Closing Recap

Friday, January 06, 2023

Index	Up/Down	%	Last
DJ Industrials	699.71	2.12%	33,629
S&P 500	86.90	2.28%	3,895
Nasdaq	264.05	2.56%	10,569
Russell 2000	40.77	2.33%	1,793

 

Equity Market Recap

·     US equities ripped higher off the pre-mkt economic data and never looked back, finishing with gains in excess of 2% for both the S&P and NASDAQ. One may say there was something for everyone as the payrolls gain was slower but still strong, the unemployment rate improved and average hourly earnings came in a little shy of expectations with a downward revision to the prior report as well. The markets seemed to focus on the wage data with some hope the Fed may view the results favorably and be slightly less aggressive. As a result, equities and gold moved higher while the Dollar and yields retreated. Additionally, despite multiple recent Fed speakers discussing expectations of terminal rates above 5% for an extended period, the terminal rate actually slipped back to about 4.95% after today’s data and the implied probability of a +25bps move at the next Fed meeting jumped from about 56% to 73%. Fed speakers are speaking, but it would appear the market isn’t listening.

·     Communication Services $XLC has taken an early lead in 2023 after being the worst sector in 2022 (-37%). Energy $XLE and Tech $XLK are 2023’s biggest losers so far. Today’s winners were Materials (XLB) gaining more than 3%, Technology (XLK) and Real Estate (XLRE) also up about 3%. There were no real losing sectors on the day, but Healthcare was the laggard, gaining only 90-100bps. Value and Growth both gained more than 2% and breadth favored gainers by about 4:1.

 

Economic Data:

·     December nonfarm payrolls reported at +223K vs. est. +200K (prior revised to 256K from 263K; Private payrolls rose +220K vs. est. +180K (prior revised to 202K from 221K); Manufacturing payrolls rose +8K vs. est. +10K; Unemployment rate falls to 3.5% vs. est. at 3.7%; Average Hourly earnings rose +0.3% vs. est. +0.4% (and prior revised to +0.4% from +0.6%); Labor force participation 62.3% vs. prior 62.1%

·     U.S. services industry (ISM Non-Manufacturing) activity contracted for the first time in more than 2-1/2 years (May 2020) in December falling to 49.6 last month from 56.5 in November and below est. 55.0. New orders fell to 45.2 from 56.0 in November (lowest since May ’20), prices paid by services industries fell to 67.6 from 70 (Jan ’21 lows) supplier deliveries fell to 48.5 from 53.8 in November; and employment fell to 49.8 from 51.5 in November

·     Factory orders for November fell (-1.8%), more than the expected consensus (-0.8% vs Oct +0.4%; factory orders ex-transportation (-0.8%) vs Oct +0.1% (prev +0.8%); U.S. Nov Durables orders unrevised at (-2.1%); Nov inventories/shipments ratio 1.47 months’ worth vs oct 1.46 months

 

Commodities, Currencies & Treasuries

·     WTI crude futures climbed $0.10, or +0.14% to settle at $73.77/bbl, while Brent lost $0.12/bbl, or -0.15% to finish at $78.57/bbl. Despite the small uptick, WTI futures finished the week with more than an 8% decline. The recent weakness has been attributed to demand fears as more global economies look likely headed for recession. Natural gas futures finished the day roughly flat after their lowest close in a year on Thursday. Warm weather has generally been to blame for the weak 2023 start.

·     February gold settled at $1,869.70/oz, +$29.10 or +1.58% to mark a third straight weekly rise. Earlier employment and wage data gave some investors hope the Fed would be slightly less aggressive, pushing yields and the Dollar lower, but stocks and gold higher. The moves came despite recent Fed speakers renewing expectations for a 5%+ terminal rate.

·     The 10-year yield extends losses, drops below 3.6% down 13.3 bps and the 2-yr slides over 17 bps to 4.25%

 

 

Macro	Up/Down	Last
WTI Crude	0.10	73.77
Brent	-0.12	78.57
Gold	29.10	1,869.70
EUR/USD	0.0128	1.0648
JPY/USD	-1.342	132.05
10-Year Note	-0.168	3.554%

 

 

Sector News Breakdown

Autos

·     TSLA shares slide on reports to cut its prices in China for the second time in less than three months for its best-selling Model Y and Model 3 cars in Japan, South Korea, and Australia

·     Chinese electric vehicle makers NIO, LI, XPEV under pressure following reports TSLA to cut its prices in China for the second time in less than three months on Friday, stoking expectations of a wider price war for electric vehicles

 

Consumer Staples & Restaurants:

·     Mizuho said top picks are KHC (large cap value), MDLZ (large cap growth), SMPL (SMID growth) and are most cautious on HAIN and BYND; Danone (DANOY) downgraded to Underweight from Equal Weight at Morgan Stanley

·     KRUS posts 1Q23 EPS loss of $0.21 fell below consensus loss of $0.18 reflecting softer comps and restaurant margins partially offset by lower G&A

·     DPZ named top pick at Bank America in Restaurants while expect 1H23 to be like 2022 for the sector (high inflation and pricing boosting comps/margins), with trends reversing in 2H.

