Closing Recap

Friday, December 03, 2021

Equity Market Recap

·     Not a pretty day as stocks finished the day lower (bounced off bottom in final minutes) as rising inflation and interest rate fears, coupled with new variant cases popping up around the globe (though appear milder) pressures market sentiment into the historically strong month of December trading. Was it a case of bad news is actually bad news? For months, stocks rallied on positive or negative economic data as good news meant the economy was improving while the Fed remained accommodative, while bad news meant the Fed would remain accommodative even longer (lower rates/asset purchases etc.). However, the narrative changed in a big way this week when Fed Chairman Powell said in Senate Banking Committee testimony it is time to retire the word “transitory” when describing inflation and the Fed may debate ending bond purchases a few months sooner at its meeting next month. Following the Powell comments several Fed speakers this week also echoed the same hawkish sentiment (Quarles, Bullard, Barkin, Daly) which further entrenched the thought the Fed “easy money” policy could indeed be in the rear-view mirror. The last time this happened, the stock market witnessed a “taper-tantrum”, leading to the Fed reverting to their accommodating ways and lifting stocks. Fear rising as the CBOE volatility index (VIX) briefly tops 35 for first time since January before paring gains. Market breadth decisively negative by margin of 3 to 1 decliners leading advancer with many more new lows vs. new highs.

·     Stock and Sector movers: DOCU nosedives over 40% to lowest levels since June 2020 after billings misses its prior guidance, prompting several downgrades; ASAN loses over 25% as its decelerating growth overshadows its beat, and SMAR jumps on its beat, accelerating growth, and stronger than expected guidance; DIDI plummets to record lows after announcing plans to delist from the NYSE, dragging other Chinese stocks with it; FXI hits lowest levels since April 2020, KWEB lowest since March 2020 as ETFs give up pandemic gains along with BABA, TME, PDD’; reopen struggles with PENN, NCLH, CCL, CZR among the worst S&P decliners amidst flight to defensive sectors like utilities DUK, ED, ES, staples K, MKC, PG, and chemicals LYB, EMN; ULTA gaps higher after its strong beat and raise, but shares fall to red intraday while SWBI, OLLI crash after missing in retail earnings; MRVL surges to record highs after its beat with a strong guide while NVDA slides as its acquisition of Arm looks less likely to close; ARKK stumbles to 52-week lows as high-growth names a victim of the latest rotation; ROKU, TWLO, CRSP, NVTA, EXAS, DKNG, TDOC, SQ, ZM among holdings also hitting 52-week lows today.

·     The Senate passed a stopgap spending bill overnight to avert a U.S. government shutdown, which President Joe Biden signed today. The bipartisan 69-28 vote came hours after House passage of the legislation on a largely party-line basis. The Senate vote followed day-long negotiations between Senate leaders and a group of conservative Republicans who demanded consideration of an amendment that would block Biden’s Covid-19 vaccine mandates. In exchange, they agreed to not throw up procedural obstacles for the spending bill.

·     Britain’s FTSE 100 up 1.1% on the week, best week since mid-October while Europe’s Stoxx 600 down 0.3% on the week, third straight week of losses; Germany’s DAX down 0.6% this week, France’s Cac 40 up 0.4%; Oil and gas index best performer this week, up 3% while Europe’s travel and leisure sector logs fourth straight week of losses, down 0.7%

·     Debt concerns remain: a bipartisan think tank warned on Friday the U.S. government could start missing payments on its bills as soon as Dec. 21 if Congress fails to raise the debt limit. The Bipartisan Policy Center’s projection, based on updated official data on tax receipts and government spending, underscores the mounting pressure on President Joe Biden’s Democratic Party to find a way to raise the statutory $28.9 trillion debt limit and avoid the heavy economic repercussions that could come with missed payments – DJ

·     Omicron variant remains a concern: a sixth U.S. state – Nebraska – reported the Omicron variant of the coronavirus after detecting six confirmed cases of the highly contagious strain. Only one of the six people was vaccinated, and none have needed to be hospitalized. While Omicron has been grabbing headlines as the newest coronavirus variant in the United States, the predominant strain remains the Delta variant, said U.S. CDC said. There have been cases of Omicron detected in about 40 countries, including the United States, where it was found in California, New York, Colorado, Minnesota, Hawaii, and Nebraska.

