Closing Recap

Wednesday, June 08, 2022

Equity Market Recap

·     Stocks stalled out a second day at the same level that has troubled markets the last two-weeks (roughly 4,160 on the S&P) ahead of several upcoming potential market moving catalysts the next few sessions. Market breadth was negative with defensive sectors such as REITs, Utilities, and Healthcare among the biggest drags, though selling was broad-based with Industrials/Transports, Financials, IT, Materials all falling sharply. Same market concerns remain with inflation fears (CPI data Friday), rising commodity and food prices, interest rate hikes (ECB meeting tomorrow after bigger hike by RBA this week and FOMC next week) as well as rising costs and supply chain disruptions that have crippled stock prices in some sectors. Stocks turned lower midday after SEC Chair Gary Gensler confirmed recent reports, saying he has asked agency staff to consider requiring brokerages to route individual investors’ orders to buy or sell stocks into auctions, as part of an effort to increase competition in the market. The potential change would represent a major shakeup to the lucrative business of executing trades in the stock market, and directly impact how brokerages including Citadel Securities, Virtu Financial and Robinhood Markets process many retail trading orders. Semiconductors sunk, led by weakness in Dow component INTC after Citi cut its estimates for the second time in a week following negative comments made by company executives at an investor conference. The market drop follows a Tuesday when stocks closed higher after swinging between small gains and losses. The combination of slowing growth and rising prices has raised the specter of recession or stagflation.

·     The Organization for Economic Co-operation and Development (OECD) cuts world growth forecast and warns that the world economy will pay a "hefty price" for Russia’s invasion of Ukraine. The OECD cut its projection for global GDP to 3% from 4.5% previously. At the same time the inflation forecast was doubled to 8.5% – the highest level since 1988. The growth forecast for the U.S. was scaled back to 2.5% from 3.7%, that of China to 4.4% from 5.1%. Eurozone GDP growth is now expected to be at 2.6% instead of 4.3%.

Commodities

·     Oil prices jumped $2.70 or 2.26% to settle at $122.11 per barrel, a fresh 13-week high as U.S. demand for gasoline has kept rising despite record pump prices. The national average for gasoline sets a record for the 10th straight day at $4.97/gallon. Natural gas prices slipped, ending lower around $8.699 MMBtu after hitting highest levels since July 2008 ($9.66) earlier. U.S. commercial crude oil inventories rose unexpectedly last week, while crude in the Strategic Petroleum Reserve fell by a record amount as refiners’ inputs rose to their highest since January 2020, the Energy Information Administration said. Gold prices rise $4.40 or 0.2% to settle at $1,856.50 an ounce, on track for a weekly advance after booking back-to-back daily gains.

Currencies & Treasuries

·     Treasury yields edged higher following a weaker auction as the U.S. Treasury sold $33B in 10-year notes at a yield of 3.03% vs. 3.018% when issued prior, with the bid-to-cover at 2.41, lowest since Nov ‘21 (vs. 2.49 prior) and indirect bidders awarded 63.6% (vs. 70.3% prior) and directs awarded 19.4% vs. 18.2% prior. Overseas, France’s 10-year bond yield rises to highest since May 2014 above 1.883%, while Germany’s 10-year yield rises to highest since 2014 as well above 1.35.

·     The U.S. dollar (DXY) slipped against a basket of major currencies for a second straight day but still hit a fresh 20-year high against the yen, while the euro strengthened ahead of a policy announcement by the European Central Bank tomorrow morning where they are expected to raise rates with a more “hawkish” tone. The yen weakened to hit 134.47 per dollar, its softest since Feb. 27, 2002, and the euro hit its highest level against the safe-haven yen since 2015, as the Bank of Japan remains one of the few global central banks to maintain a dovish stance while others have adopted tightening policies of hiking interest rates to combat inflation. The Turkish lira tumbles against the U.S. dollar as President Recep Tayyip Erdogan continues to reject higher interest rates despite surging consumer price inflation.

Interesting stats:

·     Today was only the 5^th close above 3% for the 10-year note since November of 2018

·     Cboe volatility index (VIX) hits lowest level since April 22, dropping below the 24 level

·     Reverse repos by the Federal Reserve have hit $2.140 trillion, another new record.

·     Americans are saving less: 4.4% savings rate at lowest levels since 2008.

·     Americans are borrowing more: 7.5% increase in credit over the past year is largest since 2011.

