Closing Recap

Friday, July 09, 2021

Equity Market Recap

·     Stocks roar back following yesterday’s declines as the S&P 500 touched a new all-time high as financials and energy rebound after the selloff, recouping all its losses triggered by growth worries earlier in the week, along with gains in materials and industrials. With today’s advance, the S&P 500, Dow, and Nasdaq finish modestly higher on the week while the Dow Transport average and Russell 2000 each dropped over 1%. Focus will now shift to second-quarter earnings, with major banks reporting next week. Expectations are for earnings growth of 65.8% for companies in the S&P 500 index in the quarter, up from a previous forecast of 54% growth at the start of the period, according to Refinitiv IBES data. Treasury yields correct higher, while U.S. stocks hit new highs, and the dollar weakened as markets relaxed a bit over fears of a slowing pace of economic recovery from COVID-19. The first sizable selloff in bonds in 8-sessions reflected prices getting a bit lofty. Tech advanced despite the White House coming out with an executive order of 72 actions that include reining in Big Tech, including increased scrutiny on acquisitions. Markets had been hurt this week as a rise in cases of the delta coronavirus variant reduced risk appetite and prompted a flight to safety – but close out the week strong. Apple joining Amazon in setting new all-time highs this week. Lots going on next week including Fed Chair Powell’s testimony (Wednesday, Thursday), data on inflation (CPI and PPI), sales, production, along with supply and the start of earnings.

·     Stock/sector movers: LEVI soars on its quarterly beat with full-year guidance above 2019 levels to lift other retail (GPS, KSS, M, CPRI, RL, PVH, LB, TPR lead the S&P); GM rallies after Wedbush initiates at Outperform with an $85 PT and position to double its SOTP market cap by the end of next year on its EV potential; STMP spikes after PE firm Thomas Bravo will take the firm private in a $6.6B deal for $330/share in cash, a 67% premium to yesterday’s close; DCT slides despite reporting a surprise quarterly profit and rev guidance above consensus; BIIB suffers sharp drop midday after the FDA calls for an investigation into their approval of the company’s Alzheimer’s drug last month (LLY, PRTA, SAVA also slip on news – other Alzheimer’s drug co’s; banks with strong returns (JPM, BAC, GS, WFC, C) as Treasury yields correct higher and positioning ahead of earnings results from many large banks next week.

Commodities

·     Oil prices rose for a second day, with WTI crude up $1.62 or 2.22% to settle at $74.56 per barrel, helped late week from bullish EIA/API inventory data that showed a draw in U.S. stockpiles, though oil prices finished lower on the week for the first time in seven amid uncertainty over global supplies after an OPEC+ impasse Monday between Saudis and UAE. Negotiations to rescue the Iran nuclear accord are also not making much progress. Gold futures rallied $10.40 or 0.6% to settle at $1,810.60 an ounce, ending the week with a 1.5% advance as commodity prices extend gains for a third straight week. Gold was buoyed by a drop in Treasury yields on the week.

Currencies & Treasuries

·     The U.S. dollar slipped, pulling back further after topping 3-month highs mid-week, managing a move higher this week despite Treasury yields hitting 5-month lows Thursday. The buck was down slightly vs. the euro, while USD-JPY sits near 110.15 after having fallen sharply midweek following the FOMC minutes. Treasury yields correct higher after having fallen for an 8^th straight day on Thursday as Wall Street rebounds from yesterday’s rout. The 10-year yield touched highs around 1.36% today, off lows of 1.25% yesterday (February lows). The curve steepened slightly to 113.5 bps versus a narrow of 104 bps Thursday.

Sector News Breakdown

Consumer

·     Retailers; COST June U.S. comp sales ex-gas, FX +7.8%, vs. est. +7.2%; net sales of $18.92 bln for retail month of June, five weeks ended July 4, 2021, an increase of 16.9%; June total co comp store sales +14.1% vs. est. 11.1%; LEVI reports Q2 earnings that beat and raised its full-year outlook above analysts’ projections ($1.29-$1.33 vs. est. $1.15) saying Q3 revs will be above ’19; PSMT reported better-than-expected earnings as the company’s profit beat estimates on revenue that rose 12% from last year

