Closing Recap

Thursday, December 08, 2022

Equity Market Recap

·     Stocks rise in choppy action as investors position themselves ahead of key inflation data points tomorrow in the form of producer prices (PPI) and inflation expectations data, while the big tests come next week with consumer prices (CPI) on Tuesday and the Fed meeting Wednesday. A 50-bps hike is widely anticipated at this juncture, but wording about futures hikes and pace will be key from Fed Chair Powell. Stocks managed to snap their 5-day losing streak, avoiding their 3^rd 6-day losing streak this year amid broad based stock buying (last time there were three 6-day losing streaks for the S&P dates to 2011). Stocks have tumbled the last few days by worries about how severe an economic downturn might be. Though recent data, including last week’s jobs report for November, showed that the economy has been more resilient than anticipated. Hong Kong rallied on reopening hopes as Covid easing continues – boosting material and leisure stocks. A quiet day overall with no Fed speakers, light earnings, and economic data.

Economic Data:

·     Weekly Jobless Claims rose to 230,000 in latest leek vs. est. 230,000 and 226,000 prior; the 4-week moving avg rose to 230,000 from 229,000 prior week; continued claims rose to 1.671M from 1.609M prior week. Treasury yields edge higher while the dollar dips

·     Tomorrow data: November Producer Price Index (PPI) expected at 8:30 AM with estimate for +0.2% rise in headline reading m/m and +7.2% y/y (from +8% prior month). On a core basis (ex food & energy), PPI m/m expected to rise +0.2% and on a y/y basis rise +5.9% (from +6.7% prior month). Also, University of Michigan Sentiment (est. 56.9) and inflation expectations data at 10:00 AM with prior reading at 4.9% for 1-yr expectations and +3.0% for 5-yr.

Commodities, Currencies & Treasuries

·     U.S. crude futures turn negative after rising by $3 a barrel earlier in the session, with WTI crude falling -$0.55 or 0.76% to settle at $71.46 per barrel. Prices topped highs of $75.44 initially on reports the Keystone oil pipeline was shut down following leak in Nebraska. TC Energy said system shut after oil released into a creek. Oil prices fell for a 5^th straight session.

·     Gold rises $3.50 or 0.2% to settle at $1,801.50 an ounce, rising for a 3^rd straight session, helped by a softer dollar ahead of key inflation data tomorrow morning. The dollar index (DXY) falls -0.35% to 104.75 as the euro rises further above the 1.05 level into key data.

·     Treasury yields, especially longer-dated ones, ended higher on the day into the producer price index (PPI) data tomorrow morning, with the 10-yr back up at 3.50%, a 6 bps move off intraday lows and 9-bps off yesterday close. Still, the 10-yr is still well below its 52-week high of 4.23%, set on Oct. 24. After the PPI tomorrow, we get CPI on Tuesday and the Fed meeting Wednesday. The two-year Treasury yield was at 4.32%, but well off its 52-week of 4.726% set on Nov. 7^th.

Sector News Breakdown

Consumer

·     Retailers: GME Q3 revs of $1.19B misses the $1.34B estimate on larger EPS loss of (-$0.31), while Q3 expenses as a percentage of revenue came in at 32.7%, down from 34.1% in the prior quarter; WWW said it started cutting jobs earlier this week and plans to either divest or license its Keds shoe brand as well as its Wolverine Leathers business; RENT raised full-year 2022 revenue and earnings margin forecasts, signaling strong demand for affordable fashion and announces a restructuring plan, which involved laying off about 24% of corporate employees; EXPR posted Q3 EPS loss that missed consensus and sales of $434.1M down from $472M y/y but shares rise after enters into strategic partnership WHP Global which takes 7.4% stake; OXM better earnings and guide – 3Q adj EPS $1.46 vs est. $1.22 on revs $313Mm vs est. $303.4Mm; in sporting good, SPWH Q3 top and bottom line slightly above views, but Q3 comp sales fell (-15%) and guides Q4 revs $370M-$385M below est. $401M (follows better ASO results day prior)

·     Auto sector: TSLA slides early after Bloomberg reported Tesla will shorten shifts by about two hours at its Shanghai factory as soon as Monday and has delayed onboarding new staff at the plant; CARG announces $250M share repurchase program; Used car prices were flat m/m in November and is now down 14% y/y, according to Manheim, seasonally adjusted and factoring in mix and mileage. Non-adjusted, November was down 2% m/m and down 12% y/y; GM CEO said 40% of customers ordering gm EVs are new to the company

