Closing Recap

Monday, June 27, 2022

Equity Market Recap

·     Stocks finish lower in a relatively dull and boring trading day with the appearance many traders were in holiday mode already ahead of the upcoming 4^th of July long weekend amid light volumes and sparse news as major averages pulled back after massive gains last week. There are several macro summits taking place this week – G7, EU Sintra Forum & NATO over the next few days. A handful of earnings worth watching this week, with footwear and apparel giant Nike (NKE) expected to report tonight and chip maker Micron (MU) later in the week. Oil prices jumped, Treasury yields bounced after awful auctions for the 3 and 5-year notes, and the dollar slipped. Russia failed to pay interest on time on its foreign-denominated debt for the first time since 1918. The Russian government was unable to compensate creditors on about $100 million of interest denominated in dollars and euros after a 30-day grace period following the May 27 deadline expired. Asian markets jumped, but U.S. markets very quiet.

Economic Data:

·     Durable Goods Orders for May rose +0.7% vs. est. + 0.1%; Durable goods orders ex transports rose +0.7% vs. est. +0.4%; Capital Goods orders non-def ex air rise +0.5% vs. est. +0.2%

·     The National Association of Realtors (NAR) said its Pending Home Sales Index, based on signed contracts, rose 0.7% last month to 99.9, rebounding from a two-year low in April but plunged 13.6% in May on an annual basis.

Commodities

·     Oil prices end higher in a volatile, choppy session, as WTI crude rises $1.95 or 1.81% to settle at $109.57 per barrel (highs of day $110.54 and lows $105.60). Upbeat U.S. economic data helped to ease worries about a potential slowdown in energy demand. According to preliminary DoE data, the U.S. released 6.9 million barrels of crude from its Strategic Petroleum Reserve (SPR) last week (~985,000 b/d). The latest weekly release has pushed the SPR below the 500 million barrels mark for the first time since 1986. Meanwhile, leaders of seven of the richest western nations, known as the G-7, prepared to announce new efforts to put a cap on prices for Russian exports.

·     Gold prices dip -$5.50 or 0.3% to settle at $1,824.90 an ounce with many focusing on news that the Group of Seven nations would announce a ban on new Russian gold. Copper, meanwhile, recouped a small portion of its loss last week, when worries about a slowdown in economic activity prompted the metal to suffer its biggest weekly percentage loss in about a year.

Currencies & Treasuries

·     The U.S. dollar slipped vs. most counterparts amid softening inflation expectations the last few days (UoM, weaker oil prices) as aggressive rate hike bets have eased for the time being. But with some indicators showing economic momentum starting to cool and a broader drop in commodity prices, investors are becoming cautious. Against its rivals, the dollar edged 0.12% lower to 103.89 after hitting 105.79 earlier this month, its highest since late 2002. The Federal Reserve hiked the federal funds rate by 75 basis points two weeks ago and is expected to do the same in July.

·     Treasury yields rise following weaker bond auctions: The U.S. Treasury sold $46B in 2-year notes at a yield of 3.084%, above the 3.077% when issued prior with the bid-to-cover (demand) at 2.51 below the prior auction of 2.61, as indirect bidders awarded 51.5%, below the previous 62.6% and direct 25.3% vs. 22.1% prior. The U.S. Treasury also sold $47B in 5-year notes today at a yield of 3.271% vs. 3.236% when issued prior (biggest tail since 2016) with bid-to-cover at 2.28 vs. 2.44 prior and indirects awarded 56.5% vs. 62.9% prior. Note another $40 billion of 7-year notes will be sold on Tuesday, the last of the week’s auctions before the Fourth of July holiday weekend.

Sector News Breakdown

Consumer

·     Retailers: Dow component NKE earnings after the bell tonight; CHWY upgraded to Buy at Needham with a $55 PT saying after 4 quarters of missing consensus EBITDA (and 3 quarters of missing consensus Sales), CHWY beat expectations in 1Q22, and they think the positive momentum continued into 2Q22; FL signed a deal to sell its Eastbay Team Sales business to BSN SPORTS, a direct marketer and distributor of sporting goods and apparel to schools and sports leagues, Foot Locker said Monday

·     Auto sector: Mizuho lowered JunQ/2H EV unit delivery estimates for TSLA, RIVN, and NIO, given Shanghai shutdowns and supply chain constraints. However, they see strong EV demand despite higher prices, with longer lead times, as production and new models ramp; CVNA sought to disrupt auto sales, but it delivered undriveable cars according to a Barron’s article this weekend; AZO was upgraded to Buy from Neutral at Goldman Sachs and up tgt to $2,296 from $1,969 as views the company as defensively positioned in the current environment saying the majority of auto part sales are non-discretionary.

