Closing Recap

Monday, March 07, 2022

Equity Market Recap

·     Slow, steady, selling pressure from the onset as major U.S. averages close around the lows with the Nasdaq Composite posting its 3^rd closing decline of 3% this year, topping all last year’s 3% declines (only two-times). Markets couldn’t lift, extending losses after taking out overnight lows for S&P futures (was 4,238), with no significant results on truce or ceasefire between Russia and Ukraine as the Russian invasion of the European territory moved into its second week. Reports that the U.S. and Europe are considering an oil import ban significantly increased economic & market risks, especially for Europe which imports 20% of its oil and a third of its gas from Russia. In another day where the Russia/Ukraine war captured all the headlines, 10-year Treasury yields steady at 1.73% (after falling 25 bps last week) as global investors rushed into safe havens as commodity prices, and agriculture prices most alarmingly, spiked higher as asset markets globally started to contemplate the economic damage from this war. Consumer discretionary, payment stocks (credit cards/BNPL), leisure and activity and travel were the hardest hit sectors today as the jump in oil prices increase the chances of recession.

·     Stock & Sector movers: Oilfield names SLB HAL BKR lead the S&P as WTI Crude tops $130/barrel at yesterday’s highs, though XLE broader energy space reverses to red after ETF touches its highest level since October 2018 early in the day; travel names UAL RCL CCL ALK rolling again amidst rising fuel costs and geopolitical concerns; CZR WYNN PENN LYV other reopen trades also sinking; retail was weak today with European-exposed PVH TPR LEVI (all at 52-week lows) RL underperforming others within the space and UAA also among the worst S&P decliners on the day, KSS stumbling after introducing long-term growth targets, DKS dropping into tomorrow morning’s earnings report; BBBY outlier, opening +85% after Ryan Cohen took a stake and will explore strategic alternatives though morning strength fades; payment space another laggard as V MA dip to approach 52-week lows and AXP slides after suspending operations in Russia; PYPL also threatens 52-week lows as it goes below $100 with SQ; banks tumble as Citi falls to 52-week lows after a Jefferies downgrade as the latest analyst lukewarm on the stock after its investor day (KBW, Atlantic downgraded the stock and JPM was cautious last week in reaction as well); $JPM also touches 52-week lows as banks WFC BAC broadly lower; AAL DAL JBLU sets 52-week low amid oil price spike and continued fighting in Ukraine.

·     European markets tumbled on Ukraine war, impacting of sanctions on Russia as Euro Stoxx 50 index closes in a bear market, while the German Dax confirms bear market, down more than 20% from record closing high of 16,271.750 on Jan. 5. A Kremlin spokesman said Monday that Russia will halt Ukrainian operations "in a moment" if Kyiv meets a list of conditions, according to Reuters. Ukraine ceases military action, change its constitution to enshrine neutrality (eliminate possibility of NATO, EU membership), recognize separatist republics of Donetsk and Lugansk and acknowledge Crimea as Russian territory.

Commodities, Treasury’s, and Currencies

·     Another incredible move in oil prices, as WTI crude gained $3.72 or 3.22% to settle at $119.40 per barrel after hitting highs of $130.50 (highest since 2008) overnight in a wide trading range (lows $115.54). Shock waves rippled through the market after the U.S. said it was considering a ban on Russian crude imports. Secretary of State Antony Blinken told NBC over the weekend that the White House is in “very active discussions” with Europe about a ban to tighten the economic squeeze on Russian President Vladimir Putin. The U.S. has so far resisted restrictions on Russian crude imports due to concerns about the impact of rising prices. Delays in talks between the U.S. and Iran linked to Tehran’s nuclear program also added upward price pressures.

·     The average price in gasoline has moved up to $4.06 a gallon, fast approaching the all-time high from July 2008 ($4.11) – likely topping that after today. Average price a week ago: $3.61, Average price a month ago: $3.44 and average price a year ago: $2.77. Amazingly reports indicate the Biden administration is considering easing sanctions against Venezuela for it to begin producing more oil and selling it on the international market. Move is to counter global dependence on Russia’s oil, as per the New York Times.