·     Auto sector; GM initiated Buy and $85 tgt at Wedbush saying CEO Mary Barra along with other key executives has led the legacy auto company back to the top of the auto industry in the United States, accounting for over 17% of the market share in 2020; LMPX got a significant boost on news of debt refinancing and a stock buyback; TSLA raises Model S and Model X prices $5,000 in the U.S.; Ford (F) China reports H1 sales 306,700, +24%y/y; China’s cyberspace administration said it would remove 25 mobile apps operated by DIDI from app stores as the government stepped up a crackdown on the ride-hailing giant (follows last week when the regulator ordered app stores to remove Didi’s main ride-hailing app); XPEV launched g3i smart SUV at a price range of rmb149,800 – 185,800 post-subsidies, with delivery starting in sept 2021

·     Housing & Building Products; KBH authorized an expansion of the Company’s stock repurchase; Jefferies said that checks show no sign of higher discounting in 2q nor early 3q from Wayfair (W), boosting gross margin % but noted following the early May QTD sales update, they’ve observed a deceleration in web traffic; in building products, Loop Capital trimmed 2Q and FY21E estimates on MLM, SUM and VMC but raising FY22E after our aggregates survey

·     Consumer Staples; Bank America raising tgt prices for HSY, BRBR, MDLZ and PEP heading into 2H21 as expect focus to be on consumption patterns as mobility increases and pricing power vs. inflation; SAFM downgraded to Equal Weight from Overweight with an unchanged price target of $190 at Stephens; int tobacco, PM agreed to buy U.K. pharma company Vectura, valuing it at GBP1.05 billion ($1.44 billion), while MO said that the company subsidiary UST LLC has agreed to sell its Ste. Michelle Wine Estates business to private-equity firm Sycamore Partners Management LP for around $1.2 billion.

·     Casinos, Gaming, Lodging & Leisure sector; PLBY’s lifestyle brand Playboy announced its first curation collaboration with SuperRare, the Miami Beach Art Collection, to present NFT art; in casinos, Citi opens a 30-day positive Catalyst Watch on MLCO saying forecasts suggest that MLCO is the operator with the most EBITDA improvement amongst the six operators during 2Q21E; HOFV announces partnership with esports and online gambling co GMBL as the co to become the exclusive provider of esports at HOFV’s Ohio-based Hall of Fame Village; DKNG shares popped early afternoon on headlines it expanded relationship with Major League Baseball

Energy

·     Oil Equipment and services; Morgan Stanley cautious on more-defensive service companies such as BKR and CLB (which was downgraded to EW from OW) given substantial share price appreciation and more balanced risk-reward following its rally, while firm said expects both HAL and SLB to reiterate their double-digit y-o-y growth targets for 2H21 during earnings; MS also constructive on NEX and PTEN and cautious LBRT, RIG, while says equipment suppliers have the most upside to consensus earnings expectations as they upgraded NOV to equal-weight. The weekly Baker Hughes rig count showed U.S. active drilling rigs added another 4 to 479 after rising by 5 a week ago while oil rigs in the U.S. rose by 2 to 378, and gas rigs gained 2 to 101.

Financials

·     Bank movers; President Joe Biden’s planned executive order to promote greater U.S. competition will target bank mergers by pushing the Federal Reserve and the Department of Justice to update merger guidelines and increase scrutiny of deals, according to a source familiar with the matter, Reuters reported; Earnings next week for large cap banks (Tues: GS, JPM; Weds: BAC, BLK, C, PNC, WFC; Thurs: BK, MS, TFC, USB; Fri: STT); Raymond James initiated Outperform ratings on GNTY ($40 pt) on tailwinds from a strong Texas economy, deposit cost advantage over peers, superior credit quality, and growing scarcity value, and on PFHD ($22 pt) as they see it as an early stage, tech forward growth story which will narrow its profitability gap vs. peers; Credit Suisse reiterated their OP on SBNY and raised their price target to $270 from $260 ahead of earnings; Piper initiated BSBK at Neutral with an $11 price target; RBC upgraded DB with EUR11 target as they are running out of reasons to be critical, though the speculative risk remains

·     Trust banks; UBS upgraded STT to Buy and raised its PT to $95 from $83 as the stock has lagged both peers and the BKX substantially (lagging peers by 8% and the BKX by 13% YTD) despite pending rate benefits and tailwinds from equity markets; Jefferies raised their 2022 EPS estimates for all 3 trust banks (STT, BK, NTRS) driven mostly by better fees, though modestly lower their NII forecasts

