Closing Recap

Friday, February 11, 2022

Equity Market Recap

·     What a wild way to end the week as U.S. stocks tumble Friday afternoon, while Treasury yields pulled back, gold rises, and oil prices set fresh 7-year highs as White House National Security Advisor Jake Sullivan warned that Russia was in position to mount an invasion of Ukraine any day now. He said in a press briefing the U.S. wasn’t saying that Russian President Vladimir Putin had made a final decision on Ukraine but continue to see signs of Russian escalation at border. The headlines pushed major averages (which was already dealing with a 40-yr high inflation reading yesterday and rising interest rate fears) lower, with the S&P 500 back below its key 200-day technical support level around 4,450, as technology, transports, and other sectors sold-off. Defense stocks, energy names and defensive assets (gold, bonds, currencies) saw buying.

·     Stock & Sector movers: UAA tumbles despite EPS/revs beat as forecasts gross margin to shrink 200 bps in the upcoming quarter and URBN sinks after on its quarterly sales miss as retailers pressured after earnings; autos another space seeing names slide after earnings as MGA posts a beat but rolls on the impact from Ontario bridge closure and continued semiconductor supply chain constraints, while GT open in the green on its beat but quickly plunges during its conf call; NWL MPWR among leaders in the S&P early on earnings, EXPE jumps to record highs after posting strong quarters; ZG surges on its beat and long-term guidance; CLF sinks after a disappointing quarter, weighing on other metals X FCX; Energy outperforms again as CTRA BKR HAL HES PSX VLO and several others among the best non-earnings related movers in the S&P; SQ extend rally from Tuesday’s 20-month low after Citi and bank America upgraded to Buy as recent underperformance presents an undervalued discount, while AFRM plunges again as analysts were mixed on yesterday’s earnings report (u/g at DA Davidson, d/g at Jefferies for example).

·     Economic data weighs on sentiment as the University of Michigan sentiment index falls to its lowest since October 2011, while one-year inflation expectations are at the highest seen since July 2008. The inflation fears were peaked yesterday as data showed the CPI rose 7.5% in the 12 months through January, marking the biggest year-on-year increase since February 1982 and fueling expectations of a hefty rate hike by the Federal Reserve.

·     Regarding Fed interest rate hikes: CNBC noted that several Federal Reserve officials, both privately and publicly, are pushing back against calls by St. Louis Fed President Jim Bullard on Thursday for super-sized rate hikes, and instead suggesting the central bank is likely to embark initially on a more measured path. Atlanta Fed President Raphael Bostic told CNBC on Thursday after the inflation report, “My views have not changed” for three or four rate hikes this year, likely beginning with a 25-basis point increase https://cnb.cx/3Joi0Ou . Goldman Sachs raised its outlook for Fed tightening this year to seven 25-bps hikes from five after the latest inflation data.

Economic Data:

·     University of Michigan sentiment index at lowest since October 2011, falling to 61.7 for Feb-P, below consensus 67.5 and the Jan-Final 67.2; one-year inflation expectations are at the highest seen since July 2008; consumers current conditions index prelim Feb 68.5 vs final Jan 72.0 and consumers expectations index prelim Feb 57.4 vs final Jan 64.1

Commodities

·     Oil prices surged late Friday, with WTI crude up $3.22 or 3.58% to settle at $93.10 per barrel at fresh seven-year highs on escalating tensions over Russia/Ukraine, and after the International Energy Agency (IEA) said oil markets were tight. Price rose for an eighth straight week on growing concerns about global supplies as demand recovers from the coronavirus pandemic. Reports late day of a rising possibility that oil producer Russia would invade Ukraine, possibly during the Olympics, raised concerns for oil prices. Reuters reported that the U.S. to send 3,000 additional troops to Poland in coming days. Earlier, the IEA raised its 2022 demand forecast and expects global demand to expand by 3.2M barrels per day this year, reaching a record 100.6M bpd. The weekly baker Hughes (BKR) oil rig count rose 19 to 516, gas rig count up 2 to 118 and the U.S. Total rig count up at 635 – it was the 6^th week in a row oil and gas rigs were added

·     Gold prices end the day/week strong, rising $4.70, or 0.3%, to close at $1,842.10 an ounce for a 1.9% weekly rise (up a 5^th straight day), but added to gains in extended futures trading to $1,860 on geopolitical concerns. White House National Security Adviser Jake Sullivan told reporters that while the U.S. hadn’t concluded that Russian President Vladimir Putin had made a final decision, an invasion next week as Winter Olympic Games continue in Beijing was a possibility – that news pushed precious metal prices higher. Natural gas prices finish a slight, 0.5% lower at $3.941/MMBtu and end the week lower -14%with peak winter demand in the rear-view mirror.

