Closing Recap

Friday, January 20, 2023

Index	Up/Down	%	Last
DJ Industrials	329.81	1.00%	33,374
S&P 500	73.50	1.89%	3,972
Nasdaq	288.17	2.66%	11,140
Russell 2000	30.99	1.69%	1,867

 

Equity Market Recap

·     A massive flurry of buying helped pare/erase weekly losses for major US averages, with the S&P 500 index reclaiming its 50-day and 200-day MA, as 2022 top sector decliners continue to be the big winners thus far in 2023. After 30% declines last year, the communications sector off to a hot start, up 10% YTD led by gains in NFLX today following earnings overnight. The Consumer discretionary sector +7% the first three weeks of the year and Technology rises 5% to start the year while defensive sectors underperform (Utilities -2%, Healthcare -1.5% and Staples -2.8%). There has been a “risk-on” mentality for investors after a dismal 2022, with no fear shown despite the Fed continuously communicating for higher rates to keep inflation from popping higher after a few months of deceleration. Bottom line: stock markets just wanted to go higher on this option expiration Friday (likely reason for late day surge), as even hawkish commentary from Fed Governor Waller (2023 voter) failed to weigh on sentiment.

·     Waller said he backs quarter-point rate rise at next meeting (in-line with Street views) saying continued rate rises will be needed, but sees ample evidence that economy is slowing as needed to contain inflation. He also said market’s expectation for rate cuts later this year is driven by optimism inflation will melt away – says Fed doesn’t expect inflation to melt away and will need to keep rates high, not cut rates by year-end. The comments were the last in a while as the Fed “blackout period” ahead of the first FOMC meeting of the year on February 1 where expectations are for the FOMC to raise interest rates only 25 bps to a range of 4.50%-4.75.

·     Today’s option expiry was among the biggest for single stock options according to Goldman Sachs, $797B of single stock options expiring, and the largest since Jan-2022 and the fourth largest on record. From an index perspective, $1.3trn of options rolled today, the largest non-quarterly expiry on record. (Likely reason for the market funny business surge late day).

·     Data yesterday showed individual investor optimism over the short-term direction of the U.S. stock market hit a nine-week high in the latest American Association of Individual Investors (AAII) Sentiment Survey as bullish sentiment rose 6.9% to 31.0% while Bearish sentiment, or expectations that stock prices will fall over the next six months, lost 6.9% to 33.1%.

 

Economic Data:

·     Existing Home Sales for December fall -1.5% to 4.02M unit rate, above consensus 3.96M and down slightly from Nov reading of 4.08M; inventory of homes for sale 970,000 units, 2.9 months’ worth; national median home price for existing homes $366,900, +2.3%

 

Commodities

·     Oil prices finish higher, as WTI crude settles at $81.31 a barrel to a 2-month high, rising $0.98 or 1.22% and Brent Crude futures settle at $87.63/bbl, rising +$1.47, or 1.71%, posting its second straight weekly gain, spurred largely by brightening economic prospects for China. Oil prices up about 11% over the last 2-weeks. Natural gas prices dip again to settle at $3.174 mln Btus, falling over 7% this week. Gold rises +$4.30 to settle at $1,928.20 an ounce amid a flattish dollar, rising for a 5^th straight week on hopes of slower rate hikes from the Fed.

 

Currencies & Treasuries

·     Bitcoin rises for the 16^th time in the last 17-trading days, up roughly 29% YTD after a dismal 2022 campaign. Treasury yields edged higher for a second day, with the 10-yr topping at 3.5% before paring gains but remains down 34-bps to start 2023 (down 3-straight weeks). The U.S. dollar was mixed, though outperformed against the Japanese yen rising 1% after the Bank of Japan governor Kuroda repeated that the central bank will maintain its ultra-loose monetary policy amid speculation an imminent shift is coming. Recent speculation the BoJ would shift to a tighter stance has boosted the dollar/yen pair down by 14% in three months. The dollar was up over 1.5% on the week, best week since early December.

 

 

Macro	Up/Down	Last
WTI Crude	0.98	81.31
Brent	1.47	87.63
Gold	4.30	1,928.20
EUR/USD	0.0021	1.0848
JPY/USD	1.12	129.54
10-Year Note	0.088	3.487%

 

 

Sector News Breakdown

Consumer

Autos:

·     LCII downgraded to Hold at Jefferies saying following discussions with several RV OEMs and dealers, they see increased risk of ’23 wholesale shipments being materially below current industry forecasts.

·     VC PT to $164 (from $144) and BWA PT to $52 (from $50) in auto suppliers at Cowen saying they see 4Q22 earnings risk/reward as balanced, as quarterly results are likely to achieve respective guidance and believe FY23 guidance will be somewhat muted. APTV and VC, remain top picks given their leadership in compute consolidation with domain controller offerings.

 

Consumer Staples & Restaurants:

·     Food stocks KHC, HSY, CPB, PEP, GIS and others underperform as investors continue 2023 trend of selling defensive sectors (food, utilities, Healthcare) and rotate into risker assets

·     QSR upgraded to Outperform in casual dining at BMO Capital saying traffic trends have been flat/negative last few qtrs. for most quick-service brands due to tough 2021 COVID-recovery comps and a squeezed consumer wallet – but expect traffic to turn positive soon.

