Closing Recap

Wednesday, March 23, 2022

Equity Market Recap

·     Volatility continues on Wall Street, with a more than 200 point move from highs to lows for the Nasdaq and as the S&P 500 battled at its 200-day moving average support (SPX 4,471) most of the afternoon after easily topping it to the upside yesterday (and held) but slipped below late afternoon as stocks took a breather following a massive 6-day rally. Despite anxieties about mounting inflation, rising interest rates and the war in Ukraine, investors have climbed the “wall of worry” the past week with stocks closing higher by more than 1% for 5 of the last 7-trading days, including multiple days closing at the highs. But today was different as stocks slumped off its morning rally as a spike in oil prices to best levels in 2-weeks weighed on consumer discretionary (JWN, DDS, URBN), housing/home improvement (HD, LOW, WSM), MedTech (BSX, RMD, SYK) and travel names today (AAL, BKNG, UAL) as it cuts into spending for U.S. consumers. The sharp rally in U.S. government bond yields paused today, pulling back off highest levels since May 2019 after having surged this/last week as Fed Chairman Jerome Powell said the central bank was prepared to raise interest rates in half-percentage-point steps if needed to tame inflation. The recent rally has come even as Russia’s attacks on Ukraine intensify, Western countries continue to pile on sanctions and pricing pressures show no signs of abating.

·     So, the dilemma the market faces is the Fed wants to slow inflation, but the big stock market rally (cutting YTD losses by more than half in just over a week) creates a massive wealth effect and further fuels inflation – which in turn makes the Fed more comfortable to raise rates to help slow this inflation and ups chances of more aggressive hikes. At what point will this matter to stock markets is the question? Markets, specifically technology, have gone from oversold to overbought conditions in just over a week.

·     Note two years and two days ago to the day, March 21, 2020, marks the pandemic stock market bottom low, which for the S&P 500 was 2,191 low – we have since risen roughly 105%, or more than double from those lows. Following up on that, according to Bespoke, the 20 worst performing stocks during the COVID Crash (2/19/20 – 3/23/20) are up an average of 362% over the past two years compared to an average gain of only 33.5% for the 20 stocks that were the best performers during the COVID Crash.

·     Stock & Sector movers: ADBE tumbles as its quarterly beat was overshadowed by a weak outlook; GME surges to highest level since early January after Ryan Cohen purchased an additional 100K shares after yesterday’s close; GIS jumps on its EPS beat and guidance raise due to strong demand and higher prices; WGO slumps to 52-week lows despite a top and bottom line beat as its profit margin was impacted by production inefficiencies; APA MRO DVN OXY 52-week highs as energy best S&P sector again today as crude prices resume upwards momentum; homebuilders and home improvement stocks slide HD LOW LEN on rising rate fears as the 30-year mortgage rate jumped 23 bps to 4.50% its biggest weekly increase since March 2020

·     In geopolitical news, The United States will announce a package of Russia-related sanctions on political figures and oligarchs on Thursday while U.S. President Joe Biden meets with NATO leaders on Ukraine, U.S. national security adviser Jake Sullivan said on Wednesday. The Central Bank of Russia said stock market trading will resume on Thursday for the first time since the country invaded Russia, triggering crippling economic sanctions from the West. Trading in 33 companies in the Moscow Exchange Index will be permitted from 9:50 to 14:00 Moscow time. There will be a ban on short sales for these securities

Economic Data:

·     New Home Sales for February fall -2.0% to 772K, missing the 805K consensus as new home sales supply at 6.3 months vs Jan 6.1 months; the February median sale price $400,600, +10.7% from Feb 2021 ($362,000)

Commodities, Currencies & Treasuries

·     Oil prices paced the gains in commodities, with WTI crude rising $5.66 or 5.18% to settle at $114.93 per barrel, marking their highest finish in over two weeks (and up over 20% the last 5-sessions) and Brent crude rose $6.12 or 5.3% to settle at $121.60 per barrel amid ongoing global supply disruption concerns from the Russia-Ukraine war, as well as data showing weekly declines in U.S. crude, gasoline, and distillate inventories. Oil prices rose this morning after Russia said that oil exports via a pipeline from Kazakhstan to the Black Sea may temporarily fall by around 1 million barrels a day — representing about 1% of global oil demand — citing storm damage.

