Closing Recap

Friday, April 22, 2022

Equity Market Recap

·     A very ugly end to the trading week as markets remain on track for big April losses! It was a bidless market for a second straight day, as the S&P 500 fell for the 5^th time in six as major averages tumbled in orderly fashion – no signs of panic selling. There was no place to hide as every sector ended lower, with the biggest drop coming in healthcare after several earnings/guidance warnings about slowing spending (ISRG, HCA, GMED). The second week of earnings season was mixed at best with highlights coming in the transports amid signs of improved demand for travel in airlines (AAL UAL), while tech was mixed (NFLX big disappointment), telecom gets a lowered outlook from Dow component VZ (shares fall 5% today), and banks still lagging after large cap and regional banks fail to impress. Investors sold anything and everything growth related as the Federal Reserve ramped up its “hawkish” interest rate hike rhetoric, with some members even calling for a discussion about 75-bps hikes. In the last few days alone (now ahead of the Fed blackout period into the May meeting), Fed Chair Powell, as well as Bullard and Daly were very aggressive in their commentary of stepping up rate hikes to fight inflation. Futures contracts tied to the Fed’s policy rate now reflect overwhelming expectations for a rise in short-term borrowing costs to the 0.75%-1% range at the Fed’s May 3-4 meeting, and to a 2%-2.25% range by the close of its July 26-27 meeting (likely more aggressive than markets were expecting). The CBOE volatility index (VIX) rose to a 5-week high above the 26 level (off lows below 20 yesterday).

·     Stock & Sector movers: medical device makers and hospitals tumble after HCA ISRG GMED plunge amid earnings/guidance/warning that hospital budgets are strained for big ticket capital deployments; ISRG beat for quarter but warned of constrained spending, while GMED lowers sales view, weighs on MedTech DXCM SYK ZBH BAX and HCA posts quarterly miss and lower guide hurting hospital shares CYH UHS THC; GPS cut its sales forecast, weighing on retail space AEO ANF DDS; KMB beat and raised year revs and organic sales guidance, helping boost household product names CLX CHD; ALV posts quarterly miss and lower guidance hitting auto suppliers LEA VC MGA AXL. Bespoke noted the Nasdaq is now down 9% MTD, which is the 2nd worst start to April in the index’s history behind only 2000 when the index fell 23.8% through the month’s first 15 trading days.

Commodities, Currencies & Treasuries

·     Oil prices slumped, as WTI crude dips -$1.72 or 1.66% to settle at $102.07 per barrel (down 4% for week) as a combination of weaker global growth concerns, higher interest rates and COVID lockdowns in China hurting demand all pressured prices. Prices fell even as the EU considers a ban on Russian oil that would further tighten supply. The IMF earlier this week cut its global economic growth forecast) citing sanction concerns on Russia. Meanwhile Bloomberg reported that Chinese demand for gasoline, diesel and aviation fuel in April is expected to slide 20% from a year earlier, as many of China’s biggest cities, including Shanghai, are in COVID-19 lockdowns.

·     Gold prices fell -$13.90 or 0.7% to settle at $1,934.40 an ounce as the dollar hit fresh 2-year highs on rising interest rate hike expectations by the Fed; gold prices dropped around 2% for the week, while silver was down over 5.5% on the week and copper -2.8% for the week. U.S. Treasury yields edge higher, although the 10-yr is still trading below the psychological level of 3.00% (touching highs around 2.98% this week).

·     The U.S. dollar Index (DXY) rose to highs around 101.25, a level last seen in March 2020 when investors piled into the greenback during the onset of the COVID-19 pandemic. The buck has received a lift from expectations that the Federal Reserve is about to start aggressively hiking rates to combat inflation, currently at its highest annual rate since 1981. Meanwhile, the British pound has slumped to levels not seen since late 2020 and the offshore yuan is heading for its biggest weekly drop since August 2015. Some banks expect the Fed to be even more aggressive to avoid a wage-price spiral and hike by 75bps in June and July.

