Closing Recap

Thursday, January 12, 2023

Index	Up/Down	%	Last
DJ Industrials	216.44	0.64%	34,189
S&P 500	13.49	0.34%	3,983
Nasdaq	69.43	0.64%	11,001
Russell 2000	32.01	1.74%	1,876

 

Equity Market Recap

·     Bulls survived the CPI data as stocks push higher for a 3^rd straight session, boosted by a plunging dollar and Treasury yields with no investor fear as the CBOE Volatility index (VIX), drops over 9% to lowest levels since early December (19.00) as annual inflation cooled in December for the sixth straight month, returning to its slowest pace in more than a year. The S&P 500 index (SPX) battled at its 200-day moving average all afternoon (roughly 3,985 level) on bets the slowing inflation will impact the Federal Reserve’s aggressive monetary policy tightening efforts. Data showed the annual rate of headline inflation retreated in December to 6.5% from 7.1% in November, lowest reading in more than a year and a significant improvement from the 40-year peak of 9.1% last June. On a m/m basis, headline prices declined by -0.1%, the first such decline in more than two years. The question remains, will prices be able to continue falling all the way back to the Fed’s 2% target, or will it plateau higher and force the Fed back into aggressive action? The bond market is saying the latter while Fed officials have warned more actions is needed, though many have adjusted to a more normal 25-bps hike (as per Harker today).

·     Earnings season unofficially kicks off tomorrow morning with the big banks, and sector numbers continue into next week before the true earnings onslaught begins! There are low expectations for the group given a weaker trading environment, weaker housing industry (mortgage originations), and non-existent IPO market last year. CNBC previewed earnings for banks, noting GS is projected for earnings decline of -49%, WFC -47%, MS -41%, C -22%, JPM -8% and BAC -6%. In stock news today, defensive sectors fell (staples, healthcare, utilities), while energy led. Lot of “high short interest” names that were pummeled in 2022 have seen renewed interest in the start of 2023, with mass “squeezes” from the likes of BBBY, CVNA, SI, COIN, MARA, UPST, RIOT, MSTR.

·     Federal Reserve Bank of Philadelphia leader Patrick Harker said that while the central bank needs to raise rates more to cool off inflation, it can probably do so at much slower pace compared to the action of last year. “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Harker said in the text of a speech. “In my view, hikes of 25 basis points will be appropriate going forward.” St. Louis Fed President James Bullard said the most likely scenario is inflation number will remain above 2% and so policy rate will need to be higher for longer

 

Economic Data:

·     Mostly in-line inflation data for December as the Consumer Price Index (CPI) headline rises +6,5% Y/Y vs. est. +6.5% (vs. prior +7.1%) and falls (-0.1%) M/M vs. est. of unchanged. Core consumer prices (CPI), ex: food & energy rises +5.7% Y/Y vs. est. +5.7% (vs. prior +6.0%) and on a M/M basis, rises +0.3% vs. est. +0.3%. Posts sixth consecutive month of declining y/y CPI growth

·     Shelter was biggest contributor to Core CPI 0.3% gain: the increase in the shelter index in December at 0.8% is biggest since 1990s; energy prices-declined by 4.5%, used cars fell by 2.5% & airline fares fell 3.1% in December.

·     Food prices were up 10.4% in December from a year ago and tracked 0.3% higher from Nov. Some of the food categories that are still showing elevated levels of inflation include breakfast cereal (+13.0% Y/Y), flour (+23.4%), poultry (+12.2%), lettuce (+24.9%), bakery products (+16.3%), and coffee (+14.3%). Meat prices moderated quite a bit and were only up 2.0% year-over-year.

·     U.S. wage growth has failed to keep pace with rising consumer prices for a record 21 consecutive months. This is a decline in prosperity for the American worker and the primary reason why the Fed will hike rates for the 8th time at the Feb 1 meeting as per Charlie Bilello

·     Weekly Jobless Claims fell to 205K in latest week from 206K prior and vs. consensus 215K; the 4-week moving average fell to 212,500 in latest week from 214,250 prior; continued claims fell to 1.634M vs. est. 1.705M and prior 1.697M; the US insured unemployment rate falls to 1.1%

·     The U.S. government’s budget deficit for December quadrupled from a year earlier to $85 billion as receipts shrank slightly and outlays grew to a new December record, led by higher interest costs on the federal debt, the Treasury Department said.

 

Commodities

·     Gold prices rise $19.90 or 1.1% to settle at $1,898.80 an ounce, highest since April (earlier hit highs of $1,906.50) after data showed continued signs of cooling inflation in the U.S., raising bets for slower rate-hikes from the Federal Reserve ahead. U.S. consumer prices grew 6.5% on an annual basis in December, in line with expectations, from a 7.1% rise last month. The dollar hit lowest levels since June following the tamer CPI report.