·     Insurance; EU antitrust regulators cleared AON’s $30B bid for WTW after the company agreed to divest central parts of WTW’s business to AJG; Piper upgraded CINF to Neutral and still think property-casualty insurance sector stocks should perform well over the course of 2021; Bank of America added PGR to its US 1 List and removed ACGL; Credit Suisse said MBS issuance has PFSI, COOP, and HMPT tracking better than estimated and UWMC, FOA, LDI, and RKT below expectations, and the recent decline in rates reinforces near-term upside potential to volume estimates; RBC said CB ranks their favorite large cap idea as the stock still hasn’t rebounded from its M&A foray and they remain keen on ACGL, MKL and KNSL as well in P&C, and also say life names merit a fresh look, especially MET, VOYA since they are less sensitive to interest rates; RDN unit Radian Guaranty on Friday reported new loan defaults of 2,680 in June, down from 2,714 in May and 2,751 in April.

·     FinTech & Payments; SQ said it will make a hardware wallet for bitcoin/Bitcoin wallets can be stored offline or online at cryptocurrency exchanges, venues where bitcoin can be bought and sold for traditional currencies or other virtual coins; OpCo raised their price targets on V (Visa) to $281 from $260 and on PYPL to $342 from $322, whose pt was also raised at Evercore to $370; Stripe, whose last fundraising round in March gave it a $95B valuation to make it the most valuable U.S. startup, hired a law firm in its first step towards an IPO, and the company would go public through a direct listing instead of a traditional IPO since it does not need to raise money

·     Consumer Finance; Citi assumed coverage on DFS at Buy from Neutral with a $150 tgt from $101 as it has the clearest path to benefit from the return of consumer card spending and lending as pandemic-related benefits expire and elevated payment rates return to lower levels, and Neutral ratings on AXP ($183 tgt) as it is currently at the high end of its historical range and likely faces a slower return to normal due to its higher proportion of Travel & Entertainment spending (particularly corporate travel), and on SYF ($51 pt) as potential strong top and bottom line growth is offset by elevated competition for store cards; QFIN confirms that its app has been pulled from the Android app store, but is still on Apple’s (news hit shares yest). On May 10, China’s Cyberspace Administration identified 84 apps for over-collecting and using personal information, a 360 DigiTech spokesperson said in an email

·     Bitcoin news; FPAC is taking Bullish public in a $9B deal, and Bullish plans to launch a cryptocurrency exchange that offers liquidity for investors to generate yield from their digital assets; RIOT produced 243 BTC in June mining vs 48 BTC YoY to bring its YTD Bitcoin production to 1,167 unaudited Bitcoin (vs 508 YoY), started developing 400 MW of additional capacity at its Whinstone facility in TX, and expects total hash rate capacity of 7.7 eh/s by 4Q22

Healthcare

·     Pharma Industry news: Within an executive order released by the White House aimed at promoting competition in the American economy are several provisions targeting various aspects of the healthcare industry. Key highlights: 1) push antitrust agencies to vigorously enforce antitrust laws and potentially challenge prior bad mergers, 2) lowering prescription drug prices by pushing for importation from Canada, 3) increase specific anticompetitive focus on prescription drugs, hospital consolidation and insurance, 4) Increase support for generic and biosimilar drugs, 5) develop comprehensive plan within 45 days to combat high prescription drug prices and price gouging, 6) encourage FTC to ban “pay for delay” and similar agreements

·     Pharma movers; the FDA and CDC both said there isn’t scientific evidence that COVID-19 booster shots are required, hours after drug maker PFE and partner BNTX said it would seek authorization; IMAB expands emerging portfolio of next generation novel oncology therapeutics through cutting-edge MRNA and ai technology platforms; NOVN initiated Buy and $30 tgt at Cantor lifts shares as think peak sales potential for lead pipeline asset SB206 is underappreciated; INMB rises ahead of key data – co focused on immunotherapies is advancing its Alzheimer’s disease candidate XPro1595 in Phase 1 trials.

