Closing Recap

Thursday, June 16, 2022

Index	Up/Down	%	Last
DJ Industrials	-738.83	2.41%	29,929
S&P 500	-122.73	3.24%	3,667
Nasdaq	-453.06	4.08%	10,646
Russell 2000	-81.67	4.72%	1,649

 

Equity Market Recap

·     Markets in freefall as stocks, bonds, the dollar tumble on Thursday (commodities mixed), with major averages hitting more than 1-year lows with no sector safe from the carnage, though growth and cyclical names were hit the hardest. Aggressive central bank action (globally) on interest rates grabbing markets attention in their bout to slow inflationary prices that have crippled consumer purchasing power as well as corporations which must pay up for material costs. Tech giant Apple (AAPL) hit its lowest level in a year, dragging the Dow, Nasdaq, and S&P all decisively lower just a day after the Fed raised interest rates by a whopping 75-bps, with calls for another 75-bps likely at the July meeting. Global recession and/or stagflation (rising prices with slowing growth) fears increasing by the day. Economic data has been abysmal of late with sliding manufacturing data, tumbling housing data, jobless claims rising, etc. Just today alone, data showed weekly Jobless Claims above ests, housing starts plunge -14% and Philly Fed reading first negative post since July 2020 and missing ests.

 

Market stats on the day (not pretty):

·     The Dow Jones Industrial Average drops below 30,000 for the first time since January 2021

·     The S&P 500 falls for the 6^th time in the last 7-sessions to lowest level since December 2020

·     The S&P and Nasdaq on track for 10^th weekly loss out of last 11 and Dow 11 of last 12-weeks

·     The Nasdaq hits its lowest levels since September 2020, falling more than 4%

·     The 10-year yield has had an intraday range of at least 15 bps for five straight days which is the longest streak of 15 bps intraday high low swings since the COVID crash (13 days) – Bespoke

·     Gas pump prices in the U.S. hit another record high, rising to an average of $5.11 per gallon – a year ago the average price was $3.16 and two years ago the average price was $2.19

·     Housing data points alarming: Mortgage rates in the US surged the most for a week since 1987, to 5.78%, the highest level since 2008. In Jan 2021, the 30-yr mortgage rate was 2.65% and average new home price in the U.S. was $401,700. Today the 30-yr mortgage rate is 5.78% and average new home price is $570,300. Assuming a 20% down payment, that’s a 106% increase in the monthly payment (from $1,294 to $2,671), as per Charlie Bilello

·     Bank America said today in a note, the Fed has yet to even begin unwinding its balance sheet (QT), but it’s likely to only exacerbate underlying liquidity issues without actions from regulators, the Fed or Treasury. Bank of America strategists estimate the Fed to reduce its balance sheet by $2.6 trillion in assets through 2024: $1.75 trillion in treasuries and $850 billion in MBS

 

Economic Data:

·     Weekly jobless claims fell to 229K in latest week from 232K but above ests for 215K reading; the 4-week moving average rose to 218,500 from 215,750 prior week; continued claims rose to 1.312M from 1.309M prior week and U.S. insured unemployment rate unchanged at 0.9%

·     Housing starts for May tumble -14.4% to 1.549M (lowest rate since April 2021), below estimate of 1.701M units and down vs April +5.5%; May single-family starts -9.2% to 1.051M unit rate and multifamily -23.7% to 498,000-unit rate; Building permits 1.695M below est. 1.785M

·     Philly Fed Business Index June actual -3.3, its first negative reading since July 2020 and below forecast of +5 and down from previous month reading of +2.6; prices paid index declined for the second consecutive month, down 14 points to 64.5; new orders index fell 35 points to -12.4, and the shipments index fell 25 points; employment index moved up from 25.5 to 28.1

 

Commodities

·     Gas prices in the U.S. hit another record high, rising to an average of $5.11 per gallon (a year ago the average price was $3.16 and two years ago the average price was $2.19). European natural gas prices surged this week after a recent fire at Freeport LNG sparked a rally, which continued today after Russia’s Gazprom indicated that "maintenance" would impact supplies from Nord Stream. ENI (E) said Gazprom had cut supply by ~1/3, with Germany seeing a 40% reduction.

