Closing Recap

Wednesday, December 15, 2021

Index	Up/Down	%	Last
DJ Industrials	382.59	1.08%	35,926
S&P 500	75.66	1.63%	4,709
Nasdaq	327.94	2.15%	15,565
Russell 2000	35.56	1.65%	2,195

 

Equity Market Recap

·     All four indices above were in jeopardy of trading lower for the third straight day to start hits week but were saved by the afternoon FOMC release that provided some clarity on where the Fed was headed with its actions. The S&P rebounded as much 2% and the Nasdaq over 3% off their respective daily lows as markets recovered much of their weekly losses in a frenetic final two hours of trading today. As expected, the Fed will double the rate at which it tapers its asset purchases and kept rates constant for now, but they now expect three hikes in each of the next two years. The move higher in equities reversed a decline on macroeconomic data from across the globe, including a record U.S. PPI yesterday and this morning’s highest U.K. inflation reading in more than a decade, along with retail sales that missed expectations in both the U.S. and China. Additionally, travel and other reopen-related stocks generally underperformed today after the United Kingdom recorded 78,610 cases in the last 24 hours this morning, a record since the pandemic began and a 30% increase from yesterday. Overnight, Congress voted to raise the nation’s debt limit by $2.5 trillion, an amount intended to extend the government’s borrowing authority until early 2023. It now goes to Joe Biden for his signature. Lawmakers had reached a one-time deal to fast-track the vote in the Senate to shield it from the threat of a Republican filibuster.

·     Stocks/sector news; LLY surges to lead the S&P after setting FY22 guidance that crushed consensus estimates, NUE stumbles as the S&P’s worst decliner after its Q4 guidance missed estimates, and LOW opens red after issuing its 2022 outlook below estimates with a new $12B buyback authorization but shares shake off the weakness to go green; FXI, KWEB, BABA, DIDI, JD, PDD China stocks roll after the country’s retail sales missed estimates overnight and on potential tougher sanctions on SMIC, their largest chipmaker; PGR soars after reporting November results that substantially improved from last year, while RBLX sinks after saying its November bookings/DAU were projected to fall from last year; MDT slides to 52-week lows after the FDA issued a warning letter for inadequacies at the headquarters of its diabetes business; competitors TNDM, PODD jumped on the news; ROKU tumbles to 52-week lows after the ITC a final determination in $UEIC patent infringement case against them and Morgan Stanley cut its price target to a street-low

 

Economic Data:

·     Empire State Manufacturing Index for Nov beats at 31.9 vs. 25.5 consensus and 30.9 prior; new orders index 27.1 in December vs 28.8 in November; prices paid index 80.2 in December vs 83.0 in November; employment index at 21.4 in December vs 26.0 in November and six-month business conditions index 36.4 in December vs 36.9 in November

·     Retail sales for November well below consensus, rising +0.3% vs. est. +0.9% while Oct revised up to +1.8% from 1.7%; Retail Sales Ex-autos rise +0.3% below est. +0.9%; Gasoline sales +1.7% vs oct +3.7%, Cars/parts sales -0.1% vs Oct +1.7%, Retail ex-autos/gasoline +0.2% vs Oct +1.6%

·     Import/Export Prices for November mixed: Import prices rise +0.7% MoM vs. +0.7% est. and +1.2% prior; Export prices rise +1.0% MoM below the +0.7% consensus and +1.5% prior; Nov year-over-year import prices +11.7%, export prices +18.2%

 

FOMC Results

·     The Federal Reserve double the pace it will taper its monthly asset purchases starting next month by $30B, with its Treasury purchases slowing by $20B and mortgage-backed securities by $10B. It will now purchase $60B of bonds in January vs December’s $90B and continue that trajectory in the months ahead, putting it on track to complete its bond purchasing program in March.

·     Interest rates were kept unchanged at 0-0.25% and the Fed said it is appropriate to keep rates at this level until the labor market meets levels consistent with maximum employment. In his prepared remarks after the release, Chairman Jerome Powell said the committee thinks full maximum employment will be reached sometime next year and he further said that rates will not be raised until after the taper is finished during the Q&A session. All 18 policymakers now see a lift-off next year compared to only half at September’s meeting, and the median forecast now shows three hikes in both 2022 and 2023 while the new year-end Fed funds rate for 2022 is 0.9% from 0.3%, 2023 is 1.6% from 1%, and 2024 is 2.1% from 1.8%, while the longer run view remains 2.5%, a level that five policymakers see by the end of 2024.

