Closing Recap

Friday, June 24, 2022

Equity Market Recap

·     Stocks finish the day at the highs, as a broad-based rally capped off a strong week of returns for major averages, as all 11 S&P sectors were higher with the biggest gains coming from Industrials, Materials and Financials (which were the biggest losers yesterday) while defensives were the weakest gainers (as defensive were top gainers yesterday). Treasury yields rose, but choppy after an unexpected jump in new home sales, while the dollar slides and oil prices finished higher. University of Michigan confidence data reported its lowest levels on record, but that didn’t scare stock markets which rallied and held gains all day. Part of today’s sharp advance was considered technical in nature after the S&P moved well through its resistance at 3,800 overnight and is approaching the important 3,900 level. Inflation expectations eased a bit today after the June Michigan consumer sentiment five-year inflation expectations dropped to 3.1% from 3.3%. That, along with easing commodity prices this week (oil, nat gas, metals) helped ease some near-term inflation fears, giving investors a sentiment boost. Financials got a boost overnight after positive Federal Reserve “stress tests” on banks capital health. For the week, the S&P 500 advanced 6.4%, Nasdaq 7.5%, the Dow 5.4%, and the Russell 2000 up 5.6%. 

Economic Data:

·     University of Michigan Sentiment Jun-Final reported at 50.0 vs. est. 50.2 and final May 58.4; the current conditions index final June 53.8 vs prelim June 55.4 and final May 63.3; the consumers expectations index final June 47.5 vs prelim June 46.8 and final m=May 55.2

·     New Home Sales for May rose +10.7% M/M to 696KK vs. 588K expected and 629K prior (revised from 591K); Home sales northeast -51.1%, Midwest -18.3%, South +12.8% and West +39.3%; new home supply 7.7 months’ worth at current pace vs April 8.3 months; May median sale price $449,000, +15.0 pct from May 2021 ($390,400)

Commodities, Currencies & Treasuries

·     Gold prices steadied on Friday, rising 50c to $1,830.30 an ounce as the dollar eased. Rising interest rates remain a concern for both stock and commodity markets. St. Louis Fed President James Bullard said on Friday the Federal Reserve must act boldly in raising interest rates to contain inflation. U.S. Crude oil futures settle at $107.62/bbl, up $3.35, 3.21%and Brent crude futures settle at $113.12/bbl, up $3.07, 2.79%.

·     The U.S. dollar slipped, posting its first weekly decline this month on reduced bets of more aggressive rate cycle amid the slide in oil and gas prices this week which has eased come inflation fears as well as mixed economic data today. U.S. rate futures priced in a 73% probability of a 75 basis-point increase at the July meeting and 50-bps for September. The dollar remains up around 9% this year, but down more than 100-bps off its 20-year highs. This rate hike repricing sent 10-year Treasury yields to two-week lows, while the dollar index has lost 0.5% this week.

Sector News Breakdown

Consumer

·     Auto sector: for TSLA, Credit Suisse reaffirmed its Outperform while cut tgt to $1,000 from $1,125 as expect Tesla 2Q’22 deliveries of 242k vs. sell-side consensus of ~280k, largely driven by the Shanghai COVID shutdown and also lower ests on the associated margin impact, and an expected Bitcoin impairment; in auto retail, KMX earnings top expectations as higher prices boosted the quarter – did say Used vehicle unit sales fell 11.0% to 240,950 and same-store used unit sales fell 12.7%, citing the lapping of stimulus benefits and inflation impact

·     Consumer Staples; MO upgraded to Equal Weight from Underweight at Morgan Stanley following the stock’s recent underperformance and believe that the shares are now appropriately discounting our cautious view; in beverages, Cowen said they are getting more positive as TAP’s top line is the best it’s been in years and think TAP is reasonably well positioned to hit its guidance for mid-single-digit revenue growth this year, driven by the U.S; food stocks rise CAG GIS after USDA said sees 2022 U.S. food prices rising 7.5%-8.5%

