Closing Recap

Friday, March 10, 2023

Equity Market Recap

·     Stocks slide, closing out a dreadful week. Coming into the week, Friday was supposed to be about the February payroll report, its potential impact on future rate hikes by the Fed, and the precursor to the consumer price (CPI) inflation data on Tuesday…but it was not! The jobs data played second fiddle to perhaps the biggest financial story of 2023 so far, as financial regulators closed Silicon Valley Bank (SIVB) just two days after the bank raised capital and sold assets at losses, as the FDIC took control of the banks’ deposits. As of the end of December, SVB had roughly $209 billion in total assets and $175.4 billion in total deposits, according to the press release, making it one of the biggest bank failures ever. It also raised contagion fear highlighting that banking deposits are competing with surging Treasury yields (especially on the short end of curve paying much higher yields), while quantitative tightening from the Fed is also reducing deposits. With banks owning long-term paper at extremely low interest rates how can they compete with shorter-term Treasuries is the concern. SVB was a major bank for venture-backed companies (VCs), which were already under pressure due to higher interest rates and slowdown for initial public offerings that made it more difficult to raise additional cash.

·     After stocks posted their worst weekly return of 2023 (Russell 2000 down over -8.3%, S&P -4.6%, Dow -4.4% and Nasdaq -4.7%) and major averages dropping below key technical support levels late week, attention will turn to the CPI data on Tuesday (and of course a watchful eye if there is more to be fearful of in the banking sector) .The current headline estimate for Feb CPI is for 0.4% MoM and 6.0% YoY and core estimate is 0.4% MoM and 5.5% YoY. After weeks of no fear, the CBOE Volatility index (VIX) jumped from Monday low 18.49 to highs around 29 today.

·     Nonfarm payrolls were reported at 311k vs est. 205k, as US unemployment rate comes in at 3.6% vs est. 3.4% and US average earnings climb 4.6% y/y vs est. +4.7% (the slowing wages and rise in unemployment overshadowed fears of the headline jobs beat initially). The data pushed Treasury yields much lower, as the 10-yr hit new lows below 3.68%, down 24-bps (off weekly highs around 4%); while the shorter term the 2-yr fell -31bps below 4.60% (nearly 50-bps off weekly highs around 4.07%). Fed swaps downgrade odds of 50bp March rate hike to under 50% (after highs around 70% chance earlier this week) following the data and weakness in banks. Defensive assets such as gold, silver, and defensive healthcare among early leaders.

Economic Data:

·     Nonfarm payrolls for February rose +311K jobs above consensus +205K (10^th beat in a row) and below Jan revised data of +504K from 517K. Private sector jobs +265K vs. est. +210K (prior revised to +386K from +443K and Manufacturing jobs fell -4K vs. est. +12K. Feb. Unemployment rate rises to 3.6% vs 3.4% as labor participation rate rises to 62.5% vs. prior 62.4%.

·     Average Hourly earnings all private workers rose +0.2%, below ests. +0.3% and vs. Jan +0.3% to $33.09 vs January $33.01; February year-on-year earnings +4.6% and Average work week all private workers 34.5 hours vs. est. 34.6 hours. Average Hourly Earnings increased 4.6% y/y in Feb. This will be the 23rd consecutive month where inflation has outpaced the growth in wages.

·     Money supply growth fell again in January, falling even further into negative territory after turning negative in November 2022 for the first time in twenty-eight years. January’s drop continues a steep downward trend from the unprecedented highs experienced during much of the past two years. Data on Thursday.

Commodities, Currencies & Treasuries

·     U.S. Treasury yields tumbled on Friday, after economic data showed the labor market added more jobs than expected in February, while investors continued to assess any possible fallout in the banking sector as those stocks remained under pressure. The yield on 10-year Treasury notes was down 22 basis points to 3.70%, while the 2-year yields fell -28 bps to 4.61% (down from mid-week highs around 5.07%) as expectations for a larger rate hike by the Fed at its March 22 policy announcement lessened after the jobs data, with fed funds futures now projecting a 44.7% chance of a 50-basis point hike, down from 68.3% on Thursday.

·     April gold rises $32.60 or 1.8% to settle at $1,867.20 an ounce as investors flee to haven assets. The US dollar sunk vs. counterpart currencies, with the dollar index (DXY) down -0.7% to 104.55 after hitting highest levels since late November this week. The weaker dollar and reduced rate hike expectations also helped buoy gold prices. WTI crude oil rose $0.96 or 1.27% to settle at $76.68 per barrel, but prices for the front-month contract down 3.8% for the week.