·     TAP upgraded Market Perform to Outperform at Cowen saying after a decade of revenue declines, they view TAP now on much firmer footing to deliver solid revenue growth

·     STZ downgrade Outperform to Market Perform at Cowen and slash tgt to $200 from $275 on growing concerns over downtrading, in both the above-premium beer segment, as well as wine

·     HSY downgraded from Outperform to In Line at Evercore saying valuation premium reflects sustainable growth with a lower risk profile but see potentially less EPS upside potential in 2023 driven by increased elasticity and less gross margin potential.

 

Retailers & Discretionary:

·     COST Dec comps better at +6.4% (ex-gas) and traffic improved from +3.4% in Nov to +4.6% in Dec. Foods strong +LDD/+MSD, sporting goods/apparel/health/beauty better while electronics/housewares worse

·     SKX upgrade from Hold to Buy at Argus with $50 tgt saying given prospects for sustained revenue growth and margin improvement, believe that the shares are undervalued and expect it to benefit from rapid growth in emerging markets, especially China and India.

·     LULU, PVH upgrade to Overweight, SFIX upgrade to Equal Weight at Wells Fargo while downgraded VFC, BBWI, REAL noting the space is coming off its worst year since the GFC, declining ~35% (vs. SPX -20%) and they see a very challenging catalyst path heading into 2023 – with holiday results likely "OK" at best

·     Bank America said total card spending per household (HH) was up 1.2% during holiday, per aggregated BAC credit and debit card data with leading categories in the latest week were off-price (+21.7% y/y), beauty (23.2% y/y) and athletic apparel (24.7% y/y). Pickup in spending in the final week of Dec likely reflects choppy weather prior and consumers waiting to make purchases.

 

Leisure & Casinos

·     MGM upgraded to Buy, and PENN downgraded to Hold in Gaming & Leisure 2023 Outlook at Stifel saying they want Macau/LV Strip/Cruise exposure, while pure play regionals concern them.

·     Cruise lines: Bank America said CCL, NCLH, RCL saw a capacity-weighted sequential pricing change of +0.6%/+0.3%/-0.4% from December to January. All three cruise lines experienced near-term pricing softness in 1Q23, which was down on average -3.5% sequentially.

 

Energy, Solar, and Utilities:

·     CVX downgraded to Neutral at Bank America, OXY upgraded to Buy from Neutral at Bank America with $80 tgt, CTRA upgraded to Neutral at Bank America on pullback

·     PSX in agreement to buy publicly held common units of DCP

·     In solar, RUN, NOVA, FSLR upgraded to Overweight, SPWR upgrade to Equal Weight; BE downgrade to Equal Weight, and BLDP downgrade to Underweight at Wells Fargo saying they are positive on the clean energy sector for 2023. Says while continued Fed tightening in early 2023 will likely act as a near-term headwind, the fundamental and regulatory backdrop is much improved in 2023 and beyond.

 

Financials

·     Banking sector: Deutsche Bank said they are cautious on the bank group reflecting ongoing macro risks and likely weakening bank fundamentals–including peaking net interest margins/NIMs, a likely slowdown in loan growth, rising credit costs, continued cost pressures, limited excess capital to support buybacks and likely sluggish capital markets revenues.

·     BAC and JPM downgraded from Buy to Hold at Deutsche Bank reflecting a cautious view on banks overall and as BAC/JPM are more exposed to areas that will likely be weak (credit card and capital markets) than regionals. In Large regionals they cut TFC to Hold and upgraded PNC which reflects view that it will remain among the most defensive in the bank group given strong credit underwriting, strong capital allocation decisions and consistently solid cost control

·     DFS, SYF, OMF, and OPRT downgraded to Equal Weight from Overweight in consumer finance saying at Barclay’s saying card issuers & installment lenders may struggle to work with recession looming. Firm said think these stocks could get more inexpensive before they work, so we view the risk/reward as balanced

·     ESNT, MTG, NMIH, and RDN downgraded to equal weight from overweight in mortgage insurers at Barclay’s saying they believe these stocks will struggle to work as credit starts to deteriorate and look for more clarity once the risks of recession are more fully discounted

·     SI receives more analyst downgrades as Bank America cuts to underperform saying sees 35% more downside and JPM cuts to Neutral with $14 tgt after crypto bank Q4 metrics Thursday

 

Biotech & Pharma:

·     ALKS received an interim award in arbitration with JNJ’s Janssen – will engage with Janssen and the Tribunal in additional proceedings prior to the Tribunal’s issuance of a final award – 8-K

·     ALVO and TEVA said the FDA has accepted for review a Biologics License Application for AVT04, Alvotech’s proposed biosimilar to Stelara, which is prescribed to treat a variety of inflammatory conditions

·     ATAI tumbles after saying it may explore steps including strategic partnership options after its Phase 2a trial of PCN-101 (R-ketamine) for treatment-resistant depression missed its primary endpoint

·     AUPH said it expects its Q4 revenue to be $28.4M, up from year-ago sales of $23.4M; net product revenue accounts for most of its Q4 sales at $28.3M

·     BIIB jumped after the FDA approved Leqembi for treatment of Alzheimer’s disease. LLY also gained on the news.

·     BLUE announced that it has entered into a definitive agreement to sell its second Rare Pediatric Disease Priority Review Voucher (PRV) for $95 million.

·     CTMX announced a research collaboration agreement with MRNA and gave an update on a phase 2 study for its CX-2029 treatment

·     FATE said it had terminated its collaboration and option agreement with JNJ’s Janssen, with all collaboration activities set to be wound down in Q1 2023, prompting several analyst downgraded and pushing shares lower – said will reduce operating expenses

·     GERN 55.88M share Secondary priced at $2.45

·     GRPH shares fall as announced a voluntary pause of its phase 1/2 CEDAR study evaluating lead program nula-cel (a gene therapy candidate being developed for severe sickle cell disease) given a serious adverse event in the first patient dosed

·     RCM reaffirmed its 2022 guidance and issued 2023 revenue guidance that was in line with consensus and adjusted EBITDA guidance that was a 3.5% above current consensus

·     USNA sees FY22 net sales approx $995Mm vs est. $203.8Mm and EPS approx $3.65 vs est. $3.28; guides FY23 net sales $850-950Mm vs est. $959.9Mm and EPS $2.35-3.30 vs est. $3.35

 

MedTech and Healthcare Services:

·     BAX announces strategic actions to enhance operational effectiveness, accelerate innovation for patients and drive value for shareholders

·     Deutsche Bank said one clear theme in recent MedTech sales data (BSX) is they are seeing sluggishness across cardiovascular device markets, with major structural cardiology categories – TAVR, LAAO, and TEER all showing underwhelming 4Q volume trends through November

·     NVRO downgrade from Neutral to Underweight at Piper and cut tgt to $38 from $42

·     DOCS, HSKA downgraded to Underweight from Equal weight and LFST upgraded to Overweight at Morgan Stanley in Healthcare Services & Distribution sector saying they would be Selective – but remain positively biased into 2023 as an insulated sector w/ strong underlying fundamental

·     AGTI downgraded to EW, EMBC downgraded to UW in MedTech at Morgan Stanley and downgrade the industry to In-Line saying device sentiment remains muted heading into 2023

 

Transports, Industrials & Materials

·     CAT said it has invested in Lithos Energy Inc., a San Francisco-based designer and maker of lithium-ion battery packs

·     GBX slips on EPS miss as Q1 adj EPS $0.05 vs. est. $0.50 while Q1 revs $766.5M topped est. $747.08M; new railcar backlog of 28,300 units with an estimated value of $3.4B as of Nov 30

·     LUV promised a thorough review of an operational collapse that stranded thousands of passengers at the end of the year after a union leader said the carrier had not identified how to avoid a repeat; said it expects to report a net loss in Q4

·     LAC said a U.S. federal court expects to issue a decision in the next couple months on the appeal of the issuance of the Record of Decision for the Thacker Pass lithium project in Nevada.

·     Truckers outlook at KeyBanc – shift to a balanced view (from cautious) ahead of 4Q22 truckload/ multimodal earnings. Said while fundamentals materialized below expectations, and they lower estimates accordingly, our sense is weaker trends are anticipated and expectations generally low. Firm sees potential for 4Q22 truckload misses to be bought (KNX, WERN) but are cautious on names with lingering elevated expectations (JBHT)

 

Technology, Media & Telecom

·     Samsung said Q4 op. profit would plunge ~69% YoY to KRW4.3T, falling wel short of the street’s KRW6.65T forecast, while revs of KRW70T also missed cons of KRW72T

·     TikTok CEO Chew is scheduled to meet with EU officials and regulators in Brussels next week, as the popular app faces heightened scrutiny in Washington over its Chinese ownership.

·     CACI wins $2.25 billion defense counterintelligence and security agency background investigation fieldwork contract

·     WWE rises as founder Vince McMahon is trying to return as Executive Chairman to lead the firm through its upcoming media rights negotiations and a parallel review of strategic alternatives