Currencies & Treasuries

·     Treasury yields opened below yesterday’s +2-year highs but touched fresh highs for the 10-year above 2.06% at one point and the 2-yr back around the 1.6% level after a more than 25 bps spike on Thursday following the hitter CPI data. Treasury prices jumped late day, pushing yields lower (10-year fell to 1.95%) in a flight to safety after the White House reported that Russian invasion of Ukraine could begin any day now, National Security Adviser Jake Sullivan said Friday, telling reporters at the White House that Moscow is in position to mount a major military action.

·     The U.S. dollar traded was higher while the euro weakened back below the 1.14 level (off recent YTD highs of 1.1495) as the higher-than-expected CPI inflation reading boosted investor expectations of interest rate hikes. St. Louis Federal Reserve President James Bullard on Thursday said he’d like to see 100 basis points of hikes by July, which rallied fed fund futures expectations. Meanwhile the euro slipped this week after ECB Pres Lagarde said that raising rates now would not bring down record euro zone inflation but only hurt the economy.

Sector News Breakdown

Consumer

·     Retailers; UAA posts Q4 EPS and sales beat and said inventory was down 8% to $811M but forecasts gross margin to shrink 200 bps in the quarter ending March 31, including an about 240 basis point hit due to higher freight expenses; Truist said TSCO and HD best relative trends and BBY, OLLI weakest in Hardlines saying proprietary data indicated some softening in YoY growth towards the end of January; URBN sinks after in-line earning as segment results mostly in-line; retail in general soft after earnings in space

·     Auto sector; AXL secured securing a contract valued at more than $10B for next-gen full-size truck axle programs with multiple customers, but reports a Q4 adj loss of (9c) vs est. 2.5c profit on sales $1.24B vs est. $1.28B; GT tumbles as Q4 results beat estimates with adj EPS 57c topping est. 32c and sales $5.05B vs est. $4.96B, but CEO said expects inflationary pressures to persist over the next several quarters; auto suppliers MGA Q4 adj EPS $1.30 beat est. $0.85 on sales $9.11B vs est. $8.88B, sees FY22 sales $38.8-40.4B vs est. $40B and expects semiconductor supply constraints to impact production with 1H results being weaker than 2H as a result; GM and Ford (F) said that trucker protests in Canada would cause further production delays at their north American plants with GM completely halting production at a site in Michigan that builds SUV and Ford looking at flying in some auto parts to its Ontario plant

·     Housing & Building Products; ZG beat Q4 sales est. ($3.9B vs. est. $2.98B), helped by an 11-fold increase in revenue from its homes segment and as all three reportable segments posted revs that exceeded prior guidance driven by higher-than-anticipated margins in IMT segment; MHK Q4 adj EPS $2.95 tops est. $2.87 on better revs $2.76B, but guides Q1 below views

·     Consumer Staples: FLO reported 4Q results with revenue below consensus estimates ($984M vs est. $991M) and EPS in-line below but introduced 2022 guidance above consensus estimates; Kellogg (K) was downgraded to Underweight at JPMorgan saying 2022 guidance is aggressive and think the EV/EBITDA valuation is a bit elevated; NWL Q4 top and bottom-line beat though said it expects sales to fall in 2022 while normalized earnings are expected to grow slightly

·     Casinos, Gaming, Lodging & Leisure sector; in online travel, EXPE rises as 4Q21 results beat with revenue/adj. EBITDA of $2.28b/$479mm vs. our $2.14b/$337mm and says impact from covid was less severe and shorter duration than previous waves, qtrly total gross bookings $17.5B; ELY posted strong 4Q and initial ’22 guide that exceeded expectations; in gaming, DKNG, PENN, CZR, WYNN strong initially ahead of Super Bowl weekend on rising gambling betting

