Closing Recap

Wednesday, August 10, 2022

Equity Market Recap

·     Up, up, and away! Stocks rallied as the July consumer price inflation (CPI) reading was as good as markets could have hoped, with headline prices staying steady overall in July compared with June, marking the slowest monthly inflation in more than two years as fuel prices dropped (offsetting other data points that showed increases). The market reaction was a jubilant one, with the S&P 500 surging to top its May 31^st highs above the 4,200 level, while the Nasdaq and SmallCap Russell jumped as well with stocks hitting 3-month highs, extending the rally that began in July. The market bounce was broad based on expectations of a “softer” rate hike cycle by the Fed (despite their ongoing warnings that inflation is still higher than they would like) as the market is now pricing in a 37.5% chance of a 75-basis-point increase in fund rates at the U.S. Federal Reserve’s next meeting in September, compared with 67.5% before the data. After a rough start to the year, the benchmark S&P 500 is up nearly 16% from its mid-June low, largely on expectations the Fed will be less hawkish than anticipated in its efforts to provide a soft landing for the economy. Even more caution expressed from Fed members failed to moderately dent today’s rally; Minneapolis Federal Reserve Bank President Neel Kashkari said he is sticking to his view that the U.S. central bank will need to raise its policy rate another 1.5 percentage points this year and more in 2023, even if that causes a recession. Not much else going on as the dollar plunged post CPI, oil was volatile and Treasury yields plunged before recovering in another choppy summer day overall.

Economic Data:

·     July consumer price index (CPI) flat m/m vs. estimate +0.2% and rises +8.5% y/y vs. est. +8.7% for headline CPI, and core CPI (ex food & energy) rises +0.3% vs. est. +0.5% m/m and rises +5.9% vs. est. +6.1% y/y – headline and core both below views and markets rallied. U.S. real average hourly earnings rebounded 0.5% in July following respective drops of -0.8% in June and -0.6% in May.

Commodities

·     Oil prices recovered from earlier declines, as WTI crude gains $1.43 or 1.58% to settle at $91.93 per barrel, more than $4 off the $87.66 lows as risk assets rebounded across the board. Oil prices slipped earlier after Hungary’s biggest refiner said it has paid Russia’s transit fee to Ukraine to resolve a dispute that has led to a halt in oil flows to central Europe while Russian state oil pipeline Transneft restarted oil flows via the southern leg of the Druzhba oil pipeline, RIA news agency said. Weekly inventory data mixed: U.S. crude stocks and distillate inventories rose while gasoline inventories fell, the Energy Information Administration (EIA) said. Crude inventories rose by 5.5M barrels in the week while crude stocks at the Cushing, Oklahoma, delivery hub rose by 723,000 barrels. Gasoline stocks fell by 5M barrels in the week to 220.3M barrels, and distillate stockpiles rose by 2.2M. Gold prices finish with a modest +0.1% rise to $1,813.70 an ounce.

·     Regarding natural gas prices, Reuters reported top U.S. gas exporter, Freeport LNG, has retracted the force majeure it initially declared after an explosion in June, a development that could cost its buyers billions of dollars in losses. Force majeure is a notice used to describe events outside a company’s control, such as a natural disaster, which usually releases it from contractual obligation without penalty. The force majeure would also have allowed Freeport’s LNG buyers to exit their own agreements to deliver gas to end users. Instead, they are facing a collective loss of up to $8 billion as they source alternative supplies at elevated spot market prices, according to the trading sources, who have knowledge of the matter, and calculations by a consultancy.

Currencies & Treasuries

·     The U.S. dollar fell broadly, posting its biggest decline against the yen since March 2020, after a cooler-than-expected inflation report for July raised expectations of a less aggressive rate hike cycle from the Fed. With the slowing inflation report (still stubbornly high), the buck dropped over 1.3% to its lowest levels since March 2020 (DXY down as low as 104.60). Headline CPI prices did not rise m/m in July as the cost of gasoline plunged (roughly -20%), though several other data points showed increases. The dollar fell around 2% vs. the yen to 132.45 yen. The Euro climbed 1.2% to $1.033, on track for its biggest one-day rise against the dollar since March 9, while sterling gained 1.4% to $1.225, its best single-day performance since mid-June. Bitcoin jumped over 4% topping the $24,000 level and Ethereum +8% to $1,850.

