Closing Recap

Thursday, January 13, 2022

Equity Market Recap

·     The Nasdaq and S&P 500 declined sharply, closing at the lows as growth sectors slumped, with the S&P 500 breaking testing key technical levels as investors took profits in technology and biotech/healthcare stocks ahead of the kickoff of fourth quarter earnings season. The Dow outperformed behind industrials such as Boeing and retail, while the Smallcap Russell 2000 managed small losses. Among the S&P’s 11 major sectors, industrials, materials, energy, consumer staples, and financials were leaders. The Nasdaq dropped over 2% after having risen 1.7% in the last three sessions after falling -5.7% in the four prior trading days. The prospect of several Federal Reserve interest rate hikes this year grows with several Fed speakers noting over the last few days that three to four hikes this year is likely, a concern to growth sectors such as technology and consumer discretionary. Stocks sold off late despite treasury yields moving to weekly lows, while the buck, Bitcoin and oil slipped. Inflation data higher again as headline PPI rose in-line, while core PPI was above expectations.

·     Stock & Sector movers: Industrials among leaders, led by gains in BA on reports Boeing 737 Max to resume service in China as soon as this month, along with gains in machinery and E&C with CAT and MTZ rising; DAL rises after its earnings beat and expectation of profitability this year to lift other travel names AAL UAL NCLH RCL EXPE while saying the worst of the Omicron variant may be behind us/peaking in the next few days; vaccine names MRNA BNTX NVAX slide again on waning fears of Omicron; TSM soars to record highs after its quarterly beat with strong guidance, helps boost semi equipment names early ASML LRCX AMAT KLAC on cap-ex boost – group faded late day with tech roll; KBH surges on strong Q4 profit and sales growth as well as a robust outlook due to healthy demand and rising home prices; social media names weak as SNAP plummets to 52-wk lows on a Cowen downgrade to weigh on TWTR, FB; autos F, GM outperform

·     In vaccine news, The Supreme Court blocked the Biden administration’s Covid-19 vaccine-or-testing rules for large private employers, upending the government’s most aggressive effort to combat the pandemic in the workplace. The high court, however, did give the administration more latitude in the healthcare industry, allowing it to impose a vaccine mandate for more than 10 million healthcare workers whose facilities participate in Medicare and Medicaid.

Economic Data:

·     Inflation readings soar again, mostly in-line with elevated estimates: Producer Price Index (PPI) MoM for Dec rises +0.2% vs. est. +0.4% and YoY reported at +9.7% vs. est. +9.8%; on a core level, or ex food & energy, PPI MoM rises +0.5% vs. est. +0.5% and on a YoY basis, rises +8.3% vs. est. +8.0% (data follows 40-year high inflation reading for CPI on Wednesday)

·     Weekly jobless claims rose to 230K from 207K in prior week, and above ests of 200K, while the 4-week moving average rose to 210,750 in latest week from 204,500 prior; continued claims fell to 1.559 mln in latest week from 1.753 mln prior week; the U.S. insured unemployment rate fell to 1.1% from 1.3% prior week

·     The 30-year mortgage rate in the US rises to 3.45%, its highest level since March 2020; a year ago it hit an all-time low of 2.65%.

Commodities

·     Oil prices eased after touching 2-month highs Wednesday, with WTI crude slipping -$0.52 or 0.63% to settle at $82.12 per barrel, recently rising on expectations that a strong economic recovery will boost demand but rising U.S. inventories and high inflation capped gains. Gold prices fell -$5.90 or 0.3% to settle at $1,821.40 an ounce, snapping its 4-day winning streak as the dollar remains down on the day, but off worst levels. Precious metals failed to rally behind tense Russian situation after Russia’s deputy foreign ministry said talks with the U.S. over the security situation in Ukraine had stalled and suggested that Moscow could dispatch a military deployment to Venezuela and Cuba.

Currencies & Treasuries

·     Another day, another U.S. dollar pullback after a strong 2021, with the dollar index hitting (DXY) hitting fresh 2-month lows at 94.66 before paring losses. Th dollar/yen printed a three-week low of 114.7, down from 114.70 highs late Wednesday as the buck remains under pressure, with long positions continuing to be unwound following Wednesday’s CPI outcome. The euro extends gains, moving to fresh 2-month highs vs. the greenback.

