Closing Recap

Thursday, July 08, 2021

Equity Market Recap

·     Stocks finish lower as the Nasdaq Composite snaps its 4-day win streak, pulling back from record closing highs Wednesday, while financials dragged the S&P 500 off its record close as the 10-year yield hits 1.25% for 1st time since Feb 16 before bouncing. Markets pullback after recent strength in a reaction to yesterday’s FOMC minutes, rising global Covid cases, and an unexpected increase in weekly jobless claims. Yesterday’s June FOMC meeting minutes showed that the Committee’s standard of "substantial further progress" was generally seen as not yet having been met, though various participants said they expect conditions for beginning to reduce pace of asset purchases to be met somewhat earlier than previously anticipated given incoming data.

·     The Dow Jones Industrial Average and Dow Transports both declined sharply, down about 1% and over 3% respectively. The Dow Industrials fell behind weakness in financials AXP, GS, TRV following another decline in Treasury yields, while Dow Transports dropped as much as 3.5% or 500 points to 14,450, slipping below its 100-day MA support of 14,785 led by a drop in airlines on Covid variant fears to economy as well as rails (CSX, KUS, NSC) after a WSJ report that U.S. President Biden will call for regulators to address consolidation and possible anticompetitive pricing in ocean shipping and railroad industries.

·     Stock/sector movers: China ADRs (BIDU, BABA, DIDI, YMM) extend declines after the country earlier this week said it will step up supervision of domestic firms listed offshore, which follows news this past weekend that regulators ordered DIDI’s app be taken down days after its U.S. listing; metals decline led by weakness in FCX after being downgraded at Barclay’s and firm sector to Neutral from Positive; Bitcoin and ethereum decline, dragging Bitcoin mining, investing companies lower; banks fall on lower treasury yields; energy names rebound with oil.

·     Interesting Stat from Bank America this morning: The SPX has not had a daily close below its 200-day moving average (MA) in 2021. This has happened through June in 35 out of 93 years (38% of the time) from 1929-2021. For years that the SPX did not have a daily close below its 200-day MA through June, the average first half (1H) return is 11.40% (11.24%), which extends to an average annual return of 16.80% (19.02% median) with the SPX up 88% of the time for the year.

·     In another interesting tidbit: Marketwatch.com reported that with about $480 billion already flowing into exchange-traded funds (ETFs), that it’s possible the industry will hit a record for net flows, set in 2020 at $504 billion, by the end of July.

·     Earlier today, the European Central Bank set a new inflation target and carved out a major role in the fight against climate change. In the key conclusion of the review, the ECB set its inflation target at 2% in the medium term, ditching a previous formulation of "below but close to 2%." In Europe, Britain’s FTSE 100 down 1.68%; Germany’s DAX down 1.78%, Europe’s Stoxx 600 down 1.77% for biggest one-day drop in two months and France’s Cac 40 down 2.12%, biggest one-day drop since April 20; Spain’s ibex down 2.29%

Economic Data:

·     U.S. jobless claims rose to 373,000 in latest week vs. est. 350,000 while prior week revised to 371,000 from 364,000; the 4-week moving average fell to 394,500 in latest week from 394,750; continued claims fell to 3.339M vs. est. 3.335M and prior 3.469M; U.S. insured unemployment rate fell to 2.4% from 2.5% prior.

Commodities

·     Oil futures rebounded as WTI crude rises $0.74 or 1.02% to settle at $72.94 per barrel, well off earlier lows of $70.76 following the government’s weekly report that showed big drops in U.S. crude and gasoline inventories. The EIA said U.S. crude inventories fell by 6.9M barrels in the week ended July 2, while gasoline inventories sank 6.1M barrels, both more than expected. Prices have been pressured this week by the lingering uncertainty over the continued OPEC dispute and rising Covid variant infections which could hinder the economic recovery. Early in the session, both contracts fell to their lowest in about three weeks. August gold prices reversed off earlier highs ($1,819.50 an ounce) to settle slightly lower (-0.1%) at $1,800.20 an ounce, snapping its 5-day win streak as the dollar bounced off lows and stock recovered.

