Closing Recap

Monday, March 14, 2022

Equity Market Recap

·     Stocks finish broadly lower, losing steam throughout the afternoon. The Dow Jones Industrial Average, which is on a five-week losing streak, held up better today than the S&P and Nasdaq as financials AXP, V, JPM, TRV helped offset losses elsewhere within the index. The sector was a bright spot due to yields rising ahead of the Fed’s two-day meeting that starts tomorrow (expectations priced in for a 25-bps hike) as the 10-year yield hit above 2.1% for the first time since July 2019. Meanwhile, today’s broader weakness extends 2022 losses that were already historically putrid. The S&P’s -11.8% YTD decline entering today is its 4th worst 48-day start in history and the index has failed to notch a record high since the second trading day while the Nasdaq has fared even worse, hitting 52-week lows today as it slumps deeper into a bear market off last November’s record high. However, investors can hold out hope of history repeating itself as the five worst prior annual starts all saw massive comebacks to end the year in strong positive territory, including the most recent bull market that kicked off this month two years ago. In international news, China locked down multiple cities amidst the country’s worst Covid outbreak since the height of the pandemic in 2020 to send Chinese stocks tumbling and vaccine makers higher, though stay-home names who ripped higher during the pandemic have been unable to garner any support. Video conference king Zoom Video, streaming service Netflix, and remote healthcare service Teladoc all traded down to pre-pandemic levels as investors who fled the space as restrictions were lifted are yet to return. Stocks bled lower late following headlines from the Financial Times that the U.S. tells allies China signaled openness to provide Russia with military support.

·     Stocks & Sector movers: Chinese stocks hammered again as the country locks down several cities on rising Covid cases — FXI ETF lowest since March 2009, KWEB Internet ETF record lows for 2nd consecutive session (started trading July 2013); JPMorgan downgrades BABA JD BIDU DOYU BILI PDD NTES KC all to UW, YUMC sinks again after reporting same-store sales dropping from last year, TCEHY plunges on record anti-money laundering fine; EV companies NIO XPEV 52-week lows, LI tumbles; Macau-exposed casinos WYNN LVS MLCO also rolling to 52-week lows; vaccine MRNA, BNTX, PFE, NVAX outperform amid concerns over a new COVID-19 variant, as China experiences its worst outbreak since early 2020 and the WHO said that some cases of deltacron had been recorded in Denmark, France, and the Netherlands; AFRM extends recent weakness to trade at record lows more than 84% off November highs (and down more than 72% YTD) after halting a bond sale due to market volatility; financials outperform as the 10-year yield goes to highest level since July 2019 above 2.1%; RF KEY FITB DFS CINF CMA among S&P leaders; SCHW also gets a boost after reporting February results with assets rising from last year; energy sharply falls with CTRA OXY MRO HAL among the worst S&P performers as WTI Crude prices go below $100/barrel for the first time since March 1 (today’s $99.76 low is a 23.5% fall from last Monday’s 14-year high of $130.50).

Commodities

·     Oil prices plunge, as WTI crude drops -$6.32 or 5.78% to settle at $103.01 per barrel, off the earlier lows of $99.76 per barrel, while Brent drops -$5.77 or 5.12% to settle at $106.90 per barrel. Oil futures finished lower Monday, on reports that the U.S. may reach a deal to lift sanctions on Venezuelan oil, which would help ease any losses from Russia following its invasion of Ukraine. WTI crude now down 25% from recent 14-year highs above $130 per barrel in what a broad day of selling pressure of risk assets as commodity prices declined alongside the drop in stock markets amid uncertainty in Europe. Gold prices fall -$24.20 or 1.2% to settle at $1,960.80 an ounce (lowest level in about 2-weeks after hitting record highs the week prior) but rallied in futures trading after as stocks tumbled to lows late afternoon. Other commodity prices tumbled as well including coal, industrial metal and energy prices.

