Closing Recap

Friday, December 09, 2022

Equity Market Recap

·     Stocks slide to the lows into the close after trading flattish all afternoon, finishing with weekly losses as investors brace for a potentially huge week coming up. We get updated consumer price index inflation (CPI) data on Tuesday, then the Federal Reserve sets interest rates Wednesday along with press conference from Powell, and then the European Central Bank follows Thursday. Volatility could be high with quadruple witching, the quarterly expiration of options and futures, takes place in the US on Friday. Light week of earnings as we near end of month holiday, but Oracle (ORCL) on tap Monday. A 50-bps rate hike is widely expected by the US Fed next week given high inflation and a tight jobs market (note the Fed has raised rates by 75 basis points at each of its last four meetings). Looking further ahead, several Fed officials have suggested the central bank may not be in a position to cut interest rates until 2024. Data today showed a further deceleration of inflation, but still coming in above estimates, while confidence improved for consumers. Nothing earth shattering to likely chance the stance of the Fed into next week’s meeting. Some interesting data points this week show the 30-year US mortgage rate has moved from 7.08% to 6.33% over the last 4 weeks, the largest 4-week decline (-75 bps) in rates since December 2008. Bespoke noted China’s stock market just ended its longest streak of daily closes below its 200-DMA since at least 1999. The MSCI China index closed below its 200-DMA for 371 trading days from 7/2/21 to 12/2/22 before finally getting a close above on Monday.

Economic Data:

·     Producer Price Index (PPI) headline reading for November rises +0.3% m/m vs. est. +0.2% rise and rises +7.4% y/y vs. est. +7.2% y/y (from +8% prior month). On a core basis (ex food & energy), PPI m/m rose +0.4% vs. est. rise +0.2% and on a y/y basis rises +6.2% vs. est. +5.9% (from +6.7% prior month). The PPI for food manufacturing reaccelerated to 11.8% YOY in November from 11.0% in October

·     University of Michigan surveys of consumers sentiment prelim Dec 59.1 vs. 56.9 estimate and vs final Nov 56.8; consumers expectations index prelim Dec 58.4 vs final Nov 55.6 and current conditions index prelim Dec 60.2 vs final Nov 58.8

·     U. Michigan surveys of consumers 1-year inflation outlook prelim December 4.6% vs final November 4.9% and surveys of consumers 5-year inflation outlook prelim December 3.0% vs final November 3.0%

·     U.S. Household net worth fell at a -1.1% rate in Q3, after contraction rates of -15.7% (was -15.3%) in Q2 and -0.4% in Q1 from the all-time high of $150.1 (was $150.0) tln in Q4 of 2021, according to the Fed’s Z.1 report. Total asset values fell at a -0.2% rate in Q3, after a -13.3% (was -12.9%) Q2 decline. Financial asset values fell at a -3.8% rate in Q3 after a -23.6% (was -23.0%) Q2 drop. Real estate values rose at a 7.4% rate in Q3 after a 14.2% (was 13.5%) Q2 rise.

·     Bloomberg cited a new CreditCards.com report that outlined the average annual percentage rate for retailer-brand credit cards is now at a mindboggling record high of 26.72%, up from 24.35% in 2021. Meanwhile, the average APR for general-purpose cards is 22.66%. BankRate.com reports that the APR on the average US credit card just hot 19.40% – a new record high.

Commodities

·     Oil prices fell, with WTI crude down -$0.44 or 0.62% to settle at $71.02 per barrel, adding to the biggest weekly decline for crude since early August on growing recession fears following weak economic data from China, Europe, and the United States. The contracts hit 2022 lows earlier this week and fell over 11% on the week. Brent crude futures settle at $76.10/bbl, down 5 cents, 0.07%. Gold prices rise $9.20 or 0.5% to settle at $1,810.70 an ounce to conclude a strong week for the precious metal, rising by about +0.7% ahead of the FOMC meeting next week.

Currencies & Treasuries

·     The U.S. dollar jumped initially PPI data came in higher than expected on both a m/m and y/y basis for November – but still showing further confirmation that inflation in the U.S. is slowing when compared to prior month data. The dollar leveled off to finish flat on the day ahead of the November CPI data Tuesday and FOMC meeting on Wednesday.

·     Treasury yields rose following the monthly PPI and Michigan sentiment and inflation expectations data. The core November PPI, which excludes food and energy, increased by 0.4% from the previous month, above the consensus call for a 0.2% gain and rose by 6.2% year over year, exceeding the consensus forecast of 5.9%. But headline PPI increased by 7.4% year over year, down from 8.1% last month. The yield on the 10-year Treasury note, which reflects expectations about the economy and inflation, was at 3.55% rising from 3.47% prior.