·     U.S. natural gas futures edged up to a seven-week high on forecasts for cooler weather and higher heating demand as front-month gas futures rose 4.5 cents, or 0.9%, to settle at $5.232 per million BTU – highest since Feb. 2

·     Gold prices rise $15.80 or 0.8% to settle higher at $1,937.70 an ounce despite a bounce in the dollar, helped by a rotation into havens, highest settlement in over a week. Commodities were higher on a range of issues that threatened to pinch supply chains. Aluminum, nickel, and steel prices rose on concerns ranging from the war in Ukraine to Covid-19 lockdowns in China.

·     Treasury yields slipped off best levels since 2019. The U.S. Treasury sold $16B in 20-year notes at a yield of 2.651% vs. the 2.665% when issued prior with a bid-to-cover at 2.72 vs. 2.44 prior auction and indirect bidders awarded 64.39%, a record high direct bidder award of 26.03% (recall 20-yr bond auction restarted in May 2020 for reference). Treasury yields have been incredibly volatile to start the month as we were at 1.84% for the U.S. Treasury yield to start the year, just below 2.4% this week (highest since May 2019), but down slightly today around 2.33%. The U.S. dollar rebounded with the yen holding at 6-year lows around the 1.21 level while the euro slipped back to the 1.10 vs. the greenback.

Sector News Breakdown

Consumer

·     Retailers: GME shares jumped after billionaire Ryan Cohen’s investment company bought 100,000 shares according to a regulatory filing, raising stake to 11.9%, with the total number of shares owned at 9.1 million; POSH posts mixed Q4 results with slightly larger loss and better sales but guides Q1 revs $86M-$88M (rev growth slows to 11%) vs. est. $90.53M and weaker Ebitda view; AZO announced it is adding another $2B to its buyback (added $1.5B back in Dec and $1.5B more in Oct)

·     Auto sector; HYZN Q4 EPS loss in-line (12c) on revenue $5.1M vs est. $26.5M, increased its backlog by 246% from its July 2021 update to $287M, said they expect to deliver 300-400 vehicles in 2022 from 87 in 2021; NKLA is holding a virtual investor day today at 4pm EDT; STLA said its Automotive Cells Company joint venture with Mercedes-Benz and TTE would build a battery plant in Italy and boost its capacity in Europe; EVGO was selected by California energy commission for two regional project proposed awards to support CA Rideshare electrification and separately reported Q4 revenue of $7.1M vs est. $6.2M and EPS (9c) vs est. (12c) with guidance forecasting FY22 sales ~$52M vs est. $53.6M; TM announced a buyback program of up to 80M shares worth 100B yen effective through May 10; LI will raise the price of its One model on April 1 but NIO said it will not be raising prices yet; CLSA initiated XPEV with a Buy rating and $42 PT as they expect it to be the first to achieve high-level autonomous driving in China

·     Housing & Building Products; in building products, AMWD and FBHS downgraded to Hold from Buy at Loop Capital and are lowering our PT to $59 for AMWD (-$4) and $91 (-$29) for FBHS as are concerned that inflationary pressures will both weigh on sales and margins over the next several quarters and says survey of cabinet manufacturers and dealers illuminated a few more specific headwinds; in housing, LGIH downgraded from Neutral to Sell at BTIG, reducing ests saying as rates rise, believe LGIH has a higher demand risk profile than most public peers; weekly MBA mortgage data shows the U.S. mortgage market index falls 8.1%, the purchase index fell -1.5% and the refinancing index decreases 14.4% as the 30-yr yield jumped 23 bps to 4.50% its biggest weekly increase since March 2020 – TOL, LEN, PHM, KBH, MTH homebuilders; shares of home improvement names HD, LOW, WSM were all dragged lower on rising rate fears impacting home purchases and improvements (XHB on track for 3^rd weekly loss in a row)