·     Gold prices rose $29.30 or 1.5% to settle at $1,995.90 an ounce, its highest closing level since August 2020 as investors continue rotation into haven assets amid ongoing Russian invasion of Ukraine and its impact on global stock markets and commodities. The London Metal Exchange has introduced **emergency measures** in the aluminium, cobalt, lead, nickel, tin, and zinc markets according to Bloomberg. Among them, the LME has set limits on the nearest-term spreads and allowances for holders of some short positions to avoid delivery of metal. Chicago wheat settles at record $12.94/bushel on supply fears.

·     The U.S. dollar index (DXY) rises again in a flight to safe-haven currency, topping the 99 level, the highest levels since May 2020 while the euro drops below the 1.09 level vs. the buck. Bitcoin prices fall in sympathy with global stock markets, dropping over 3% to around $38,000; Rouble sinks to record lows; Latin American currencies also slipped.

·     Treasury yields were up modestly compared to last weeks sharp declines, as the 10-year yield was up a few bps to 1.72%, while the 2-yr rose 4 bps to 1.53% as the curve narrowed to 19 bps; the 3-yr was up 4.4bps to 1.65%.

Sector News Breakdown

Consumer

·     Retailers; brutal day for retailers with high exposure to Europe as PVH, RL downgraded to Neutral, CRI upgraded to Outperform at Wedbush saying the situation in Ukraine is a key sentiment overhang for our group, which may weigh more heavily going forward. Firm lowers estimates and price targets on several names with sizable exposure to Europe. Wells Fargo noted Europe exposure for retailers include, PVH (40%), FTCH (33%), LEVI 30%) RL (18%) generate the largest components of rev from Europe, while the best non-Euro plays include TPR, ASO and BBWI; FTCH disclosed in its 20F annual filing that Russia represented 6% of GMV in 2021; KSS introduces new long-term financial targets of low-single digits percent sales growth and mid-to-high single digits percent EPS growth; BBBY among the top stories after GME’s Chairman Ryan Cohen and co-founder of CHWY took a 9.8% in the company is and pushing for changes, saying wants a more simplified turnaround plan and wants to either split up Buybuy Baby or sell the company

·     Auto sector; rising commodity costs for parts still hurting the auto trade, with GM, F and auto suppliers extending recent selling pressure; UBER boosted its outlook for Q1 core profit, guiding Ebitda $130M-$150M from prior $100M-$130M saying its ride hailing business was recovering faster than expected on the back of a surge in airport and said customers continued to order food at a high rate in February; DASH is said to have held talks about a potential takeover of Deliveroo last summer, though a deal never came to fruition, according to a Sunday Times report

·     Consumer Staples; PM was downgraded to neutral at JPMorgan and cut tgt to $110 from $130 noting Philip Morris International derives 8% of group sales (c6% Russia, c2% Ukraine) and c8% of group EBIT from Russia/Ukraine. More importantly, the two countries account for c23% of its HTU volume (Russia 17%, Ukraine c6%); Food stocks remain in focus (GIS, CPB, HSY, K, SJM, CAG) given the massive surge in commodity prices in recent weeks for wheat, corn, soy, adding to pricing pressures; SEED establishes new subsidiary to expand its nutrition enhanced corn production; BRBR will replace CRNC in the S&P MidCap 400 as POST is converting its interest in BellRing Brands into new BellRing Brands stock and then distributing 80.1% of that interest to shareholders on March 11

·     Restaurants fall on consumer discretionary spending fears; MCD shares fall sharply – CNBC noted since opening its first location in the Soviet Union 32 years ago, McDonald’s has grown its footprint in Russia and Ukraine to more than 900 locations. Those restaurants account for 2% of its systemwide sales, roughly 9% of its revenue and 3% of its operating income.

