Closing Recap

Wednesday, February 24, 2021

Equity Market Recap

·     Stocks jump as yesterday’s morning mini flash crash is all but a memory, as major U.S. averages were paced by record high totals in the Dow Jones Industrial Average and Dow Transports as Fed Chairman Powell again allays market fears. Smallcap stocks also spike as the Russell 2000 advances 2% while the S&P 500 and Nasdaq Composite also climb. The outlook appeared bleak Tuesday morning, with major averages tumbling on inflation fears and rising Treasury yields, but Jerome Powell basically said the Fed has inflation under control and that higher rates are more a function of the economy getting better. Those words reverberated throughout stock markets with the biggest gains coming in energy, financials, industrials, and materials as the reflation trade is strong, while large cap tech climbed, but less than others (defensive sectors also lagged). Meanwhile, Fed Vice Chairman Richard Clarida said in a speech to the U.S. Chamber of Commerce on Wednesday that the downside risk to the outlook for the economy in 2021 has diminished amid “the development of several effective vaccines and the passage by the Congress in late December of a package of fiscal relief measures.” The yield on the benchmark 10-year Treasury note has risen to its highest level in a year this week, as high as 1.43% today, but lately was at 1.37%, up from 1.363% Tuesday. Positive JNJ vaccine data this morning helped boost markets initially (and has helped further boost “reopen” related trades such as airlines, theme parks, casinos, lodging, etc.). Markets also remain hopeful as the House of Representatives will vote Friday on legislation to provide $1.9 trillion in new coronavirus relief.

·     Sector and top story stocks today: Energy ETF (XLE) tops $50 for the first time in a year as the sector outperforms again, now up over 30% YTD and MRO, OXY leading the S&P; other S&P leaders include cruises NCLH, RCL, CCL, airlines UAL, AAL, as Dow Transports hit new record levels as reopen names move higher after the FDA finds JNJ vaccine effective; Dow component BA top gainer as industrials extend gains; SQ shares slip despite a relatively in-line earnings as Wells downgraded the name on limited upside after rallying almost 700% off of March lows into this morning’s report amid general underperformance in stay-home names ZM, PTON, DOCU; LOW results top estimates, but shares among the worst S&P performers on the day along with HD (which fell yesterday despite also beating after failing to provide guidance); credit cards another sector rising MA, AXP, V on re-opening hopes; late day surge in GME, EXPR, KOSS, AMC on no news as the old Reddit/WSB short squeeze names saw renewed interest.

·     JPMorgan in a note today suggested there is no broad equity market bubble but sees VIX bubble according to head of macro quant and derivatives strategy. Firm said “while there is a lot of talk about bubbles – it is hard to see one in the broad equity market, where a dominant group (FANGs) practically hasn’t moved for 6 months despite massive amount of stimulus and an expected economic recovery, Financials that have barely recovered 2020 losses, and Energy that is still down 25% from last year despite a commodity bull market. Reiterating the reasons why we think the VIX is bound to decline: 1) Positive macro fundamentals of monetary and fiscal stimulus, as well as recovery from pandemic; 2) Strong rotation from growth to value/cyclicals that is keeping correlation between stocks low. In fact, in the last 2 weeks, despite large moves in sectors and factors, the S&P 500 has remained largely unchanged; 3) Low volatility drives inflows, triggering a positive feedback loop of a rising market and declining volatility – despite some warning of a ‘var shock’ what we are seeing now is ‘var inflows’ with volatility targeters/risk parity funds adding (rather than reducing) ~$1.5bn in equity exposure daily; 4) Gamma hedging reducing S&P 500 volatility, and long VIX positioning (e.g. via ETPs, see here) limiting VIX upside.”

Economic Data, Fed

·     New Home Sales for January rose +4.3% MoM to 923K vs. 855K expected and 855K prior; Jan new home supply 4.0 months’ worth at current pace vs dec 4.1 months; homes for sale at end of Jan 0.307 mln units vs Dec 0.299 mln units and median sale price $346,400, +5.3% MoM

·     Speaking to the U.S. House Financial Services Committee on Wednesday, Fed Chairman Powell said it may take more than three years to reach the Federal Reserve’s inflation goals. The Fed has said it will not raise interest rates until inflation has exceeded 2%.

