Closing Recap

Wednesday, July 14, 2021

Equity Market Recap

·     Major U.S. averages finish mixed as the S&P 500 touches another intraday all-time high, while the Smallcap Russell 2000 falls for the 6^th time in the last 8-sessions (posting declines of more than -0.9% or worse in each of those losing sessions) as inflation fears take its toll on economic sensitive names. Stocks opened strong across the board despite another “hot” inflation reading as PPI touches its highest levels in over 10-years but had no impact on stock markets. Bonds also unaffected as the 10-year yield slid further with the 10-year at 1/.35% (off overnight highs of around 1.42%). Oil prices fell along with the U.S. dollar was gold closed at 1-month highs.

·     Inflation was a huge topic today with nearly every House Committee member questioning Fed Chairman Powell on prices during his testimony about the economic outlook (he testifies to Senate tomorrow). Powell again touted that prices are believed by the Fed to be “transitory”, downplaying the spike consumers heave felt recently. This morning, the June PPI report came in much “hotter” than expected, following a spike in CPI prices yesterday. Note CPI growth has now been above economists ests. for 4 straight months & came in at +5.4%; PPI growth has been above economists ests. for 12 straight months & came in at +7.3%. Steven Mnuchin, former Treasury Secretary under Donald Trump, said on CNBC that the Federal Reserve should start cutting back its purchases of assets like Treasury bonds and mortgage-backed securities. In prepared text, Powell showed that the central bank’s trigger-point for cutting back on its asset purchases is "still a ways off" and also noted that inflation will likely remain "elevated" in the near term, though he expects an eventual moderation, according to testimony prepared.

·     Top sector/stock movers: BAC shares tumble as lending business was hurt by low interest rates, lower net interest income, while Citi shares rallied initially behind beat on top and bottom line, but overall banks slumped with broader pullback in banks on lower rates; oil stocks tumble, erasing morning gains as oil prices pressured; Philly semi index (SOX) jumped near record highs above 3,350 after reports AAPL asked suppliers to build as many as 90M next-gen iPhones this year, a 20% increase from its 2020 iPhone shipments (boost chip names); GKOS shares tumbled after CMS released its calendar 2022 proposed physician fee schedule that includes a "significant reduction" to the physician reimbursement code for the company’s iStent; AMC shares slide, extending recent losses with shares down for the 8th time in 9-days as "meme" stock momentum has slowed; NFT stocks also losing momentum as PLBY falls for the 8th time in last 10-days.

·     IPO calendar busy tonight with at least six deals expected to price: FXLV (fitness) 20.3M share IPO (price range $15-$17; MCG (entertainment sector) 30M share IPO (price range $14-$16); PECO (grocery shopping centers) 17M share IPO (range $28-$31); RPID (life science space) 6.6M share IPO (range $18-$20); SERA (women’s diagnostic co) 4.6M share IPO (range $15-$17); SGHT (ophthalmology) 10M share IPO (range $23-$24)

·     Thursday calendar includes: China Q2 GDP, June retail sales, industrial production…UK May unemployment…in the U.S. we get July Empire State manufacturing survey (est. 18.0), Philadelphia Fed business outlook (est. 28.0), weekly initial jobless claims (est. 360K), June industrial production (est. +0.6%, capacity utilization (est. 75.6%)…for central Banks the Bank of Korea monetary policy decision, and day two of Fed Chair Powell testimony on economy and monetary policy (to Senate).

Economic Data:

·     Hotter inflation again: Producer Price Index (CPI) MoM for June reported up 1%, above the 0.6% estimate and on a YoY basis rose 7.3% vs. est.6.8%; PPI Ex: Food & Energy (core) MoM for June rose 1.0% vs. est. 0.5%, while on a YoY basis, core PPI rose 5.6% vs. est. 5.1% – inflation readings come in above ests on headline and core prices

Commodities, Currencies & Treasury’s

·     Oil prices finish lower, as WTI crude drops -$2.12, or 2.82% to settle at $73.13 per barrel after hitting a one-week low of $72.21 amid rising inflation fears and market uncertainty. Markets were volatile early on reports of a production agreement between Saudi Arabia and the UAE, allowing the Emirates to pump more oil in 2022 – but that was later denied by a UAE energy minister (as per Reuters). Weekly data showed that U.S. crude oil stockpiles fell for the eighth straight week last week, as renewed vigor in the U.S. economy continues to drive higher fuel demand, the Energy Information Administration said. The report was delayed for one hour due to technical issues. Crude inventories fell by 7.9 million barrels in the week to July 9, far more than analysts’ expectations for a decrease of 4.4 million barrels.

