Closing Recap

Tuesday, March 15, 2022

Equity Market Recap

U.S. stocks finish at the highs, with markets rebounding behind strength in consumer discretionary and technology, halting a 3-day slide as investors await the FOMC rate decision tomorrow where a 25-bps rate hike is widely anticipated. Outside of the Fed rate meeting, lots for investors to chew on as NATO leaders including President Biden said they will meet in Brussels next week, Asian markets tumbled overnight on increasing Covid cases and partial lockdowns in key cities, producer price inflation data jumped again in February (boosted by energy and food) while commodity prices slide after touching multi-year highs last week on supply disruption concerns amid the Ukraine/Russia conflict. Ukraine’s leader hinted at a compromise as Russian forces pummeled its capital, which helped sentiment slightly today. Major averages continue to trade in a wide range but remain susceptible to big moves on macro headlines – with tomorrow FOMC meeting the next catalyst. According to CME FedWatch Tool, out to the May meeting, the probability of two hikes is 49.8% and three hikes is 48.5%. Today’s market action may have been short covering given the recent weakness in markets into the Fed.

·     Stock & Sector movers: Airlines pace the markets after AAL UAL DAL LUV JBLU all raised their current quarter outlooks; NLCH CCL EXPE ALK CZR BKNG among other S&P leaders as beaten down reopen plays rally from recent losses helped by sliding oil; MTN also rising after a mixed quarter with raised EBITDA guidance; COUP plummets to 3-year lows despite a stronger Q4 report as decelerating growth and margin compression with a full-year guide below consensus draws downgrades from OpCo and Piper while GTLB spikes off yesterday’s record low on its Q4 beat with guidance ahead of estimates in software earnings; WTI Crude retreats to March lows to weigh on energy sector yet again – Energy slides as the only S&P sector down with VLO XOM CVX SLB APA BKR OXY etc. among worst decliners; Semis outperform in their rebound after three straight declines of >2%; MRVL MPWR NVDA AMD strongest within the Philly Semi Index.

Economic Data:

·     Producer price inflation data (PPI) for February not as “hot” as feared: Headline Feb PPI m/m rises +0.8% vs. est. +0.9% while on a y/y basis, rises +10%, in-line with estimates (vs. +9.7% last month). On a core basis, ex: food & energy, PPI rose +0.2%, below the +0.6% estimate m/m, while PPI core y/y rose +8.4% vs. est. +8.3% (and prior 8.3%)

·     NY Empire Fed manufacturing actual -11.8, below forecast +6.1 and previous +3.10; New orders: -11.2 vs. +1.4 prior and shipments -7.4 vs. +2.9 prior; delivery times index climbed eleven points to 32.7, and inventories rose at the fastest pace in years

Commodities

·     The oil swoon continued as WTI crude declined -$6.57 or 6.38% to settle at $96.44 per barrel, while Brent declined -$6.99 or 6.54% to settle at $99.91, as both settle below the $100 level for first time since late February. Oil prices are now down more than 20% from 14-year highs hit last week above the $130 level for WTI. Gold prices fall -$31.10 or 1.6% to settle at $1,929.70 an ounce (lowest level in 2-weeks and well-off last week near record highs above $2,070 an ounce) ahead of the Fed tomorrow; dollar index (DXY) back to flat as Euro pares gains.

Currencies & Treasuries

·     Treasury yields jump and the U.S. dollar index (DXY) was steady around the 99 level as markets await results from the two-day FOMC meeting tomorrow where they are expected to raise rates by 25 bps. The Japanese Yen remains near 5-year lows around 118.25 while the buck lost value to the euro and other major currencies after oil prices fell on indications of COVID-crimped economic growth in China amid ongoing talks to halt the Russia-Ukraine conflict.

Sector News Breakdown

Consumer

·     Retailers; BIG shares jumped late day after Mill Road files 13D on Big Lots, reports 5.1% Stake and pushes for sale; CTRN mixed Q4 as EPS beats but revs miss, but guides Q1 and year EPS outlook below consensus saying FY22 is difficult to predict; The EU is set to ban sales of luxury goods (BURBY, LVMUY, etc.) worth more than EUR 300 ($329.58) to Russia; Bernstein initiated ROST, TPR, PTON, NKE at Outperform, CPRI, SFIX at Market Perform, and LULU at Underperform; Piper does not expect home improvement spend to be impacted by rising gas prices as price shocks over the past 20 years have not had any impact and spend is supported by strong cash-out refinance activity recently, and they prefer LOW as a large cap and FND as a mid-cap; NKE estimates lowered for F22/23 to $3.58/$4.22 at Bank America ahead of earnings to reflect exposure to Russia/Eastern Europe, COVID-related volatility in China