Commodities, Currencies & Treasury’s

·     Oil prices climb to fresh 13-month highs, with WTI crude up $1.55 or 2.51% to settle at $63.22 per barrel after U.S. government data showed a drop in crude output after a deep freeze disrupted production last week. U.S. crude oil production dropped by more than 1 million barrels per day last week during the rare winter storm in Texas, equaling the largest weekly fall ever, the Energy Information Administration (EIA) said. Refinery crude inputs dropped to the lowest since September 2008 as the freeze knocked out power to millions. Oil prices have extended gains to levels not seen since prior to the coronavirus pandemic as vaccine distribution increases, OPEC+ production, OPEC+ intervention and on forecasts for renewed demand. Gold prices slip -$8.00 or 0.4% to settle at $1,797.90 an ounce as the dollar was mixed.

·     Treasury yields were modestly higher from yesterday’s closing levels, but off the morning highs as the spread between the 2 and 10-yr treasury moved to its steepest level in 4-years at 1.25%. Prices gained as Federal Reserve Chairman Jerome Powell again continued signaling the central bank will leave interest rates unchanged for a long time, while indicating the fed has inflation under control and rising rates was a factor of an improving economy. The 10-year yield had reached as high as 1.435% in the morning, its first time above 1.4% since a year ago, before settling as Powell gave a second day of testimony in Washington. The U.S Treasury sold $61 billion worth of five-year notes at a high yield of 0.621%, with a bid-to-cover ratio of 2.24.

Sector News Breakdown

Consumer

·     Retailers; the NRF says online sales, which are included in the total, are expected to grow between 18% and 23% to between $1.14 trillion and $1.19 trillion in 2021 while overall retail sales expected to rise to more than $4.33 trillion in 2021; GME announced that Jim Bell, Executive Vice President and CFO, will be resigning from his roles on March 26, 2021; TJX posted a Q4 top and bottom line miss (27c/$10.94B vs. 62c/$11.48B) and comp sales falling (-3%) in Q4 as a strong performance for the Home Goods chain (+12%) was offset by weakness with the Marmaxx (-7%) – weak margins and no guidance; AEO upgrade from Market Perform to Outperform at Cowen as see stock upside on Aerie’s business doubling to $2bn in the next 3 years (+26% revenue CAGR), AEO’s solid capitalization, relevant brand concepts to younger customers; CSPR smaller Q4 EPS loss than expected on better sales $150.3M (est. $138M) but weaker guidance Q1 revs $118M-$125M vs. $130.1M; OSTK shares fell despite posting 84% sales growth YoY in the latest quarter and nearly doubled its new-customer growth as a trend toward more online shopping during the pandemic

·     Auto sector; after trading just above its 100-day moving averages of $616 yesterday (100-day was $619), TSLA shares have surged off that level and up again today (now more than 100 points of yesterday lows); renowned investor Cathie Wood last night disclosed purchases shares in TSLA in three of her ETF funds; FSR shares rise as Foxconn Technology Group agreed to assemble cars for the electric-vehicle startup Fisker Inc./signed a memorandum of understanding to jointly produce more than 250,000 vehicles a year; LYFT introduces call a LYFT ride, a service that lets one request a ride by phone, no app required; in auto parts, TEN rises as Q4 EPS of $1.68 beat the $1.02 estimate on better revs of $4.65B

·     Housing & Building Products; LOW beats Q4 sales and profit estimates, riding a sustained boom in demand for home improvement as a result of the COVID-19 pandemic, along with a 28.1% rise in Q4 same-store sales, topping views around 22%; homebuilder TOL reported higher Q1 profit and sales, helped by low mortgage rates, tight housing inventory, favorable demographic trends and the pandemic helped boost home ownership demand/contracted homes rose nearly 60% from a year earlier to 2,874 while the contract value increased 68% to $2.51 billion; ENR downgraded to Neutral from Buy, price target $46 from $53 at Goldman Sachs

·     Leisure and Gaming; lodging (MAR, HLT, H), leisure (LYV, MSGS), online travel (BKNG, EXPE), gaming (WYNN, LVS) extend gains on reopen hopes; BALY tgt raised to $80 from $65 at Truist as highlight as sports betting value play with near-term catalysts/believe shares are still undervalued; GNOG signs New York market access deal with Tioga Downs; in leisure, Truist raised estimates and reiterated Buys on RV names CWH, THO, WGO to reflect the resilient retail environment into early ’21 as well as our view that industry-wide production levels should remain at elevated rates throughout CY22; SIX Q4 EPS loss ($1.00) vs. est. loss (89c) and revs of $109M vs. est. $86.59M; said had 2.2 million guests, a decline of 4.0 million guests YoY which represented 35% of prior year total attendance