·     The central bank also issued revised economic forecasts that are more optimistic than before with Q4 GDP now projected to be +4% from the prior view of +3.8% and the jobless rate at 2022-end is now expected to be 3.5% from 3.8%, though inflation expectations for 2022 are now higher than prior forecasts as well.

 

Commodities, Currencies & Treasuries

·     Oil prices were relatively flat, settling up $0.14, or 0.2%, at $70.87/barrel. This comes as demand concerns related to the recent surge in Covid, including the U.K. reporting today its highest number of daily cases since the pandemic began, was offset by bullish inventory data from the API and EIA.

·     Following the FOMC, Gold prices slipped to settle -$7.80, or 0.4%, at $1,764.50/oz, as the Dollar strengthened due to the accelerated taper rate and timeline. Elsewhere, bond yields rose and the yield curve flattened with the revised policy.

 

 

Macro	Up/Down	Last
WTI Crude	0.14	70.87
Brent	0.18	73.88
Gold	-7.80	1,764.50
EUR/USD	0.0035	1.1292
JPY/USD	0.29	114.00
10-Year Note	0.018	1.457%

 

 

Sector News Breakdown

Consumer

·     Retailers; overall retail sales for November weaker than expected, rising +0.3% vs. est. +0.9% while Oct revised up to +1.8% from 1.7%; Retail Sales Ex-autos rise +0.3% below est. +0.9% (weighs on retailer sentiment); NKE tgt raised to $189 from $180 at Cowen ahead of upcoming earnings as don’t believe management will make significant changes to its FY22 guidance but view the business as running above plan in N. America and Europe (EMEA); CONN authorizes $150M share repurchase program; LESL 12.5M share Spot Secondary priced at $20.50; UAA resumed with an Overweight rating and a $33 PT at Wells Fargo as see UA’s turnaround story as being on firmer footing headed into 2022; NKE resume EW and $175 tgt at Wells noting shares have bounced back ~13% from the September lows as shares digest recent supply chain volatility; LVLU Q3 EPS 13c vs est. 8c on revs $106.3M vs est. $105.4Mm, guided FY revs $370-372M and adj EBITDA $38-39M above estimates

·     Housing & Building Products; AZEK upgraded to Overweight, TREX downgraded to Underweight and IBP downgraded to Neutral at JPMorgan in building products space saying they expect sales growth to continue to "comp the comp" in 4Q21 and persist in 2022 and 2023 – and estimate 6% organic growth on average across our universe (ex-AZEK, TREX) in 2022 (said continue to highlight OW-rated WHR, MHK and FBHS); LOW forecasts FY 2022 revenue and profit below market estimates, signaling a slowdown in demand for home-improvement goods as sees 2022 sales between $94B-$97B below est. $97.6B (also announces $13B buyback); Barclay’s upgraded MAS in building products and downgraded MHK saying they remain relatively more positive on homebuilders vs. building products entering 2022.

·     Consumer Staples; SYY upgraded to Overweight at Barclay’s saying it offers what they believe is a compelling combination of accelerating organic sales & EBITDA growth. This is led by outsized global market share opportunities & easing of transformation expenses, all accelerated by significant disruption from the pandemic; Citi initiated TWNK at Buy with a $22 target as it appears to be exiting the pandemic in a strong position with robust innovation driving market share gains; FREE initiated by Cowen at OP with a $16 target due to its opportunity to disrupt the $96B refined sugar market

·     Restaurants; DPZ downgraded from Equal weight to Underweight at Barclays w/ $495 PT (from $500) saying Domino’s has continued to deliver best in class fundamentals, but industry headwinds are fading, leading to an easing in Domino’s tailwinds; Barclay’s comments on dining stocks saying they expect more tailwinds than headwinds in ’22 and make several PT changes including: BLMN (26 from 30), EAT (41 from 44), CMG (1845 from 1715), DRI (179 from 175), DIN (100 from 108), JACK (90 from 105)