Economic Data:

·     November Jobs data mixed as headline jobs showed payrolls increased 210K, well below the 550K estimate, while private payrolls were 235K, missing the 530K estimate and manufacturing payrolls adding 31K vs. est. 45K; the unemployment rate tumbles to 4.2% from 4.6% prior and est. 4.5%; average hourly earnings rise +0.3% vs. est. +0.4%; labor participation rate rises to 61.8% from 61.6% (helping the unemployment rate fall)

·     Markit Composite PMI Final Actual 57.2 (vs. Previous 56.5) and Markit Services PMI Final Actual 58.0 (vs. Forecast 57, Previous 57.0); composite input prices index for November at 77.6 vs flash reading 78.1 and final October 74.1

·     ISM U.S. non-manufacturing sector PMI 69.1 in November vs 66.7 in October (est. 65.0); Prices Index at 82.3 vs. 82.9 prior, Business Activity Index 74.6 vs. 68.8 prior, New Orders Index 69.7 vs. 69.7 prior and Employment Index 56.5 vs. 51.6 prior.

·     Factory Orders for October rose +1.0% vs. est. +0.4%; Factory Orders, Excluding Transportation, +1.6%; Factory Orders, Excluding Defense, +1.6%; Sept Factory Orders revised to +0.5% from +0.2%

Commodities, Currencies & Treasuries

·     Oil prices fall alongside broader stock averages, erasing earlier gains with WTI crude slipping -$0.24 or 0.36% to settle at $66.26 per barrel (off highs of $69.22) and was down -2.77% on the week. The Baker Hughes (BKR) weekly rig count fell 3 to 569, with the oil rig count down 3 to 467 and gas rigs unchanged at 102. Nymex natural gas snapped a 4-session losing streak, but still fell 24.56% this week to settle at $4.1320 (largest one-week decline since 2007).

·     Gold prices closed out the day higher, with February gold rising $21.20, or 1.2% to settle at $1,783.90 an ounce, getting a boost in a flight to safety as stocks were sold, and bouncing off lowest levels in roughly 7-weeks. For the week, gold prices managed small loss.

·     A big reversal to the downside for the U.S. dollar, with the dollar index (DXY) falling -0.1% to around the 96 level, off earlier highs of 96.45; as the euro bounced back above the 1.13 level and the buck dropped below 113 vs. the safe-haven yen. The release of a disappointing U.S. jobs report suggested the Federal Reserve could pull back from plans to accelerate tapering of its asset purchases and deliver less aggressive interest rate hikes. Bitcoin quietly moved to lows late Friday, dropping below the $52K level (8% move) while Ethereum slides over 9% to $4,100.

·     U.S. Treasury yields tumbled on Friday in choppy trading, with the 10-year yield dropping below 1.35% for the first time since September (and now more than 35 bps off the 1.7% highs just 2-weeks ago) as a risk-off sentiment took hold in markets, sending Wall Street lower. The 30-year yield dropped over 8 bps to its lowest since January below 1.70% while the shorter-term yield 2-year (which reflects short-term interest rate expectations) finished only modestly lower at 0.59%.

Sector News Breakdown

Consumer

·     Retailers; HIBB Q3 EPS $1.68 vs est. $1.57 on sales $381.7M vs est. $360.6M, raised FY EPS view to $11.70-11.90 from $11-11.50; BIG Q3 EPS (14c) vs est. (15c) on sales $1.34B vs est. $1.32B, sees Q4 EPS $2.05-2.20 below est. $2.39 and FY21 EPS outlook to $5.70-5.85 from $5.90-6.05 as they see freight headwinds impacting margins; GCO Q3 adj EPS $2.36 crushed est. $1.26 on sales $600.5M above est. $581.5M, same-store sales +25%, sees FY21 sales +9-11%, guided FY22 adj EPS to $6.40-6.90 vs est. $5.82; OLLI was downgraded to UW at JPMorgan after a weak earnings report with Q3 adj EPS 34c and revs $383.5M missing ests. 47c and $415.1M, and its FY sales forecast $1.762-1.772B was also below est. $1.833B; SWBI Q2 EPS $1.13 missed est. $1.29 on sales $230.5M (-7%) vs est. $265M, raised FY ranges for adj EPS and revenue, but Cowen downgraded it to Market Perform as they see demand possibly softening given midterms favoring Republicans and potential abating Covid overhang, as well as a risk it needs to cut prices to maintain share; ZUMZ Q3 EPS $1.25 beat est. $1.09 on sales $289.5M slightly under est. $290.8M, said its sales in Q4-to-date are +11.5% vs 2020 and +8.6% vs 2019; JOAN Q3 was mixed with adj EPS 73c topping est. 64c but revs $611M missing est. $619.6M, comps -14.2%, and Wells downgraded to EW with a $10 PT from $15 this morning; TLYS Q3 results and Q4 guidance were ahead of estimates; Morgan Stanley upgraded SFIX to EW with an unchanged $27 PT as they see a more balanced risk/reward with shares underperforming the S&P by ~83% YTD; RCII announced a new $500M share buyback authorization and increased its dividend 10% to 34c/shr; SPWH terminated its merger agreement with Great Outdoors Group as they did not believe they would have obtained FTC clearance