Sector News Breakdown

Retailers:

·     In apparel, GPS shares fall as posted a bigger-than-expected Q4 loss and forecast full-year sales below estimates, signaling a slowdown in demand (4Q EPS loss (-$0.75) vs est. (-$0.46) on revs $4.2B vs est. $4.36B, and gross margin 33.6% vs est. 34.5% on weaker comps.

·     In beauty, ULTA posted another beat and raise quarter with sales accelerating, controlled promotions, and positive traffic (4Q EPS $6.68 vs est. $5.68 on sales $3.23B vs est. $3.03B), while comps +15.6% and guides FY23 comps +4-5%, net sales $10.95-11.05B vs est. $10.75B; blemish on quarter according to analyst was softer gross margin.

·     In Footwear & Accessories, BIRD shares tumble after reported Q4 revs below expectations as well as bottom-line results below and announced the planned departure of CFO Mike Bufano, who will be leaving in mid-May.

·     Other movers: BKE reports better-than-expected results for both Q4 ($1.76/$401.8M vs. est. $1.56/$384M) and 2022 revenue of $1.35B vs estimate $1.33B; Q4 comp sales +4.6% and online sales rise +2.3%; TLYS slides on weaker guidance and ZUMZ top and bottom line Q4 results beat but guides 1Q net sales $178-184Mm vs est. $222Mm and EPS ($0.95)-($0.85) vs est. $0.03.

Autos, Leisure, Gaming & Lodging:

·     In theme parks, KeyBanc domestic geolocation data tracking DIS and Universal (CMCSA) theme parks showed mixed February results following a positive January data set. Disney showed a greater y/y decline and m/m was below the 2017-2019 averages. Universal fared slightly better showing a small decline y/y but with a m/m change better than 2017-2019 averages.

·     In autos: TSLA battery supplier Contemporary Amperex Technology, or CATL, beat annual earnings expectations as the Chinese lithium-ion battery manufacturer said net profit rose 92% to 30.72 billion yuan ($4.4 billion) in 2022, beating ests of 28.8B yuan, while revenue soared 152% to 328.59B yuan, also beating the consensus of 325.9B yuan.

Energy, Industrials and Materials

·     Baker Hughes (BKR) weekly rig data showed U.S. drillers cut oil and gas rigs for fourth week in a row, oil rig count down 2 to 590 – US gas rig count down 1 to 153 – US total rig count 746. Energy not immune to the broad-based market sell-off today, erasing initial gains.

·     Mizuho maintained CTRA, XOM and FANG as Top Picks despite YTD outperformance vs. the XOP while upgraded MPC to Buy in refiners. Said are marking 1Q23 commodity prices to QTD averages, lowering 2023 natural gas price outlook by ~9%, and increasing their blended U.S. refining margin by ~10% while outlook for 2023 oil prices remains unchanged.

·     In transports; airlines: ALK and UAL each upgraded to Overweight from Equal Weight saying airlines should benefit from strong demand this Spring and is swapping its "safe" airline recommendation from LUV to ALK and taking on more leverage risk with UAL while stepping back from an increasingly complex ALGT which they downgraded to Equal Weight

·     In industrials: CAT downgraded to sell from neutral at UBS, saying its growth momentum is not good enough to justify its valuation. GE price tgt raised by a few analysts noting yesterday’s analyst meeting was a positive catalyst for the stock as management surprisingly raised its long-term frameworks for both Aerospace and Vernova.

·     @charliebilello: Average gas prices in the US are 79 cents (-19%) lower than they were a year ago. Barring another spike, this YoY decline (along with other commodities) should be an important factor in pushing down the March US inflation number (YoY CPI).

Financials

·     It was all about the banks and the fallout from SIVB after yesterday banking collapse: After trading as high as $271 on Wednesday, Silicon Valley Bank (SIVB) has been closed by regulators, which have taken control of the bank’s deposits, the Federal Deposit Insurance Corporation announced Friday. FDIC said SIVB had $175B in deposits. Earlier this morning, CNBC had reported the company was in talks to sell itself after attempts to raise capital have failed, David Faber reported. Yesterday SIVB announced ~ $2.25b capital raise after it was forced to sell most of its available-for-sale securities to offset a fall in customer deposits. The Silicon Valley-based bank is the second-largest FDIC-insured bank by assets to fail and the largest since 2008 when Washington Mutual collapsed (Washington had $307B assets at the time).