Energy

·     E&P and Majors; BP and SHEL have decided to pause operations at their SAPREF oil refinery, which is the largest in South Africa. BP, which intends to sell its shareholding in the refinery, said the companies are unable to invest in the plant until a decision about its future ownership is made and it will remain shut for an indefinite period, and re-start is possible in the future even in the event of a sale; Mizuho upgraded MUR to Buy with a $42 PT from $33 after its recent results with visibility on Gulf of Mexico project start-ups driving production & cash flower higher in 2023/24 on lower spend, and also raised their COP PT to $115 from $88; BE Q4 EPS (5c) was slightly wider than est. (4c) on revenues and EBITDA that beat consensus, but FY22 revenue guidance $1.1-1.15B was below est. $1.21B; JPMorgan initiated CHK at OW with an $85 PT as its improved cost structure and focus on FCF generation puts it in a position to be a leader in cash return among E&Ps; Goldman upgraded IMO to Buy

·     Utilities & Solar; Dominion (D) reports Q4 operating EPS 90c vs est. 91c on revenue $3.88B vs est. $4.15B; FE Q2 adj EPS 51c and revenues $2.7B barely missed ests. 52c, $2.71B and agreed on terms to resolve shareholder derivative litigation; NWE reported Q4 adj EPS $1.04 vs est. $1.06 on revs $347.3M vs est. $310.1M and reaffirmed FY22 EPS $3.20-3.40 vs est. $3.38

Financials

·     Bank movers: after a tremendous run over the last 2-weeks, financials take a breather as the Treasury yield curve flattens on strong expectations of a rate hike; shares of big banks JPM, BAC, WFC, C, MS others slip after a strong run alongside a surge in Treasury yields to highest levels in over 2-years (2-yr jumped over 25 bps yesterday alone to 1.6% and 10-yr to 2.04%). The spread between 2’s and 10’s fell below 40 bps for the first time since August 2020 (narrower spread can have banks take a hit to profitability with a flatter yield curve). RBC Capital said today although the new DFAST scenarios still incorporate a challenging environment, expects all the publicly traded banks to pass the stress test; AB prelim AUM of $751B in January 2022 compared to $779B at the end of December

·     FinTech & Payments; AFRM extends declines after a volatile session Thursday when shares rose 9% after earnings leak on Twitter – only to have shares sink as much as 33% as full earnings release as analysts lower tgt on margin pressure concerns, with increasingly difficult rev growth as FY 2022 guidance implies lowered unit economics and potentially conservative GMV for FQ3; SQ upgraded to Buy at Bank America following big underperformance saying its (SOTP) analysis, suggests the market is currently ascribing only ~$6.5B of value to Cash App, or ~$93 per annual active user vs. PYPL at $326 and AFRM at $1,472

·     Services, Lending, Consumer Finance; SOFI was initiated Buy and $17 tgt at Bank America saying recently approved bank charter also provides incremental upside and near-term catalyst potential; FRSH reported strong 4Q results but slowing revs growth as sees 2022 revs $486.5M-$495M or 30% y/y growth after 2021 rev growth rose 49% y/y, sending shares lower

Healthcare

·     Pharma movers: RHHBY said it had seen positive results from new two-year data for its Vabusmo and Susvimo eye issue treatments.; ENDP said it expects a Tennessee state court to grant a default judgment against it in regards to the company’s sale of prescription opioids; in cannabis, ACB posts Q2 revs that beat estimates; PRQR plunges after saying mid-to-late-stage study of experimental drug sepofarsen for a rare genetic eye disease did not meet primary endpoint nor notable secondary endpoints

·     Biotech movers; REGN said that its eye-injection treatment for patients with wet age-related macular degeneration, a kind of eye disorder, met the primary endpoint in a Phase 2 trial; RARE upgraded to Overweight at JPMorgan after earnings and as Cohorts 4 and 5 are now cleared to dose escalate in UK/Canada; NVAX said its COVID-19 vaccine was 80% effective in a late-stage trial testing it in teens aged 12 to 17 years; expects to submit applications to global regulators for vaccine’s use in adolescents during Q1;

·     Vaccine news (PFE, MRNA, BNTX, JNJ), Washington Post reported booster effectiveness wanes after 4 months, but showed sturdy protection against hospitalization, CDC study shows; The U.S. FDA said it was postponing the advisory committee meeting to discuss request for authorization of PFE COVID-19 vaccine for children 6 months through 4 years of age.

