Closing Recap

Wednesday, August 31, 2022

Equity Market Recap

·     Stocks finish lower as the S&P 500 failed again at another key technical level, trading below its Tuesday lows and extending its losing streak to 4-straight days as major averages close in negative territory to end the month. In the last few days, the S&P 500, Dow, Nasdaq, and Russell 2000 all dropped below key technical supports, leading to a breakdown – the S&P touched above its 50-day moving average of 4,015 earlier briefly, but quickly failed and sold. Investors continue to fret over the speed and scope of future Federal Reserve rate increases and the outlook for the economy, finally believing the “hawkish” rhetoric from Fed members over the last week (Powell on Friday, Mester, Williams, Kashkari among them) that rates will rise to fight inflation and will likely remain high for the foreseeable future. Cleveland Fed President Loretta Mester said this morning that “it would be a mistake to declare victory over the inflation beast" and that "it is far too soon to say that inflation has peaked, let alone on a downward path to 2%" (echoing recent Fed commentary and tough talk on rates). Oil prices slumped again, falling a 3^rd straight month along with gold prices while the dollar and Treasury yields rise. The communications sector was the best performing sector while Materials, Industrials and Energy were the worst. Volumes remain light in the final week of summer trading, and into the Labor Day holiday weekend.

Commodities

·     Oil prices close lower, as WTI crude drops -$2.09, or 2.28% to settle at $89.55 per barrel, now falling for a 3^rd straight month (longest monthly losing run in 2-years) on investor worries about the ailing state of the global economy, bearish oil demand signals from OPEC+ and increased restrictions to curb COVID-19 in China. Tighter monetary policy fears weigh on growth and China presses on with its Covid Zero strategy. The weekly EIA report showed U.S. crude-oil stockpiles fell by a larger-than-forecast 3.3M barrels, while gasoline inventories dropped by 1.2M to a 9-month-low 214M barrels. But gasoline exports surged above 1M barrels a day to 1.04M, up 13% from 920,000 barrels a week ago and more than double the 466,000 barrels a year ago.

·     OPEC+ said today in its monthly report that the oil market will likely see a bigger-than-expected surplus this year, as rising energy costs and tighter monetary policy exert downward pressure on oil demand. The report comes days ahead of an OPEC+ policy meeting on Sept. 5 and over a week after OPEC leader Saudi Arabia said the group may cut oil output. At its last meeting, OPEC+ agreed to raise production targets by 100,000 bpd for September.

·     Gold prices slip -$10.10 or 0.6% to settle at $1,726.20 an ounce, settling lower for a 5^th straight month (down -3.1% for August) amid a stronger dollar (hit 20-year highs this month) and Treasury yields weighing on commodity prices as well as slowing global growth fears.

Currencies & Treasuries

·     The yield on the benchmark 10-year Treasury note edged up to 3.131% from 3.10% late Tuesday and shorter-dated yields continue to be higher, sending a recessionary signal. The 2-year yield climbed to 3.5% yesterday (14-yr highs) before fading to 3.45%. The U.S. dollar index (DXY) dipped against, but still posted its third-straight monthly advancers as investors anticipate more oversized interest rate hikes from the U.S. Federal Reserve, with futures pointing to a 75-bps hike in September. The dollar was last at 108.65, down from a near two-decade peak of 109.48 earlier this week and posted a roughly 3% rise in August. Hawkish Fed officials, including Fed Chair Powell last Friday after backed further rate hikes to quell inflation and many have essentially shut the door on the idea that the Fed might pivot and begin lowering rates by mid-2023, which prompted a wave of dollar strength. The euro rose back above parity despite weaker data this week as inflation in the euro zone rose to another record in August.

Economic Data:

·     Chicago PMI for August reported at 52.2 vs. 52.1 consensus and 52.1 prior

·     ADP payrolls for August rose +132k vs. +300k est. & 270k in prior month; report has been on pause since May and ADP has teamed up w/Stanford Digital Economy Lab to work methodology

·     China manufacturing PMI remained in contraction though beat estimates (49.4 vs. 49.2 est.)

