Closing Recap

Thursday, March 17, 2022

Equity Market Recap

·     U.S. stocks close “green” on this St. Patrick’s Day, with major averages surging for three straight days in a massive ‘risk-on” bet for investors this week, despite several uncertain market events still up in the air. Stock futures started lower overnight as comments from the Kremlin said, “reports of major progress in Ukraine talks wrong, Biden calling Putin war criminal unforgivable, Ukrainian negotiators in no rush, more talks with Ukraine expected today.” The comments weighed initially but were quickly dismissed for more buying as energy paced today’s gains with oil snapping its 3-day losing streak, pushing up major producers, along with gains in materials and metals behind positive updates from steel producers. Markets got a little good news midday as Russia avoids default after $117 Million Eurobond coupons funds were sent to Citigroup. Markets are also taking the FOMC 25bps hike yesterday in stride interest rates as well as a more aggressive forecast plan to push borrowing costs to restrictive levels next year. Policymakers also trimmed their economic growth projections for the year. All in all, the solid week for stocks continues as the Dow Transports on track for a weekly gain of over 8% (into FDX numbers tonight), the Nasdaq up over 5% this week, the S&P, Russell, and Dow up over 4%. Today also marked the third straight day stocks closed at their highs!

·     Stock & Sector movers: Energy best performing sector as WTI Crude prices bounce back above $100, OXY best in the S&P after BRK.A adds another $1B to its stake for a total of $7B over the past 11 days, DVN APA also leading; WSM opens up nearly 9% after its quarterly beat combined with a div raise and new $1.5B buyback but comes off morning highs, SIG jumps after its quarterly beat, DG rises after an in-line quarter but better full-year outlook, WRBY sinks early after its sales miss and weak guidance pre-market but rallies all the way back to green; GME reports tonight; banks stumble as yields come off yesterday’s levels (10-year hit highest since May 2019 after the FOMC decision) with regional banks particularly underperforming and ADS COF SYF slide elsewhere in financials after each were downgraded at Wolfe; PD spikes after a quarterly beat with a robust revenue forecast while ACN comes off morning strength to go red as weaker margins overshadowed its beat and raise among other earnings reporters; STLD soars after guiding Q1 well above consensus in steel to lift X CLF AA; NUE slips to underperform others as the top-end of its Q1 EPS guidance is below consensus.

Economic Data:

·     Weekly Jobless Claims fell to 214K in latest week vs. est. 220K while prior week revised to 229K from 227K; the 4-week moving avg fell to 223,000 from 231,750 prior week; continued claims fell to 1.419M from 1.490M prior and U.S. insured unemployment rate fell to 1.0%

·     Philly Fed Business Index for March actual 27.4, well above the forecast 14.75 and previous 16.0; Fed employment index at 38.9 vs 32.3; prices paid index rises to highest levels since 1969

·     Housing starts for February rose +6.8% m/m to 1.769M vs. 1.69M expected and above the upwardly revised 1.657M reading (from 1.64M); Building permits dipped -1.9% m/m to 1.859M vs. 1.85M expected and 1.895M prior

·     Industrial output for February rose +0.5%, in-line with estimates and January unrevised at 1.4%; Feb mining output +0.1%, utilities output -2.7%; Capacity utilization rate 77.6% vs. est. 77.8%; Feb manufacturing output +1.2%

·     The 30-year mortgage rate in the US rises to 4.16%, its highest level since May 2019. In January of last year it hit an all-time low of 2.65%

Commodities

·     Oil prices rebounded, snapping a 3-day losing streak, as WTI crude moved back above the $100 per barrel level, up $7.94 or 8.35% to settle at $102.98 per barrel. No major developments in the Ukraine today as war moves into its 4^th week, while the International Energy Agency (IEA) said three million barrels a day (bpd) of Russian oil and products could be shut in from next month and despite the U.S. Federal Reserve’s decision to raise interest rates. U.S. Natural gas futures extend gains after EIA reports slightly bigger-than-expected storage draw.

·     Gold prices rise $34 or 1.8% to settle at $1,943.20 an ounce, getting a boost from the roll in the U.S. dollar index (DXY), which is down -0.8% despite the Fed aggressive interest rate outlook Wednesday, calling for between 6-7 rate hikes this year.

