Closing Recap

Monday, August 01, 2022

Equity Market Recap

·     U.S. markets finish slightly lower, with consumer staples and discretionary the standout winners, while energy, materials, and financials the biggest decliners ahead of another busy week of corporate earnings (roughly 1/3 of S&P due this week). Oil prices dropped after poor Chinese economic data added to concerns that a global slowdown may weaken demand. Stock markets were choppy throughout but held steady after last week’s solid gains despite another round of disappointing economic data and geopolitical concerns. U.S. stocks dipped initially on weaker data overseas in China and Japan, as well as reports House Speaker Nancy Pelosi is still expected to visit Taiwan in a trip to several Asian nations, raising the prospect of increased tensions between the U.S. and China. China had warned last week against a Taiwan visit by Mrs. Pelosi and threatened unspecified countermeasures should the visit take place. There remain lots of market headwinds such as a strong dollar, China weakness/tensions, 40-yr high inflation, supply chain issues and higher commodity prices. But stocks have improved over the last month as many of these concerns, although remain a problem, have also improved. The S&P 500 holding around its 100-day moving average level of 4,120 most of the day after topping its 50-day around 3,925 last week after a strong July rebound.

Economic Data:

·     ISM U.S. Manufacturing activity index 52.8 in July (lowest since June 2020) vs 53.0 in June but above estimate for 52.1; prices paid index 60.0 in July vs 78.5 in June; new orders index 48.0 in July vs 49.2 in June (lowest since May ’20); employment index 49.9 in July vs 47.3 in June

·     June Construction Spending fell -1.1% m/m to $1,762.3B vs. +0.2% consensus and +0.1% in May (revised up from -0.1%); construction spending climbed 8.3% Y/Y in June.

·     Manufacturing PMI in the United States decreased to 52.20 points in July from 52.70 points in June of 2022. U.S. Manufacturing sector final PMI for July at 52.2 vs flash 52.3 and final June 52.7. S&P global U.S. Manufacturing sector final output index for July at 49.5 vs flash 49.9 and final June 50.2 and final new orders index for July at 48.6 vs flash 48.6 and final June 48.7.

Commodities

·     Oil prices drop, with WTI crude down -$4.73 or 3.8% to settle at $93.89 per barrel and Brent crude futures settle at $100.03/bbl, down $3.94, 3.79% as weak manufacturing data from China and Japan weighed on the demand outlook while investors braced for this week’s meeting of officials from OPEC and other top crude producers on supply adjustments. OPEC+ is set to meet Wednesday to discuss whether to keep September output steady or increase production.

·     Gold prices rebound given sliding Treasury yields, a softer dollar, and the prospect of increased tensions with China as House Speaker Pelosi travels to Taiwan. Gold prices settle at $1,787.70 an ounce, rising $5.90 on day on dollar weakness and yield decline. Gold prices have now risen 4-straight days, longest streak since May.

Currencies & Treasuries

·     U.S. Treasury yields slip as the 10-year hit 4-month lows below 2.59% after manufacturing (ISM lowest reading since June 2020) and construction data pointed to a slowing economy which could prompt the Federal Reserve to slow its interest rate increases. Inflation data was a positive as the prices paid component from ISM report fell from 78.5 to 60, its lowest since Aug 2020. News of an upcoming visit to Taiwan by U.S. House of Representatives Speaker Nancy Pelosi also spurred a flight-to-quality/safety bid for Treasuries and gold. Since hitting an 11-year high of 3.4980% in mid-June, the 10-year yield has declined by more than 90 bps. The 10-yr remains inverted against the 2-yr by nearly 30-bps, a general warning sign of a recession.

Sector News Breakdown

Consumer

·     Retailers: TGT upgraded from Equal Weight to Overweight at Wells Fargo and raised tgt to $195 from $155 saying the sell-off provides the opportunity to pick up a proven share gainer into an underappreciated earnings recovery at the right price; AEO downgraded Outperform to Market Perform and slash tgt to $13 from $25 saying they like Aerie’s brand equity and its younger consumer-focused brand positioning but near-term risk factors outweigh potential long-term growth opportunities; WEBR downgrade from Neutral to Sell and halve tgt to $4 at UBS as revise EBITDA ests for next year to $173M, below ’19 levels, and significantly below Street’s $222M; for gun related stocks (SWBI, RGR, VSTO), U.S. unadjusted criminal background checks fell 6.5% to 2.4 million in July, according to data from the FBI’s NICS – compared to a year earlier, background checks decreased 17% from 2.88 million

