Closing Recap

Tuesday, June 21, 2022

Equity Market Recap

·     U.S. stock futures extended its overnight rally, pushing higher at the open, and for the first time in several weeks held its gains in a broad-based rally ahead of monetary policy testimony by Fed Chairman Powell tomorrow and Thursday. Energy was the top sector gainer in the S&P 500 (after tumbling last week when S&P 500 Energy stocks declined over -17% in five days), along with notable advances in consumer staples, utilities, REITs, and technology. Communication Services sector was one of the few weak sectors, dragged down by shares of META, NFLX, DISH and a handful of other media names. Today was a nice response for major averages after the S&P 500 fell 12% over 10 days from June 7th through June 17^th, was more than 10% below its 50-DMA coming into the day, which is by far the widest spread of the last year and every mega-cap Tech stock was down at least 25% YTD as we approach the halfway point of 2022. NYSE breadth overly positive as advancers lead by more than a 4-1 margin. Oil prices closed higher, gold was flat, treasury yields edged higher, and the buck dipped. Lone piece of economic data showed another deceleration in housing as higher mortgage rates impact the industry. A record 42 million people around the United States are expected to hit the road for trips over the July 4 Independence Day weekend, AAA said Tuesday. Crypto assets rebounded after Bitcoin hit below $18K this weekend.

Commodities, Currencies & Treasuries

·     Oil prices rise as WTI crude gains $1.09 or about 1% to settle at $110.65 per barrel, but off earlier highs of $112.47. In news, President Biden said to be considering the idea of a federal gas tax holiday and "hopes to have a decision based on the data I’m looking for by the end of the week." Any suspension of the 18.4c a gallon tax would require action from Congress and would be unprecedented. Natural gas prices fell about 2% to $6.806 mln Btus.

·     Gold prices settle slightly lower, dipping -$1.80 to finish at $1,838.80 an ounce (high $1,848.40 an ounce and low $1,832.70 an ounce). The U.S. dollar index (DXY) edged lower, down about -0.25% as the euro drew support from ECB plans to raise interest rates to contain inflation, while the yen slumped to a 24-year low (136.48) as the Bank of Japan’s ultra-loose monetary policy stance continued to weigh. Treasury yields edge higher with the 10-year back to 3.3%. Note the U.S. bond market is on pace for its worst year in history with a current loss of 11.5% (entering the year, the 2.9% decline for bonds in 1994 was the largest ever).

Economic Data:

·     Existing Home Sales for May reported at 5.41M unit rate (lowest since June 2020), but in line with consensus and down -3.4% from April 5.60M figure; inventory of homes for sale 1.16M units, 2.6 months’ worth; median home price for existing homes $407,600, +14.8% Y/Y

Sector News Breakdown

Consumer

·     Retailers: ODP slides after co’s announcement saying: "the board also determined not to resume the company’s previously announced potential public company separation at this time and instead to maintain all of its businesses under common ownership." UAA downgraded to Market Perform from Outperform at Cowen and cut tgt to $10 from $13 as the sector’s inventory position is likely to deteriorate further based on our supply chain checks and AUC inflation is accelerating into 2023 and has worsened since Q1

·     Auto sector; TSLA is cutting its salaried workforce by about 10% over the next three months, resulting in an overall reduction of some 3.5% in total headcount as hourly staff numbers are still expected to grow said CEO Elon Musk; ALV said it is working on reducing costs by reviewing and prioritizing certain projects, reducing headcount, consultants, and temporary employees as reit it sees organic sales growth of 12%-17% and an adj operating margin of about 5.5%-7% in 2022

·     Housing & Building Products; LEN Q2 EPS $4.49 vs. est. $3.98; Q2 revs $8.36B vs. est. $8.11B; Q2 new orders increased 4% to 17,792 homes; new orders dollar value increased 20% to $9.1B; backlog increased 16% to 28,624 homes; Citigroup lowered estimates and tgts for the homebuilding sector (DHI, TOL, LEN) saying with rates spiking (Freddie Mac now 5.78%, +267bp YTD) and Consumer Confidence deteriorating, they are cutting avg. ’23 EPS est. by -12%, with ASP declining -10% on discounting and mix-down. For context, a -10% decline in New Home prices would be steeper than 4 out of 6 periods of price declines seen since 1981 recession.