Currencies & Treasuries

·     The U.S. dollar tumbled on the day, with the dollar index down -0.8% despite bullish economic data (jobless claims, Philly Fed, Housing Starts) and the Fed being a bit more “hawkish” on rising interest rates for the rest of 2022 yesterday. The euro rose 0.85% to 1.1125, while Sterling erased early losses following its “dovish” rate hike of 25 bps earlier today. The USD-JPY touched intraday lows of 118.40, after topping at 119.85 early in the session. Profit taking likely a factor ahead of the BoJ policy announcement tonight, where no changes are expected to its -0.1% rate stance.

·     Another wild day (and week) in treasury markets as the benchmark U.S. 10-Year rises a 9^th straight day (tops last 8-day streak in April 2018). The yield hit 2.246% on Wednesday after the FOMC decision to hike rates for the first time since pandemic, hitting its highest level since May 2019, before settling at 2.1920% which it topped late day. Today, the 10-yr fell to lows below 2.11% before rebounding. Of note, there have been three nine-day winning streaks, Feb/Mar 2017, March 2012, and June 2006 as per Refinitiv. Given rising inflation (CPI, PPI), Fed commentary and the Ukraine war, the 10-yr has moved 60-bps this month. One-year ago the 10-Year Treasury Yield was 1.62%, 2-Year Treasury Yield 0.15% for spread 1.47%…vs. today 10-Year 2.19% and 2-Year Treasury Yield: 1.95% with spread a little over 20 bps as yield curve flattens.

Sector News Breakdown

Consumer

·     Retailers; GES 4Q adj EPS $1.14 vs est. $1.15 on revs $799.9Mm vs est. $805.9Mm, guides 1Q revs +low-teens with no meaningful incremental covid shut-downs vs est. +4% with FY revs +low-single digit vs est. +5.7% and op margin 10.5%; JWN announced today that it is reinstating a quarterly dividend at 19c; DG Q4 EPS $8.57 and revs $8.7B were in-line with consensus, comp sales -1.4%, sees Q1 EPS $2.25-2.35 vs est. $2.73 with same-store sales down YoY, but sees FY22 growth in same-store sales of ~2.5%, EPS of 12-14%, and sales of ~10% (~$37.6B from FY21’s $34.2B vs est. $36.8B); SIG Q4 EPS in-line $5.01 on sales $2.81B slightly ahead of est. $2.78B with same-store sales +23.8%, and FY23 guidance was better than expected with adj EPS expected $12.28-13 vs est. $10.52 on sales $8.03-8.25B vs est. $7.9B; WRBY Q4 EPS (41c) on sales $132.9M vs est. $133.4M, sees FY22 sales $650-660M below est. $687.8M; DBI Q4 adj EPS 15c vs est. 16c on sales $822.6M vs est. $838M, sees full-year EPS $1.75-1.85 vs est. $1.66 and comp sales growth in the high-single digits; DXLG Q4 EPS 14c vs est. 13c on sales $133.5M vs est. $131.9M, announced a $15M buyback, and guided FY22 sales $510-530M fully above est. $503.5M

·     Retail research: JPMorgan upgraded RL to OW as it trades at just 6x their CY23E EBITDA which is ~25% below RL’s pre-pandemic multiple with their $142PT based on its 5-year average pre-pandemic; Needham initiated RVLV at Buy with a $60 target as the ultimate reopening play with upside to the Street’s expected near-term sales growth and a forecast for consistently strong growth in sales and EBITDA, as well as valuation that is back to pre-pandemic levels; Wells has a favorable view on the top-line trajectory of REAL but flagged it a name whose margin dynamics the Street appears to be mis-modeling with Q1 GM too high along with Q2 adj EBITDA assumptions that also appear too high; DA Davidson downgraded FLWS to Neutral with a $13 PT from $20.50 due to worsening fundamentals since its Q2 disappointment with rising fuel costs and softer consumer spending that could impact demand