Sector News Breakdown

Consumer

·     Retailers; VRA lowers year revs view to $490M-$505M from prior $555M-$575M view and est. $565M and lowers year EPS view to $0.35-$0.50 from $0.57-$0.67 after posting Q1 EPS loss and miss on revs and margins; JILL Q1 net sales rises 21.7% to $157.1M amid strong demand for its apparel as posts Q1 net income of $14.4M, or $1.02 per share, compared with net loss of $18.3M y/y; OLLI falls as Q1 EPS miss of $0.20 vs. est. $0.34 and sales fell -10% y/y to $406.7M vs. est. $434M on weaker margins of 34.8% vs. 40.4% y/y, Q2 guidance slightly better, but lowers year net sales view to $1.87B-$1.9B from prior $1.91B-$1.93B; LOVE falls despite better quarterly EPS and sales as implied guide down for balance of the year

·     Housing & Building Products; housing stocks active (LEN ) as Mortgage demand falls to the lowest level in 22 years, amid rising rates and slowing home sales as the average contract interest rate for 30-year fixed-rate mortgages increased to 5.40% from 5.33%, applications to purchase a home fell 7% for the week and were 21% lower y/y and refinance demand dropped 6% for the week and was down 75% y/y – MBA data

·     Consumer Staples; CPB Q3 EPS of $0.70 beats $0.61 estimate on sales $2.13B vs. est. $2.04B while saying saw continued share pressure from private label following their distribution recovery, market’s higher overall prices; BF Q4 EPS $0.31 vs. est. $0.27 and revs rose 23% y/y to $996M vs. est. $831.8M and said anticipates FY 2023 organic net sales growth in mid-single digit range; STZ positive mention at Wells Fargo as reiterate OW and raise PT to $280 as see a "beat and maintain" setup into Q1 results June 30^th; CASY Q4 EPS $1.60 vs. est. $1.59 and revs $3.46B (in-line) as Q4Inside same-store sales up 5.2% with an inside margin of 39.4%; Fuel same-store gallons sold up 1.5% with a fuel margin of 36.2c per gallon; raises dividend; MO downgraded to Underweight at Morgan Stanley see risk-reward skewed to the downside given the combination of near-term fundamental pressures and our longer-term concerns about MO’s cigarette portfolio, limited RRP offering, and PM’s pending SWMA acquisition

·     RV/Towables: in towables/RVs, THO Q3 EPS $6.32 vs. est. $4.77; Q3 revs $4.66B vs. est. $4.18B; expect calendar year 2022 North American RV industry retail sales of between 460,000 and 480,000 units; however analyst note that in RV space (WGO ), April saw significant drop-off in registrations as data showed total RV industry sales were reported to be down 13% vs. 2019, a meaningful drop-off from the 15% growth vs. 2019 seen in March and the 20-30% growth rates seen from November through February, as per Citi

·     Leisure movers: Cruise lines active as Morgan Stanley cuts price tgt on CCL to $13 from $17, RCL to $54 from $59 and NCLH to $14 from $18 to reflect weak channel checks, growing macro risks, and rising debt costs, all of which they think makes further equity raises more likely. Said they are holding forecasts at this stage, having already cut 2022 sharply this year, but see growing risk to 2023; in gaming, DKNG shares strong early after UBS revenue estimates move higher, with ‘22E revenue now at $2.11B, up from $1.95B previously, and ‘23E at $2.77B, up from $2.57B mainly adjusting for DKNG’s acquisition of GNOG and entrance into the Ontario market

Energy

·     Energy stock movers: The national average sets a record for the 10th straight day at $4.97/gallon as energy prices again outperform. Weekly inventory data showed: 1) the API reported weekly crude inventories rose 1.9M barrels, inventories at Cushing fell -1.8M barrels, reported gasoline inventories rose 1.8M barrels and distillates rose 3.4M barrels, 2) the EIA said U.S. crude oil inventories actual rose 2.025M barrels vs -5068k previous and est. -22.5M barrels while Cushing oil inventories fell -1.59M barrels vs. 256k previous and gasoline draw was -812K barrels vs. est. +800K. U.S. Crude stocks in SPR fell in latest week to lowest since March 1987.

Financials

·     Bank movers; Credit Suisse (CS) said it is likely to post a loss for Q2, as it continues to face challenging market conditions while it presses on with a restructuring; said its investment bank performance was depressed in April and May, and the unit will likely post a quarterly loss (CS shares rebounded following a foreign report that STT is exploring a takeover bid for the Swiss bank https://bit.ly/3QbCwWO ) ; XP slips early after Brazilian lender Itau Unibanco said it has sold 1.21% for $153.7M a day earlier

·     Brokers & Exchanges: Wall Street’s regulator is about to announce rule changes that would force trading firms to directly compete to execute trades from retail investors in a bid to boost competition for orders, according to four industry sources – Reuters https://reut.rs/3tnSqUh (shares of HOOD, VIRT been active on this story the last few days)

·      Bitcoin, FinTech & Payments; AFRM was initiated at Underperform and $15 tgt at Wedbush, which represents ~40% downside citing concern about Affirm’s path to GAAP profitability, increasing competition in the buy now, pay later space, industry forecasts calling for slowing e-commerce sales and its ability to cover its cost of capital as funding costs increase; FISV expanded the diverse portfolio of payout options available to businesses using its Carat operating system to include digital checks; MA has partnered with MELI to strengthen the security and transparency of its recently launched crypto program in Brazil