Sector News Breakdown

Consumer

·     Retailers; BBBY announces strategic changes to strengthen its financial positioning as secured financing commitments for more than $500 mln of new financing and files for common stock shelf from time to time; plans 20% reduction in corporate/supply chain workforce and cutting capex by $150mn – also cut sales guidance; PVH slashed its 2022 adj EPS forecast to around $8 from around $9, saying customers are lowering their discretionary spending in the face of high cost of living and it needs to discount more to clear an inventory glut – inventory increased 19% from a year earlier and guided 2022 revenue to decrease 3% to 4% from a year earlier, vs. prior forecast for an increase of 1% to 2%; CHWY lowered sales guidance for the year to $9.9B-$10.0B from prior $10.2B-$10.4B consensus, and active customers only grew 2.1% during the quarter; CHS raises full-year 2022 sales and profit forecast as now sees sales $2.14B-$2.17B from prior $2.13B-$2.16B and EPS 79c-87c from prior 64c-74c but noted Q2 inventories totaled $338.8 mln, compared to $202.1 million, a year earlier; DBI posted a beat and raise quarter; VRA cuts FY net revenue forecast, misses estimates; BNED quarterly loss widens; EXPR w/lower outlook

·     Auto sector; CHPT reported stronger-than-expected 2Q23 revenue of $108.3M surpassed the $100M level for the first time and beat consensus forecasts while backs FY23 revenue view $450M-$500M vs. est. $476.47M and backs FY23 adjusted gross margin view 22%-26%; TM revealed plans for spending $5.6 billion on electric-vehicle battery capacity, with about $2.5 billion on scaling up production at a plant it is building in North Carolina and another roughly $3 billion will be invested in plants in Japan as well as a facility operated by Prime Planet Energy & Solutions Co., a joint venture of Toyota and Panasonic Holdings Corp.; ZEV said it entered into a partnership with GoBolt to make 170 all-electric vans and trucks over the next 12 months

·     Consumer Staples & Restaurants; BF/B Q1 EPS $0.52 vs. est. $0.47 and Q1 revs rose 11% y/y to $1.01B vs. est. $977.76M – Jack Daniel’s family of brands saw sales up 11%, driven by 10% sales growth for its Jack Daniel’s Tennessee Whiskey; earnings tomorrow in food space with CPB results expected

Energy

·     Energy stock movers: energy stocks opened sharply lower, among the biggest drags in the S&P 500 and adding to recent 2-day weakness, but stocks rebounded midday; macro news plentiful, but not much stock specific. Russia halted gas supplies via Europe’s key supply route on Wednesday, as state energy giant Gazprom said Nord Stream 1, the biggest pipeline carrying gas to its top customer Germany, will be out for maintenance from 0100 GMT on Aug. 31 to 0100 GMT on Sept. 3. Europe faces the risk of blackouts, rationing and a severe recession if Russia further slashes gas deliveries, and the next reality check is at hand.

Financials

·     FinTech & Payments; PYPL was upgraded from Neutral to Buy at Bank America with $114 tgt saying for the first time in about a year, they see upside potential to out-year consensus EPS estimates which they say will be driven primarily by additional cost efficiencies, and to some degree by share buybacks; Visa (V) said August U.S. Payments volume on a y/y basis was up 11%, flat with July; August credit and debit grew 17% and 7%, respectively, both up 1 point from July

·     Consumer Finance: OCN files for stock shelf of up to 2.1 mln shares of common stock; RWT downgraded to Neutral from Buy on low visibility for rates, spreads at BTIG as continue to like many of the key fundamentals supporting the single-family rental and transitional loan space, although we see too much uncertainty surrounding interest rates and mortgage spreads

Healthcare

·     Pharma & Healthcare Service movers: SUPN tgt raised to $38 from $33 at Piper amid accelerating weekly prescription growth for key top-line driver Qelbree for ADHD and continue to view SUPN as one of the most attractively valued SMid cap names; the FDA said it authorized the retooled COVID-19 booster shots of both MRNA and PFEthat target the currently dominant BA.4/BA.5 Omicron subvariants of the coronavirus; GH expands collaboration with German drugmaker Merck KGaA to help accelerate development of its cancer therapy pipeline; CNC shares slid after the Iowa Department of HHS announced the intent to award managed care contracts to two winning bidders: Amerigroup Iowa and Molina Healthcare of Iowa