·     Casinos, Gaming, Lodging & Leisure sector; the impact of higher energy oil prices and gas prices nearing their highest national all-time high averages of July 2008 ($4.11), came into the day at $4.06 a gallon, which is putting pressure on leisure (SIX, LYV), casino (WYNN), travel (BKNG, ABNB) and cruise lines (CCL, RCL) on expectations spending could be impacted; DKNG was downgraded to Hold from Buy at Argus saying it is facing fierce competition from MGM and Wynn, which are expanding their online sports betting operations and firm expects revenue growth to slow in 2022 as fewer states approve online sports betting

Energy

·     Energy stock movers: energy prices jumped to highest levels in nearly 15-years after reports the Biden administration is considering whether to prohibit Russian oil imports into the U.S. without the participation of allies in Europe. OXY shares see profit taking after gains of 17.5% Friday; Warren Buffet’s Berkshire said in a filing it holds a total of 113.7M shares of OXY, including both the stock and warrants (represents 11.2% of Occidental’s outstanding shares), while activist investor Carl Icahn exited his big bet on the oil company selling the last of what was once a roughly 10% stake in the oil-and-gas producer as its shares surge. https://on.wsj.com/3HMaSdU; in M&A news. OAS and WLL confirmed a report this weekend as the E&P companies said they have reached a deal to merge, forming a combined company that they valued at $6 billion including debt; XLE extends gains, up over 35% YTD as energy names lead.

·     Oil Services and Gas plays; CHK, AR, CTRA, EQT, RRC, SWN, TOU are the 7 stocks to play on the natural gas rally according to Barron’s this weekend; oil service stocks outperform in energy complex with HAL, SLB, BKR also leading after the group underperformed the broader energy space last week

Financials

·     Bank movers; banks stocks unable to rebound after last week losses with big decliners in traditional large cap banks (WFC, JPM, USB) as Treasury yields unable to rise and fears of Russian sanctions impacts; insurance and FinTech (PYPL, SQ, AFRM, UPST) also unable to find solid footing; Citigroup (C) downgraded to Hold at Jefferies from Buy saying while mgmt. articulated a clear vision at the investor day, the new ROTCE targets are loftier (11%-12%) and farther away (’24-’26) than their expectations; JPM files $150B mixed securities shelf; SCHW will replace BIIB in the S&P 100 effective prior to the opening of trading on Monday, March 21 to coincide with the quarterly rebalance. Biogen will remain in the S&P 500.

·     Consumer Finance; shares of U.S. payment services providers fall early after they suspend operations in Russia as AXP it was suspending all operations in Russia and Belarus which followed V and MA suspension of their Russian operations the previous day, as well as payments company PYPL. Russia’s Sberbank said the moves by Visa and Mastercard would not affect users of the cards it issues in Russia; ADS was downgraded at Oppenheimer.

·     REITs; WE announced late Friday the company has no plans to issue additional equity at this time. Our liquidity at the end of the third quarter stands at $2.3 billion; ESRT and STOR were both downgraded to Underperform at BMO Capital with the backdrop of an increasingly challenging macro environment which may impact to their growth.

Healthcare

·     Biotech movers; vaccine makers (MRNA, NVAX, BNTX) extend late 2021-22 declines as Covid headline risk abates, mask mandates being removed in many parts of the country and case counts not even a mention on major newswires or media; BLUE shares fell after the company flagged uncertainty about its ability to continue as a going concern after posting Q4 loss of $2.14 per share; CHRS was downgraded to neutral at JPMorgan on toripalimab uncertainty; NVAX COVID-19 vaccine moves closer to FDA authorization decision, the WSJ reported; GILD shares slipped after a highly anticipated announcement of the results of a trial of the company’s breast cancer drug Trodelvy offered few details on its performance.