·     Housing & Building Products; KeyBanc lowered tgts for several housing stocks KBH, LEN, TOL, NVR saying their “wall of worry” thesis is not over, but just beginning, in our view, with Fed tightening set to begin this week (asset purchases over). As this tightening cycle begins, amid rising inflation unlike cycles since 1982, we reiterate that low valuation(s) are not a catalyst for Builders with negative earnings revisions a nascent catalyst for the group’s multiple expansion

·     Consumer Staples; HRL downgraded to Sell from Neutral at Goldman Sachs with $44 tgt saying citing the impact on the agricultural supply chain due to the Russia/Ukraine conflict and sees backdrop as negative for Hormel; COTY remains Buy rated at Citigroup but remove from focus list amid some n-t unknowns though remain firm believers in the ongoing turnaround that we believe is evident at the company; Goldman Sachs expects underperformance for sell rated KHC, GIS, SJM as continuous rise in price of inputs like grains, fertilizers and energy prices to drive a low- to mid-single-digit reduction in EBITDA

·     Restaurants; SOVO Q4 beat and 2022 sales + EBITDA ahead of street. It does include a 53rd week but even without it would still be ahead; WING CEO and Chairman Morrison resigns to become CEO of Salad and Go, where he serves on the board

·     Casinos, Gaming, Lodging & Leisure sector; casinos with Macau exposure (WYNN ) remain weak (as do U.S. listed Chinese stocks across the board as recent concerns include 1) Shenzhen lockdown 2) Hong Kong Covid outbreak 3) De-listing concerns for China ADRs 4) Geopolitical tensions; in leisure, ski resort co MTN missed for quarter but surprisingly raising the FY adj EBITDA guide to $808-$838m from $779m-$835m despite investing in labor

Energy

·     OPEC said that oil demand in 2022 faced challenges from Russia’s invasion of Ukraine and rising inflation as crude prices soar, but it stopped short of changing its forecast for robust demand this year. In a monthly report, OPEC stuck to its view that world oil demand would rise by 4.15 million barrels per day (bpd) in 2022. But OPEC said the war in Ukraine and continued concerns about COVID-19 were reshaping the world economy, and it said this would have a negative short-term impact on global growth.

·     Energy stock movers; shares of energy stocks slide as crude prices extend fall, declining after last week’s rally as worries over growing coronavirus cases in top crude importer China weigh; WTI crude oil down over 22% in a week – Bespoke notes haven’t seen that large a decline from a 52-week high in at least 40 years. Global oil prices stumbled to a two-week low (after hitting 14-yr highs last week), putting U.S. crude well below the $100 per barrel as investors continue to pare bets on near-term demand amid a resurgence in Covid infections in China.

·     The WSJ reported that Saudi Arabia is in active talks with Beijing to price its some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and Mark another shift by the world’s top crude exporter toward Asia.

·     E&P and Majors; energy names were the biggest decliners on the day as oil prices drop over 20% from last week highs; NBR upgraded to Neutral/High Risk at Citigroup as believe their FCF outlook is improving on the heels of rate inflation, undermining our previous bear thesis, while downgrade NOV and WHD to Neutral on a combination of these risks and valuation

Financials

·     Insurance; WSJ reported Americans went on a buying spree for life insurance in 2021, driven by concerns of death from the continuing coronavirus pandemic. Premium volume for new individual life-insurance policies surged 20% over 2020, while the number of policies issued rose 5%, the biggest year-over-year percentage gains since the 1980s, according to industry-funded research firm Limra (shares of PRU, AIG, MET, HIG among names to watch)

·     Consumer Finance; BAC credit card delinquency rate was 0.95% at Feb end vs 0.93% at Jan end and credit card charge-off rate was 1.24% in February vs 1.19% in January; ADS reported charge-offs for February of 4.8% and delinquencies 4.4%; COF February domestic credit card net charge-offs rate 2.19% vs 2.03% in January; 30+ day performing delinquencies rate for auto 4.01% at Feb end vs 4.42% at Jan end; 30+ day performing delinquencies rate for domestic credit card 2.51% at Feb vs 2.40% at Jan end; DFS credit card delinquency rate 1.10% at February end vs 1.07% at January end

·     Banks & Services; investors have been adding to bank over the last few sessions into tomorrow’s FOMC rate decision where a 25-bps hike is widely expected; TRU said it is reaffirming its full-year 2022 forecasts of revenue of between $3.75 billion and $3.81 billion, which represents growth of 27% to 29% from a year earlier.