·     Housing & Building Products; Homebuilders are among some of the cheapest stocks, according to Barron’s as Wedbush analyst recommended DHI, which generated a 34% return on equity in the year that ended in March and trades for four times earnings and favors small-cap builder TPH and luxury leader TOL; FND downgraded to Neutral from Buy at Goldman Sachs and cut tgt to $64 from $109 as the rising interest rate environment is likely to lead to a slowdown in demand

Energy

·     Energy stock movers; was one of the few sectors higher today, despite volatile oil swings between positive and negative; in Utilities & Solar; FTCI files $250M mixed securities shelf; to sell 35.7M shares of common stock for holders; WEC upgraded to Overweight at KeyBanc Capital citing valuation dislocations triggered by the recent industry volatility

Financials

·     Bitcoin, FinTech & Payments; COIN downgraded to sell from neutral at Goldman Sachs with price target of $45 citing the continued downdraft in crypto prices and drop in industry activity levels; HOOD upgraded to Neutral from Sell at Goldman Sachs but lower tgt to $9.50 from $11.50 saying fundamentals are still very weak as continued declines in retail trading risk appetite have weighed on active users and margin balances. Notes HOOD shares are now trading at a $6.5B market cap versus its cash position of $6.2B and tangible book value of $7B; crypto broker Voyager issued a notice of default to Three Arrows Capital for its failure to make required payments on a loan for 15,250 bitcoin (~$324M) and $350M worth of USDC stablecoin, co says. HOOD popped further late day after Bloomberg reported Sam Bankman-Fried’s FTX crypto exchange is exploring whether it might be able to acquire Robinhood https://bloom.bg/3xXthS2

Healthcare

·     Pharma movers: shares of SIGA, CMRX, TNXP, BVNRY were weak initially after the WHO ruled on Saturday that monkeypox is not yet a global health emergency, weighing on shares of smallpox drug and vaccine makers; ALNY downgraded to Neutral at Guggenheim saying their proprietary analyses, complemented by KOL discussions, point to uncertainties in ATTR-CM, despite the inherent superiority of silencers in ATTR-PN.

·     Biotech movers: AXSM shares surge after saying it received proposed labeling from the U.S. FDA for its depression drug candidate, AXS-05; AXSM is reviewing proposed labeling and will reply to FDA to secure final labeling agreement; EPZM agreed to be acquired by France’s Ipsen for an initial $247 million; Ipsen is paying $1.45 a share in cash for Epizyme, a roughly 52% premium; MDGL data from the Phase 3 MAESTRO-NAFLD-1 trial highlighted at EASL over the weekend continue to support an impressive overall profile for resmetirom according to JMP Securities

Industrials & Materials

·     Transports: SAVE slides after urging its shareholders to back a merger deal with ULCC after ULCC raised its offer for co to $4.13 per share, along with 1.9126 of co’s shares in the cash-and-stock deal. ULCC’s revised offer stands at $24.29 per share, still lower than JBLU’s offer at $33.50 per share. Proxy advisory firm Institutional Shareholder Services Inc (ISS) also urged SAVE shareholders to vote for proposed merger with ULCC; in trucking, ODFL upgraded from Equal Weight to Overweight at Wells Fargo and raised tgt to $300 PT as walked away from mgmt meeting more constructive and confident about the LTL freight environment; TSA officers screened 2,462,097 people at airport security checkpoints nationwide yesterday, Sunday, June 26. It was the highest checkpoint volume since Feb. 11, 2020.

·     Metals & Materials; in the lithium sector, ALB was initiated at Underperform at Credit Suisse noting lithium prices are well above the high-end of the industry cost curve and at that situation, in any commodity, can incentivize new capacity which will drive down prices to a level where prices are only a little beyond the cost to produce something; in fertilizers, RBC Capital said they expect NTR and MOS to continue benefiting from a tight potash market, with both companies increasing production in an elevated price environment

Technology, Media & Telecom

·     Internet: ETSY downgraded from Buy to Hold at Needham saying while shares have lagged and some near-term volatility is arguably in the stock, in the near term, they view the discretionary nature of the Etsy model increasingly at risk; pullback in shares of high beta names AMZN, GOOGL, NFLX, PINS, SHOP after last week’s rally

·     Software movers; INFA was downgraded from Buy to Neutral at Goldman Sachs and cut tgt to $28 PT from $40 as take a more cautious view on when such changes will fully materialize and reach an inflection point within the model; ALTR also downgraded from Neutral to Sell at Goldman Sachs and cut tgt to $41 PT from $62 saying macro susceptibility puts top line at line, creating downside risk, while Goldman upgraded TEAM from Neutral to Buy and up tgt to $300 from $279 as have become incrementally more positive as the company reaches a pivotal moment in its cloud transition; PATH board approved restructuring actions with a reduction of ~5% of co’s global workforce and estimates it will incur ~$15M in restructuring expenses

·     Hardware, Components & Services; DWAC slides after discloses in 8K that U.S regulators have issued subpoenas to each member of its board of directors and request for co’s due diligence and other documents related to its SPAC merger; WSJ reports (on DIS) Shanghai Disneyland remains closed amid prospect of further lockdowns as Shanghai Disneyland officials fear a positive covid test could disrupt operations; representative says company is in talks with Shanghai’s gov’t