Sector News Breakdown

Consumer

·     Retailers: COST missed consensus expectations Q1 as same-store sales rose 6.6%, but e-commerce sales declined 3.7% in the quarter (EPS and overall revs topped ests); LULU shares tumble after reports mixed quarterly results, disappointing margins and high inventories which were up 85% to $1.7B, compared with $900M y/y but EPS, revs and comp store sales (+25%) came in above; CHWY Q3 revenue +14.5% beat est. 10.8% and a 2.8% EBITDA margin (est. 1.4%) and raised year guidance, but issued Q4 rev outlook of $2.63B-$2.65B below est. $2.68B; CURV tumbles on Q3 miss as EPS $0.07/revs -5.3% y/y to $290M vs. est. $0.12/$299.2M and sees Q4 revenue $285M-$300M vs. est. $311.99M; RH big Q3 beat as EPS $5.67/$869.1M revs vs. est. $4.70/$839.8M; GM 49.7% vs consensus 51.3%; SG&A 28.9% vs consensus 32.4% and guides FY revenue growth (4.5%)-(3.5%) y/y vs prior (5.5%)-(3.5%)

·     Auto sector: TSLA will suspend Model Y assembly at its Shanghai plant between Dec. 25 and Jan. 1, according to an internal memo detailing the automaker’s latest production plan, reviewed by Reuters; LI reports wider Q3 loss of (-$0.18) vs. est. loss (-$0.15) on revs $1.31B and reports Q3 deliveries 26,524 vehicles while sees Q4 deliveries 45,000-48,000 vehicles and Q4 revs $2.32B-$2.47B vs. est. $2.55B; CVNA downgraded to Hold from Buy at Needham but shares later bounced after the WSJ reported lenders say they don’t expect the company to file for bankruptcy soon – criticize how executives handled the company’s downturn

·     Consumer Staples & Restaurants: BYND downgraded to Sell from Hold at Argus saying demand for plant-based protein has fallen amid weaker economic conditions, and many customers are trading down to cheaper proteins – including meat; YUM’s holding 12/13 Investor Day in NY; FIZZ Q2 EPS $0.39/$299.6M above $0.34/$293.8M consensus; APRN downgraded to Hold from Buy at Lake Street and cut tgt to $2 from $4

·     Gaming & Leisure: PENN authorizes a new $750m buyback, which is in addition to its prior $750m; MTN Q1 Rev beat, EBITDA miss, reit FY; in lodging REITs, Raymond James downgraded PEB, XHR and SHO in the aftermath of 3Q earnings reports, conference calls, and NAREIT’s REITWorld gathering, and in response to higher interest rates and a more precipitous 2023 macro-outlook, and adjusting 2023-2024 RevPAR, EBITDA, and FFO/share estimates

Energy, Industrials and Materials

·     Energy: the biggest drag in the S&P today as investors rotate into year-to-date losers like tech and discretionary and out of winners like energy; PSX reports 2023 capital program of $2b, including $865m for sustaining capital and $1.1b for growth capital – program consistent with commitment to maintain a $2b annual budget through 2024; TC Energy, which shut its Keystone pipeline in the United States and declared force majeure on shipments after more than 14,000 barrels of crude oil spilled into a creek in Kansas, is planning to restart one leg of the shuttered pipeline starting on Saturday Bloomberg reported

·     Aerospace & Defense: UAL plans to announce a major Boeing (BA) 787 Dreamliner order next week, two sources briefed on the matter told Reuters; the world’s first C919, a Chinese-made narrowbody jet rivaling Airbus A320neo and Boeing 737-MAX, was delivered to launch customer China Eastern Airlines in Shanghai on Friday and took off for a 15-minute flight to mark the historic moment.

·     Transports, Industrial & Machinery: Citigroup said top picks in Multis include IR, ROK, TT, EMR, and DOV and institute negative catalyst watches on FTV and VRT – notes Megatrends + still emerging fiscal tailwinds think should help moderate potential downside for industrials in a slowing macro-economic environment while improving price vs. cost trends and gradually improving supply chains should remain supportive of good/improving profitability; AAL and JBLU plan to expand domestic and short-haul international flying next year under a much-scrutinized operating partnership focused on the US Northeast. 

