Closing Recap

Monday, January 30, 2023

Index	Up/Down	%	Last
DJ Industrials	-260.40	0.77%	33,717
S&P 500	-52.66	1.29%	4,017
Nasdaq	-227.90	1.96%	11,393
Russell 2000	-25.74	1.35%	1,885

 

Equity Market Recap

·     US equities faced a give-back day, with both the NASDAQ and S&P 500 tracking along overnight losses for much of the day before beginning the final hour at the lows. We will hear from the Fed this week and a +25bps move is almost universally forecast. Regardless, today’s action and several comments around the market reflect expectations we will hear a more hawkish Powell in his prepared comments. That said, the implied rates peak continues to hold just below 5% in June/July and incorporate lower rates in 2H23. So the bottom line is expectations Powell talks but nobody really listens? We shall see.

·     Data items of note today include these on inflation and the Fed from @RobinBrooksIIF and @LizAnnSonders, respectively: “Main driver of Fed policy will be downside surprises vs its inflation forecast. The Fed forecasts Q4 2023 core PCE inflation of 3.5% y/y. Blue-chip consensus is below that at 2.9% and we’re even further below at 2.7%. Big downside surprises are coming. Fed hikes are ending…” and “Inflation expectations falling fast … 6-month change in expectations for inflation 1 year out is most negative since 2011 per @UMich sentiment survey.” Separately, @MBjogovic reminds us the 3M moving average of Headline CPI (MoM annualized, unadjusted) is 0%. Lastly, while yield curve inversion has been another indicator drawing much attention recently, @LizClaman points out that though the last eight recessions were predicted by yield curve inversion, the inventor of the indicator (@camharvey) now says it’s flashing a false signal for the first time.

·     Sector-wise, heading into the final hour of trading, only Consumer Staples was in the green. Leading the decliners were Energy (XLE, -1.15%), Technology (XLK, -1.8%), Communications (XLC, -1.4%) and Consumer Discretionary (XLY, -1.4%). Consumer Staples group was the lone green sector (XLP, +0.03%). Other “leaders” on the day included Financials (XLF, -0.32%) and Utilities (XLU, -0.34%). Breadth was solidly unfavorable, with decliners leading advancers by about 2.3:1 and growth and value segments were both losing ground consistent with the sector performance. Russell 1000 Growth was -1.4%, modestly ahead of Russell 1000 Value at -0.85%.

·     Morgan Stanley (which has been cautious for months) notes 2023 is off to a much better start than most expected when we entered the year. Says many investors had adopted their Fire and Ice narrative. Fast forward 3 weeks and that view has changed almost 180 degrees, with most clients now adopting the new, more positive narrative of China reopening, falling inflation / dollar and possibility of a Fed pause right around the corner. While they acknowledge these developments as real, net positives, they remind readers that these were essentially the exact same reasons they cited back in October when they turned tactically bullish. However, at that point, the S&P 500 was trading 500+ points lower with a P/E that was almost 20% lower than today. In other words, this new narrative that seems to be gaining wider attention has already been priced, in our view. In fact, we exited our tactical trade at these same prices in early December. What’s happening now is just another bear market trap, in our view.

·     Citigroup said today Low expectations have fueled a 6% SPX rally to start the year with flows showing very active tactical call buying and a shift towards Growth and Tech. That said, from these levels’ risks are to the downside in February. Macro events that are now priced equally for FOMC, NFP and CPI days. We see labor data (particularly wages) as the main event, CPI a close 2nd, and FOMC and Tech earnings neutral to slightly positive.

 

Commodities

·     Oil prices drop as WTI crude March futures fell -$1.78 or 2.2% to settle at $77.90 per barrel, while the plunge in natural gas futures continue, hitting $2.677 mln Btus, lowest in nearly 2-years. April gold prices fell -$6.90 or 0.3% to settle at $1,939.20 an ounce, pulling back after rising for 6-straight weeks (longest streak since August 2020), a small pullback ahead of the FOMC policy meeting Wednesday. Bitcoin prices drop around 2% to $22,600.

 

Currencies & Treasuries

·     Treasury yields rose Monday ahead of the Federal Reserve decision Wednesday that’s expected to deliver a quarter of a percentage point rate hike and clues to future moves. The yield on the 2-year Treasury note rose 3.3 bps to 4.24% and the 10-year Treasury yield rose 3 bps to 3.552%. The US dollar edged higher as the euro fell below 1.09 and the buck overall rose. The Fed will conclude a two-day policy meeting mid-week that’s expected to deliver a rate increase of 25 bps, down from last meeting’s 50-bps. The Fed has signaled that it intends to raise the fed-funds rate above 5% and keep it there for some time as it looks to quash inflation. Money-market traders, however, have priced in the potential for rate cuts before year-end.