·     Retailers & Restaurants: a good day for discretionary spending names as investors jump on board on several beaten-up sectors; DENN downgraded to neutral from Outperform at Wedbush saying its pre-Pandemic business model in flux and Q2 checks indicate comp store sales growth is below consensus and margins to remain under pressure; QSR Tim Hortons Canada franchisee checks indicate same-store sales growth is tracking above expectations in 2Q, said Loop Capital

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines active after CCL posted Q2 adjusted net loss of $1.9B, said cash from operations turned positive in Q2, revenue increased by nearly 50% quarter-over-quarter to $2.4B below the $2.77B estimate and occupancy was 69%, an increase from 54% in prior quarter – said booking volumes for all future sailings were nearly double booking volumes during Q1; BALY announced Friday it has started a Dutch auction tender offer to purchase up to $190M of its shares in cash; big rebound day for discretionary stocks with casinos, travel, theme parks, hotels, and the like all sharply higher.

Energy, Industrials

·     Bespoke Investment noted that at -23.7%, this is the 3rd worst two-week (10 trading day) drop for the S&P 500 Energy sector over the last 40+ years. The only two-week stretches that saw bigger drops for the Energy sector came in October 2008 and March 2020. The Baker Hughes (BKR) weekly rig count was up 13 from last week to 753 with oil rigs up 10 to 594, gas rigs up 3 to 157 and miscellaneous rigs unchanged at 2.

·     E&P and Majors; Citigroup become more selective in the E&P sector, downgrading several names saying the investment regime has degraded on the E&P’s, and they don’t foresee a major reversal near term. Says while a bounce in the stocks is possible near term, they see beta to material crude upside now being diminished given the associated economic risk and downgrade CTRA, HES, CLR and MRO while remain positive on names with better defined catalysts such as takeout/private potential for DEN, 45Q tax credit enhancement (DEN, CRC, OXY) and stocks discounting lower commodity prices than peers (OVV and EQT).

·     Transports: FDX posted mostly in-line quarterly results while saying for FY23 unable to forecast Mark-to-market retirement plan accounting adjustments and may incur additional costs related to business optimization – said operating income rose 6.7% from a year earlier to $1.9B, led by its Freight and Express units, where operating income rose 67% and 20%, respectively

·     Refiners: The US’s capacity to refine crude oil into fuel and other products hit its lowest level since 2014 in beginning of 2022, according to the federal government’s annual refinery capacity report. SUN was upgraded to Buy at Mizuho saying it has been a relative laggard versus the rest of our coverage YTD (-11.8% vs. +5.7%, respectively), which we attribute to concerns about how rising fuel prices could impact SUN’s wholesale margins. Yet, SUN’s flexible business model should prove resilient. 

Financials

·     Bank movers; The largest U.S. banks would remain well capitalized in the event of a severe economic shock, the U.S. Federal Reserve said on Thursday in its stress tests. The 34 lenders the Fed oversees with more than $100 billion in assets would suffer a combined $612 billion in losses under a hypothetical severe downturn, but that would still leave them with roughly twice the amount of capital required under its rules. As a result, banks including JPM, BAC, WFC, Citi, MS and GS can use their excess capital to issue dividends and buybacks to shareholders

·     Implications of stress tests: Wedbush said in regional banks, MTB, CFG, HBAN experienced the largest declines in CET1 ratio vs. its 4Q21 CET-1 ratio of 4.1%, 3.0% and 2.5% to an estimated minimum CET-1 requirement for MTB at 9.2%, CFG at 7.9% and HBAN at 7.7%, in our group of regional banks (other banks not covered had more extreme declines, including CS, GS and MS at 7.5%, 5.8% and 4.6%, respectively); Morgan Stanley said Relative to their estimates, the new SCBs suggest that BAC, Citi and JPM will need to keep dividends flat, eliminate buybacks and cut RWAs to generate a CET1 ratio that is above their new required minimum capital ratios

·     Investment Managers & Insurance; AMP downgraded to neutral from Buy as expect AMP will continue to benefit from strong organic growth in its Wealth Management business (AWM) with EPS upside from higher short-term rates and sticky deposit/cash balances. but think AMP’s earnings mix is relatively more exposed to market drawdowns; AIZ downgraded to Neutral from Overweight at Piper as anticipate outperformance seen ’22-to-date (& 2Q22) will fade as emerging cyclical headwinds more than offset counter-cyclical tailwinds.