Currencies & Treasuries

·     The U.S. dollar hit a fresh five-year high versus Japanese yen, up 0.6% above the 118 level, while bonds tumbled, sending the 10-year yield to highest levels since June 2019. Treasury markets stuck between a rock and hard place, with bonds selling off all day, pushing yields higher ahead of the FOMC rate decision later this week where a 25-bps hike is well expected. But markets keeping a close eye on China and Russia, especially after the Financial Times reported midday that the U.S. tells allies China signaled openness to provide Russia with military support. Note coming into today, U.S. bonds are -4.8% this year, which is their worst year in history, as per reports (prior record was -2.9% in 1994).

Sector News Breakdown

Consumer

·     Retailers; ASO will replace KRA in the S&P SmallCap 600 effective before trading begins on March 16, according to S&P Dow Jones Indices; Piper said the February PSC Mattress Retailer Survey showed a bounce-back month with sales growth of +7%-11% – following January at -6% to -11%. The month was led by a very strong Presidents’ Day Weekend at +29%-30% (shares of TPX, SNBR, PRPL active on news); UBS lowers tgt on NKE to $173 as think NIKE’s 4Q22 guidance and its initial FY23 outlook, if it offers one, will disappoint the market – says checks suggest NIKE’s China business is not recovering as fast as they, or the market, expected; GME tumbles as much as 10% below $84 ahead of earnings this week (52-week lows)

·     Auto sector; Ford Motor (F) unveiled plans for more electric vehicles, and more EV batteries, to be produced and sold in Europe, as is planning three passenger EVs and four commercial EVs, all to be on sale by 2024; ELMS slides as announced the termination of a consulting agreement with former CEO James Taylor, in addition, the company announced a delay in production of the Urban Delivery Vehicle and updated its financial position; Chinese EV companies NIO 52-week lows, LI tumbles; LYFT said given rapid rise in gas prices co will be asking riders to pay temporary fuel surcharge, all of which will go to drivers

·     Consumer Staples; in food space, Bernstein upgraded DANOY to OP from MP and raised UL to MP from Underperform at Bernstein; COCO downgrade to Neutral at Bank America on rising transportation costs and a weaker qtr, cutting tgt to $10 as see potential downside to COCO’s FY22 guidance especially during the 2H; TSN downgraded to a Market Perform at BMO Capital and reduced F2023 outlook as expect lower beef packer margins to offset the chicken improvement; THS said now is not the right time to pursue a sale of the whole company and will continue to explore a potential divestiture transaction, including the sale of portions of the Meal Prep business.

·     Restaurants; YUMC said China same store sales down about 20% first 2 weeks March and same store sales down about 4% in January, February; SHAK was removed from the Best Ideas list at Wedbush and lower tgt to $83 from $100 but stay OP rated as concede that visibility into SHAK’s margin trajectory in 2H:22 and 2023 is deteriorating with feed costs under pressure and fuel surcharges ahead; MCD tgt trimmed to $280 and reduce ests at OpCo as adjust for Russia and Ukraine exposure

·     Casinos, Gaming, Lodging & Leisure sector; Macau casinos tumble overnight as China locks down technology hub Shenzhen as Covid cases jump; shares of WYNN, MLCO, LVS, MGM volatile (52-week lows for many of the casino names); LAZY said its board has rejected an unsolicited bid for from B. Riley Financial of $25 a share saying the offer meaningfully undervalues the company and is not in the best interests of shareholders

Energy

·     Energy stock movers; energy stocks fall early as oil futures fell with a morning low below $103 with a focus on Ukraine-Russia talks and China lockdowns amidst rising Covid cases. E&P and Majors; Warren Buffett’s BRK and its subsidiaries boosted their stake in OXY by another $1.5B billion over the past week in addition to some $3B of stock bought less than two weeks ago; Morgan Stanley downgraded CVX and OXY to Equal-Weight; Wells upgraded CDEV to EW an downgraded SWN to UW and NOG to EW after updating their estimates and models; Seaport upgraded HP to Buy with a $50 PT on a higher land drilling rig demand and day rate outlook while also raising estimates on WTTR and LBRT