·     Auto sector: NKLA acquired Romeo Power (RMO) in an all-stock transaction with holders of Romeo Power receive 0.1186 of a share of Nikola stock per share of RMO. In roughly $144M deal; NIO reported deliveries rose in July from a year ago to mark a third-straight monthly increase; said July deliveries increased 26.7% to 10,052 vehicles – that comes after a 60.3% increase in July and a 4.7% rise in May; XPEV reported a 43% jump in July deliveries y/y to 11,524 vehicles; LI reported July deliveries that grew 21.3% y/y to 10,422 vehicles

·     Housing & Building Products; JELD slides after Q2 adj EPS $0.57 misses est. $0.64 on in-line revs at $1.33B while cuts FY22 core revenue view to up 4%-6% from up 7%-10% and guides FY22 adjusted EBITDA $430M-$450M down from prior $520M-$565M view; BLDR shares rise as Q2 adj EPS $6.26 vs. est. $3.05 on revs $6.92B vs. est. $5.54B saying adj EBITDA increased 80% to $1.5 bln driven by core organic growth (32%); MHK was downgraded to market perform at Raymond James and SWK downgraded to equal weight at Wells Fargo, both post earnings

·     Consumer Staples & Restaurants; PEP and CELH announce long-term distribution agreement and investment where Pepsi will make a net cash investment of $550M in exchange for convertible preferred stock (8.5% stake) and Pepsi will also become preferred distribution partner globally (CELH shares jump on headlines); CL upgraded to Equal Weight from Underweight at Wells Fargo; the WSJ reported late morning that EL is in talks to buy luxury fashion brand Tom Ford

·     Casinos, Gaming, Lodging & Leisure sector; RCL files to sell $900M of senior convertible notes due 2025; Macau gaming bureau reported July gross revenue from games of fortune in the region was down 95.3% year-over-year to 398M patacas, the lowest since records began in 2009 – but Bloomberg notes was better than analyst expectations for a 97% slump but is still 98% lower than pre-pandemic levels; in ride-share industry, LYFT tgt cut to $16 from $28 and UBER to $40 from $50 at Deutsche Bank despite saying the rideshare demand backdrop for both Uber and Lyft remain strong, with intra-quarter checks highlighting robust momentum in mobility trends; in online betting (DKNG, PENN, CZR), for Massachusetts online sports betting: Lawmakers reach deal including some collegiate betting as session ends https://bit.ly/3cYf6Fh

Energy

·     Energy stock movers: Crude prices dropped Monday, as energy markets digest poor factory data from China and Japan and prepare for OPEC and its oil-producing allies to decide September output later in the week. WTI and Brent declined for the second-straight month in July as recession concerns weighed on prices, their first two-month losing streak since October 2020. E&P and Majors fall; not a lot of individual stock news on the energy sector ahead of OPEC meeting this week and handful of earnings results this week; oil stock overall dropped with decline in energy prices on weaker China data; DVN released earnings early as 2q free cash flow $2.11b vs. est. $1.75b; Q2 core eps $2.59 vs. est. $2.36 and raised full-year production & FCF

Financials

·     Bitcoin, FinTech & Payments; Bitcoin prices drop as crypto assets broadly lower; GPN delivered an EPS beat driven by better-than-expected operating expenses as Merchant segment revenues beat, but Issuer and Business & Consumer segment revenues continue to lag; GPN also agreed to acquire smaller rival EVOP for around $4 billion including debt in an all-cash deal valued at $34 per share, a 24% premium to Friday; BITF records 270% increase in July hashrate and 28% growth in new mined bitcoin

·     Financial Services & Insurance: OPEN shares mentioned positively in Barron’s saying the stock could double. At the current price, Opendoor is valued at around $3 billion, which isn’t much more than the cash on its balance sheet, or alternatively, its book value; Loew’s (L) posted a drop in Q2 profit despite a rebound in the hotel business as market volatility weighed on the CNA Financial business; Q2 net income fell to $180M from $754M y/y

Healthcare

·     Pharma movers: ARQT said the FDA approved late Friday its Zoryve skin cream for treatment of plaque psoriasis for patients aged 12 and older and is expected to be available commercially by mid-August; CYAD said the FDA lifted the clinical hold on its early-stage cancer therapy study after the company made changes to eligibility criteria for study; OTIC slides on news it will discontinue development of its experimental Tinnitus treatment OTO-313 after it failed a mid-stage study

·     Biotech movers; MRNA was awarded ~$1.74B firm-fixed-price contract for the purchase, storage, and distribution of COVID-19 vaccines; BEAM disclosed it received a clinical hold on its BEAM-201 IND for the treatment of relapsed/refractory T-cell acute lymphoblastic leukemia. The FDA will provide the company with an official clinical hold letter within 30 days

·     MedTech Equipment; PKI Q2 adj EPS $2.32 vs. est. $2.02; Q2 revs $1.23B vs. est. $1.2B; raises FY22 adjusted EPS view to $7.80-$7.90 from $6.80-$7.00 (est. $7.33) and raises FY22 revenue view to $4.60B-$4.64B from $4.42B-$4.50B (est. $4.58B); OM announced clearance by the FDA of its previously disclosed 510(k) submission and resumption of Tablo(R) Hemodialysis System shipments for home use and issued Q2 guidance

