Closing Recap

Friday, June 03, 2022

Equity Market Recap

·     U.S. stocks were notably weaker on Friday, giving back much of yesterday’s gains as the U.S. economy added more jobs than expected in May but wages slowed. Nonfarm payrolls increased by 390,000 jobs last month, above the forecast increasing by 325,000 jobs in May, while wages rose a less-than-expected +0.3% M/M. While the gain in payrolls will further ease concerns about a near-term recession, investors remain worried that the labor market is still too hot for the Fed’s liking as two 50-bps hikes are widely anticipated in coming months (and there is increasing speculation that another half point hike will be needed in September). The 10-year Treasury yield jumped to highs of 2.98% following the data before paring gains but finished higher. Oil prices posted a 6^th straight weekly advance after OPEC+ delivered a modest increase in output.

·     Prominent CEO’s raising warning signs for markets: Tesla’s Elon Musk overnight said he wants to cut 10% of its workforce, noting he had a "super bad feeling" about the economy. The comments followed JPMorgan CEO Jamie Dimon this week who Wednesday equated the economy to a “hurricane” and advised we “brace ourselves”, while also noting he expects price turmoil in commodities. Other companies have recently announced pause in hiring

·     More Fed commentary (seems like every day) as Cleveland Fed President Mester said late day on CNBC "I don’t see a hurricane, but we have to admit that the risk of a recession has gone up." "It is a struggle to get that supply-demand back in balance." At the September Fed meeting, "I could easily be for a 50-basis point increase at that meeting as well," she said. But if the economic data warrants, she could support a 25-bp hike instead. It seems that while they try and telegraph every move for markets it creates more noise and uncertainty in the process.

·     Meanwhile, Russia’s war in Ukraine entered its 100th day. The U.S. added restrictions on doing business with 71 entities in Russia and Belarus. A UK intelligence report showed Russian forces are achieving tactical success in eastern Donbas, but at significant cost.

Economic Data:

·     Nonfarm Payrolls for May reported at +390K, above est. +325K – April revised to +436,000 from +428,000) and March +398,000 from +428,000; Private Payrolls for May reported at +300K vs. est. +325K; Manufacturing Payrolls for May rise +18K below est. +40K; Unemployment Rate for May reported at 3.6% vs. est. 3.5%; Average Hourly Earnings for May rises +0.3% vs. est. +0.4% (buy y/y rises 5.2%); labor force participation rate 62.3% in May vs. 62.2% in April

·     ISM Services PMI comes in weaker than expected in May as services industry growth slowed for a second straight month. The Institute for Supply Management said its non-manufacturing activity index fell to a reading of 55.9 last month from 57.1 in April (est. 56.4). Its services industry employment gauge also rebounded to 50.2 from a reading of 49.5 in April.

·     S&P global May final composite PMI at 53.6 (vs flash 53.8) and S&P global May final services PMI at 53.4 (vs flash 53.5)

Commodities, Currencies & Treasuries

·     Oil posted its sixth straight weekly advance after yesterday’s OPEC+ meeting delivered only a modest increase in output. There had been speculation the Saudis were preparing to pump significantly more as part of a reset of relations with the U.S. WTI crude settles at $118.87/bbl, up $2.00, 1.71% while Brent crude futures settle at $119.72/bbl, up $2.11, 1.79%. The National average for a gallon of gas hit a record of $4.761 a gallon according to AAA, while the National Average for a gallon of diesel hit a record of $5.581 a gallon. Gold prices fell -$21.20 or 1.1% to settle at $1,850.20 an ounce, posting its biggest daily drop in about 3-weeks. Prices had been rising amid mounting worries over a softening economy.

·     The U.S. dollar index (DXY) reclaims the 102 level (still down 300-bps from 20-year highs reached this month), as weaker economic data in recent weeks has raised concern of a weaker economy while markets still struggle with high inflation. The dollar rose 0.5% to a more than three-week high of 130.46 yen, with the Japanese currency not far from the two-decade low touched in May as the Bank of Japan (BoJ) stuck to its super-low interest rate policy stance. Treasury yields were broadly higher, at their best levels of the week with the 10-yr hitting highs of 2.98% before paring gains. Bitcoin prices again stalled under $30,000, falling over 2% today.