·     Oil prices finish higher, with WTI crude gaining $0.98 or 1.27% to settle at $78.39 per barrel, while Brent crude futures settle at $84.03/bbl, up $1.36, 1.65%. Natural gas ends 0.7% higher at $3.695 per MMBtu, closing below $4 for the 6^th straight session (well below last summer highs which was above $10 per mln btu)

 

Currencies & Treasuries

·     Downward momentum in Treasury yields: a slow steady decline with the 10-yr down at 3.44%, down -9.5 bps and the 2-yr also down -8.5 bps to 4.143% as bond market showing no concern of Fed taking interest rates much higher despite Fed speakers continuing to say the opposite.

·     Another strong Treasury auction as the US Treasury sold $18B in 30-year notes at a yield of 3.585% vs. 3.609% when issued and bid to cover at 2.45 as primary dealers take 9.04%, directs 16.33%, and indirects 74.63%. Follows good demand in 3 and 10-yr auctions earlier this week.

·     Dollar weakness continues in 2023. Given the dovish take the market had on the CPI data (despite Fed speakers again speaking somewhat hawkishly), the US dollar tumbled further vs. peers, as the Euro rose over +1% topping $1.0865 while the yen also surged vs. the greenback (buck hit lows below 129, down 2.6% vs. the yen)

·     Bitcoin (BTC) prices surge for a 9^th straight day, rising over 8% topping $19,000, its highest levels since November (when FTX announced collapse) in a mass “risk-on” trade for riskier assets as investors put money to work in 2023 in beaten up sectors in 2022.

 

 

Macro	Up/Down	Last
WTI Crude	0.98	78.39
Brent	1.36	84.03
Gold	19.90	1,898.80
EUR/USD	0.009	1.0845
JPY/USD	-3.18	129.29
10-Year Note	-0.118	3.438%

 

 

Sector News Breakdown

Consumer

Autos:

·     As per CPI data, the price for used cars and trucks continue to decline, offering little relief to used-car retailers, falling -2.5% last month from November (y/y index is 8.8% lower). The price index for new cars fell 0.1% M/M, but remains 5.9% higher than it was a year ago

·     In auto retail, AAP downgraded to Neutral from Outperform at Wedbush as see mounting risks to consensus expectations as the company embarks on price and inventory investments to improve market share performance and faces enormous LIFO charges

·     FREY announced a conditional offtake agreement with Impact Clean Power Technology, a leading manufacturer of battery systems for transportation, industry, and stationary energy storage for renewable energy sources

·     LCID said produced 3,493 vehicles in Q4, up 53% sequentially and overall, 7,180 vehicles produced in 2022, exceeding guidance of 6,000-7,000 vehicles

·     TSLA’s slides on reports its expansion of its Shanghai plant has been delayed, according to Bloomberg sources; cites concerns in Chinese government over CEO Musk’s Starlink having such a large presence in China

 

Retailers, Consumer Staples & Restaurants:

·     CALM rises he price for eggs jumps 11.1% last month, per the latest Consumer Price Index and the index for egg prices is a whopping 59.9% higher than it was a year ago

·     NSRGY upgraded to Buy from Hold at Deutsche Bank

·     FNKO downgrade from Buy to Hold at Jefferies saying brand value & diversification continues to be the fundamental longer-term story here and they appreciate both

·     JAKK upgrade from Hold to Buy at Jefferies with $23 tgt saying strong operational execution and deleveraging has largely gone unnoticed by investors and the co carries a 66% discount to peer group median

·     PM said Expects to deliver FY22 results broadly in line with prior forecast; expects IQOS user growth in Q4 of 2022 to be at a similar level to Q3 of 2022

·     HSY announces organizational changes to its international business to accelerate growth in key markets

 

Homebuilders, Building Products, Home Furnishing:

·     In homebuilders, KBH reported a top and bottom line miss for Q4 while saying Q4 net orders of 692 and net order value of $362.7M decreased from 3,529 and $1.77B, respectively; Q4 inventories totaled $5.54B, up 15%

 

Energy

·     Oil stocks among the day’s top S&P sector performers as oil prices rise after figures showed U.S consumer prices unexpectedly fell in December and prices also gets support by optimism over China’s demand outlook – shares of XOM, CVX strong. Shares of HES NINE OII SLB RIG among energy names hitting 52-week highs