·     Housing & Building Products; negative for housing stocks (TOL, MTH, LEN, PHM) the 30-year fixed mortgage rate is at 4.46% according to bankrate.com. Over the last decade, it has only been higher than this on ~6% of days; The U.S. median home sale price surged 7% during the four-week period ending March 13, according to a new report from Redfin. LEN Q1 adj EPS $2.70 vs est. $2.60 on revs $6.2B vs est. $6.1B; home sales revs $5.7B vs est. $5.76B with orders $7.8Mm on 15,747 homes, deliveries 12,538 homes, gross margin on home sales 26.9%; in home furnishing, WSM Q4 adj EPS $5.42 vs est. $4.82 on revenue $2.5B vs est. $2.58B, announced a $1.5B stock repurchase authorization and raised its dividend 10% to 78c, and reiterated long-term financial guidance of mid-to-high single digit revenue growth with revs increasing to $10B by FY24 (current est. $9.25B); KIRK Q4 adj EPS 84c vs est. 83c on sales $176.2M vs est. $172.5M, comps -8.5%

·     Consumer Staples & Restaurants; YUMC expands share buyback program by $1B; Keybanc trims DRI and EAT PTs slightly to reflect near-term uncertainty and a modest amount of demand destruction from a reduction in discretionary income and maintain our DIN PT; MCD tgt lowered to $287 from $294 at Morgan Stanley, cites profit loss from Russia and Ukraine

·     Casinos, Gaming, Lodging & Leisure sector; in cruise lines, NCLH upgraded to EW from Underweight at Morgan Stanley with $19 tgt as now sees a relatively balanced risk/reward and the potential for Norwegian shares to outperform; meanwhile, Truist lowers ests and tgt on cruise names (CCL, RCL, NCLH) citing a disappointing March survey for future quarters; UBS slashes tgt on DKNG to $18 from $44citing more subdued profit outlook for 2024

Energy

·     Energy stock movers; after lagging broader markets over the last week amid a 3-day pullback in oil prices, energy stocks outperformed today with WTI and Brent resuming upward momentum on supply disruption concerns amid ongoing Russia/Ukraine conflict. OXY rises as Warren Buffett’s Berkshire Hathaway scoops up another $1 billion in shares of the energy company, bringing total stake to $7 billion in 11 days. Berkshire already holds preferred stock and warrants in Occidental due to a financing deal in 2019; service stocks HAL, BKR, SLB outperform after recent pullback – group names levered to Oil & Gas spending

·     Energy equipment and Services; CLB cuts Q1 EPS view to 5c-8c from 16c-20c (est. $0.20) and cuts Q1 revenue view to $110M-$113M from $117M-$122M saying disruptions reached an all-time high due to Covid impact; Utilities & Solar; SEDG announced a public offering of 2M common shares; CSIQ reported Q1 revenue that fell short of analyst expectations and cut its forecast for 2022 total project sales; utility stocks rebounding as most names were higher

Financials

·     Bank movers: sector remain volatile as UBS notes as expected, the Fed raised the Fed funds rate by 25bp, with the "dot plot" moving significantly and “hawkishly” vs. the December 2021 meeting and futures pricing in 6 more rate hikes by the December 2022 meeting. So long as the US avoids a recession (as Chair Powell seems to signal it will), rising rates and recently positive updates on commercial loan growth imply positive EPS revisions on a net basis outpacing negative revisions for trading, investment banking, and mortgage revenues, on average. Truist said the Fed’s announcement indicated faster rate hikes (7 in 2022 and continuing toward a 2.8% Fed Funds rate in 2023), should support spread income upside and stronger than expected net interest margin expansion for banks – JPM, WFC, C, MS, GS, BAC, ZION , etc.

·     Consumer Finance: ADS, COF, SYF all downgraded to Peer Perform from Outperform at Wolfe Research saying Russia’s invasion of Ukraine has heightened his concerns over higher inflationary pressures on issuers with elevated exposure to the low-end consumer and recommends being overweight prime and super-prime credit card issuers over those that focus more on the low-end consumer

Healthcare

·     Biotech, Pharma movers; ABBV, BMY, LLY, MOH among names hitting 52-week highs today in healthcare; AQST receives FDA fast track designation for AQST-109 for emergency treatment of allergic reactions including anaphylaxis; CNTG agreed to expand its data access and collaboration agreement with the PFE; ALNY files patent infringement suits against PFE and MRNA seeking damages for infringement of U.S. Patent No. 11,246,933 in the parties’ manufacture and sale of their messenger RNA (mRNA) COVID19 vaccines; QURE upgraded to Buy and $40 tgt at UBS saying at current levels, see attractive long-term risk/reward ahead of key catalysts over the next 1-2 years with a potential approval in Hemophilia B (~late ’22/1H23) and key readouts for Huntington’s program (1H23); MRNA CEO Stephane Bancel has sold more than $400 million of company stock during the pandemic, CNBC reported; BGNE downgrade from Outperform to Market Perform w/ $177 PT from $300 at Leerink

