate hike as August’s CPI print overshadowed the favorable trends in producer and import prices.

For the week ending Sept. 17, electric flying taxi maker Eve stood out taking the top gainer spot for the second week in a row (in our segment), while financial outlook was a main theme among majority of the worst five decliners of this week. The S&P 500 saw its worst weekly performance (-5.17%) since mid-June, with all 11 sectors being in the red. YTD, the SPDR S&P 500 Trust ETF (SPY) is -18.82%. The Industrial Select Sector SPDR (XLI), which too had seen rare gains, like SPY last week (having broken a three-week losing streak), shed -6.38%. YTD, XLI is -15.69%.

The top five gainers in the industrial sector (stocks with a market cap of over $2B) all gained more than +1% each this week. YTD, three out of these five stocks are in the green.

Eve Holding (NYSE:EVEX) +43.97%. The Melbourne, Fla.-based eVTOL aircraft maker’s stock rose throughout the week with +10% gains on two successive days (Sept. 13-14). YTD, Eve, which is backed by Brazilian aircraft maker Embraer, has gained +9.04%. The SA Quant Rating on the shares is a Hold, which takes into account factors such as Momentum and Profitability, among others. EVEX has an F factor grade for Profitability and A+ factor grade for Momentum, currently. The rating is in contrast to to the average Wall Street Analysts’ Rating of Buy, wherein 2 out of 4 analysts tag the stock as a Strong Buy.

Enovix (ENVX) +3.23%. The Fremont, Calif.-based lithium-ion battery maker was back among the gainers after being among the losers two weeks ago. However, the stock has seen volatility — having swung to gains following its quarterly earnings results but swapping places among top gainers and decliners since then. YTD, the stock has declined -20.31%, the most among this week’s top five gainers. The SA Quant Rating on the stock is Hold with Growth having a factor grade of B and Profitability with a score of D. The average Wall Street Analysts’ Rating differs with a Strong Buy rating, wherein 5 out of 6 analysts tag the stock as a Strong Buy.

The chart below shows YTD price-return performance of the top five gainers and SP500:

China Southern Airlines Company (ZNH) +2.09%. The stock was back among the top five gainers after over two months. YTD, ZNH has shed -10.89%; being the only other stock besides ENVX among this week’s gainers which is in the red for this period.

Icahn Enterprises (IEP) +1.11%. The Florida-based conglomerate has a Wall Street Analyst Rating of Strong Buy, from 1 analyst. The SA Quant Rating concurs with a Strong Buy rating of its own, with Growth having a score of B+ and Valuation with a factor grade of A. YTD, the shares have risen +4.40%.

KBR (KBR) +1.11%. Earlier in the week, the Houston-based company received a $38M contract for automated fuel handling equipment maintenance. The SA Quant Rating on the stock is Hold, with Profitability having a factor grade of C+ and Growth with a score of B-. The average Wall Street Analysts’ Rating differs with a Strong Buy rating, wherein 7 out of 10 analysts see it as a Strong Buy. YTD, KBR has gained +3.36%.

This week’s top five decliners among industrial stocks (market cap of over $2B) all lost more than -13% each. YTD, all these five stocks are in the red.

Arconic (NYSE:ARNC) -24.10%. The aluminum products maker’s stock fell the most on Sept. 15 (-16.64%) after the company slashed its FY22 outlook noting that Q3 will be impacted by production outages and other operational challenges in Tennessee and Davenport that have reduced production from planned operating rates. The Pittsburgh, Pa.-based company also said that Q3 and Q4 results are expected to see a negative impact as hyperinflationary energy costs are driving increased cost pressures and declining demand in Europe. Q3 adjusted EBITDA is expected to be in the range of $135M to $150M. Arconic expects FY22 revenue to be between $9.2B to $9.5B (prior range was $9.6B to $10B) Consensus $9.25B. Adjusted EBITDA expected between $715M and $765M (prior forecast was of the low end of the range of $820M to $870M.

The SA Quant Rating on ARNC is Hold, with Profitability having a factor grade of C- and Valuation with a score of C+. The rating is in contrast to the average Wall Street Analysts’ Rating of Buy, wherein 3 out of 5 analysts see it as Strong Buy. YTD, the stock has shed -38.75%.

FedEx (FDX) -22.98%. The Memphis, Tenn.-based company saw its stock plummet -21.40% on Sept. 16 after Q1 results (post market Sept. 15) widely missed analysts’ estimates and the freight transport provider withdrew its FY23 earnings guidance. The news saw a flurry of downgrades from Wall Street, while Transportation ETFs also fell with stocks of FedEx peers also feeling the pressure.

The SA Quant Rating on FDX is Hold, with a factor grade of C+ for Momentum and a D- score for Growth. The average Wall Street Analysts’ Rating differs with a Buy rating, wherein 15 out of 30 analysts see it as Strong Buy. YTD, the stock has declined -37.74%.