·     Consumer Staples: GIS posted a Q3 adj EPS 84c beat est. 78c on in-line sales $4.54B and raised FY22 core sales and profit forecasts on higher prices and strong demand with organic net sales now expected to increase +5% from prior range of +4-5% and adj EPS to be +0-2% YoY from prior range of (-2%) to +1%; BYND debuted their partnership’s first product, Beyond Meat Jerky; in grocers, LA Times reported Southern California grocery workers reportedly preparing to authorize a strike against Ralphs, Albertsons, Vons, and Pavilions

·     Restaurants: Wedbush added WING to its Best Ideas List as the continue to believe there is upside to 2022 same-store sales growth and view it as relatively well-positioned in both recessionary and expansionary environments; FWRG Q4 EPS (8c) vs est. (7c) on sales that rose 48.7% to $162.6M vs est. $159.4M, same-store sales +36.7% YoY, sees FY22 revenue growth above 15% and same-store sales growth in high-single digits; in a CNBC interview last night, activist investor Carl Icahn criticized MCD as having a rubber stamp board that is not moving fast enough to address his push for more humane treatment of pigs

·     Casinos, Gaming, Lodging & Leisure sector; GAN issues prelim qtrly total revenue of $30.5M, below $32.3M in the prior quarter and below consensus $35.2M and guides full year 2022 revenue expectations of $155M-$165M (est. $171M); hotel names, theme parks and gaming stocks lagged broader market rebounds early as rising oil weighs on consumer spending

Energy

·     Energy stock movers: The average price for a gallon of gas is $4.24, according to AAA while last year at this time it was $2.88. Weekly inventory data overnight showed the API reported weekly crude inventories fell -4.3M barrels, crude inventories at Cushing rose 700K barrels, gasoline inventories fell -600k barrels and distillates fell -800K barrels. Today, the EIA showed a weekly drawdown of -2.5M barrels vs, estimate for mild build as inventories of crude in U.S. Strategic petroleum reserve off 4.2M barrels to 571.32M; larger draw for gasoline inventories as well as -2.9M barrels to 238.04 mln, vs forecast of -2.0M barrel draw

·     E&P and Majors; BP upgraded to Overweight from Equal Weight at Morgan Stanley noting it offers highest distribution yield, Russia risk priced in, strategic clarity improving, while the firm degraded Eni (E) to EW from OW saying prior positive view was based on the company’s relatively high earnings sensitivity to oil & gas prices

·     Refiners: Wells Fargo said remains bullish on sector given solid indications of demand resiliency despite the rise in oil and retail fuel prices, continue to favor the larger, diversified coastal exposed refiners MPC, PSX and top pick VLO

·     Solar, Alternative power: BLDP and PLUG shares higher on day after China unveiled a plan to boost hydrogen output and support industry development – KeyBanc said China’s plan should be good for hydrogen fuel cell companies

Financials

·     Bank & Insurance movers; big banks pare some of Tuesday’s gains, with pullbacks in BAC, C, MS and the likes, as Treasury yields remain elevated, but were less volatile today; yield curve inversion remains; Cowen said today to offer spot Bitcoin and crypto trading; MMC increases share repurchase program by $5 billion and declares quarterly cash dividend

·     Bitcoin, FinTech & Payments; AFRM tgt cut to $80 from $140 at Morgan Stanley as expects the buy-now, pay-later lender to struggle in the current macroeconomic environment, while resumed SQ with an equal-weight and $146 tgt as view as a high growth business with large TAM opportunities across Square (now solely the seller business), Cash App, and Afterpay; FB files 8 trademark applications including crypto trading within the metaverse