·     Pipelines: JPMorgan said incremental North American production growth from the rapid rise in oil prices bodes well for midstream and they name ET, DCP as their top picks in the AMZ and TRGP, LNG as their favorite mid-streamers overall and downgraded USAC to UW; WMB acquired Trace Midstream in a transaction valued at ~$950M

·     Utilities & Solar; AEP downgraded to Neutral at Seaport on valuation after the stock’s reaction since its Q4 update and a strategic shift to sell contract-based renewable that boosted its EPS CAGR outlook as they prefer EXC at current valuations; Carl Icahn’s Icahn Enterprises raised its tender offer to acquire SWX to $82.50/share from its prior offer of $75; BLDP reported Q4 EPS (15c) vs est. (7c) on revenue $36.7M vs est. $26M, order backlog at qtr-end $93.1M, sees total operating expenses rising in FY22 to $140-160M from $102.1M in FY21 and CapEx to $40-60M from $14.7M; Goldman initiated NRGV at Sell with a $9 PT on risks from high customer concentration and a cost structure that appears less scalable and CEG at Buy with a $62 PT

Financials

·     Bank movers; banking (WFC ) and insurance stocks among outperformers following the surge in Treasury yields ahead of the FOMC meeting this week, with a 25-bps hike widely anticipated, which can help lending margins for financial institutions. On Monday, the gap between yields of two- and 10-year Treasury note was about 25 bps – narrower curve. Wells Fargo and Raymond James both said that Friday’s selloff in SBNY was overdone on a rumor the bank was added to the FDIC Problem Bank List that both believe is false; DB is ceasing all operations in Russia, reversing course from Thursday’s decision to remain operational in the country

·     Bitcoin, FinTech, & Payments; AFRM said it sees Q3 revs at least $335M and at least $1.3B of rev for FY 2022, both high-end of prior guidance, citing strong QTD performance – but shares tumble. AFRM decided to delay $500M asset-backed securities (ABS) sale citing heightened levels of rates volatility; crypto related stocks pressured again as COIN hits fresh 52-week lows

Healthcare

·     Pharma movers; PFE said it will end all planned investments with Russian local suppliers in response to the conflict in Ukraine, but will continue to supply medicine to Russia and donate all its profits to causes that provide direct humanitarian support to the people of Ukraine; AGRX announces $4.85M registered direct offering; APDN and Spindle Biotech are collaborating for research on simplified high yield mRNA production system.

·     Biotech movers; vaccine makers MRNA, PFE, BNTX, NVAX rise amid concerns over a new COVID-19 variant, as China experiences its worst outbreak since early 2020; NKTR plunges after the company said a combination of its experimental therapy bempegaldesleukin in combination with BMY Opdivo failed as a treatment for melanoma; said its phase 3 PIVOT IO-001 trial failed to meet primary endpoints; BBIO announces positive phase 2 data for limb-girdle muscular dystrophy type 2i (lgmd2i) saying 90- and 180-day data show improvements on walk tests from baseline; MRNA rises after saying the first participant has been dosed in a clinical trial of an experimental human immunodeficiency virus trimer mRNA vaccine

·     Healthcare Services; Loblaw Cos Ltd said its Shoppers Drug Mart division would buy physiotherapy and mental health services provider Lifemark Health Group for C$845 million ($662.33 million), as the Canadian chain looks to bolster its healthcare business.