·     MedTech Equipment; DVA Q4 adj EPS $2.02 vs est. $1.80 on revenue $2.944B vs est. $2.91B with weak guide (sees FY22 EPS $7.50-$8.50 vs est. $8.38); DXCM slips on Q4 EPS miss PS $0.68 vs. est. $0.85 while revs rose and reiterates FY22 rev guidance of about $2.82B-$2.94B vs. est. $2.96B; sees FY22 gross margin of about 65% and operating margin of about 16%; ILMN with 4Q21 results in line with pre-announcement and 1Q22 guidance ahead of expectations; MTD Q4 adj EPS $10.53 vs. est. $10.08 on better revs and raises FY22 adjusted EPS view; TWST 4.5M share Spot Secondary priced at $55.00; BIO rises after guided 2022 well ahead of expectations, with EBITDA margin guidance of 23.5%-23.8% and Life Sciences expected to grow +16-18% YY

Industrials & Materials

·     Industrials, Aerospace & Defense; ASTR was downgraded to Underperform at Bank America after a launch failure of its LV0008 rocket late on Thursday. The mission failure followed two aborted prior LV008 launch attempts; TEX posted solid 4Q21 results and guidance that came in below consensus and midpoint of guidance implies HSD revenue growth and mid-teen percentage incremental margin; NDSN will replace XLNX in the S&P 500 index; defense stocks LMT, NOC, GD among market gainers on Ukraine/Russia headlines in the afternoon.

·     Metals & Materials; CLF announces $1B share buyback program but shares slip as Q4 EPS of $1.69 missed the $2.08 estimate and miss on revs $5.35B vs. est. $5.73B (but above the $2.26B y/y), but said it expects higher steel prices this year based on the current 2022 futures curve and the renewal of relevant fixed-sales contracts; MT announces us$1 billion share buyback program; in chemicals, CC falls as Q4 EPS of $0.81 missed the $0.92 est., while revs rose 18% to $1.60B vs. est. $1.57B; and guides FY 2022 adjusted EPS between about $4.07-$4.70 vs. est. $4.54

Technology, Media & Telecom

·     Internet; GDDY posted 4Q upside driven by Domains (primarily after market strength) and strong EBITDA upside with revenue upside and operating expense efficiencies, guided 2022 in line with Street estimates and announced a $3B share repurchase program; TWTR announces $2B accelerated share buyback pacts; YELP jumps on EPS and revs beat, driven by record advertising sales for services categories and multi-location and self-serve channels; NET posted strong results with 54% revenue growth that accelerated q/q and solid profitability, mostly driven by enterprise demand with customers >$100K growing 71% and a record NRR of 125% and guidance was ahead

·     Semiconductors; MPWR posted strong results and guidance, which were both solidly above expectations, most notably, GM exceeded consensus estimates by 120 bps; INTC said it will contribute to developing blockchain technologies – blockchain accelerator will ship later this year; AMD was weaker than most semis, falling over 10% ahead of XLNX deal closing Monday; Philly semi index down under 5% to 3,374 (dropping back below its 200-day MA support 3,438 earlier)

·     Software movers; HUBS rises a 6^th straight day after earnings and revs beat for Q4 as recorded a 47% jump in subscription revenue; BL mixed with EPS miss on better revs but a deceleration from 21% q/q, sub revenue growth of 21%, down from 22% q/q, and guidance also disappointing as EPS pressured by spending on the Google Cloud migration; AVLR reported solid 3Q results with revenue, profitability and cash flow exceeding expectations driven by solid new customer growth and continued strong net-dollar-expansion rates; ZEN quarterly top-line outperformance was driven by continued traction with the Zendesk Suite and noted that 90% of new customer bookings and 60% of total bookings during the quarter were on Suite; FROG reported a slight beat and raise with 2% revenue upside to $59.2M (vs. last quarter’s beat of 2%) as total revenue accelerated slightly to 39% y/y (from 38% y/y); COUR reported a solid 4Q with better than expected performance in Consumer/Enterprise and strong ’22 guide