 

 

Macro	Up/Down	Last
WTI Crude	-1.78	77.90
Brent	-1.76	84.90
Gold	-6.40	1,939.20
EUR/USD	-0.0028	1.0839
JPY/USD	0.62	130.47
10-Year Note	0.03	3.548%

 

 

Sector News Breakdown

Consumer

Autos:

·     TSLA pared recent gains after rising 65% in just three weeks after tumbling in 2022, upgraded from Hold to Buy at Berenberg with $200 tgt from $255 saying the company’s price cuts represent an "investment in growth", which they believe reflects Tesla’s cost leadership strategy.

·     GM was downgraded from Buy to Hold at Berenberg and cut tgt to $41 from $45 saying they expect investors to gain confidence in GM’s ability to execute EV rollouts through 2023: New launches in the North American SUV and pick-up segments should support order intake momentum, as should efficiencies from GM’s dedicated EV platform.

·     Ford (F) prices of its electric crossover SUV Mustang Mach-E by as much as $5,900 per vehicle after rival TSLA slashed prices on its electric vehicles by as much as 20%.

 

Consumer Staples & Restaurants:

·     CL upgraded to overweight from equal weight at Morgan Stanley citing a good entry point and saying company’s robust long-term organic sales growth is not fully reflected in discounted valuation against peers.

·     Credit rating agency Fitch said it expects U.S. Retailers and restaurants will experience pressure on sales volumes in 2023; expects U.S. Restaurant sector revenues to grow modestly during 2023, driven by higher menu prices, partially offset by lower volumes; said margins should rebound modestly as recent price increases take effect & inflationary pressures moderate.

·     GTIM said it bought limited liability company membership interests from its partners in five previous joint-venture Bad Daddy’s restaurants for $4.4 million, funded out of cash reserves.

·     UL announced the appointment of Hein Schumacher as its new CEO, following an extensive, global search process.

Retailers:

·     BBBY is closing an additional 87 of its flagship stores and its entire Harmon chain of drugstores, as the retailer struggles to find financial support to keep its operations funded – WSJ reported.

·     LVLU downgraded from Overweight to Sector Weight at Keybanc saying 2023 is likely to be a challenging year for the Company as reopening tailwinds dissipate and difficult revenue compares continue in 1H23.

·     PRPL guides prelim year sales $574M vs. est. $579M and sees 2022 net loss.

·     SHOP upgraded from Neutral to Buy at Roth Capital with $56 tgt as see the last of tough comparables for SHOP subsiding entering ’23. After more than tripling sales in just three years, we still project double-digit growth this year.

 

Leisure, Gaming & Lodging:

·     In cruise lines, CCL’s Holland America Line said sees biggest January booking week on record; said the week ending January 20 also exceeded bookings during the same week in 2019 by mor than 20% (RCL, NCLH shares also moved on headlines).

 

Homebuilders, Building Products, Home Furnishing:

·     In building products, Bank America downgraded AZEK and FBIN to neutral from buy primarily on valuation saying in 4Q preview they still see risk to 2023 consensus estimates. Expect in-line 4Q22 earnings for building product manufacturers but continue to see risk to 2023 consensus estimates. On average, we model ‘23 EPS 9% below consensus.

 

Energy, Utilities, Solar

·     In coal, ARLP Q4 revenue of $700.7M rises 48% y/y and tops ests $688M helped by higher coal sales and oil and gas royalties’ revenue; Q4 net income jumps 4x y/y to $214M.

·     DAR tgt raised to $115 and added to Select List at Stifel as believes the stock’s earnings revisions are now behind it and expects the core rendering business to bounce back in Q4.

 

Financials

·     SOFI posted record Q4 adj Ebitda ($70M tops $43M est.), on better revs ($443.3M vs. $425.6M est.) as well as an upbeat forecast for Ebitda of $260M-$280M vs. est. $246M.

 

Healthcare

Biotech & Pharma:

·     JNJ shares slumped more than 2% after the United States Court of Appeals for the Third Circuit court rejected the company’s plan to use a legal strategy to push about 38,000 talc lawsuits into bankruptcy court.

·     APTO initiates dosing of Tuspetinib in APTIVATE expansion trial in patients with acute myeloid leukemia; patients receive Tuspetinib monotherapy to kick off APTIVATE phase 1/2 Trial.

·     CVAC announces positive data in older adults from Covid-19 and Flu mRNA Vaccine development programs.