·     SIVB fallout hitting regional banks, among those under the most pressure. KRE hit fresh 2-year lows below the $50 level – no let-up in regional bank pressure following the SIVB tumble on deposit outflows hurting banks – contagion fears running rampant tail end of trading week (BANC, FRC, PACW, SBNY, ZION, WAL, KEY, others down sharp a second day).

·     SCHW defended by several analysts as Deutsche Bank notes after a -13% decline Thursday they said they spoke to mgmt and took a fresh look at SCHW’s overall liquidity position, including under stressed scenarios. Overall said they see SCHW having more than ~$255bn in excess liquidity from potential cash sources in the near-term and this year, without selling any long-term securities, or issuing any long-term debt, preferred stock, or common stock.

·     Several analysts defended the sell-off in several banks: 1) Wells Fargo said in Mid Cap Banks, they view sell off as an overreaction and remain buyers of WAL and FNB as value picks and in large cap banks, said like the trust banks due to less exposure to credit and more capital for buybacks, also favor larger banks due to more diverse funding (BAC); 2) Citigroup added CMA to Focus List as think the recent pull back has created an opportunity

·     In asset managers, monthly assets under mgmt data released: AB preliminary assets under management decreased to $665 billion during February 2023 from $680 billion at the end of January; APAM preliminary assets under management as of February 28, 2023, totaled $134.8B; BEN prelim month-end assets under management (AUM) of $1,416.5 billion at February 28, 2023, compared to $1,451.9 billion at January 31, 2023; IVZ preliminary month-end assets under management (AUM) of $1,458.0 billion, a decrease of 1.7% versus previous month-end; LAZ reported assets under management of $224.16 billion vs. $251.57 billion y/y; TROW preliminary month-end assets under management of $1.31 trillion as of February 28, 2023. Preliminary net outflows for February 2023 were $5.9 billion.

·     Bitcoin is having its worst week since November as an equity selloff, fear over higher interest rates and an escalating US regulatory crackdown on crypto combine to hurt investor sentiment. The largest token fell as much 3.2% on Friday, breaking below $20,000 for the first time since January, after falling more than 8% on Thursday.

Healthcare

·     Defensive large cap pharma and biotech outperformed, but biotech sector (XBI, IBB) was sharply lower. STAT news reported that Silicon Valley Bank (SIVB), which does business with roughly half of the nation’s tech and biotech companies, failed on Friday. Now, as federal regulators step in to clean up SVB’s mess, biotech startups are left wondering: What happens to their money, and who’s going to finance the industry? https://bit.ly/3ZB1MdJ

·     In ortho, ZBH upgraded from Neutral to Overweight at Piper and raise tgt to $145 PT given the strong continued commentary on the large joint market and what they see as beatable revenue guidance for the year.

·     In MedTech technology: (HCAT ), Keybanc said they view this month’s hospital credit card data as another positive data point marking the second consecutive month of improving provider trends after seven months of weaker data. In this month’s report, total hospital customers were up strongly (+9.4%) y/y and hospital spend was up 3.4% y/y. On the physician side, physician customers were up 6.7% y/y and physician spend was up 3.1% y/y

·     GEHC mentioned positively in Barron’s saying since spin-off from GE, investors like what they’ve seen from the company so far in 2023, the inaugural year for the newly independent company as the stock has gained 26%, and feels more gains lie ahead.

Technology

Hardware & Software movers:

·     DOCU shares slide as reported better-than-expected 4QFY23 results, though provided roughly in-line 1Q and FY24 revenue guidance highlighting softening demand trends and ongoing NRR pressure (-1pt QoQ to 107%) and said CFO intends to step down in the coming months.

·     ORCL -4% Q3 beat (EPS $1.22/$12.4B vs. $1.20/$12.41B) on better op margin 42% though Q4 cloud license and on-premises license revenues $1.288Bn vs $1.289B as reported last year.

·     HCP reported a Q4 beating estimates behind solid demand and impressive execution despite a tough macro environment (Q4 EPS loss (-$0.07) vs. est. loss (-$0.22); Q4 revs $135.79M vs. est. $124.22M) and 1Q guidance was above expectations (FY24 guidance was in line).

·     In the 3D sector, SSYS confirms receipt of unsolicited acquisition proposal from Nano Dimension (NNDM) for $18.00 per share in cash (other 3D stocks were somewhat active in sympathy DDD, DM, VJET, MTLS, MKFG).

·     RBLX upgraded to buy from hold at Jefferies, saying it expects continued growth through near-term macro and competitive pressures.