·     Oil prices volatile but end near the best levels of the day as WTI crude rose $2.27 or 1.97% to $117.58 per barrel in another volatile day (highs $117.98 per barrel and off the lows $112.31). Gold gains $30.30 or 1.7% to end the day at $1,849.90 an ounce, bouncing back-to-back sessions, while silver near highs up 2.4%, benefitting from the weaker dollar (off 20-year highs) and easing Treasury yields.

 

Currencies & Treasuries

·     U.S. dollar slumped, falling from over 20-year highs, down against safe-have currencies such as the Japanese yen and the Swiss Franc, and the British Pound after central bank actions. GBP rises to near 1-week high vs. U.S. Dollar, rising as much as 1.80% to $1.2398 (well off earlier lows around 1.205 today). Bonds bounce after an awful week (and year for that matter) as the 10-yr yield dropped -15 bps to 3.25% (off earlier highs around 3.5%); the 2-yr down 17 bps to 3.10%.

·     Central Bank action spurring investor “risk-off”: yesterday, as expected, the FOMC approved a 75-bps hike, its biggest interest-rate increase since 1994 but suggested moves of that scale would likely not become common. Fed Chairman Jerome Powell added that he expected either a 50 or 75-bps increase at the Fed’s July meeting as they try and get rampant inflation under control

·     The Bank of England (BoE) raised rates by 25 basis points again but says ready to act forcefully (in-line with estimates) to stamp out dangers posed by an inflation rate heading above 11%. The BoE warned that Britain’s economy would shrink in the April-June period. The nine-strong Monetary Policy Committee voted 6-3 for the 25 basis-point hike in Bank Rate to 1.25% (highest since Jan 2009), the same breakdown as in May with the minority voting for a 50 basis-point increase. Note the U.K.’s rate of inflation hit a 40-year high of 9% in April.

·     The Swiss National Bank (SNB) delivered a surprise interest rate hike, triggering its biggest daily jump against the euro since the central bank ditched its currency peg in 2015. The SNB joined other central banks in tightening monetary policy to fight surging inflation in its first-rate hike in 15 years, increasing its policy rate to -0.25% from the -0.75% level.

 

 

Macro	Up/Down	Last
WTI Crude	2.27	117.58
Brent	-2.38	119.81
Gold	30.30	1,849.90
EUR/USD	0.0128	1.0570
JPY/USD	-1.69	132.15
10-Year Note	-0.145	3.25%

 

 

Sector News Breakdown

Consumer

·     Retailers; group down with broader market on recession fears and slowing consumer spending concerns; in research, AZO upgraded to Overweight with a $2,420 PT at Morgan Stanley saying the stock offers ~20% upside with an attractive ~3:1 bull/bear skew and raised DG to OW as well saying it fits their theme of favoring quality, defensive retailers with offensive characteristics. The firm downgraded AIRS to equal weight and cut tgt to $8.50 from $17 as misjudged the market’s appetite for a high growth services retailer at IPO and updating our valuation framework and cut SBH to Underweight (tgt to $12 from $19) noting it has struggled to hold market share as the category favors omni-channel offerings

·     Auto sector; TSLA increased its Model Y long-range price to $65,990 from $62,990 after delaying the deliveries of some long-range models in the United States by up to a month; RACE held its capital markets day and unveiled its long-term electrification plans and expected BEV penetration for BEV/ PHEV/ICE of 5%/55%/40% by 2026 and 40%/40%/20% by 2030; in EV space (TSLA, RIVN, NIO, XPEV) Jefferies lowered their global EV sales estimates for 2022 and 2023 as expect EV sales in 2022 of 8.7M, down from a prior forecast of 9M, and 2023 sales of 11.5M, lower than prior view 11.8M; LEV files $350M mixed securities shelf

