Closing Recap

Friday, July 08, 2022

Equity Market Recap

·     Stocks slipped in the final minutes, denying the S&P 500 of its first five-day win streak of the year. The first half of July has historically been the two best weeks of the year for stocks, so maybe we shouldn’t be too shocked, but stocks have been struggling for direction. Stronger payroll data initially pulled indices lower as traders focused on the Fed’s likely response and raised probabilities of a 75bps hike at the next meeting, but recognition that the data does not yet point to recession lifted spirits, and stocks, in the end. MKM summed up today’s market support, “…an economy is not in recession when it creates more than 2.7 million jobs over a six-month time span.”

·     Performance was mixed across sectors, with Healthcare (MCK, CNC, REGN), Energy (DVN, VLO, APA), Consumer Discretionary (PHM, AZO TSLA) and Financials (SYF, AXP, DFS) leading. Laggards were Communication (TWTR, PARA, LYV) and Materials (FCX, ECL, DD), both finishing in the red. Value and growth also each finished flattish today, with Russell 1000 Growth slightly higher and Russell 100 Value slightly lower.

Economic Data:

·     June jobs data: Nonfarm Payrolls reported at +372K above the +268K estimate and vs. May reading of 384K; U.S. June private sector jobs +381K above est. +240K, and May +336K and June factory jobs +29K above est. 18K; the unemployment rate unchanged and in-line at 3.6% as Labor force participation rate falls to 62.2% in June vs 62.3% in May. Average Hourly earnings M/M reported +0.3%, in-line with estimates and Y/Y rose +5.1% vs. est. 5% (prior month +5.3%)

Commodities, Currencies & Treasuries

·     Oil prices finish the day higher, but week lower in what was a volatile week for commodity prices in general. On Friday, WTI crude rose $2.06, or 2%, to settle at $104.79 a barrel, but dipped roughly 3.4% on the week. Brent Crude futures settle at $107.02/bbl, up $2.37, 2.26%. Worries over a potential recession pulled prices down for the week. U.S. natural gas futures dropped about 4% on Friday after soaring over 14% in the prior session on a slow rise in output and forecasts for less demand next week than previously expected. Front-month gas futures fell 26.3c, or 4.2%, to settle at $6.034 per million British thermal units (MMBtu).

·     Gold priced edged higher $2.60 to settle at $1,742.30 an ounce, but fell -3.3% on the week, its fourth straight weekly drop and the longest such stretch since May as a surging U.S. dollar weighed on metal prices this week. Gold is trading near the lowest level in more than nine months. Silver prices fell over 2% to $19.167 an ounce, also down 4-straight weeks.

·     Treasury yields end the week at its best levels, with the 10-year rising roughly 40-bps off midweek lows to finish around 3.09% as bonds sold off following a stronger June payroll report. The 10-yr yield jumped about 10-bps after the data and the 2-year leapt to 3.11% – the curve initially inversion deepened as much as 7-points before steepening again. Yields could face pressure to move higher next week when the Treasury sells $95 billion in coupon-bearing supply including $43 billion in 3-year notes, $33 billion in 10-year notes and $19 billion in 30-year bonds.

Sector News Breakdown

Consumer

·     Retailers: GME announced it terminated its CFO Michael Recupero, who will be replaced by Chief Accounting Officer Diana Saadeh-Jajeh; COST June total comp sales +18.1%, vs. est. +14.1% and June us comp sales ex-gas, FX +13%, vs. est. +12.8%; reported net sales of $22.78 billion for the retail month of June, the five weeks ended July 3, 2022, an increase of 20.4% from $18.92 billion last year; LEVI Q2 adj EPS $0.29 vs. est. $0.23; Q2 revs $1.47B vs. est. $1.43B; reaffirms annual guidance for revenue and EPS; increases quarterly div by 20%

·     Auto sector; TSLA achieved its highest monthly sales of China-made vehicles since opening its Shanghai plant in 2019, as the U.S. carmaker sold 78,906 China-made vehicles in June, including 968 for export (in May it sold 32,165 vehicles and exported 22,340); RIVN tgt raised to $40 from $30 at Wedbush saying after brutal production woes since its IPO it appears the Rivian story is now finally starting to turn the corner (slowly) with positive supply news heading into 2H/2023

·     Consumer Staples: PEP kicks off staples’ earnings season next Tuesday with Morgan Stanley positive today as expects the market to react favorably to what he predicts will be a "solid" Q2 sales and earnings beat and reiteration of fiscal year guidance; NUS sees 2Q revs $557-562Mm vs est. $604.7Mm citing softer than expected revs on extended COVID-related factors in Mainland China, distractions in EMEA related to the ongoing conflict in Russia and Ukraine; KRUS posts Q3 top/bottom-line beat and better sales view of $137M-$142M for year vs. est. $136M

·     Casinos, Gaming, Lodging & Leisure sector; in online sports betting. Wells Fargo noted for the 2Q22TD (April/May), FanDuel’s sports betting GGR share has meaningfully accelerated to ~45% vs. ~33% in the 1Q22 and 34% in the 4Q22 (DKNG, PENN, CZR active on news); in theme parks, Citigroup downgraded SIX to Neutral from Buy and cut tgt to $26 from $41 saying is beginning to see signs of weakness across the theme park industry (also cuts tgts on SEAS, FUN); in lodging, TH raises 2022 financial outlook by 53% with a projected record $505 million annual revenue