·     Services & Consumer Finance; FA posted Q4 net income of $15.4 mln, compared to a net loss of $5.9 mln a year earlier and forecasts FY22 revenue between $813M-$828M vs. est. $759M

Healthcare

·     Pharma movers: cannabis sector busy as Cresco Labs Inc. (CRLBF) agreed to acquire Columbia Care Inc. (CCHWF) for $2 billion in stock as Columbia holders will receive 0.5579 of a subordinate voting share of Cresco for each share; ACB said it has reached an agreement to acquire all of the issued and outstanding shares of TerraFarma Inc. based upon aggregate consideration of $38 million payable in cash and Aurora common shares, plus two earnout amounts payable in shares

·     MedTech Equipment; ABT shares active after an inspection at its facility in Sturgis, Michigan found a harmful bacteria called Cronobacter sakazakii on the surface of some areas producing its powdered baby formula, the U.S. health regulator said; CDNA wins $44.9m in damages in trial against NTRA with $21.2m in compensatory damages and $23.7m in punitive damages as a jury found that Natera intentionally and recklessly misled the transplant community by deliberately engaging in false advertising in the promotion and marketing of its Prospera kidney transplant rejection assessment test

·     Healthcare Services: WOOF outlines strategic approach to drive sustained, profitable growth with industry-leading ecosystem, reinforces success across services, unique merchandise, digital and powerful data and reaffirmed FY22 outlook; HQY Q4 EPS $0.20 vs. est. $0.22; Q4 revs $203.3M vs. est. $200.07M, sees year EPS $1.21-$1.30 vs. est. $1.41, revs $820M-$830M vs. est. $817.4M; CNC weaker as Jefferies said decision to name heir apparent Vice Chairman Sarah London as chief executive officer may surprise some investors in light of a board refresh in December that followed pressure from activist investor Politan Capital Management

Industrials & Materials

·     Industrials, Aerospace & Defense; Agriculture complex getting better, as famine gets worse with shares of DE, AGCO, ADM, CTVA in machinery and ag space been active; the rally in oil prices again took a toll on transports (albeit modest), on fears rising energy would crimp consumer spending for travel, leisure

·     Metals & Materials; PLL 1.75M share Secondary priced at $65.00 – Offering size boosted from 1.5 mln shares, prices at 13.5% discount to stock’s last close of $75.17 on Monday; in steels, WOR Q3 adj EPS $1.13 misses the $1.37 estimate while sales rose 82% to $1.4B topping views but said steel price volatility is expected to remain a headwind for co; STZHF downgraded at RBC Capital and adjusts his PT to $60 (from $51) after revising our steel price estimates for 2022

Technology, Media & Telecom

·     Software movers; ADBE posted a slight top and bottom line beat for Q1 with net new Digital Media (DM) ARR coming in at $418M vs. consensus $402M, but softer Q2 guidance weighed on shares as sees Q2 adj EPS roughly $3.30 on revs $4.34B, below est. $3.35/$4.41B; OKTA says up to 366 customers are potentially hit by a security breach caused by a hacking group known as Lapsus$ (follow up from hack announcement yesterday); the weakness post ADBE guidance weighed on some members of the high growth software sector

·     Hardware, Components & Services; NTAP board had authorized repurchase of up to an additional $1 billion of the Co’s common stock, with no expiration date at Analyst Day; for AAPL, Wedbush said based on our recent supply chain checks in Asia, believe Apple is seeing stellar iPhone 13 demand globally on this elongated product cycle which is the drumroll to iPhone 14 this Fall – AAPL was a market leader throughout the day

·     Internet, Media & Telecom movers; TMUS was upgraded to Overweight from Sector Weight at KeyBanc saying most concerns have been alleviated and see a best-in-class 5G network, margin expansion, and material FCF generation; NLSN rises overnight after a report that Elliott Investment Management and Brookfield Asset are considering raising their $25.40/share offer (report comes after Nielsen rejected the $9 billion bid late Sunday);