·     Treasury yields touched nearly 2-year highs to start the week, above 1.8% for the 10-year, but yields have been slipping nearly every day since, hitting a weekly low below 1.7% today despite back-to-back days of “hot” inflation (CPI, PPI) and on expectations that the Fed will boost rates at least three times during 2022. Yields had been moving up to start the year in anticipation of such actions, so this week maybe more sell the news. The U.S. Treasury sold $22B in 30-year notes at a yield of 2.075% vs. 2.072% when issued prior with the bid-to-cover (demand) at 2.35 (vs. prior auction 2.22) and indirect bidders awarded 65.0% (vs. 60.8% last auction) and directs 17.1%.

Sector News Breakdown

Consumer

·     Retailers; BGFV now sees Q4 EPS 84-86c well above its prior guidance of 55-70c (est. 61c) with same-store sales +0.2% vs 2020 and +10.6% vs 2019, Q4 sales $273.4M vs est. $269.5M to bring annual sales to $1.16B, an increase from $1.04B in FY20; MAT upgraded to Buy at MKM with a new $30 PT from $24 on the strength of its upcoming product lineup and capital structure optionality; Jefferies started SSU at Buy with an $11 target as the largest digital player in the global sports retail market, and lowered their PT on Buy-rated ANF to $50 from $61 given transitory issues; Truist initiated Buy ratings on HD, LOW, TGT, COST, TSCO, ORLY, AAP, AZO, FIVE, DLTRand Hold ratings on WMT, OLLI, DG, BBY, GPC; Piper reiterated TPX and SNBR at OW after their Dec mattress survey showed YoY sales growth of +9-11%; Barclays lowered their price targets on OW-rated AEO, LULU, URBN after the ICR conference this week and are increasingly cautious as post-holiday demand slows; GPS launched non-fungible tokens (NFTs) of its iconic hoodies, sending the apparel maker’s shares about 5% higher

·     Auto sector; TSLA removed a reference on its website to 2022 as a production date for the Cybertruck, As spotted by Edmunds; DDAIF said it would combine Mercedes-Benz Rent and Mercedes-Benz Van Rental to create an integrated rental specialist called Mercedes-Benz Automotive Mobility GmbH; NKLA said its Tre battery-electric vehicle has been deemed eligible for the Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project program by the California Air Resources Board as Cali customers will be eligible for $120,000 incentive per truck; in auto parts, Deutsche Bank updates ests and tgts and see potential for notable 2022 guidance misses from ALV, APTV and VC, followed by AXL, LEA and DAN

·     Housing, home improvement, & Building Products; KBH a leader to upside in homebuilders as FY22’s gross margin and revenue guidance easily exceeded estimates after mixed Q4 results with EPS beating but revs missing views while ending backlog value grew 67% to $4.95 billion and average selling price increased 9% to $451,100; not coming into today, homebuilders are down -7% YTD as the Fed narrative has quickly moved to 4 rate hikes in 2022 and accelerated balance sheet reduction. In addition to driving rates higher, inflation also threatens Builder margins; LEN Increases Annual Dividend to $1.50 Per Share; Guggenheim raised their estimates on TSCO with their PT going to $250 from $230 as they expect it to continue to benefit from customer maturation trends and find it difficult to envision its 2022 EBIT margin not being higher than the company’s long-term target range of 9-9.5%;

·     Consumer Staples; KR shares trade to all-time highs as defensive food and staple names seeing strength with investors rotating out of high growth tech; BGS ests lowered at Piper saying they expect actual earnings results could be well below consensus; MNST is acquiring CANarchy Craft Brewery Collective LLC, a craft beer and hard seltzer company for $330M in cash; GRWG shares slide as announced Q4 revenue to be $88M-$90M, down from prior view $114M-$116M and est. $105.6M with same-store sales decreasing (12.3%) and lowers full-year as company faced cannabis industry pressures that lead to a general slowdown in the hydroponics market