Sector News Breakdown

Consumer

·     Retailers; GPS cuts Q1 net sales growth guidance, which is now expected to be low to mid-teens year-over-year declines from its prior guidance of mid to high-single-digit declines, citing macro-economic dynamics as well as execution challenges at Old Navy as CFO exits; the sales outlook from Gap weighed heavily on shares of DDS, ANF early amid what may come in retail; LE was downgraded to Hold from Buy at Craig Hallum; BBBY shares got a late day spike after the WSJ reported it is fielding interest from potential acquirers of its Buybuy Baby biz after they came under pressure from an activist investor to unload the unit. https://on.wsj.com/3ECch6A

·     Auto sector; in auto suppliers, ALV shares slide after Q1 adj EPS misses at $0.45 vs. est. $1.11 on revs $2.12B vs. est. $2.18B as sales declined organically by 1.0% and lowers year organic revenue +12% to +17%, from about +20% and sees adj operating margin 5.5%-7%, below prior view 9.5%; Bloomberg reported RACE recalls over 2,000 cars in China on brake risk; CVNA looks to rebound after recent lower earnings/guidance sent shares lower – co 15.625M share Secondary priced at $80.00; Bloomberg reported GM and HMC in talks to develop solid-state EV batteries

·     Housing & Building Products; AZEK upgraded to Buy in building products at Citigroup saying while they acknowledge softening consumer sentiment may pressure some repair & remodel activity in the spring/summer, and continued cost inflation will crimp margins temporarily, view AZEK’s underlying earnings power as intact and top picks in the group are DHI, PHM, and VMC; SWK announced it has signed a definitive agreement for the sale of its automatic doors business, Access Technologies, to ALLE for $900M in cash

·     Consumer Staples; KMB a winner on day after Q1 beat and raised year revs to 2%-4% from prior view of up 1%-2% and sees organic sales growing 4%-6% from prior 3%-4% view; SAM posted an unexpected quarterly loss on light revs ($430M vs. $445M est.) saying Q1 shipment volume was down 25.1% from the prior year citing decreases in several brands (Truly Hard Seltzer, Twisted Tea, Angry Orchard); BUD said it will sell its stake in its Russian joint venture in a deal, which could result in a $1.1 billion hit; ACI shares fell early after Reuters reported JPMorgan re-offered 15 mln shares at $32.50, 4.1% discount to stock’s Thurs close

·     Casinos, Gaming, Lodging & Leisure sector; CRSR shares slide as guides Q1 adj Ebitda $14M-$15M and revs about $380M, well below the $447.4M est. Saying revenue was lower than they expected; KeyBanc revises ests mostly higher for CZR on solid land-based gaming trends, offsetting reductions to non-gaming revenue expectations

Energy, Industrials and Materials

·     Energy stock movers; oil prices were lower, as energy stocks dipped for the most part; oil service stock earnings out of the way as SLB the last major to report, rising after results (follows strength in HAL post earnings and BKR weakness); the Baker Hughes weekly rig count showed total rigs rose to 965, with oil rigs up 1 to 549 and gas rigs up 1 to 144.

·     Transports; several analyst changes after a good week of earnings for the space (AAL, UAL, CSX – DAL last week); AAL upgraded to Neutral from Underweight, and United (UAL) upgraded to Overweight from Underweight at JPMorgan; HA, JBLU downgraded to Hold from Buy at Deutsche Bank saying the carrier faces specific headwinds that are likely to limit share price upside; in rails, UNP was downgraded to neutral at UBS and cut tgt to $267 from $283 as expect the current capacity constraints and service issues to weigh on volume performance and these issues also reduce conviction in UNP’s ability to execute on its volume growth strategy

·     Metals & Materials; an absolute dreadful week for some of 2022 biggest winners with fertilizers (MOS ), metals and mining stocks tumbling on profit taking and growing fears of a recession; AA was downgraded to Neutral at Citi following a 50% YTD return (still remains one of their best l-t ideas in metals); CLF Q1 EPS $1.50 tops est. $1.41 on better revs $6.0B vs. est. $5.37B saying expect to set another free cash flow record in 2022; increasing its full-year 2022 average selling price expectation by $220 to $1,445 per net ton; gold miners NEM tumbles along with the price of the precious metal