·     Treasury yields plunged following the CPI data at first, hitting lows of 2.675% from 2.81% into the release before bouncing back to 2.75% and the 2-yr fell to 3.13% from 3.29% prior, but extended declines falling below 3.1% (curve still inverted by over 35-bps). The U.S. sold $35B in 10-year notes at high yield 2.755% vs. 2.761% when issued prior with bid-to-cover ratio 2.53, primary dealers take 9.92% of U.S. 10-year notes sale, direct 15.56% and indirect 74.52%.

Sector News Breakdown

Consumer

·     Retailers: PLBY slides following a wider-than-expected Q2 loss and revs rose 31% y/y to $65.4M, missing the est. $70.9M as deteriorating trends at Yandy and Lover’s caused a shortfall in 2Q and -$50mn cut to FY22 revenue estimates; mattress retailer PRPL slumps on miss and lower guide as 2Q adj EPS ($0.11) vs est. ($0.07) on revs $144.1Mm vs est. $155.8Mm and guides FY revs $570-590Mm vs est. $652.6Mm; REAL lowered GMV & EBITDA guidance again after 2Q GMV missed Street and REAL still met the low-end of $450-$470m guidance; WWW mixed Q2 as EPS beats by 2c but revs of $713.6M misses the $737.4M estimate and lowers year EPS guidance to $2.10-$2.20 vs prior $2.50-$2.65 and consensus $2.51

·     Auto sector: TSLA CEO Elon Musk has sold 7.92 million shares of the electric vehicle maker thru 8/5-8/9 worth $6.9 billion, six U.S. securities filings showed; SFT said it will acquire LOTZ in an all-stock deal, sending LOTZ shares as shareholders are expected to receive ~0.692158 SFT shares for each LOTZ share; NKLA said Michael Lohscheller to take over as chief executive officer when Mark Russell retires on Jan 1 next year; Kelley Blue Book says New vehicle avg. transaction price hit yet another all-time high in July at $48,182 (up 11%) as demand for new models continued to outpace supply.

·     Consumer Staples; SG drops as Q2 EPS loss (-$0.36), in-line with ests as revs of $124.9M misses the consensus $130.4M and sees FY22 revenue $480M-$500M below consensus $530.1M; GO posts beat and raise quarter which included the strength of comp sales, sequential improvement in traffic, and GPM, along with an increase in the full-year top- and bottom-line outlook; CELH Q2 EPS $0.12 vs consensus $0.08 on better revs $154M (est. $148.7M) and EBITDA $17.1M (est. $14.0M) but margins weaker at 38.5%; POST announces $400M offering of convertible senior notes maturing in 2027; BGS files automatic mixed securities shelf; PM extends its $16 billion takeover bid for Swedish Match to Oct. 21 because it doesn’t expect the European Commission to rule on the deal in time

·     Restaurants: WEN reported a Q2 beat and raise (sees year EPS 84c-88c vs. est. 82c-86c) but missed Q2 comp sales estimates for U.S. growth and revenue, rising 2.3% vs. est. 2.78% and cuts 2022 net new restaurant growth to 3%-4% from 5%-6%; JACK rises on earnings

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines, leisure, theme parks, hotels and lodging all benefitting from the softer than expected CPI report, raising hopes of increased spending; WYNN posted a larger Q2 loss and revenue of $908.8M below the consensus est. $980.9M while operating rev from Wynn Macau was $58.6M, a decrease of $125.4M from $184.0M y/y; RRR reported an upside 2Q22 report, with revenue of $422m, adj. EBITDA of $189m and margins of 48.5% all above ests; ABNB says in U.S., number of new hosts grew by more than 50% in q2 2022, compared to q2 2021 and new hosts alone earned a combined total of over $1.8 billion in 2021, up more than 30 percent from 2019

Energy, Industrials and Materials

·     Energy stock movers: sector one of fed underperformers as investors rotate money back into high growth sectors with technology and discretionary names among biggest leaders; volatile oil prices also weighed on energy stocks; weekly inventory data was mixed to bearish as U.S. oil production rose last week to the highest level since April 2020 at 12.2M barrels per day, while East Coast refinery utilization rose to 100.4%, the highest on record, the data showed.

