Closing Recap

Wednesday, December 14, 2022

Equity Market Recap

·     The Fed hiked rates for the 7th time this year, adding another 50-bps on the year to a range to 4.25%-4.5%, the highest since 2007. The hike was smaller than the 75-bps hikes in 4-consecutive meetings prior but was in-line expectations. In new projections, Fed officials forecast in 5.25% as the top end for its benchmark rate – that’s higher than their forecast of 4.75% in September. Those projections, along with lower growth, higher unemployment forecasts paused the market rally as stocks worked their way lower. The CBOE Volatility index (VIX) tumbled 6% to 21 level as markets later appeared concerned over the more aggressive outlook from the Fed. But stocks resumed their slide, the Vix pared losses as investors digest more of the statement. After it was all said and done, stocks finished modestly lower heading into two more central bank meetings tomorrow morning, the ECB and BOE.

FOMC Meeting results:

·     The FOMC raised a key short short-term interest rate by 50-bps points (as expected) to a top end of 4.5% and signaled several more increases are likely in 2023. Markets didn’t like that most officials see rates ending 2023 between 5% and 5.5% (which would mean another 75-bps at peak in 2023), which is higher than the forecast of 4.75% in September. Seven Fed officials expect rates to go even higher, with two seeing rates topping out at 5.75%. Fed median forecast shows rates at 5.1% in 2023, 4.1% in 2024. Fed officials see 100 basis points of cuts in 2024 and 100 more in 2025 (financial markets are expecting a rate cut next September).

·     The Fed slashed its forecast for U.S. growth in 2023 as now predicts gross domestic product (GDP) will rise a meek 0.5% next year from 1.2%. Hawkish revisions to the inflation forecast as a majority of FOMC participants see core PCE decelerating to 3.5% at the end of 2023, vs a projection of 3.1% in the September forecast round. Hawkish revisions to the unemployment forecast as most officials project an unemployment rate that rises to 4.6% or higher by the end of 2023 (from 4.4%) and stays above 4% after that. Fed officials see inflation of 5.6% at end of 2022; 3.1% for 2023; 2.5% for 2024; 2.1% for 2025.

Commodities, Treasuries and Currencies

·     Oil prices finish higher as WTI crude gains $1.89 or 2.51% to settle at $77.28 per barrel. Brent crude futures settle at $82.70/bbl, up $2.02, 2.5%. Oil prices rebounded despite bearish weekly inventory data as the EIA said crude stockpiles posted an unexpected rise of 10.2M barrels to 424.13M vs. forecast of -3.6M barrel draw. Prices got a boost after the IEA cautioned that prices could rally next year amid a tightening market.

·     Gold futures slipped -$6.80 or 0.4% to settle at $1,818.70 an ounce and then extended their decline after the Federal Reserve announced a hike in the fed funds rate of 50 basis points to the 4.25% to 4.5% range, as expected – but had higher rate outlooks then markets anticipated.

·     Throughout the FOMC policy statement and the 45-minute Fed Chair Powell press conference, Treasury yields didn’t move too much and the dollar after an initial spike, worked its way lower afterwards. The 10-yr yield fell to 3.48% late after initial pop to 3.55% and the dollar index slides -0.5% to 103.50 after first popping above 104.

Economic Data

·     U.S. import prices fell for a fifth straight month in November, falling (-0.6%) vs. est. (-0.5%) and (-0.4%) prior, weighed down by decreases in the costs of petroleum products and a range of other goods. In the 12 months through November, import prices increased 2.7%, the smallest gain since January 2021, after rising 4.1% in October.

Sector News Breakdown

Consumer

·     Retailers: BBY was downgraded to Underperform at Bank America and cut tgt to $69 as expect a challenging environment for BBY to achieve earnings growth in both the near term and medium term; Bloomberg reported that Serta Simmons Bedding is preparing for Chapter 11 bankruptcy protection – Wedbush said they view this positively for TPX

