Closing Recap

Monday, August 15, 2022

Equity Market Recap

·     Monday was a typical low volume, market melt higher kinda of summer day, with news flow sparse ahead of some key earnings in the consumer space this week (WMT, HD tomorrow, LOW, TGT later this week among other retailers) and key economic data. U.S. futures fell overnight on some more “noise” in China as Chinese retail sales, industrial output and investment slowed, missing July estimates; China’s Central Bank unexpectedly cut a key policy interest rate for the first time since January and China said it held fresh military patrols around Taiwan to ‘fight back’ against a US congressional visit. The move lower was short lived, and attention turned to data. However, the US data was disappointing as well with one of the biggest one-month declines in NY manufacturing (business conditions index -31.3 in August vs +11.1 in July) while homebuilder confidence plummets for 8th consecutive month, worst slump since 2007 crash. Still no concerns though as stocks rise with the S&P approaching its 200-day MA resistance level around 4,325. Weaker China data hit commodity prices as energy, metals and mining names underperformed with oil prices falling over 4%. The yield on 10-year slipped to 2.784% from 2.848% Friday.

·     So as stocks melt higher the last 5-weeks, the question remains is the stock market misunderstanding the Fed? Or is the Fed misunderstanding the market? It remains a fair question as stocks continue to push higher over the last few weeks despite several Fed officials calling for higher rates to fight inflation, which remains their number one focus to get to 2% inflation (where currently stands well above 8%). At the same point, markets have jumped on weaker economic data on hopes it will mean the Fed will pare its rate hikes. Recall during the rate cut cycle and easy money policy the mantra always remained as stocks melted higher “don’t fight the Fed”, however the market appears to be fighting the Fed now. Zero fear in the market as the Vix moves back below the 20 level (compared to highs 30’s level during 1H’22 pullback). U.S. stocks are trying to build on gains after stocks booked gains last week, with the S&P 500 and Nasdaq notching their longest weekly win streak since November 2021 (4-weeks).

Economic Data:

·     U.S. Manufacturing data weak as NY Fed’s empire state current business conditions index -31.3 in August (second-largest monthly decline in the index on record) vs +11.1 in July and vs. an expected +5.0 reading by economists. New orders index -29.6 in August vs +6.2 in July, prices paid index +55.5 (lowest level in a year) in August vs +64.3 in July, employment index at +7.4 in August vs +18.0 in July and six-month business conditions index +2.1 in August vs -6.2 July

·     Data outlined that China’s industrial production grew by 3.8% YoY in the month of July, which was well short of the consensus figure that was anticipated at 4.6%. The figure also was weaker than the previous month’s level. Last month in June, China’s industrial production grew by 3.9%.

·     Nearly 60% of renters say their rents increased in the past 12 months, with a ratio of nearly 1 in 3 seeing rent increases of 10% or more, according to a newly released Freddie Mac survey. Just 38% of renters saw their wages increase, and a third say their raise won’t cover their increased rent. Nearly 1 in 5 who experienced a rent increase say they are now extremely likely to miss a payment – Dow Jones reported

Commodities, Currencies & Treasuries

·     Energy and Precious metals lagged following weaker China data and as the US dollar jumped vs. other currency rivals. Gold prices fell -$17.40 or 1% to settle at $1,798.10 an ounce after the dollar spiked and commodity prices fell on China data. WTI oil drops toward lowest since January, down as low as $86.82 per barrel before paring losses as WTI crude slips -$2.68 to settle at $89.41 while Brent crude fell -$3.05 or 3.11% to settle at $95.10 per barrel. Bitcoin prices hit highs above $25K overnight before sliding back to $24K midday (was first time above since early June); the US dollar was broadly higher despite another round of weaker economic data (softer housing and NY manufacturing data). Treasury yields fell on weaker economic data with the 10-yr down to 2.78% from 2.84% prior to data.

Sector News Breakdown

Consumer

·     Retailers; big week coming up for retail earnings with WMT, TGT, HD, LOW, and KSS among those expected to report; DG downgraded to Market Perform at DMO Capital (ahead of earnings) as believe valuation is close to peak levels on recessionary comps; AEO mentioned positively in Barron’s saying shares are trading at a third of their all-time high reached in April 2021, but the company could be in a better position by the holidays as logistics headwinds ease; WEBR reported Q3 earnings loss vs. profit y/y and sales fell to $527.9M from $668.9M y/y which was mostly in-line with estimates and suspends its dividend; DDS upgraded to Neutral at JPM

·     Auto sector; TSLA has produced over 3 million cars to date, with 1 million of them made in its Shanghai factory as CEO Elon Musk said "production is a much bigger challenge than demand" for the EV maker; LI Q2 EPS loss (-$0.05) vs. est. loss (-$0.06); revenue grew 73.3% to RMB8.73 ($1.30 billion), but missed consensus of $9.49 billion and sees total revenue of RMB8.96 billion to RMB9.56 billion, vs. RMB14.26 billion consensus; VRM and SFT both downgraded to Underweight from Neutral at JPMorgan, turning bearish on the online auto buying platforms, citing an expected continued challenging backdrop for the used car industry.

