Closing Recap

Friday, June 17, 2022

Equity Market Recap

·     Equities enjoyed a lower-volatility, up day today as investors took a day to digest recent, aggressive moves lower. Sliding oil and natural gas prices prompted some to feel we may be on our way to getting some inflation relief in the energy arena with an expectation that we will see a flow-through to lower prices at the pump. Comments from Fed speaker Kashkari was balanced and did little to rattle already-frayed nerves, as he indicated support for another 75bps hike in July but was open to future moves as directed by economic data. Interestingly, some macro prognosticators and strategists have already begun to look to the end of a bear market later this year with discussion about how the next cycle could buoy earnings growth and lead to bull market highs in the out-years (probably not marking lows in equities or sentiment yet, but a subtle shift worth watching). Perhaps today was just a day of sellers’ fatigue after a record-setting stretch of more than 90% of S&P stocks declining five days in the past seven, heading into today’s session. Consumer Discretionary, Utilities and Energy were sector laggards, with only Energy marking meaningful declines. Reminder U.S. stock and bond markets are closed on Monday in observance of new holiday.

·     Bank America noted that the S&P 500 entered a bear market on June 13, the 20th bear market in the past 140 years; average peak to trough bear decline = 37.3%, average duration 289 days; history is no guide to future performance but if it were, today’s bear market would end on Oct 19, 2022 (35-year anniversary of Black Monday) with S&P 500 at 3000; good news. Avg bull market duration is 64 months with 198% return, so next bull sees SPX at 6000 by Feb’28.

Economic Data:

·     U.S. May Industrial Output rose +0.2%, below consensus of +0.4% and April +1.4%; May mining output +1.3% vs. April +1.1% and utilities output +1.0% vs. April +5.5%; Capacity utilization rate rose to 79.0% from 78.9% in April but below consensus 79.2%. May motor vehicle assembly rate rose to 10.72 mln units/year from April 10.51 mln units/year

Commodities

·     Oil prices tumbled, as Brent posts its first weekly dip in five weeks, and U.S. WTI crude for its first decline in eight weeks, in line with a fall in equity markets amid fears of a possible recession as several central banks delivered big rate hikes. U.S. Crude oil futures settle at $109.56/bbl, down $8.03, 6.83% and Brent fell -$6.69 or 5.58% to settle at $113.12 per barrel. Gold fell $9.30, or 0.5%, to settle at $1,840.60 an ounce and fell roughly -1.9% on the week.

·     According to Charlie Bilello (as of last night data), Commodity price changes over the last year: Natural Gas: +130%, Heating Oil: +110%. Gasoline: +78%, Cotton: +67%. Wheat: +63%, Brent Crude +61%, WTI Crude: +60%, Coffee: +49%, Nickel: +45%, Corn: +38%, Soybeans: +27%, US CPI: +8.6%, Sugar: +8%, Gold: -1%, Copper: -6%, Silver: -21%, Lumber: -41%

Currencies & Treasuries

·     The U.S. dollar index (DXY) rose as much as 1.3% back near the 105 level after sliding yesterday, up 300 bps vs. Japanese yen, Euro dips -0.85% to 1.0455 and British Pound down -1.3% below 1.22. The Canadian dollar weakened to 5-week lows vs. the dollar as oil prices fell and the greenback broadly rallied, down at 1.3035 to the buck and on track to decline 1.9% (biggest weekly drop since Aug 2021). Treasury yields end the week with a two-day slide after hitting decade highs for the 10-year (3.49%) and rest of the curve – the 2-year was down 6-bps today to 3.245% and the 2-yr up 1 bps to 3.172%. Still no bounce in Bitcoin, falling again, holding just above $20,000 into the 3-day holiday weekend.

Sector News Breakdown

Consumer

·     Retailers; AEO and URBN downgraded to Neutral at B Riley on promo risk and slowdown; expect ANF to continue to trend towards industry margin levels – and lower our AEO PT from $22 to $13 and URBN from $35 to $23. Believe AEO is at risk of seeing continued margin pressure throughout the year as higher promos could continue and for URBN, believe UO will be a detractor for the year and turn negative; Cowen says remain positive for LULU and DECK cautious HBI, ROST, PVH and SKX and tgt changes for FIGS $10 (Prior $11) FL $29 (Prior $35) HBI $10 (Prior $11) VFC $53 (Prior $57) YETI $64 (Prior $71) saying recent data surrounding monthly Retail Sales, Clothing/Footwear and broader ecommerce is now showing significant deceleration in unit sales as inflation builds

·     Housing & Building Products; Homebuilders MDC and MTH downgraded to Underweight from Equal Weight at Wells Fargo and downgrade TOL to Equal Weight from Overweight saying given that fundamental housing data is likely to incrementally get worse from here and continue to feed negative investor sentiment, we try to estimate how much lower the stocks can go based on perceived risk; also, DFH downgraded to Underperform at Bank America as see a tougher backdrop relative to other builders with high exposure to entry level homebuyers, and DFH has higher financial leverage than peers; in building products, Bank America downgraded OC to Underperform and lower tgt to $80 from $119 while upgrade AZEK to Buy following analyst day

·     Consumer Staples: REV rises after Reuters reported Indian conglomerate Reliance Industries is considering buying out Revlon in the United States https://reut.rs/3xBtbPS ; UTZ upgraded from Neutral to Buy with $16 tgt at Goldman Sachs as see an above average top and bottom-line growth outlook; food prices were mixed after a good rebound on Thursday.