Sector News Breakdown

Consumer

·     Retailers: KSS active after the WSJ reported private equity firm Sycamore Partners offered in the mid-$50s/share for Kohl’s, while FRG offered around $60/share, citing people familiar. https://on.wsj.com/396pqcX ; LULU reported solid Q1 sales and profit trends and raised 2022 EPS guidance to improve 20-22% to $9.35-9.50 vs. $9.15-9.35 previously; JOAN downgraded to Neutral at Bank America following Q1 earnings results overnight (miss on top and bottom line) and ongoing challenges; TLYS tumbles as Q1 results mostly in-line but sees Q2 EPS $0.14-$0.20 vs. est. $0.34 on lower revs; ZUMZ also guides next quarter revs below consensus; COST reported total and U.S. core May comp growth of 15.5% and 11.8%, respectively, compared to consensus of 9.6% and 7.2%. Sales growth remained strong, with the 2-year comp CAGR consistent with F3Q22 levels at ~13%, though a slight deceleration sequentially from month of April levels

·     Housing & Building Products; RH results mixed as EPS handily beat and 1Q revs were ahead as worked through its backlog with gross margins rising 480bps on product margins, but lowered FY22 sales & margin outlook; NX 2Q adj EPS $0.80 vs est. $0.43 on net sales $322.9Mm vs est. $286Mm; guides FY net sales $1.18-1.2B vs est. $1.14B and adj EBITDA $150-155Mm vs est. $135.9Mm; MLM upgraded from Neutral to Overweight at JPMorgan aa have a positive perspective towards the 2H based on pricing acceleration, strong demand outlook coming from all end-use segments, and market tightness.

·     Consumer Staples: NAPA posted a strong quarter with a ~7.7% topline beat, a ~13.8% EBITDA beat, and a ~30% EPS beat and said that depletions were up strong double digits; CVGW 2Q adj EPS $0.33 vs est. $0.22 on revs $331.4Mm vs est. $316.9Mm; SBUX said reopens 600 of 940 stores in China and will continue to reopen rest of store portfolio

Energy

·     Energy stock movers: energy once again the only sector in the S&P outperforming as oil prices climb a 6^th straight week; shares of CVI, CVE, DK, EOG, ESTE, EPD, GLOP, GPOR, LPI, MPC, PBF, PSX, TALO, VLO, WTI, WMB all hitting 52-week lows today; the Baker Hughes rig count unchanged from prior week at 727

·     Utilities & Solar; POR upgrade from Neutral to Buy with higher $52 tgt as see it as an improving regulated utility story in a balanced regulatory environment, with potential earnings growth upside driven by incremental renewable generation investments not embedded in our current estimates; CNP said its green hydrogen project in Minneapolis is operational

Financials

·     Bank movers: still failing to rally; in regional banks, RF upgraded to Market Perform and SSB to Outperform at KBW Inc., while the firm downgraded OPBK, FBC, BKU to Market Perform and HBAN cut to Underperform rated as favor banks with balance sheet flexibility from excess cash and low loan-to-deposit ratios, enabling them to achieve greater net interest margin expansion and likely valuation support

·     Insurance: TRV was downgraded to Sell from Neutral at Goldman Sachs and cut tgt to $170 (saying has less upside to further margin improvement), while upgraded VOYA to Buy from Neutral saying Voya screens positive for strong cash conversion and ability to buy back stock, trades cheap on cash flow, earnings, and statutory book value and gets solid benefits from higher interest rates. Morgan Stanley downgraded mortgage brokers AON and MMC to Underweight saying brokers tend to underperform late in a P&C pricing cycle (as we’re in now) & key fundamentals (organic growth, margins) look less favorable near term.

·     FinTech & Payments; STNE rises as Q1 adj EPS R$0.43 vs. R$0.60 last year and Q1 revenue R$2.07B vs. R$867.7M last year; accelerates growth, recovering profitability, and reports record revenue of BRL 2.07 billion in 1q22, with 138.6% increase y/y (shares of PAGS move in sympathy)

·     Financial Services: MKTX May 2022 showed $34.8B in total trading average daily volume, up 45%, consisting of credit ADV of $12.0B, up 16%, and rates ADV of $22.8B, up 66%. U.S. high-grade ADV of $5.7B, up 16%; estimated market share of 21.7%, up from 20.4%; TW reported trading volume for May 2022 stood at $25T; ADV for the month stood at $1.19T (+21.4% Y/Y)

·     Crypto: Bitcoin dropped over 2% to $29,500 after NY just passed a bill cracking down on bitcoin mining that run on carbon-based power sources. The measure now heads to the desk of Governor Kathy Hochul, who could sign it into law or veto it. https://cnb.cx/3GNEYP7 ; in research, BTIG slashed tgts for RIOT to $15 from $50, MARA to $16 from $50, CLSK to $10 from $30 while reiterate Buys across BTC Mining Coverage noting BTC mining stocks are down on average ~70% YTD or about 2x the BTC price. Consumers reported losing more than $1B of cryptocurrency through various types of fraud since January 2021, the FTC says. More than 46,000 people filed such complaints over that period, reporting a median loss of roughly $2,600. The FTC says most of the losses, about $575M, stemmed from bogus investment schemes that often originated on social media platforms such as Instagram and Facebook.