·     MedTech Equipment; HCAT upgraded to Buy at Jefferies saying with shares down 60% in the past six months they are upgrading on the back of positive KOL call, solid 4Q and outlook, and recent bullish mgt meetings; Piper said NVCR, SWAV, and TNDM believe may be the least impacted from the macroeconomic impact of the Ukraine/Russia conflict across their MedTech universe while says in a more normalized environment, recommend owning ALGN, ATRC, and AXNX.

Industrials & Materials

·     Aerospace & Defense and Industrials; in air leasing, JPM said equity market’s swift capitulation in response to the ongoing crisis, particularly in the case of AER is overdone and Credit Suisse said view this exposure as less than it seems the market expected

·     Transports: FDX earnings tonight; in rails, CSX upgraded from Sector Perform to Outperform at RBC Capital saying valuation has dropped toward the lowest level relative to peers – mainly on the back of comparatively lower volumes and comparatively less favorable Q4 results, while firm downgraded UNP to Sector Perform as valuation has expanded to the high end of its historical range relative to peers and at the high end relative to the broader index as well; ZTO shares tumble follo9wing quarterly results; CP said late Wednesday will lock out its employees in 72 hours if no agreement is reached with a union, which could potentially disrupt the movement of grain, potash and coal at a time of soaring commodity price

·     Metals: steel producers with monthly outlooks: NUE said it expects to achieve a new record for Q1 earnings in range of $7.20-$7.30 per diluted share, below consensus views of $7.56, said steel mill segment earnings in Q1 are expected to decrease from Q4 and earnings for raw materials segment are expected to be in line with Q4; STLD guides Q1 adj EPS $5.85-$5.95 vs. est. $5.09; said Q1 profitability from the company’s steel operations is expected to be historically strong, but significantly lower than record Q4 results; CMC posted mixed quarter as EPS topped expectations but sales of $1.61B missed expectations but highlighted ongoing robust demand across all major product lines; in precious metals/miners, GFI downgraded to market perform at BMO; in materials, CF is increasing fertilizer shipments to both U.S. coasts from its nitrogen complex in Louisiana to help offset a decline in exports from Russia after it invaded Ukraine

Technology, Media & Telecom

·     Semiconductors; SMTC Q4 sales/EPS of $190.6M/$0.70 topped consensus estimates by 1% on top/bottom lines and mgmt guided F1Q (Apr) to $200M/$0.76, besting Street estimates by 4%/9%; overall semis were little changed despite broader tech rally as weakness in AMD, NVDA, AVGO dragged on the index

·     Services, Hardware, Software movers; PD qtrly report exceeds expectations as Q4 revs increased 32% y/y to $78.5M topping the $76.5M estimate on a smaller-than-expected EPS loss and said total paid customers hit 14,865 at-end Jan, up from 13,837 a year ago; ACN Q2 EPS $2.54 vs. est. $2.20; Q2 revs $15.0B vs. est. $13.44B; raises year rev outlook to up 24%-26% from prior 19%-22% and op margin 15.2% from prior view 15.2%-15.4%; raise year EPS to $10.61-$10.81 from $10.32-$10.60

·     Internet, Media & Telecom movers; LLNW upgraded to outperform from market perform at Cowen, citing positive traffic trends for the infrastructure software company; NFLX recent move of limiting password sharing may be a sign of weaker growth trends according to Benchmark; AMZN announces that it closes $8.5 bln deal to buy MGM after deadline passes for the Federal Trade Commission to challenge the deal; U.S. listed Chinese stocks (BABA, BIDU, PDD, NTES, TCEHY) giving back some gains – group jumped yesterday as Beijing said would step in support the economy and financial markets, but Bloomberg notes the China Securities Regulatory Commission is considering allowing U.S. officials to inspect documents on firms that don’t possess sensitive data – appears China not offering full transparency