·     Consumer Staples: HSY upgraded from Neutral to Buy and up tgt to $269 from $244 as believe Hershey will remain in a beat and raise cycle through 2025 and believe HSY can achieve 4% OSG and 9% EPS growth over the LT, which is above the Street’s 3% and 7% expectations; MDLZ downgraded to Neutral at UBS as believe macro headwinds will likely cap earnings growth in 2023 including FX, low double-digit inflation, and increasing interest expense; SOVO downgrade to Neutral at UBS as continue to believe there is upside to consensus estimates but margin est. is well below the Street; NAPA reported 1Q23 adj. EBITDA of $35.7mm, ahead of consensus of $31mm; COKE doubles quarter dividend to 50c per share; UL said to weigh $3 billion sale of US ice cream brands, according to Bloomberg report; 52-week highs CPB, CAG, HSY, GIS, SJM

·     Casinos, Gaming, Lodging & Leisure sector: casinos rally (WYNN, LVS, MGM) behind bounce in China related strength after Hong Kong rallied on reopening hopes as Covid easing continues (boost to Macau casinos); PII downgraded to Market Perform from Outperform at BMO Capital and lowering estimates owing to concerns about loss of market share and an increase in the number of recalls; in towables/RVs (THO ), BMO Capital noted October North American RV Retail Registrations -23% y/y, -17% vs. 2019 and registrations declined -36% compared with 2020 (towables -38%, motorized -23%)

Energy

·     Energy stock movers: oil prices jumped initially on reports the Keystone Oil Pipeline is shut down following leak in Nebraska – TC Energy says system shut after oil released into a creek – but prices later reversed to hit fresh 2022 lows for WTI crude. Iraq produced 4.43 million barrels per day (bpd) of crude in November, down by 221,000 bpd from October, data from state-owned marketer SOMO seen by Reuters showed on Thursday.

·     E&P and Majors: CVX said it increased its 2023 capital spending budget by a double-digit percentage from this year to $17 billion, as inflation drives up energy production costs and the firm pours cash into low-carbon fuel projects; XOM said it will lift spending next year to $23 billion-$25 billion, the top end of its guidance, and expand investments to curb carbon emissions while expanded its share-buyback program to $50 billion through 2024; SHEL injected nearly $1.5 billion into its British energy retail business this year to help it weather huge volatility in power prices that caused the collapse of several rival UK power utilities; RIG announces $1.04B in contract awards for two ultra-deepwater drill ships; in pipelines: KMI provided its 2023 financial guidance, guiding to an adjusted EBITDA of $7.7 billion, which is ahead of the $7.5 billion consensus and our $7.6 billion estimate

·     Utilities & Solar: DTE upgrade from Peer Perform to Outperform at Wolfe noting shares have underperformed by 3% since the electric rate order and now trades at a discount multiple – this is near relative trough levels since moving to nearly fully regulated post-midstream spin; NEE prices $500 mln 2.50% convertible senior notes due 2026; AEP and AES said they will invest about $4 bln in building largest U.S. green hydrogen plant

Financials

·     Financial Services & Insurance: PFG downgraded to underperform from neutral at Credit Suisse on valuation grounds, with the broker preferring the investment manager’s peer VOYA; LNC notable underperformer in S&P and insurance space all day with comments from financial services conference cited for weakness; MBI shares spiked midday in bond insurers

Healthcare

·     Pharma movers: RXDX adds to yesterday big gains after reported Phase II data for its precision-enabled anti-TL1A mAb PRA023 in Ulcerative colitis (UC) and Crohn’s disease (CD), which Guggenheim said showed “game-changing efficacy” and raised tgt to $185 from $75 with peak sales increased to $4.2B from $3B; TRDA announced a deal with VRTX that aims to develop treatments for myotonic dystrophy type 1, as Vertex will pay Entrada an upfront payment of $224 million and make an equity investment of $26 million; in research, AVRO upgraded to Buy with $4 tgt at BTIG; MRTX downgraded at BMO Capital citing unclear path of Adagrasib; OMER downgrading to Neutral at UBS and slash tgt to $2 from $12

·     Biotech movers: RVMD announced that SNY has provided notice to terminate its development and commercialization collaboration on SHP2 inhibitor RMC-4630 – RVMD will regain global rights to the molecule; DSGN shares slid after reported results from early-stage drug trial for inherited nerve disorder – first in human data for their lead geneTAC, DT-216, in Friedreich’s ataxia; PHVS said the RAPIDe-1 Phase 2 clinical study of PHVS416, an oral on- demand treatment for HAE attacks, met primary endpoint and all secondary endpoints