·     Casinos, Gaming, Lodging & Leisure sector; WWE CEO Vince McMahon steps down as CEO, Chairman, daughter Stephanie returns as interim CEO amid an ongoing investigation into an alleged secret hush deal with a former employee; the discretionary names saw a rebound today amid a rotation out of 2022 winners such as energy – cruise, casino, etc.

Energy

·     Energy stock movers; biggest decliner in the S&P 500 as investors sell 2022 winners, with broad weakness in energy on day in major oil (XOM ), refiners (VLO ) and services (SLB ) after leading markets; OAS declares $15.00 per share special dividend payable July 8, in connection with, and its payment is subject to, the closing of Oasis’ previously announced merger with WLL; in pipelines: TRGP had two major announcements after the close, agreed to acquire private Permian G&P Lucid Energy from its sponsors in a $3.55 billion cash and debt-funded deal and raised its standalone guidance for its 2022 adjusted EBITDA to $2.675 – 2.775 billion, up from $2.3 – 2.5 billion, and above the $2.66 billion consensus. The Lucid transaction brings in 1.4 bcf/d of processing capacity and 1,050 miles of gathering pipeline

Financials

·     Financial Services & Insurance; RDFN said Nationwide, 57.8% of home offers written by Redfin agents faced competition on a seasonally adjusted basis in May, the lowest level since February 2021; insurance brokers initiated coverage at Bank America, with Overweight on AON but BRO and MMC initiated at underweight as expect fundamentals to remain strong for the insurance brokers and we believe the industry is very resilient in a recessionary environment with on average over 80% of revenues considered non-discretionary.

·     Bitcoin, FinTech & Payments; as astounding end of week for crypto assets, with Bitcoin prices volatile again (rode 10-day losing streak), with more cautious headlines in space as the WSJ reported that crypto Hedge fund Three Arrows Capital considers asset sales, bailout after suffering heavy losses from a broad market selloff in digital assets. Also reports today that Babel Finance said redemptions and withdrawals from co’s products will be temporarily suspended, resumption of normal service be notified separately (follows Celsius freeze the other day)

Healthcare

·     Pharma movers: BHC said it was suspending its plans for an initial public offering (IPO) for its Solta Medical business; MYOV and PFE announced that results of the Phase 3 SPIRIT 1 and SPIRIT 2 studies of investigational once-daily relugolix combination therapy; RYTM said the FDA approved its supplemental new drug application for Imcivree to treat patients with Bardet-Biedl, a genetic disorder which can cause obesity and other difficulties

·     Biotech movers: The WSJ reported that MRK is eyeing a purchase of cancer-focused biotech SGEN citing people familiar with the matter, noting talks have been under way for a while and a deal isn’t imminent, https://on.wsj.com/3mUFwd1 ; ADXN slides as announced it would end its lead program, Phase 2b/3 study for experimental therapy dipraglurant in dyskinesia associated with Parkinson’s disease (PD-LID); biotech space in general outperformed today (IBB, XBI)

·     MedTech Equipment & Healthcare Services; CNC raises its annual profit forecast to between $5.55 and $5.70, up from prior guidance of $5.40 to $5.55, betting on higher premiums from its government-backed Medicaid health insurance plans and announces %3B share buyback plan

Industrials & Materials

·     Metals & Materials; GLNCY said it made more money trading oil, metals, & other commodities in six months than it had expected to make all year; said its trading division expects to post half-year Ebit of more than $3.2 billion, at the top end of the company’s full-year guidance; in steel sector, United Steel (X) issues Q2 guidance as sees 2q adj EBITDA about $1.6B vs. est. $1.34B and guides Q2 EPS $3.83-$3.88, consensus $3.20 Q2 EPS $3.83-$3.88 above consensus $3.20; Citigroup downgraded DOW, WLK, OLN and CF to Neutral from Buy noting YTD commodity chemicals outperformed S&P 500 until last week by >30%, but we think that’s about to end.

Technology, Media & Telecom

·     Media & Internet; BABA rises after Reuters reported China’s central bank has accepted Ant Group’s application to set up a financial holding company, a key step in finishing a year-long revamp of Jack Ma’s fintech business (BABA is an affiliate of Ant Group) https://bit.ly/3N2kfsp ; JD rises on news the co is working on an on-demand food-delivery service that will pit it against offerings from Meituan and Alibaba, JD Retail CEO Xin Lijun tells Bloomberg TV; SNAP said it is testing a new subscription service called Snapchat+ that would give subscribers access to exclusive and pre-release features

·     Hardware & Software movers: ADBE posts Q2 beat but conservative guidance as 2Q adj EPS $3.35 vs est. $3.31 on revs $4.39B vs est. $4.35B; guides 3Q adj EPS $3.33 vs est. $3.40 and revs $4.43B vs est. $4.51B; guides FY adj EPS $13.50 vs est. $13.66 – Q2 Digital Media ARR exceeded guidance by the widest margin seen over the past year; ROKU struck a partnership with WMT allowing viewers to make purchases with their remotes while streaming television programs; TEL board approves additional $1.5B share buyback