Energy

·     Services, E&P and Majors; HAL upgraded, BKR downgraded in oil services at JPMorgan as the firm raises estimates for NAM-levered pressure pumpers based on the tightening supply-demand balance for frac. Said updated EBITDA forecasts for frac coverage are now +3% and +13% above consensus in 2022- 23 and we see more earnings upside and a more attractive relative valuation (said preferred pure-play frac stocks in our coverage remain OW-rated NEX and PUMP); RBC Capital updates 4Q21 estimates for PXD, MRO, ESTE, CDEV reflecting final commodity prices and other changes based on our channel checks, data analytics, and conversations

·     Solar: Guggenheim upgraded SEDG and ENPH to Buy from Neutral as concerns that drove their downgrade in October, such as high valuations, high consensus expectations, and potential negative news, have largely dissipated with both falling ~4% vs the S&P +8% since then; Morgan Stanley upgraded SPWR to EW on a more balanced risk-reward after a recent selloff and emerging opportunities to the upside; note coming into today, several solar stocks have lost more than 10% in the past month, including FSLR -13%, SPWR -14%, ENPH -30%, MAXN -26%, SEDG -14%, RUN -21%, and the recent selloff followed a California proposal to cut subsidies for homeowners’ solar systems, though changes are still needed before a final proposal; KeyBank continues to be cautious to negative on alt energy and lowered their price targets on OW-rated NOVA to $39 from $50 and ENPH to $200 from $280 while also listing NEP as their only other OW; JKS aims to raise 10B yuan at 5 yuan/share in its Shanghai IPO

·     Utilities: KeyBank upgraded EXC to OW as the separation with Constellation (CEG) creates a premium T&D utility and a standalone merchant power company that stands to benefit from the clean energy transition, downgraded PEG to Sector Weight on valuation, and said D (Dominion) and XEL are their key ideas in the regulated space to benefit from the current environment; Goldman upgraded WEC to Neutral and downgraded CNP, EVRG to Neutral, and D to Sell

Financials

·     Bank movers; big week of earnings coming up with WFC, C, PNC, JPM results expected Friday morning; TPG priced its 33.9M share IPO at $29.50 a share, the mid­point of its projected range of $28-$31 apiece; UBS initiated Buy ratings on FITB as it is strongly levered to a return in commercial (C&I) loan growth, has the second highest level of relative excess cash among regional banks, and has been mindful of self-funding investments, MTB as the most rate sensitive regional bank they cover, HBAN which should reach its profitability goal with the return of loan growth, rising rates, and TCF deal synergies, and RF as it transitions into an efficiency improvement growth story driven by revenues, not expenses, and FRC at Neutral as it is a best-in-class franchise long-term but management uncertainty can cause near-term divergence between stock performance and fundamentals; Deutsche said primary interest rate sensitive trust banks and their top overall pick SCHW possess the best risk/return during Q4 earnings season, and they prefer BK near-term and STT longer-term within the trust banks; OpCo raised PTs on NDAQ to $230 from $228 and FOCS to 477 from $74 while keeping their $146 PT on CBOE

·     FinTech & Payments; MQ upgraded to Buy from Neutral at Mizuho saying following a disappointing start ‘out-of-the-gate’ with decelerating volumes from MQ’s top customers ex-SQ, analysis shows growth for this cohort likely inflected positively in 3Q despite several customers’ decelerating growth, potentially reflecting wallet-share gains; Vise (V) announced a new platform, Visa acceptance cloud; COIN acquired derivatives exchange FairX which Needham says puts them closer to offering crypto derivatives products for both institutional and retail customers; Credit Suisse downgraded NNI as it faces rising rates and compressing margins

·     REITs; Keybanc upgraded LTC, XHR and downgraded ESRT, OFC, HPP, GMRE in 2022 REIT Outlook – maintaining the apartment and retail REITs at Overweight. We are maintaining industrial, data center, self-storage, healthcare, and triple net REITs at Sector Weight. We are upgrading the lodging REITs to Overweight from Sector Weight and are downgrading the office REITs to Underweight from Sector Weight.