·     Auto sector; DIDI tumbles as firm begins preparations to withdraw from U.S. stock exchanges and will start work on a Hong Kong share sale; TSLA CEO Musk sold more than 934,000 Tesla shares valued at just over $1 billion on Thursday, according to regulatory filings; HMC is recalling nearly 723,000 SUVs and pickup trucks because the hoods can open while the vehicles are moving; Ford (F) rises after saying it has close to 200K retail reservations for the electric F-150 Lightning and has sold 22K Mach-E vehicles this year

·     Housing & Building Products; ZG rises after its board authorized a share repurchase program for up to $750 million and said it made progress winding down Zillow Offers inventory; EXP was downgraded to Hold from Buy at Loop Capital on fewer near- to mid-term catalysts vs. consensus as see lower levels of wallboard price increase traction in CY22; BLD was downgraded to neutral from Buy at BTIG as shares are within 6% of our target and the multiple is in-line; for homebuilders (DHI, LEN, TMHC), BTIG bumped EPS estimates higher for 2022 by 4% for the average homebuilder in coverage as now expect average yoy EPS growth of 29% next year

·     Consumer Staples; ULTA posted a quarterly beat with Q3 EPS $3.94 vs est. $2.46 on sales $2.0B vs est. $1.9B, comps +25.8%, and guided ahead of consensus with FY EPS outlook now $16.70-17.10 from $14.50-14.70 (est. $15.19) on sales $8.5-8.6B from $8.1-8.3B (est. $8.4B), and comps +36-37% from +30-32%; FIZZ declared a special $3 cash dividend to be paid on or before Feb. 11 to shareholders of record on Dec. 13; Piper reiterated their OW rating on OTLY as they see it having stronger brand equity, pricing power, path to profitability, and cheaper valuation vs BYND whose PT was lowered to $61 from $72 after lowering their EV/sales multiple

·     Restaurants; CMG reit Outperform at Cowen saying they expect CMG’s symbiotic sales playbook focused on digital, social responsibility, menu innovation & loyalty to drive upside to 2022 comps as we now model 7.5% (from 6.5%) vs 6.7% consensus; Loop Capital said latest MCD U.S. franchisee checks indicate same-store sales growth is tracking ahead of expectations QT; SHAK was initiated Neutral and $78 PT at UBS given favorable brand strength and some of the best unit development and overall system sales growth potential in the sector, while pandemic recovery challenges and margin pressures could limit near-term upside

·     Casinos, Gaming, Lodging & Leisure sector; Truist said they remain most positive on the more leisure-centric names in our hotel coverage as reiterate the companies relatively best positioned like the leisure-centric C-Corps: CHH (Hold) and WH (Buy) (of the two we prefer WH on valuation) and the Vacation Ownership companies, BVH, HGV, TNL, and VAC (BUY); Deutsche Bank initiated PTON with a Buy rating as they see asymmetrical risk/reward over the next 12 months and their $76 PT implies almost 80% upside potential from Dec 1’s close despite not even being half of the stock’s 52-week high

Financials

·     Bank movers; MS was upgraded to Buy from Neutral at Citigroup and raise tgt to $115 from $105 saying they are very constructive on the bank stocks, and would use the recent pullback to build position with high quality names; BMO reported Q4 adj EPS C$3.33 vs est. C$3.21, raised its dividend 25% to C$1.33, and said it intends to buyback 22.5M shares; RJF raised its quarterly dividend to 34c/share from 26c and approved a $1B buyback authorization

·     Consumer Lending & Finance; UPST resumed coverage at Buy from neutral at Citigroup with $350 tgt calling it a solid buying opportunity due to the company’s sell-off and thinks it will onboard a large bank in the next 18 months; AXP said American Express Global Business Travel, the world’s leading B2B travel platform, to go public via combination with Apollo Strategic Growth Capital – to combine at pro forma market capitalization of $5.3 billion

·     Bitcoin news; RIOT reports near four-fold jump in bitcoin production for November saying it has produced 3,387 BTC so far this year, an increase of ~262% over its BTC production during the same period in 2020; MARA said as of December 1, 2021, marathon’s mining fleet has produced approximately 2,712.3 self-mined bitcoin during 2021; RIOT was initiated with a Buy and $55 tgt as view it as an equity-based way to gain exposure to the quickly expanding Bitcoin mining and infrastructure market.

