Closing Recap

Thursday, December 22, 2022

Equity Market Recap

·     Today’s markets proved yesterday’s rally to be 1-day reprise as the selling pressing resumed, making today the 5th down day out of the past 6 trading days. The selling pressure emanated from this morning’s strong labor market numbers and a resilient GDP report, coming in at a 3.2% annual rate versus a consensus estimate of 2.9%. These strong economic numbers validated the Federal Reserve Chairman’s assertion that the economy is strong enough to withstand more interest rate tightening, exactly what traders hoping for an eventual Fed pivot feared. Traders feel more Fed-induced pain is on the way.

·     With few upticks in sight, the S&P 500 fell as much as -3%, the Nasdaq 100 lost -4% and the Dow Jones slid -2.4% before all 3 major indices began a steady climb off intraday lows at 1:30 pm. In addition to the robust macro data, the brutally frank bearish comments from respected hedge fund David Tepper loomed over the markets all day. Two of his comments stuck out: “Sometimes you just need to believe the Fed, I believe them.” & "I’m an optimist but I would lean short on the equity markets because so many Central banks are telling me what they’re going to do."

·     Traders were also both flummoxed and outraged when the judge overseeing FTX CEO Sam Bankman-Fried’s trial stated that he was permitting “SBF” freed on a $250 million bond just weeks after Bankman-Fried had stated that the former billionaire had only $100k to his name.

·     On a positive view, Bank America strategist Michael Hartnett said the outlook for small-cap stocks is “really quite good” in 2023 as investors start to price in an economic recovery. He said, “at some stage in 2023, the market will anticipate recovery rather than recession.” Small caps are relatively cheaper to large caps, making them a good inflation hedge. He is bullish on bonds in the first half when there’s likely to be a recession, but more optimistic on stocks in the second half after the peak in interest rates and the trough in corporate profits.

Economic Data:

·     Q3 GDP (third estimate) rose +3.2% vs. +2.9% consensus and prior estimate of +2.9 %. In Q2, U.S. GDP slipped 0.6%. US final Q3 GDP deflator +4.4% (consensus +4.3%), prior +4.3%, US Q3 PCE price index +4.3%, prior +4.3%; core PCE +4.7% (est. +4.6%), and Q3 year-on-year PCE price index +6.3% in-line with prior and core PCE +4.9% also in-line with prior

·     Weekly Jobless Claims rose to 216K in latest week from 214K prior but below est. of 222K; the 4-week moving average fell to 221,750 from 228,000 prior; continued claims fell to 1.672M from 1.678M prior and the US insured unemployment rate steady at 1.2%

·     Leading Economic Indicator Index fell far below expectations at -1% (vs. the Street -0.5%)

Commodities, Currencies & Treasuries

·     Oil prices slipped after hitting their highest in two and a half weeks with U.S. crude, heating oil and jet fuel stocks growing tighter just as a wintry blast hits the United States.

·     Gold prices fell -$30.10 or 1.7%, to settle at $1795.30 per ounce, after recording solid gains earlier this week, while silver prices were down 57 cents, or 2.4%, to end at $23.62 per ounce. Prices slipped as the dollar bounced as strong U.S. economic data exacerbated concerns that the Federal Reserve would stick to its aggressive tightening path

·     Treasury yields were little changed despite the big drop in U.S. stocks, as the 10-yr was around 3.68% end of day, while the dollar index (DXY) posted a bounce vs. the euro following the better GDP data, raising expectations the Fed will remain steadfast on rate hikes.

Sector News Breakdown

Consumer

·     AMC shares fall as proposes 1 for 10 reverse stock split and said would raise $110 million in new equity capital through the sale of its preferred stock

·     CLF said it will achieve higher annual fixed prices for steel in the calendar year 2023 and expects significantly lower steelmaking unit costs in 2023 compared to 2022 – projected an average

·     FATE, NKTX and CELU downgraded at Oppenheimer in the NK-cell therapy names saying amidst the progress that bispecific antibodies and commercial CAR-Ts, they believe that NK-cell therapies are rapidly being left behind.

·     FDX a leader in the S&P, bouncing further after quarterly results the day prior

·     MRTX said the FDA granted ‘Breakthrough Therapy Designation’ (BTD) to its lead drug adagrasib in combination with cetuximab in advanced colorectal cancer (CRC) patients

·     ORIC entered a clinical development collaboration for a potential Phase 2 study of ORIC-533 in multiple myeloma with Pfizer (PFE)

·     TSLA is now offering a discount of $7,500 (up from $3,750) for anyone that takes delivery of a new/inventory Model Y or Model 3 in the US before the end of this year. Buyers will still also get 10,000 free Supercharger miles

·     Semiconductors weak on disappointing quarterly results and guidance from MU as Q1 EPS loss (-$0.04) vs. est. loss (-$0.01); Q1 revs $4.09B vs. est. $4.11B; sees Q2 adj gross margin 6%-11% vs. est. 17.8%; sees Q2 adj EPS loss (52-72c) vs. est. (-$0.29); sees Q2 revs $3.6B-$4.0B vs. est. $3.88B; to reduce headcount by 10% during 2023 – weakness in the semi equipment sector after MU cut 2023 CAPEX to range between $7.0B-$7.5B from earlier $8B Target and from $12B in FY22 (shares of LRCX, KLAC, AMAT, ASML lower on the capex)

·     In auto retail, KMX shares slide following weak results as Q3 EPS $0.24 well below the $0.70 estimate as sales fell -23.7% to $6.5B vs. est. $7.28B; paused share repurchases; combined retail and wholesale unit sales fell by -28%; retail used car unit sales fell -20.8% (AN, GPI, SAH slip in auto retail while auto loan lenders ALLY, COF also pressured)

·     In office supplies/furniture, MLKN Q2 EPS $0.46 vs consensus $0.42 and revenue $1.07B vs consensus $1.04B; guides Q3 EPS $0.40-$0.46 vs consensus $0.43 and revenue $980M-$1.02B vs consensus $1.02B; expects to realize annualized expense reductions of ~$30M-$35M

·     U.S.-listed shares of Chinese companies BABA rise early as China’s securities regulator vowed to deepen market reforms and improve the quality of listed companies

·     In retailers: LULU remains Underperform rated and $200 tgt at Jefferies saying latest web scrape data shows elevated levels of discounting Y/Y that we believe will weigh on results going forward as inventory remains high; UAA announced that Stephanie Linnartz will join the company as President, CEO, and member of its board, effective 27-Feb-23; Linnartz currently serves as the president of Marriott International, Inc

·     In transports, Rail volumes were -6% Y/Y / -9% vs. 2019 this week, compared to the four-week trend of -5% Y/Y / -6% vs. 2019 (CSX, UNP, NSC)