·     Consumer Staples; grocer KR raises FY adj EPS $3.85-$3.95 from prior $3.75-$3.85 (est. $3.84) and boosts its FY22 identical Sales growth without fuel to 2.5%-3.5% from 2.0%-3.0% while reported Q1 beat of $1.45/$44.6B vs. est. $1.30/$44.35B; for BYND, BTIG lowers ests following recent franchisee checks on the McPlant, category growth and selling price trends that lead us to believe management’s guidance and our initial estimates were just too high; REV filed for bankruptcy saying that the company is currently unable to timely fill almost one-third of customer demand for its products; defensive food/product names held up well K, SJM, CHD, PG

·     Homebuilders & Building Products movers: TMHC, TPH, GRBK all downgraded to Neutral from Buy at B Riley on the expected impact of higher interest rates on new home starts and the potential for gross margin pressure in 2023. The actions come after the Federal Reserve raised the federal funds rate target range by 75 basis points to 1.50%-1.75% and indicated it could boost it by the same amount in July.

·     Casinos, Gaming, Lodging & Leisure sector; anything discretionary spending related has been crushed over the last few weeks, with inflation fears gripping markets and boosting expectations of slower consumer spending, as the likes of casinos (WYNN ), theme parks (SIX ) hotels (HLT ), online travel (BKNG ); delivery (UBER ), cruise lines (RCL ) tumble daily; in news, UBER and LYFT slide as the top court in Massachusetts blocked a ballot measure Tuesday that would have asked voters to classify gig workers as independent contractors rather than employees

 

Energy

·     Energy stock movers; as many know and widely documented, energy has been the biggest (and only) sector advance in the S&P 500 this year, but as recession fears rise on slowing economic data points and surging inflation/rate fears, oil has tumbled this week, taking down the energy sector stocks. Note the XLE is down roughly -12% over the last 5-days and OIH (oil services) down roughly -15% over that same stretch as investors taking profits in strongest S&P sector this year. In stock news, NEX boosted Q2 guidance for adjusted EBITDA, revenue growth – sees adjusted EBITDA to at least $155M, compared with its earlier view of at least $130M and revs rising at least 30% Q/Q, compared with prior expectations for at least 20%

 

Financials

·     Banks remain weak despite Treasury yields jumping to multi-week highs this week, pressured by recession fears, lower deposits with stock markets falling, an IPO market that has completely dried up in 2022 due to market uncertainty, and slowing trading results amid volatile stock markets; credit card names also feeling weakness SYF, DFS, COF

·     Services & Insurance; RDFN ests lowers at BTIG, cutting 2Q ($624M to $591M) and 2022 ($2.4B to $2.2B) revenue estimates, and take EBITDA for the year from -$20M to -$57M after May demand was 17% below expectation and RDFN is cutting 6% of the workforce; AJG upgraded to Outperform at RBC Capital as see the current valuation as a good entry point to own a high-quality, growing insurance broker with strong cash flows and excellent earnings visibility; ALL said estimated catastrophe losses for the month of May of $436M or $344M, after-tax

 

Healthcare

·     Pharma movers: AQST reported positive AQST-109 data from first three arms in EPIPHAST Part 3 further characterized/confirmed key PK/PD/safety measures showing faster Tmax (12 minutes) and similar Cmax (350 pg/mL) at Target 4-minute hold time vs. epinephrine IM, while also showing good exposure at lower hold times; ABT after baby formula output in Michigan after severe storms