Healthcare

·     Pharma movers; LLY said it would continue to supply drugs for urgent medical conditions such as cancer and diabetes to Russia, but will suspend all investments and no longer start new clinical studies in the country; ANAB said Phase II ACORN trial of imsidolimab (anti-IL-36R) in moderate-to-severe acne failed to demonstrate improvement over placebo in the primary or secondary endpoints at either high or low doses – is planning to discontinue the program in acne; PASG to cut operating expenses by cutting its workforce by 13% and prioritizing its R&D programs in partnership with the University of Pennsylvania’s Gene Therapy Program

·     MedTech Equipment; CDNA and NTRA shares volatile after a jury found they engaged in false advertising; Natera continues to pursue its own patent enforcement action against CareDX; final monetary relief, if any, remains to be decided by the court

Industrials & Materials

·     Positive revenue outlook for many of the airlines today: AAL said it is raising its first-quarter revenue guidance as now expects Q1 revenue to be about 17% lower than in the comp quarter in 2019, better than previously guided for revenue to come in between 20% and 22% lower than pre-pandemic levels (lowered capacity while raised CASM guidance); UAL raised rev view as well to "near the better end" of its range of 20% to 25% lower than the first quarter of 2019 levels; DAL said it now expects revenue in the March quarter to recover to 78% of 2019 levels, up from a previous guidance of between 72% and 76% issued in January and flat TRASM; LUV said it sees Q1 operating revenue down 8% to 10% vs 2019, sees Q1 available seat miles (ASMS or capacity) compared with 2019 down 9% to 10%; sees Q1 fuel hedging cash settlement gains per gallon $0.52; JBLU said strong demand has led the company’s revenue to outperform so far this quarter, boosting its quarterly forecast as now expects revenue to be down by 6% to 9% compared with pre-pandemic 2019 levels in the quarter, compared with a previous view: decline of 11% to 16%.

·     Metals & Materials; sector saw major profit taking as the steels (X, CLF), ferts (MOS, NTR), energy, coal, etc. lower amid rotation back into discretionary and tech names that have slumped recently; MOS upgraded to Buy from Neutral at Goldman Sachs with $83 tgt saying the Russia/Ukraine conflict has the potential to be one of the most disruptive events across the food and agricultural supply chain in decades; ECL announced a temporary 8%-12% energy surcharge on all its global products, effective April 1, 2022. This surcharge is intended to mitigate the dramatic rise in energy costs; precious metals miner HYMC rises after AMC said it is buying ~22% of HYMC, as well as an additional 23.4 million Hycroft warrants at $1.07

Technology, Media & Telecom

·     Internet; note the selloff in Chinese stocks has been so intense that it’s erased all the gains in KWEB since the debut in 2013 – CNBC reported earlier. BABA and TCEHY underperform but saw a little bounce from beaten up Chinese stocks today: BIDU ; big jumps as well for large cap internet with FB solid recoveries; GDDY shares slipped late day after GOOGL announced online home with Google Domains, now out of beta; AMZN’s $8.5 billion acquisition of MGM Studios gains approval in European Union, but approval by the U.S. Federal Trade Commission remains an open question.

·     Semiconductors; WDC called the most attractive value tech stock under coverage as stock price of $44 represents a -65% to -70% discount to peers, and our their current tgt price of $75; NVDA outperformed in the chip sector as Cowen named it new top pick, along with AMD and MPWR (replacing STM, ON, and IFX) – said no change to positive Auto thesis but pullback shifts 12 mo return potential back to higher growth names; INTC unveiled an initial investment of EUR33.5 billion ($36.8 billion) the research and development and manufacturing of semiconductors in the European Union

·     Software movers; COUP shares slide over 30% overnight as better Q4 results were overshadowed by a weaker EPS and rev outlook for Q1 and the year that Oppenheimer said showed significant organic growth deceleration and margin contraction; SentinelOne (S) to Buy Attivo Networks in a cash and stock transaction valued at $616.5 million as the company sees deal adding to GAAP and non-GAAP gross margin; RBLX February 2022 daily active users were 55.1 mln, up 28% year over year and estimated bookings for February 2022 were between $203 mln and $206 mln, down 2% – 4% year over year; ZM upgraded to Buy from Hold at Berenberg and installing a conservative $124 price Target still affording 30%+ upside off a five-year forecast through F2027 that implies rather stunted long-term TAM development; GTLB reported Q4 revenue that beat expectations and gave a full-year forecast that is stronger than expectations

·     Hardware, Components & Services; JBL added to the Citigroup US Focus list with Street high target price of $90, which is +67% upside given the recent pull back that was associated with both the overall stock market and even more pressure on technology stocks; EVLV declined after weaker 2022 revs outlook of $29M-$31M below est. $49.1M