Currencies & Treasuries

·     Treasury yields dropped to start the day, with the benchmark 10-year hitting fresh 4-month lows of 1.25% before rebounding partially to around 1.3% late day, but not enough to stop the 8-day decline in yields. Treasury yields have slipped on slowing economic recovery concerns, variant fears, and cooling risks of high inflation. The U.S. dollar retreated from a three-month high hit late yesterday (pared losses late day as stocks rebounded off lows), mainly due to strength in the euro after the European Central Bank set a new inflation target and as concerns grew over the spread of COVID variants. The dollar extended losses following a slightly weaker than expected jobless claims report as unemployment benefits rose unexpectedly last week. The dollar index (DXY) fell 0.5% to 92.25 from Wednesday, when it touched 92.844 for the first time since April 5.

Sector News Breakdown

Consumer

·     Retailers; OSTK initiated with a Buy and $150 tgt at Needham as view it as one of the more interesting ideas in E-Commerce; BKE reports June sales $111M, which is +17.8% y/y and +49.3% vs. 2019; Needham also initiated CHWY at Hold as its position in the fast-growing pet space is offset by near-term headwinds of persistent out-of-stocks and higher labor-related costs, and Buy ratings on REAL ($35 PT) as shares have lagged YTD vs peers and the SPX despite strong projected sales growth and a moat in the luxury space, TDUP ($35 PT) as a potential disruptor in retail, and ETSY ($250 PT) as one of the best growth ideas under coverage with 20%+ GMS growth over the long term; HIBB new Outperform with $110 target at Telsey who believes the company’s sales growth can continue given their unique geographic footprint in small and rural markets, a higher pace of store openings, POWW raised their Q1 rev outlook to $44M from $41M and said they plan to report their first positive net income quarter

·     Autos; RACE has three business lines that could potentially lead the Italian luxury carmaker’s stock to accelerate to a $265 price target, according to a report from Morgan Stanley; TSLA shares fall initially (then rebound) as the latest set of China data showed deliveries of its cars made in the country dropped in June; legacy carmaker STLA announced a big investment in electric vehicles (shares of rival EV names mixed on day – NIO, XPEV, LI)

·     Housing & Building Products; after having benefitted from lower Treasury yields the last 7-trading days, homebuilders giving back some gains as RBC Capital turns incrementally cautious on the group near-term and downgrades DHI to Sector Perform and TPH to Underperform as data shows a second consecutive month of deceleration with 72% of base plans seeing a m/m price increase in June, down from 79% last month, the lowest level since January.

·     Restaurants & Consumer Staples; HELE shares fell as posted Q1 EPS/sales handily above consensus ($3.48/$541.2M vs. $2.62/$438.9M) but issued disappointing guidance as expects sales of $1.93B-$1.98B for FY22, below the $2.02B estimate and EPS $10.46-$10.97, missing the $11.64 estimate (said sales in the health and home segment will decline by 24% to 27%) – shares of beauty names SBH, EL, ULTA, ELF active; BYND says introduces chicken tenders to U.S. market; Cowen previews restaurants saying believe DPZ, MCD offer the greatest potential for 2Q sales upside vs consensus while QSR and Burger King has the greatest risk of a sales shortfall

·     Casinos, Gaming, Lodging & Leisure sector; GAN rises early after saying sees Q2 revs between $34-$35M, beating the consensus of $23.98M; GAME said its Winview subsidiary is suing DKNG for patent infringement citing multiple causes. The action seeks recovery of damages and other appropriate relief; RICK sets new record for total qtrly club and restaurant sales of $56.7m in 3q21; PLBY and Gaming Technologies are teaming up to bring a new Playboy-branded, real-money Rummy mobile game to the Indian market, expected to launch in 2021.

Energy

·     Inventory data: the EIA said Crude stockpiles fell a 6^th straight week, down -6.866M barrels vs. -4.03M consensus, with gasoline inventories falling -6.076M vs. -2.176M consensus, and Distillates +1.616M vs. +0.171M consensus. Last night the API showed a draw of 7.98M barrels of oil for the latest week; gasoline inventories showed a draw of 2.74M barrels, distillate inventories show a build of 1.09M barrels and Cushing inventories show a build of 152K barrels.

·     E&P and Majors; KeyBanc said they expect EOG and PXD to report hedging losses in 2Q21 of ~$198M and ~$391M, respectively and expect APA, EOG, and PXD to generally report solid 2Q21 oil price realizations vs. 1Q21, but slightly wider than 1Q21 oil diffs. FANG may also provide preliminary 2Q21 production, which they expect to come in 1.7% above consensus; MKM upgraded RRC to Buy from Neutral and up tgt to $20 from $15; LPI raises FY21 capital expenditure forecast to $420M from $360M and lowers FY21 production outlook to 77,000 – 80,000 barrels of oil equivalent per day (boepd), from 80,000-85,000 boepd previously.