·     Auto sector: GM recalling 740,000 newer trucks, SUVs in the U.S. because daytime running lights may not deactivate when headlights are on -automaker; LEA & MGA downgraded from Overweight to Equal Weight at Wells Fargo and continue to prefer top pick BWA, and remain Underweight on F in auto outlook noting auto OEMs and suppliers have rallied 21% and 28% (S&P 12%), respectively, since end-Q3; however, most earnings drivers have weakened, except FX. We lower our 2023 global LVP forecast to 1.8% from 7.1%, below S&P’s 4.0; QS downgrade from Neutral to Sell at Goldman Sachs as believe that ramping into volume production as a new entrant could also pressure FCF; Morgan Stanley said believe the market is too optimistic on EV penetration in the short term – remain OW TSLA and RIVN, each having separate reasons as to why, but do expect legacy OEs to pare down their EV ambitions

·     Housing & Building Products: LEN to report earnings tonight in homebuilder sector; MLM downgraded to equal weight at Morgan Stanley saying share price and volume headwinds from Resi-related dynamics are increasingly offsetting more durable upside from Non-Resi and Public/Infrastructure; in broad sector call, Barclay’s turns positive on homebuilder subsector, with valuations already priced for a sharp housing recession and are now relatively more positive builders vs. building products upgrading LEN and PHM to Overweight while downgrade SKY and SWIM to Equal weight; Within traditional building products, they remain Underweight MHK, Equal Weight OC, with a relative preference for MAS (OW). Prefer secular names that may see a greater deflation benefit and whose volume decrementals are better calibrated (AZEK, WMS). Prefer distributors with residential exposure (BLDR remains Top Pick, FERG)

·     Consumer Staples: SJM guides FY FCF $550M, and still sees FY adj EPS $8.35-$8.75 vs. est. $8.60 and sees FY net sales +5.5% to +6.5%; in restaurants: DRI upgraded to Outperform at Wedbush and raise tgt to $160 from $134 saying their FQ2 checks point to comp store sales growth in line-to-above at both OG and LH; YUM held investor day yesterday as analysts weigh in noting there were no strategic pivots as the company continues to prioritize digital and development, a playbook that is working

·     Casinos, Gaming, Lodging & Leisure sector: in gaming, CZR, PENN were downgraded to Neutral from Buy at Bank America underpinned by slowing Y/Y consumer spending growth according to BAC aggregated credit and debit card data, flattening gaming spend and declining visitation; AMC said it is launching a Co-branded credit card with Visa (V) to enable moviegoers and members of its Stubs reward program earn more rewards with everyday purchases

Energy, Industrials and Materials

·     Industrial & Machinery: PCAR upgraded to OW at Morgan Stanley and raise tgt from $91 to $136 as see the combination of a more resilient NA Class 8 market, margin tailwinds vis a vis price/cost & supply chain normalization, and strong valuation support; ABM reported EPS/EBITDA inline at 89c/$131MM (vs. the St 89c/$130MM) w/revs a tiny bit better ($2.01B vs. the St $1.98B) while shares fall as sees FY23adj EPS $3.40-3.60 vs est. $3.70; REVG shares outperform after earnings

·     Transports: airlines were the biggest drag in transports yesterday after cautious guidance from JBLU weighed on the group, but today gets a boost after DAL said it expects to nearly double its profit next year (EPS about $5.00-$6.00 from prior $3.07-$3.12), driven by "robust" travel demand and a decline in non-fuel operating costs and expects 2023 revs up 15% to 20% y/y

·     Utilities & Solar: SEDG upgraded to overweight from equal weight at Barclays, citing the company’s game plan to chase business in Europe; company makes systems used to squeeze more energy output from solar modules; PLUG initiated Buy at UBS with $26 tgt, forecasting $5B in sales by 2026, arguing that investors are underappreciating the growth potential

Financials

·     Bank movers: for online brokers, exchanges (SCHW, VIRT, IBKR, ICE, HOOD), Bloomberg reported all Street Stock trading set for major overhaul in new SEC plan as the agency to propose biggest changes for order filling since 2005 with plan set for industry pushback before it can be finalized; in lending & Consumer Finance: SOFI rises after an SEC filing showed CEO Anthony acquires 1,134,065 shares of SOFI between Friday and Tuesday, buying in the range of $4.28 to $4.70