·     REITs; RHP upgraded to Hold from Sell at Truist saying the recent 20% pullback in share price, more favorable risk-reward; O (Realty Income) disclosed ~$1.1B in property purchases from Oct 1-Dec 1 with agreements or intentions to purchase more than $1.1B in additional properties expected to close in Q4, and said it raised ~$1.55B over the same period

Healthcare

·     Pharma movers; JNJ’s Tremfya shows durable response in psoriatic arthritis in late-stage trial; BMY said the FDA has accepted for priority review the supplemental Biologics License Application (sBLA) for Reblozyl, for the treatment of anemia in adults with non-transfusion dependent beta thalassemia (PDUFA goal date of March 27, 2022); XENE announces additional positive data from mid-stage study of its drug candidate, XEN1101, for treating adults with focal epilepsy; PFE and MRK announce act with Canada to deliver up to 1.5 million courses of COVID-19 pills

·     Biotech movers; STAT News noted the median biotech stock performance YTD is -16% (Encompassing 414 stocks with market caps of $300M or more). If widen the screen to 724 biotech stocks with market caps of $50M or greater, the median YTD performance drops to -29%; BNTX CEO said the company has the ability to quickly adapt its COVID-19 vaccine following the emergence of the Omicron variant, Reuters reported; LGVN rises early after the FDA granted orphan designation to Lomecel-B, its allogeneic bone marrow-derived mesenchymal stromal cells, or MSCs, as a treatment of Hypoplastic Left Heart Syndrome.

·     MedTech Equipment & Services; CDRE reported Q3 results that were in line with its pre-announcement and consensus expectations; COO reported a mixed F4Q, with sales of $759.1M topping consensus by $11.3M while EPS of $3.28 missed by $0.10 and FY22 EPS guidance came in below Street expectations on both the top and bottom lines; WBA shares rose early afternoon after Sky news reported the company is exploring sale of Boots chain in U.K

Industrials & Materials

·     Transports; Dow Transports one of few bright spots, with gains in truckers such as CHRW, rails CSX, and package delivery FDX; KeyBanc said remain constructive on parcel providers UPS, FDX as their Online Parcel Index suggests a favorable start to the holiday peak, and while cost headwinds persist, sense is they have not intensified/expect rational pricing and secular trends to aid margins; airlines fail to rally w other transports

·     Industrials, Metals & Materials; NUE increases quarterly dividend by 23.5% to $0.50 from $0.405; announces new buyback program; MOS among top S&P gainers; strength in materials, as well as follow thru strength after Belarus Potash sanctions were increased yesterday (had lifted shares of NTR too); in rare earth, Dow Jones reported China has approved the creation of one of the world’s largest rare-earths companies to aim to maintain its dominance in the global supply chain of the strategic metals (shares of MP potentially leveraged to data)

Technology, Media & Telecom

·     Semiconductors; MRVL standout winner today after 3Q results and 4Q outlook were above expectations as Standalone Marvell delivered solid 30% Y/Y growth in F3Q22 and is expected to grow 30% Y/Y in F4Q22 while issued FY22 revenue outlook for >30% growth, which is well above consensus (~22%); NVDA shares active following news late Thursday that the U.S. FTC blocked its $40 Billion chip takeover of Arm Holdings, saying the deal would hobble innovation in semiconductors and undermine Nvidia’s rivals; SYNA raises FQ2 guidance to reflect DSP Group contribution

·     Software movers; DOCU among top losers today, downgraded by at least four firms after posting total billings growth of 28% significantly below 34% guide and initial Q4 billings guidance 22% below the street’s 32%; SMAR surges on Q3 accelerating revenue growth (up 46% y/y versus 44% in prior quarter and 38% last 3Q) and billings strength (up 44% y/y) while guided FY23 billings growth to 37% – 40% well above some estimates (Truist at 25% previously); ASAN delivered another quarter ahead of expectations, beating rev by $6.5M vs. $7.2M last qtr, but revs up 70% y/y, a slight deceleration from 72% growth last quarter, on billings of $115.4M (consensus $111.1M), up 56% y/y, a deceleration from 81% growth last quarter