·     Gold prices rise $15.10 or 0.8% to settle at $1,825 an ounce, its highest settlement in nearly a month, getting a boost after Federal Reserve Chair Jerome Powell reassured investors that the central bank would continue its accommodative monetary policy despite a recent spike in inflation readings. Powell, in prepared remarks before a congressional hearing, said the U.S. job market "is still a ways off" from the progress the Fed wants to see before reducing its support, while current high inflation will ease "in coming months."

·     The U.S. dollar was broadly lower, falling sharply vs. major rival (euro, yen) as well as others (Mexican peso rises as much as 1%), with the dollar index (DXY) down -0.4%, pulling back from near 3-month highs. Treasury yields no lift at all over the last 2-days despite a spike in both the CPI and PPI inflation data as the Fed remains vigilant calling the spikes temporary.

Sector News Breakdown

Consumer

·     Retailers; LB pre-announced 2QTD results ahead of expectations again as robust demand trends continued from 1Q citing healthy merchandise margins as strong customer demand and inventory management led to lower promotions; PTON downgraded to neutral at Wedbush and lowering target from $130 to $115 saying consumers now back to having a full complement of in-person workout options along with an "unprecedented and ever-growing list" of digital and at-home choices; NKE lost its fight to stop a probe into its Dutch tax affairs, as Europe’s second-highest court backed an EU investigation opened two years ago.

·     Consumer Staples; OTLY negative mention by short seller Spruce Point Capital which accused the company of shady accounting practices and greenwashing and alleges that Oatly has overstated both its revenue and margins to investors https://cnb.cx/2TcFdPu ; beauty space a focus of Raymond James today as they upgraded shares of ULTA to outperform ($395 tgt), EL to strong buy ($355 tgt) and SBH to market perform, while initiated ELF at Outperform and $33 tgt; CHD also downgraded to Raymond James on valuation; CAG downgraded by a few analysts after co lowered year outlook Tuesday; KRUS posted Q3 sales of $18.5M topping ests of $15.5M

·     Auto’s, Casinos, Gaming, Lodging & Leisure sector; movie theatre chain AMC shares tumble for the 8th time in 9-days as "meme" stock momentum has slowed; cruise lines slipped (CCL, RCL) as reopen names pressured lately amid rising Covid variant cases; electric vehicle sector pressured again (NIO, NKLA, LI, BLNK), with CHPT leading decline ahead of expected pricing of secondary offering tonight (filed to sell 12M shares yesterday)

Energy

·     Energy stock movers; Crude prices volatile on reports Saudi Arabia and the United Arab Emirates (UAE) reached a deal that would allow a stalled OPEC+ deal on output levels to proceed, with the U.A.E. allowed to boost the baseline used to determine how much crude it’s allowed to pump, Reuters reported (Reuters headlines later from UAE energy minister said no agreement has been reached yet with OPEC+ on supply deal, deliberations continue). OPEC+ talks on a proposal to lift production by a cumulative 2 million barrels a day between August and December fell apart earlier this month after the U.A.E. insisted that its baseline should be raised from around 3.16 million barrels a day. Reuters reported that the UAE’s baseline would be lifted to 3.65 million barrels per day after the current pact on production curbs expires in April 2022.

·     Inventory data: U.S. oil demand is firing on all cylinders, triggering an eighth consecutive drop in domestic stockpiles. Weekly API data said inventories fell by more than 4 million barrels last week, bringing total stocks to the lowest since February 2020 (gasoline supplies also fell, while distillates rose…demand for both fuels has returned to pre-pandemic levels). Weekly EIA report showed Inventories fell -7.896M barrels vs. estimate draw -4M barrels and Cushing draw -1.589M barrels vs. previous draw -614K.

·     Oil Services, Equipment & Pipelines: MRO, FANG, XOM, SLB among top decliners in the S&P as oil prices erase initial gains, pressuring the energy complex; CVA to be acquired by EQT Infrastructure for $20.25 a share in cash in a deal valued at $5.3B https://on.mktw.net/3ekeDeG ; in refiners, Wolfe Research downgraded DK to Peer Perform and cut both PBF, HFC to Underperform saying primary rationale for the downgrade is Industry-driven, explaining a sharp cut in our FCF estimate and price target from prior levels. Solar stocks were broadly lower, led by declines in SPWR, but whole group seeing weakness (RUN, ENPH, SEDG) as momentum led sectors generally selling pressure on the day.