Energy

·     Energy stock movers: the sector was mixed with oil prices moving higher to highs above $105 after touching lows of $95 per barrel just two days ago in another volatile week of trading in the commodity space; Russia, which supplies about ~55% of Germany’s natural gas supply has already cut supply by ~60%, with concerns that it could be cut completely. The EU is taking actions shore up its LNG reserves and shifting to coal for electricity; Berkshire Hathaway buys another $700 million of OXY and now commands a $11 billion stake in the energy giant

Financials

·     Bank movers; earnings season upon us with banks starting things off next Thursday with JPM then several big banks Friday; for online brokers (IBKR, SCHW), Jefferies notes activity levels continue to moderate, while the interest rate backdrop is improving; in research, HBAN and PEBO downgraded to Neutral at Piper as company-specific drivers such as merger cost savings have largely worked their way through the #’s, exhausting a catalyst; FRC added to Wedbush Best Ideas List as view it a defensive growth company that is well-positioned to generate consistent above-average growth in a rising rate environment and a possible recession.

·     Bitcoin, FinTech & Payments; UPST shares slide after cuts Q2 revenue view to $228M from $295M-$305M, below consensus $297.68M and lowers Q2 net Income view to ($31M)-($27M) from prior ($4M)-$0M; MARA said produces 707 Bitcoin in Q2 2022, up 8% year-over-year and cash on hand was $88.7 mln, and total available liquidity was $153.7 mln at June 30

Healthcare

·     Pharma & Biotech movers; one of the top sector performers in the S&P led by managed care and services names; a nice start to the 2H of 2022 after a dreadful 1H when the XBI and NBI were down ~34% and ~21%, respectively, compared to the ~21% loss by the S&P500. Cantor noted one key overhang on the biotech sector that we identified in our 1H22 preview has been resolved, which was the appointment of an FDA Commissioner. The second overhang, which they believe will be resolved in the coming months, is the PDUFA VII reauthorization for FY 2023 through 2027

·     MedTech Equipment; Agilent (A) was downgraded to Neutral at Citigroup in Life Science Tools & Diagnostics 2Q22 Preview where they say they prefer to own names whose end markets have evolved more towards biopharma as opposed to industrial/applied, citing TMO, DHR and WAT as preferred names for the prints; Citigroup noted that CMS released its proposed CY23 physician fee schedule, which they view as incrementally positive for the relevant stocks under coverage (IRTC, GKOS, SGHT); Truist also noted bullishness on IRTC following CMS’s $229 proposed ZioXT NCD rate which came in better than our assumption (~$210), and should help remove a reimbursement overhang; IQV named a catalyst call Buy idea at Deutsche Bank as expect to deliver 2Q EPS in line or above consensus expectations with positive forward looking comments

Industrials & Materials

·     Industrial & Machinery; MRC positively pre-announced Q2 results and raised the FY guide on strong, broad based revenue and margins. MRC is one of the largest global distributors of pipe, valves, and fittings serving all key energy markets (Mizuho notes FLS, EMR are key customers); ITW was downgraded to Neutral from Buy at UBS and cut KMT to Sell from Neutral; Cowen upgraded TT to OP from MP calling it an attractive entry point for HVAC Bellwether and upgraded LII to Outperform as well saying shares oversold given C23 headwinds

·     Transports: AAL downgraded to Hold at Argus from Buy which reflects the company’s high debt relative to other legacy airlines and concerns we have about the extent to which AAL can reduce its leverage; XPO upgraded from Equal Weight to Overweight at Morgan Stanley with $75 tgt, over 50% upside as model normalized EPS (for the combined company ahead of the spin later this year) of $5 and applying a 15-16x normalized PE

·     Metals & Materials; KALU announced force majeure at its Warrick rolling mill due to limited availability of magnesium used in the production of aluminum beverage and food packaging products. Kaiser anticipates production and deliveries will be reduced by 30-40% in the month of July, and ~50% during the remainder of 3Q; TECK said Q2 steelmaking coal sales were 6.3 mln tonnes, at lower end of previously announced guidance of 6.3 mln–6.7 mln tonnes

Technology, Media & Telecom

·     Internet, Media, and telecom movers: TWTR slides after the Washington Post reported that Elon Musk’s $44 billion proposed takeover of the social media company was in serious jeopardy; in advertising, Wells Fargo upgraded shares of IPG, OMC to Overweight as think the business models are far more resilient than prior periods, have strong cash flows to support bigger buybacks, and have limited estimate risk, while bearish on Radio and see a tough period ahead, as downgrade IHRT, AUD and CCO; in Telecom, Wells maintained Overweight rating on TMUS, but are incrementally positive on T and cautious on VZ heading into Q2 earnings

·     Semiconductors; TSM reported net revenue of ~NT$175.87B (-5.3% M/M), and 18.5% Y/Y growth; revenue for January through June 2022 marked a 39.6% increase Y/Y; Exports to the United States were up 27.9%, much faster than a 15.5% jump recorded the previous month; Reuters reported the U.S. mulls fresh bid to restrict chipmaking tools for China’s SMIC; IMOS reported 2Q Revenue of NT$6.85 billion, down 1.9% y/y and 2Q revenue in USD $230M

·     Software & Hardware, Components & Services; Display driver IC specialist Novatek Microelectronics has reported June revenue fell 25.7% sequentially, with total revenue for the second quarter coming below its guidance given previously