·     In research, Wolfe double upgraded HAL to Outperform from Underperform with a $51 price target as sees a favorable relative valuation and ongoing revenue tailwinds in 2023; also upgraded HES to Outperform calling it defensive. On the flip side, they downgraded shares of SHEL to MP, COP to Peer Perform saying free cash flow impact could keep the shares range-bound, and cut SLB to Peer Perform citing relative valuation

·     YTEN shares jumped following a memorandum of understanding with Mitsubishi Corp. for a potential biofuel partnership

 

Financials

Banks, Brokers, Asset Managers:

·     Bank earnings get underway tomorrow morning, with the unofficial kick off to earnings season: results expected from BAC

·     Monthly Assets Under Management (AUM) data out from managers: AB prelim AUM decreased to $646 billion during December 2022 from $658 billion at the end of November; APAM AUM totaled $127.9 billion; BEN prelim AUM of $1,387.5 billion on December 31, 2022, compared to $1,410.6 billion at November 30, 2022; IVZ prelim AUM of $1,409.2 billion, a decrease of 2.0% versus previous month-end as experienced net long-term outflows of $3.4 billion in the month; LAZ prelim AUM totaled approximately $216.1 billion; TROW prelim AUM of $1.28 trillion as of December 31, 2022. Preliminary net outflows for the fourth quarter of 2022 were $17.1 billion; VRTS prelim AUM up at $149.4 billion as of December 31, 2022

·     Bitcoin levered stocks seeing strength early as Bitcoin rises a 9^th straight session to start the year – shares of COIN, MARA, MSTR, RIOT, SI higher all day

 

Healthcare

Biotech, Pharma, Healthcare Services:

·     ARVN downgraded to Neutral from Buy at Guggenheim following company disclosures this week that raise the development risk & timelines of lead program ARV-471

·     CRL downgraded to hold from buy at Jefferies, citing heightened uncertainty around non-human primate supplies for the scientific research organization

·     EYEN said it saw positive results from a research study involving its Optejet delivery technology

·     OSH upgraded to Outperform at Raymond James following reports that CVS is exploring a potential takeout of the company for a $10B enterprise value, which equates to ~$40/share, which would represent a 2.4x multiple on 2024 revenue, a premium to the ONEM/AMZN deal

 

Industrials & Materials

Transports

·     Airline stocks bounce following upbeat AAL guidance which sees Q4 adj EPS $1.12-$1.17, above consensus of $0.60 and expected Q4 revs to be better (16%-17% vs. prior 11%-13%) than it previously expected as demand for air travel remained strong through the holiday season

·     Freight costs fell year over year (y/y) in December for the first time in 28 months, according to a Thursday report from Cass Information Systems. The Cass Freight Index report showed total expenditures on the payment’s platform were down 4.3% y/y and 5.5% lower than in November (shares of JBHT, CHRW, XPO, WERN, KNX)

·     In machinery, JPMorgan laid out Q4 preview, as they name AGCO, CAT Top Picks, removes ITW from the Analyst Focus List (AFL) and add CAT to the AFL while downgraded CNHI to Neutral following the recent run that has left relatively balanced risk-reward

 

Aerospace & Defense

·     BA upgraded to Neutral from Underperform and raises tgt to $200 from $121 at Credit Suisse saying strong order activity, coupled with higher probability of regaining market access in China, creates opportunity for upside revisions to its estimates

·     CHR initiated with a Buy and a $5.00 tgt price at Deutsche Bank as think the stock represents an attractive investment in a diversified business model (asset management, leasing, contract flying, charter)

·     BAH named top pick for qtr and LDOS top pick in IT Services at Jefferies as they preview Q4 Aerospace & Defense electronics – say they prefer Commercial Aftermarket names over Commercial OE names given recent commentary around supply chain challenges which has delayed production ramps and likely limits upside surprise to estimates

·     LHX tgt lowered to $240 from $260 at Cowen and issue 2023 estimates below consensus as expect LHX to guide ‘23 close to or even below our number on the Q4 print

 

Materials, Metals & Mining

·     In Chemicals, KeyBanc previews Q4 as they downgrade DD from Overweight to Sector Weight herein, reflecting their below consensus estimates, the stock’s recent outperformance, and risks around semiconductor volumes and construction in 1H23. Firm said sees risk/reward for sector skewed favorably in 2023 but expect upside this year to be modest. Said 1Q23 and/or 2023 estimates are meaningfully below consensus for CE, HUN, RPM, WLK, OLN, DD, and LYB.