Energy

·     Energy earnings movers; COG reported Q4 adj EPS 26c vs. est. 21c on revenue $456.78M vs. est. $417.46M, daily production 2,375M cubic feet equivalent, reaffirmed its recently announced guidance for 2021, and is targeting FY21 capital program of $530M-$540M; PXD posted Q4 adj EPS $1.07, beating est. 68c, on rev $1.86B with FCF $294M for the quarter and $689M for FY20, averaged oil production of 204 MBOPD and oil production of 364 thousand barrels of oil in the quarter, both of which were in the upper half of guidance; RRC Q4 adjusted EPS 2c missed est. 6c on adjusted revenue $531M vs. est. $497.57M. and FY21 production is expected to average approximately 2.15 Bcfe per day, with approximately 30% attributed to liquids production and they see 2021 all-in capital budget $425M; NBR Q4 rev $443M, adj EBITDA $108.1M topped consensus $419.2M, $96.8M; CDEV Q4 EPS loss (32c) missed est. (7c) loss and was wider than Q3’s (19c) loss on revs $148.1M vs est. $142.6M; MTDR reported Q4 adj EPS 27c vs est. 12c on revs $224.24M vs est. $241.63M and expects Q1 output to drop 13-15% due to TX deep freeze

·     MLPs and Pipelines; ENBL Q4 EPS 19c vs est. 13c on revs $704M vs est. $721.3M; LNG posted Q4 EPS (77c) loss vs $3.34 YoY on revs $2.79B (-7.3% YoY, est $2.584B), adj EBITDA $1.05B (+6.4% YoY, est. $999.6M) and sees FY21 distributable cash flow $1.4-1.7B and adjusted EBITDA $4.1-4.4B; WES Q4 EPS 62c was unch YoY and narrowly topped 60c estimate as rev $647.5M missed est. $655.1M and declined from $723.2M YoY

·     Refiners DK Q4 adj EPS loss ($2.77) was wider than est. loss ($1.87) and revenue $1.88B beat est. $1.38B as refining contribution margin decreased to $(82.0M) from $127.8M YoY; HFC reported a Q4 EPS loss (74c) vs est. (71c) loss on revs $2.9B vs est. $2.46B; Citi made VLO their Top Pick and upped its price target to around $95 as the company offers the best earnings exposure to their improving 2021 refining outlook, which was accelerated after the Winter Storm Uri, and they also say the market is grossly underpricing the company’s clean energy plans; Tudor Pickering downgraded CVR to Hold from Buy while keeping their $23 target unchanged

·     Inventory data; The American Petroleum Institute (API) reported weekly crude inventories rose +1.026MM barrels, gasoline with a build of +0.066MM barrels, distillate a -4.489MM barrel draw and Cushing weekly inventories with a build of +2.783MM barrels. The EIA reported a surprise Crude inventory build of +1.3M barrels vs. -5.2M consensus (-7.3M last week) while gasoline stockpiles were unchanged vs. barrels vs. -3.1M consensus draw

·     Utilities & Solar; EXC reported Q4 EPS 76c (est. 70c) and announced it will separate its utility and competitive energy businesses into two industry-leading companies to unlock strategic flexibility for each company to focus on its core business strategies; ETR posted Q4 adj EPS 71c vs 66c on rev $2.37B vs est. $2.95B and still sees FY21 EPS $5.80-6.10 (est. $5.89); JE was downgraded to Underperform by RBC Capital; ENPH shares slid after offering privately $1 bln green convertible notes equally split between 5-yr and 7-yr maturities

Financials

·     Bank movers; big banks JPM, WFC, GS, C rose w/further bounce in Treasury yields; Credit Suisse upgraded BMO to Outperform after their Q1 earnings were better than expected as headwinds dissipated, and they expect to see continued earnings momentum for the bank through FY22; Piper downgraded WBS to Neutral after shares have tripled from last March’s lows (vs +104% in Nasdaq Bank Index, peers +93%) to levels above their $54 price target; WSFS will join the S&P SmallCap 600 starting next Monday 3/1; PNW reported a Q4 EPS loss (17c) on revs $741M