The chart below shows YTD price-return performance of the worst five decliners and XLI:

Generac (GNRC) -15.89%. The Waukesha, Wis.-based company, which sells power generation equipment, saw its stock decline throughout the week. teamed with Pearlstone Energy Limited to provide energy management solutions to commercial and industrial facilities in the United Kingdom. Solar system installer Pink Energy is suing Generac over supplying an allegedly faulty product for its solar installations, Renewables Now reported. Generac, however, noted that Pink Energy customers suffered from poor installation.

The average Wall Street Analysts’ Rating on GNRC is Strong Buy, wherein 14 out of 21 analysts see the stock as such. The rating is in stark contrast to the SA Quant Rating of Sell, with Profitability possessing a score of B, while Valuation with a factor grade of D. YTD, the stock has declined -43.12%.

GXO Logistics (GXO) -13.65%. The Greenwich, Conn.-based company was among the FedEx peers which saw its stock slump on Sept. 16 (-8.30%). The SA Quant Rating on the stock is Hold, with a factor grade of D for Momentum and an A+ and C+ score for Growth. The average Wall Street Analysts’ Rating differs with a Buy rating, wherein 9 out of 15 analysts see it as Strong Buy. YTD, the stock has declined -55.86%, the most among this week’s worst five performers.

Flowserve (FLS) -13.58%. The stock fell (-7.66%) on Sept. 14 after the Texas-based company said its Q3 EPS would be impacted due to technology disruptions and one-time expenses. Credit Suisse downgraded the stock to Neutral from Outperform following the news. YTD, FLS has shed -11.21%. The SA Quant Rating on the stock is Hold, with both Profitability and Growth carrying a C score. The average Wall Street Analysts’ Rating differs with a Buy rating, wherein 5 out of 13 analysts seeing it as a Strong Buy.

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Santos gets $1.4B offer for PNG LNG stake from Papua’s state oil company (OTCMKTS:STOSF)

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Santos (OTCPK:STOSF) said it received a binding conditional offer from Kumul Petroleum Holdings, Papua New Guinea’s national oil and gas company, to buy a 5% interest in the PNG LNG liquefied natural gas project for US$1.4B plus ~$300M in project finance debt.

Santos (OTCPK:STOSF) said Kumul paid $55M to be held in escrow to secure the offer, which will remain open for acceptance until December 31 and is conditional on Kumul obtaining waivers on some pre-emptive rights by other PNG LNG project partners.

With the sale of a 5% stake, Santos (OTCPK:STOSF) would own 37.5% of the project, still ahead of operator Exxon Mobil (NYSE:XOM) with 33.2%, while Kumul Petroleum would own 21.8%, with the remaining shared between Japan’s JX Holdings and Papua New Guinea’s state-owned Mineral Resources Development Co.

Santos (OTCPK:STOSF) became the largest shareholder in PNG LNG, Papua New Guinea’s largest resource project, with its takeover of Oil Search Ltd. last year.

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Falling home prices shouldn’t collapse the financial system, says hedge funder who made $4 billion betting on the 2008 housing crash

The U.S. housing market is experiencing one of the most rapid and dramatic shifts in its history.

The reason is pretty simple: Spiked mortgage rates are sidelining buyers across the country. 

And it’s far from over. Last week, Fed Chair Jerome Powell even went as far as to call it a “difficult correction.”

While the speed and breadth of the slowdown have some Americans worried about a repeat of the 2008 housing bust and subsequent global financial crisis, others aren’t as concerned. John Paulson, the hedge funder who famously pocketed $4 billion betting against the U.S. housing market in 2008, is among those who believe history isn’t repeating itself.

“We’re not at risk of a collapse today in the financial system like we were before,” Paulson told Bloomberg on Sunday. “Yeah, it’s true, housing may be a little frothy. So housing prices may come down or they may plateau, but not to the extent it happened [in 2008].”

A tale of two Wall Street oracles

Paulson, who started his hedge fund (which has since been converted to a family office), Paulson & Co., in 1994 and boasts a net worth of $3 billion, believes that the housing market is on stronger footing than it was at the start of the Great Financial Crisis.

“The underlying quality of the mortgages today is far superior. You don’t even have any subprime mortgages in the market,” he said. “In that period [2008], there was no down payments, no credit checks, very high leverage. And it’s just the opposite of what’s happening today. So you don’t have the degree of poor credit quality in mortgages that you did at that time.”

After the blow-up of the 2008 housing bubble and subsequent global financial crisis, senators passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in order to ensure the stability of the U.S. financial system and improve the quality of U.S. mortgages.

The act created the Consumer Financial Protection Bureau (CFPB), which is tasked with preventing predatory mortgage lending. In the years since the CFPB’s creation, the average credit rating of homebuyers has improved dramatically. Leading up to the 2008 housing bust, U.S. homebuyers’ average credit rating was 707. In the first quarter of this year, it was 776, according to data from Bankrate.