·     REGN upgraded to Outperform at Cowen and raise tgt to $875 from $775 saying with the future of the Eylea franchise re-secured, and Dupixent being a top growth asset in biopharma, REGN is likely to remain one of the more fundamentally attractive companies in LC biotech.

·     XERS said the FDA granted "orphan drug" status to its drug to treat endogenous Cushing’s syndrome.

 

Healthcare Services & MedTech movers:

·     EW was downgraded from Overweight to Neutral at Piper and cut tgt to $80 from $95 citing proprietary doc survey, which suggests slower-than-expected TAVR and transcatheter mitral market growth and believe the U.S. TAVR market is becoming increasingly competitive.

·     GEHC reported its first report as a standalone company, with revenue of $4.9B (+8% y/y, +13% organic), driven be growth in Imaging, PCS, and Ultrasound; adj EPS of $1.31, with standalone adj EPS of $1.06 and reaffirmed many of the guidance pieces given prior.

·     GH said the FDA approved its Guardant360 as companion diagnostic in patients with ESR1 mutations.

·     PHG said it would cut an extra 6,000 jobs by 2025, including 3,000 this year, as part of a reorganization aimed at improving its performance.

·     RBC Capital said they are buyers of BIO and QDEL in life science tool sector ahead of EPS and cautious on RGEN said MRVI remains one of their two best ideas and ILMN is favorite large cap.

·     RCM (Top Pick), EVH, and AMWL are Top picks for HCIT/Digital Health at Cowen saying they remain positive on the HCIT/Digital Health names into 2023.

 

Industrials & Materials

Transports

·     In freight, ODFL downgraded from Neutral to Underperform at Credit Suisse with $323 tgt and SAIA downgraded to neutral from OP (raises tgt) noting truck stocks posted strong gains on Friday, adding to sizeable gains since the start of the year, with shares of Old Dominion up +18% year-to-date and Saia up +30% year-to-date.

 

Industrials, Aerospace & Defense

·     U.S. Air force has awarded BA a $2.3 bln contract for ninth production lot of 15 KC-4A Pegasus tanker aircraft.

·     OTR Global upgraded its view on farm equipment manufacturers AGCO, CNHI, and DE to Mixed from Negative, citing dealer checks.

·     FLS upgraded from Neutral to Buy at Bank America and raise tgt to $40 on prospects of material multiple expansion in 2023 including key drivers: 1) Attractive valuation, 2) Low investor expectations, 3) Recovering oil and gas exposure, 4) Improving operations, IRA benefits.

 

Materials, Metals & Mining

·     In chemicals, Citigroup upgraded AXTA to a Buy after reporting a solid 4Q and said they see further upside ahead; AXTA also upgraded from Hold to Buy at Deutsche Bank with $40 tgt citing new customer wins in Refinish and Light Vehicle driving above market volume growth into ’24. RBC previews 4Q22 earnings for fertilizers: CF (Maintain OP, lower PT to $130), MOS (Reit SP, lower PT to $55), NTR (Maintain OP, lower PT to $115), and LXU (Maintain OP, lower PT to $18).

·     In metals, AEM and GOLD maintain OW ratings at Barclay’s in gold miners, but downgrade KGC to EW saying while economic growth has remained better than expected, they still see gold as a good hedge against further deterioration in the outlook and continue to prefer gold over copper; Thyssenkrupp joined peers in saying that European industry was under threat should they fail to come up with a scheme similar to the U.S. climate package, dubbed the IRA, to boost companies. WTO says United States appeals panel reports regarding US duties on steel and aluminium products (X, NUE, STLD).

 

Technology

Hardware & Software movers:

·     CACI announces $250 million accelerated share repurchase agreement.

·     OKTA upgraded from Hold to Buy at Stifel and raise tgt to $90 from $60 following survey of 37 current customers which reveal generally happy customers who support Okta’s broader identity swim-lane convergence strategy and are interested in Okta’s emerging IGA/ PAM opportunities.

·     WDAY positive mention in Barron’s The Trader column, calling it the software stock to own now.

 

Semiconductors:

·     Samsung (SSNLF) is considering cutting chip production – CNBC reported citing the Korean Economic Daily.

·     For chip names, WSJ reported memory chip makers face a prolonged price slump. Analysts expect sharp declines through at least year’s first half, piling pressure on industry that has been cutting back https://on.wsj.com/3Jp2YLI

·     State-owned institute continued buying INTC and NVDA made chips despite inclusion on a U.S. export blacklist in 1997, the WSJ reported this weekend, China’s top nuclear-weapons lab used American computer chips decades after ban. https://on.wsj.com/3HjTheZ