Healthcare

·     Pharma movers; BMY to acquire TPTX for $76.00 per share in deal valued at about $3.8B which represents a 122.5% premium to Thursday’s closing price of $34.16 https://bit.ly/3anePL5 ; AMLX rises after the FDA extended its the review period by three months to Sept 29th (from June 29th) for its ALS medicine AMX0035 to have more time to review additional analyses of data

·     Biotech movers; ICPT announces new clinical trial and real-world outcomes data for Ocaliva in PBC as Cobalt study in advanced PBS did not demonstrate a statistically significant difference in clinical endpoints between Ocaliva, placebo; for vaccines, the risk of myocarditis following NVAX covid vaccine could be higher than reported during post-authorization use of MRNA COVID-19 vaccines as per FDA briefing documents – sent shares of NVAX lower by over 20%; IMCR announces collaboration with SNY to evaluate Sanofi’s product candidate SAR444245, non-alpha IL-2, in combination with KIMMTRAK® in patients with metastatic cutaneous melanoma

·     Healthcare Services: THC added to analyst current favorites list at Raymond James while CI was removed from its current favorites list; CI said it expects to reaffirm projected FY2022 consolidated adjusted revenues of at least $177B vs. est. $178.34B; COO cuts full-year 2022 profit forecast as now sees 2022 adj. EPS $13.09-$13.29, down from prior view $13.70-$14.20

Industrials & Materials

·     Transports, Industrial & Machinery: in autos, Elon Musk told execs that TSLA needs to cut its workforce by about 10% and pause all hiring worldwide, Reuters reported, citing an internal email; Ryder (R) said its Q2 and full-year 2022 forecasts ahead of its Investor Day as sees Q2 EPS at $4.37-$4.62 from $3.97-$4.22 previously and raised its forecast for 2022 adjusted RO; the WSJ reported midday that supply chain problems caused BA to pause 737 MAX production for ~10 days in May, complicating the company’s ability to satisfy demand for new aircraft

·     Airlines: AAL updates Q2 guidance as sees Q2 revenue up 11% to 13% vs 2019 level vs. prior view of up 6% to 8% saying increase driven by demand, pricing strength and sees Q2 capacity down -7%-8%, from prior view down -6%-8%/sees CASM ex-items 10% to 11%, from 8%-10% but fuel costs would increase in Q2, raising average fuel expenses to between $3.92 and $3.97 per gallon; ALK said sees Q2 passenger load factor about 87% to 88%, sees Q2 capacity (ASMS) down about 7% to 9% vs. 2019; sees Q2 revenue passengers % change versus 2019 to be down about 9% to 10%; ULCC announce amended merger which has been unanimously approved by the boards of directors of both companies, as Frontier would pay a reverse termination fee of $250M to Spirit in the unlikely event the combination is not consummated for antitrust reasons.

·     Metals & Materials; ECL receives 2^nd upgrade in as many days, boosted to Outperform at Credit Suisse today noting the stock is down ~26% YTD and ~20% over the past year saying as the global economy recovers (albeit unevenly) as Covid impacts fade, they expect ongoing volume/pricing momentum to continue; WLK downgrades from Overweight to Neutral at JPMorgan based on valuation and notes recessionary risks to the global economy are rising

Technology, Media & Telecom

·     Internet, Media, & Telecom: TWTR said the waiting period under the HSR Act for Elon Musk’s $44-billion acquisition of the social media firm has expired – the HSR act requires parties to report large transactions to both the FTC and DoJ for review; AMT 8.35M share Spot Secondary priced at $256.00; TMUS said it launched commercial Voice over 5G service in two markets.

·     Semiconductors: MU downgraded to Underweight from Neutral at Piper and cut tgt to $70 from $90 citing the company’s oversized exposure to mobile, PCs, and other consumer end markets and the associated trends in the macroeconomy; a day after the Philly semi index (SOX) topped its 50-day MA resistance around 3,090, the sector fell back below those levels today in profit taking, down over 2% today for the sector (MU a big drag after downgrade)

·     Software movers; ASAN reported the smallest beat-and-raise since the IPO, but posted better beat and guide where metrics were ahead but was offset by weaker margins, leading shares down; SNOW initiated new Outperform and $184 tgt at JPMorgan saying its differentiation in cloud data warehouse enables it to compete against cloud-agnostic and public cloud options; PD Q1 revenue/billings growth was ahead of expectations at +34%/+38% and strong customer metrics, while Q2/23 revenue/EPS guidance was largely in-line; HCP with 1Q subscription growth of 50% above Street of 39%, led by strength in its Self-Managed product and FY23 rev growth guide was raised from 32% to 35%

·     Internet Security Software: CRWD reported better than expected FQ1’23 results with upside on all top- and bottom-line metrics and increased its FY23 growth outlook (posted Q1 ARR growth of 61% y/y – slightly ahead of the street at 59% y/y); OKTA posted Q1 results that topped expectations and raised guidance for Q2 and rest of the year, as headline billings of $389MM / +28% y/y was only fractionally above the street, but CRPO growth of 57% was nicely above OKTA’s prior low- to mid-50s guidance