·     Services; ASPU tumbles after disappointing FQ2 results – downgraded at Craig Hallum noting a 3.5% sequential decline in revenues in a typically seasonally strong quarter with new student enrollments down 10% along with ARPU per student falling 1%; SKIL raises full year outlook following stronger than expected result; sees FY 2022 adjusted revenue in the range of $685M-$700M from prior view $670M-$690M and adjusted revenue and updated its outlook for adjusted EBITDA; JKHY downgraded to Market Perform at Raymond James following significant outperformance vs. peers throughout 2021 (flat vs. peers -15%), and on valuation

·     Casinos, Gaming, Lodging & Leisure sector; Goldman upgraded SIX to Buy as they see positive earnings revisions on resilient ticket pricing, in-park spending, cost control, and re-rating after soft guidance that looks conservative, downgraded PK to Sell as they expect elevated debt levels to hold back their recovery compared to peers and drive downside to consensus estimates, and upgraded HST to Neutral; Morgan Stanley resumed coverage on VICI at EW with a $32 PT as it is a blue-chip REIT but its near-term growth is understood, outsized deals are likely harder to come by, and there are more attractive opportunities in gaming operators; Citi added KIM, RHP to its Focus List and removed PLD

 

Energy

·     Energy stock movers; The API reported crude oil stockpiles declined 815K barrels last week, gasoline inventories reportedly increased by 425K barrels, while distillate inventories fell by 1.0M barrels; EIA said Petroleum demand hit a record 23.2M bpd last week

·     E&P and Majors; RBC thinks most US E&Ps offer an implied return of nearly 10% through dividends and buybacks before considering the potential upside to the equities and estimated underlying growth rates in the low-to-mid single digits, their top idea is COP with CRC as their dark horse, and their favorite name in services are SLB, HP, PSI, SES

·     Refiners: Citi upgraded SUN to Buy to reflect underperformance vs peers since the Omicron variant was announced at the end of November, conservative volume assumptions, the lack of jet fuel exposure that would be impacted by travel bans, and cash flow protection tied to inverse relationship between volume and margin

·     Utilities & Solar; Argus upgraded OGE to Buy as they like the company’s visible forward earnings stream, strong cost controls, well-run generation facilities, and growing dividend; Bank of America upgraded ATO to Buy as they expect investors to return to the cleanest and fully-regulated stories first as gas prices return to greater normalcy and OGS to Buy as their earnings growth is supported by demographic trends and customer growth; Scotiabank downgraded SO to Sector Perform and started CNP at Sector Perform

Financials

·     Bank movers; JPMorgan suggested investors narrow long positions and concentrate in banks best positioned to drive market share gains via delivering a differentiated customer experience in 2022, and their top picks in order are FRC, SIVB, SBNY, SI, MCB, PNFPand LOB, they see SNV, FHN, HBAN, BKU as best positioned along with attractive valuations, upgraded CMA to N given strong earnings leverage tied to rising short-term rates and SNV to OW as they are impressed with their transformation, and removed MCB, PNFP from their Analyst Focus List; KEY double-upgraded at Bank of America to Buy from Underperform with a $27 target from $25 on the back of a stronger loan growth outlook and a faster Fed rate hike cycle; DA Davidson upgraded HTBK to Buy and downgraded UBSI, NFBK to N; Wells believes risk remains biased to the upside given sufficient macro momentum to support higher interest rates and healthier loan growth, see more than 25% return in their top pick WFC and GS

·     Insurance; PGR November net premiums written rose 11% YoY to $3.29B and Nov net premiums earned rose 14% YoY to $3.59B; PLMR was upgraded to Outperform at JMP, reversing their downgrade last month as shares have fallen ~36% since then without any material company-specific catalyst

·     FinTech & Payments; RBC’s top five investment ideas for FY22 in order are FOUR, LSPD, MA, NCR, FLYW; Baird named GPN as a Fresh Pick and reiterated its Outperform rating, $205 PT; Reuters reported MGI was approached by Dearborn Partners with an acquisition offer