Financials

·     Bank movers; BAC 2Q EPS $1.03 vs est. $0.77, NII $10.2B vs est. $10.45B (light), net charge-off ratio 0.27%; FICC revs $2.0B, equities revs $1.6B, excl DVA sales & trading revs $3.6B (Results were boosted by a $2.2 bln release from BAC’s reserves that it had set aside last year at the height of the COVID-19 pandemic); PNC 2Q adj EPS $4.50 vs est. $3.10, NII $2.6B vs est. $2.53B, revs $4.7B vs. est. $4.4B; qtrly provision $302Mm; common equity tier 1 capital ratio estimated 10% June 30 and 12.6% March 31; WFC Q2 EPS $1.38 tops the $0.97 est. on better revs $20.27B vs. est. $17.75B (includes $1.6B, or $0.30 per share, decrease in allowance for credit losses) – says Q2 non-interest expense $13,341 mln vs $14,551 mln in q2 2020; Citigroup (C) Q2 EPS $2.85 tops the $1.96 estimate on revs $17.47B (down 12%), as beats est. $17.2B – said spending on Citigroup-issued credit cards soared 40% from a year ago, during the depths of the pandemic (it was also up 6% compared with the 2019 period) – said trading revs fell 33% YoY.

·     Asset managers, Brokers & Exchanges: BLK reported a better-than-expected quarterly profit as investors poured more money into the company’s funds, driving robust fee growth and boosting its assets under management to a record high (AUM jumped to a record $9.49 trillion in the second quarter from $7.32 trillion a year earlier); JEF formed a strategic alliance with Sumitomo Mitsui Financial Group Inc. to work on leveraged finance and cross-border merger businesses, as the Japanese company plans to acquire up to 4.9% of Jefferies shares, worth about $386M.

·     Bitcoin, FinTech & Payments; AFRM defended at Truist today noting shared fell ~10% Tuesday after Bloomberg reported Apple and Goldman Sachs may launch an integrated Apple Pay solution allowing consumers to pay for purchases over time – firm said sell-off seems like an overreaction given the company’s position as the leading enterprise BNPL provider, boasting exclusive integrations with platforms including SHOP and PTON; GPN announces that PwC, a global leader in professional services, will be a charter member of its new TSYS Partner Program; for PYPL Jefferies said in a note they little risk of PYPL losing default status on SHOP as a checkout option (we est. ~3% of PYPL’s TPV is from SHOP), but despite the mutually beneficial partnership today, believe Shop Pay bears watching as an emerging direct competitor.

Healthcare

·     Pharma & Biotech movers; shares of Covid-19 vaccine maker MRNA reaches an all-time high and exceed the $100B market capitalization for the first time; AXSM falls as the company released an 8-K filing stating the FDA had rescinded the Breakthrough Therapy Designation for AXS-12 for the treatment of cataplexy in narcolepsy, due to the approval of another therapy after BTD was granted, which we believe to be Harmony’s Wakix (pitolisant); UTHR upgraded to Buy at Argus noting shares have pulled back from their recent highs and offer investors a favorable entry point; cannabis names (GTBIF, TCNNF, CURLF) pare gains, slip after Senator Schumer says don’t have votes necessary yet for marijuana bill.

·     MedTech Equipment; shares of GKOS pressured as CMS released its proposed CY22 Medicare Physician Fee (PFS) (CMS-1751-P), and left extended ECG rates as contractor-priced – GKOS slides with the company commenting it is "extremely disappointed with CMS’ proposed 2022 physician fees for the new Category I codes” (was downgraded at William Blair saying the proposed rate calls for incremental reimbursement for the iStent procedure to be approximately $34, well below the analyst’s expectation of somewhere just south of $300); Oppenheimer cautious on IRTC saying in essence, IRTC is stuck with Novitas rates of $115 until at least YE22; LMAT 1M share Spot Secondary priced at $54.50; ILMN extends losses following yesterday report of EU antitrust probe into its $8B Grail buyout that was announced last September.

·     Healthcare Services; TDOC enters into a collaboration with MSFT to strengthen physician and patient access to virtual healthcare; Truist said they remain bullish on the group, as raise tgts on CYH, FMS, HCA, LH and THC as continue to see several factors increasingly favoring the large publics, look for ongoing reopening strength and expect solid 2Q results. The shift towards value-based care should remain a brisk tailwind benefiting low-cost, high quality providers and significant FCF generation/deployment is helping drive a virtuous cycle and widening the competitive moat for many of our names.