·     Biotech movers; ACIU falls after it and partner Roche said its investigational Alzheimer’s treatment fails to meet main goals in a mid-stage study as crenezumab did not "statistically significantly" slow or prevent cognitive decline in people with a specific genetic mutation that causes early-onset of Alzheimer’s; KPTI said it received notice from BIIB that they elected to terminate asset purchase agreement dated January 24, 2018; as result of termination, Co is not entitled to receive any milestone payments or royalties under agreement; NTLA initiated with a Buy rating and $70 tgt at Bank America noting they became the first to edit the human genome in vivo with NTLA-2001, which they would argue is also an attractive commercial opportunity

·     MedTech Equipment; PHG downgraded to Sell from Neutral at UBS as expect the downgrade cycle to continue at Philips and are 6% below consensus adjusted EBITA for 2022 driven by margin concerns – also think the risk/ reward is negative around the upcoming Sleep device testing data associated with a product recall; for IRTC, tgt cut to $165 from $200 at Truist ahead of a potential CMS National Coverage Decision (NCD) for its ZioXT service expected in the Physician Fee Schedule in July – revise base case ZioXT ASP to $250, below prior $285 est.; seeing more weakness in medical device names DXCM, SYK, BAX, ISRG on fears of slowing consumer spending for some procedures; hospital names also fall HCA

 

Industrials & Materials

·     Aerospace & Defense; BA was upgraded to Buy from Neutral at Citigroup as seek to value Boeing on the basis that the medium-term risks can be resolved: says 1) if the 737MAX, 777X (both of reasonable concern to us) and the 787 (of less concern) programs achieve our forecast levels of production and profitability, estimate fair value to be $209, 2) if the 737MAX and 777X only achieve their downside case, estimate value to be $116 and 3) if all three programs go badly, see value at about $84 per share

·     Metals & Materials; STLD guides Q2 adj EPS $6.61-$6.65, above the $5.68 estimate saying profitability from the company’s steel operations is expected to be historically strong, but lower than Q1 results, due to lower earnings from the company’s flat roll steel operations; shares of industrial metals/miners slipped on global worries over easing demand and broader market weakness amid recession fears (RIO, VALE, AA, FCX, CLF among movers); TROX increased the bottom-end of the range for its full-year 2022 financial outlook in TiO2 sector; CMC reported Q3 net sales of $2.52B topping ests of $2.32B on better adj Ebitda

Technology, Media & Telecom

·     Media & Internet; KeyBanc said they see a ~50% probability of GOOGL making concessions on AdTech to the EU, which could prompt similar actions by Meta; UBS cuts ests for 2Q, ’22 and ’23 across the online ad space (SNAP, PINS, GOOGL, META) to significantly below-consensus reflecting increasing macro risk and FX moves as see SNAPs preannounce plus deteriorating ad checks as a precursor to risk to 2Q revs, and more so, a weaker outlook; WWE tgt raised to $82 from $72 at Guggenheim as see strong momentum continuing for the remainder of the year

·     Semiconductors; KLAC said its board raised the quarterly dividend by 24%, to $1.30 from $1.05, and authorized the repurchase of up to an additional $6 billion in stock; AMAT has acquired Picosun Oy, a privately held semiconductor equipment company based in Espoo, Finland; Samsung temporarily reduces procurement amid inventory pressure – asks component makers and others to delay shipments https://s.nikkei.com/3b3MtG2 ; NVDA Director Stephens sells 227,650 shares @ $158.06 for proceeds of $35.9M as per For 4 filing

·     Software movers; Unity Software (U) was initiated a new Sell and $27 tgt at Benchmark as suspect sustained economic malaise, post-pandemic normalization on player engagement and user acquisition, and rationalized spend scenarios could be a challenging environment; MSFT announced Microsoft Viva Sales, a new seller experience application; ATVI said a review by its board and external advisers found no evidence that senior executives ever intentionally ignored or attempted to downplay instances of gender harassment that took place; Jefferies lowering AdTech estimates across the board on increased macro pressures in 2H 2022 for U, IS, and OB to varying degrees; EBIX tumbles after Hindenburg Research takes a short position calling the company’s plans for the public listing of its Indian unit EBixCash a ‘race against the solvency clock’