Industrials & Materials

·     Aerospace & Defense – Industrial & Machinery; TDG announces acquisition of Dart Aerospace in deal for approximately $360 mln in cash; Dow Jones reported a new Dominican Republic-based low-cost airline on Monday agreed to buy up to 35 Boeing Co. (BA) 737-8 MAX jets

·     Transports; Brazilian airline GOL reported a deeper-than-expected Q4 net loss, while also reducing lowers its 2022 EPS view to come in at zero from 0.26 real in its previous forecast and full year net revenue seen at 13.7 billion reais, a 300 million-real cut from the previous estimate; in package delivery, KeyBanc said they take a cautious near-term stance ahead of FDX Q3 results as believe rising geopolitical tensions may begin to be reflected in outlook commentary pressuring estimates; MATX tgt raised to $131 from $98 at Stifel saying Matson continues to be one of the few companies that have and continues to benefit from supply chain disruption, freight inflation, port congestion, etc.

·     Metals & Materials; RIO said that it has made a nonbinding proposal to acquire the remaining 49% shareholding in TRQ for $2.7B, the holding company of the Oyu Tolgoi copper-gold project in Mongol; gold miners fall as risk appetite improves; in chemicals, FMC mentioned positively in Barron’s noting shares have gained 9.2% this year, buoyed by rising crop prices following Russia’s invasion of Ukraine and expectations that they will lead to greater profits for the pesticide maker; OLN upgraded to Overweight at KeyBanc as see the recent spike in global energy as favorable to OLN, both in the short and long term; ECL announces $500M share repurchase plan; palladium and uranium names slide as suppl worries ease PLL, SPPP, CCJ

Technology, Media & Telecom

·     Internet; BZ, BILI, BIDU, BABA, JD, NTES, PDD weakness in other U.S. listed Chinese stocks BZ, BIDU, BABA, JD, NTES, PDD on rising COVID-19 infections in China and latest tech regulations as China’s cyberspace regulator issued a new set of draft measures aimed at protecting minors, demanding online gaming, livestreaming, audio and video platforms to set up a "youth mode" for minors (shares of BABA, BIDU, JD, YY, DOYU downgraded at JPMorgan today)

·     Semiconductors; Stocks within the semi sector have seen a sharp pullback (SOX -19% YTD vs. S&P -11%) driven by a combination of geopolitical uncertainties, the resulting potential for supply/demand disruptions within the sector, and general undercurrents of cyclical correction fears; TSM February sales outperformed their 10-year average, though Citi says fears of a recession and a potential Chinese invasion of Taiwan have caused investors to be bearish in AMD (~55% exposure to TSM), AVGO (~75%), ADI (~40%), NVDA (~50%), MRVL (~60%); AAPL suppliers (SWKS, CRUS, QCOM) weak after Foxconn halts production in Shenzhen due to Covid-related lockdowns; Susquehanna lowered their estimates on AMAT, ASML, KLAC, LRCX to reflect an ~16% decline in 2023 WFE that brings their 2023 EPS and revenue estimates below current consensus and still sees downside risks even with SCE stocks falling ~25% YTD as they still trade at a premium P/E multiple to consensus

·     Software, Hardware, Components & Services; AAPL supplier Hon Hai Precision Industry Co Ltd, known as Foxconn, says it suspended operations in China’s Shenzhen amid rising COVID-19 cases. Foxconn, which counts AAPL as one of its major customers and assembles many iPhones, also says it will deploy backup plants to reduce disruption

·     Media & Telecom movers; Advertising stocks IPG, OMC, WPP, PUBGY all downgraded to Equal weight from Overweight at Barclay’s and lower price tgts; NOK upgraded at Raymond James to Outperform based on its improving competitive position and market opportunities that exceed expectations; IPGP was downgraded at Raymond James given view that just about every demand and cost input indicator has turned negative over the last couple of months with little chance of meaningful improvement for IPGP in CY22; NLSN shares jumped after the WSJ reported a consortium of private-equity firms including Elliott Management Corp. is in advanced talks to buy TV-ratings company Nielsen Holdings Plc for about $15B including debt https://www.wsj.com/articles/consortium-including-elliott-in-advanced-talks-to-buy-nielsen-holdings-sources-say-11647278285?page=1