·     Insurance; UBS upgraded WRB to Buy as they believe we are in the beginning of a period of upward estimate revisions and see meaningful upside to premium growth, underwriting margins, and consensus earnings over the next 2 years; GSHD Q4 EPS 19c and revs $34.7M both topped estimates (18c, $31.32M), though FY21 sales guidance $144-155M was lower than estimates $156.75M; MTG posted Q4 adj EPS $0.43 vs est $0.40 on total revs $302.3M vs est $301.1M, and new insurance written $33.2M, net premiums written $233.4M (est $254.4M) for the quarter; EQH reported Q4 EPS $1.65 vs consensus $1.21 on revs $568M (from $1.68B YoY); VRSK slides after top and bottom line q4 miss; 4Q adj EPS $1.27 vs. est. $1.30 on revs $713Mm vs. est. $716.8Mm

·     Asset managers; EV Q1 adj EPS 94c and revs $488.9M beats est. 88c on $463M; Credit Suisse reinitiated coverage on ARES at Neutral with a $54 12-month price target with one of the most attractive long-term growth trajectories in the private markets vertical due to its sizable fundraising pipeline and its $37B shadow AuM balance; Ladenburg increased their pt on ECC to $14 from $10 and reiterated it as a Buy

·     Services; INTU Q2 results were mostly in-line with its pre-announcement and included outperformance for Credit Karma as adj EPS 68c on revs $1.6B, sees adj EPS for Q3 $6.75-6.85 (est. $6.47) and FY21 $8.20-8.40 (est. $8.36), and guides Q3 revs +53-55% (+45%) and FY21 revs $8.81-8.995B (est $8.9B), and Stifel raised its target to $425 and Mizuho’s target went to $450 from $430 after the report; Janney upgraded ORCC to Buy with a $15 price target from Hold with a $13 target

·     Consumer Finance; SQ shares slipped, said it bought 3,318 Bitcoins at an average price of $51,236 and reported Q4 adj EPS 32c vs. est. 24c on revenue $3.16B vs. est. $3.09B/Wells downgraded to EW with a new $255 target from $200 as they see modest upside due to the company’s significant long-term growth potential being priced in at these levels; Stephens reiterated NCR at OW and raised their pt to $51 from $49, saying they remain buyers as they are less worried about the CATM acquisition, who separately reported Q4 adj EPS 64c vs est. 55c on revs $274.8M vs est. $276.1M; Credit Suisse lifted its price target on COOP to $40 from $34 and kept their Outperform rating

·     REITs; VER Q4 FFO 31c on revs $287.9M were both in-line with expectations; EPRT posted Q4 FFO 25c vs est. 16c on revs $41.11 vs est. $44.6M and reiterated FY21 adj FFO guidance $1.22-1.26; APLE reported a Q4 adj FFO loss of (1c) (est 2c, 32c YoY) on revs $133.97M (est. $145.27M, $290M YoY); GLPI raised its quarterly dividend to 65c from 60c; URI was rated as a new Buy at Redburn and its price target was upped to $355 from $290 at KeyBanc who kept their OW rating; DEA Q4 adj FFO 30c on revs $65.2M

Healthcare

·     Pharma movers; JNJ one-shot COVID-19 vaccine effective and safe according to FDA staff/;a panel of independent experts to the FDA will meet Friday to decide whether to approve the shot; KURA rises following FDA breakthrough therapy status for tipifarnib in head and neck carcinoma; ELAN reported 4Q revenue of $1.14B (vs. $1.05B cons) and adjusted EBITDA of $176M (vs. $168M cons), with the company noting 4Q results benefitted from better than guided performance in US Pet Health; HOTH filed a provisional patent application with the United States Patent and Trademark Office for the use of one of its current portfolio therapeutics to treat and prevent Alzheimer’s disease.

·     Biotech movers; HALO reported 2020 royalty revenues of $88.6mm, above guidance and consensus estimates, punctuating the strong adoption of Darzalex Faspro; GMAB reported FY20 earnings today that included a top line beat and the announcement of FY2021 guidance with revenues below Street estimates; PPD 4Q came in well above expectations, as revenue beat, EBITDA beat by 1% and EPS beat by 3%; RGEN Q4 results were significantly better than expected

·     Healthcare services and providers; PRAH +24%; to be acquired by ICLR in a cash-and-stock transaction valued at about $12 billion; consideration consisting of $80 in cash and 0.4125 shares of ICON stock and represents about a 30% premium to PRA’s closing price as of February 23rd. https://on.mktw.net/2ZRCk69; OMI 4Q adj EPS $1.14 vs. est. $0.85 on revs $2.36B vs. est. $2.16B; sees FY21 adj EPS $3.00-3.50 vs. est. $2.46; HZNP shares rose after strong Q4 beat, FY forecast as revs rose 105% YoY