·     Pharma movers; not much safety in healthcare today as pharma, services, and hospitals lower; OPTN reports positive top-line results in ReOpen1, a landmark phase 3 trial for XHANCE in Chronic Sinusitis as XHANCE met both Co-primary endpoints in the ReOpen1 trial, demonstrating statistically significant benefits on symptoms and CT scans in patients with chronic sinusitis; TEVA announces launch of a first generic version of BMY’s Revlimid® (lenalidomide), in the U.S.

Industrials & Materials

·     Aerospace & Defense; BA tgt lowered to $230 from $265 at Cowen saying the company faces near-term risks due to likely weak Q1, potential slip in deliveries of 787/777 and uncertainties in Russia-Ukraine conflict…but adds if 787 stays close to schedule, it sees healthy backloaded 2022 cash flows, potentially at over $20 per share by 2024; defense price tgts raised at Wells Fargo with LHX tgt to $291, LMT to $486, NOC to $472, GD tgt to $282 as believe valuation is likely to remain high on elevated tensions for some time to come and doubt the budget increases enough to justify the ~30% increase in share prices since late last year; airlines tumbling with shares of AAL, DAL, JBLU hitting 52-week lows as CNBC noted jet fuel up 72% over the last year.

·     Metals & Mining; another day of huge swings on metals sector with palladium, aluminum, copper falling well off overnight highs in a bit of an unwind in prices; in steel sector, U.S. Steel (X) upgraded to Equal Weight from Underweight at Morgan Stanley and raise tgt to $31 from $21; AA tgt raised to $90 at JPMorgan as update model to reflect the move in commodity prices; precious metals/miners jumped initially/overnight on gold move above $2,000 an ounce, AU was upgraded to Overweight at JPMorgan as recommend increasing exposure to gold; PALL, SPPP shares were active after palladium hit an all-time high of $3,440.76 before erasing its daily gains to drop below $3,000/oz as supply constraints impacting prices; TS rises as Jefferies said with Russian steel exports expected to lose access to the European market, sees a market opportunity for established producers like Tenaris and Vallourec of about $200 million.

·     Materials & Chemicals: potash producers MOS, NTR another move higher, extending gains on supply concerns after Russia’s invasion of Ukraine, and sanctions on Russia and its ally Belarus which are the world’s second- and third-largest potash producers after Canada. RBC Capital today tightens both n-t and l-t outlooks for the sector as the Russian invasion of Ukraine has resulted in significant changes to fertilizer markets (shares of CF, IPI also active); in packaging, BLL was upgraded to Buy at Bank America following constructive comments at their Annual Global Agriculture & Materials Conference as well as other sessions’ takeaways.

Technology, Media & Telecom

·     Software, Hardware, Components & Services; not many places to hide in high beta software stocks, extending losses in SNOW, MDB, FTNT, ZEN, TWLO among them; AAPL is scheduled to host its first product event of 2022 on Tuesday, March 8, and the company is expected to launch a slew of new devices, including its first low-cost iPhone with 5G connectivity; CIEN mixed results as Q1 adj EPS $0.47 vs. est. $0.45 but revs of $844.4M misses the $856.8M estimate; says expect strategic investments to drive significant increase in supply chain capacity in second half.

·     Internet, Media, & Telecom movers; broad selling in high beats names AMZN, GOOGL, FB, TWTR, SNAP, etc.; SQSP weaker guidance as Q4 revs rose 20% y/y to $207.4M vs. est. $205.4M and sees Q1 revs $203M-$205M below est. $216.8M; sees year revs up 10%-12% y/y or $862M-$878M vs. est. $934.6M; IRDM approves additional $300 million share repurchase program; KVHI said it plans to cut its work force by about 10% as part of a restructuring aimed at bringing expenses in line with expected revenue and said Co-founder Martin Kits van Heyningen is retiring as Chairman, president and CEO; LLNW announced a deal to buy Yahoo’s Edgecast Inc., a provider of security, content delivery and video services, in a stock deal that values Edgecast at about $300 million.