Industrials & Materials

·     Industrial & Machinery; CAT was downgraded by OTR Research saying although expanding demand for Caterpillar equipment in the Americas and EMEA fueled significant order growth yy during 2Q21, worsening supply constraints continue to weigh on the 2021 sales outlook and demand is declining in Asia/Pacific; WBT announces definitive pact to be acquired by Ali Group for $24 per share in deal valued at approximately $3.5B (comes a day after MIDD terminated its merger agreement with WBT, as it did not raise its offer); Deutsche Bank with several changes as they raised price tgts for DOV, EMR, ETN, ITW, JCI, LII, ROK, RXN, TT (and named catalyst call buy ideas for ETN, CARR, OSK) while lowered tgts for AGCO, CAT, CMI, GE, HON, MMM, OSK, PCAR and URI (and named CMI a catalyst call sell idea); ETN slipped after the DOJ sues to block private Danish company Danfoss’s deal to buy Eaton’s hydraulics unit

·     Transports; airlines earnings begin as DAL Q2 adj EPS loss ($1.07) narrower than expected loss of ($1.40) as op revs in-line at $6.3B – sees Q3 total revenue down 30%-35%, sees Q3 capacity down 28%-30% and sees Q3: CASM-ex up 11%-14%; overnight, AAL said it expects to report between a net loss of $35M and a net profit of $25M in Q2; sees Q2 revs to be down about 37.5% yoy; says ex effect of net special items, expects to report net loss of $1.1B-$1.2B in Q2; DAL confirms that it entered into agreements to add 29 used Boeing 737-900ERs and lease seven used Airbus A350-900s as it continues to streamline and modernize its fleet; XL said it is offering its Hybrid electric drive system as an upfit solution on the new Isuzu NPR-HD across North America.

·     Metals & Materials; in fertilizer sector, Scotiabank raised Ebitda ests for MOS, NTR, SQM, and YAR while lowered estimates for SDF and CF saying while N, P, and K fertilizer prices all realized multi-year highs in Q2, it’s important to note that much of the price surge, particularly for potash, occurred later in the quarter, when order books had mostly been filled. Therefore, they’re more excited about Q3 EBITDA revisions than for Q2 EBITDA beats; CMP rises as identifies a lithium brine resource of ~2.4 mln metric tons lithium carbonate equivalent (LCE) at its active Utah site

Technology, Media & Telecom

·     Internet; EBAY agreed to sell part of its stake in Norway’s Adevinta to private equity firm Permira for $2.25 billion in cash; YELP launches new advertising platform allowing national and regional brands to reach its high-intent audience off; large cap names again outperformance early with GOOGL, AMZN, NFLX, TWTR moving higher initially

·     Semiconductors; AVGO is said to no longer in talks buy SAS Institute after a WSJ report yesterday that SAS may be acquired for $15B-$20B. The founders of the SAS Institute changed their minds on a potential sale after news of the possible sale – WSJ reported; shares of iPhone suppliers (TSM, QCOM, CRUS, QRVO, SWKS, AVGO) surge after Bloomberg reported that AAPL has asked suppliers to build as many as 90 million next-generation iPhones this year, a 20% increase from its 2020 iPhone shipments (semiconductor index touches intraday record-high); VLDR said it joined the Nvidia Metropolis program for traffic monitoring and analytics.

·     Software movers; for SPLK, Truist said believe that the sentiment has bottomed and is turning for the positive on Splunk following a string of events that began with the retraction of their long term guidance in November of last year; tgts raised for ASAN $77 tgt from $43; BOX $30 tgt from $27; CRWD $300 tgt from $225; FTNT $300 tgt from $225 and PANW $450 tgt from $420 at Oppenheimer and says most constructive on ESTC, PANW, OKTA, SMAR and TWLO into earnings

·     Hardware, Components & Services; AAPL has asked suppliers to build as many as 90M next-generation iPhones this year, a 20% increase from its 2020 iPhone shipments, Bloomberg reported, citing people with knowledge of the matter; JNPR upgraded from Peer perform to Outperform saying the stock has lagged peers and the market in recent years. However, its current strong or improving trajectory across all three verticals should allow participation in what they say is the best time to invest in comm tech; INFY raises FY22 revenue growth guidance to 14%-16%