·     Consumer Staples; MDLZ announced an agreement to acquire Clif Bar & Company, maker of energy bars with organic ingredients, for $2.9 billion with additional contingent earnout considerations; Kellogg (K) said it plans to separate into three independent companies, by spinning off its U.S., Canadian, and Caribbean cereal and plant-based businesses, which collectively represented approximately 20% of its net sales in 2021; CHD upgraded to overweight at Wells Fargo saying the stock is now at historical discount to entire HPC peer set; in beverages, SAM, KDP and TAP downgraded to Neutral from Buy at UBS as expect growth to moderate looking ahead and say analysis suggests that KO, PEP, STZ, and CELH will see continue to see higher levels of organic revenue growth vs. peers and as such offer compelling risk/reward

·     Restaurants: Loop Capital said their WEN U.S. franchisee checks indicate QTD same-store sales growth is now tracking ahead of expectations; Piper reiterated its Underweight rating on WING as a compare/contrast to PFGC shares, the most resilient within their coverage universe as see a lack of material upside for WING if/when market conditions turn

Energy

·     Energy stock movers: energy the top leader in the S&P after tumbling last week, with the XLE rising over 5% this morning, rebounding after S&P 500 Energy stocks declined over -17% in five days prior, the sector’s worst week since the COVID lows. OIH rises as much as 6%, strong rebound for oil services after coming into the day with an 8-day losing streak (SLB, HAL leading)

·     E&P and Majors; XOM upgraded to Outperform from Neutral at Credit Suisse saying between Guyana, Permian, Brazil, and LNG projects, XOM has an attractive line-up of upstream growth projects versus other global majors; XOM said global oil markets may remain tight for another three to five years, largely because of a lack of investment since the pandemic began – Bloomberg; SU upgraded to Outperform at RBC Capital following mgmt meetings; FANG board approved increase to its return of capital commitment to at least 75% of FCF from at least 50%.

·     Pipelines & Natural gas: U.S. nat gas futures fell as much as 5% to an 8-week low on forecasts for less demand over the next two weeks than previously projected and expectations Texas Freeport LNG export plant shutdown will allow utilities to quickly rebuild low U.S. stockpiles; SWN announces $1 billion share repurchase program; Wells Fargo said DTM, WMB, and ET viewed as best positioned in natural gas space to add incremental capacity via potential expansion and newbuild projects while on the upstream side see CHK and SWN as well positioned

·     Solar: in the solar industry, AES, CWEN, Cypress Creek Renewables and D.E. Shaw Renewable Investments pledge to buy $6B of U.S.-made solar panels. The Co’s said on Tuesday they have formed a buying consortium to purchase 6-7 GW/year of crystalline silicon solar modules to encourage the rapid scaling of domestic solar manufacturing in the U.S. – the equivalent of more than 25% of the amount installed in the U.S. last year; in research SPWR downgraded to Sell from Neutral (tgt to $13 from $19) and NOVA downgraded to Neutral from Buy (tgt to $24 from $31) at Goldman Sachs, while lowered tgt on RUN to $36 from $40, and raised SHLS to $22 from $19

Financials

·     Bank movers: Citigroup (C) mentioned positively in Barron’s this weekend saying it is the cheapest of the big banks, at 0.5x book value; SCHW was upgraded from Neutral to Buy at UBS and raise tgt to $75 from $68 as believe investors are now focused on the impact of cash sorting and PFOF (estimate a 25% decline in PFOF = a 3-4% hit to EPS)

·     FinTech & Payments; PAYA rises after Bloomberg reported the company is working with an advisor to explore sale https://bloom.bg/3QyO9rh ; Credit Suisse said AFRM’s May securitization data continue to show good performance on Affirm’s Z securitizations (used for longer-term 0% APR loans which are for high credit quality customers) with negligible delinquency and loss.

·     Bitcoin news: Bitcoin prices up 5% and back above the $21K level after hitting $17,787 on Saturday afternoon – Bitcoin is still off 70% from the all-time high of $67,802 seen in November (boosting shares of COIN, MSTR, RIOT, SI, MARA and others that mine or invest in the space). A train wreck in crypto space over the last few weeks as investors lose faith following several catalysts: collapse of Terra in May (UST-USD), a dollar-pegged algorithmic stablecoin project, insolvency fears after crypto lending firm Celsius paused all withdrawals last week/transfers between accounts, crypto hedge fund Three Arrows Capital failed to meet margins calls from lenders and several firms including Coinbase and BlockFi announced layoffs

·     REITs: NRZ announced late Friday it has entered into agreements providing for the internalization of the Company’s management function; in research, NHI downgraded to Market Perform at BMO Capital on valuation given strong YTD performance (+5.7% YTD; vs. REITs -11.9%); LTC was upgraded to Market Perform at BMO saying with downside risk significantly reduced, an Underperform is no longer warranted

Healthcare

·     Biotech, Pharma movers: ACAD slides after an FDA Advisory Committee (AdCom) delivered a negative vote on evidence of efficacy for ACAD’s pimavanserin (Nuplazid) in Alzheimer’s disease psychosis late Friday – analysts say they expect that FDA will issue a rejection (CRL) near the PDUFA date of August 4, 2022; AZN said that Eplontersen met Co-primary and secondary endpoints in a phase 3 trial for hereditary transthyretin-mediated amyloid polyneuropathy. Eplontersen will be jointly developed and commercialized with IONS in the U.S. and developed and commercialized in the rest of the world by AstraZeneca; PTCT surges as STAT news reported Duchenne muscular dystrophy drug achieves study goal, potentially confirming European approval https://bit.ly/3y6Y7ZC ; NVCT said the FDA cleared an investigational new drug application for its novel ovarian cancer treatment.