·     Biotech movers; BIIB shares fell after the FDA called for a wide-ranging federal investigation into the approval of Biogen’s treatment for Alzheimer’s disease just one month after a decision that sparked the ire of lawmakers, doctors, and public health advocates (which weighed on other Alzheimer drug treatments – LLY, SAVA); GALT rises after saying it saw positive top-line clinical data from the extension cohort of a Phase 1b clinical trial of Belapectin in combination with Keytruda in patients with metastatic melanoma and head and neck cancer; HGEN said that its submission for Marketing Authorization for lenzilumab in Covid-19 has been accepted by the U.K.’s Medicines and Healthcare Products Regulatory Agency for expedited Covid- related rolling review; BLUE lifts voluntary marketing suspension of its gene therapy to treat rare blood condition beta thalassemia after European regulator says the benefit-risk balance remains favorable

·     Healthcare Services; ALGN upgraded to Overweight with $700 pt at Stephens as recent analysis of Invisalign App data prompted a favorable outlook for the company’s revenue growth; Healthcare payment solutions provider MPLN said UNH’s recent policy change to not cover non-emergency services at out-of-network providers outside members’ service areas is not expected to have an impact to MPLN’s business (reaffirms forecast); ACCD strong start to FY22 in which revenue and adj. EBITDA came in above consensus which included approximately $1mm of performance fees early and benefited from better-than-expected member counts

Industrials & Materials

·     Industrial & Machinery; TEX upgraded to Buy from Hold with $52 tgt at Deutsche Bank as they have been watching the stock for a while and it has a nearly identical investment thesis to OSK, which they have been buying since assuming coverage of the Machinery industry about a year ago; AZZ Q1 EPS 88c vs est. 67c on net sales $229.8M vs est. $2237M, and raised full-year guidance for EPS to $2.65-3.05 from $2.45-2.95 and revs $855-935M from $835-935M; Loop trimmed Q2 and FY21 estimates on MLM, SUM, VMC but raised FY22 estimates as poor weather, higher fuel costs, and labor and supply constraints should affect near-term margins, but very strong pent-up demand and price increases should help drive performance next year

·     Transports; Dow Jones Transportation Average with a healthy rebound after sliding 3.3% on Thursday, the biggest daily drop in over eight months (note several analysts defend sector after Thursday sell-off after a Biden executive order raised concern the KSU/CNI M&A deal could be derailed); NSC upgraded to outperform from in-line with $303 tgt at Evercore/ISI; Wells Fargo said remain Overweight on NSC and CP in order of preference into earnings in rail space; XL was downgraded to Neutral at BTIG saying while continues to expect the electrification of the commercial fleet to gain momentum over the next few years, thinks 2021 is shaping up to be more of a transition year owing to supply chain issues

·     Materials, Metals & Mining; copper, aluminum, nickel and other industrial metals also are rising after China said it will cut the amount of cash that banks must hold as reserves in an effort to boost its economy; in chemical space, BASFY issued an upside preannouncement for the Q and boosted its guidance for the year

Technology, Media & Telecom

·     Internet; big tech in crosshairs as President Biden came out with an executive order of 72 actions that include reining in Big Tech, including increased scrutiny on acquisitions; STMP surges after agreeing to be acquired by Thoma Bravo in a cash deal that values the web-based mailing and shipping services company at $6.6B, with holders to get $30 per share in cash, a 67% premium to Thursday’s closing price of $197.72 https://on.mktw.net/2Vfbd63 ; seeing a rebound early in China ADRs (BIDU, BABA) after the country said earlier this week it will step up supervision of domestic firms listed offshore

·     Software movers; Piper boosted targets for CRWD, DARK, DOCU, ESTC, FTNT, KNBE, NOW, RPD, VRNS and ZS in the Internet security sector saying channel checks and survey results going into 2Q’21 earnings are pointing to a meaningful increase in security spending as news of large breaches and ransomware attacks continue to highlight vulnerabilities; ZNGA cautious mention at Keybanc saying proprietary data suggests caution heading into earnings – concerned the live services portfolio won’t produce the typical upside investors are used to; DCT slides despite reporting a surprise quarterly profit and rev guidance above consensus

·     Media & Telecom movers; RBC Capital initiates MTCH with an Outperform and $190 PT noting it is a leading and diversified player in the $8B online dating market, which they think doubles over the next five years; RBC also initiates BMBL with an Outperform and $65 PT based on 14x EV/’22E revenue as believe BMBL is the quality over quantity play in online dating; LYV shares active after its CEO says the U.S. concert business is fully open just in time for the peak of the summer, after enduring the COVID-19 pandemic.