Healthcare

·     Pharma movers: ALDX said lead drug candidate, reproxalap, met two of its main goals of increasing tear production in patients and plans to submit marketing approval application to FDA pending a meeting with the drug regulator; DBVT said its phase 3 trial assessing its Viaskin Peanut for the treatment of peanut allergies in toddlers aged 1 to 3 years met its main goal; MNOV announces positive top-line results from phase 2 trial of MN-166 (Ibudilast) in hospitalized #COVID19 patients at risk for ARDS; VRTX wins key FDA and EU designations for kidney disease drug; RIGL tumbles after the company’s Phase III trial of fostamatinib in patients with warm autoimmune hemolytic anemia failed

·     Biotech movers; NVAX rises after the FDA’s Vaccines and Related Biological Products Advisory Committee recommended that the FDA grant Emergency Use Authorization for the Novavax COVID-19 vaccine for individuals aged 18 years and older; BCRX said the FDA has granted Fast Track designation for its BCX9250 for the prevention of heterotopic ossification in patients with fibrodysplasia ossificans progressiva; MRNA said its COVID-19 vaccine booster that targets both the original coronavirus strain as well as Omicron produced better immune response against the variant than its original vaccine – raised virus-neutralizing antibodies eightfold in a study; TLSA reports positive clinical results in the second patient with secondary progressive multiple sclerosis following three months of dosing with foralumab

·     Healthcare Services & MedTech Equipment; EW removed from Citi’s NAM Focus List, while maintain Buy rating as remain positive on the underlying company and market fundamentals as well as the clinical pipeline

Industrials & Materials

·     Transports: SAVE postpones a shareholder meeting to vote on the proposed merger agreement with ULCC to June 30^th (airline was originally set to vote on the Frontier deal this Friday), two days after JBLU improved its buyout offer for Spirit to include a higher reverse break-up fee; for ride hailing, Barclays’s said it is time to revisit the long thesis for UBER because shortage of drivers has ended; North American freight railroad traffic falls 3.4% for the week ended Saturday, marking a 15th straight down week (UNP ), amid a sharp drop in service-centric intermodal volume. Carloads fall 1.4% on 12 reporting US, Canadian and Mexican railroads, while the volume of intermodal units slides 5.2%

·     Metals & Materials; in chemicals, SMG lowers FY22 adj. EPS view to $4.50-$5.00 below prior view of $8.50-$8.90 and consensus $7.01, said sales are expected to decline 4%-6% and Hawthorne sales are now expected to decline 40%-45% for the year ending September 30, 2022; OI said it now expected its Q2 adjusted earnings to exceed its previous guidance range; now anticipates Q2 adj. EPS to exceed $0.65, compared to its previous expected range of $0.55–$0.60 (est. $0.58); in TiO2 industry (CC ), BMO Capital says remains tight, and expect pricing to continue to push higher into 2H of 2022 as low inventories, reasonably tight demand, and elevated raws/energy keep upward pressure on the industry.

Technology, Media & Telecom

·     Internet & Media movers: ROKU rises following a Business Insider report saying that talk is heating up about an acquisition by NFLX https://bit.ly/3MwNPWw . Rich Greenfield of Lightshed partners said on CNBC talking about the Business insider report this morning of NFLX/ROKU- calls it "one of the more absurd tings I ever heard in 27-years following media stocks." FB said it was excited to launch our Crayta social world and game-building environment on Facebook Gaming; SPOT shares rallied during its investor day after upbeat guidance

·     Semiconductors: INTC shares weak after analysts said mgmt sounded incrementally more cautious at investor conference on its n-t outlook, citing that the three major headwinds flagged on its most recent earnings call (matched set issues, customers reducing inventory levels, and China closures) will likely have a larger impact in the current quarter than originally anticipated, and that 2H22 has become more uncertain (as per Citi, which cut ests and Deutsche Bank). Citi lowers INTC’s FY22 sales est. to $71.9 bln from $74.4 bln and EPS est. to $2.33 from $2.63; TSM maintained its strong revenue growth forecast for the current year saying demand remains solid for its chips; expects its revenue to increase by about 30% this year from last year’s 24.9%; WDC announced that it will explore potential strategic alternatives for the company, including potentially separating its NAND and HDD segments

·     Software movers; GWRE reported better-than-expected Q3 results, with total revenue of $197.4M, up 20% y/y (consensus $188.4M), non-GAAP EPS of ($0.26) (consensus ($0.28)), subscription revenue of $66.4M (JMPe $65.4M), up 49% y/y, a deceleration from 64% growth last quarter, and ARR of $637M (consensus $635.5M), up 18% y/y, down from 19% q/q; KC posts Q1 revenue of 2.17 billion yuan, up ~20% from a year earlier and says gross billings from core cloud services, including computing, storage, and enterprise, jumped 61.2%; DOCU last night said it expands partnership with MSFT SMAR reported customer metrics and net retention that were better and FY23 operating loss/FCF guidance less bad, while billings beat was lower than previous quarters