·     Oil Services & Equipment; Piper updates land driller (HP, PTEN, PDS) estimates with upwardly revised rig count template, with no significant change to expected ~in line Q2 results, but with 5-10% increases to ’22 activity levels based on the higher expected H2’21 baseline; Citigroup upgraded shares of HP to neutral from sell in services and up tgts on several (HP, NINE, GTLS, SLB, PTEN, RIG) saying they prefer the more internationally levered OFS names (SLB, BKR, NOV) along with WHD (rig leverage and M&A/cash return). Notes that Oil Service stock performance has been solid YTD (OIH up 33%) but has lagged E&P (XOP up 54%); MCF entered into an agreement to acquire low decline, conventional gas assets in the Wind River Basin of Wyoming from ConocoPhillips, for $67M in cash.

·     Coal, Utilities & Solar; Solar stocks (SPWR, FSLR, RUN) were weak today, reversing recent strength with TAN (Solar ETF) giving back most of its gains from the past 2 weeks; Goldman removed SRE from its Conviction Buy list given a lack of near-term catalysts, but they reiterate their Buy rating as they still see shares trading at a discount to their SOTP implied value and robust regulated utility growth in CA and TX; MKM upgraded CNX to Buy with a $16 pt (from $15) due to a $0.10 increase in their structural NYMEX gas price outlook to $2.90 and the stock’s 10%-15% decline since mid-March

Financials

·     Bank movers; shares of major U.S. banks track Treasury yields lower today (slipping the last few days), with big banks JPM, BAC, WFC, Citi among decliners as well as insurers with long-dated Treasury yields falling for the eighth straight session (big banks also kick off earnings next week). Minutes from the Fed’s June meeting, which were released on Wednesday, showed central bank officials believed "substantial further progress" on economic recovery had not been made yet (the 2yr-10yr yield gap was at 105 basis points, narrowest in at least five months); in research, TCBI upgraded to Outperform with $78 tgt at Raymond James while firm downgrade BOCH, BRKL, CARE, RF, WSBC to market perform; SCHW was removed from conviction buy list at Goldman after rally in shares; RBC Capital previews group saying believe investors should be overweight the bank group and should own BAC, C, FITB, KEY, MTB, PNC, RF, and TFC

·     Financial Services; RBC Capital launches coverage on 10 business and information services names – with top ideas SPGI, TRU, VRSK, DNB (all Outperform rated), noting that digitalization and ESG have increased the demand for data while Cloud and AI/ML disrupt the traditional data life cycle, expand and enhance proprietary data, and generate predictive insights; WFC said today the bank was shutting down all existing personal lines of credit in coming weeks and no longer offers the product, according to customer letters reviewed by CNBC. The product, which typically gave users $3K-$100K in revolving credit lines, was pitched as a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees

·     Bitcoin news; shares of Cryptocurrency-exposed stocks (RIOT, MARA, MSTR) slide with Bitcoin sinking back below $33,000 per token, down over 5%, with Ethereum down over 10% to slip below $2,200; Voyager Digital (VYGVF) initiated with a Buy Rating and C$36 PT at BTIG saying shares of fast-growing crypto brokerage compelling as interest offerings driving influx of "sticky" customers, while emphasis on altcoins boosting spread revenues

Healthcare

·     Pharma movers; FSTX rises after exclusive licensing agreement with AZN for STING inhibitors ($12M upfront; eligible for milestone payments of over $300M and single-digit % royalties); SNY and GSK granted Indian approval for COVID-19 vaccine trial; large cap pharma (defensive) stocks declined, but better than major averages

·     Biotech movers; rebound early for biotech space, with the XBI partially recovering after falling six of the last seven trading sessions; AMGN said the U.S. FDA has accepted a Biologics License Application and granted Priority Review for Tezepelumab in the treatment of asthma (Tezepelumab is being developed by Amgen in collaboration with AZN); BIIB updated the label for its new Alzheimer’s disease treatment, Aduhelm, which now says that the therapy should be used in patients with "mild cognitive impairment or mild dementia stage of disease" (narrows tgt population); ARPO was upgraded to Buy with $22 tgt at HC Wainwright following recent acquisition of privately held Aadi Bioscience in May calling the deal “transformative”