·     Healthcare Services & MedTech Equipment: CUTR falls early after pricing $100 million of 4% convertible senior notes due 2029; DXCM G7 receives FDA clearance: the most accurate continuous glucose monitoring system cleared in the U.S. and expects to initiate a US launch of DexCom G7 in early 2023; CANO slides after Bloomberg reported shareholder Third Point sells Cano stake as medical provider’s cash dwindles; GE said it expects its healthcare unit, which is to be spun off into a separate company early next year, to have a medium-term organic revenue growth in mid-single-digits; CTLT shares fell after a short report from GlassHouse Research

Industrials & Materials

·     Aerospace & Defense; The Pentagon awarded $9 billion worth of cloud computing contracts to GOOGL, AMZN, MSFT and ORCL as the Joint Warfighting Cloud Capability (JWCC) is the multi-cloud successor to the Joint Enterprise Defense Infrastructure (JEDI). The separate contracts, which carry a notional top line of $9 billion, run until 2028; in research, Citigroup initiated coverage of the Defense sector, with Buys on LDOS ($130 tgt) GD ($298 tgt) LMT ($546 tgt) SAIC ($141 tgt) and BA ($222 tgt) assumed Buy as expect the return of great power competition to drive US and European defense budgets higher, providing a lock on growth this decade; in commercial aerospace, Cowen named RTX and TDG top aftermarket picks; BA and HWM OE recovery plays; In a 350-80 vote, lawmakers approved the annual National Defense Authorization Act to increase America’s total national security budget for fiscal year 2023 to $857.9 billion

·     Metals & Materials: GEF declines as posts a top and bottom line miss as Q4 EPS adj EPS $1.83 vs. est. $1.94; Q4 sales $1.49B vs. est. $1.58B; Adjusted EBITDA of $218.7M rose $7.4M but below est. $229M and total debt decreased by $309.5M; MERC downgraded to Sector Perform at RBC Capital saying while continue to like the longer-term story, we see near-term headwinds for the business that dampen our enthusiasm for the shares over a one-year horizon; The Norwegian foreign ministry on Thursday said a World Trade Organization (WTO) panel had ruled in Norway’s favor against the United States in a case the Nordic country had brought over U.S. import duties imposed in 2018 on steel and aluminium; industrial metal stocks rise on China reopen hopes

Technology, Media & Telecom

·     Internet movers: GOOGL said plans to combine the team working on the mapping service Waze with the group overseeing the company’s Maps product, as the search giant faces pressure to streamline operations and cut costs; SHOP slides as UBS initiated Sell and $30 tgt at UBS as projections for PCE on goods suggests that consensus estimates for GMV, and revenue are not de-risked for a recession in 1H’23

·     Semiconductors: for the sector, Citigroup said their checks in the channel indicate order rates from the PC food chain remain depressed amid poor demand and excess inventory and it appears the data center end market is rolling over as well. It appears the share gains of INTC’s CPU business in 3Q22 have reversed and we expect AMD to gain back market share in 4Q22; for ASML, Bloomberg reported Netherlands plans curbs on China tech exports in deal with US; Dutch export limits on chipmaking tech may hit ASML China sales

·     Software movers: HCP reported a strong F3Q23 print with 52% revenue growth beating expectations by $14.2M ($11.6M beat last Q) driven by healthy NDRR 134% and strength in the company’s expand and extend sales motions including a third customer reaching $10M of ARR; AI Q1 non-GAAP EPS of ($0.11) vs. est. ($0.16) on revenue of $62.4M (est. $60.8M), up 7% y/y versus 25% last quarter, subscription revenue of $59.5M, up 26% y/y; DDOG rises after filing overnight showed Director Jacobson buys 192K shares between 12/5-12/6 – valued at $13.3M purchase; ATVI shares slid after the FTC filed a complaint to stop MSFT from acquiring the video game maker in pending $69B deal

·     Hardware, Components & Services: CIEN jumps after the networking solutions co posts higher-than-expected quarterly revenue at $971M, easily topping the $850M estimate saying benefited from some favorable supply chain developments in the second half of the quarter (shares of ANET, JNPR, FFIV, INFN bounce in reaction); VRNT mixed Q3 results as revenue came in slightly below consensus as the FX headwind persisted & macro pressures resulted in elongated sales cycles but outperformed expectations on the bottom line

·     Telecom & Media movers: SBGI downgraded to Underweight from Neutral at JPMorgan and cuts tgt to $16 from $25 while lowers 2023, 2024 estimates, saying to reflect more challenged outlook for advertising and distribution revenue; AT upgraded from Hold to Buy at Argus with 424 tgt saying with the spinoff of WarnerMedia to Discovery, AT&T has finally moved past its long sad foray into the media business; The ad-supported version of the DIS Disney+ service launched Thursday, attracting major advertisers from different sectors, bringing in new revenue