Financials

·     Bank movers; SIVB jumps on big earnings beat ($7.31 vs. est. $5.49) saying they benefited from stronger spread revenue, equity gains, and lower credit costs and boosted its FY22 forecast for loan growth, spread revenue, and core fee income; RF Q1 profit tops estimates with EPS of $0.555 vs. est. $0.47 though revs fell 2% to $1.6B, below the $1.61B estimate while net interest income for Q1 was $1.02B, up from $967M y/y; in insurance; ALL announced estimated catastrophe losses for month of March of $227M or $179 mln, after-tax

·     Bitcoin, FinTech & Payments; UPST upgraded to Buy at Citigroup saying its one-year roundtrip from ~$400 has been astonishing to say the least, now at its 52-week low, and think much of the drawdown is unjustified, mostly on business model misconceptions and/or misperceived market observations; no rebound in FinTech space as SQ, PYPL remain weak

·     Consumer Finance; AXP reported Q1 revs rose 29% y/y to $11.74B topping the $11.63B estimate; recovery of credit losses $33M, -95% y/y vs. est. provision $287.4M and still sees EPS $9.25 to $9.65, vs. estimate $9.72 and revs up +18 to +20%; travel and Entertainment spending was up 121% on an FX-adjusted basis over a year ago and essentially reached pre-pandemic levels globally for the first time in March, driven by continued strength in consumer travel

·     REITs; BXP upgraded to Buy at Mizuho, replacing KRC as top pick in Office; initiate coverage of VNO (Underperform), and SLG, CUZ and HIW (all at Neutral) and reiterate Underperform on HPP saying fundamental analysis leads them to believe we are close to approaching peak Office valuations, at which the potential bear case downside risk of 28% outweighs the forecast bull case upside of 22% for Office REITS under coverage; MPW downgrade from Buy to Hold w/ $20 PT from $25 at Jefferies as forecast FFO growth to slow to a +2.8% CAGR through FY24 from the +8.7% CAGR achieved in the past three years, largely driven by lower net acquisition volumes.

Healthcare

·     Biotech movers; BIIB said it decided to withdraw its Marketing Authorization Application (MAA) for its U.S.-approved Alzheimer’s therapy aducanumab in Europe citing inadequacy of data to support its regulatory recommendation; SCYX 15M share Spot Secondary priced at $3.00 which overshadowed reports of interim data from two ongoing phase 3 studies of oral ibrexafungerp showed improvement in ~61% of patients with fungal infection.

·     MedTech Equipment; GMED reported preliminary Q1 net sales of about $230.5M, compared to consensus estimates of $236.1M, and said CEO Dave Demski resigns; ISRG posts Q1 profit and sales beat but system placements missed consensus estimates by 4% according to one analyst and co said weaker demand from hospitals for installing its surgical robots is in part due to tightening of hospital finances (MedTech names tumble in reaction – SYK )

·     Healthcare Services; HCA shares slide after the hospital operator missed Q1 EPS ($4.14 vs. est. $4.25) on slightly better revs while Ebitda of $2.94B missed the $3.02B est./lowers year rev view to $59.5B-$61.5B from $60B-$562B prior and EPS at $16.40-$17.60 from prior $18.40-$19.20; the miss and lower guide pressure other hospitals UHS as well as managed care names CI , etc.

Technology, Media & Telecom

·     Internet, Media & Telecom movers: VZ posted Q1 totals that largely met analysts’ expectations, but sees 2022 wireless service revenue growth at lower end of prior 9%-10% view and sees 2022 adjusted EBITDA growth at lower end of prior view of 2%-3%; sees FY adj EPS low end of $5.40 to $5.55, est. $5.43; SNAP the first social media name to report with mixed results as Daily active users (DAUs) on Snapchat rose 18% y/y to 332M above ests around 330M but growth rate down from 22% y/y and guides Q2 rev growth 20%-25% vs. est. 28%; DWAC said Donald Trump’s new media platform, Truth Social, has migrated to video platform Rumble’s cloud platform

·     Software movers; SAP beat Q1 expectations with revenue growth of nearly 12%, but missed projections with its bottom-line figure – said it expects a total negative revenue impact of around EUR300 million in 2022 from a lack of new business by exiting Russia; JD announced that it is considering a special dividend on or around May 4; UBSFY advanced on reports it is drawing buyout interest https://bit.ly/3EFmdwd ; broad weakness across the board FTNT