Healthcare

·     Biotech movers; another brutal day for biotech with the XBI falling to its lowest levels since June of last year, weighed down by weakness in vaccine makers MRNA, NVAX, BNTX as Omicron fears wane; DNLI slips after the company said the FDA placed a clinical hold on its application to begin testing DNL919 in human clinical trials (DNL919 is an investigational treatment for the indication of Alzheimer’s disease); PBYI said that its Nerlynx treatment was included in the National Comprehensive Cancer Network’s (NCCN) clinical practice guidelines in oncology for the treatment of breast cancer; BIIB cut to neutral from buy at Guggenheim after the U.S. government said it would cover the costs of the biotech company’s Aduhelm Alzheimer’s drug only in very limited circumstances; AUPH, BHVN, AMLX shares rallied late day after STAT news reported Goldman provided BIIB with a list of smaller biotech companies that might fit with the company’s focus on neuroscience https://bit.ly/3Gt10Wy

Industrials & Materials

·     Industrials, Aerospace & Defense; BA shares jump following headline Boeing 737 max to resume service in China as soon as this month, as per Bloomberg; SPCE shares dropped after the company offered $425 million of convertible senior notes due 2027 in a private offering; industrials were among the top gainers today led by likes of CAT as investors bailed on tech; metals were mixed after a good trading week

·     Industrials; Transports; DAL the first transport/airline to report quarterly earnings, as Q4 adj EPS $0.22 vs. est. $0.14 and Q4 revs $9.47B vs. est. $9.21B; see’s losses in January, February but a return to healthy profit in June, Sept, Dec quarters; HA upgrade Underperform to Market Perform at Cowen and raise tgt to $23 from $17.5 as think industry capacity to Hawaii will decline this year as borders reopen and the larger international airlines shift capacity back to Europe

Technology, Media & Telecom

·     Internet; SNAP was downgraded to Market Perform at Cowen citing near-term concerns around lingering iOS 14.5 changes impacting Snap’s measurement, targeting and attribution for direct response ad units, and difficult 1H22 comps (peaking in 2Q22); Bloomberg reported GRUB management has indicated to some investors they’re open to the idea of a sale of GrubHub, and advisers are also pitching a take-private deal or breakup of the unit, according to separate people familiar https://bit.ly/3FpqItx

·     Semiconductors; TSM rises initially after 4Q21 results came in better than expected, with revenue rising 6% QoQ to TWD438bn and GM rising 140bps QoQ to 52.7% while raised L-T revenue/GM guidance given the company’s bullish growth outlook; semi-equipment stocks AMAT, LRCX, ASML, KLAC boosted early after TSM said it plans to increase its CAPEX spending again, with its CAPEX rising by 40% to $40-42bn CAPEX in 2022; QRVO downgraded to Perform from OP at Oppenheimer saying they see limited content gains for QRVO at iPhone and increased competition from QCOM in China Android; Wells Fargo said continue to favor names w idiosyncratic or secular growth independent of the semi cycle, RFFE cos like SWKS, EDA/IP cos CDNS and auto ALGM

·     Software movers; ESTC announced a leadership transition to CEO and President/CRO roles and noted that they expect to exceed guidance for FQ3 – said CEO Shay Banon is transitioning back to CTO with Product Chief (CPO) Ash Kulkarni taking the helm; Bloomberg reported that MIME said to draw higher bid from security rival PFPT https://bit.ly/3nnrrWe ; BAND upgraded to Overweight at Piper saying its prior thesis has played out, the company has a differentiated approach and multiple opportunities/use-cases in front of it; CHGG upgraded to OW from neutral, and QTWO, TWOU downgraded to Neutral at Piper while lowering PT on 20 stocks following a multiple reset and estimate revisions noting Vertical Software & FinTech names have pulled back -26% on average since the start of November

·     Media & Telecom movers; BMBL upgraded to Buy at Goldman Sachs but trim tgt to $54 from $57 while firm raised MTCH to Buy from Neutral at Goldman Sachs and trim tgt to $157 from $162; Bank America reduced 4Q21 residential internet net add forecast to 180k (vs. 230k prev.) for CHTR but maintaining our residential video losses (-170k) and total mobile net add forecast (280k); VIAC said it secured the exclusive rights to stream English Premier League soccer on its Paramount+ service in Mexico and several other countries in a three-year deal that represents its first live sports offering for Latin America; FUBO acquires exclusive rights to the Premier League, England’s top soccer league in Canada for the next three seasons beginning in 2022/2023