·     Consumer Finance & Lending; DFS credit card delinquency rate of 1.60% vs. 1.55% in the prior month, down from 2.03% in the same year-ago period; net charge-offs rises to 1.53% from 1.40% in October, but well below 2.55% YoY; COF November Domestic credit-card net charge-off rate 1.66% vs. 1.04% in Oct; Domestic credit-card 30-day delinquency rate 2.13% vs. 2.06% in Oct; November auto net charge-offs rate 0.48% vs 0.53% In October; JPM reported charge-offs for November of 1.05%, delinquencies 0.66%; ADS Nov delinquencies 3.9%, charge-offs 4.6%; SYF Nov charge-offs 2.12%, delinquencies 0.66%; UWMC initiated at Neutral at Piper with a $6.50 target as industry-wide headwinds from declining origination demand could restrain growth and shares currently trade at the high end of the peer group on P/E and P/TBV

 

Healthcare

·     Pharma movers; LLY provides 2022 financial guidance and updating outlook for 2021 as sees EPS for 2022 in the range of $8.00 to $8.15 on a reported basis and $8.50 to $8.65 on a non-GAAP basis (consensus $8.21) and anticipates 2022 revenue between $27.8B and $28.3B (consensus $27.84B) driven by volume growth from key products including Trulicity, Verzenio, Taltz, Jardiance, Cyramza, Tyvyt, Emgality, Retevmo and Olumiant; A California issued a final ruling in its opioid trial that defendants, including ENDP, are not liable

·     Biotech movers; REGN downgraded to Market Perform from Outperform at Bernstein; BLU 25M share Secondary priced at $8.00; ALLO downgraded to Neutral at SMBC Nikko after presented lackluster clinical data from the lead CD19 (ALLO-501A) and BCMA (ALLO-715) allogeneic CAR-T programs showing mixed efficacy and durability results; VIR said laboratory data showed its drug Sotrovimab retained neutralizing activity against all tested coronavirus variants, including Omicron; ZLAB was added to JPMorgan’s Analyst Focus List as they see potential for shares to double after falling ~50% YTD to create a valuation disconnect; FATE upgraded to OP at Wedbush as they see significantly improved risk/reward after several Ph 1/2 trial updates

·     MedTech Equipment; MDT said the FDA issued the company a warning letter following an inspection on its Northridge, California, facility, the headquarters for its Diabetes Business; EW and IRTC upgraded to Buy from Neutral at Citigroup and downgrade HAE to Neutral from Buy saying they enter 2022 cautiously optimistic – 2021 was supposed to be the year of the "recovery trade", which turned into the year of the delayed elective procedure, exacerbated by staffing shortages; Cowen initiated APEN at Outperform with a $13 target as each of their three key products is highly differentiated with clear growth catalysts

Industrials & Materials

·     Aerospace & Defense; PSN downgraded to Market Perform at William Blair as one of the few defense contractors to not issue preliminary 2022 guidance after others have referenced a laundry list of headwinds that have led to downward 2022 estimate revisions

·     Industrial & Machinery; TTC posted Q4 adj EPS 56c vs est. 53c on sales $960.7M vs est. $955.8M, forecasts FY22 sales growth 8-10%, adj EPS $3.90-4.10 above est. $3.85; ABM reported Q4 adj EPS 85c vs est. 80c on revenue $1.7B vs est. $1.66B, sees FY22 adj EPS 3.30-3.55 vs. est. $3.48, increased its quarterly div to 19.5c from 19c; REVG missed Q4 estimates with adj EPS 27c vs est. 28c on sales $589.9M vs est. $600.8M and guided FY22 sales below consensus; RRD agreed to be acquired by Chatham Asset Management for $10.85/share in cash, terminating its merger with Atlas Holdings that was agreed to last week for $10.35/shr

·     Transports; UPS upgraded to Buy from Neutral at Citigroup and raise tgt to $250 from $245 saying Parcel follows rail in our preference order as we remain quite confident about pricing power and also expect volume comps to get easier as the year progresses; SKYW downgraded to MP from Outperform and cut tgt to $42 from $50 at Cowen saying read through from the recent Mesa Airlines earnings release regarding higher maintenance costs, longer maintenance times and employee attrition are concerning