·     Consumer Finance & Lending; Credit Suisse said stress test results for specialty finance were better at the majority of their companies as DFS and ALLY better, AXP stable and all three at the minimum SCB; TREE guided Q2 revenue lower at $259-$264M down from prior range of $283M-$293M; sees Q2 adj EBITDA in range of $26M-$29M, below prior range of $35M-$40M and said Q2 variable marketing margin is now seen $88M-$92M from prior $100M-$106M

·     Bitcoin news; COIN is launching a derivatives product next week in the midst of a meltdown in the market for digital assets. Coinbase Derivatives Exchange, will launch Nano bitcoin futures, its first listed product, on June 27

Healthcare

·     Pharma movers; BHC said its chairman Joseph Papa had resigned from the board, effective immediately with john Paulson stepping in; EBS said the FDA accepted for review its application seeking approval of its anthrax vaccine candidate AV7909; CYTK announces date for FDA advisory committee meeting to review new drug application for omecamtiv Mecarbil – FDA has assigned NDA a prescription drug user fee act (PDUFA) Target action date of February 28, 2023; SNY said its coronavirus booster vaccine, developed alongside Britain’s GSK PLC, has produced successful results against the Omicron variant of the coronavirus in an efficacy study; LLY and BMY among large cap pharma hitting 52-week highs while managed care was weak (UNH )

·     Biotech movers: WSJ reported MRK is pushing forward with a potential deal for SGEN citing people familiar with the matter https://on.wsj.com/3nbYmfA; SRPT shares slip after the FDA has placed a clinical hold on SRP-5051, the company’s next-generation PPMO, to treat patients with DMD; BMRN said the European medicines regulator conditionally approved BMRN’s gene therapy for hemophilia A, the first approval anywhere for a gene therapy for the bleeding disorder; NTLA and REGN present updated interim data from phase 1 study of Crispr-based ntla-2001 for the treatment of transthyretin amyloidosis

·     MedTech Equipment & Healthcare Services; Wells Fargo downgraded BAX to equal weight from overweight and cut tgt to $71 from $90 as sees potential downside to Q2 and 2022 sales and earnings as believe that incremental inflationary pressure from rising oil prices and continued supply chain challenges may put additional pressure

Technology, Media & Telecom

·     Media & Internet; RBC Capital reduce estimates and price targets for AMZN, GOOGL, META, PINS saying they found clear signs of cracks forming on overall spend though interestingly, SMB weakness seems very much yet to fully run its course, indicating potentially more persistent risk to 2H estimates.

·     Semiconductors; big bounce back day for semis with the Philly semi index rising as much as 4% before paring gains, with most names higher on day; WOLF upgraded to Buy from neutral at Goldman Sachs saying while WOLF’s growth story tied to EVs is likely well appreciated by investors given the company’s ongoing investment and backlog growth in this space over the past couple of years, the stock has given back a significant amount of the momentum trade, in our view; ENTG won Chinese antitrust approval for its planned acquisition of CCMP (ENTG agreed to acquire CMC Materials in December in a cash and stock transaction worth $6.5B at the time)

·     Hardware & Software movers; ZEN confirmed this morning a WSJ report overnight, agreeing to be acquired by an investor group led by leading global investment firms Permira and Hellman & Friedman LLC in an all-cash transaction valued at approximately $10.2 billion with shareholders to receive $77.50 per share (here was overnight story https://on.wsj.com/3OprIDy; CAMP shares slide after posting larger than expected Q1 EPS loss (-$0.34) vs. est. loss (-$0.03); Q1 revs fell -19% Y/Y to $64.7M vs. est. $69.4M; said visibility into product shipments remains uncertain due to the global component supply shortages