·     Healthcare Services; AMED, EHC slip after CMS released late Friday its proposed 2023 home health reimbursement rule that included a net (4.2%) rate decrease inclusive of a (6.9%) impact from behavioral adjusters (Truist cut tgts on both after Home health proposed reimbursement risk comes in worse); CNVY surges after news to be taken private, as TPG to acquire the 25% remaining shares of CNVY it does not already own, paying $10.50 cash/share, representing a 143% premium to Friday’s close https://bit.ly/3y7wZcS ; CNC upgraded to Outperform at Credit Suisse and up tgt to $88 as believe CNC has, in recent weeks, priced in potential headwinds associated with redeterminations and the expiration of enhanced public exchange subsidies; DVA falls after the Supreme Court ruled in a case between the company and Marietta Memorial Hospital Employee Health Benefit Plan.

Industrials & Materials

·     Aerospace & Defense; SPCE initiated with an underperform and $4 tgt at Wells Fargo saying they see further risk left to go as are doubtful it can develop its new Delta spacecraft and continue to fund operations without a further capital raise; MAXR initiated with an Overweight and $39 tgt at Wells Fargo saying it is the established leader in satellite earth imaging, with potential upside in space infrastructure if the LEO small satellite boom plays out as planned; GD tgt cut to 4250 from $270 at Cowen saying sell-side Gulfstream tour was impressive; but they shaved their above-consensus ests. for supply chain issues & plateauing bizjet demand

·     Transports: SAVE rises as JBLU sweetens its takeover offer by $2 per share to $33.50 per share as it attempts to fend off rival Frontier Airlines’ (ULCC) proposal and represents a 68% premium to Frontier’s cash-and-stock; LUV said it sees Q2 operating revenue compared with 2019 up 12% to 15%, sees Q2 load factor 85% to 87% and CASM compared with 2019 down about 7%; EasyJet Plc (EJTTF) said it expected to fly about 90% of its pre-pandemic capacity in July, August, and September, down from the 97% it had scheduled last month; also warned the ongoing operational disruption would lead to higher crew costs and airport charges; The American Trucking Associations says its advanced seasonally adjusted For-Hire Truck Tonnage Index rose in May even as indicators important to trucking slowed/says the Tonnage Index was up 0.5% in May, its second highest level since the pandemic started, after falling 1.4% in the prior month

·     Paper & Packaging: Citigroup downgrades paper stocks/containerboard IP and WRK following cautious commentary Friday evening from PPI Pulp & Paper Week (P&PW) and evidence of slowing demand (KeyBanc also noted today that the tone is getting increasingly worse on Containerboard). Citigroup said demand for Durables & distribution goods (~25% of box demand) is slowing, and they expect Y/Y industry shipments to be negative through year-end. ~1.8mmt of capacity is scheduled to be added in 2H ‘22, which we model pushing op rates

Technology, Media & Telecom

·     Internet; TWTR said its board of directors unanimously recommends stockholders vote "for" the adoption of the merger agreement; board recommends stockholders vote for compensation that will or may become payable by to its named executives in connection with merger; in research, CHWY upgraded to Outperform at Wedbush saying they revisit CHWY customer retention and spending and find little downside risk to the consensus outlook; JD total sales rose 10.3% over the 18 days to Sunday during the first major shopping festival since a recent COVID-19 outbreak, the company said, sharply down from the 2021 event’s growth of 27.7%; NFLX has met with Google, Comcast and NBCUniversal, and Roku to discuss potential marketing partnerships, sources told CNBC; META and NFLX notable decliners in large cap Internet; META settled a lawsuit over a housing advertising system that illegally discriminated against Facebook users based on race and other characteristics, the Department of Justice said on Tuesday.

·     Semiconductors: broad strength in chip names in bounce back for tech; HIMX cut its Q2 revenues and EPS guidance provided on May 12, 2022, citing weaker macro environment, and slowing end market demands – said revenues are expected to decrease 22% – 27% sequentially, lower than the previous guidance of 16% – 20% sequential decline vs. consensus decline of 1.2% Y/Y

·     Hardware, Software movers; SYM rises after WMT disclosed a 62% stake in the company last Friday https://on.mktw.net/3HJfUcv (SYM was also initiated at Outperform and $18 tgt at Cowen); ADBE downgraded to equal-weight at Morgan Stanley and given Street-low $362 Target from $591 on expectation of a slowing structural growth profile; DOCU announced Dan Springer has agreed to step aside as CEO and the company has retained a leading national executive search firm to assist with succession planning; BKSY shares jump after awarded 5-year JAIC contract for AI data that has ceiling value of $241M; CDNS announces $100 million accelerated share repurchase agreement

·     Media & Telecom movers; AMT was double upgraded from Underweight to Overweight at JPMorgan and raise tgt to $285 PT from $245 saying the stock is down ~19% YTD and 16.5% since January (SPX -22.9%/-23.3%) and see a positive risk reward due to the company’s highly predictable (and recession resistant) revenue stream, and valuation; MGNI rises after the company said it struck a multi-year deal with LG Ads Solutions