·     Metals & Materials; in chemicals, ALB, LTHM downgraded to sell and SHW downgraded to neutral at Goldman Sachs, while firm upgraded HUN to Buy from Neutral and CMP upgraded to Neutral from Sell – for lithium names (ALB, LTHM), finds current valuation multiples too high, while is optimistic on coating companies; expects surprise bias to upside should inflationary pressures ease in 2022; steel stocks slip after NUE forecasts Q4 profit between $7.65-$7.75, below analysts’ estimate $7.95, as sees decline in Q4 earnings from raw materials segment vs. Q3 due to margin pressure at co’s direct reduced iron facilities (shares of STLD, X, active); SLI signs LOI with Koch Engineered to support lithium project

Technology, Media & Telecom

·     Internet; Chinese ADRs BABA, BIDU, JD DIDI pressured after the Biden administration was said to be considering tougher sanctions on China’s largest chipmaker, SMIC, and as China reported weaker economic data overnight (Chinese retail sales YoY actual 3.9% below the est. forecast 4.7% and previous 4.9% reading); Internet sector changes at Citigroup: BKNG upgraded to Overweight, EBAY to Neutral from not rated, EVER downgraded to Underweight and MAX downgraded to Neutral – while top picks include a mix of GARP (AMZN, FB, TWTR), continued secular subscription winners (NFLX, SPOT), and reopening recovery names (UBER, BMBL, MTCH).

·     Semiconductors; Bloomberg reported that the Biden Administration is considering imposing stricter export restrictions on SMIC and CCMP announced a definitive merger agreement wherein the former will acquire the latter in a cash and stock transaction with an enterprise value of ~$6.5B as CCMP shareholders will receive $133 in cash and 0.4506 shares of Entegris common stock for each share of CMC Materials common stock they own. https://bit.ly/3DRoen2; IIVI upgraded from Equal weight to Overweight at Morgan Stanley w/ $82 PT (from $80) saying they believe pullback in valuation over the last year (down ~12% YTD and ~26% since initial COHR announcement) and current multiple (~17-18x CY23 P/E) is too pessimistic

·     Software movers; RBLX reported November DAUs 49.4M (+35% YoY), hours engaged 3.6B (+32%), estimated Nov bookings $206-211M (+22-24%), revenue $184-187M (+84-87%), avg bookings/DAU $4.21-4.27 (down 8-9%); Samsara (IOT) 35M share IPO priced at $23.00; GRAB was initiated at Evercore with an Outperform rating as the category leader in Southeast Asia across its Delivery and Mobility segments affords them meaningful scale and network effect advantages; Unity Software (U) files to sell up to 3.5M shares of common stock by selling stockholder; CRNC said CEO Sanjay Dhawan has resigned effectively immediately and will be replaced by EVP and General Manager, Stefan Ortmanns; AI authorizes stock repurchase program, up to $100 million over 18 months

·     Hardware, Components & Services; BB entered into a multi-year agreement with automobile manufacturer BMW to collaborate and develop technology for its next-generation vehicles; Cantor initiated LVOX at OW with an $8 PT as shares falling ~47% since de-SPACing has created an attractive buying opportunity; Jefferies initiated PI at Buy with a $100 PT as it is uniquely positioned to anticipate market needs, develop the market, and benefit from what they expect will be sustained 20%+ CAGR

·     Media & Telecom movers; ROKU slides after the ITC issued its favorable final determination in UEIC’s patent infringement case against them; also, was maintained underweight at Morgan Stanley as cut tgt to street low $192 citing slowing active account growth, difficult comps and margin compression concerns; CMCSA downgraded to a Neutral at Citigroup with a revised target of $53 and maintaining Neutral on CHTR, ATUS saying they find that consensus cable broadband net adds remain at risk in 2022 and over the next four years; Morgan Stanley also a media note as they upgraded EDR to OW which replaces MSGS, which they downgrade to EW as the catalysts for value capture have passed and not translated as expected; says remain UW MSGE as uncertainty over Sphere returns and pressure at MSG Networks remain headwinds to multiple expansion; Cantor reiterated OPA at OW with a new $14.50 PT from $10 to reflect its target operating asset of Forbes