·     Biotech movers: LQDA rebounded after a judge ruled in favor of it in a patent dispute with UTHR as Judge Richard Andrews ruled in favor of LQDA on the `066 patent, according to a court filing (judge did rule against Liquidia over its `793 patent); AMGN announced the confirmatory Phase 3 CodeBreaK 200 study, evaluating Lumakras vs. docetaxel in previously treated patients with KRAS G12C-mutated NSCLC, met the primary endpoint of PFS over chemo in 2L NSCLC (JMP Securities said + read thru for MRTX as it strengthens the case for an accelerated adagrasib approval by December 2022); the FDA grants Orphan Drug Designation for BCRX ALK-2 Inhibitor, BCX9250, for the Treatment of Fibrodysplasia Ossificans Progressiva

·     MedTech Equipment; MDT announces partnership with BioIntelliSense for exclusive U.S. distribution of multi-parameter wearable for continuous remote patient monitoring from in-hospital to home; SRNE announces Scilex granted fast track designation for SP-103; BAX announces U.S. FDA Clearance of Novum IQ syringe infusion pump with dose IQ safety software

Industrials & Materials

·     Aerospace & Defense; NASA said it aims for Artemis launch attempt on Saturday after reviewing rocket engine problem; the Air Force announced that CACI beat three other bidders for the $5.7B, 10-year enterprise information technology as a service Wave 1 contract (William Blair noted this contract has the potential to scale to be CACI’s largest contract by revenue); RKLB upgraded to Outperform and tgt raised to $8 from $6.50 at Cowen for key execution milestones, an improved competitive position, and benefits from Russian sanctions.

·     Transports, Industrial & Machinery; the US Army has temporarily grounded its fleet of about 400 Chinook helicopters due to a risk of engine fires (note HON makes the engines for the Chinook copters and BA makes the actual copters); for PH, Cowen reiterated its underperform saying it is still too early to be long as see downside risk to 2H23 into FY24, plus rates moving higher implies that downside support valuation is below what a simple historical analysis might suggest; major airlines (UAL, AAL, LUV, DAL, JBLU) said they will provide meals for customers delayed by three hours and hotel rooms for stranded passengers if prompted by issues under the airlines’ control.

Technology, Media & Telecom

·     Media, Internet; SNAP said current year-over-year qtd rev growth of 8% is "well below what we were expecting" earlier this year and have built 2023 plan to generate free cash flow even in a low growth scenario, while confirms prior day reports of reducing workforce by 20%; SNAP was downgraded to Neutral from Buy at Citigroup given the broader challenges facing the online advertising environment due to macro, Apple’s IDFA changes, and increasing competition for ad dollars – particularly among emerging platforms; note late; in social media (META, SNAP, PINS) California Passes Bill on Social-Media Apps, which would for the first time in the U.S. require the makers of social-media apps such as Facebook, Instagram and TikTok to consider the physical and mental health of minors when designing their products

·     Semiconductors; STX lowered its Q1 business outlook against a worsening macro-economic backdrop as now sees Q1 revs of $2.1B plus/minus $100M vs. prior view of $2.5B plus/minus $150M and with non-GAAP EPS expected to be meaningfully below prior guide of at least $1.20 (shares of WDC, MU among names falling in sympathy); AMBA posts a net loss of $23.7M, greater that the loss of $7.2M y/y and guided Q3 revs $81M-$85M vs. est. $85M

·     Software movers; CRWD strong beat-and-raise quarter with ARR up 59% YoY and net new ARR a record $218M, total customers up 51% YoY to 19,686, achieving a rule of 84 on a FCF basis, the highest DBNR in 7 quarters, quarterly revenue surpassing $500M for the first time, and prudently raising the 2023 revenue guide to 53-54% growth from 51-52%; big earnings night for software with AI, MDB, OKTA, VEEV results expected; in software preview, Cowen said favorite names are PD and BRZE while we are most worried about HCP

·     Hardware, Components & Services; HPQ guides Q4 EPS $0.79-$0.89 vs. est. $1.06; lowers year adj EPS to $4.02-$4.12 from prior $4.24-$4.38 (est. $4.30) and cuts FY FCF to $3.2B-$3.7B from at least $4.5B; HPE lowered top end of year EPS view to $1.96-$2.04, from prior $1.96-$2.10 (est. $2.02) and sees free cash flow $1.7B-$1.9B from prior $1.8B-$2.0B; earnings tonight from PSTG, NTNX in storage space