·     Consumer Staples & Restaurants; YUMC said it has applied for a voluntary conversion of its secondary listing status on the Hong Kong stock exchange to a primary listing. In compliance with exchange rules, the company will call a special shareholder meeting on Oct. 11 to seek approval for the move; GO announced a partnership with DASH to offer on-demand grocery delivery from more than 398 locations across the country; APRN shares rise after the solid beat from HelloFresh in Europe

·     Casinos, Gaming, Lodging & Leisure sector; RCL announces proposed offering of senior unsecured notes to refinance near term debt maturities as commenced a private offering of $1 bln of senior unsecured notes due 2027; AGS confirmed it got a non-binding indication of interest valued at $10 a share in cash, and said they did not accept the proposal

Energy, Industrials and Materials

·     Energy stock movers: broad weakness in energy stocks (APA, DVN, MRO, HAL, HES) with oil prices tumbling to 6-month lows below $87 per barrel on demand fears as disappointing Chinese economic data renewed global recession concerns. China cut lending rates to revive demand as data showed economy slowing unexpectedly in July.

·     Industrial & Machinery; TISI shares jump after quarterly results and agreed to sell its energy tech unit Quest Integrity to oilfield services firm BKR for $280 mln in cash; ITW downgraded to Sell at Deutsche Bank saying there is no compelling thesis, along with huge P/E valuation; POWW shares drop after business plan, announcing plans to split its ammunition and marketplace businesses into two independent publicly traded entities

·     Transports: LUV downgraded to Hold at Argus as think that Southwest will be hurt by inflationary pressures and capacity constraints. Although a revenue recovery is underway, they do not expect the shares to move higher until it becomes clear to investors that costs have stabilized. For truckers (ODFL, SNDR, KNX) the3 WSJ reported Freight demand across the U.S. is showing signs of softening heading into the peak fall shipping season. The closely watched Cass Freight Index, which measures shipping demand in the U.S., declined 1.7% from June to July, the second straight month-to-month drop (remains up +0.4% y/y). Freight rail volumes are faltering, declining 2.6% overall in the first week of August

·     Metals & Materials; TRQ rejected an offer by majority shareholder RIO to buy the 49% stake it doesn’t already own for $2.7 billion, as it did not reflect the Canadian company’s full and fair value; in containerboard (IP, PKG, WRK) KeyBanc noted the market is under increasing pressure, and the softwood pulp market is starting to come under pressure as well as supply chains are normalizing, and Chinese demand remains poor; in gas space, APD upgraded to Outperform at BMO Capital on accelerating H2 growth, improved execution & defensive ops; metals generally weaker on slowing demand fears given China data (FCX, AA, CENX, X)

Financials

·     Consumer Finance: monthly credit card data out as COF reported charge-offs for July of 2.36% vs. 1.45% y/y; Charge-offs 2.36% vs. 1.45% y/y; Delinquencies 2.56% vs. 1.71% y/y; DFS credit card delinquency rate 1.05% at July end vs 1.03% at June end; credit card charge-off rate 1.16% at July end vs 1.19% at June end; JPM charge-offs for July of 1.02% and delinquencies 0.66%; SYF July net charge-offs 2.51% vs. 2.09% m/m and delinquencies 1.6% vs. 1.6% m/m; AXP card member loans 30 days past due loans as a % of total 0.7% at July end vs 0.7% at June end

Healthcare

·     Pharma movers: NVS said a phase III Canopy-A study for canakinumab as adjuvant treatment in non-small cell lung cancer didn’t meet the primary endpoint of disease-free survival versus placebo; AXDX enters into an agreement with BDX to market and sell its testing solutions through BD’s global sales network; MRNA rises as UK MHRA approves a booster dose of its COVID-19 vaccine that is tailored to target the Omicron variant, the first such approval ever; IDYA shares fall after GSK waived its rights to exercise its option to obtain an exclusive license to further develop and commercialize IDYA’s experimental cancer drug IDE397

·     Biotech movers; VRDN rises as reports positive initial data from an early-stage trial of its antibody candidate, VRDN-001, in patients with active thyroid eye disease; HALO announces proposed offering of $500 million of convertible senior notes due 2028; NVAX submits emergency use authorization application for its COVID19 vaccine, adjuvanted as a booster in adults 18-older; GILD said Trodelvy significantly improves overall survival in pre-treated HR+/HER2- metastatic breast cancer patients in the TROPiCS-02 study

Technology, Media & Telecom

·     Media, Internet; SNAP has reached 1 million subscribers for its Snapchat+ premium subscription, the company said on Monday, after launching the service in June as a new source of revenue -shares rebounded after headlines/update; DIS shares active after Hedge fund Third Point unveils new position in Disney and makes series of suggestions; SPOT is offering three months free of individual premium plan to eligible free & first-time users

·     Software movers: Unity Software (U) said it won’t accept APP’s merger proposal now that its board of directors has completed a thorough financial and strategic evaluation and instead voted in favor of Unity’s planned deal to buy IS for $4.4 billion https://bit.ly/3QGDji8 ; Morgan Stanley lowers ests. on remaining infrastructure software coverage on further signs of softening demand trends (SPLK, SUMO, DOMO, SNOW); TASK downgraded to Equal-weight at Morgan Stanley as constructive on management’s ability to drive improved growth in the medium-term, but mindful of near-term growth challenges driven by client mix and delivery optimization

·     Hardware, Components & Services; ahead of earnings this week, Citigroup says CSCO is losing market share as supply chain issues hurt the network gear maker more than its peers; in cable, CMCSA and CHTR both downgraded to Neutral at Atlantic Equities on broadband pressures; AAPL is reportedly planning to expand its advertising business, which generates about $4 billion annually, according to Bloomberg.