·     Industrials, Transports; railroads among top gainers in transports on economic data, with CSX, UNP pacing gains as Dow Transports jumped over 3% moving back above the 15,000 level, its best since early May; MAXR falls following its results last night and delayed the launch of its Legion satellites to Q4, dropping below its 50-day MA around $27 today

Financials

·     Asset managers; monthly AUM data out for several as: BEN preliminary month-end assets under management (AUM) of $1,429.7 billion at July 31, 2022, compared to $1,379.8 billion at June 30, 2022; IVZ preliminary month-end assets under management of $1,449.0 billion, an increase of 4.2% versus previous month-end; CNS preliminary assets under management of $94.0 billion as of July 31, 2022, an increase of $6.1 billion from assets under management at June 30, 2022.

·     Bitcoin, FinTech & Payments; COIN posts larger Q2 EPS loss of ($4.98) vs. est. loss ($2.65); Q2 revs fell -31% y/y to $808.3M vs. est. $832.23M and said qtrly trading volume $217B vs $462B y/y; RIOT said it delays its earnings report to sort out how much crypto rout devalued its assets; Blockchain payments company Ripple Labs Inc is interested in potentially purchasing assets of bankrupt crypto lender Celsius Network, according to a company spokesperson – Reuters

Healthcare

·     MedTech Equipment; MASI 2Q22 revenue and EPS beat consensus and management raised its 2022 guidance on a constant currency basis although it lowered its guidance on a reported basis; BLI downgraded at BTIG and JPMorgan after announced a Q2 miss, expects revenue to come in roughly flat for 2022 (far below its +30% Y/Y guide issued at the beginning of this year, and following last year’s miss), and announced a 12% workforce reduction; QTRX downgraded at Cowen and cut tgt to $18 from $38 noting Q2 consumables revenues declined -29% Y/Y due to manufacturing quality issues and lower consumables sales to one large customer

Technology, Media & Telecom

·     Media, Internet; BABA slips investor SoftBank Corp says it will pare stake in the co; SoftBank will book an estimated gain of 4.6 trillion yen ($34.08 billion) on settling prepaid forward contracts using shares in Alibaba, reducing its stake to 14.6% from 23.7%; IHRT downgraded to Neutral at Goldman Sachs and cut tgt to $9 following mixed 2Q results and a weaker 3Q22 & full-year 2022 outlook; RBLX Q2 Bookings (-4% y/y; better ex FX) and DAUs (+21% y/y) were in-line, while AEBITDA was in below consensus; TWTR rises after Elon Musk’s selling of nearly $7B worth of Tesla stock in recent days, according to regulatory disclosures, raises prospect his $44B deal for Twitter may happen

·     Software movers: TTD surges as delivered strong results overcoming a challenging macro-environment to deliver upside to virtually all consensus metrics; EVBG Q2 results beat but business metrics highlighted decelerating momentum as calculated billings growth slowed to 15.8% and revenue growth decelerated to below 20%; MAPS tumbles on Q2 rev miss, prompting downgrade by several analysts; OKTA downgraded to Hold from Buy at Davidson

·     Telco, Hardware, Components & Services; RXT reported 2Q22 revenue below expectations at $772.2m (+3.8% Y/Y, +5.2% cc) and EPS of $0.17 which was slightly above consensus driven by higher-than-expected EBIT margins and a share count well below guidance; AKAM beats on top and bottom line for Q2 but says it expects operating margin to remain under 30% in near term; expects macro headwinds will dampen growth rates; ATUS downgraded to Hold from Buy at Cantor saying given the uncertainty regarding a potential disposal of Suddenlink at this time, they do not factor in any upside from an accretive transaction