Bank of America Research analysts led by Thomas Thornton also found that the portion of buyers with so-called “superprime” FICO scores of 720 or above hit 75% this summer. During the years preceding the 2008 housing bust, just 25% of buyers boasted similarly strong credit.

The Dodd-Frank Act also established the Financial Stability Oversight Council which monitors the health of major U.S. financial firms and sets reserve requirements for banks, and the Securities and Exchange Commission (SEC) Office of Credit Ratings which verifies the credit ratings of major firms after critics argued private agencies gave misleading ratings during the financial crisis. Both of these regulatory bodies have helped to improve the resiliency of the U.S. financial system and banks during times of economic stress.

Paulson noted on Sunday that banks were highly leveraged during the financial crisis and took risks that would be seen as unacceptable in today’s markets after the Dodd-Frank act established the Volcker Rule, which prevents banks from making some specific types of risky investments.

“The problem, in that period of time, was the banks were very speculative about what they were investing in. They had a lot of risky subprime, high-yield, levered loans. And when the market started to fall, the equity quickly came under pressure,” he said, noting that the average bank now has three to four times as much equity as they did during the Great Financial Crisis of 2008, which makes them less susceptible to default.

While Paulson isn’t worried about a repeat of 2008, hedge funder Michael Burry, who also rose to fame predicting and profiting from the Great Financial Crisis, as depicted in the book and movie “The Big Short,” has warned for years that he believes the global economy is in the “greatest speculative bubble of all time in all things.”

Burry argues that central banks created a bubble in everything from stocks to real estate with loose monetary policies after the Great Financial Crisis, and pandemic-era spending meant to boost the economy only made things worse.

Now, as central bank officials around the world shift stances to fight inflation and continue raising interest rates in unison, the hedge fund chief argues asset prices will fall dramatically.

“There is risk growing in many sectors. The unfettered narrative feeding itself until the absurdity explodes, revealing the folly to all and easily starting a revolution,” Burry said in a cryptic, since-deleted Sept. 21 tweet.

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The U.S. housing market stares down an even bigger economic shock—mortgage rates near 7%

Unbeknownst to buyers lining the sidewalks outside of frenzied open houses this spring, the Pandemic Housing Boom was already in its final inning. In March, Fortune published a pair of articles titled “The housing market enters uncharted waters“ and “An economic shock just hit the housing market“ arguing just that: The red-hot housing market would quickly shift in the face of spiked mortgage rates, which had jumped from 3.2% in January to over 4% by late March.

Not only did higher mortgage rates help to cause the Pandemic Housing Boom fizzle out, but it was replaced by what Federal Reserve Chair Jerome Powell now calls a “difficult correction.”

“For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again. We probably in the housing market have to go through a correction to get back to that place,” Powell told reporters last week. “This difficult [housing] correction should put the housing market back into better balance.”

The bad news for mortgage brokers and builders? This housing correction is far from over.

In fact, the shock hitting the U.S. housing market continues to grow: On Monday, the average 30-year fixed mortgage rate jumped to 6.87%. That marks both the highest mortgage rate since 2002 and the biggest 12-month jump (see chart below) since 1981.

Anytime the Federal Reserve flips into inflation-fighting mode, things get challenging for rate sensitive industries like real estate. Higher mortgage rates lead to some borrowers—who must meet lenders’ strict debt-to-ratios—losing their mortgage eligibility. It also prices some buyers out of the market altogether. A borrower in January who took out a $500,000 mortgage at a 3.2% rate would be on the hook for a $2,162 monthly principal and interest payment over the course of the 30-year loan. At a 6.8% rate, that monthly payment would be $3,260.

The economic shock caused by elevated mortgage rates, of course, underpins the ongoing housing correction. The housing correction is the U.S. housing market—which had been based on 3% mortgage rates—working towards equilibrium. As buyers pull back, the housing correction will cause inventory levels to rise and home sales volumes to fall. It’s also putting much of the nation at risk of falling home prices.

We’re already starting to see home price declines in bubbly housing markets like Austin, Boise, and Las Vegas. However, home price declines have yet to hit the whole country. According to Zillow, just 117 housing markets saw home price declines between May and August. In another 500 plus housing markets, prices were either flat or prices rose.

But more markets could soon move into the falling home price camp. As long as mortgage rates remain near 7%, housing analysts tell Fortune we’ll see downward pressure on home prices in the near term.

“The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode. And the affordability resetting mechanism right now that has to happen is on [home] prices,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune.

The big question: How much can “pressurized affordability”—a 3 percentage point jump in mortgage rates coupled with frothy home prices—push home prices lower? Unlike the 2008 housing crash, this time around we don’t have a housing supply glut nor a subprime crisis.

Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.



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