·     MedTech Equipment; SPNE said it received FDA clearance for its 7D percutaneous spine module for minimally invasive surgery; Fujifilm Medical Systems announces that the FDA has granted 510(k) clearance for Fujifilm’s (FUJIY) new image enhancement technology; QDEL opened lower, adding to yesterday losses after focus on an FDA bulletin on Quidel recalling its Lyra SARS-CoV-2 Assay due to risk of false negatives; GBS awarded a $4.7 mln Australian federal government scientific grant to manufacture biosensor technology

Industrials & Materials

·     Aerospace & Defense; BA spikes late day on Bloomberg report its 737 Max edges toward China return as test flights near; SPCE shares outperformed following the recent news that Sir Richard Branson will be on the second test flight on July 11; in an Aerospace & Defense preview at Cowen, firm says favorites are HWM, SPR, TDG, and MOGA, while lower tgt for HII to $200 (from $230) and up RTX to $95 (from $88) saying they are upbeat regarding commercial demand as increasing vaccination rates bolster air travel, above 2019 levels. However, Q2 demand commentary is more important than results which likely were mixed

·     Transports; Dow Transports dropped as much as 3.5% or 500 points to 14,450 (before rebound), falling below its 100-day MA support of 14,785 earlier; U.S. airlines pressured as concerns about the coronavirus continue to linger, especially due to the spread of the delta variant (AAL, DAL, UAL, JBLU, LUV); KSU shares slide after the WSJ reported U.S. President Biden will call for regulators to address consolidation and possible anticompetitive pricing in ocean shipping and railroad industries https://on.wsj.com/36n8o5m (also hitting other rail names CSX, NSC, UNP)

·     Metals; industrial metals decline (copper, aluminum, iron ore, steels); Barclay’s downgrades the industrial metals sector to Neutral from Positive, with miner margins now near record highs and stocks trading at relatively elevated price-to-NAV multiples – shares of FCX and FNV downgraded to Underweight while firm upgraded shares of LUN and SCCO to equal-weight; Bank America upgraded TECK to Buy from Neutral and our tgt to US$30 from US$27 on rising met coal prices and a better near-term outlook

·     Materials, Chemicals: in packaging, Citigroup said they see upside in BERY into earnings, which are trading at wider-than-usual discounts to the S&P, as investors look past near-term cost pressures towards stepped-up organic growth, while also like IP, and open a Catalyst Watch on improved portfolio management & de-leveraging; in chemicals, WDFC rises as Q3 sales surged 39% higher led by unprecedented demand for maintenance products, with Q3 results well above views (EPS $1.52 vs. est. $1.15; Q3 sales rose 39% to $136.4M vs. est. $108.33M) and higher sales guidance for the year ($475M-$490M vs. est. $461.85M)

Technology, Media & Telecom

·     Internet; GOOGL slips as thirty-seven U.S. states and district attorneys general sued Google on Wednesday, alleging the search giant bought off competitors; also alleged that the co was using restrictive contracts to unlawfully maintain a monopoly for its app store on Android phones; BTIG raised2Q and 2H estimates for OPEN and ZG (PT $202 to $185, lower multiples), going above-Street/guidance, based on a big uptick in iBuyer activity (said iBuyer listings increased by >4x in 2Q, listing prices were +20% from March-June and share across 26 active markets reached ~5%); Instacart named Facebook (FB) app head Fidji Simo as its CEO today

·     Semiconductors; SIMO reported prelim Q2 as now expect revs to grow ~20% sequentially, well above their prior guidance range of 5-10% growth, and now see gross margin of at least 50.5% (est. 48.7%) vs prior guidance 48-50%; Goldman reiterated AMD as a Conviction Buy and lifted their price target to $111 from $106 as they believe the market is under-estimating the company’s near- and long-term revenue growth potential, margin expansion opportunity, and ultimately earnings power; Truist raised their targe on Buy-rated NVDA to $910 from $768 due to their proprietary checks suggesting continued rapid growth in the datacenter end market and their views on the company’s software monetization model; OpCo said they expect TXN is set up to report a beat and raise in Q2 and well positioned for 2H upside in autos and industrials; Raymond James is bullish on analog stocks (ON, MCHP, ADI, MPWR) as they see the current supply shortages due to a cut in the industry’s capex during the pandemic, but these stocks performed well under similar circumstances in 2009 and 2017, though they note the risk that accelerating capex could create a cyclical peak in 2022

·     Media & Telecom movers; DISH was upgraded to Hold form Reduce at HSBC; TESS shares active after the company said Wednesday evening it expects 2022 1Q total revenue of $105M, 9% higher than a year earlier; AMZN reaches film licensing deal with CMCSA’s Universal