·     REITs: DLR announced the departure of CEO and Board member Bill Stein effective immediately to be replaced by President and CFO Andrew Power (shares downgraded at Wells Fargo); Citigroup with several change, downgrading AKR, DEA, HLT, HR, and MAR from Buy to Neutral and cutting BDN, SLG, and VNO from Neutral to Sell, upgraded PLYA from Neutral to Buy; removing KIM from Citi’s focus list and adding PLD; PEAK downgraded to Sector Perform at RBC Capital as believe the near-term earnings trend will be more muted given a lower Mark to market on its 2022-2024 life science lease expirations; As part of its 2023 REIT outlook, KeyBanc upgraded EGP and DOC to Overweight, while downgrading AKR, NTST, LTC, VICI and ESS to Sector Weight; for Wireless Tower REITs, Wells Fargo said believe the sector remains a key defensive sector heading into uncertain 2023, top pick is SBAC where we see the most upside, also believe AMT remains very attractive; in data center REITs, Wells downgraded DLR to EW from OW as sees emerging risks to the 2023 outlook and believe EQIX is best positioned to navigate the potentially choppy waters

Healthcare

·     Pharma movers: CYTK received an unfavorable vote from a U.S. FDA advisory committee as the committee voted 8 to 3 that the benefits of omecamtiv Mecarbil don’t outweigh its risks for treatment of heart failure with reduced ejection fraction; TCON announces results based on double-digit objective response rate in each cohort from the ongoing envasarc phase 2 pivotal trial; large cap Pharma saw good gains early

·     Biotech movers: MRNA was downgraded to Neutral from Buy at Chardan following surge in shares Tuesday – bur shares continued upward momentum early; KYMR shares jump following positive data from a Phase 1 clinical trial evaluating the treatment it’s developing with Sanofi for two skin conditions: hidradenitis suppurativa, and atopic dermatitis; RNA shares jump after saying its experimental RNA therapy, when injected into the muscle, has potential as a treatment for myotonic dystrophy type 1; PTCT was initiated sell and $35 tgt at Goldman Sachs while initiated XENE at a Buy rating and $60 tgt

·     Analysts recap ASH conference data: BMO Capital noted XNCR’s plamotamab (with JNJ) continues to show a competitive clinical profile in heavily pre-treated patients with relapsed/refractory non-Hodgkin lymphoma; FATE’s FT538 in multiple myeloma showed modest efficacy in early dose cohorts and escalation is ongoing; SGEN’s Adcetris in frontline classical Hodgkin lymphoma reflects the positive risk/benefit profile in later-line treatments.

·     Healthcare Services: Mizuho raised price targets on DGX, HCA, UHS, and WBA while downgraded SYNH and reduced-price target as believe managed care and drug distributors’ earnings visibility remains good, incrementally we believe hospitals and EHC have the most improved outlook. Top picks are DGX, EHC, ELV, HCA, IQV and UHS

Technology, Media & Telecom

·     Media, Internet: RBC Capital said intra-qtr SMB agency checks indicate digital ad spend is tracking below expectations QTD for Q4, an obvious group-wide headwind and found checks were incrementally (+) for PINS, (+/-) for META & (-) for GOOGL ; CHTR at its Investor Day, mgmt guided ’23 CAPEX $10.5-10.8B, higher than the street’s $8.9B forecast; LBTYA downgraded from Conviction Buy to Neutral w/ $23.50 PT from $28 at Goldman Sachs reflecting weaker UK pricing power, revenue growth lagging the broader sector and a muted group FCF outlook

·     Software movers: in research, RNG upgraded to EW to OW but lower tgt to $50 from $55 at Morgan Stanley while raise tgt prices for EGHT, BAND, FIVN and lower tgts for TWLO and ZM as expect outperformance from names with earnings upside potential or idiosyncratic catalysts; larger rerating requires demand durability; DDOG was upgraded to Outperform with $105 tgt at Oppenheimer saying its unified, real-time view into the entire technology stack remains mission-critical to developers/enterprises as they focus on identifying/eliminating performance issues; BRZE 3Q w/ rev growth of 46% above Street of 42% (but decelerates from 54% growth last quarter) and operating losses were smaller than forecast

·     Telecom movers: CHTR shares tumble after higher cap-ex spending forecasts given at investor day – provided CAPEX guidance for 2023 of $10.5B-$10.8B well above estimate of around $9.2B; VZ said it would give some of its customers free premium NFLX for a year if they subscribed to another service through its new streaming marketplace – WSJ; satellite network operator VSAT announced a deal with MSFT to boost internet connectivity on Africa and across the planet.