·     In supermarkets, Goldman Sachs recommends buying GO as see strong store traffic trends and improving margins as promotional activity remains low with decelerating cost inflation and recommends selling SFM as see declining store traffic trends combined with weakness in digital

Retailers:

·     COST announced a $4B share repurchase plan.

·     Department stores were pressured after JWN cuts its FY EPS outlook to $1.50-$1.70 from prior $2.30-$2.60 and cuts FY22 EBIT margin view to 2.8%-3.1% from 4.1%-4.4% reflecting lower than expected gross margin (M, KSS were weaker early).

·     BBBY shares volatile after saying it received notice from Nasdaq on Jan. 12 that said the company is not in compliance with requirement for continued listing.

·     In apparel retailers, PVH upgraded to Overweight from Equal-Weight at Barclay’s and raise tgt to $106 from $72 and upgrades RL to Overweight from Equal-Weight and up tgt to $134 from $101 citing early signs of success in North American markets for PVH and its position as a best-in-class apparel brand for RL.

·     SWIM said Masson will step down as CFO effective March 17^th; reaffirms FY EBITDA $140-145M vs consensus $146.1M and revenue $685M-$700M vs consensus $698.2M

 

Leisure, Gaming & Lodging:

·     In cruise lines (CCL, RCL, NCLH), Deutsche Bank says they are now below consensus across the board in 2024 for all 3 names as think consensus expectations for yields are too high based on the most recent extrapolation of pricing trends.

 

Homebuilders, Building Products, Home Furnishing:

·     In home improvement retail, Piper reduces estimates for LOW, HD saying declining home equity extraction activity (the combination of cash-out refinancings and / or HELOC originations) will likely slow large project remodel (i.e., Pro) spend in 2023.

·     In furniture retail, Wayfair (W) announces restructuring with reduction of approximately 1,750 employees and now expects to reach its adjusted EBITDA breakeven commitment earlier in 2023 as the first step toward its goal of generating sustainable positive free cash flow.

·     B Riley said continue to be cautious towards homebuilders (BZH ) heading into 4Q22 earnings and 2023 in general, as consumer demand remains pressured by high interest rates and concerns for home values over the near to intermediate term.

·     Two years ago: 30-yr mortgage rate was 2.77% & median existing home price in the US was $304k. Today: 30-yr mortgage rate is 6.15% & median existing home price is $367k. Result: $13k increase in down payment (20% down) and 80% increase in monthly payment (from $995 to $1,788), as per Charlie Bilello.

 

Energy

·     The US oil rig count was down 10 to 613 for biggest drop since Sept 2021 while the US total rig count was 771 and gas rig count rose 6 to 156 according to Baker Hughes

·     SLB Q4 EPS $0.71 vs. est. $0.68 and revs $7.88B vs. est. $7.81B and Q4 adj. EBITDA margin 24.4%, vs. est. 23.9%, raises quarterly cash dividend to $0.25 per share and said impact of loosening covid curbs and an earlier than expected reopening of China could support further upside.

·     In refiners, PARR upgraded to Overweight at Piper and downgraded DK to Neutral citing 2023 outlook improving. Firm noted after having navigated a soft patch in recent months as investors wrestled with recession fears, warm winter, and an uncertain path for Russia and China, energy stocks again feel well positioned for another year of strong performance.

·     In natural gas related names (AR, EQT, RRC, SWN), natural gas futures held near an 18-month low on forecasts for lower heating demand over the next two weeks than previously expected, as well as concerns that Freeport LNG’s liquefied natural gas (LNG) export plant in Texas would not return to service until February or later.

 

Financials

Banks, Brokers, Asset Managers:

·     GS shares lipped after the WSJ reported the Federal Reserve is investigating the co’s consumer business to determine whether the bank had appropriate safeguards in place as it ramped up lending.

·     Trust bank STT reports a better Q4 result than comp NTRS on Thursday (shares fell -8%) after EPS of $2.07 tops $1.98 estimate and Net interest income increased to $791M from $484M y/y and authorizes to repurchase up to $4.5 billion of common stock during 2023.

·     SIVB Q4 earnings of $4.62 missed consensus $5.29 but included $113M of CECL reserve builds. Piper noted downside to their number stemmed from a $141M provision (vs. US at $70M and losses on investments and warrants totaling $49M (including a $27M loss on the sale of $1 billion of AFS securities). Expenses were also larger – shares jumped on the day.

 

Consumer Finance, Insurance & Services:

·     ALLY rises after reporting Q4 adj EPS of $1.08, topping consensus of $1.00 on better revs of $2.2B (est. $2.05B) as qtrly provisions for credit losses boosted to $490M from $438M and sees 2023 adj EPS of about $4 and 2024 adj EPS of about $6.00.