·     MedTech and Equipment; DGX introduces new COVID-19 semi-quantitative serology test service; SYK tgt raised to $265 from $245 at JPMorgan as continue to view as one of the most attractive names to own into the recovery as management’s history of solid execution is coupled with a return to premium growth and the integration of Wright Medical; ATRC posted results in-line with the prior preannouncement, with sales of $57.7M (-5.9% reported, -6.0% organic) largely in-line with the Street’s prior expectation for $58.2M; FMS downgraded to hold at Truist given the difficult operating environment, limited near-term visibility, and ongoing cost pressures; CSLT reported better-than-expected 4Q20 results, but weaker Q1 revenue outlook while ARR (annualized recurring revenue) declined again; QGEN and INO extend their partnership to develop liquid biopsy-based companion diagnostic products to complement Inovio’s therapies; INSP Q4 revenue of $46.0M grew 71% YOY and topped consensus by $4.3M; PODD posted a $14mn top-line beat as new patients improved to -10% of pre-COVID levels (-25% last Q).

Industrials & Materials

·     Industrial, Materials & Machinery; industrials leading gains again as economic recovery trade continues to play out (CAT, DE); OSK shares extend gains after the US Postal Service (USPS) announced the company had won the much-anticipated contract with the USPS for their Next-Gen Delivery Vehicle (beating out WKHS); GE fresh 52-week highs, topping the $13 level – note its 2020 (Feb 20) high stands at $13.26

·     Transports; Dow Transports back to new record highs, rising more than 1.6%, topping 13,600 level with top gainers again airlines with UAL, AAL, LUV, ALK, JBLU all outperforming as investors still piling into “reopen” related trades; nearly all 20 components in the index were high along with rails, truckers ad package delivery; travel is extremely bullish based on expectations for a rapid recovery beginning this spring and companies emerging from postCOVID-19 with higher margins due to ’20 cost cuts

·     Aerospace & Defense; BA a monster today, rising over 7% for the top gainer in the Dow as industrials pace market gains; The Federal Aviation Administration (FAA) ordered airlines in the United States to ground planes equipped with certain Pratt & Whitney PW4000 engines (RTX owns Pratt) following an engine failure that showered debris over a Denver suburb; SPAC RTP rises Joby Aviation to become public through Reinvent Technology Partners combination; AVAV acquires Progeny Systems’ ISG for $30M in cash

Technology, Media & Telecom

·     Semiconductors; memory chip maker SK Hynix said it had agreed a five-year procurement contract worth $4.34 billion with ASML to secure extreme ultraviolet (EUV) scanners used in manufacturing chips; MU tgt raised to $125 from $100 at Susquehanna citing other catalysts other than DRAM/NAND ASP trends; WDC tgt raised to street high $100 from $85 at Susquehanna as well in space; President Biden expected to sign executive order aimed at addressing the global semiconductor chip shortage and will launch an immediate 100-day review of supply chains for semiconductor chips, large-capacity batteries for electric vehicles, and others

·     Software movers; BIGC extends merchant reach with new WMT partnership; for a limited time, Walmart rolls out a new-seller savings offer for new sellers to join Walmart marketplace and enjoy zero commission fees during their first month with Walmart.com; UPWK reported strong 4Q results and guided 1Q21 and FY21 well above expectations as 4Q GSV came in at $728MM (+33% y/y), well above our $660MM estimate while 1Q21 and FY21 outlooks were robust; ADSK to acquire Innovyze, inc. for $1 billion; provider of smart water infrastructure modeling and simulation technology; MCFE upgraded to buy at Deutsche bank after co delivered a strong quarter marked by solid execution with +23% consumer growth; PUBM delivered 18% and 65% Q4 revenue and EBITDA beats, respectively

·     Media & Telecom movers; DIS making new all-time high as reopen trades leading markets higher on vaccine rollout picking up steam; ETM fell to its lowest point in nearly a month, after a narrow miss on profits in its fourth-quarter earnings while revenues slipped 23% to $319.5M, though they rose 19% from the third quarter; SBGI Q1 revenue $1.46B-$1.49B vs. est. $1.52B; SNAP tgt raised by several analysts following the upbeat comments on revenue growth outlook yesterday at its investor day

·     Hardware & Component news; HPQ said it agreed to buy the gaming peripherals portfolio of Kingston Technology Co.’s HyperX division for $425 million; DDD said to delay Q4 results until March 1 after internal control deficiencies discovered;