·     Metals & Materials: in industrial metals, Morgan Stanley upgraded VALE to OW with $20 tgt on bullish 1H23 iron ore outlook/idiosyncratic catalysts and downgraded AA to EW on downside to consensus saying they stay selectively constructive on mining equities against the positive backdrop of China’s reopening.

Financials

·     Asset managers: CNS announces preliminary assets under management and net flows for November 2022 at $84.2B; VCTR assets under management (AUM) of $161.5 billion as of November 30, 2022. The Company also reported average assets under management for the month of November of $157.1 billion.

·     Bitcoin, FinTech & Payments: COIN downgraded to underperform from neutral at Mizuho and tgt cut to $30 saying that consensus expectations are too optimistic for the company’s 2023 revenue; FIS downgraded to Hold from Buy at Jefferies and cuts its PT to $75 from $95 on additional risks to FY23 ests as consensus is baking in close to best-case scenario in terms of the timing and magnitude of cost savings; for AFRM The Information reports Walmart will soon introduce “buy now, pay later” capabilities through its fintech venture, putting the company into competition against the likes of AAPL/AFRM/Klarna

Healthcare

·     Pharma movers: PFE and BNTX announced an FDA fast track designation for a single-dose Covid and flu vaccine candidate; EXEL Phase 3 CONTACT-01 study of cabozantinib + atezolizumab vs. docetaxel for metastatic non-small cell lung cancer did not show a statistically significant benefit on the overall survival primary endpoint; JAZZ upgraded from Neutral to Buy wat Goldman Sachs while downgraded IOVA from Buy to Neutral and slash tgt to $6 from $20 given concerns around the clinical, regulatory, financing, competitive, and commercial path for the company’s lead asset; LLY hosting its 2023 guidance call Tuesday 12/13

·     Biotech movers: ACLX and GILD’s Kite announce strategic collaboration to co-develop and co-commercialize late-stage clinical CART-ddBCMA in Multiple Myeloma – Arcellx to receive $225m upfront payment, $100m equity investment and up to $3.9B in total contingent consideration; RXDX 4.55M share Secondary priced at $110.00

·     Healthcare Services: PHR posted another beat and raise with its 3QFY’23 report, driven by continued 30%+ growth in Subscription and Network Solutions (previously Life Sciences). This was the 7th consecutive quarterly report with 30%+ growth; WBA announced the sale of $1B in ABC shares, taking its ownership down by ~3% to ~17%, but still #1 holder – ABC to buy back ~$200M of those shares under its repurchase program; Cowen said they shift their top picks from MOH, HUM, UNH to CI, CNC, MOH with Cigna as our 2023 Best Idea in managed care; COO misses on EPS while Q4 results included revenue of $848M/+12% organic that beat the Street’s $839M, with upside in the period tied to slightly better than expected CVI and CSI performance

Technology, Media & Telecom

·     Media, Internet: NFLX upgraded to overweight from equal weight at Wells Fargo as sees a path of positive catalysts in 2023 driven by lower churn and stable subscribers; for MTCH Bank America lowers ests and cuts tgt to $60 from $85 saying Sensor Tower download/revenue data showing weaker QTD y/y trends

·     Semiconductors: AVGO reported Q4 results that beat expectations and gave a revenue forecast that was ahead of consensus – F4Q (Oct) sales/EPS $8.93B/$10.45 and F1Q (Jan) sales outlook of $8.9B topping Street expectations; TSM reported a ~50% YoY spike in November revenue as the co benefited from rising smartphone orders, including for Apple’s iPhone; NVDA continued recent outperformance, approaching its 200-day moving average

·     Software movers: DOCU shares rose after posted better-than-expected results as Q3 adjusted EPS $0.57 vs. est. $0.42; Q3 revs rose 18% y/y to $645.5M vs. est. $626.88M; Q3 billings were $659.4M, an increase of 17% y/y (upgraded at Piper); in mobile game stocks (TTWO ), Bank America notes Mobile game bookings & player engagement are still weak in Nov, but lower expectations mostly de-risked 4CQ

·     Hardware, Components & Services: for AAPL, Credit Suisse saying remain positive on the long-term opportunity given its 1.8 billion+ installed base, but based on our channel checks and input from our Asia tech team, they believe Apple’s production issues at the Hon Hai factory in Zhengzhou will reduce F1Q23 revenue and EPS – lower our F1Q23 iPhone estimate by ~7 million to 69 million units, leaving total F1Q23 revenue at $121.66 billion, down 2% y/y and down 4% from our prior estimate