·     In metals: CLF upgrade from Equal Weight to Overweight at Morgan Stanley and raise tgt to $26 from $13.60 on the back of sequentially higher annual fixed pricing contracts; RIO upgraded to Equal Weight from Underweight and raise tgt at Barclay’s saying China’s reopening should underpin an acceleration in commodity demand through 2023; UBS noted the rising gold price remains supportive to GOLD and NEM, with the stocks continuing to price in a discount to spot.

 

Technology

Internet & Media

·     DIS is gearing up for a boardroom battle with activist investor Nelson Peltz after the company opposed the billionaire’s efforts to join the board. Peltz’s Trian Fund Management said it wasn’t pushing for Iger to be replaced but identified several problems that urgently need tackling. It also wants to ensure smooth succession at the end of his proposed two-year tenure.

·     Several changes in media space at Jefferies, upgrading NFLX from Hold to Buy and raise tgt to $385 PT as expect AVOD + password sharing changes to result in lower churn and a return to consistent DD sub growth; firm downgraded ROKU from Hold to Underperform (tgt to $30 from $45) as do not believe that a significantly slower digital ad market is reflected in NT consensus expectations and the LT trajectory of the business remains unclear; SPOT downgraded to Hold from Buy and cut tgt to $95 as does not see its gross margins returning to 2021 levels until 2024

·     In Internet, WIX upgraded to Outperform at RBC Capital noting with WIX down 51% in ’22, they throw their hat back in the ring, on slightly raised estimates calling it a solid defensive play; Evercore/ISI said they are making three tactical calls into the quarter: Outperform on NFLX and on BKNG based on the belief that Street estimates revisions are likely to be positive post their EPS prints. For PINS, make tactical Underperform call based on intra -quarter data points and our model sensitivity analysis, our near-term view on PINS into the print is neutral to modestly risky

·     LBTYA was downgraded to Market-Perform at Bernstein – noting they had been bullish since September 2021, when leverage was high, but rates were low – but notes the stock hasn’t performed as we expected with the share losing 32% of its value in 2022

·     WBD’s HBO MAX ad-free monthly sub in US to rise to $15.99 from $14.99

 

Telecom:

·     In towers, AMT upgraded to Buy with $254 tgt at Deutsche Bank as expect its proportionate AFFO/share CAGR will outpace peers over the next several years, despite current valuation that sits at the middle of the pack; CCI was downgraded to Equal Weight at Barclay’s saying long-anticipated demand will not materialize in earnest until 2026 or later

·     TMUS is considering buying Mint Mobile, the budget wireless provider backed by Ryan Reynolds, Bloomberg reported, citing people familiar with the matter

 

Hardware & Software movers:

·     LOGI cuts FY23 revenue growth view to down 15% to down 13%, well below prior guidance of revenue growth down 8% to down 4%; also cut its FY23 operating income view to $550M-$600M from $650M-$750M; sees Q3 revenue at $1.26B-$1.27B vs. est. $1.39B

·     Unity Software (U) downgrade to Underperform at Jefferies with $19 tgt as believe in real time 3D rendering and Unity has a stranglehold on game engines for mobile, VR, and AR, but they couldn’t make the valuation work with using SOTP peer group multiples

·     In IT Services, INFY reported in-line Q3/FY23 results, including its strongest bookings/TCV ($3.3B; 36% from new logos) in 8 quarters, while raising its FY23 USD revenue growth guidance (from a range of 15-16% to a range of 16-16.5%); CTSH announced a new CEO and issued higher revenue guidance for Q4 ($4.8B vs. prior $4.72B-$4.77B view)

·     AMPL, LAW, SMWB, WKME, INFA all downgraded in North America Application Software sector at Citigroup as expect the first half to remain challenging from a demand perspective, while are more optimistic on the 2H given easier compares and a potentially more favorable interest rate environment. Top picks are MDB, SNOW and MSFT

·     S, TENB and ZS downgraded to equal weight from overweight in security software at Morgan Stanley saying while positive on secular tailwinds, the slowdown in security is just starting as the macro & comps remain difficult thru ’23. Valuations largely reflect this, but estimates take longer to bottom. Leaning into consolidators: PANW is top pick, followed by FTNT

·     Global PC shipments fell 28.5% y/y in Q4, marking largest quarterly decline since Gartner began tracking market in mid-1990s.

 

Semiconductors:

·     TSM reported a record net Q4 profit and beat analysts’ expectations but warned Q1 revs would be between $16.7B-$17.5B, 14% worse sequentially than Q4 and below est. $17.64B and said its operating margin will fall to between 41.5%-43.5%, from the fourth quarter’s 52%

·     MRVL CFO to join AMD and MRVL appointed Willem Meintjes as CFO