 

Healthcare

Biotech & Pharma:

·     In the Alzheimer’s space, LLY said that U.S. regulators had rejected its application seeking accelerated approval for donanemab, a treatment for people with early-stage Alzheimer’s disease. Lilly said that the planned readout from an ongoing, Phase 3 study of donanemab remains on track for the middle of the year. BIIB rises in response to the FDA declining to grant accelerated approval to competitor LLY’s Alzheimer’s drug, citing problem with data – recall the FDA granted accelerated approval for BIIB and Eisai Co Alzheimer’s drug a few weeks ago.

·     DCPH 6.94M share Secondary priced at $18.00.

·     EXEL Cabometyx patent trial results came out in line with Street expectations, with judge ruling in favor of Exelixis for ‘473 composition of matter patent (expires 2026), but not for ‘776 polymorph patent (expires 2030).

·     MRNS positive initiation at RBC Capital with Outperform and $23 tgt saying its main seizure drug, Ztalmy, should continue steadily and establish MRNS’ commercial presence.

·     REGN was upgraded to Overweight at JPMorgan ahead of several important 2023 updates; notes while US Eylea results were weaker than expected in 4Q they ultimately see 8mg Eylea as a best-in-class therapy and meaningfully extending Regeneron’s US AMD franchise.

 

Healthcare Services & MedTech movers:

·     AWH, PAVM, PACB all downgraded at Cantor in Medical technology sector as hold a favorable view for 2023 in terms of fundamentals; names AZYO best idea within our Medical Devices & Supplies coverage and PRE in Life Science Tools

 

Industrials & Materials

Transports & Industrials

·     HAYW and GNRC previews at Jefferies saying while we see risk to NT results, they see secular trends such as household formation contributing to Pool equipment growth of 6-9% annually through the cycle.

·     Stifel with industrials earnings preview, saying they are cautious around earnings: AOS, WTS, ZWS; neutral around earnings: AQUA, CIR, CR, CW, DCI, ESAB, FLS, HLIO, IEX, IR, ITW, LECO, PNR, VMI, XYL and positive around earnings: BMI, DNOW, ITT, MRC, PH

 

Materials, Metals & Mining

·     PPG Q4 adj EPS $1.22 topped the est. $1.13; Q4 revs $4.19B vs. est. $4.1B, while 1Q23 EPS guidance of $1.10-1.20 was below Street expectations.

·     MOS was downgraded to Neutral at Citigroup in as chemicals on softness in potash and initiate a pair trade, overweight CTVA, underweight MOS. Firm said the grain market has held up so far with corn and soy prices staying at elevated levels, but fertilizer prices have declined significantly.

 

Technology

Internet, Media & Telecom

·     NFLX reported a Q4 EPS miss and lower Q1 guidance while revs were in-line on both, but the Q4 global streaming paid net additions of +7.66M handily surpassed the 4.5M estimate, leading shares higher – also CEO Hastings stepped down with Sarandos & Peters to serve as co-CEO.

·     GOOGL shares rise after the NY Times reported Google founders Larry Page and Sergey Brin re-engaging to meet threat from ChatGPT; the two approved plans and gave ideas to put more chatbot features into Google’s search mechanism; separately, GOOGL to lay off 12,000 employees or 6% of total workforce.

·     MTCH outperforms following recent pricier membership testing for its Hinge dating app

·     PINS downgraded to Neutral from Buy at MKM Partners with $27 tgt noting shares are +52% since late July vs. S&P 500 -2%, while 2023 and 2024 consensus ests have steadily declined.

·     ERIC reported lower than expected Q4 core earnings as sales of 5G equipment slowed in high-margin markets such as the U.S., sending shares to their lowest since 2018.

·     In US listed China stocks, Morgan Stanley upgraded PD from Equal Weight to Overweight saying strong unit economics, highly ratable sub revenue and market leadership in an important category and downgraded DOMO to Equal Weight with $16 tgt down from $24. Chinese stocks listed in the US trade broadly higher before the country heads into Lunar New Year holidays.

·     TMUS discloses data breach through single API as a hacker obtained data on 37M customers; FCC looking into the matter.

 

Hardware & Software movers:

·     CRM was downgraded from Outperform to Market Perform at Cowen saying after several recent exec departures & a major restructuring underway, and they expect to see elevated levels of disruption risk.

·     In Commerce/Backoffice Software, SQSP, RSKD, and BIGC downgraded to Sector Weight from OW at Keybanc saying key ideas include INTU and ESMT citing a result of business diversity, secular growth, and defensive aspects, respectively.

·     FARO shares decline after saying it’s offering privately $60 mln 5-yr convertible bonds; to use net proceeds for working capital, other general purposes.

·     Nintendo (NTDOY) plans to ramp production of its Switch console as supply chains improve and demand stays strong; Zelda-themed Switch is a possibility this year, analyst says.

 

Semiconductors:

·     Broad strength in semiconductors, with the SOX index up over 2% to 2,770, paced by big gains in NVDA, AMD, TSM and equipment names AMAT

·     TXN said Haviv Ilan to become new President/CEO starting April 1^st; current CEO Templeton will transition out of these roles over the next two month’s but will remain the co’s chairman.

·     SK Hynix started to cut production at its DRAM plant in Wuxi, China, taking extreme measures to reduce semiconductor production to respond to the slump in information technology (IT) demand that began in Q4 – Seoul Economic Daily reports.