·     Healthcare Services: for skilled nursing REITs (OHI, CTRE, SBRA, NHI), post market close on Friday (7/29), the Centers for Medicare & Medicaid Services issued the final ruling to update the Medicare payment policies and rates for skilled nursing facilities for FY23, which is set to begin October 1, 2022. After initially proposing a 0.7% reduction in Medicare reimbursement back in April (the worst reimbursement rate in the last 10 years), the final ruling will result in a 2.7% increase in SNF Medicare payments (the best reimbursement rate in the last 10 years).

Industrials & Materials

·     Aerospace & Defense; BA shares jumped, among top leaders in the Dow after reports the company cleared a hurdle with the Federal Aviation Administration that could allow it to resume deliveries of its 787 airliner, according to reports this weekend; AJRD shares slide following quarterly results that missed consensus estimates

·     Transports, Industrials, & Machinery; AAWW shares spike after the WSJ reported a group led by Apollo Global Management Inc. is in advanced talks to buy the airfreight company, according to people familiar with the matter https://on.wsj.com/3vzQskT ; The Baltic Exchange’s main sea freight index extended losses on Monday to hit its lowest since February, weighed down by slowing demand for iron ore and coal shipments from China. The overall index, which factors in rates for Capesize, panamax, Supramax and Handysize shipping vessels, shed 23 points, or 1.2% to 1,872 points. The index touched its lowest level since Feb. 9; Jacobs Engineering (J) shares slide after its Q3 beat was overshadowed by weaker guidance (saw Q4 EPS of $1.75-$1.85, below $1.93 analyst consensus estimated, and adjusted EBITDA of $340M-$360M, below $384M est.)

·     Metals & Materials; VVV sells Global Products Business for $2.65B, sees Q2 EPS above consensus; in containerboard sector, Deutsche bank said view box data that was released after market close Friday as negative relative to expectations. While estimates on box shipments were likely recalibrated lower following results from IP and PKG, they believe the inventory levels and weeks of supply was worse than anticipated. Ultimately, box shipments declined 2.3% year over year in the quarter. Inventories increased 187,200 tons on a sequential basis with weeks of supply at 4.4 in June. As a positive, operating rates were healthy at 94.8%

Technology, Media & Telecom

·     Media, Internet; BABA said it would work to maintain its New York Stock Exchange listing alongside its Hong Kong listing after the Chinese e-commerce giant was placed on a delisting watch list by U.S authorities; BMBL downgraded to Hold from Buy at Jefferies but rise tgt to $39 from $30 saying while third part data checks show an acceleration in Q2 revenue and downloads for the Bumble App, still sees several reasons to be cautious at current levels; PUBM and TBLA both cut to sector weight at KeyBanc as anticipates disparate 2Q results from the AdTech sector and lower tgt for TTD to $52 while lower estimates across three stocks; SIRI downgraded to Hold at Pivotal Research after reported an in line 2Q result, reiteration of full year financial guidance, and an unsurprising reduction in ‘22 self-pay net additions forecasts

·     Semiconductors; ON shares slide despite beat; Q2 EPS $1.34 vs. est. $1.26 and revs rose 25% y/y to $2.09B vs. est. $2,01B; said Q2 non-GAAP gross margin expansion of 1,130 basis points to 49.7%; sees Q3 EPS $1.25-$1.37 vs. est. $1.27; sees Q3 revs $2.07B-$2.17B, above consensus $2.02B; Reuters reported the U.S. is considering limiting shipments of American chipmaking equipment to memory chip makers in China including Yangtze Memory Technologies, part of a bid to halt China’s semiconductor sector advances and protect U.S. companies; for MU and other memory names, KeyBanc noted 8Gb DRAM pricing declined 11.8% m/m, and 256Gb NAND pricing was down 8.7% m/m. July DRAM contract pricing for 8Gb DDR4 DRAM declined 11.8% m/m, 29.0% y/y, and 13.1% q/q due to weakening mobile and PCs demand

·     Software, Hardware, Components & Services; AAPL said it is planning to use the proceeds from the sale for general corporate purposes, including buying back shares and paying dividends, the company said in a filing with the SEC; SWIR shares jumped early morning after Bloomberg reported SMTC said to be in advanced talks https://bloom.bg/3JnofDF

·     Telecom movers: cable companies CMCSA and CHTR both downgraded at Barclays which said it sees the cable companies as likely past peak growth and could see flat growth in 2023, and potentially negative after that (CHTR tgt to $388 from $436 and CMCSA to $42 from $48)